Notice2025-06764
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Amend Phlx's Complex Order Functionality
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
April 21, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 75 (Monday, April 21, 2025)</title>
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[Federal Register Volume 90, Number 75 (Monday, April 21, 2025)]
[Notices]
[Pages 16731-16758]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-06764]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102862; File No. SR-Phlx-2025-17]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change to Amend Phlx's
Complex Order Functionality
April 15, 2025.
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 April 3, 2025, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed with
the Securities and Exchange Commission (``Commission'') the proposed
rule change as described in Items I, II, and III below, which Items
have been prepared by the Exchange. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing a rule change in connection with a
technology migration. Specifically, the Exchange proposes to adopt: (1)
Legging Order functionality identical to ISE and MRX Options 3, Section
7(k); (2) Complex Order functionality identical to ISE and MRX Options
3, Section 14; and (3) Complex Order Risk Protections identical to ISE
and MRX Options 3, Section 16. With this proposal, the Exchange would
amend rule text in the following Options 3 rules related to Complex
Order functionality: Section 7, Types of Orders and Order and Quote
Protocols; Section 9, Trading Halts; Section 14, Complex Orders;
Section 15, Simple Order Risk Protections; and Section 16, Complex
Order Risk Protections. The Exchange also proposes to amend rule text
in Options 5, Section 4, Order Routing and Options 8, Section 32, Types
of Floor-Based (Non-System) Orders. Finally, the Exchange proposes to
amend certain definitions and citations in Options 1, Section 1,
Definitions; Options 2, Section 1, Application for Approval as an SQT,
RSQT, or RSQTO and Assignment in Options; Options 4C, Section 2,
Definitions, and Section 5, Series of U.S. Dollar-Settled Foreign
Currency Options Contracts Open for Trading; and Options 7, Section 1,
General Provisions.
The text of the proposed rule change is available on the Exchange's
website at <a href="https://listingcenter.nasdaq.com/rulebook/phlx/rulefilings">https://listingcenter.nasdaq.com/rulebook/phlx/rulefilings</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
Purpose
In connection with a technology migration to an enhanced Nasdaq,
Inc. (``Nasdaq'') functionality that will result in higher performance,
scalability, and more robust architecture, the Exchange intends to
align all complex order functionality on Phlx to Nasdaq ISE, LLC
(``ISE'') and Nasdaq MRX, LLC (``MRX'') complex order functionality.
Specifically, the Exchange proposes to
[[Page 16732]]
adopt: (1) Legging Order functionality identical to ISE and MRX Options
3, Section 7(k); (2) Complex Order functionality identical to ISE and
MRX Options 3, Section 14; and (3) Complex Order Risk Protections
identical to ISE and MRX Options 3, Section 16. With this proposal, the
Exchange would amend rule text in the following Options 3 rules related
to Complex Order functionality: Section 7, Types of Orders and Order
and Quote Protocols; Section 9, Trading Halts; Section 14, Complex
Orders; Section 15, Simple Order Risk Protections; and Section 16,
Complex Order Risk Protections. The Exchange also proposes to amend
rule text in Options 5, Section 4, Order Routing and Options 8, Section
32, Types of Floor-Based (Non-System) Orders. Finally, the Exchange
proposes to amend certain definitions and citations in Options 1,
Section 1, Definitions; Options 2, Section 1, Application for Approval
as an SQT, RSQT, or RSQTO and Assignment in Options; Options 4C,
Section 2, Definitions, and Section 5, Series of U.S. Dollar-Settled
Foreign Currency Options Contracts Open for Trading; and Options 7,
Section 1, General Provisions. Each change will be described below.
Legging Order Functionality
The Exchange proposes to amend the Legging Order type currently
located at Options 3, Section 7(b)(10) that provides,
Legging Order. A Legging Order is a Limit Order on the regular
order book in an individual series that represents one leg of a two-
legged Complex Order (which improves the cPBBO) that is to buy or
sell an equal quantity of two options series resting on the CBOOK.
Legging Orders are firm orders that are included in the Exchange's
displayed best bid or offer. Legging Orders are not routable and are
Limit Orders with a time-in-force of DAY, as they represent an
individual component of a Complex Order.
(A) A Legging Order may be automatically generated for one leg
of a Complex Order at a price: (i) that matches or improves upon the
best Phlx displayed bid or offer; and (ii) at which the net price
can be achieved when the other leg is executed against the best
displayed bid or offer (other than Legging Orders). Legging Orders
will not be generated if the Exchange or a particular option has not
opened, is halted or is otherwise not available for trading.
Similarly, the particular Complex Order Strategy must be available
for trading.
(B) A Legging Order will not be created: (i) at a price that
locks or crosses the best bid or offer of another exchange, (ii) if
there is an auction on either side or a Posting Period under Options
3, Section 15 regarding Acceptable Trade Range on the same side in
progress in the series, (iii) the price of the Complex Order is
outside of the ACE Parameter of paragraph (i), (iv) if there is
already a Legging Order in that series on the same side of the
market at the same price (unless it has priority based on the
participant type, under existing Exchange rules), or (v) for a
Complex Order if the generated Legging Order would immediately cause
resting Legging Orders to be removed pursuant to section
(f)(iii)(C)(4)(ix) below. Legging Orders may be generated and
executed in an increment other than the minimum increment for that
series and will be ranked on the order book at its generated price
and displayed at a price that is rounded to the nearest minimum
increment for that series. Two Legging Orders relating to the same
Complex Order can be generated, but only one of those can execute as
part of the execution of a particular Complex Order.
(C) A Legging Order is executed only after all other executable
orders (including any non-displayed size) and quotes at the same
price are executed in full. When a Legging Order is executed, the
other leg of the Complex Order will be automatically executed
against the displayed best bid or offer on the Exchange and any
other Legging Order based on that Complex Order will be removed.
(D) A Legging Order is automatically removed from the regular
order book: (i) if the price of the Legging Order is no longer at
the Exchange's displayed best bid or offer on the regular Limit
Order book, (ii) if execution of the Legging Order would no longer
achieve the net price of the Complex Order when the other leg is
executed against the Exchange's best displayed bid or offer on the
regular Limit Order book (other than another Legging Order), (iii)
if the Complex Order is executed in full or in part, (iv) if the
Complex Order is cancelled or modified, (v) if the price of the
Complex Order is outside the ACE Parameter of paragraph (i), (vi)
upon receipt of a Qualified Contingent Cross Order which includes a
component in which there is a Legging Order, an order that will
trigger an auction under Exchange rules in a component in which
there is a Legging Order (whether a buy order or a sell order), or
pursuant to Options 3, Section 13(f) a PIXL Order for the account of
a public customer paired with an order for the account of a public
customer, (vii) if a Legging Order is generated by a different
Complex Order in the same leg at a better price or the same price
for a participant with a higher priority, (viii) if a Complex Order
is marketable against the cPBBO where a Legging Order is present and
has more than one leg in common with the existing Complex Order that
generated the Legging Order, (ix) if a Complex Order becomes
marketable against multiple Legging Orders, (x) if a Complex Order
consisting of an unequal quantity of components is marketable
against the cPBBO where a Legging Order is present but cannot be
executed due to insufficient size in at least one of the components
in the cPBBO, or (xi) when the Legging Order is on the book at a
price which is not at the minimum price increment and which is more
aggressive than the same side PBBO, and an away market moves to lock
the PBBO (which is also the NBBO).
The Exchange proposes to relocate Options 3, Section 7(b)(10) to
Options 3, Section 7(k) and expand and amend the description of Legging
Orders to add detail to describe the current System functionality and
describe changes to the functionality. The proposed functionality of
Legging Orders is identical to the functionality in ISE and MRX Options
3, Section 7(k).
Generally, the Exchange proposes to amend the phrase ``regular
limit order book'' throughout Options 3, Section 7(k) to instead state
``single-leg limit order book'' to conform the rule text to the order
book description in ISE and MRX Options 3, Section 7(k).
With respect to the first paragraph of Options 3, Section 7(k), in
order to make the rule text identical to ISE and MRX Options 3, Section
7(k), the Exchange proposes to remove the words ``(which improves the
cPBBO),'' add ``resting on the top of the Complex Order Book'' and
replace the term ``CBOOK'' with ``Exchange's Complex Order Book''.
These changes are non-substantive and are meant to harmonize the
language in Phlx's Legging Order rule to that of ISE and MRX. Further,
the Exchange proposes to amend the last sentence of Options 3, Section
7(k) which currently states, ``Legging Orders are not routable and are
Limit Orders with a time-in-force of DAY, as they represent an
individual component of a Complex Order.'' The Exchange would instead
provide, ``Legging Orders are not routable and have a TIF of Day.'' The
Exchange believes the first sentence of Options 3, Section 7(k)
specifies that Legging Orders are Limit Orders. All Legging Orders are
Day Orders.
The Exchange proposes to add a new second paragraph to Options 3,
Section 7(k), which is identical to ISE and MRX Options 3, Section
7(k), to specifically explain the way the System will generate a
Legging Order. The Exchange proposes to state,
The System will evaluate whether Legging Orders may be generated
(1) when a Complex Options Order enters the Complex Order Book, and
(2) after a time interval (to be determined by the Exchange, not to
exceed 1 second) when the NBBO or Exchange best bid or offer in any
component of a Complex Options Order changes. The Exchange may
determine to limit the number of Legging Orders generated on an
objective basis and may determine to remove existing Legging Orders
in order to maintain a fair and orderly market in times of extreme
volatility or uncertainty. Legging Orders are treated as having no
Public Customer or Market Maker capacity on the single-leg order
book, regardless of being generated from Public Customer or Market
Maker Complex Options Orders.
[[Page 16733]]
The Exchange proposes to make clear that the System will evaluate
whether Legging Orders may be generated, which occurs at the time a
Complex Options Order \3\ enters the Complex Order Book and after a
time interval (to be determined by the Exchange, not to exceed 1
second) \4\ when the NBBO or Exchange best bid or offer in any
component of a Complex Options Order changes. This is the manner in
which the System operates today. The Exchange proposes to state that it
may determine to limit the number of Legging Orders generated on an
objective basis and may determine to remove existing Legging Orders,
and cease the creation of additional Legging Orders, to maintain a fair
and orderly market in times of extreme volatility or uncertainty. This
rule text currently exists in Phlx Options 3, Section 14(f)(iii)(C).\5\
This limitation assists the Exchange in managing the number of Legging
Orders generated to ensure that Legging Orders do not negatively impact
the Exchange's System capacity and performance so that the Exchange may
maintain a fair and orderly market in times of extreme volatility or
uncertainty. Of note, the Exchange does not limit the generation of
Legging Orders on the basis of the entering member or member
organization or the member category of the order (i.e., Professional or
Public Customer).
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\3\ The Exchange is amending Options 3, Section 14 to define a
Complex Options Order in this rule change. The Exchange proposes to
generally replace ``Complex Order'' with ``Complex Options Order.''
\4\ Today, Phlx's time interval is set to 500 milliseconds and
will become 100 milliseconds with the proposal.
\5\ Phlx's rule states, in part, in Options 3, Section
14(f)(iii)(C) that, ``. . . The System will evaluate the CBOOK when
a Complex Order enters the CBOOK and at a regular time interval, to
be determined by the Exchange (which interval shall not exceed 1
second), following a change in the national best bid and/or offer
(``NBBO'') or Phlx best bid and/or offer (``PBBO'') in any component
of a Complex Order eligible to generate Legging Orders, to determine
whether Legging Orders may be generated. The Exchange may determine
to limit the number of Legging Orders generated on an objective
basis and may determine to remove existing Legging Orders in order
to maintain a fair and orderly market in times of extreme volatility
or uncertainty.''
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Finally, the Exchange proposes to provide that Legging Orders are
treated as having no Public Customer capacity or Market Maker capacity
on the single leg order book, regardless of being generated from Public
Customer or Market Maker Complex Options Orders. A Legging Order is
handled in the same manner as other orders on the single-leg order book
except as otherwise provided in Options 3, Section 7(k), and is
executed only after all other executable orders and quotes at the same
price are executed in full. When a Legging Order is executed, the other
component of the Complex Order on the Complex Order Book will be
automatically executed against the best bid or offer on the Exchange.
ISE has identical functionality at Options 3, Section 7(k).
Additionally, this rule text at proposed Options 3, Section 7(k) \6\
represents current System functionality. The Exchange believes that a
Legging Order, created for the execution of a Complex Order, should not
be afforded priority over resting orders and quotes on the single-leg
order book, and therefore has determined to protect the priority on the
single-leg order book of such resting orders and quotes. Miami
International Securities Exchange, LLC (``MIAX'') similarly executes a
derived order only after all other executable orders and quotes at the
same price are executed in full.\7\ ISE and MRX have identical rule
text at Options 3, Section 7(k) except that Phlx will allocate executed
orders pursuant to its allocation model at Phlx Options 3, Section
10(a)(1)(E). ISE and MRX allocate executed orders pursuant to their
allocation models in ISE and MRX Options 3, Section 10. Legging Orders
would receive the allocation applicable to all other remaining interest
in 10(a)(1)(G).
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\6\ The last sentence of Options 3, Section 7(k) states that a
Legging Orders are treated as having no Public Customer or Market
Maker capacity on the single-leg order book, regardless of being
generated from Public Customer or Market Maker Complex Options
Orders.
\7\ See MIAX Rule 518(a)(9)(iv). See also Securities Exchange
Act Release No. 79072 (October 7, 2016), 81 FR 71131 (October 14,
2016) (SR-MIAX-2016-26) (Order Approving a Proposed Rule Change to
Adopt New Rules to Govern the Trading of Complex Orders).
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The Exchange proposes to amend Options 3, Section 7(k)(1) and add
the title ``Generation of Legging Orders'' to describe the contents of
the paragraph. The Exchange proposes to amend the rule text which
currently states,
[a] Legging Order may be automatically generated for one leg of
a Complex Order at a price: (i) that matches or improves upon the
best Phlx displayed bid or offer; and (ii) at which the net price
can be achieved when the other leg is executed against the best
displayed bid or offer (other than Legging Orders). Legging Orders
will not be generated if the Exchange or a particular option has not
opened, is halted or is otherwise not available for trading.
Similarly, the particular Complex Order Strategy must be available
for trading.
The Exchange proposes to instead provide in Options 3, Section
7(k)(1) that,
[a] Legging Order may be automatically generated for one or both
leg(s) of a Complex Options Order resting on top of the Complex
Order Book at a price: (i) that matches or improves upon the best
displayed bid or offer on the single-leg limit order book; and (ii)
at which the net price can be achieved when the other leg is
executed against the best displayed bid or offer on the single-leg
limit order book, excluding Legging Orders. Legging Orders will be
generated and executed in the minimum increment for that options
series.
The Exchange is proposing to add ``or both leg(s)'' to the first
sentence of proposed Options 3, Section 7(k)(1) (current Options 3,
Section 7(b)(10)(A)) to make clear a Legging Order may be generated for
each leg of a two-legged Complex Order. This proposed change is new to
Phlx. Today, on Phlx, a Legging Order may be automatically generated
for one leg of a Complex Order at a price: (i) that matches or improves
upon the best Phlx displayed bid or offer; and (ii) at which the net
price can be achieved when the other leg is executed against the best
displayed bid or offer (other than Legging Orders). Legging Orders will
not be generated if the Exchange or a particular option has not opened,
is halted or is otherwise not available for trading. Similarly, the
particular Complex Order Strategy must be available for trading. At
this time, the Exchange proposes to align Phlx's Legging Order
functionality with ISE and MRX Options 3, Section 7(k)(3) which differs
so that they will be identical. ISE and MRX permit two Legging Orders
related to the same Complex Options Order to be generated, and both can
execute as part of the execution of a particular Complex Options Order.
With this change, Phlx notes that Legging Orders may be generated for
each leg of a two-legged Complex Orders with the same quantity on both
legs. Automatically generating Legging Orders, which will only be
executed after all other executable interest at the same price
(including non-displayed interest) is executed in full, will provide
additional execution opportunities for Complex Orders, without
negatively impacting any investors in the single-leg market. In fact,
the generation of Legging Orders may enhance execution quality for
investors in the single-leg market by improving the price and/or size
of the PBBO and by providing additional execution opportunity for
resting orders on the single-leg order book. The generation of Legging
Orders is fully compliant with all regulatory requirements. In
particular, Legging Orders are firm orders that will be displayed at
the PBBO. Also, a Legging Order will be automatically removed if it is
no longer displayable at the PBBO or if the net price of the Complex
Order
[[Page 16734]]
can no longer be achieved. Finally, the generation of Legging Orders is
limited in scope, as they may be generated only for Complex Options
Orders with two legs. Additionally, as noted herein, the Exchange will
closely manage and curtail the generation of Legging Orders to assure
that they do not negatively impact system capacity and performance.
Today, two legging orders may be generated from the same Complex
Options Order on ISE and MRX pursuant to Options 3, Section 7(k)(1).
The addition of ``resting on the top of the Complex Order Book'' in
the first sentence of proposed Options 3, Section 7(k)(1) (current
Options 3, Section 7(b)(10)(A)) will make clear that the priority of
orders in the Complex Order Book controls with respect to the
generation of Legging Orders. The addition of this language is intended
to provide greater detail with respect to the generation of Legging
Order and reflects current System behavior. The proposed language is
identical to ISE and MRX rule text at Options 3, Section 7(k)(1).
The Exchange proposes to amend the second sentence of proposed
Options 3, Section 7(k)(1) (current Options 3, Section 7(b)(10)(A)) to
add ``on the single-leg limit order book'' in two places to conform to
the language to ISE and MRX Options 3, Section 7(k)(1). Additionally,
the Exchange proposes to state ``excluding Legging Orders'' to the end
of the sentence, instead of ``other than Legging Orders'' to clarify
the meaning of the current sentence and harmonize the rule text to ISE
and MRX Options 3, Section 7(k)(1). The Exchange notes that the price
of a Legging Order is not considered in the PBBO for purposes of
determining whether the net price of a Complex Order could be achieved
were it to generate a Legging Order. Below is an example of the manner
in which the current System calculates the net price and excludes a
Legging Order.
Example #1
Assume
Leg A is quoted 4.20 (100) x 4.25 (100)
Leg B is quoted 4.00 (100) x 4.10 (100)
Leg C is quoted 3.80 (100) x 3.90 (100)
Create A-B strategy, ratio of 1. cBBO \8\ for A-B is 0.10 x 0.25
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\8\ The cBBO is the net best bid or offer comprised of the best
bids and offers of the individual legs of the complex strategy.
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Create B-C strategy, ratio of 1. cBBO for B-C is 0.10 x 0.30
Generation of Legging Orders
Complex Order is entered to Buy A-B 10 @ 0.20
System generates Legging Order on Leg A's bid @ 4.20
System generates Legging Order on Leg B's offer @ 4.05
Complex Order is entered to Buy B-C 10 @ 0.20
System generates Legging Order on Leg B's bid @ 4.00
System generates Legging Order on Leg C's offer @ 3.90
Executions
If Complex Order B-C sold leg C @ 3.90, it would have to buy Leg
B for 4.10 or less to satisfy its net price of 0.20. Given that a
Legging Order is available on Leg B's offer at 4.05, this Legging
Order on Leg C would have been able to generate at 3.85 instead of
3.90 if the Legging Order at 4.05 was included in the calculation of
possible net execution price, but since it is not, the Legging Order
is generated at 3.90 on Leg C's offer instead of 3.85.\9\
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\9\ Furthermore, if a single-leg order arrives to buy for 3.90
on Leg C, the B-C strategy trades with the 4.10 offer of Leg B and
the 4.05 Legging Order is removed.
The Exchange is removing the last two sentences of proposed Options
3, Section 7(k)(1) \10\ (current Options 3, Section 7(b)(10)(A))
because that concept is being relocated to proposed new paragraph
Options 3, Section 7(k)(2) as described below.
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\10\ The last two sentences of Options 3, Section 7(k)(1) state,
``Legging Orders will not be generated if the Exchange or a
particular option has not opened, is halted or is otherwise not
available for trading. Similarly, the particular Complex Order
Strategy must be available for trading.''
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Finally, the Exchange proposes to add a sentence to proposed
Options 3, Section 7(k)(1) (current Options 3, Section 7(b)(10)(A))
which states, ``Legging Orders will be generated and executed in the
minimum increment for that options series.'' Options 3, Section 3
describes the minimum increments for options traded on MRX. This rule
makes clear that the minimum increment rule in Options 3, Section 3 is
applicable to Legging Orders. This amendment would modify the current
System behavior. Today, on Phlx, Legging Orders may be generated and
executed in an increment other than the minimum increment for that
series and will be ranked on the order book at its generated price and
displayed at a price that is rounded to the nearest minimum increment
for that series. The Exchange proposes to modify the behavior to be
identical to ISE and MRX Options 3, Section 7(k)(1). Additionally, MIAX
Rule 518(a)(9)(iii) similarly provides that MRX's derived orders will
not be created at a price increment less than the minimum established
by Rule 510.\11\
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\11\ MIAX Rule 510 specifies the minimum increments for options
traded on MIAX.
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The Exchange proposes to add a title ``When Legging Orders Will Not
Be Generated'' to proposed Options 3, Section 7(k)(2) (current Options
3, Section 7(b)(10)(B)) to describe the contents of the paragraph. The
Exchange proposes to state in proposed Options 3, Section 7(k)(2),
When Legging Orders Will Not Be Generated. A Legging Order will
not be generated: (i) at a price that locks or crosses the best bid
or offer of another exchange, (ii) if there is a complex auction on
either side in the Complex Options Strategy, or a single-leg auction
on either side in any component of the Complex Options Strategy, or
a Posting Period in progress on the same side in the series,
pursuant to Options 3, Section 15 regarding Acceptable Trade Range;
(iii) if the price of the leg(s) of a Complex Options Order is
outside of the price limits described in Options 3, Section 16(a);
(iv) if there is already a Legging Order in that options series on
the same side of the market at the same price; or (v) for Complex
Orders with 2 option legs, where both legs are buying or both legs
are selling and both legs are calls or both legs are puts, as
described in Options 3, Section 14(d)(3)(A); or (vi) if the Exchange
has not opened; or a particular option series has not opened or such
options series is halted.
This paragraph is intended to describe when Legging Orders will not be
generated.
The Exchange proposes to add rule text in proposed Options 3,
Section 7(k)(2)(ii) (current Options 3, Section 7(b)(10)(B)(ii))
concerning ``if there is an auction on either side or a Posting Period
under Options 3, Section 15 regarding Acceptable Trade Range (``ATR'')
\12\ on the same side in progress in the series.'' The Exchange
proposes to specifically note ``complex auction'' and proposes to
clarify that it is a complex auction on either side in the Complex
Options Strategy,\13\ or a single-leg auction on either side in any
component of the Complex Options Strategy, or a Posting Period in
progress on the same side in the series. This additional rule text is
intended to bring greater clarity to the scenario that would cause a
Legging Order not to be generated. The additional language does not
amend the current System functionality and is
[[Page 16735]]
identical to ISE and MRX Options 3, Section 7(k)(2)(ii).
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\12\ ATR is a risk protection, that sets dynamic boundaries
within which quotes and orders may trade. ATR is designed to guard
the System from experiencing dramatic price swings by preventing the
immediate execution of quotes and orders beyond the thresholds set
by this risk protection.
\13\ As proposed in Options 3, Section 14 below, a Complex
Options Strategy is the simultaneous purchase and/or sale of two or
more different options series in the same underlying security, for
the same account, in a ratio that is equal to or greater than one-
to-three (.333) and less than or equal to three-to-one (3.00) and
for the purpose of executing a particular investment strategy. Only
those Complex Options Strategies with no more than the applicable
number of legs, as determined by the Exchange on a class-by-class
basis, are eligible for processing. See proposed Options 3, Section
14(a)(1).
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Next, the Exchange proposes to amend the provision in Options 3,
Section 7(b)(10)(D)(iii) that provides, ``the price of the Complex
Order is outside of the ACE Parameter of paragraph (i).'' The Exchange
instead proposes to state, ``if the price of the leg(s) of a Complex
Options Order is outside of the price limits described in Options 3,
Section 16(a).'' First, the price of the ``leg(s)'' of the Complex
Options Order is what is looked at in this scenario, adding ``leg(s)''
is intended to clarify the current rule text. Second, the Exchange
proposes to amend the complex order risk protections in Options 3,
Section 16 to replace them with the identical risk protections that
exist on ISE and MRX Options 3, Section 16. With this rule proposal,
the Exchange intends to remove the existing ACE Parameter described in
Options 3, Section 16(i) and replace it with price limits which are
identical to ISE and MRX price limits at Options 3, Section 16(a). The
proposed changes to Options 3, Section 16 risk protections for Complex
Orders will be explained below in this rule change in the section
related to Complex Order risk protections. With this change, in the
instance where a Legging Order generated is currently outside the price
parameter (because the ABBO has moved), the System will remove the
Legging Order that was outside the price limits pursuant to proposed
Options 3, Section 7(k)(2)(iii) and will attempt to re-generate a new
Legging Order that is within the price limits described in Options 3,
Section 16(a) as proposed in Options 3, Section 7(k)(4)(v). This
behavior is similar to current Phlx behavior except that the price
limits are being replaced with limits utilized on ISE and MRX.
The Exchange proposes removing the phrase ``(unless it has priority
based on the participant type, under existing Exchange rules)'' from
Options 3, Section 7(b)(10)(D)(iv). The Exchange notes in the proposed
new rule text in the second paragraph of Options 3, Section 7(k) that
``Legging Orders are treated as having no Public Customer or Market
Maker capacity on the single-leg order book, regardless of being
generated from Public Customer or Market Maker Complex Options
Orders''. With this proposal, a higher priority Legging Order (i.e.,
Customer) at the same price as a resting Legging Order would not cause
the prior to be removed and replaced with the Customer order, rather
Phlx would preserve the prior Legging Order similar to ISE and MRX.
The Exchange proposes to remove current Options 3, Section
7(b)(10)(D)(v) which states,
A Legging Order will not be generated: (v) for a Complex Order
if the generated Legging Order would immediately cause resting
Legging Orders to be removed pursuant to section (f)(iii)(C)(4)(ix)
below. Legging Orders may be generated and executed in an increment
other than the minimum increment for that series and will be ranked
on the order book at its generated price and displayed at a price
that is rounded to the nearest minimum increment for that series.
The Exchange proposes to replace the aforementioned rule text with
``A Legging Order will not be generated: (v) for Complex Orders with 2
option legs, where both legs are buying or both legs are selling and
both legs are calls or both legs are puts, as described in Options 3,
Section 14(d)(3)(A).'' Today, ISE and MRX Options 3, Section
14(d)(3)(A) provides for this limitation. The Exchange is proposing to
adopt the provision in ISE and MRX Options 3, Section 14(d)(3)(A) into
Phlx's rules, as proposed below. With the addition of this limitation,
Phlx proposes to adopt the same rule text within ISE and MRX Options 3,
Section 7(k)(2)(v). With this change, Phlx adopts the same Complex
Order functionality as ISE and MRX at Options 3, Section 14. The
current functionality described in Phlx Options 3, Section
14(f)(iii)(C)(4)(ix) would be removed from Phlx Rules and is therefore
no longer applicable.
The Exchange relocated the sentence related to minimum increments
in current Options 3, Section 7(b)(10)(B) to the end of proposed
Options 3, Section 7(k)(1) and amended it. The rule text that is in
current Options 3, Section 7(b)(10)(B) provides, ``Two Legging Orders
relating to the same Complex Order can be generated, but only one of
those can execute as part of the execution of a particular Complex
Order'' is being relocated to the end of proposed Options 3, Section
7(k)(3) and amended. The Exchange proposes to add a new Options 3,
Section 7(k)(2)(vi) that states, ``if the Exchange has not opened; or a
particular option series has not opened or such options series is
halted.'' The Exchange has a similar rule in Phlx Options 3, Section
14(f)(iii)(C)(1).\14\ Since a complex strategy must be available for
trading to generate a Legging Order, the failure of an options series
that is a component of the complex strategy to open or a subsequent
halt would cause Legging Orders not to generate. The Exchange believes
that permitting both Legging Orders to execute as part of the execution
of a particular Complex Options Order will allow more Complex Orders to
execute while the price of the leg(s) will continue to be bounded by
the price limits described in Options 3, Section 16(a).\15\ By way of
example,
---------------------------------------------------------------------------
\14\ Phlx Options 3, Section 14(f)(iii)(C)(1) states, in part,
that Legging Orders will not be generated if the Exchange or a
particular option has not opened, is halted or is otherwise not
available for trading. MRX believes that not opening and a halt are
the two possible scenarios and therefore Phlx's rule and MRX's rule
are identical in this regard.
\15\ Proposed Options 3, Section 16(a) provides that, as
provided in Options 3, Section 14(d)(2), the legs of a complex
strategy may be executed at prices that are inferior to the prices
available on other exchanges trading the same options series.
Notwithstanding, the System will not permit any leg of a complex
strategy to trade through the NBBO for the series or any stock
component by a configurable amount calculated as the lesser of (i)
an absolute amount not to exceed $0.10, and (ii) a percentage of the
NBBO not to exceed 500%, as determined by the Exchange on a class,
series or underlying basis. A member can also include an instruction
on a Complex Order that each leg of the Complex Order is to be
executed only at a price that is equal to or better than the NBBO on
the opposite side for the options series or any stock component, as
applicable (``Do-Not-Trade-Through'' or ``DNTT'').
---------------------------------------------------------------------------
Example #2
Assume:
Complex A-B strategy, ratio of 1:1
Complex 2A-B strategy, ratio of 2:1
MM Quote for leg A 4.20 (100) x 4.50 (100)
MM Quote for leg B 4.00 (100) x 4.10 (100)
Leg Generation:
Complex Order to Buy A-B 10 @ 0.45
System generates a Legging Order on leg A's bid @ 4.45
System generates a Legging Order on leg B's offer @ 4.05
Execution:
Complex Order to Sell 2A-B 5 @ 4.85
2A-B Order trades with Legging Order on leg A 10 @ 4.45
2A-B Order trades with the Legging Order on leg B 5 @ 4.05
A-B trades with MM Quote on leg B 5 @ 4.00
The Exchange proposes to add the title ``Execution of Legging
Orders'' to describe the contents of proposed Options 3, Section
7(k)(3), or current Options 3, Section 7(b)(10)(C). As noted above, the
Exchange relocated the sentence in current Options 3, Section
7(b)(10)(B) that provided, ``Two Legging Orders related to the same
Complex Options Order can be generated, and both can execute as part of
the execution of a particular Complex Options Order'' to the end of
proposed Options 3, Section 7(k)(3).
The Exchange proposes to add the title ``Removal of Generated
Legging Orders'' to describe the contents of proposed Options 3,
Section 7(k)(4), or current Options 3, Section 7(b)(10)(D). At the end
of proposed Options 3, Section 7(k)(4)(i) or current Options 3, Section
7(b)(10)(D)(i) the Exchange proposes to add ``or is at a price that
[[Page 16736]]
locks or crosses the best bid or offer of another exchange.'' The
Exchange is rewording the sentence at Options 3, Section 7(b)(D)(xi)
that states, ``. . . when the Legging Order is on the book at a price
which is not at the minimum price increment and which is more
aggressive than the same side PBBO, and an away market moves to lock
the PBBO (which is also the NBBO).'' Phlx would remove a Legging Order
if the ABBO locks that order; this behavior is not changing. If the
Legging Order is at a price that is no longer at the displayed best bid
or offer on the single-leg limit order book or is at a price that locks
or crosses the best bid or offer of another exchange, the Legging Order
will be removed pursuant to proposed Options 3, Section 7(k)(4)(i).
This behavior is identical with functionality described at ISE and MRX
Options 3, Section 7(k)(4)(i).
Current Phlx Options 3, Section 7(b)(10)(D)(ii) currently states,
``A Legging Order is automatically removed from the regular order book:
. . . (ii) if execution of the Legging Order would no longer achieve
the net price of the Complex Order when the other leg is executed
against the Exchange's best displayed bid or offer on the regular Limit
Order book (other than another Legging Order) . . .''. The rule text
language at current Phlx Options 3, Section 7(b)(10)(D)(ii) differs
from the rule text at ISE and MRX Options 3, Section 7(k)(4). The
Exchange proposes to amend the rule text at proposed Phlx Options 3,
Section 7(k)(4) to make the language identical to ISE and MRX Options
3, Section 7(k)(4) by stating, ``A Legging Order is automatically
removed from the single-leg limit order book if: . . . (ii) execution
of the Legging Order would no longer achieve the net price of the
Complex Options Order when the other leg is executed against the best
displayed bid or offer on the single-leg limit order book, excluding
other Legging Orders . . .''.
Current Phlx Options 3, Section 7(b)(10)(D)(iii) currently states,
``A Legging Order is automatically removed from the regular order book:
. . . (iii) if the Complex Order is executed in full or in part.''. The
rule text language at current Phlx Options 3, Section 7(b)(10)(D)(iii)
differs from the rule text at ISE and MRX Options 3, Section 7(k)(4).
The Exchange proposes to make the rule text at Phlx Options 3, Section
7(b)(10)(D)(iii) identical to the ISE and MRX rule text in Options 3,
Section 7(k)(4). The Exchange proposes to amend the rule text at
proposed Phlx Options 3, Section 7(k)(4) to make the language identical
to ISE and MRX Options 3, Section 7(k)(4) by stating, ``A Legging Order
is automatically removed from the single-leg limit order book if: . . .
(iii) the Complex Options Order is executed in full or in part on the
Complex Order Book . . .''.
Current Phlx Options 3, Section 7(b)(10)(D)(v) currently states,
``A Legging Order is automatically removed from the regular order book:
. . . (v) if the price of the Complex Order is outside the ACE
Parameter of paragraph (i) . . .''. The Exchange instead proposes to
state in proposed Options 3, Section 7(k)(2)(iv), ``A Legging Order is
automatically removed from the single-leg limit order book if: . . . if
the price of the leg(s) of a Complex Options Order is outside of the
price limits described in Options 3, Section 16(a) . . .''. First, the
price of the ``leg(s)'' of the Complex Options Order is what is looked
at in this scenario; adding ``leg(s)'' is intended to clarify the
current rule text. Second, the Exchange proposes to amend the complex
order risk protections in Options 3, Section 16 to replace them with
the identical risk protections that exist on ISE and MRX Options 3,
Section 16. Similar to proposed Options 3, Section 7(k)(2), the
Exchange intends to remove the existing ACE Parameter described in
Options 3, Section 16(i) and replace it with price limits which are
identical to ISE and MRX price limits at Options 3, Section 16(a). The
proposed changes to Options 3, Section 16 risk protections for Complex
Orders will be explained below in this rule change in the section
related to Complex Order risk protections.
Under current Options 3, Section 7(b)(1)(vi) a Legging Order is
removed from the order book upon receipt of Qualified Contingent Cross
(``QCC'') Order which includes a component with a Legging Order and
upon receipt of a Public Customer to Public Customer (``C-to-C'') cross
order, which can be accomplished through a PIXL auction pursuant to
Options 3, Section 13(f). Similar to ISE and MRX, the Exchange does not
believe it is necessary to remove a Legging Order upon receipt of a QCC
or C-to-C order because both a QCC or C-to-C order trade immediately as
a two-sided order without an auction timer and do not interact with the
order book. Also, Legging Orders have no priority in the System (even
if generated from a Public Customer Complex Order or Market Maker
Complex Order).
Similar to ISE and MRX Options 3, Section 7(k)(2)(vi), Phlx will
continue to remove a Legging Order if the System initiates a complex
auction on either side in the Complex Options Strategy, or the System
initiates a single-leg auction on either side in any component of the
Complex Options Strategy. Today, the Phlx rule notes in current Options
3, Section 7(b)(10)(D)(vi) that ``. . . . an order that will trigger an
auction under Exchange rules in a component in which there is a Legging
Order (whether a buy order or a sell order).'' The Exchange is
proposing to amend the wording of this sentence in proposed Phlx
Options 3, Section 7(k)(2)(vi) to conform the rule text to ISE and MRX
Options 3, Section 7(k)(2)(vi).
Finally, the Exchange proposes to not include in Options 3, Section
7(k)(3) the rule text in current Options 3, Section 7(b)(10)(D)(viii)-
(xi). First, current Options 3, Section 7(b)(10)(D)(viii) states that a
Legging Order will be removed from the regular book, ``. . . if a
Complex Order is marketable against the cPBBO where a Legging Order is
present and has more than one leg in common with the existing Complex
Order that generated the Legging Order.'' With this proposal, Phlx will
permit a Complex Order to trade with two Legging Orders at the same
time pursuant to proposed Options 3, Section 7(k)(3).\16\ Accordingly,
current Options 3, Section 7(b)(10)(D)(viii) will no longer be
applicable and the Exchange proposes to exclude this provision from
Options 3, Section 7(k)(3). Proposed Phlx Options 3, Section 7(k)(3) is
identical to ISE and MRX Options 3, Section 7(k)(3).
---------------------------------------------------------------------------
\16\ Options 3, Section 7(k)(3) states in the last sentence
that, ``[t]wo Legging Orders related to the same Complex Options
Order can be generated, and both can execute as part of the
execution of a particular Complex Options Order.''
---------------------------------------------------------------------------
Second, the Exchange proposes to exclude from Options 3, Section
7(k)(2) the rule text in current Options 3, Section 7(b)(10)(D)(ix)
that states that a Legging Order will be removed from the regular order
book, ``. . .if a Complex Order becomes marketable against multiple
Legging Orders.'' Instead, proposed Options 3, Section 7(k)(3) will
permit a Complex Order to trade with two Legging Orders at the same
time. Accordingly, the rule text in current Options 3, Section
7(b)(10)(D)(ix) will no longer be applicable. The proposed Phlx rules
text at Options 3, Section 7(k)(2) and (3) is identical to ISE and MRX
Options 3, Section 7(k)(2) and (3).
Third, the Exchange proposes to exclude from Options 3, Section
7(k)(2) the rule text in current Options 3, Section 7(b)(10)(D)(x) that
states that a Legging Order will be removed from the regular order
book, ``. . .if a Complex Order consisting of an unequal quantity of
components is marketable against the cPBBO where a Legging Order is
present but cannot be executed due to insufficient size in at least one
of the
[[Page 16737]]
components in the cPBBO.'' The Exchange is excluding this text from
proposed Options 3, Section 7(k)(2) because it is unnecessary with
these proposed changes. The proposed Phlx rule text at Options 3,
Section 7(k)(2) is identical to ISE and MRX Options 3, Section 7(k)(2).
To illustrate the reason for removal, the Exchange utilized the
below example.
Assume the following:
Exchange BBO Quote Leg A: 4.20 (100) x 4.50 (100)
Exchange BBO Quote Leg B: 4.00 (100) x 4.10 (100)
A-B strategy, ratio of 1:1
2A-B strategy, ratio of 2:1
Complex Order in A-B is entered: Buy 1 @ 0.45
Generates a legging order on leg A's Bid 1 @ 4.45
Generates a legging order on leg B's Offer 1 @ 4.05
If the Complex Order in 2A-B is entered as Sell 1 @ 4.85, the
Complex Order could not trade due to insufficient size on Leg A that
would be needed to satisfy the 2:1 ratio. This Legging Order could
however rest on the Complex Order Book and the Legging Orders from the
A-B Buy order would not be removed. This example illustrates that there
is no need to remove the automatically generated Legging Orders if a
Complex Order consisting of an unequal quantity of components is
marketable against the cPBBO where a Legging Order is present but
cannot be executed due to insufficient size in at least one of the
components in the cPBBO.
Fourth, the Exchange proposes to exclude from Options 3, Section
7(k)(2) the rule text in current Options 3, Section 7(b)(10)(D)(xi)
that states that a Legging Order will be removed from the regular order
book, ``. . . when the Legging Order is on the book at a price which is
not at the minimum price increment and which is more aggressive than
the same side PBBO, and an away market moves to lock the PBBO (which is
also the NBBO).'' Today, Phlx generates Legging Orders at non-minimum
price increments and displays at the closest inferior price increment
as provided for in Options 3, Section 4.\17\ Today, Phlx would re-price
the Legging Order to avoid locking and crossing an away market. With
the proposed amendment, Phlx will amend its rule text to adopt
identical System behavior to ISE and MRX and would no longer re-price a
quote, rather Phlx will remove a Legging Order that is at a price that
is no longer at the displayed best bid or offer on the single-leg limit
order book or is at a price that locks or crosses the best bid or offer
of another exchange. As proposed, Options 3, Section 7(k)(4)(i) would
provide that a Legging Order is automatically removed from the single-
leg limit order book if: . . . the price of the Legging Order is no
longer at the displayed best bid or offer on the single-leg limit order
book or is at a price that locks or crosses the best bid or offer of
another exchange. Proposed Options 3, Section 7(k)(4)(i) is identical
to ISE and MRX Options 3, 7(k)(4)(i).
---------------------------------------------------------------------------
\17\ 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 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.
---------------------------------------------------------------------------
Options 3, Section 14
As part of its technology migration, the Exchange proposes to
replace Phlx's Complex Order functionality in Options 3, Section 14, in
its entirety, with Complex Order functionality identical to ISE and MRX
Options 3, Section 14. Today, ISE and MRX Complex Order functionality
is harmonized. Phlx is the only other Nasdaq affiliated options market
to offer Complex Order functionality among the six Nasdaq affiliated
options markets. A goal of the technology migration is to harmonize
rules to permit market participants who are members of multiple Nasdaq
affiliated options markets to realize the benefits of common
functionality across its options markets. The proposal will harmonize
the way Nasdaq affiliated markets handle Complex Orders as the Phlx
Complex Order functionality would be identical to the ISE and MRX
Complex Order functionality.
Phlx Complex Order Functionality
Definitions
Phlx Options 3, Section 14(a) defines a variety of terms including:
Complex Order,\18\ Complex Order Strategy,\19\
---------------------------------------------------------------------------
\18\ For purposes of the electronic trading of Complex Orders, a
Complex Order is an order involving the simultaneous purchase and/or
sale of two or more different options series in the same underlying
security, priced as a net debit or credit based on the relative
prices of the individual components, for the same account, for the
purpose of executing a particular investment strategy. A Complex
Order can also be a stock-option order, which is an order to buy or
sell a stated number of units of an underlying security (stock or
Exchange Traded Fund Share (``ETF'')) coupled with the purchase or
sale of options contract(s). The underlying security must be the
deliverable for the options component of that Complex Order and
represent exactly 100 shares per option for regular way delivery.
Stock-option orders can only be executed against other stock-option
orders and cannot be executed by the System against orders for the
individual components. Member organizations may only submit Complex
Orders with a stock/ETF component if such orders comply with the
Qualified Contingent Trade Exemption from Rule 611(a) of Regulation
NMS. Member organizations submitting such Complex Orders with a
stock/ETF component represent that such orders comply with the
Qualified Contingent Trade Exemption. Members of FINRA or The Nasdaq
Stock Market (``Nasdaq'') are required to have a Uniform Service
Bureau/Executing Broker Agreement (``AGU'') with Nasdaq Execution
Services, LLC (``NES'') in order to trade Complex Orders containing
a stock/ETF component; firms that are not members of FINRA or Nasdaq
are required to have a Qualified Special Representative (``QSR'')
arrangement with NES in order to trade Complex Orders containing a
stock/ETF component. The maximum number of components of a Complex
Order is six. A stock-option order may include up to five options
components (legs). See Options 3, Section 14(a)(i).
\19\ The term ``Complex Order Strategy'' means a particular
combination of components of a Complex Order and their ratios to one
another. The Exchange will calculate both a bid price and an offer
price for each Complex Order Strategy based on the current PBBO (as
defined below) for each component of the Complex Order. Each Complex
Order Strategy will be assigned a strategy identifier by the System.
See Options 3, Section 14(a)(ii).
---------------------------------------------------------------------------
PBBO,\20\ cPBBO,\21\ NBBO \22\, cNBBO,\23\ Participant,\24\ Phlx
market
[[Page 16738]]
maker \25\ and Phlx electronic market maker,\26\ Do Not Auction,\27\
Conforming ratio,\28\ and Firm.\29\ Phlx proposes to replace these
defined terms with definitions that are identical to ISE and MRX
Options 3, Section 14(a) and is used in the proposed rule.
Specifically, the Exchange proposes to add the following definitions:
``Complex Options Strategy'' for complex strategies that have only
options components, ``Stock-Option Strategy'' for complex strategies
that have a stock component and a single options component,\30\ and
``Stock-Complex Strategy'' for complex strategies that have a stock
component and multiple options components.\31\ The Exchange notes that
the terms that are being removed are not relevant to the proposed rule
text or are described in proposed Options 3, Section 14, or would
retain the meaning of the term as defined in Options 1, Definitions.
Further, the Exchange proposes to remove the description of Complex
Orders at Options 3, Section 7(b)(12) and the description of Stock-
Option Orders at Options 3, Section 7(b)(13). These terms relate to the
current Complex Order functionality at Options 3, Section 14 which is
being replaced as described herein.
---------------------------------------------------------------------------
\20\ The term ``PBBO'' means the Phlx Best Bid and/or Offer for
individual option series. See Options 3, Section 14(a)(iii).
\21\ The term ``cPBBO'' means the best net debit or credit price
for a Complex Order Strategy based on the PBBO for the individual
options components of such Complex Order Strategy, and, where the
underlying security is a component of the Complex Order, the
National Best Bid and/or Offer for the underlying security. See
Options 3, Section 14(a)(iv).
\22\ The term ``NBBO'' means the National Best Bid and/or Offer
for an individual option series. See Options 3, Section 14(a)(v).
\23\ The term ``cNBBO'' means the best net debit or credit price
for a Complex Order Strategy based on the NBBO for the individual
options components of a Complex Order Strategy, and, where the
underlying security is a component of the Complex Order, the
National Best Bid and/or Offer for the underlying security. See
Options 3, Section 14(a)(vi).
\24\ The term ``participant'' means SQTs, RSQTs, Floor Market
Makers, Lead Market Makers and non-Phlx market makers on another
exchange; Public Customers, Professionals, Firms, and non-market-
maker off-floor broker-dealers; and Floor Brokers using the Options
Floor Based Management System. See Options 3, Section 14(a)(vii).
\25\ The term ``Phlx market maker'' means SQTs, RSQTs, Lead
Market Makers and Floor Market Maker. See Options 3, Section
14(a)(vii).
\26\ The term ``Phlx electronic market maker'' means SQTs, RSQTs
and Lead Market Makers. See Options 3, Section 14(a)(vii).
\27\ The term ``Do Not Auction'' means that this Complex Order
is not ``COLA-eligible,'' as defined in (d)(ii)(B) below and thus
prevents it from triggering a Complex Order Live Auction, pursuant
to paragraph (e) below, or joining one that is in progress. (A) DNA
Orders received prior to the opening or when the Complex Order
Strategy is not available for trading will be cancelled. (B) DNA
Orders are cancelled if not immediately executed. (C) DNA Orders
will initially only be available for Complex Orders consisting of
more than two options components or where the underlying security is
a component; once the Exchange has fully rolled out its enhanced
Complex Order System, which will be announced in an Options Trader
Alert, DNA Orders will also become available for Complex Orders
consisting of two options components. See Options 3, Section
14(a)(viii).
\28\ The term ``conforming ratio'' is where the ratio between
the sizes of the options components of a Complex Order is equal to
or greater than one-to-three (.333) and less than or equal to three-
to-one (3.00). For example, a one-to-two (.5) ratio, a two-to-three
(.667) ratio, or a two-to-one (2.00) ratio is a conforming ratio,
whereas a one-to-four (.25) ratio or a four-to-one (4.0) ratio is
not; where one component of the Complex Order is the underlying
security, the ratio between any options component and the underlying
security component must be less than or equal to eight contracts to
100 shares of the underlying security. See Options 3, Section
14(a)(ix).
\29\ The term ``Firm'' means a broker-dealer trading for its own
(proprietary) account that is: a member of The Options Clearing
Corporation (``OCC'') or maintains a Joint Back Office (``JBO'')
arrangement with an OCC member. Unless otherwise specified, Firms
are included in the category of non-market-maker off-floor broker-
dealer. See Options 3, Section 14(a)(x).
\30\ By definition, Stock-Option Strategies will have only one
option leg and one stock leg.
\31\ Currently, Phlx accepts up to 6 option legs on Complex
Orders, and Stock-Tied Complex Orders may have up to 5 option legs
in addition to one stock leg. Currently, ISE and MRX accepts Complex
Options Strategies with up to 10 options legs, and Stock-Option
Strategies and Stock-Complex Strategies with up to 9 options legs in
addition to one stock leg. Phlx would be modified to accept the same
number of legs as ISE.
---------------------------------------------------------------------------
Specifically, the Exchange proposes to provide that,
A Complex Options Strategy is the simultaneous purchase and/or
sale of two or more different options series in the same underlying
security, for the same account, in a ratio that is equal to or
greater than one-to-three (.333) and less than or equal to three-to-
one (3.00) and for the purpose of executing a particular investment
strategy. Only those Complex Options Strategies with no more than
the applicable number of legs, as determined by the Exchange on a
class-by-class basis, are eligible for processing.
Further, the Exchange proposes to provide that,
A Stock-Option Strategy is the purchase or sale of a stated
number of units of an underlying stock or a security convertible
into the underlying stock (``convertible security'') coupled with
the purchase or sale of options contract(s) on the opposite side of
the market representing either (A) the same number of units of the
underlying stock or convertible security, or (B) the number of units
of the underlying stock necessary to create a delta neutral
position, but in no case in a ratio greater than eight-to-one
(8.00), where the ratio represents the total number of units of the
underlying stock or convertible security in the option leg to the
total number of units of the underlying stock or convertible
security in the stock leg.
Finally, the Exchange proposes to provide that,
A Stock-Complex Strategy is the purchase or sale of a stated
number of units of an underlying stock or a security convertible
into the underlying stock (``convertible security'') coupled with
the purchase or sale of a Complex Options Strategy on the opposite
side of the market representing either (A) the same number of units
of the underlying stock or convertible security, or (B) the number
of units of the underlying stock necessary to create a delta neutral
position, but in no case in a ratio greater than eight-to-one
(8.00), where the ratio represents the total number of units of the
underlying stock or convertible security in the option legs to the
total number of units of the underlying stock or convertible
security in the stock leg. Only those Stock-Complex Strategies with
no more than the applicable number of legs, as determined by the
Exchange on a class-by-class basis, are eligible for processing.
The applicable number of legs would be determined by Phlx on a
class-by-class basis independently for Complex Options Strategies and
Stock-Complex Strategies. At proposed Options 3, Section 14(a)(4), the
Exchange proposes to note that the term ``complex strategy'' includes
Complex Options Strategies, Stock-Option Strategies, and Stock-Complex
Strategies. Finally, the Exchange proposes to state at Options 3,
Section 14(a)(5) that the terms ``Complex Options Order,'' ``Stock-
Option Order,'' and ``Stock-Complex Order'' refer to orders for a
Complex Options Strategy, Stock-Option Strategy, and Stock-Complex
Strategy, respectively. Also, the term ``Complex Order'' includes
Complex Options Orders, Stock-Option Orders, and Stock-Complex Orders.
The proposed new definitions are identical with the terms at ISE and
MRX Options 3, Section 14(a) and will be utilized throughout proposed
new Phlx Options 3, Section 14. The proposed terms are intended to
provide greater clarity to the Options 3, Section 14 handling of
Complex Order functionality.
Current Phlx Options 3, Section 14(b) notes that Complex Orders may
be entered in increments of $0.01 with certain ``time in force''
designations and as certain order types with certain contingencies.
Proposed new Phlx Options 3, Section 14(c)(1) will address minimum
increments which would continue to be expressed in one cent ($0.01)
increments and would provide,
Minimum Increments. Bids and offers for Complex Options
Strategies may be expressed in one cent ($0.01) increments, and the
options leg of Complex Options Strategies may be executed in one
cent ($0.01) increments, regardless of the minimum increments
otherwise applicable to the individual options legs of the order.
Bids and offers for Stock-Option Strategies or Stock-Complex
Strategies may be expressed in any decimal price determined by the
Exchange, and the stock leg of a Stock-Option Strategy or Stock-
Complex Strategy may be executed in any decimal price permitted in
the equity market. The options leg of a Stock-Option Strategy or
Stock-Complex Strategy may be executed in one cent ($0.01)
increments, regardless of the minimum increments otherwise
applicable to the individual options legs of the order.
Phlx proposes to also address minimum increments in new
Supplementary .02 to Options 3, Section 3, similar to ISE Supplementary
Material .0 to Options 3, Section 3. Phlx proposes to state,
``Notwithstanding any other provision of this Rule, complex strategies
may be traded in the increments described in Options 3, Section
14(c)(1).'' This proposed rule text would be identical to rule text at
proposed Options 3, Section 14(c)(1)
[[Page 16739]]
and provide more transparency to the minimum increment.\32\
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\32\ The Exchange also proposes to renumber Phlx Supplementary
Material .02-.04 to Options 3, Section 3.
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Current Options 3, Section 14(a)(i), (ii) and (iii) contain certain
restrictions on what order types certain Phlx participants may enter.
With this proposal, all market participants will continue to be able to
enter Complex Orders as is the case on ISE and MRX. Today, Options 3,
Section 14(b)(i) \33\ describes ``off-floor broker-dealers.'' Phlx
removed this definition from its rules,\34\ therefore, the restrictions
for off-floor broker dealers are no longer applicable. The Exchange
proposes to remove the references to the restrictions on off-floor
broker dealers, with respect to Complex Orders in Options 3, Section
14(b)(ii) \35\ with this proposal. Market participants from another
exchange may enter Complex Orders on Phlx through a member or member
organization utilizing any of the order types that would be available
for Complex Orders which are described below similar to ISE and MRX.
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\33\ Options 3, Section 14(b)(i) provides, ``Public Customers
and Professionals and non-market maker off-floor broker-dealers may
enter the Complex Orders listed in paragraph (a) above as Day, Good
Til Cancelled (``GTC'') or Immediate or Cancel (``IOC'') as those
terms are defined in Options 3, Section 7(c).''
\34\ SR-Phlx-2024-71 removes the rule text at Options 3, Section
14(b)(i) describing an ``off-floor broker-dealer. See Securities
Exchange Act Release No. 101989 (December 30, 2024), 89 FR 106888
(December 30, 2024) (SR-Phlx-2024-71). SR-Phlx-2024-71 is effective
but not yet operative. SR-Phlx-2024-71 would be operative at the
same time as this rule change as they are both part of the same
technology migration.
\35\ Current Options 3, Section 14(b)(ii) provides, ``SQTs,
RSQTs, Floor Market Makers, Lead Market Makers and non-Phlx market
makers on another exchange may enter the Complex Orders listed in
paragraph (a) above as IOC only. In addition, for Complex Orders
consisting of more than two options components or where the
underlying security is a component, SQTs, RSQTs, non-SQT Market
Makers, Lead Market Makers and non-Phlx market makers on another
exchange may enter the Complex Orders listed in paragraph (a) above
as Day orders; once the Exchange has fully rolled out its enhanced
Complex Order System, which will be announced in an Options Trader
Alert, Day orders will also become available for Complex Orders
consisting of two options components.''
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Additionally, current Options 3, Section 14(b)(ii) provides,
SQTs, RSQTs, Floor Market Makers, Lead Market Makers and non-
Phlx market makers on another exchange may enter the Complex Orders
listed in paragraph (a) above as IOC only. In addition, for Complex
Orders consisting of more than two options components or where the
underlying security is a component, SQTs, RSQTs, non-SQT Market
Makers, Lead Market Makers and non-Phlx market makers on another
exchange may enter the Complex Orders listed in paragraph (a) above
as Day orders; once the Exchange has fully rolled out its enhanced
Complex Order System, which will be announced in an Options Trader
Alert, Day orders will also become available for Complex Orders
consisting of two options components.
Phlx defines a Market Maker at Options 1, Section 1(b)(28) as an
SQT or a RSQT who enters quotations for his own account electronically
into the System. A Lead Market Maker is a Market Maker on Phlx.\36\
Phlx proposes to utilize the defined term ``Market Maker'' in proposed
Options 3, Section 14, rather than the individual terms (SQT, RSQT, and
Lead Market Maker) to refer to electronic Market Makers that are
subject to Options 3, Section 14. The Exchange notes that all
electronic Market Makers will continue to be subject to the specified
quoting obligations in Options 2, Section 5.\37\
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\36\ 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).
\37\ Options 2, Section 5 specifies the continuous quoting
obligations for SQTs and RSQTs, as well as the quoting obligations
for Lead Market Makers.
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Floor Market Makers \38\ are Phlx market participants located on
Phlx's trading floor that are subject to the rules in Options 8 which
govern Phlx's trading floor. Phlx floor participants enter into open
outcry to announce Complex Orders for execution. Those orders are
processed in the same manner as all other orders announced in open
outcry. Phlx electronic market participants may utilize the electronic
Complex Orders described in proposed Options 3, Section 14, while Phlx
Floor Market Makers are subject to the rules in Options 8. Therefore,
Floor Market Maker are not currently subject to Options 3, Section 14,
and would not be subject to proposed Options 3, Section 14. Non-Phlx
market makers on another exchange, also known as away market makers,
are not Phlx Market Makers and, therefore, are not subject to Phlx
quoting obligations and Phlx's other rules applicable to Phlx Market
Makers.
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\38\ The term ``Floor Market Maker'' is a Market Maker who is
neither an SQT nor an RSQT. A Floor Market Maker may provide a quote
in open outcry. See Options 8, Section 2(a)(4).
---------------------------------------------------------------------------
The Exchange will no longer restrict certain market participants to
enter the Complex Orders as IOC only as noted in Options 3, Section
14(b)(ii). Proposed Options 3, Section 14 will permit all Members to
enter any complex order listed in Options 3, Section 14(a) without
restriction.
The rule text currently in Options 3, Section 14(b)(iii),\39\ as
well as other rules that refer to Floor Market Makers or Floor Brokers,
is no longer necessary as the Exchange proposes to amend Options 8,
Section 32 to describe the types of Complex Orders that would be
available to be utilized on Phlx's trading floor in open outcry in
light of the changes to Options 3, Section 14.\40\ The Exchange notes
that Phlx market participants located on Phlx's trading floor are
subject to the rules in Options 8 which govern Phlx's trading floor.
Phlx floor participants enter into open outcry to announce Complex
Orders for execution. Those orders are processed in the same manner as
all other orders announced in open outcry. Phlx electronic permit
holders may utilize the electronic Complex Orders described in proposed
Options 3, Section 14.
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\39\ Current Options 3, Section 14(b)(iii) states, ``Floor
Brokers using the Options Floor Based Management System may enter
the Complex Orders listed in paragraph (a) above as Day, GTC or IOC
on behalf of Public Customers, Professionals and non-market-maker
off-floor broker-dealers, and as IOC only on behalf of SQTs, RSQTs,
Floor Market Makers, Lead Market Makers, non-Phlx market makers on
another exchange and Firms.''
\40\ The Options 8 rules relate to floor trading. ISE and MRX do
not have a trading floor.
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As noted above, with the proposed new Complex Order rules, all Phlx
members and member organizations will be able to enter all Complex
Order types.
As noted in Options 3, Section 14(b)(iv), member organizations will
continue to mark the stock/ETF component of a Complex Order ``long,''
``short,'' or ``short exempt'' in compliance with Regulation SHO under
the Exchange Act, however Regulation SHO would be described in proposed
new Options 3, Section 16(e), which will be discussed below.
Order Types
Today, Phlx may determine to make certain order types and/or times-
in-force available on a class or System basis as described in current
Options 3, Section 7(b). Pursuant to proposed Options 3, Section
14(b)(v), Complex Orders may be submitted as: All-or-None Orders,
Cancel-Replacement Orders, Directed Orders, Limit Orders or Market
Orders as those terms are defined in Options 3, Section 7(b).
Phlx proposes to replace the aforementioned order types with order
types that are identical those offered on ISE and MRX at Options 3,
Section 14(b). Phlx proposes to state at proposed Options 3, Section
14(b) that unless otherwise specified, the definitions in the proposal
have the same meaning
[[Page 16740]]
contained in Options 3, Section 7.\41\ Similar rule text appears in
current Phlx Options 3, Section 7(b). As is the case today, the
Exchange may determine to make certain order types and/or times-in-
force available on a class or System basis. Phlx proposes to adopt the
following Complex Orders or designations: Market Complex Order,\42\
Limit Complex Order,\43\ All-Or-None Complex Order,\44\ Attributable
Complex Order,\45\ Complex Customer Cross Order,\46\ Qualified
Contingent Cross Complex Order,\47\ Day Complex Order,\48\ Fill-or-Kill
Complex Orders,\49\ Immediate-or-Cancel Complex Orders,\50\ Opening
Only Complex Order,\51\ Good-Till-Date Complex Order,\52\ Good-Till-
Cancel Complex Order,\53\ Exposure Complex Order,\54\ Exposure Only
Complex Order,\55\ Cancel-Replacement Complex Order,\56\ Complex PIXL
Order,\57\ and Complex Directed Order.\58\ These order types are
identical to those at ISE and MRX Options 3, Section 14(a). With this
proposal, Phlx will offer more order types than today.
---------------------------------------------------------------------------
\41\ SR-Phlx-2024-71 proposed to adopt the same single-leg order
types in Options 3, Section 7 that currently exist on ISE and MRX at
Options 3, Section 7. See Securities Exchange Act Release No. 101989
(December 30, 2024), 89 FR 106888 (December 30, 2024) (SR-Phlx-2024-
71). SR-Phlx-2024-71 is effective but not yet operative. SR-Phlx-
2024-71 would be operative at the same time as this rule change as
they are both part of the same technology migration.
\42\ A Market Complex Order is a Complex Order to buy or sell a
complex strategy that is to be executed at the best price
obtainable. If not executable upon entry, such orders will rest on
the Complex Order Book unless designated as fill-or-kill or
immediate-or-cancel. See proposed Options 3, Section 14(b)(1).
\43\ A Limit Complex Order is a Complex Order to buy or sell a
complex strategy that is entered with a limit price expressed as a
net purchase or sale price for the components of the order. See
proposed Options 3, Section 14(b)(2).
\44\ A Complex Order may be designated as an All-or-None Order
that is to be executed in its entirety or not at all. An All-Or-None
Order may only be entered as an Immediate-or-Cancel Order. See
proposed Options 3, Section 14(b)(3).
\45\ A Market or Limit Complex Order may be designated as an
Attributable Order as provided in Options 3, Section 7(h). See
proposed Options 3, Section 14(b)(4).
\46\ A Complex Customer Cross Order is comprised of a Public
Customer Complex Order to buy and a Public Customer Complex Order to
sell at the same price and for the same quantity. Such orders will
trade in accordance with Options 3, Section 12(b). See proposed
Options 3, Section 14(b)(5).
\47\ A Complex Options Order may be entered as a Qualified
Contingent Cross Order, as defined in Options 3, Section 7(j).
Qualified Contingent Cross Complex Orders will trade in accordance
with Options 3, Section 12(d). See proposed Options 3, Section
14(b)(6).
\48\ A Complex Order may be designated as a Day Order that if
not executed, expires at the end of the day on which it was entered.
See proposed Options 3, Section 14(b)(7).
\49\ A Complex Order may be designated as a Fill-or-Kill Order
that is to be executed in its entirety as soon as it is received
and, if not so executed, cancelled. See proposed Options 3, Section
14(b)(8).
\50\ A Complex Order may be designated as an Immediate-or-Cancel
Order that is to be executed in whole or in part upon receipt. Any
portion not so executed is cancelled. See proposed Options 3,
Section 14(b)(9).
\51\ An Opening Only Complex Order is a Complex Order that may
be entered for execution during the Complex Opening Process
described in Supplementary Material .04 to Options 3, Section 14.
Any portion of the order that is not executed during the Complex
Opening Process is cancelled. See proposed Options 3, Section
14(b)(10).
\52\ A Good-Till-Date Complex Order is an order to buy or sell
which, if not executed, will be cancelled at the sooner of the end
of the expiration date assigned to the Complex Order, or the
expiration of any individual series comprising the order. See
proposed Options 3, Section 14(b)(11).
\53\ A Good-Till-Cancel Complex Order is an order to buy or sell
that remains in force until the order is filled, canceled or any
series of the order expires; provided, however, that a Good-Till-
Cancel Complex Order will be cancelled in the event of a corporate
action that results in an adjustment to the terms of any series
underlying the Complex Order. See proposed Options 3, Section
14(b)(12).
\54\ An Exposure Complex Order is an order that will be exposed
upon entry as provided in Supplementary Material .01 to this Rule if
eligible, or entered on the Complex Order Book if not eligible. Any
unexecuted balance of an Exposure Complex Order remaining upon the
completion of the exposure process will be entered on the Complex
Order Book. See proposed Options 3, Section 14(b)(13).
\55\ An Exposure Only Complex Order is an order that will be
exposed upon entry as provided in Supplementary Material .01 to this
Rule if eligible, or cancelled if not eligible. Any unexecuted
balance of an Exposure Only Complex Order remaining upon the
completion of the exposure process will be cancelled. See proposed
Options 3, Section 14(b)(14).
\56\ A Cancel-Replacement Complex Order shall mean a single
message for the immediate cancellation of a previously received
Complex Order and the replacement of that Complex Order with a new
Complex Order. If the previously placed Complex order is already
filled partially or in its entirety, the replacement Complex Order
is automatically canceled or reduced by the number of contracts that
were executed. The replacement Complex Order will retain the
priority of the cancelled Complex order, if the order posts to the
Complex Order Book, provided the price is not amended or size is not
increased. See proposed Options 3, Section 14(b)(15).
\57\ A Complex PIXL Order is an order entered into the Complex
Price Improvement Mechanism as described in Options 3, Section 13.
See proposed Options 3, Section 14(b)(18).
\58\ A Complex Directed Order is a Complex Order for which a
member organization has designated a Directed Market Maker as
described in Options 2, Section 10. The component leg(s) of a
Complex Order with a Directed Order instruction may allocate
pursuant to Options 3, Section 10(a)(1)(C) when the Complex Directed
Order legs into the single-leg market provided that the Directed
Market Maker is quoting at the better of the internal BBO or the
NBBO for a component leg(s) of the Complex Directed Order at the
time the Complex Directed Order is received. A Directed Market Maker
will not receive an allocation pursuant to Options 3, Section
10(a)(1)(C) for a component leg(s) of a Complex Directed Order if
the Directed Market Maker is not quoting at the better of the
internal BBO or the NBBO for that leg at the time the Complex
Directed Order is received. See proposed Options 3, Section
14(b)(19).
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Current Phlx Options 3, Section 14(c)(i) provides that a Complex
Order is eligible to trade on the System only when each options
component of the Complex Order is open for trading on the Exchange, and
where the underlying security is a component of the Complex Order, such
underlying security is open for trading on its primary market. Complex
Orders may be executed against the Complex Order Book or placed on the
Complex Order Book. This will continue to be true of Phlx's new Complex
Order functionality. The Exchange's proposal notes at proposed Options
3, Section 14(c), Applicability of Exchange Rules, that except as
otherwise provided in Options 3, Section 14, complex strategies shall
be subject to all other Exchange Rules that pertain to orders and
quotes generally. Complex Orders may execute against orders and quotes
in both the single-leg order book and Complex Order Book.
Current Phlx Options 3, Section 14(c)(i) also provides that certain
Complex Orders will be entered into a Complex Order Live Auction (as
defined below) either following a Complex Order Opening Process (as
defined below) or when a Complex Order improves the cPBBO. Phlx will no
longer offer the Complex Order Live Auction. This will be discussed in
greater detail below.
Current Phlx Options 3, Section 14(c)(ii) states that Complex
Orders will not trade on the System under the following conditions: (A)
the Complex Order is received prior to the opening on the Exchange of
any options component of the Complex Order; (B) during an opening
rotation for any options component of the Complex Order; (C) during a
trading halt for any options component of the Complex Order; (E) when
an automatic removal of quotes occurs in any options component of the
Complex Order that represents all or a portion of the PBBO; or (F) when
the Exchange's market for any options component of the Complex Order is
disseminated pursuant to Options 3, Section 6(a)(ii)(B).
With this proposal, Phlx will continue to not trade Complex Orders
prior to the opening. Proposed Supplementary Material .04 to Options 3,
Section 14 notes that with respect to the Complex Opening Process,
after each of the individual component legs have opened, or reopened
following a trading halt, Complex Options Strategies, Stock-Option
Strategies and Stock-Complex Strategies will be opened pursuant to the
Complex Opening Price Determination described in Supplementary Material
.05 to Options 3, Section 14. The Complex Opening Process will be
discussed in greater detail below. The Exchange notes that it will
continue to not trade during a
[[Page 16741]]
trading halt as specified in proposed Supplementary Material .04 to
Options 3, Section 14 and proposed Supplementary Material .01(d) to
Options 3, Section 14. The Exchange will continue to not trade when
quotes are automatically removed in an option component as the quotes
will not be available as described in proposed Options 3, Section 16.
The Exchange proposes to remove the rule text within Options 3, Section
6 as that rule is being removed in another rule change.\59\
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\59\ SR-Phlx-2024-71 proposed the removal of Options 3, Section
6. See Securities Exchange Act Release No. 101989 (December 30,
2024), 89 FR 106888 (December 30, 2024) (SR-Phlx-2024-71). SR-Phlx-
2024-71 is effective but not yet operative. SR-Phlx-2024-71 would be
operative at the same time as this rule change as they are both part
of the same technology migration.
---------------------------------------------------------------------------
Current Phlx Options 3, Section 14(c)(iii)(A) discusses spread
priority. The current rule provides:
Spread Priority. (A) Complex Orders consisting of a conforming
ratio may be executed at a total credit or debit price without
giving priority to individual bids or offers established in the
marketplace that are not better than the bids or offers comprising
such total credit or debit, provided that if any of the bids or
offers established in the marketplace consist of a Public Customer
order, at least one option leg is executed at a better price than
the established bid or offer for that option contract by the minimum
trading increment and no option leg is executed at a price outside
of the established bid or offer for that option contract.
(B) Where a Complex Order in a conforming ratio consists of the
underlying security (stock or ETF) and one options leg, such options
leg has priority over bids or offers established in the marketplace,
except over bids or offers established by Public Customer orders.
However, where a Complex Order in a conforming ratio consists of the
underlying stock or ETF and more than one options leg, the options
legs have priority over bids and offers established in the
marketplace, including Public Customer orders, if at least one
options leg improves the existing market for that option.
(C) Options 5, Section 2 shall apply to all Complex Order
executions. Accordingly, Complex Orders with conforming ratios are
eligible for the exception contained in Options 5, Section
2(b)(viii) and therefore may trade through the NBBO for that option.
(D) This paragraph (c) shall apply to all Complex Order
executions, whether executed in a Complex Order Live Auction or
otherwise.
Phlx proposes to delete Options 3, Section 14(c)(iii)(A) and
replace it with proposed Options 3, Section 14(c)(2) which would
provide,
Complex Order. Complex strategies will not be executed at prices
inferior to the best net price achievable from the best Exchange
bids and offers for the individual legs. Notwithstanding the
provisions of Options 3, Section 10:
(i) a Complex Options Strategies may be executed at a total
credit or debit price with one other member organization without
giving priority to bids or offers established on the Exchange that
are no better than the bids or offers in the individual options
series comprising such total credit or debit; provided, however,
that if any of the bids or offers established on the Exchange
consist of a Public Customer Order, the price of at least one leg of
the complex strategy must trade at a price that is better than the
corresponding bid or offer on the Exchange by at least one minimum
trading increment for the series as defined in Options 3, Section 3.
(ii) The option leg of a Stock-Option Strategy has priority over
bids and offers for the individual options series established on the
Exchange by Professional Orders and market maker quotes that are no
better than the price of the options leg, but not over such bids and
offers established by Public Customer Orders.
(iii) The options legs of a Stock-Complex Strategy are executed
in accordance with subparagraph (c)(2)(i) above.
The Exchange notes that with this proposal the spread priority will
remain the same. The proposed rule text will be identical to ISE and
MRX Options 3, Section 14(c)(2). The Exchange notes that with respect
to the trading floor, the Exchange proposes to amend Options 3, Section
24(j) to clarify that the spread type priority would consist of Spread-
Type Orders consisting of a conforming ratio.\60\ The Exchange also
proposes to amend Options 8, Section 32 to indicate that the Complex
Order types that may be utilized on the trading floor at Options 3,
Section 14(a)(1)-(3) also may be used on the trading floor.\61\
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\60\ The Exchange proposes to add the definition of a conforming
order at Options 1, Section 1(b)(13) as described in this proposal.
As proposed, the term ``conforming ratio'' is where the ratio
between the sizes of the options components of a Complex Order is
equal to or greater than one-to-three (.333) and less than or equal
to three-to-one (3.00). For example, a one-to-two (.5) ratio, a two-
to-three (.667) ratio, or a two-to-one (2.00) ratio is a conforming
ratio, whereas a one-to-four (.25) ratio or a four-to-one (4.0)
ratio is not; where one component of the Complex Order is the
underlying security, the ratio between any options component and the
underlying security component must be less than or equal to eight
contracts to 100 shares of the underlying security.
\61\ These order types may be utilized on the trading floor in
addition to other order types that may be utilized on the trading
floor as specified in proposed Options 8, Section 32.
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Phlx proposes to include the following text concerning
internalization in proposed Options 3, Section 14(c)(3).
Complex Orders represented as agent may be executed (i) as
principal as provided in Options 3, Section 22(b), or (ii) against
orders solicited from member organizations and non-member
organization broker-dealers as provided in Options 3, Section 22(c).
The exposure requirements of Options 3, Section 22(b) or (c) must be
met on the Complex Order Book unless the order is executed in one of
the mechanisms described in Options 3, Sections 12 and 13.
While Complex Orders on Phlx are subject to these rules today in
Options 3, Section 22, current Phlx Options 3, Section 14 does not
specifically refer to these rules. Accordingly, proposed Options 3,
Section 14(c)(3) will make clear that the internalization rules will
apply to Complex Orders in the same manner that they apply to all other
orders executed on Phlx.
Complex Opening
Phlx's current complex opening process will be replaced with a
complex opening process identical to ISE and MRX at Supplementary .05
to Options 3, Section 14. The Exchange notes that Complex Options
Strategies will open faster with the proposed new process and the
boundary prices for determining the opening price will differ as a
result.
First, with respect to the process for opening a Complex Orders,
today, on Phlx, after trading has opened in each component of a pending
Complex Order, or re-opened following a trading halt, the System
initiates a Complex Order Opening Process or ``COOP.'' The System
accepts interest for the COOP during a COOP Timer, and at the
conclusion of the COOP Timer the System determines the price at which
the maximum number of contracts can trade, if any, from the market and
marketable limit Complex Orders. Complex Orders received during the
COOP Timer will be placed on the CBOOK. Once an options symbol opens
pursuant to Options 3, Section 8, Opening Process, for the single-leg
book, a COOP can commence. Complex Orders will open at a single price.
Second, with respect to the opening price, today, Phlx opens
Complex Orders that are in price range consistent with the ACE
Parameter pursuant to Options 3, Section 14(b)(i).\62\ In contrast,
with the adoption of the ISE and MRX opening process, Phlx's System
will calculate Boundary Prices at or within which Complex Orders may be
executed during the Complex Opening Price Determination based on the
NBBO for the individual legs; provided that, if the NBBO for any leg
includes a Priority Customer Order on the Exchange, the
[[Page 16742]]
System adjusts the Boundary Prices according to subparagraph
(c)(2).\63\
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\62\ The ACE Parameter is either a percentage or number defined
by the Exchange and may be set at a different percentage or number
for Complex Orders where one of the components is the underlying
security. The ACE Parameter price range is based on the cNBBO at the
time an order would be executed. See Options 3, Section 14(b)(i).
\63\ See proposed Supplementary Material .05 to Options 3,
Section 14.
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Third, ISE and MRX have an Uncrossing Process described in
Supplementary Material .06 to Options 3, Section 14 that occurs, if
necessary, immediately after the Opening Process. With this process,
the Complex Order Book will be uncrossed using the Complex Uncrossing
Process described Supplementary Material .06(b) to Options 3, Section
14 if a resting Complex Order that is locked or crossed with other
interest becomes executable during regular trading or as part of the
Complex Opening Process.
As noted above, the Exchange is replacing the current Phlx Complex
Opening Process with a new opening process that is identical to the
Complex Opening Process on ISE and MRX. Today, current Options 3,
Section 14(d) describes Phlx's COOP. Today, Phlx's COOP identifies a
price at which the maximum number of contracts can trade on the opening
based on interest received in the Complex Order Strategy. Thus, the
COOP operates like a traditional opening process for non-Complex Orders
(meaning, single leg orders), considering buys and sells, taking all
interest into account (without bias toward any participant) to
determine which interest is executable and identifying any
imbalance.\64\ Specifically, for each Complex Order Strategy, the
System takes into consideration all Complex Orders, identifies the
price at which the maximum number of contracts can trade and calculates
the imbalance, if any. The System accepts pre-opening Complex Orders,
and accepts Complex Orders prior to re-opening following a halt in
trading on the Exchange. The proposed Complex Opening Process in
Supplementary .05 to Options 3, Section 14 will continue to perform
similar functions.
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\64\ An imbalance is the number of contracts that cannot be
matched with other interest at a particular price.
---------------------------------------------------------------------------
Pursuant to current Options 3, Section 14(d)(ii), once trading in
each option component of a Complex Order Strategy has opened or
reopened following a trading halt for a certain configurable time not
to exceed 60 seconds (and none of the conditions described in paragraph
(c)(ii) of current Options 3, Section 14 exist), the System will
initiate the COOP for that Complex Order Strategy, provided that a COOP
will only be conducted for any Complex Order Strategy that has a
Complex Order received before the opening of that Complex Order
Strategy, unless that Complex Order Strategy is already open as a
result of another electronic auction process or another electronic
auction involving the same Complex Order Strategy is in progress.
Following a trading halt, a COOP will be conducted for any Complex
Order Strategy that has a Complex Order present or had previously
opened prior to the trading halt. The COOP will be conducted in two
phases, the ``COOP Timer'' and the ``COOP Evaluation.''
With respect to the COOP Timer, current Options 3, Section
14(d)(ii)(A) provides that the Exchange will send a broadcast message
indicating that a COOP has been initiated for that Complex Order
Strategy. The broadcast message identifies the Complex Order Strategy,
the opening price (based on the maximum number of contracts that can be
executed at one particular price, except if there is no price at which
any orders can be executed), and the imbalance side and volume, if any
(``Complex Order Opening Auction Notification'').\65\ Complex Orders in
such a Complex Order Strategy that are received during the COOP Timer
and COOP Evaluation reside on the CBOOK.\66\ Complex Orders received
prior to the COOP Timer and Complex Orders received during the COOP
Timer (other than COOP Sweeps and Complex Order Responses marked as a
response) are visible to participants upon receipt.\67\ Complex Orders
in a Complex Order Strategy marked as IOC received during a COOP will
join the COOP and be treated like any other Complex Order, except such
orders will be cancelled at the end of the COOP Timer if not executed.
DNA Orders received during a COOP are cancelled and will not
participate in the COOP. Complex Orders marked as IOC and DNA Orders
received before the initiation of the COOP in that Complex Order
Strategy are cancelled and do not participate in the COOP; however, a
COOP will occur in that Complex Order Strategy.\68\
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\65\ Pursuant to current Options 3, Section 14(d)(ii)(A), the
Complex Order Opening Auction Notification starts a COOP Timer
(``COOP Timer''), which will begin counting a number of seconds
during which the Complex Order, if any, may not be traded. The COOP
Timer is configurable to a period ranging from 0 to 600 seconds as
determined by the Exchange and communicated to Exchange membership
on the Exchange's website. The COOP Timer will be configured for the
same number of seconds for all options trading on the Exchange.
Participants can submit responses to the Complex Order Opening
Auction Notification.
\66\ See current Options 3, Section 14(d)(ii)(A)(3).
\67\ See current Options 3, Section 14(d)(ii)(A)(4).
\68\ See current Options 3, Section 14(d)(ii)(A)(5).
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Currently, in response to a Complex Order Opening Auction
Notification, participants may bid and/or offer on either or both
side(s) of the market during the COOP Timer by submitting one or more
Complex Orders in increments of $0.01 (``Complex Order Response'').
Phlx electronic market makers may also bid and/or offer on either or
both side(s) of the market during the COOP Timer by submitting one or
more bids and/or offers known as COOP Sweeps.\69\
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\69\ A COOP Sweep is a one-sided electronic order (IOC) entered
by a Lead Market Maker or Market Maker through SQF at a particular
price submitted for execution against opening trading interest in a
particular Complex Order Strategy. See current Options 3, Section
14(d)(ii)(B) and (B)(1)-(3). A Phlx electronic market maker may
submit multiple COOP Sweeps at different prices (but not multiple
COOP Sweeps at the same price, except as provided in subparagraph
(2)) in increments of $0.01 in response to a Complex Order Opening
Auction Notification, regardless of the minimum trading increment
applicable to the specific series. Phlx electronic market makers may
change the size of a previously submitted COOP Sweep during the COOP
Timer. The System will use the Phlx electronic market maker's most
recently submitted COOP Sweep at each price level as that market
maker's response at that price level unless the COOP Sweep has a
size of zero. A COOP Sweep with a size of zero will remove a Phlx
electronic market maker's COOP Sweep from that COOP at that price
level. COOP Sweeps and Complex Order Responses marked as a response
will not be visible to any participant and will not be disseminated
by the Exchange. Any COOP Sweeps which remain unexecuted at the end
of the COOP Timer once all executions are complete will expire. A
Complex Order Response will expire if unexecuted at the end of the
COOP Timer once all executions are complete, but a Complex Order
submitted during the COOP Timer which is not marked as a response
will be available to be traded after the opening of a Complex Order
Strategy unless it is marked IOC. Such Complex Order will be placed
on the CBOOK if not executed during the opening.
---------------------------------------------------------------------------
Today, upon expiration of the COOP Timer, the System conducts a
COOP Evaluation to determine, for a Complex Order Strategy, the price
at which the maximum number of contracts can trade, considering Complex
Orders. The Exchange opens the Complex Order Strategy at that price,
executing marketable trading interest, in the following order: first,
to Public Customers in time priority; next to Phlx electronic market
makers on a pro rata basis; and then to all other participants on a pro
rata basis. The imbalance of Complex Orders that are unexecutable at
that price are placed on the CBOOK.\70\
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\70\ See current Options 3, Section 14(d)(ii)(C).
---------------------------------------------------------------------------
At the end of the COOP Timer, no trade may be possible. Current
Options 3, Section 4(d)(ii)(C)(1) provides, if at the end of the COOP
Timer the System determines that no market or marketable limit Complex
Orders or COOP Sweeps, Complex Orders or COOP Sweeps that are equal to
or improve the cPBBO, and/or Complex Orders or COOP Sweeps that cross
within the cPBBO exist in the System, all Complex Orders received
[[Page 16743]]
during the COOP Timer will be placed on the CBOOK.
At the end of the COOP Timer, a trade may be possible. Current
Options 3, Section 4(d)(ii)(C)(2) provides, if at the end of the COOP
Timer the System determines that there are market or marketable limit
Complex Orders or COOP Sweeps, Complex Orders or COOP Sweeps that are
equal to or improve the cPBBO, and/or Complex Orders or COOP Sweeps
that cross within the cPBBO in the System, the System will do the
following: if such interest crosses and does not match in size, the
execution price is based on the highest (lowest) executable offer (bid)
price when the larger sized interest is offering (bidding), provided,
however, that if there is more than one price at which the interest may
execute, the execution price when the larger sized interest is offering
(bidding) is the midpoint of the highest (lowest) executable offer
(bid) price and the next available executable offer (bid) price
rounded, if necessary, down (up) to the closest minimum trading
increment. If the crossing interest is equal in size, the execution
price is the midpoint of lowest executable bid price and the highest
executable offer price, rounded, if necessary, up to the closest
minimum trading increment. Executable bids/offers include any interest
which could be executed at the net price without trading through
residual interest or the cPBBO or without trading at the cPBBO where
there is Public Customer interest at the best bid or offer for any leg,
consistent with paragraph (c)(iii).\71\ Finally, pursuant to current
Options 3, Section 14(d)(ii)(C)(3), the Complex Order Strategy will be
open after the COOP even if no executions occur.
---------------------------------------------------------------------------
\71\ If there is any remaining interest and there is no
component that consists of the underlying security and provided that
the order is not marked all-or-none, such interest may ``leg''
whereby each options component may trade at the PBBO with existing
quotes and/or Limit Orders on the Limit Order book for the
individual components of the Complex Order; provided that remaining
interest may execute against any eligible Complex Orders received
before legging occurs. If the remaining interest has a component
that consists of the underlying security, such Complex Order will be
placed on the CBOOK. See current Options 3, Section 14(d)(ii)(C)(2).
---------------------------------------------------------------------------
To illustrate ``if such interest crosses and does not match in
size, the execution price is based on the highest (lowest) executable
offer (bid) price when the larger sized interest is offering
(bidding)'' as referenced above, assume the following is present at the
end the COOP Timer for a given Complex Order Strategy:
cPBBO = 3.50 (10)-3.90 (10).
Complex Order #1: Buy 30 for $3.79.
Complex Order #2: Sell 20 at $3.56.
COOP Opening execution will be for 20 strategies at a price of
$3.79 because there were more contracts to buy than there were to sell.
In this example, while there are multiple price points at which the
System can open the same number of contracts, there is only one price
point, $3.79, at which there will be no residual contracts available
after the opening process at a price which crosses the opening price.
After the System executes 20 strategies at $3.79, there will remain 10
unexecuted strategies to buy for $3.79.
If the example were changed slightly such that Complex Order #1 was
a market order instead of a limit order, the market order is limited by
the cPBBO assuming no customer interest is present, and the COOP
execution price for 20 strategies would be $3.90. The remaining 10
strategies of Complex Order #1 will then leg to the simple market at
$3.90.
To illustrate ``if there is more than one price at which the
interest may execute, the execution price when the larger sized
interest is offering (bidding) is the midpoint of the highest (lowest)
executable offer (bid) price and the next available executable offer
(bid) price rounded, if necessary, down (up) to the closest minimum
trading increment'' as referenced above, assume the following is
present at the end the COOP Timer for a given Complex Order Strategy:
cPBBO = 3.50 (10)-3.90 (10).
Complex Order #1: Buy 20 for $3.79.
Complex Order #2: Buy 20 for $3.77.
Complex Order #3: Buy 20 at $3.74.
Complex Order #4: Sell 20 at $3.60.
Complex Order #5: Sell 20 at $3.62.
COOP Opening execution will be for 40 strategies at a price of
$3.76. The execution price of $3.76 is derived from the midpoint of the
lowest executable bid price of $3.74 and the next available executable
bid price of $3.77, rounded up to the closest minimum trading
increment. In this example, 40 strategies can be opened at multiple
price points ranging from $3.74 up to $3.77. None of these potential
opening prices will cause the unexecuted $3.74 buy order to be
available at a price which crosses the opening price, therefore, the
System opens at the midpoint of such prices, $3.76.
If the example were changed slightly such that Complex Order #1 and
Complex Order #2 were market orders instead of a limit orders, the COOP
Opening execution price for the 40 strategies would be $3.82, which is
the midpoint of the potential opening prices ranging from $3.74 to
$3.90.
To illustrate ``if the crossing interest is equal in size, the
execution price is the midpoint of lowest executable bid price and the
highest executable offer price, rounded, if necessary, up to the
closest minimum trading increment'' as referenced above, assume the
following is present at the end the COOP Timer for a given Complex
Order Strategy:
cPBBO = 3.50 (10)-3.90 (10)
Complex Order #1: Buy 10 for $3.78
Complex Order #2: Buy 20 for $3.74
Complex Order #3: Buy 10 at $3.71
Complex Order #4: Sell 20 at $3.64
Complex Order #5: Sell 20 at $3.66
COOP Opening execution will be for 40 strategies at a price of
$3.69. The execution price of $3.69 is derived from the midpoint of the
lowest executable bid price of $3.71 and the highest executable offer
price of $3.66, rounded up to the closest minimum trading increment. If
the example were changed slightly such that Complex Order #4 and
Complex Order #5 were market orders rather than limit orders, the COOP
Opening execution price for the 40 strategies would be $3.61, which is
derived from the midpoint of the lowest executable bid price of $3.71
and the highest executable offer of $3.50, rounded to the closest
minimum trading increment.
If there is any remaining interest after complex interest has
traded against other complex interest and there is no component that
consists of the underlying security,\72\ such interest may ``leg''
whereby each options component may trade at the PBBO with existing
quotes and/or limit orders on the limit order book for the individual
components of the Complex Order; provided that remaining interest may
execute against any eligible Complex Orders received before legging
occurs.\73\ If the remaining interest has a component that consists of
the underlying security, such Complex Order will be placed on the
CBOOK.
---------------------------------------------------------------------------
\72\ Complex Orders that are not executable at the opening
price, including those that could not leg because there is a
component that consists of the underlying security, will be placed
on the CBOOK.
\73\ Remaining interest includes Complex Orders that did not
execute at the opening price and are therefore on the CBOOK and
available to be traded before legging occurs as well as any new
interest that may have arrived during the legging process.
---------------------------------------------------------------------------
New Proposal for Opening Process
The Exchange proposes to amend the opening process by adopting
proposed Supplementary Material .05 to Options 3, Section 14 which is
identical to ISE and MRX Supplementary Material .05 to Options 3,
Section 14. The Complex Opening Price Determination is designed to
provide an opportunity for
[[Page 16744]]
members and member organizations to trade complex strategies in a
transparent opening rotation at a price that is within the NBBO prices
of the individual legs prior to uncrossing the complex strategy in the
Complex Uncrossing Process to allow additional interest to participate.
The Exchange believes that this new process will allow for additional
contracts to be included in the Potential Opening Price calculation
leading to better price discovery and more contracts executing as part
of the Complex Opening Price Determination process. With this proposal,
when the interest does not match the size and there is more than one
Potential Opening Price at which the interest may execute, the Exchange
would calculate a Potential Opening Price using the mid-point of the
highest (lowest) executable offer (bid) price and the next available
executable offer (bid) price rounded, if necessary, down (up) to the
closest minimum trading increment. As a result, more options contracts
are likely to be executed at better prices than under the current rule.
Proposed Supplementary Material .05(a) of Options 3, Section 14
provides definitions for the Boundary Price,\74\ the Opening Price \75\
and Potential Opening Price.\76\ Pursuant to Supplementary Material
.05(b) of Options 3, Section 14, which describes eligible interest, the
rule text notes that eligible interest during the Complex Opening Price
Determination includes Complex Orders on the Complex Order Book. Bids
and offers for the individual legs of the complex strategy are not
eligible to participate in the Complex Opening Price Determination. If
the best bid for a complex strategy does not lock or cross the best
offer, there will be no trade in the Complex Opening Price
Determination and the complex strategy will open pursuant to the
Complex Uncrossing Process described in proposed Supplementary Material
.06(b) to Options 3, Section 14, which will be described below.\77\ If
the best bid for a complex strategy locks or crosses the best offer,
the System will open the complex strategy as described herein.
---------------------------------------------------------------------------
\74\ ``Boundary Price'' is described herein in paragraph (d)(1).
See proposed Supplementary Material .05(a)(1) of Options 3, Section
14.
\75\ ``Opening Price'' is described herein in paragraph (d)(3).
See proposed Supplementary Material .05(a)(2) of Options 3, Section
14.
\76\ ``Potential Opening Price'' is described herein in
paragraph (d)(3). See proposed Supplementary Material .05(a)(3) of
Options 3, Section 14.
\77\ See proposed Supplementary Material .05(c) of Options 3,
Section 14.
---------------------------------------------------------------------------
Pursuant to the proposed Supplementary Material .05(d)(1) to
Options 3, Section 14, the System calculates Boundary Prices at or
within which Complex Orders may be executed during the Complex Opening
Price Determination based on the NBBO for the individual legs; provided
that, if the NBBO for any leg includes a Public Customer Order on the
Exchange, the System adjusts the Boundary Prices according to proposed
Supplementary Material .05(c)(2) to Options 3, Section 14.
Pursuant to proposed Supplementary Material .05(d)(2) to Options 3,
Section 14, the System will calculate the Potential Opening Price by
identifying the price(s) at which the maximum number of contracts can
trade (``maximum quantity criterion'') taking into consideration all
eligible interest pursuant to proposed Supplementary Material .05(b) to
proposed Options 3, Section 14.
Pursuant to the Opening Price Determination in proposed
Supplementary Material .05(d)(3) to Options 3, Section 14, when
interest crosses and does not match in size, the System will calculate
the Potential Opening Price based on the highest (lowest) executable
offer (bid) price when the larger sized interest is offering (bidding),
provided, however, that if there is more than one price at which the
interest may execute, the Potential Opening Price when the larger sized
interest is offering (bidding) shall be the mid-point of the highest
(lowest) executable offer (bid) price and the next available executable
offer (bid) price rounded, if necessary, down (up) to the closest
minimum trading increment; or when interest crosses and is equal in
size, the System will calculate the Potential Opening Price based on
the mid-point of lowest executable bid price and the highest executable
offer price, rounded, if necessary, up to the closest minimum trading
increment. Executable bids/offers include any interest which could be
executed at the Potential Opening Price without trading through
residual interest or the Boundary Price or without trading at the
Boundary Price where there is Public Customer interest at the best bid
or offer for any leg, consistent with proposed paragraph Options 3,
Section 14(c)(2).\78\ Executable bids/offers will be bounded by the
Boundary Price on the contra-side of the interest, for determination of
the Potential Opening Price described herein.\79\
---------------------------------------------------------------------------
\78\ See proposed Supplementary Material .05(d)(3)(A) of Options
3, Section 14.
\79\ See proposed Supplementary Material .05(d)(3)(B) of Options
3, Section 14.
---------------------------------------------------------------------------
This proposed new Complex Opening Process seeks to maximize the
interest which is traded during the Complex Opening Price Determination
process and deliver a rational price for the available interest at the
opening. The Complex Opening Price Determination process maximizes the
number of contracts executed during the Complex Opening Process and
ensures that residual contracts of partially executed orders or quotes
are at a price equal to or inferior to the Opening Price. In other
words, the logic ensures there is no remaining unexecuted interest
available at a price which crosses the Opening Price. If multiple
prices exist that ensure that there is no remaining unexecuted interest
available through such price(s), the opening logic selects the mid-
point of such price points. Below are examples.
Example--More Than One Potential Opening Price--Mid-Point of
Larger-Sized Interest
``if there is more than one price at which the interest may execute,
the Potential Opening Price when the larger sized interest is
offering (bidding) is the mid-point of the highest (lowest)
executable offer (bid) price and the next available executable offer
(bid) price rounded, if necessary, down (up) to the closest minimum
trading increment''
Assume
Complex Order Strategy: A+B strategy
Quote for Leg A @ 1.75 x 1.95
Quote for Leg B @ 1.75 x 1.95
Boundary Price = 3.50 (10)-3.90 (10)
(Leg A Bid 1.75 + Leg B Bid 1.75 = 3.50)
(Leg A Offer 1.95 + Leg B Offer 1.95 = 3.90)
Complex Order #1: Buy 20 for $3.79
Complex Order #2: Buy 20 at $3.73
Complex Order #3: Sell 20 at $3.60
The Opening Price would be for 20 strategies at a price of
$3.76. The execution price of $3.76 is derived from the mid-point of
the lowest executable bid price of $3.73 and the next available
executable bid price of $3.79. In this example, 20 strategies can be
opened at multiple price points ranging from $3.73 up to $3.79. None
of these Potential Opening Prices would cause the unexecuted $3.73
buy order to be available at a price which crosses the Opening
Price, therefore, the System opens at the mid-point of such prices,
$3.76. The Opening Price seeks to distribute to the extent possible
price improvement to both the bid and offer side of the transaction.
Example--Mid-Point When Interest is Equal In Size
``Provided such crossing interest is equal in size, the System
will calculate the Potential Opening Price based on the mid-point of
lowest executable bid price and the highest executable offer price,
rounded, if necessary, up to the closest minimum trading increment''
Complex Order Strategy: A+B strategy
Quote for Leg A @ 1.75 x 1.95 each
Quote for Leg B @ 1.75 x 1.95 each
Boundary Price= 3.50 (10)-3.90 (10)
(Leg A Bid 1.75 + Leg B Bid 1.75 = 3.50)
[[Page 16745]]
(Leg A Offer 1.95 + Leg B Offer 1.95 = 3.90)
Complex Order #1: Buy 10 for $3.78
Complex Order #2: Buy 20 for $3.74
Complex Order #3: Buy 10 at $3.71
Complex Order #4: Sell 20 at $3.64
Complex Order #5: Sell 20 at $3.66
With the proposed amendment, the Opening Price will be for 40
strategies at a price of $3.69. The execution price of $3.69 is
derived from the mid-point of the lowest executable bid price of
$3.71 and the highest executable offer price of $3.66, rounded up to
the closest minimum trading increment.
If the example were changed slightly such that Complex Order #4
and Complex Order #5 were Market Complex Orders rather than Limit
Orders, the Opening Price for the 40 strategies would be $3.61,
which is derived from the mid-point of the lowest executable bid
price of $3.71 and the highest executable offer of $3.50 (which is
the Boundary Price of the sell Market Complex Orders), rounded up to
the closest minimum trading increment.
The Exchange notes that executable bids/offers include any interest
that could be executed at the net price without trading through
residual interest or the Boundary Price, or without trading at the
Boundary Price where there is Public Customer interest at the best bid
or offer for any leg, consistent with proposed Options 3, Section
14(c)(2).\80\ Further, executable bids/offers would be bounded to the
Boundary Price on the contra-side of the interest, for determination of
the Opening Price described above when crossing interest is different
in size and when crossing interest is equal in size.
---------------------------------------------------------------------------
\80\ Proposed Options 3, Section 14(c)(2) provides, ``Complex
strategies will not be executed at prices inferior to the best net
price achievable from the best ISE bids and offers for the
individual legs. Notwithstanding the provisions of Options 3,
Section 10: (i) a Complex Options Strategies may be executed at a
total credit or debit price with one other Member without giving
priority to bids or offers established on the Exchange that are no
better than the bids or offers in the individual options series
comprising such total credit or debit; provided, however, that if
any of the bids or offers established on the Exchange consist of a
Priority Customer Order, the price of at least one leg of the
complex strategy must trade at a price that is better than the
corresponding bid or offer on the Exchange by at least one minimum
trading increment for the series as defined in Options 3, Section 3;
(ii) the option leg of a Stock-Option Strategy has priority over
bids and offers for the individual options series established on the
Exchange by Professional Orders and market maker quotes that are no
better than the price of the options leg, but not over such bids and
offers established by Priority Customer Orders; and (iii) the
options legs of a Stock-Complex Strategy are executed in accordance
with subparagraph (c)(2)(i).
---------------------------------------------------------------------------
Proposed Supplementary .06(a) to Options 3, Section 14 provides for
a Complex Uncrossing Process. The Complex Order Book will be uncrossed
using the Complex Uncrossing Process described in paragraph (b) below
if a resting Complex Order that is locked or crossed with other
interest becomes executable during regular trading or as part of the
Complex Opening Process. The proposed rule text is identical to ISE and
MRX Supplementary .06(a) to Options 3, Section 14. Complex Strategies
are uncrossed using the following procedure: (1) The System identifies
the oldest Complex Order among the best priced bids and offers on the
Complex Order Book. A Complex Order entered with an instruction that it
must be executed at a price that is equal to or better than the
national best bid or offer pursuant to paragraph (a) above is
considered based on its actual limit or market price and not the price
of the national best bid or offer for the component legs. The selected
Complex Order is matched pursuant to proposed subparagraph (d)(2)-(3)
with resting contra-side interest on the Complex Order Book and, for
Complex Option Orders, bids and offers for the individual legs of the
complex strategy. The process is repeated until the Complex Order Book
is no longer executable.\81\
---------------------------------------------------------------------------
\81\ See proposed Supplementary .06(b) to Options 3, Section 14.
---------------------------------------------------------------------------
The System will process any remaining Complex Orders, including
Opening Only Complex Orders in accordance with the Complex Uncrossing
Process described in proposed Supplementary Material .06(b) to Options
3, Section 14. Bids and offers for the individual legs of the Complex
Option Order will also be eligible to trade in the Complex Uncrossing
Process. If the Potential Opening Price is at or within the Boundary
Prices, the Potential Opening Price becomes the Opening Price and the
complex strategy will open pursuant to the Uncrossing described in
proposed Supplementary Material .05(d)(5) of Options 3, Section 14.
However, as is the case today, if the bid Boundary Price is higher than
the offer Boundary Price, or if no valid Potential Opening Price can be
found at or within the Boundary Prices, there will be no trade in the
Complex Opening Price Determination and the complex strategy will open
pursuant to the Complex Uncrossing process described in proposed
Supplementary Material .06(b) of Options 3, Section 14. As noted above,
this rule text is identical to ISE and MRX Supplementary Material .06
to Options 3, Section 14.
COLA
Phlx's current Complex Order execution process will be replaced
with a process identical to ISE and MRX at Options 3, Section 14(c) and
(d) and Supplementary .01 to Options 3, Section 14 with respect to
Complex Order executions. The adoption of the ISE and MRX process will
permit Phlx members and member organizations to opt in to a Complex
Exposure where today they opt out of a Complex Order Live Auction or
``COLA,'' which is described in current Options 3, Section 14(e).\82\
---------------------------------------------------------------------------
\82\ In summary, the COLA is an automated auction for seeking
additional liquidity and price improvement for Complex Orders.
Specifically, Phlx's COLA is an auction intended to solicit interest
in a particular Complex Order other than on the opening. A COLA may
take place upon identification of the existence of a COLA-eligible
order during normal trading if the System receives a Complex Order
that improves the cPBBO. See current Options 3, Section 14(e)(i)(A).
---------------------------------------------------------------------------
Today, on Phlx, after identifying a COLA-eligible order, Phlx's
System sends a broadcast notice to participants indicating that the
System has initiated a COLA. During the COLA Timer, participants may
bid and/or offer on either or both side(s) of the market by submitting
one or more bids or offers that improve the cPBBO, known as ``COLA
Sweeps.'' If the System receives no COLA Sweeps or responsive Complex
Orders during the COLA Timer, the COLA-eligible order may trade at the
Phlx best bid or offer with quotes or orders on the limit order book
for the components of the Complex Order, provided that the order can be
executed in the correct ratio and at the desired price. If the System
receives responses during the COLA Timer, the COLA-eligible order and
the responsive COLA Sweeps or Complex Orders will trade. Phlx members
and member organizations may elect to opt out of a COLA by marking
their orders as Do Not Auction or ``DNA''. The term ``Do Not Auction''
means that this Complex Order is not ``COLA-eligible.'' \83\ In
contrast, with the new proposal a Complex Exposure Auction must be
designated by a member or member organization pursuant to Supplementary
Material .01 to Options 3, Section 14. Both auctions require responses
to improve the Complex Order Book and the synthetic book. Another
difference between these auctions is that while the COLA does not early
terminate, the Complex Order Exposure may early terminate as specified
in Supplementary .01(b)(ii) to Options 3, Section 14.
---------------------------------------------------------------------------
\83\ See Options 3, Section 14(a)(viii). A DNA Order prevents a
market participant's complex order from triggering a COLA, pursuant
to Options 3, Section 14(e), or joining one that is in progress.
---------------------------------------------------------------------------
Complex Exposure
In lieu of a COLA, proposed Supplementary Material .01 to Options
3, Section 14 proposes a Complex Exposure which would provide that
members and member organizations
[[Page 16746]]
may elect to have their Complex Orders exposed for up to one second.
Specifically, the proposed rule describes an auction process whereby
Complex Orders that improve upon the best price for the same complex
strategy on the Complex Order Book upon entry may be exposed for up to
one second. The proposed rule text at Supplementary Material .01 to
Options 3, Section 14 is identical to ISE and MRX Supplementary
Material .01 to Options 3, Section 14.
If designated by a member organization for exposure, eligible
Complex Orders are exposed upon entry for a period of up to one (1)
second pursuant to subparagraph (d)(1) as described hereafter. A
Complex Order that improves upon the best price for the same complex
strategy on the Complex Order Book (i.e., a limit order to buy priced
higher than the best bid, a limit order to sell priced lower than the
best offer, and a market order to buy or sell) is eligible to be
exposed upon entry for a period of up to one (1) second as provided in
Supplementary Material .01 to Options 3, Section 14. Incoming orders
will not be eligible to be exposed if there are market orders on the
Complex Order Book on the same side of the market for the same complex
strategy.\84\
---------------------------------------------------------------------------
\84\ See proposed Supplementary Material .01(a) to Options 3,
Section 14.
---------------------------------------------------------------------------
Upon entry of an eligible Complex Order, a broadcast message that
includes net price or at market, size, and side will be sent and member
organizations will be given an opportunity to enter Responses with the
prices and sizes at which they are willing to participate in the
execution of the Complex Order.\85\ Responses would only be executable
against the Complex Order with respect to which they are entered, can
be modified or withdrawn at any time prior to the end of the exposure
period, and will be considered up to the size of the Complex Order
being exposed. During the exposure period, the Exchange would broadcast
the best Response price, and the aggregate size of Responses available
at that price. At the conclusion of the exposure period, any unexecuted
balance of a Response would be automatically cancelled for Exposure
Only Complex Orders and for Exposure Complex Orders the remaining
balance would be placed on the order book.\86\ The exposure period for
a Complex Order will end immediately: (A) upon the receipt of a Complex
Order for the same complex strategy on either side of the market that
is marketable against the Complex Order Book or bids and offers for the
individual legs; (B) upon the receipt of a non-marketable Complex Order
for the same complex strategy on the same side of the market that would
cause the price of the exposed Complex Order to be outside of the best
bid or offer for the same complex strategy on the Complex Order Book;
or (C) when a resting Complex Order for the same complex strategy on
either side of the market becomes marketable against interest on the
Complex Order book or bids and offers for same individual legs of the
complex strategy.\87\
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\85\ See proposed Supplementary Material .01(b) to Options 3,
Section 14.
\86\ See proposed Supplementary Material .01(b)(i) to Options 3,
Section 14.
\87\ See proposed Supplementary Material .01(b)(ii) to Options
3, Section 14.
---------------------------------------------------------------------------
At the end of the exposure period, if the Complex Order still
improves upon the best price for the complex strategy on the same side
of the market, it is automatically executed to the greatest extent
possible pursuant to proposed subparagraph (d)(2)-(3), taking into
consideration: (i) bids and offers on the Complex Order Book (including
interest received during the exposure period), (ii) bids and offers on
the Exchange for the individual options series (including interest
received during the exposure period), and (iii) Responses received
during the exposure period, provided that when allocating pursuant to
proposed subparagraph (d)(2)(ii). Responses are allocated pro-rata
based on size. Thereafter, any unexecuted balance will be placed on the
Complex Order Book (or cancelled in the case of an Exposure Only
Complex Order). Notwithstanding the foregoing, proposed Supplementary
Material .01(b)(ii) to Options 3, Section 14 shall not be applicable
with respect to Stock Option Orders and Stock Complex Orders.\88\
Finally, if a trading halt is initiated during the exposure period in
any series underlying the Complex Order, the Complex Order exposure
process will be automatically terminated without execution.\89\
---------------------------------------------------------------------------
\88\ See proposed Supplementary Material .01(c) to Options 3,
Section 14.
\89\ See current Supplementary Material .01(d) to Options 3,
Section 14.
---------------------------------------------------------------------------
Example: Suppose the following market in complex strategy ABC:
ISE Complex BBO: 10 @ 1.00 x 10 @ 1.05
An Exposure Only Order is entered to buy 20 @ 1.03:
A broadcast message is sent announcing the start of an exposure
auction. During the exposure period, the following responses are
received:
Response 1: Sell 10 @ 1.03
Response 2: Sell 5 @ 1.02
At the end of the exposure period, the Exposure Only Order
trades against:
Response 2: 5 @ 1.02
Response 1: 10 @ 1.03
The remaining quantity of 5 contracts is then cancelled.
Complex Order Book
Current Options 3, Section 14(f) describes Phlx's Complex Limit
Order Book or ``CBOOK.'' Phlx's proposal adopts ISE and MRX Options 3,
Section 14(d) which rule describes the execution of Complex Strategies
on the Complex Order Book. Pursuant to current Phlx Options 3, Section
14(f)(i), Complex Orders must be entered onto the CBOOK in increments
of $0.01. The individual components of a Complex Order may be executed
in minimum increments of $0.01, regardless of the minimum increments
applicable to such components. Proposed Options 3, Section 14(c)(1)
requires that bids and offers for Complex Options Strategies be
expressed in one cent ($0.01) increments, and the options leg of
Complex Options Strategies may be executed in one cent ($0.01)
increments, regardless of the minimum increments otherwise applicable
to the individual options legs of the order. The minimum increment is
not changing. Phlx's allocation model for Complex Order will remain
specific to Phlx as noted in Options 3, Section 14(d)(2) and will
allocate in time priority according to its Options 3, Section 10 rules
while ISE and MRX allocate according to ISE and MRX Options 3, Section
10 rules.
Today, Phlx permits non-broker-dealer customer and non-market maker
broker-dealer Complex Orders to be entered on the CBOOK. An order
resting on the CBOOK may execute against quotes or orders on the limit
order book for the individual components of the order or against
incoming Complex Order(s) that do not trigger a COLA Timer, whichever
arrives first. An incoming Complex Order that does not trigger a COLA
Timer may execute against interest on the limit order book for the
individual components of the order or against Complex Orders resting on
the CBOOK. Complex Orders on the CBOOK may be executed in one-cent
increments, regardless of the minimum increments applicable to the
individual components of the Complex Order. Complex orders in the CBOOK
will be executed without consideration of any prices that might be
available on other exchanges trading the same contracts. A Complex
Order resting on the CBOOK will execute automatically against: (1)
quotes, orders on the Limit Order book for the individual options
components of the order, or sweeps, except if any of the components is
the underlying security, and provided that the Complex
[[Page 16747]]
Order can be executed in full or in a permissible ratio by such quotes
or orders (allocated in accordance with Options 3, Section 10)); or (2)
an incoming marketable Complex Order(s) that do(es) not trigger a COLA
Timer, whichever arrives first. Incoming marketable Complex Order that
does not trigger a COLA Timer will trade in the manner specified in
Options 3, Section 14(f)(iii)(B).
Phlx's proposed rules at Options 3, Section 14(d) will provide that
Complex strategies would be executed without consideration of any
prices that might be available on other exchanges trading the same
options contracts. Complex strategies would not be executable unless
all of the terms of the strategy can be satisfied and the options legs
can be executed at prices that comply with the provisions of proposed
paragraph (c)(2) of Options 3, Section 14.\90\ Complex strategies,
other than those that are executed as crossing transactions pursuant to
Options 3, Sections 12 and 13, would be automatically executed as
described in proposed Options 3, Section 14(d). Each Complex Order must
specify upon entry whether it should be exposed upon entry if eligible,
or whether such Complex Order should be processed without being
exposed. Eligible incoming Complex Orders that are designated for
exposure would be exposed for price improvement pursuant to proposed
Supplementary Material .01 to Options 3, Section 14.\91\ Complex
Options Orders would be executed at the best net price available from
Complex Order Exposure pursuant to proposed Supplementary Material .01
to Options 3, Section 14, executable Complex Orders on the Complex
Order Book, and bids and offers for the individual options series;
provided that at each price, executable Complex Options Orders will be
automatically executed first against executable bids and offers on the
Complex Order book prior to legging in the single leg order book.
Notwithstanding the foregoing, executable Complex Options Orders will
execute against Public Customer interest on the single leg book at the
same price before executing against the Complex Order Book.\92\ Thus,
Public Customer Orders on the single leg order book shall retain
priority and will execute prior to any other Complex Order or non-
Public Customer single leg interest at the same price. Stock Option
Orders and Stock Complex Orders will be executed at the best net price
available from Complex Order Exposure pursuant to proposed
Supplementary Material .01 to Options 3, Section 14 and executable
Complex Orders on the Complex Order Book. The Exchange may designate on
a class basis whether bids and offers at the same price on the Complex
Order Book will be executed: (i) in time priority; or (ii) pro-rata
based on size pursuant to Options 3, Section 10(a)(1)(E) and (F).\93\
---------------------------------------------------------------------------
\90\ For example, assume the Phlx PBBO for series A is $1.00 x
$1.10 and the Phlx PBBO for series B is $0.95 x $1.05. A resting
Complex Order to sell series A and sell series B at a net price of
$2.16 is not executable because one of the legs of the Complex Order
would need to be executed at a price that is above the best offer
available for the individual series (i.e., $1.10 for series A and
$1.06 for series B; or $1.11 for series A and $1.05 for series B).
Nor would such a Complex Order be executable at a net price of $2.15
if there were Public Customer orders on the Exchange to sell series
A and/or series B at the Phlx best offer; however, the Complex Order
would be executable at a price of $2.14.
\91\ See proposed Options 3, Section 14(d)(1).
\92\ See proposed Options 3, Section 14(d)(2).
\93\ See proposed Options 3, Section 14(d)(2). Phlx's will
retain its allocation methodology pursuant to Options 3, Section 10,
whereas ISE has a different allocation model in its Options 3,
Section 10. Phlx amended its allocation model in SR-Phlx-2024-71.
See Securities Exchange Act Release No. 101989 (December 30, 2024),
89 FR 106888 (December 30, 2024) (SR-Phlx-2024-71). SR-Phlx-2024-71
is effective but not yet operative. SR-Phlx-2024-71 would be
operative at the same time as this rule change as they are both part
of the same technology migration.
---------------------------------------------------------------------------
Pursuant to proposed Options 3, Section 14(d)(3), if there is no
executable contra-side complex interest on the Complex Order Book at a
particular price, executable Complex Options Orders up to a maximum
number of legs (determined by the Exchange on a class basis as either
two legs, three legs or four legs) may be automatically executed
against bids and offers on the Exchange for the individual options
series provided the Complex Order can be executed in full or in a
permissible ratio by such bids and offers. Legging Orders may be
automatically generated on behalf of Complex Options Orders so that
they are represented at the best bid and/or offer on the Exchange for
the individual legs of the Complex Options Order as provided in
proposed Options 3, Section 7(k). Notwithstanding the foregoing:
Complex Orders with two option legs where both legs are buying or both
legs are selling and both legs are calls or both legs are puts may only
trade against other Complex Orders in the Complex Order Book pursuant
to proposed Options 3, Section 14(d)(3)(A). The System will not
generate Legging Orders for these Complex Orders pursuant to proposed
Options 3, Section 14(d)(3)(A). Complex Orders with three or four
option legs where all legs are buying or all legs are selling may only
trade against other Complex Orders in the Complex Order Book pursuant
to proposed Options 3, Section 14(d)(3)(B). Pursuant to proposed
Options 3, Section 14(d)(4), complex strategies that are not executable
may rest on the Complex Order Book until they become executable.
Stock Option and Stock-Complex Orders
Stock Option and Stock-Complex Orders are described in proposed
Supplementary Material .02 to Options 3, Section 14 which describes an
automated process for the communication of stock-option orders by
electronically transmitting the orders related to the stock leg(s) for
execution on behalf of the parties to the trade. The Exchange notes
that the manner in which Phlx handles Complex Orders with a stock
component is not being amended with this proposal. Today, Phlx
similarly handles Complex Orders with a stock component as noted in
proposed Supplementary Material .02 to Options 3, Section 14.
Specifically, the Exchange states at proposed Supplementary
Material .02 to Options 3, Section 14, ``The Exchange will
electronically communicate the stock leg of an executable Stock-Option
Order and Stock-Complex Order to NES for execution. To execute Stock-
Option Orders and Stock-Complex Orders on the Exchange, member
organizations must enter into a brokerage agreement with Nasdaq
Execution Services or ``NES.'' \94\ The Exchange will automatically
transmit the stock leg of a trade to NES.''
---------------------------------------------------------------------------
\94\ NES is a broker-dealer, owned and operated by Nasdaq, Inc.
NES, an affiliate of the Exchange.
---------------------------------------------------------------------------
Additionally, similar to language described in current Options 3,
Section 14(a) regarding compliance with the Qualified Contingent Trade
Exemption from Rule 611(a) of Regulation NMS, the Exchange proposes
similar language in proposed Supplementary Material .07 to Options 3,
Section 14. Specifically, this rule text would provide,
Qualified Contingent Trade Exemption. Members and member
organizations may only submit Complex Orders in Stock-Option
Strategies and Stock-Complex Strategies if such Complex Orders
comply with the Qualified Contingent Trade Exemption from Rule
611(a) of Regulation NMS under the Exchange Act. Members and member
organizations submitting Complex Orders in Stock-Option Strategies
and Stock-Complex Strategies represent that they comply with the
Qualified Contingent Trade Exemption. member organizations of FINRA
or The Nasdaq Stock Market (``Nasdaq'') are required to have a
Uniform Service Bureau/Executing Broker Agreement (``AGU'') with
Nasdaq Execution Services, LLC (``NES'') in order to
[[Page 16748]]
trade Complex Orders in Stock-Option Strategies and Stock-Complex
Strategies; firms that are not members of FINRA or Nasdaq are
required to have a Qualified Special Representative (``QSR'')
arrangement with NES in order to trade Complex Orders in Stock-
Option Strategies and Stock-Complex Strategies. In addition, the
stock leg of a stock-option order must be marked ``buy,'' ``sell,''
``sell short,'' or ``sell short exempt'' in compliance with
Regulation SHO under the Exchange Act.
Floor Complex Orders
In light of the proposed changes to the Options 3, Section 14
rules, the Exchange proposes to amend Options 8, Section 32, Types of
Floor-Based (Non-System) Orders to provide the types of Complex Orders
that would be available on the Exchange's trading floor.\95\ The
Exchange proposes to amend Options 8, Section 32(a)(3)-(5) to align to
the new terms in Options 3, Section 14(a)(1)-(3) which terms also
provide the ratios applicable for these Complex Orders. Specifically,
the Exchange proposes to note that a Complex Options Strategy, Stock-
Option Strategy and Stock-Complex Strategy are available for trading on
the Exchange's trading floor, in open outcry. The current terms,
Complex Orders and Stock-Option Order will no longer exist. The
Exchange also proposes to renumber current Options 8, Section 32(a)(5)
as (a)(6).
---------------------------------------------------------------------------
\95\ The order types were renumbered in SR-Phlx-2024-71. See
Securities Exchange Act Release No. 101989 (December 30, 2024), 89
FR 106888 (December 30, 2024) (SR-Phlx-2024-71). SR-Phlx-2024-71 is
effective but not yet operative. SR-Phlx-2024-71 would be operative
at the same time as this rule change as they are both part of the
same technology migration. This proposal reflects that numbering.
---------------------------------------------------------------------------
The Exchange proposes to specifically note in Options 8, Section
32(b)(1) that a Complex Order may be designated as an Immediate-or-
Cancel Order that is to be executed in whole or in part upon receipt.
Any portion not so executed is cancelled. Additionally, the Exchange
proposes to note in Options 8, Section 32(b)(2) that a Complex Order
may be designated as a Day Order that if not executed, expires at the
end of the day on which it was entered. The Exchange proposes to amend
Options 3, Section 32(f)(7) that relates to a Complex Order to note
that a Complex Order is a type of multi-leg order \96\ that meets the
definition of Complex Options Strategy in Options 3, Section 14(a)(1),
Stock-Option Strategy in Options 3, Section 14(a)(2) or Stock-Complex
Strategy in Options 3, Section 14(a)(3). Finally, the Exchange proposes
to remove the term ``DNA Order'' at Options 8, Section 32(f)(8). A DNA
Order will no longer exist. The Exchange notes that DNA Orders are not
being utilized by floor participants on Phlx's trading floor. Today,
ISE and MRX do not utilize a DNA Order.
---------------------------------------------------------------------------
\96\ The Exchange proposes to lower case the term ``multi-leg
order.''
---------------------------------------------------------------------------
As noted above in this proposal, the Exchange also proposes to cite
to the amended definitions at Options 8, Section 32(a)(3)-(5) which
reference Options 3, Section 14(a)(1)-(3) by amending the Spread Type
Priority description at Options 8, Section 24(j). The Exchange proposes
to define a conforming ratio at Options 1, Section 1(b)(13) as
discussed later in this proposal.\97\
---------------------------------------------------------------------------
\97\ As proposed, the term ``conforming ratio'' is where the
ratio between the sizes of the options components of a Complex Order
is equal to or greater than one-to-three (.333) and less than or
equal to three-to-one (3.00). For example, a one-to-two (.5) ratio,
a two-to-three (.667) ratio, or a two-to-one (2.00) ratio is a
conforming ratio, whereas a one-to-four (.25) ratio or a four-to-one
(4.0) ratio is not; where one component of the Complex Order is the
underlying security, the ratio between any options component and the
underlying security component must be less than or equal to eight
contracts to 100 shares of the underlying security.
---------------------------------------------------------------------------
Trading Halts
The Exchange proposes to amend Options 3, Section 9(d)(2) which
describes how the Exchange will open an affected option after a trading
halt. Today, Options 3, Section 9(d)(2) states that,
After the opening, the Exchange shall reject Market Orders, as
defined in Options 8, Section 32(a) (including Complex Orders, as
defined in Options 3, Section 14), and shall notify Participants of
the reason for such rejection. The Exchange shall cancel Complex
Orders that are Market Orders residing in the System if they are
about to be executed by the System.
The Exchange proposes to amend Options 3, Section 9(d)(2) to
instead provide,
After the opening, the Exchange shall reject Market Orders, as
defined in Options 8, Section 32(a) (including Market Complex
Orders, as defined in Options 3, Section 14(b), and shall notify
members and member organizations of the reason for such rejection.
The Exchange shall cancel Market Complex Orders residing in the
System if the Market Complex Order becomes marketable while the
affected underlying is in a Limit or Straddle State. Market Complex
Orders exposed for price improvement pursuant to Supplementary
Material .01 to Options 3, Section 14, pending in the System will
continue to be processed. If at the end of the exposure period the
affected underlying is in a Limit or Straddle State, the Market
Complex Order will be cancelled. If the affected underlying is no
longer in a Limit or Straddle State after the exposure period, the
Market Complex Order will be processed with normal handling.
Specifically, the Exchange proposes to utilize the new definition
of Market Complex Order proposed in Options 3, Section 14(b)(1).\98\
The Exchange proposes to replace the word ``Participants'' with members
and member organizations.
---------------------------------------------------------------------------
\98\ As proposed, A Market Complex Order is a Complex Order to
buy or sell a complex strategy that is to be executed at the best
price obtainable. If not executable upon entry, such orders will
rest on the Complex Order Book unless designated as fill-or-kill or
immediate-or-cancel. Phlx currently permit Market Complex Orders in
its COOP.
---------------------------------------------------------------------------
The Exchange notes that the proposed language in Options 3, Section
9 considers the potential impacts to Market Complex Orders during a
trading halt and ensures that the System cancels affected series but
permits certain orders to be processed provided a Limit or Straddle
State is not in effect. The proposed change to Options 3, Section 9 is
identical to ISE Options 3, Section 9.
Simple Order Risk Protections
The Exchange proposes to amend a Market Wide Risk Protection at
Options 3, Section 15(a)(3) for single-leg orders.\99\ This risk
protection which is comprised of an ``Order Entry Rate Protection''
which protects Members against entering orders at a rate that exceeds
predefined thresholds, and an ``Order Execution Rate Protection,''
which protects Members against executing orders at a rate that exceeds
their predefined risk settings. Both of these risk protections are
detailed in the ``Market Wide Risk Protection.''
---------------------------------------------------------------------------
\99\ SR-Phlx--2024-71 proposed a new Market Wide Risk Protection
at Options 3, Section 15(a)(3). See Securities Exchange Act Release
No. 101989 (December 30, 2024), 89 FR 106888 (December 30, 2024)
(SR-Phlx-2024-71). SR-Phlx-2024-71 is effective but not yet
operative. SR-Phlx-2024-71 would be operative at the same time as
this rule change as they are both part of the same technology
migration.
---------------------------------------------------------------------------
Today, pursuant to the proposed Market Wide Risk Protection rule,
the Exchange's System maintains one or more counting programs for each
Member that count orders entered and contracts traded on ISE and MRX.
Members can use multiple counting programs to separate risk protections
for different groups established within the Member. Phlx Options 3,
Section 15(a)(1)(C) currently states, that the counting programs will
maintain separate counts, over rolling time periods specified by the
Member for each count of: (1) the total number of orders entered. The
Exchange proposes to amend this risk protection to consider counts for
Complex Orders with options legs in addition to single-leg orders.
Specifically, the Exchange proposes to add new (2) through (6) to
Options 3,
[[Page 16749]]
Section 15(a)(3), which rule text is identical to ISE and MRX Options
3, Section 15(a)(1)(C) as it pertains to Complex Orders. Specifically,
---------------------------------------------------------------------------
the Exchange proposes to add the following rule text:
Market Wide Risk Protection. All member organizations must
provide parameters for the order entry and execution rate
protections described in this Rule. The Exchange will also establish
default values for each of these parameters that apply to member
organizations that do not submit the required parameters, and will
announce these default values in an Options Trader Alert to be
distributed to member organizations. The System will maintain one or
more counting programs for each member organization that count
orders entered and contracts traded on Phlx. Member organizations
can use multiple counting programs to separate risk protections for
different groups established within the member organizations. 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 regular order book; (2)
the total number of Complex Option Orders entered in the complex
order book; (3) the total number of Stock-Option and Stock-Complex
Orders entered into the complex order book; (4) the total number of
contracts traded in regular orders; (5) the total number of
contracts traded in Complex Options Orders; and (6) the total number
of contracts traded in Stock-Option and Stock-Complex Orders entered
into the complex order book. The minimum and maximum duration of the
applicable time period will be established by the Exchange and
announced via an Options Trader Alert.
The proposed rule text would include a complex execution count for
Complex Option Orders, Stock-Option and Stock-Complex Orders. As
proposed, the counting programs will maintain separate counts, over
rolling time periods specified by the member or member organization for
each count. This risk protection will reduce risk associated with
system errors or market events that may cause members and member
organizations to send a large number of orders, or receive multiple,
automatic executions, before they can adjust their exposure in the
market. Without adequate risk management tools, such as those proposed
in this filing, members and member organizations could reduce the
amount of order flow and liquidity that they provide on Phlx. As a
result, the functionality promotes just and equitable principles of
trade.
Complex Order Risk Protections
Today, Phlx offers a Strategy Price Protection or ``SPP'' feature
of the System that prevents certain Complex Order Strategies from
trading at prices outside of pre-set standard limits. Today, SPP
applies to Vertical Spreads, Time Spreads, Box Spreads and Butterfly
Spreads.\100\ A Vertical Spread is a Complex Order Strategy consisting
of the purchase of one call (put) option and the sale of another call
(put) option overlying the same security that have the same expiration
but different strike prices.\101\ With this protection, the SPP will
calculate the maximum possible value of a Vertical Spread by
subtracting the value of the lower strike price from the value of the
higher strike price as between the two components. For example, a
Vertical Spread consisting of the purchase of one January 30 call and
the sale of one January 35 call would have a maximum value of $5.00.
The minimum possible value of a Vertical Spread is always zero.\102\
The SPP ensures that a Vertical Spread will not trade at a net price of
less than the minimum possible value (minus a pre-set value setting an
acceptable range) or greater than the maximum possible value (plus a
pre-set value setting an acceptable range).\103\ A Time Spread is a
Complex Order Strategy consisting of the purchase of one call (put)
option and the sale of another call (put) option overlying the same
security that have different expirations but the same strike
price.\104\ The maximum possible value of a Time Spread is unlimited.
The minimum possible value of a Time Spread is zero.\105\ The SPP will
ensure that a Time Spread will not trade at a price of less than zero
(minus a pre-set value setting an acceptable range).\106\ Pursuant to
current Options 3, Section 16(a)(iii), If the limits (on either side of
the market) set forth in sub-paragraphs (i)(B) and (ii)(B) are violated
by an execution, the System will cancel the order.
---------------------------------------------------------------------------
\100\ See current Options 3, Section 16(a). The current rule
fails to note that BOX and Butterfly spreads also utilize SPP.
\101\ See current Options 3, Section 16(a)(i).
\102\ See current Options 3, Section 16(a)(i)(A).
\103\ See current Options 3, Section 16(a)(i)(B). The pre-set
value and acceptable range will be uniform for all options traded on
the Exchange as determined by the Exchange and communicated to
membership on the Exchange's website. See also current Options 3,
Section 16(a)(i)(C).
\104\ See current Options 3, Section 16(a)(ii).
\105\ See current Options 3, Section 16(a)(ii)(A).
\106\ See current Options 3, Section 16(a)(ii)(B).
---------------------------------------------------------------------------
The Exchange is modifying the Complex Order risk protections at
current Options 3, Section 16 so that they are identical to the Complex
Order risk protections at ISE and MRX Options 3, Section 16. As an
overview, the Exchange proposes to (1) replace the ACE Parameter with a
price limit utilized by ISE and MRX at Options 3, Section 16(a); (2)
adopt ``Do-Not-Trade-Through'' or ``DNTT'' functionality is identical
to ISE and MRX Options 3, Section 16(a); (3) amend the Strategy
Protections in proposed Options 3, Section 16(b) to: (a) adopt a new
Vertical Spread Protection in proposed Options 3, Section 16(b)(1); (b)
adopt a Calendar Spread Protection in proposed Options 3, Section
16(b)(2) that would replace the Time Spread in current Options 3,
Section 16(a)(ii); (c) relocate the current Butterfly Spread Protection
in current Options 3, Section 16(c) to proposed Options 3, Section
16(b)(3) and amend the rule text; and (d) relocate the current Box
Spread Protection in current Options 3, Section 16(d) to proposed
Options 3, Section 16(b)(4) and amend the rule text; and (3) adopt
Other Price Protections in proposed Options 3, Section 16(c) which
apply to Complex Orders which are identical to price protections at ISE
and MRX Options 3, Section 16(c), specifically a Complex Order Price
Protection, a Size Limitation Protection, and a Price Level Protection.
Proposed Phlx Options 3, Section 16(b) will similarly provide with
respect to Complex Orders,
Where one component of a Complex Order is the underlying
security, the Exchange shall electronically communicate the
underlying security component of a Complex Order to Nasdaq Execution
Services, LLC (``NES''), its designated broker dealer, for immediate
execution. Such execution and reporting will occur otherwise than on
the Exchange and will be handled by NES pursuant to applicable rules
regarding equity trading. The execution price must be within the
high-low range for the day in that stock at the time the Complex
Order is processed and within a certain price from the current
market, which the Exchange will establish in an Options Trader
Alert. If the stock price is not within these parameters, the
Complex Order is not executable.
When the short sale price test in Rule 201 of Regulation SHO is
triggered for a covered security, NES will not execute a short sale
order in the underlying covered security component of a Complex
Order if the price is equal to or below the current national best
bid. However, NES will execute a short sale order in the underlying
covered security component of a Complex Order if such order is
marked ``short exempt,'' regardless of whether it is at a price that
is equal to or below the current national best bid. If NES cannot
execute the underlying covered security component of a Complex Order
in accordance with Rule 201 of Regulation SHO, the Exchange will
cancel back the Complex Order to the entering member organization.
For purposes of this paragraph, the term ``covered security'' shall
have the same meaning as in Rule 201(a)(1) of Regulation SHO.
As proposed, Phlx Options 3, Section 16(d) similarly provides that
with respect to Complex Orders in Stock-Option Strategies and Stock-
Complex
[[Page 16750]]
Strategies, the Exchange shall electronically communicate the
underlying security component of a Complex Order to NES, its designated
broker dealer, for immediate execution. As is the case today, such
execution and reporting will not occur on the Exchange and will be
handled by NES pursuant to applicable rules regarding equity trading.
As is the case today, NES will ensure that the execution price is
within the high-low range for the day in that stock at the time the
Complex Order is processed and within a certain price from the current
market pursuant to proposed Options 3, Section 16(a). If the stock
price is not within these proposed parameters, the Complex Order is not
executable and the Exchange will hold the Complex Order on the Order
Book, if consistent with Member instructions. Similar to ISE and MRX,
Phlx utilizes NES, today, to execute Stock-Tied Complex Orders.
Further, proposed Options 3, Section 16(e) provides, when the short
sale price test in Rule 201 of Regulation SHO is triggered for a
covered security, NES will not execute a short sale order in the
underlying covered security component of a Complex Order if the price
is equal to or below the current national best bid. This is the case
today. However, as is the case today, NES will execute a short sale
order in the underlying covered security component of a Complex Order
if such order is marked ``short exempt,'' regardless of whether it is
at a price that is equal to or below the current national best bid. If
NES cannot execute the underlying covered security component of a
Complex Order in accordance with Rule 201 of Regulation SHO, the
Exchange will hold the Complex Order on the Complex Order Book, if
consistent with Member instructions, as is the case today. The order
may execute at a price that is not equal to or below the current
national best bid, as is the case today. For purposes of Options 3,
Section 16(e), the term ``covered security'' shall have the same
meaning as in Rule 201(a)(1) of Regulation SHO.
Today, Phlx utilizes its Acceptable Complex Execution or ``ACE''
Parameter to define a price range outside of which a Complex Order will
not be executed.\107\ More specifically, the ACE Parameter is either a
percentage or number defined by the Exchange and may be set at a
different percentage or number for Complex Orders where one of the
components is the underlying security. The ACE Parameter price range is
based on the cNBBO at the time an order would be executed. A Complex
Order to sell will not be executed at a price that is lower than the
cNBBO bid by more than the ACE Parameter. A Complex Order to buy will
not be executed at a price that is higher than the cNBBO offer by more
than the ACE Parameter. A Complex Order or a portion of a Complex Order
that cannot be executed within the ACE Parameter pursuant to Options 3,
Section 16(b)(i) will be placed on the CBOOK.\108\
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\107\ See current Options 3, Section 16(b)(i).
\108\ See current Options 3, Section 16(b)(i).
---------------------------------------------------------------------------
Phlx proposes to replace the ACE Parameter with a price limit
utilized by ISE and MRX.\109\ Phlx would adopt the identical price
limit utilized by ISE and MRX at Options 3, Section 16(a). As provided
in proposed Options 3, Section 14(d)(2), the legs of a complex strategy
may be executed at prices that are inferior to the prices available on
other exchanges trading the same options series. Notwithstanding
Options 3, Section 14(d)(2), Phlx proposes to states that the System
will not permit any leg of a complex strategy to trade through the NBBO
for the series or any stock component by a configurable amount
calculated as the lesser of (i) an absolute amount not to exceed $0.10,
and (ii) a percentage of the NBBO not to exceed 500%, as determined by
the Exchange on a class, series or underlying basis. A member or member
organization may also include an instruction on a Complex Order that
each leg of the Complex Order is to be executed only at a price that is
equal to or better than the NBBO on the opposite side for the options
series or any stock component, as applicable (``Do-Not-Trade-Through''
or ``DNTT''). The proposed DNTT functionality is identical to ISE and
MRX Options 3, Section 16(a). As proposed, the System will reject
orders for a complex strategy where all legs are to buy if entered at a
price that is less than the minimum net price, which is calculated as
the sum of the ratio on each leg relative to the other legs of the
complex strategy multiplied by the minimum increment applicable to that
leg pursuant to Options 3, Section 14(c)(1). For example, if a Complex
Order has three legs where Leg 1 is a buy of 100 contracts, Leg 2 is a
buy of 200 contracts, and Leg 3 is a buy of 300 contracts, then the
ratio on each leg relative to the other legs is 1 by 2 by 3, and the
allowable minimum net price is 6 (1+2+3) multiplied by $0.01 would
equal $0.06.
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\109\ See ISE and MRX Options 3, Section 16(a).
---------------------------------------------------------------------------
The proposed price limit will prevent the legs of a complex
strategy from trading through the NBBO for the series or any stock
component by a configurable amount calculated as the lesser of (i) an
absolute amount not to exceed $0.10, and (ii) a percentage of the NBBO
not to exceed 500%, as determined by the Exchange on a class, series,
or underlying basis.
Phlx also proposes to adopt Strategy Protections in proposed
Options 3, Section 16(b). These protections will apply throughout the
trading day, including pre-market, during the Opening Process and
during a trading halt. The protections will not apply to Complex Orders
being auctioned and auction responses in Price Improvement Mechanism
within Options 3, Section 13. The Strategy Protections in Options 3,
Section 16(b) as the Vertical Spread Protection, Calendar Spread
Protection, Butterfly Spread Protection, and Box Spread Protection, and
are aimed at preventing the potential execution of certain complex
strategies outside of specified price parameters.
The Exchange proposes to adopt a new Vertical Spread Protection in
proposed Options 3, Section 16(b)(1). The Vertical Spread Protection
will apply to a vertical spread. A vertical spread is an order to buy a
call (put) option and to sell another call (put) option in the same
security with the same expiration but at a higher (lower) strike
price.\110\ The System will reject a Vertical Spread order when entered
with a net price of less than zero (minus a pre-set value), and will
prevent the execution of a Vertical Spread order at a price that is
less than zero (minus a pre-set value) when entered as a Market Order
to sell. The Exchange will set a pre-set value not to exceed $1.00 to
be applied uniformly across all classes. The Exchange may amend the
pre-set value uniformly across all classes.\111\ The System will reject
a Vertical Spread order when entered with a net price greater than the
value of the higher strike price minus the lower strike price (plus a
pre-set value), and will prevent the execution of a Vertical Spread
order at a price that is greater than the value of the higher strike
price minus the lower strike price (plus a pre-set value) when entered
as a Market Order to buy. The pre-set value used by the vertical spread
check will be the lesser of (1) an absolute amount not to exceed $1.00
and (2) a percentage of the difference between the strike prices not to
exceed 10% to be applied uniformly across all classes. The Exchange may
amend the pre-set value uniformly across all classes.\112\ The proposed
Vertical Spread Protection and the current Vertical Spread Protection
are
[[Page 16751]]
substantially similar. Today, Phlx only has a set absolute amount
configured by the Exchange for the `pre-set value' while the proposed
protection utilizes the lesser of an absolute amount or a percentage
amount as the pre-set value.\113\ The proposed change would be an
improvement over the existing Vertical Spread Protection because it
would better protect market complex order strategies with narrower
spreads.
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\110\ See proposed Options 3, Section 16(a)(1)(A).
\111\ See proposed Options 3, Section 16(a)(1)(B).
\112\ See proposed Options 3, Section 16(a)(1)(C).
\113\ Today, ISE's System Setting document notes that the
Vertical Spread Protection is the lesser of $1.00 or 5%. See <a href="https://www.nasdaq.com/docs/ISESystemSettings">https://www.nasdaq.com/docs/ISESystemSettings</a>. Phlx will have a similar
setting that will be noted in its System Setting document that is
publicly available.
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The Exchange proposes to adopt a Calendar Spread Protection in
proposed Options 3, Section 16(b)(2) that would replace the Time Spread
in current Options 3, Section 16(a)(ii) which is similar.\114\ The
Calendar Spread Protection will apply to a Calendar Spread. A calendar
spread is an order to buy a call (put) option with a longer expiration
and to sell another call (put) option with a shorter expiration in the
same security at the same strike price.\115\ The System will reject a
Calendar Spread order when entered with a net price of less than zero
(minus a preset value), and will prevent the execution of a Calendar
Spread order at a price that is less than zero (minus a pre-set value)
when entered as a Market Complex Order to sell. The Exchange will set a
pre-set value not to exceed $1.00 to be applied uniformly across all
classes. The Exchange may amend the pre-set value uniformly across all
classes.\116\
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\114\ The Time Spread allows a maximum possible value of a Time
Spread that is unlimited with a minimum possible value of Time
Spread of zero.
\115\ See proposed Options 3, Section 16(a)(2).
\116\ See proposed Options 3, Section 16(a)(2)(A).
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Phlx proposes to relocate the current Butterfly Spread Protection
in current Options 3, Section 16(c) to proposed Options 3, Section
16(b)(3) and amend the rule text in current Options 3, Section 16(c)(i)
that states,
A Butterfly Spread including an order being auctioned and
auction responses, that is priced higher than the Maximum Value or
lower than the Minimum Value will be cancelled. A Butterfly Spread
entered as a Market Order will be accepted but will be restricted
from trading at a price higher than the Maximum Value or lower than
the Minimum Value.
The Exchange proposes to amend this language to state in proposed
Options 3, Section 16(b)(3)(A),
A Butterfly Spread Limit Order that is priced higher than the
Maximum Value or lower than the Minimum Value will be rejected. A
Butterfly Spread Market Order (or Butterfly Spread Limit Order
entered with a net price inside the Butterfly Spread Protection
Range) to buy (sell) will be restricted from executing by legging
into the single leg market with a net price higher (lower) than the
Maximum (Minimum) Value. The Butterfly Spread Protection Range is
the absolute difference between the Minimum Value and the Maximum
Value.
The Exchange's amended language notes that the Butterfly Spread
Protection Range is the absolute difference between the Minimum Value
and the Maximum Value.\117\
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\117\ The Butterfly Spread Protection will continue to apply
throughout the trading day, including pre-market, during the Opening
Process and during Halts although the Exchange is removing this text
in current Options 3, Section 16(c)(ii) so that the rule text is
identical to ISE and MRX Options 3, Section 16(b)(3).
---------------------------------------------------------------------------
Phlx proposes to relocate the current Box Spread Protection in
current Options 3, Section 16(d) to proposed Options 3, Section
16(b)(4) and amend the rule text in current Options 3, Section 16(d)(i)
that states,
A Box Spread including an order being auctioned and auction
responses, that is priced higher than the Maximum Value or lower
than the Minimum Value will be cancelled. A Box Spread entered as a
Market Order will be accepted but will be restricted from trading at
a price higher than the Maximum Value or lower than the Minimum
Value.
The Exchange proposes to amend this language to state in proposed
Options 3, Section 16(b)(4)(A),
A Box Spread Limit Order that is priced higher than the Maximum
Value or lower than the Minimum Value will be rejected. A Box Spread
Market Order (or Box Spread Limit Order entered with a net price
inside the Box Spread Protection Range) to buy (sell) will be
restricted from executing by legging into the single leg market with
a net price higher (lower) than the Maximum (Minimum) Value. The Box
Spread Protection Range is the absolute difference between the
Minimum Value and the Maximum Value.
The Exchange's amended language notes that the Box Spread
Protection Range is the absolute difference between the Minimum Value
and the Maximum Value.\118\
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\118\ The Box Spread Protection will continue to apply
throughout the trading day, including pre-market, during the Opening
Process and during Halts although the Exchange is removing this text
in current Options 3, Section 16(d)(ii) so that the rule text is
identical to ISE and MRX Options 3, Section 16(b)(4).
---------------------------------------------------------------------------
Further, the Exchange proposes to provide at proposed Options 3,
Section 16(b), identical to ISE and MRX Options 3, Section 16(b), that
the complex risk protections would not apply to a Complex Order that
includes at least one P.M.-settled leg and at least one A.M.-settled
leg. A Complex Options Strategy may consist of legs with different
expirations based on settlement (a.m. or p.m.-settled). The last day of
trading for A.M.-settled index options shall be the business day
preceding the business day of expiration, or, in the case of an option
contract expiring on a day that is not a business day, the business day
preceding the last day of trading in the underlying securities prior to
the expiration date.\119\ In contrast, the last day of trading for
P.M.-settled index options shall be the business day of expiration, or,
in the case of an option contract expiring on a day that is not a
business day, on the last business day before its expiration date.\120\
---------------------------------------------------------------------------
\119\ See Options 4A, Section 12(e).
\120\ See Options 4A, Section 12(f).
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The Exchange proposes to not apply the strategy protections in
Options 3, Section 16(b) to a Complex Order that includes at least one
P.M.-settled leg and at least one A.M.-settled leg.\121\ A Complex
Order that includes at least one P.M.-settled leg and at least one
A.M.-settled leg would not qualify as a Vertical Spread, Butterfly
Spread, Calendar Spread or BOX Spread because the P.M.-settled leg and
the A.M.-settled leg would have different expirations. The System
considers these Complex Orders to be different products, as well as
customized Complex Orders, so System limitations would prevent the
application of the Strategy Price Protections to these Complex Orders.
The Exchange notes that the Vertical Spread Protections, Butterfly
Spread Protections and BOX Spread Protections all have the same
expirations unlike a Complex Order that includes at least one P.M.-
settled leg and at least one A.M.-settled leg. The Exchange also notes
that the System considers a Calendar Spread to have all legs in the
same product, unlike a Complex Order that includes at least one P.M.-
settled leg and at least one A.M.-settled leg. A Complex Order that
includes at least one P.M.-settled leg and at least one A.M.-settled
leg would still be subject to the price limits for Complex Orders in
Options 3, Section 16(a) and the price protections in Options 3,
Section 16(c), namely the Complex Order Price Protection, Size
Limitation and Price Level Protection.
---------------------------------------------------------------------------
\121\ The a.m. expiration and p.m. expiration would have
different settlement days.
---------------------------------------------------------------------------
The Exchange proposes to adopt Other Price Protections in proposed
Options 3, Section 16(c) which apply to Complex Orders which are
identical to price protections at ISE and MRX Options 3, Section 16(c).
The Exchange proposes to adopt a new Complex Order
[[Page 16752]]
Price Protection in proposed Options 3, Section 16(c)(1). This Complex
Order Price Protection will put a limit on the amount by which the net
price of an incoming Limit Complex Order to buy may exceed the net
price available from the individual options series on the Exchange and
the national best bid or offer for any stock leg, and by which the net
price of an incoming Limit Complex Order to sell may be below the net
price available from the individual options series on the Exchange and
the national best bid or offer for any stock leg. Limit Complex Orders
that exceed the pricing limit are rejected. The limit is established by
the Exchange from time-to-time for Limit Complex Orders to buy (sell)
as the net price available from the individual options series on the
Exchange and the national best bid or offer for any stock leg plus
(minus) the greater of: (i) an absolute amount not to exceed $2.00, or
(ii) a percentage of the net price available from the individual
options series on the Exchange and the national best bid or offer for
any stock leg not to exceed 10%.\122\
---------------------------------------------------------------------------
\122\ See proposed Options 3, Section 16(c)(1).
---------------------------------------------------------------------------
The Exchange proposes to adopt a new Size Limitation protection in
proposed Options 3, Section 16(c)(2) which is identical to ISE and MRX
Options 3, Section 16(c)(2). The Size Limitation protection will place
a limit on the number of contracts (and shares in the case of a Stock-
Option Strategy or Stock-Complex Strategy) any single leg of an
incoming Complex Order may specify. Orders that exceed the maximum
number of contracts (or shares) are rejected. The maximum number of
contracts (or shares), which shall not be less than 10,000 (or 100,000
shares), is established by the Exchange from time-to-time.\123\
---------------------------------------------------------------------------
\123\ See proposed Options 3, Section 16(c)(2).
---------------------------------------------------------------------------
The Exchange proposes to adopt a new Price Level Protection in
proposed Options 3, Section 16(c)(3) which is identical to ISE and MRX
Options 3, Section 16(c)(3). The Price Level Protection will place a
limit on the number of price levels at which an incoming Complex Order
to sell (buy) will be executed automatically with the bids or offers of
each component leg when there are no bids (offers) from other exchanges
at any price for the options series. Complex Orders are executed at
each successive price level until the maximum number of price levels is
reached on any component leg where the protection has been triggered,
and any balance is canceled. The number of price levels for the
component leg, which may be from one (1) to ten (10), is determined by
the Exchange from time-to-time on a class-by-class basis.\124\
---------------------------------------------------------------------------
\124\ See proposed Options 3, Section 16(c)(3).
---------------------------------------------------------------------------
As a result of these new Complex Order price protections, the
Exchange also proposes an amendment to Options 3, Section 7(d)(2).\125\
Currently, Options 3, Section 7(d)(2) provides, ``IOC orders may be
entered through FIX or SQF, provided that an IOC order entered by a
Market Maker through the SQF protocol will not be subject to the (A)
Order Price Protection, Market Order Spread Protection, and Size
Limitation Protection as defined in Options 3, Section 15(a)(1),
(a)(2), and (b)(2) respectively, for single leg orders.'' With the
addition of the proposed Complex Order Protections in Options 3,
Section 16, the Exchange proposes to add additional language to the
Immediate-or-Cancel order type, similar to ISE and MRX Options 3,
Section 7(d)(2), and provide at new ``B'' to Options 3, Section
7(d)(2), that an IOC order entered by a Market Maker through the SQF
protocol will not be subject to the Complex Order Price Protection as
defined in Options 3, Section 16(c)(1) for Complex Orders. The Exchange
notes while it generally only permits orders (including IOC orders) to
be entered into FIX,\126\ it does permit the entry of IOC orders by
Market Makers into its quote protocol, SQF.\127\ The Exchange has
elected not to apply the Complex Order Price Protection on IOC orders
entered through SQF as it does for IOC orders entered through FIX
because only Market Makers utilize SQF to enter IOC orders. Market
Makers are professional traders with their own risk settings. FIX, on
the other hand, is utilized by all market participants who may not have
their own risk settings, unlike Market Makers. Market Makers utilize
IOC orders to trade out of accumulated positions and manage their risk
when providing liquidity on the Exchange. The Exchange understands that
proper risk management, including using these IOC orders to offload
risk, is vital for Market Makers. Market Makers handle a large amount
of risk when quoting. Market Makers utilize their own risk management
parameters when entering orders, minimizing the likelihood of a Market
Maker's erroneous order from being entered. The Exchange believes that
Market Makers, unlike other market participants, have the ability to
manage their risk when submitting IOC orders through SQF and should be
permitted to elect this method of order entry to obtain efficiency and
speed of order entry, particularly in light of the quoting obligations
that the Exchange imposes on these participants, unlike other market
participants. The Exchange believes that allowing Market Makers to
submit IOC orders through their preferred protocol increases their
efficiency in submitting such orders and thereby allows them to
maintain quality markets to the benefit of all market participants that
trade on the Exchange. For the foregoing reasons, the Exchange has
opted to not offer the Complex Order Price Protection for IOC orders
entered through SQF because Market Makers have more sophisticated
infrastructures than other market participants and are able to manage
their risk.
---------------------------------------------------------------------------
\125\ Options 3, Section 7(d)(2) was amended in SR-Phlx-2024-71.
See Securities Exchange Act Release No. 101989 (December 30, 2024),
89 FR 106888 (December 30, 2024) (SR-Phlx-2024-71).
\126\ ``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. See Options 3, Section
7(a)(i)(A).
\127\ ``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. See Options 3, Section 7(a)(i)(B).
---------------------------------------------------------------------------
Order Routing
The Exchange proposes to amend Options 5, Section 4, Order Routing.
Specifically, the Exchange proposes to amend Options 5, Section 4(A) to
amend the sentence that provides, ``The sole use of the Routing
Facility by the System will be to route orders in options listed and
open for trading on the System to away markets either directly or
through one or more third-party unaffiliated routing broker-dealers
pursuant to Exchange rules on behalf of the Exchange and, in addition,
where one component of a Complex Order is the underlying security, to
execute and report such component otherwise than on the Exchange,
pursuant to Rule Options 3, Section 14(h).'' The Exchange proposes to
amend this
[[Page 16753]]
sentence to state, ``The sole use of the Routing Facility by the System
will be to route orders in options listed and open for trading on the
System to away markets either directly or through one or more third-
party unaffiliated routing broker-dealers pursuant to Exchange rules on
behalf of the Exchange.'' Options 3, Section 14(h) previously contained
the rule text that is currently in Options 3, Section 16(b) and refers
to the stock portion of an options order.\128\ The Exchange does not
route the stock portion of an options order, rather NES routes the
stock leg. Options 5, Section 4 applies only to options orders. The
Exchange proposes to remove this sentence to conform the rule text to
ISE Options 5, Section 4(a) rule text.
---------------------------------------------------------------------------
\128\ See Securities Exchange Act Release No. 88213 (February
14, 2020), 85 FR 9859 (February 20, 2020) (SR-Phlx-2020-03) (Notice
of Filing and Immediate Effectiveness of Proposed Rule Change To
Relocate Rules From Its Current Rulebook Into Its New Rulebook
Shell).
---------------------------------------------------------------------------
Options 1, Section 1
The Exchange proposes to define a conforming ratio in Options 1,
Section 1(b)(13) as follows,
The term ``conforming ratio'' is where the ratio between the
sizes of the options components of a Complex Order is equal to or
greater than one-to-three (.333) and less than or equal to three-to-
one (3.00). For example, a one-to-two (.5) ratio, a two-to-three
(.667) ratio, or a two-to-one (2.00) ratio is a conforming ratio,
whereas a one-to-four (.25) ratio or a four-to-one (4.0) ratio is
not; where one component of the Complex Order is the underlying
security, the ratio between any options component and the underlying
security component must be less than or equal to eight contracts to
100 shares of the underlying security.
This definition is the same definition that is currently in Phlx
Options 3, Section 14(a)(ix). This definition would apply to all
options rules where the term is utilized. The Exchange would also
renumber the definitions at Options 1, Section 1(b)(13) to (32). The
Exchange proposes to remove the term ``Off-Floor Broker-Dealer Order''
in current Options 1, Section 1(b)(33) as that term was removed from
rules in a prior rule change.\129\ Additionally, the Exchange proposes
to amend citations in various rules to amend them to conform to the
revised numbering.\130\
---------------------------------------------------------------------------
\129\ SR-Phlx-2024-71 removes the term ``off-floor broker-
dealer. See Securities Exchange Act Release No. 101989 (December 30,
2024), 89 FR 106888 (December 30, 2024) (SR-Phlx-2024-71). SR-Phlx-
2024-71 is effective but not yet operative. SR-Phlx-2024-71 would be
operative at the same time as this rule change as they are both part
of the same technology migration.
\130\ The Exchange proposes to remove citations to Options 2,
Section 1(a), Options 4C, Section 2(b)(2), and Section 5(b), and
Options 7, Section 1(c). The Exchange notes that the citations to
``Streaming Quote Trader'' were incorrect and they are being
corrected with this proposal.
---------------------------------------------------------------------------
Implementation
The Exchange will implement this rule change on or before December
20, 2025. Phlx would commence its implementation with a limited symbol
migration and continue to migrate symbols over several weeks. The
Exchange will issue an Options Trader Alert to Members to provide
notification of the symbols that will migrate and the relevant dates.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\131\ in general, and furthers the objectives of
Section 6(b)(5) of the Act,\132\ in particular, in that it is designed
to promote just and equitable principles of trade and to protect
investors and the public interest for the reasons discussed below.
---------------------------------------------------------------------------
\131\ 15 U.S.C. 78f(b).
\132\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Legging Order Functionality
The Exchange's proposal to amend the Legging Order type currently
located at Options 3, Section 7(b)(10) so that it is identical to rule
text at ISE and MRX Options 3, Section 7(k) is consistent with the Act
because it will harmonize the Legging Order functionality.
Providing that Legging Orders are treated as having no Public
Customer capacity or Market Maker capacity on the single leg order
book, regardless of being generated from Public Customer or Market
Maker Complex Options Orders is consistent with the Act because a
Legging Order is handled in the same manner as other orders on the
single-leg order book except as otherwise provided in Options 3,
Section 7(k), and is executed only after all other executable orders
and quotes at the same price are executed in full. When a Legging Order
is executed, the other component of the Complex Order on the Complex
Order Book will be automatically executed against the best bid or offer
on the Exchange. This rule text represents current System
functionality. The Exchange believes that a Legging Order, created for
the execution of a Complex Order, should not be afforded priority over
resting orders and quotes on the single-leg order book, and therefore
has determined to protect the priority on the single-leg order book of
such resting orders and quotes. Miami International Securities
Exchange, LLC (``MIAX'') similarly executes a derived order only after
all other executable orders and quotes at the same price are executed
in full.\133\ ISE and MRX have identical rule text at Options 3,
Section 7(k) with the exception of the Market Maker capacity language.
ISE and MRX have identical rule text at Options 3, Section 7(k) except
that Phlx will allocate executed orders pursuant to its allocation
model at Phlx Options 3, Section 10(a)(1)(E). ISE and MRX allocate
executed orders pursuant to their allocation models in ISE and MRX
Options 3, Section 10. Legging Orders would receive the allocation
applicable to all other remaining interest in 10(a)(1)(G).
---------------------------------------------------------------------------
\133\ See MIAX Rule 518(a)(9)(iv). See also Securities Exchange
Act Release No. 79072 (October 7, 2016), 81 FR 71131 (October 14,
2016) (SR-MIAX-2016-26) (Order Approving a Proposed Rule Change to
Adopt New Rules to Govern the Trading of Complex Orders).
---------------------------------------------------------------------------
Amending current Options 3, Section 7(b)(10)(A) which will be
relocated to Options 3, Section 7(k)(1) to add ``or both leg(s)'' to
the first sentence to provide that a Legging Order may be generated for
each leg of a two-legged Complex Order is consistent with the Act
because permitting both Legging Orders to execute as part of the
execution of a particular Complex Options Order will allow more Complex
Orders to execute while the price of the leg(s) will continue to be
bounded by the price limits described in Options 3, Section 16(a).\134\
Permitting Phlx to have two Legging Orders related to the same Complex
Options Order to be generated where both legs can execute as part of
the execution of a particular Complex Options Order is consistent with
the Act as it will allow more Complex Orders to execute while the price
of the leg(s) will continue to be bounded by the price limits described
in proposed Options 3, Section 16(a), similar to ISE and MRX Options 3,
Section 7(k)(1). Automatically generating Legging Orders, which will
only be executed after all other executable interest at the same price
(including non-displayed interest) is executed in full, will provide
additional execution opportunities for Complex Orders, without
negatively
[[Page 16754]]
impacting any investors in the single-leg market. In fact, the
generation of Legging Orders may enhance execution quality for
investors in the single-leg market by improving the price and/or size
of the PBBO and by providing additional execution opportunity for
resting orders on the single-leg order book. The generation of Legging
Orders is fully compliant with all regulatory requirements. In
particular, Legging Orders are firm orders that will be displayed at
the PBBO. Also, a Legging Order will be automatically removed if it is
no longer displayable at the PBBO or if the net price of the Complex
Order can no longer be achieved. Finally, the generation of Legging
Orders is limited in scope, as they may be generated only for Complex
Options Orders with two legs. Additionally, as noted herein, the
Exchange will closely manage and curtail the generation of Legging
Orders to assure that they do not negatively impact system capacity and
performance. Today, two legging orders may be generated from the same
Complex Options Order on ISE and MRX pursuant to Options 3, Section
7(k)(1).
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\134\ Proposed Options 3, Section 16(a) provides that, as
provided in Options 3, Section 14(d)(2), the legs of a complex
strategy may be executed at prices that are inferior to the prices
available on other exchanges trading the same options series.
Notwithstanding, the System will not permit any leg of a complex
strategy to trade through the NBBO for the series or any stock
component by a configurable amount calculated as the lesser of (i)
an absolute amount not to exceed $0.10, and (ii) a percentage of the
NBBO not to exceed 500%, as determined by the Exchange on a class,
series or underlying basis. A member can also include an instruction
on a Complex Order that each leg of the Complex Order is to be
executed only at a price that is equal to or better than the NBBO on
the opposite side for the options series or any stock component, as
applicable (``Do-Not-Trade-Through'' or ``DNTT'').
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The Exchange's proposal to add rule text at the end of proposed
Options 3, Section 7(k)(4)(i) (current Options 3, Section
7(b)(10)(D)(i)) that provides, ``or is at a price that locks or crosses
the best bid or offer of another exchange'' is consistent with the Act
and will continue to prevent Phlx from locking or crossing an away
market. Today, Phlx would re-price the Legging Order to avoid locking
and crossing an away market. With the proposed amendment, Phlx will
amend its rule text to adopt identical System behavior to ISE and MRX
and would no longer re-price an order. Rather, Phlx will remove a
Legging Order that is at a price that is no longer at the displayed
best bid or offer on the single-leg limit order book or is at a price
that locks or crosses the best bid or offer of another exchange. As
proposed, Options 3, Section 7(k)(4)(i) would remove the Legging Orders
if the price of the Legging Order is no longer at the displayed best
bid or offer on the single-leg limit order book or is at a price that
locks or crosses the best bid or offer of another exchange. Proposed
Options 3, Section 7(k)(4)(i) is identical to ISE
[…truncated; see source link]Indexed from Federal Register on April 21, 2025.
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