Notice2025-15317
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend PIXL and Adopt New Auctions
Primary source
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Published
August 13, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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[Federal Register Volume 90, Number 154 (Wednesday, August 13, 2025)]
[Notices]
[Pages 39042-39087]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-15317]
[[Page 39041]]
Vol. 90
Wednesday,
No. 154
August 13, 2025
Part II
Securities and Exchange Commission
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Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and
Immediate Effectiveness of Proposed Rule Change To Amend PIXL and Adopt
New Auctions; Notice
Federal Register / Vol. 90 , No. 154 / Wednesday, August 13, 2025 /
Notices
[[Page 39042]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-103667; File No. SR-Phlx-2025-35]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend PIXL and
Adopt New Auctions
August 8, 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 August 5, 2025, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
the proposed rule change as described in Items I, II, and III below,
which Items have been prepared by the Exchange. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
In connection with a technology migration to an enhanced Nasdaq,
Inc. (``Nasdaq'') functionality, to adopt the following new auctions:
Block Order Mechanism, Facilitation Mechanism and Solicited Order
Mechanism in Options 3, Section 11. The Exchange also proposes to
permit Customer Cross Orders at Options 3, Section 12(a) and Complex
Cross Orders at Options 3, Section 12(b) to transact outside of the
current Price Improvement XL (``PIXL'') mechanism where these orders
currently transact. The Exchange proposes to amend Qualified Contingent
Cross (``QCC'') Orders and Complex QCC Orders at Options 3, Section 12
and Options 3, Section 30 to align these rules to ISE Options 3,
Section 12(a) and (b). The Exchange proposes to amend the PIXL rules at
Options 3, Section 13 to align certain functionality to Nasdaq ISE LLC
(``ISE'') PIM at Options 3, Section 13. Finally, the Exchange proposes
amendments to Options 3, Section 7, Types of Orders and Order and Quote
Protocols; Options 3, Section 10, Electronic Execution Priority and
Processing in the System; Options 3, Section 14, Complex Orders;
Options 3, Section 16. Complex Order Risk Protections; and Options 3,
Section 22, Limitations on Order Entry, in connection with the
aforementioned changes. The Exchange also proposes an amendment to
Options 2, Section 10, Directed Orders and Options 5, Section 4, Order
Routing.
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>,
and at the principal office of the Exchange.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
In connection with a technology migration to an enhanced Nasdaq
functionality which will result in higher performance, scalability, and
more robust architecture, the Exchange proposes to amend and adopt
functionality identical to the functionality on ISE.
The Exchange proposes to adopt the following new auctions: Block
Order Mechanism, Facilitation Mechanism and Solicited Order Mechanism
in Options 3, Section 11. The proposed Block Order Mechanism at Options
3, Section 11(a) is identical to ISE's Block Order Mechanism at ISE
Options 3, Section 11(a). Phlx's proposed Facilitation Mechanism and
Solicited Order Mechanism at Options 3, Section 11 are substantively
identical to ISE's Facilitation Mechanism and Solicited Order Mechanism
at Options 3, Section 11. With respect to Phlx's proposed Facilitation
Mechanism and Solicited Order Mechanism, the Exchange will allocate
interest pursuant to Phlx Options 3, Section 10 \3\ whereas ISE
allocates pursuant to its allocation rules at Options 3, Section 10.\4\
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\3\ Phlx recently amended Options 3, Section 10. 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.
\4\ Phlx's allocation model is different than ISE's in that Phlx
allocates to Market Makers before allocating to all other market
participants pursuant to Phlx Options 3, Section 10 while ISE does
not have an additional allocation to Market Makers before all other
market participants pursuant to ISE Options 3, Section 10.
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The Exchange also proposes relocating its Customer Cross Orders at
Options 3, Section 12(a) and Complex Cross Orders at Options 3, Section
12(b) to transact outside of the current PIXL mechanism where these
orders currently transact. The Exchange proposes to adopt rule text
that is identical to ISE Options 3, Section 12(a) and (b).\5\
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\5\ Phlx rules are identical to ISE rules except for the use of
certain terms. Phlx's Public Customer, defined at Phlx Options 1,
Section 1(b)(46), provides that the term ``Public Customer'' means a
person or entity that is not a broker or dealer in securities and is
not a Professional as defined within Options 1, Section (b)(45).
This term has the same meaning as ISE's Priority Customer, defined
at ISE Options 1, Section 1(a)(37). The term ``Priority Customer''
means a person or entity that (i) is not a broker or dealer in
securities, and (ii) does not place more than 390 orders in listed
options per day on average during a calendar month for its own
beneficial account(s). Also, Phlx utilizes the terms ``member'' and
``member organization.'' The term ``member'' means a permit holder
which has not been terminated in accordance with the By-Laws and
these Rules of the Exchange. A member is a natural person and must
be a person associated with a member organization. Any references in
the rules of the Exchange to the rights or obligations of an
associated person or person associated with a member organization
also includes a member. See General 1, Section 1(a)(16) The term
``member organization'' means a corporation, partnership (general or
limited), limited liability partnership, limited liability company,
business trust or similar organization, transacting business as a
broker or a dealer in securities and which has the status of a
member organization by virtue of (i) admission to membership given
to it by the Membership Department pursuant to the provisions of
General 3, Sections 5 and 10 or the By-Laws or (ii) the transitional
rules adopted by the Exchange pursuant to Section 6-4 of the By-
Laws. References herein to officer or partner, when used in the
context of a member organization, shall include any person holding a
similar position in any organization other than a corporation or
partnership that has the status of a member organization. See
General 1, Section 1(a)(17). ISE utilizes the term ``Electronic
Access Member'' which is the equivalent of Phlx's term ``member
organization.'' The term ``Electronic Access Member'' or ``EAM''
means a Member that is approved to exercise trading privileges
associated with EAM Rights. See General 1, Section 1(a)(6). The
Exchange utilizes the term ``identical'' throughout this rule
proposal despite these definitional differences.
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The Exchange proposes to amend its Qualified Contingent Cross or
``QCC'' Orders and Complex QCC Orders at Options 3, Section 12 and
Options 3, Section 30 to adopt rule text that is identical to ISE
Options 3, Section 12(a) and (b). The proposed changes to QCC Orders at
Options 3, Section 12 and Complex QCC Orders at Options 3, Section 12
would apply equally to electronic QCC Orders and Floor QCC Orders. The
Exchange is not amending the System handling of electronic QCC Orders.
With respect to Floor QCC
[[Page 39043]]
Orders, the System handling will remain the same except that the
Exchange is amending the minimum increments at proposed Options 8,
Section 30(e).
The Exchange proposes to amend the PIXL rules at Options 3, Section
13 so that its rules are similar to ISE PIM at Options 3, Section
13.\6\
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\6\ The Exchange notes that it will adopt certain aspects of
ISE's PIM but not all aspects of the rule. Phlx proposed PIXL entry
checks at Options 3, Section 13(b)(1)-(3) are identical to ISE
Options 3, Section 13(b)(1)-(3). Phlx proposed Options 3, Section
13(b)(1)(A) related to PAN responses is substantially similar to
Options 3, Section 13(d)(7). Phlx Options 3, Section 13(b)(1)(B)
related to Surrender proposes a configurable Surrender provision
that is substantially similar to ISE Options 3, Section
13(e)(5)(iii). Phlx proposed Options 3, Section 13(b)(1)(C)
concerning a PAN proposes to disseminate ``price'' in addition to
side, size, and options series similar to ISE Options 3, Section
13(c). Phlx proposed Options 3, Section 13(b)(1)(H) regarding
capping a PAN response size is substantially similar to ISE Options
3, Section 13(c)(2). The proposed Complex early termination
provisions in Phlx Options 3, Section 13(b)(2)(C)(2) are identical
to ISE Options 3 Sections 13 (e)(4)(iv)(C), (e)(4)(iv)(D),
(e)(5)(iv). The proposed trade halt rule text at Phlx Options 3,
Section 13(b)(3) is substantially similar to Options 3, Section
13(d)(5). Phlx proposed rule text to amend the System allocation to
the Initiating member after Public Customer orders have been
allocated in Options 3, Section 13(b)(5)(B)(i) is identical to ISE
Options 3, Section 13(d)(3) and Options 3, Section 13(e)(5)(iii).
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The Exchange proposes amendments to Options 3, Section 7, Types of
Orders and Order and Quote Protocols, to adopt order types identical to
ISE Options 3, Section 7.
The Exchange proposes adopting applicability language in Options 3,
Section 10, Electronic Execution Priority and Processing in the System,
at subsection (b) that is identical to ISE Options 3, Section 10(a)(2).
The Exchange proposes adopting a Complex Facilitation Order type
and a Complex SOM Order at Options 3, Section 14(b)(16) and (17) that
are identical to order types at ISE Options 3, Section 14(b)(16) and
(17).
The Exchange proposes to make non-substantive technical amendments
at Options 3, Section 15, Simple Order Risk Protections.
The Exchange proposes to amend Options 3, Section 16, Complex Order
Risk Protections, at subsection (b), to add proposed new order types
identical to the rule text at ISE Options 3, Section 16(b).
The Exchange proposes to amend Options 3, Section 22, Limitations
on Order Entry, to add the new auctions proposed herein to the rule
text so that the rule text is identical to ISE Options 3, Section 22.
The Exchange proposes to amend Options 8, Section 30, Crossing,
Facilitation and Solicited Orders, to amend its Floor QCC rules to
align to the changes in its electronic QCC Order rule at Options 3,
Section 12. The Exchange notes that while Phlx has a trading floor, ISE
does not have a trading floor. The Options 3 rule amendments only apply
to electronic orders and do not otherwise amend the trading floor rules
which are located in Options 8. Specifically, the proposed amendments
to Options 8, Section 30, related to the trading floor, would align to
proposed Options 3, Section 12.\7\
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\7\ In 2011, Phlx proposed to establish a Floor QCC based on the
precedent of ISE's QCC Order. PHLX previously established an
electronic QCC Order set forth in PHLX Rule 1080(o). See Securities
Exchange Act Release No. 64249 (April 7, 2011), 76 FR 20773 (April
13, 2011) (SR-Phlx-2011-047). As part of that rule change, Phlx
analyzed the application of Section 11(a) to various Exchange
systems and order types. In analyzing Floor QCC Orders, the Exchange
has concluded that the entry and execution of Floor QCC Orders
raises no novel issues under Section 11(a) and the rules thereunder
from a compliance, surveillance or enforcement perspective. In other
words, Exchange Floor Brokers are currently required to comply and
the Exchange surveils for compliance with Section 11(a) and the
rules thereunder when using Exchange systems to effect transactions
using existing order types, and they will be required to comply with
Section 11(a) and the rules thereunder when using the Floor QCC
Order. See Securities Exchange Act Release No. 64415 (May 5, 2011),
76 FR 27732 (May 12, 2011) (SR-Phlx-2011-56) (Notice of Filing of
Proposed Rule Change To Establish a Qualified Contingent Cross Order
for Execution on the Floor of the Exchange).
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The Exchange also proposes an amendment to Options 2, Section 10,
Directed Orders, and Options 5, Section 4, Order Routing. Each of the
aforementioned rule changes are described below.
Options 2, Section 10
The Exchange previously amended \8\ Options 2, Section 10(a)(ii)
related to Directed Orders to amend the sentence to replace the words
``Exchange's best price'' with ``better of the internal PBBO or the
NBBO.'' The Exchange previously conformed the rule text with language
throughout the Options 3 trading rules that describe the Exchange's
best price with references to the internal PBBO and NBBO. Pursuant to
Options 3, Section 5, the System automatically executes eligible orders
using the Exchange's displayed best bid and offer (``PBBO'') or the
Exchange's non-displayed order book (``internal PBBO'') if there are
non-displayed orders on the order book or the best bid and/or offer on
the Exchange has been repriced pursuant to Options 3, Section 5(d) or
Options 3, Section 4(b)(6) which describes trade-through compliance and
locked and crossed markets. At that time, the Exchange inadvertently
did not amend Options 2, Section 10(a)(iii) in a similar manner.
Options 2, Section 10(a)(iii) describes when the opposite side of the
market from the Directed Order is inferior to the internal PBBO or the
NBBO. The Exchange should have amended Options 2, Section 10(a)(ii) in
a similar manner. At this time, the Exchange proposes to amend the rule
text of Options 2, Section 10(a)(iii) to state, ``When the Exchange's
disseminated price is the NBBO, and the quotation disseminated by the
Directed Lead Market Maker, RSQT, or SQT on the opposite side of the
market from the Directed Order is inferior to the internal PBBO or the
NBBO at the time of receipt of the Directed Order, the Directed Order
shall be automatically executed and allocated to those quotations and
orders at the NBBO in accordance with Options 3, Section 10(a)(1).''
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\8\ See Securities Exchange Act Release No. 100599 (July 25,
2024), 89 FR 61550 (July 31, 2024) (SR-Phlx-2024-26) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
Options 2, Sections 5 and 10 and Options 3, Section 15).
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Options 3, Section 11
Block Order Mechanism
The Exchange proposes to adopt several auctions within Options 3,
Section 11, which is currently reserved. The Exchange proposes to
entitle Option 3, Section 11 ``Auction Mechanisms.''
The Exchange proposes adopting a new Block Order Mechanism in
Options 3, Section 11(a). Today, Phlx does not have a Block Order
Mechanism. The proposed Block Order Mechanism in Options 3, Section 11
would be identical to ISE's Block Order Mechanism at Options 3, Section
11(a).
The proposed mechanism will provide a means for handling ``block-
sized orders'' (i.e., orders for fifty (50) contracts or more), and
will be identical to the Block Order Mechanism currently offered by the
Exchange's affiliate, ISE. Specifically, proposed Options 3, Section
11(a) will state that the Block Order Mechanism is a process by which a
member can obtain liquidity for the execution of block-size orders
(``Block Order''). The Block Order Mechanism is for single leg
transactions only. As discussed above, Options 3, Section 11 will
further define block-size orders as orders for fifty (50) contracts or
more. These provisions are consistent with ISE Options 3, Section
11(a).
Proposed subparagraph (a)(1) of Options 3, Section 11 would provide
that upon entry of an order into the Block Order Mechanism, a broadcast
message would be sent that includes the series, and may include price,
size and/
[[Page 39044]]
or size, as specified by the member \9\ entering the Block Order, and
members would be given an opportunity to enter Responses with the
prices and sizes at which they would be willing to trade with the Block
Order.\10\ This proposal is identical to ISE's process at Options 3,
Section 11(a)(1). The Exchange also proposes to add identical
definitions of ``broadcast message'' and ``Response'' within this rule.
Specifically, for purposes of the Rule, a ``broadcast message'' will
mean an electronic message that is sent by the Exchange to all members,
and a ``Response'' will mean an electronic message that is sent by
members in response to a broadcast message. Further, Responses
represent non-firm interest that can be canceled or modified at any
time prior to execution. Responses are not displayed to any market
participants. Also, for purposes of this Rule, the time given to
members to enter Responses for any of the below auction mechanisms
shall be designated by the Exchange via an Options Trader Alert, but no
less than 100 milliseconds and no more than 1 second.\11\ These
definitions would apply to any auction in Options 3, Section 11.\12\
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\9\ The term ``member'' means a permit holder which has not been
terminated in accordance with the By-Laws and these Rules of the
Exchange. A member is a natural person and must be a person
associated with a member organization. Any references in the rules
of the Exchange to the rights or obligations of an associated person
or person associated with a member organization also includes a
member. See Phlx General 1, Section 1(a)(16). Of note, ISE General
1, Section 1(a)(13) defines a ``Member'' as to mean an organization
that has been approved to exercise trading rights associated with
Exchange Rights.
\10\ The Exchange notes that similar to current ISE
functionality, the proposed functionality on Phlx will allow all
members, except for the initiating member, to respond to the Block
Order Mechanism.
\11\ See proposed Options 3, Section 11. See also ISE Options 3,
Section 11.
\12\ The Exchange is proposing a Facilitation Mechanism, Complex
Facilitation Mechanism, Solicited Order Mechanism and Complex
Solicited Order Mechanism within Options 3, Section 11 within this
proposal.
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Proposed subparagraph (a)(2) would provide that at the conclusion
of the time given to members entering Responses, either an execution
would occur automatically, or the Block Order would be cancelled.
Proposed subparagraph (a)(2)(A) to Options 3, Section 11 explains the
price at which orders entered into the Block Order Mechanism are
executed. Specifically, Responses, orders, and quotes would be executed
at a single block execution price that is the price for the Block Order
at which the maximum number of contracts can be executed consistent
with the member's instruction. Bids (offers) on the Exchange at the
time the Block Order is executed that are priced higher (lower) than
the block execution price, as well as Responses that are priced higher
(lower) than the block execution price, would be executed in full at
the block execution price up to the size of the Block Order. This is
identical to how ISE's Block Orders are priced at execution pursuant to
ISE Options 3, Section 11(a)(2)(A).
Proposed subparagraph (a)(2)(B) describes the proposed auction
allocation methodology. At the block execution price, Public Customer
Orders and Public Customer Responses will be executed first in price
time priority, and then quotes, non-Public Customer Orders, and non-
Public Customer Responses will participate in the execution based upon
the percentage of the total number of contracts available at the block
execution price that is represented by the size of the quote, non-
Public Customer Order, or non-Public Customer Response. This is
functionally identical to ISE's Block Order Mechanism allocation
methodology.\13\ Identical to ISE, the proposed Block Order Mechanism
is designed to provide an opportunity for members to receive liquidity
for their Block Orders, and will therefore trade at a price that allows
the maximum number of contracts of the Block Order to be executed
against both Responses entered to trade against the order and unrelated
interest on the Exchange's order book.
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\13\ See ISE Options 3, Section 11(a)(2)(B). The reference to
``Professional'' interest in ISE's rule refers to non-Priority
Customer interest as compared to Priority Customer interest. See ISE
Options 1, Section 1(a)(39) which defines a Professional Order as an
order that is for the account of a person or entity that is not a
Priority Customer.
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Example 1
A member enters a Block Order to buy 100 contracts at $1.00
Response A to sell 50 contracts at $0.90
Response B to sell 40 contracts at $0.95
The block execution price would be 90 contracts at $0.95 as this
is the price at which the maximum number of contracts could be
executed. The Block Order and both Responses would then be executed
at this single block execution price. Responses A and B would be
executed in full since there is sufficient size to execute both
Responses against the Block Order.
If two other members also enter Responses C (a Public Customer)
and D (a Firm), to sell at $0.98 for 10 contracts each, the block
execution price would be $0.98 as additional contracts could be
executed at that price. In that instance, Responses A and B, which
are priced better than the block execution price, would be executed
in full at $0.98, while Responses C and D, which are priced at the
block execution price, would participate in accordance with the
allocation methodology described in the proposed rule--i.e., the
remaining 10 contracts would go to Response C, which is the Public
Customer Response.
The Exchange proposes in subparagraph (a)(3) that if a trading halt
is initiated after an order is entered into the Block Order Mechanism,
such auction will be automatically terminated without execution. ISE
Options 3, Section 11(a)(3) has identical rule text. Lastly, the
Exchange proposes to amend Options 3, Section 7(v) to add Block Orders
to the list of order types and provide, ``A Block Order is an order
entered into the Block Order Mechanism as described in Options 3,
Section 11(a).'' ISE Options 3, Section 7(v) identically defines Block
Order as an order type.
The Exchange also proposes to note that at proposed Supplementary
.05 to Options 3, Section 11 that orders and Responses may be entered
into the Block Order Mechanism and receive executions at penny
increments. Orders and quotes in the market that receive the benefit of
the block execution price pursuant to Options 3, Section 11 (a)(2)(A)
may also receive executions at penny increments. ISE has identical
language at Supplementary .05 to Options 3, Section 11.
Facilitation Mechanism
The Exchange proposes to amend Options 3, Section 11(b) and (c) to
adopt a new proposed Facilitation Mechanism. Today, Phlx does not offer
a Facilitation Mechanism. The proposed Facilitation Mechanism will be
substantively identical to ISE's Facilitation Mechanism except that the
Facilitation Mechanism will allocate pursuant to Phlx Options 3,
Section 10 \14\ as explained below.
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\14\ See supra note 3.
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The proposed Facilitation Mechanism will provide a Phlx member with
the ability to enter a block size order and execute the order as
principal. A Phlx member is not otherwise permitted to execute an
agency order as principal unless the order is first permitted to
interact with other interest on the Exchange pursuant to Options 3,
Section 22(b).\15\ Proposed Options 3,
[[Page 39045]]
Section 11(b) would provide for a Facilitation Mechanism that would
permit a Phlx member to execute a transaction wherein the member seeks
to facilitate a block-size order it represents as agent (``agency
order''), and/or a transaction wherein the member solicited interest to
execute against a block-size order it represents as agent
(``Facilitation Order''). This mechanism allows members the flexibility
to represent a transaction where the member is facilitating only a
portion of the order and has solicited interest from other parties for
the other portion of the order. Members must be willing to execute the
entire size of orders entered into the Facilitation Mechanism.
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\15\ Currently, Options 3, Section 22(b) provides that member
organizations may not execute as principal against orders on the
Limit Order book they represent as agent unless: (i) agency orders
are first exposed on the Limit Order book for at least 1 second;
(ii) the member has been bidding or offering on the Exchange for at
least 1 second prior to receiving an agency order that is executable
against such order; (iii) the orders are entered into Price
Improvement XL or ``PIXL'' pursuant to Options 3, Section 13; (iv)
the orders are entered into the Complex Order Live Auction or
``COLA'' pursuant to Options 3, Section 14(e); or (v) the orders are
entered into the Qualified Contingent Cross or ``QCC'' mechanism
pursuant to Options 3, Section 12 or Options 8, Section 30(e).
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With respect to orders entered into the Facilitation Mechanism, the
orders are required to be entered at a price that is (A) equal to or
better than the NBBO and the internal PBBO \16\ on the same side of the
market as the agency order unless there is a Public Customer order on
the BBO or internal PBBO on the same side of the market as the agency
order, in which case the order must be entered at an improved price
over the Public Customer order; and (B) equal to or better than the
ABBO on the opposite side. Orders that do not meet these requirements
would not be eligible for the Facilitation Mechanism and would be
rejected.\17\
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\16\ The internal PBBO (also known as the internal BBO)
represents the Exchange's non-displayed order book. See Options 3,
Section 4(b)(7).
\17\ See proposed Options 3, Section 11(b).
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Thereafter, once an order is entered into the Facilitation
Mechanism, the Exchange will send a facilitation broadcast to crowd
participants. The broadcast message is anonymous and informs
participants of the proposed transaction. The broadcast message would
include the series, price and size of the agency order, and whether it
is to buy or sell. Members would be given an opportunity to enter
Responses with the prices and sizes at which they want to participate
in the facilitation of the order.\18\ The recipients of the broadcast
would have a designated amount of time, set by the Exchange,\19\ to
respond.\20\ Responses may be priced at the price of the order to be
facilitated or at a better price and will only be considered up to the
size of the order to be facilitated. Responses must be entered at a
price that is equal to or better than the better of the internal PBBO
or the NBBO: (1) on the same side of the market at the start of the
Facilitation Mechanism; and (2) on the opposite side of the market at
the time the Response is received.\21\
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\18\ See proposed Options 3, Section 11(b)(2).
\19\ See proposed Options 3, Section 11.
\20\ The Exchange proposes to set the Facilitation Mechanism
broadcast message timer to 100 milliseconds.
\21\ See proposed Options 3, Section 11(b)(3).
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Example 2
Assume the NBBO and the Phlx PBBO is $1.00 bid and $2.00 offered
and the CBOE is the next best exchange quote with $0.75 bid and
$2.25 offered. An agency order to buy 50 contracts at $2.05 is
entered into the Facilitation Mechanism by the initiating member
with a contra-side sell order.
If no responses are received, the agency order executes with the
resting 50 lot quote @ $2.00. In this instance, the agency order is
able to be crossed with the contra side Phlx PBBO because in
execution, the resting 50 lot quote @ $2.00 is able to provide price
improvement to the agency order.
By utilizing the better of the internal PBBO or the NBBO at the
start of the auction, the Exchange believes that better priced
Responses would be permitted to trade with the order to be facilitated.
This proposal would permit a Response to these auctions to be entered
at a price that is equal to or better than the better of the internal
PBBO or the NBBO on the same side of the market at the start of the
auction and on the opposite side of the market at the time the Response
is received, thereby preventing potential auction manipulation which
can occur when an order/quote is entered at a price that improves the
price of the order to be facilitated. Other Responses to that auction
may be entered at a price that improves the price of the order to be
facilitated, but are inferior to such other quote/order Responses which
improved upon the internal PBBO or NBBO. Utilizing the price of the
market at the start of the auction, for the same side check, would
prevent an order or quote from potentially manipulating the final
auction price by changing the internal PBBO/NBBO while not fully
satisfying the agency order, thus preventing Responses from being
entered at a price that improves the stop price of the auction, but
remains inferior to the price of such initial order or quote. The entry
checks differ for the same and opposite sides of the market because
manipulation may not occur on the opposite side of the Response because
only interest on the same side of the Response will be eligible to
trade with the auctioned order. The proposed amendments would allow
orders to be facilitated to potentially trade at improved prices.
Example 3
Assume the NBBO is $1.10 bid and $1.35 offered while the
internal PBBO is $1.15 bid and $1.30 offered. An agency order to
sell 100 contracts at $1.18 is entered into the Facilitation
Mechanism by the initiating member.
If Order 1 is entered to buy 1 contract @$1.25 and then Auction
Response 1 is entered to buy 100 contracts at $1.20. With the entry
check modification, Auction Response 1 is accepted based on the
market at the start of the auction of $1.15 bid and $1.30 offered.
Auction would conclude and partially trade with Order 1 at $1.25
and then trade the remainder of the agency order at a price of $1.20
based off of the acceptance of Auction Response 1.
At the end of the period given for the entry of Responses, the
agency order would be automatically executed.\22\ With respect to the
allocation of the Facilitation Order, Public Customer Orders and Public
Customer Responses to buy (sell) at the time the Facilitation Order is
executed that are priced higher (lower) than the facilitation price
will be executed at the facilitation price, unless there is sufficient
size to execute the entire Facilitation Order at a better price. The
Exchange believes that this proposal will both protect Public Customer
limit orders on the order book and provide Public Customers with the
benefit of price improvement. Thereafter, non-Public Customer Orders
and non-Public Customer Responses to buy (sell) and Market Maker quotes
at the time the Facilitation Order is executed that are priced higher
(lower) than the facilitation price will be executed at their stated
price, thereby providing the order being facilitated a better price for
the number of contracts associated with such higher bids (lower
offers). The Exchange believes that the proposal is consistent with the
public interest, and that it promotes just and equitable principles of
trade by ensuring that Market Makers will be able to compete in a fair
and equitable manner, based on the competitiveness of their quotes, for
that portion of an order remaining after Public Customer interest and
the member's facilitation allocation. The Facilitation Order will be
cancelled at the end of the exposure period if an execution would take
place at a price that is inferior to the Exchange best bid (offer), or
if there is a Public Customer Order on the same side at the same price
as the agency order unless the Facilitation Order can execute at a
price that is better than the same side Public Customer Order.\23\ The
Exchange's
[[Page 39046]]
allocation methodology ensures that executions in Facilitation Auctions
comply with the general prohibition on trade-throughs in Options 5,
Section 2(a).
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\22\ See proposed Options 3, Section 11(b)(4).
\23\ See proposed Options 3, Section 11(b)(4)(A).
---------------------------------------------------------------------------
The facilitating member will be allocated up to forty percent (40%)
(or such lower percentage requested by the member) of the original size
of the agency order after better-priced Responses, orders and quotes,
as well as Public Customer Orders and Public Customer Responses at the
facilitation price, are executed in full at such price point.
Thereafter, quotes, non-Public Customer Orders, and non-Public Customer
Responses will execute pursuant to the priority allocations in Options
3, Section 10(a)(1)(E) and (F).\24\ This allocation methodology is the
same allocation methodology utilized for order book allocation at
Options 3, Section 10.\25\ Phlx will utilize its allocation methodology
at Options 3, Section 10 whereas ISE's Facilitation Mechanism utilizes
ISE's allocation methodology at ISE Options 3, Section 10.
Specifically, Phlx's allocation methodology differs from ISE's
allocation methodology in that Phlx will allocate to Market Makers
ahead of all other non-Public Customer interest whereas ISE does not
have a separate market maker allocation. This is consistent with the
Exchange's standard allocation methodology in its PIXL auction. Phlx
believes it is consistent with the Act to retain its allocation model
in these auctions in the same way that it utilizes its allocation model
in its PIXL auction in Phlx Options 3, Section 13 and ISE utilizes its
allocation model in its PIM auction in ISE Options 3, Section 13.
Phlx's allocation model is consistent with the Act as it maintains the
priority of orders and protects Public Customer orders by allocating
them prior to other interest.
---------------------------------------------------------------------------
\24\ See supra note 3.
\25\ Id.
---------------------------------------------------------------------------
The Exchange offers an auto-match functionality, which provides an
enhanced price improvement opportunity for the agency order by
permitting the contra-side order to further participate in the cross by
auto-matching the price and size of competing interest providing price
improvement from other market participants. Proposed Options 3, Section
11(b)(4)(C) notes that upon entry of an order into the Facilitation
Mechanism, the facilitating member can elect to automatically match the
price and size of orders, quotes and Responses received during the
exposure period up to a specified limit price or without specifying a
limit price. In this case, if the facilitating member auto-matches, it
will be allocated the aggregate size of all competing quotes, orders,
and Responses at each price point, or at each price point up to the
specified limit price if a limit is specified, until a price point is
reached where the balance of the order can be fully executed. At such
price point, the facilitating member shall be allocated up to forty
percent (40%) (or such lower percentage requested by the member) of the
original size of the agency order, but only after Public Customer
Orders and Public Customer Responses at such price point. Thereafter,
non-Public Customer Orders, non-Public Customer Responses and quotes
will execute pursuant to the priority allocations in Options 3, Section
10(a)(1)(E) and (F),\26\ which is the same allocation methodology
utilized for transactions in the Exchange's order book at Options 3,
Section 10. The Exchange notes that an election to automatically match
better prices cannot be cancelled or altered during the exposure
period.\27\
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\26\ See supra note 3.
\27\ See proposed Options 3, Section 11(b)(4)(C).
---------------------------------------------------------------------------
Example 4
Assume the NBBO is $10.60 bid and $10.70 offered. An agency
order to sell 50 contracts at $10.65 is entered into the
Facilitation Mechanism by the initiating member with a contra-side
buy order that has an auto-match limit of $10.70:
If one Response is received for 10 contracts to buy at $10.70,
the agency order will receive 20 contracts at $10.70 (10 against the
Response and 10 against the contra-side order) and 30 contracts at
$10.65 (against the contra-side order).
If there is one Response for 10 contracts to buy at $10.70 and
two Responses each for 5 contracts to buy at $10.65, the agency
order will receive 20 contracts at $10.70 (10 against the Response
and 10 against the contra-side order), and then the balance of the
30 contracts will be allocated between the contra-side order and the
two Responses at $10.65 as follows: 20 contracts would be allocated
to the contra-side order (40% of the initial order); and 5 contracts
would be allocated to each of the responding participants.
The proposed auto-match feature benefits the agency order because
it sells additional contracts at the better price. When the initiating
member selects the auto-match feature prior to the start of an auction,
the available liquidity at improved prices is increased and competitive
final pricing is out of the initiating member's control.
The Exchange proposes to state at proposed Options 3, Section
11(b)(4)(D) that under no circumstances will the facilitating member
receive an allocation percentage, at the final price point, of more
than 40% of the original size of the Facilitation Order with one or
multiple competing quote(s), order(s), or Response(s), except for
rounding, when competing quotes, orders, or Responses have contracts
available for execution.
Finally, the Exchange notes that if a trading halt is initiated
after an order is entered into the Facilitation Mechanism, such auction
will be automatically terminated without execution.\28\
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\28\ See proposed Options 3, Section 11(b)(5).
---------------------------------------------------------------------------
The Exchange proposes to state in proposed Supplementary Material
.01 to Options 3, Section 11 that it would be a violation of a member's
duty of best execution to its customer if it were to cancel a
Facilitation Order to avoid execution of the order at a better price. A
member continues to have its best execution obligations even when
transacting an order in the Facilitation Mechanism and therefore must
seek the best price for its customer. To this end, the Exchange makes
clear that if a member were to cancel a Facilitation Order when there
was a superior price available on the Exchange and subsequently re-
enter the Facilitation Order at the same facilitation price after the
better price was no longer available without attempting to obtain that
better price for its customer, there would be a presumption that the
member did so to avoid execution of its customer order in whole or in
part by other brokers at the better price. Additionally, any solicited
contra orders entered by members into the Facilitation Mechanism to
trade against agency orders may not be for the account of a Phlx Market
Maker that is assigned to the options class.
The Exchange proposes to note in Options 3, Section 7(w) that a
facilitation order is a paired order entered into the Facilitation
Mechanism as described in Options 3, Section 11(b).
Complex Facilitation Mechanism
The Exchange proposes a new Complex Facilitation Mechanism which
will be substantively identical to ISE's Complex Facilitation Mechanism
except that the Complex Facilitation Mechanism will allocate pursuant
to Phlx Options 3, Section 10 \29\ as explained below.
---------------------------------------------------------------------------
\29\ See supra note 3.
---------------------------------------------------------------------------
The Complex Facilitation Mechanism is a process by which a member
can execute a transaction wherein the member seeks to facilitate a
block-size Complex Order it represents as agent, and/or a transaction
wherein the member solicited interest to execute against a block-size
Complex Order it
[[Page 39047]]
represents as agent. Members must be willing to execute the entire size
of Complex Orders entered into the Complex Facilitation Mechanism.\30\
Pursuant to proposed Options 3, Section 11(c), members may use the
Facilitation Mechanism in proposed sub-paragraph (b) to Options 3,
Section 11 to execute block-size Complex Orders at a net price. The
Exchange requires each options leg of a Complex Order entered into the
Complex Facilitation Mechanism to meet the minimum contract size
requirement.
---------------------------------------------------------------------------
\30\ See proposed Options 3, Section 11(c).
---------------------------------------------------------------------------
Proposed Options 3, Section 11(c) describes certain criteria for
transacting Complex Facilitation Orders. Pursuant to proposed Options
3, Section 11(c)(1), Complex Orders entered into the Complex
Facilitation Mechanism must be priced within the parameters described
below. Complex Orders that do not meet these requirements are not
eligible for the Complex Facilitation Mechanism and will be rejected.
Pursuant to proposed Options 3, Section 11(c)(2), Complex Options
Orders must be entered into the Complex Facilitation Mechanism at a
price that is (A) equal to or better than the best bid or offer on the
Complex Order Book on the same side of the market as the agency order;
and (B) equal to or better than the best net price achievable from the
best Phlx bids and offers for the individual legs on the same side of
the market as the agency order; provided that, if there is a Public
Customer order on the best bid or offer for any leg, the order must be
entered at an improved price consistent with Options 3, Section
14(c)(2).\31\
---------------------------------------------------------------------------
\31\ SR-Phlx-2025-17 proposed a new Options 3, Section 14(c)(2)
that provides, 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). See
Securities Exchange Act Release No. 102862 (April 15, 2025), 90 FR
16731 (April 21, 2025) (SR-Phlx-2025-17) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change to Amend Phlx's
Complex Order Functionality). SR-Phlx-2025-17 proposed the same
operative date as this rule change as they are both part of the same
technology migration.
---------------------------------------------------------------------------
With respect to the Complex Facilitation Mechanism, the entry check
is different for Complex Options Orders and Complex Orders that have a
stock component (i.e., Stock-Option Orders and Stock-Complex Orders)
since Stock-Option Orders and Stock-Complex Orders entered in the
Complex Facilitation Mechanism are not eligible to trade with bids and
offers for the individual legs. With respect to Stock-Option Orders and
Stock-Complex Orders, these orders must be entered into the Complex
Facilitation Mechanism at a price that is (A) equal to or better than
the best bid or offer on the Complex Order Book on the same side of the
market as the agency order; and (B) equal to or better than the best
net price achievable from the best Phlx bids and offers for the
individual legs on both sides of the market; provided that, if there is
a Public Customer order on the best bid or offer for any leg, the order
must be entered at an improved price consistent with Options 3, Section
14(c)(2).\32\
---------------------------------------------------------------------------
\32\ See proposed Options 3, Section 11(c)(3). See supra note
31.
---------------------------------------------------------------------------
A Complex Order entered into the Complex Facilitation Mechanism
will be rejected if any component of the Complex Order has not opened
for trading, or if there is a trading halt in any series underlying the
Complex Order. Identical to the single-leg Facilitation Mechanism at
proposed Options 3, Section 11(b)(5), if a trading halt is initiated
after the order is entered into the Complex Facilitation Mechanism,
such auction will be automatically terminated without execution.\33\
---------------------------------------------------------------------------
\33\ See proposed Options 3, Section 11(c)(4).
---------------------------------------------------------------------------
Identical to the single-leg Facilitation Mechanism at proposed
Options 3, Section 11(b)(4)(C), upon the entry of a Complex Order into
the Complex Facilitation Mechanism, a broadcast message that includes
the net price, side and size of the Agency Complex Order will be sent
and members will be given an opportunity to enter Responses with the
net prices and sizes at which they want to participate in the
facilitation of the Agency Complex Order.\34\
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\34\ See proposed Options 3, Section 11(c)(5). The time given to
members to enter Responses shall be designated by the Exchange via
Options Trader Alert, but will be no less than 100 milliseconds and
no more than 1 second.
---------------------------------------------------------------------------
Responses are only executable against the Complex Order with
respect to which they are entered, and will only be considered up to
the size of the Complex Order to be facilitated. Responses must be
entered in the increments provided in Options 3, Section 14(c)(1) \35\
at the facilitation price or at a price that is at least one cent
better for the agency order.\36\ Responses in the Complex Facilitation
Mechanism submitted by members shall not be visible to other auction
participants during the exposure period and can be modified or deleted
before the exposure period has ended. At the end of the period given
for the entry of Responses, the Facilitation Order will be
automatically executed.\37\
---------------------------------------------------------------------------
\35\ SR-Phlx-2025-17 proposed a new Options 3, Section 14(c)(1)
which describes minimum increments. Specifically, SR-Phlx-2025-17
proposed the following text at Options 3, Section 14(c)(1), 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.
See Securities Exchange Act Release No. 102862 (April 15, 2025), 90
FR 16731 (April 21, 2025) (SR-Phlx-2025-17) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change to Amend Phlx's
Complex Order Functionality). SR-Phlx-2025-17 proposed the same
operative date as this proposal as they are both part of the same
technology migration.
\36\ See proposed Options 3, Section 11(c)(6).
\37\ See proposed Options 3, Section 11(c)(7).
---------------------------------------------------------------------------
Identical to the single-leg Facilitation Mechanism at proposed
Options 3, Section 11(b)(4)(A), unless there is sufficient size to
execute the entire Facilitation Order at a better net price, Public
Customer Complex Orders and Public Customer Responses to buy (sell) at
the time the Facilitation Order is executed that are priced higher
(lower) than the facilitation price will be executed at the
facilitation price. Non-Public Customer Complex Orders and non-Public
Customer Responses to buy (sell) at the time the Facilitation Order is
executed that are priced higher (lower) than the facilitation price
will be executed at their stated price, thereby providing the Complex
Order being facilitated a better price for the number of contracts
associated with such higher bids (lower offers).\38\
---------------------------------------------------------------------------
\38\ See proposed Options 3, Section 11(c)(7)(A).
---------------------------------------------------------------------------
Also, identical to the single-leg Facilitation Mechanism at
proposed Options 3, Section 11(b)(4)(B), the facilitating member will
be allocated up to forty percent (40%) (or such lower percentage
requested by the member) of the original size of the agency order, but
[[Page 39048]]
only after better-priced Responses, Complex Orders, as well as Public
Customer Complex Orders as well as Public Customer Complex Orders at
the facilitation price, are executed in full. Thereafter, non-Public
Customer Complex Orders and non-Public Customer Responses will execute
pursuant to the priority allocations in Options 3, Section 10(a)(1)(E)
and (F).\39\ An election to automatically match better prices cannot be
cancelled or altered during the exposure period.
---------------------------------------------------------------------------
\39\ See supra note 3.
---------------------------------------------------------------------------
The Complex Facilitation Mechanism will also offer the opportunity
for auto-match, so that upon entry of a Complex Order into the Complex
Facilitation Mechanism, the facilitating member can elect to
automatically match the net price and size of Complex Orders and
Responses received during the exposure period up to a specified limit
price or without specifying a limit price. This election will also
automatically match the net price available from the Phlx best bids and
offers on the individual legs for the full size of the order; provided
that with notice to members the Exchange may determine whether to offer
this option only for Complex Options Orders, Stock-Option Orders, and/
or Stock Complex Orders. If a member elects to auto-match, the
facilitating member will be allocated the aggregate size of all
competing Complex Orders and Responses at each price point, or at each
price point up to the specified limit price if a limit is specified,
until a price point is reached where the balance of the order can be
fully executed. At such price point, the facilitating member will be
allocated up to forty percent (40%) (or such lower percentage requested
by the member) of the original size of the agency order, but only after
Public Customer Orders and Public Customer Responses at such price
point. Thereafter non-Public Customer Complex Orders and non-Public
Customer Responses will execute pursuant to the priority allocations in
Options 3, Section 10(a)(1)(E) and (F).\40\ An election to
automatically match better prices cannot be cancelled or altered during
the exposure period.\41\
---------------------------------------------------------------------------
\40\ See supra note 3.
\41\ See proposed Options 3, Section 11(c)(7)(C).
---------------------------------------------------------------------------
With respect to bids and offers for the individual legs of a
Complex Order entered into the Complex Facilitation Mechanism, the
priority rules applicable to the execution of Complex Orders that are
entered into the Complex Order Book in Options 3, Section 14(c)(2) \42\
would apply and may prevent the execution of a Complex Order entered
into the Facilitation Mechanism, in which case the transaction will be
cancelled. If an improved net price for the Complex Order being
executed can be achieved from Complex Orders, Responses and, for
Complex Options Orders, the Phlx best bids and offers on the individual
legs, the agency order will be executed against such interest.\43\
---------------------------------------------------------------------------
\42\ See supra note 31.
\43\ See proposed Options 3, Section 11(c)(7)(D).
---------------------------------------------------------------------------
Finally, as is the case for the Facilitation Mechanism in proposed
Options 3, Section 11(b)(4)(D), under no circumstances will the
facilitating member receive an allocation percentage, at the final
price point, of more than 40% of the original size of the Complex
Facilitation Order with one or multiple competing Complex Order(s) or
Response(s), except for rounding, when competing Complex Orders or
Responses have contracts available for execution.\44\
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\44\ See proposed Options 3, Section 11(c)(7)(E).
---------------------------------------------------------------------------
The following examples illustrate how complex orders are transacted
in the Exchange's crossing mechanisms and their interaction with
individual bids and offers (while the examples below are for Complex
Orders entered into the Facilitation Mechanism, these orders would
interact similarly with individual bids and offers when entered into
the Solicited Order Mechanism and the PIXL):
Example 5
Suppose the following market in option class A:
Phlx BBO: 10 @1.00 x 10 @1.05
Suppose further the following market in option class B:
Phlx BBO: 10 @2.00 x 10 @2.05
A complex order is entered into the Complex Facilitation
Mechanism in the complex order book for a strategy buying 1 option
class A and buying 1 option class B:
Agency Complex Order: Buy 50 @3.05
Contra Side Complex Order: Sell 50 @3.05
A broadcast message is sent announcing the start of the auction.
During the exposure period, the following orders and quotes are
received:
Public Customer 1 Complex Order: Sell 5 @3.05
Non-Public Customer 1 Complex Response: Sell 50 @3.05
Non-Public Customer 2 Complex Response: Sell 50 @3.05
At the end of the exposure period, the following orders/
Responses trade with the Complex agency order:
Public Customer 1 Complex Order: 5 @3.05
Contra Side Complex Order: 20 @3.05 (40% of 50)
Non-Public Customer 1 Complex Response: 13 @3.05 (Pro-Rata)
Non-Public Customer 2 Complex Response: 12 @3.05 (Pro-Rata)
Example 6
Suppose the following market in option class A:
Phlx BBO: 10 @1.00 x 10 @1.05
Suppose further the following market in option class B:
Phlx BBO: 10 @2.00 x 10 @2.05.
A complex order is entered into the Complex Facilitation
Mechanism in the complex order book for a strategy buying 1 option
class A and buying 1 option class B:
Agency Complex Order: Buy 50 @3.05
Contra Side Complex Order: Sell 50 @3.05
A broadcast message is sent announcing the start of the auction.
During the exposure period, the following orders and quotes are
received:
Public Customer 1 Complex Order: Sell 5 @3.05
Non-Public Customer 1 Complex Response: Sell 50 @3.05
Non-Public Customer 2 Complex Response: Sell 50 @3.05
Public Customer 2 Regular Order: Sell 5 Option Class A @1.02
Public Customer 3 Regular Order: Sell 5 Option Class B @2.03
At the end of the exposure period, the Complex Facilitation
transaction is canceled since a trade at 3.05 with counter side orders/
Responses will violate the priority rules \45\ for Public Customer 2
and Public Customer 3 Regular Orders.\46\
---------------------------------------------------------------------------
\45\ See proposed Options 3, Section 11(c)(2).
\46\ In Example number 6, Public Customer orders 2 and 3 do not
execute against the Agency Order because the Complex Order's
Responses and the Public Customer orders for the individual legs do
not provide an improved next price for the Complex agency order. See
proposed Option 3, Section 11(c)(7)(D).
---------------------------------------------------------------------------
Example 7
Suppose the following market in option class A:
Phlx BBO: 10 @1.00 x 10 @1.05
Suppose further the following market in option class B:
Phlx BBO: 10 @2.00 x 10 @2.05.
A complex order is entered into the Complex Facilitation
Mechanism in the complex order book for a strategy buying 1 option
class A and buying 1 option class B:
Agency Complex Order: Buy 50 @3.05
Contra Side Complex Order: Sell 50 @3.05
A broadcast message is sent announcing the start of the auction.
During the exposure period, the following orders and quotes are
received:
Public Customer 1 Complex Order: Sell 5 @3.05
Non-Public Customer 1 Complex Response: Sell 50 @3.05
Non-Public Customer 2 Complex Response: Sell 50 @3.05
Non-Public Customer 3 Regular Order: Sell 40 Option Class A @1.02
Non-Public Customer 4 Regular Order: Sell 40 Option Class 5 @2.02
[[Page 39049]]
Non-Public Customer 5 Complex Response: Sell 10 @3.03
At the end of the exposure period, the following orders/
Responses trade with the Complex agency order:
Non-Public Customer 5 Complex Response: Sell 10 @3.03
Non-Public Customer 3 Regular Order: Sell 40 Option Class A @1.02
Non-Public Customer 4 Regular Order: Sell 40 Option Class 5 @2.02
In the above example, the Response and bids and offers on the
individual legs together with the Non-Public Customer Complex Order
Response to sell @3.03 can provide price improvement for the full
size of the Complex Agency Order, hence the Complex agency order
trades at improved price(s).\47\
---------------------------------------------------------------------------
\47\ See proposed Options 3, Section 11(c)(7)(D).
The Exchange proposes to note in Options 3, Section 14(b)(16), that
a Complex Facilitation Order is an order entered into the Complex
Facilitation Mechanism as described in Options 3, Section 11(c).\48\
---------------------------------------------------------------------------
\48\ The Exchange proposed amendments to Options 3, Section 14
in SR-Phlx-2025-17. See Securities Exchange Act Release No. 102862
(April 15, 2025), 90 FR 16731 (April 21, 2025) (SR-Phlx-2025-17)
(Notice of Filing and Immediate Effectiveness of Proposed Rule
Change to Amend Phlx's Complex Order Functionality). SR-Phlx-2025-17
proposed the same operative date as this proposal as they are both
part of the same technology migration.
---------------------------------------------------------------------------
Solicited Order Mechanism
The Exchange proposes to amend Options 3, Section 11(d) and (e) to
adopt a new proposed Solicited Order Mechanism or ``SOM''. Today, Phlx
does not offer a SOM. The proposed SOM will be substantively identical
to ISE's SOM except that the SOM will allocate pursuant to Phlx Options
3, Section 10 \49\ as explained below.
---------------------------------------------------------------------------
\49\ See supra note 3.
---------------------------------------------------------------------------
The SOM is a process by which a member can attempt to execute
orders of 500 or more contracts it represents as agent (the ``Agency
Order'') against contra orders that it solicited. Each order entered
into the SOM shall be designated as all-or-none.\50\ The Exchange
proposes to establish a new SOM at proposed Options 3, Section 11(d).
---------------------------------------------------------------------------
\50\ See proposed Options 3, Section 11(d).
---------------------------------------------------------------------------
The Exchange would require that orders be entered into the SOM at a
price that is equal to or better than the NBBO and the internal PBBO on
both sides of the market; provided that, if there is a Public Customer
order on the BBO or internal PBBO, the order must be entered at an
improved price over the Public Customer order. Orders that do not meet
these requirements are not eligible for the SOM and will be
rejected.\51\ The proposed rule ensures that the SOM complies with the
general prohibition on trade-throughs in Options 5, Section 2(a).
Additionally, with respect to a Public Customer order, the requirement
that the order must be entered at an improved price over the Public
Customer order ensures price improvement, provided there is a Priority
Customer order on the BBO or internal PBBO.
---------------------------------------------------------------------------
\51\ See proposed Options 3, Section 11(d)(1).
---------------------------------------------------------------------------
Once the two-sided order is entered into the SOM at a proposed
execution price, a broadcast message that includes the series, price
and size of the Agency Order, and whether it is to buy or sell, will be
sent and members will be given an opportunity to enter Responses with
the prices and sizes at which they would be willing to participate in
the execution of the Agency Order.\52\ Responses must be entered at a
price that is equal to or better than the better of the internal PBBO
or the NBBO: (1) on the same side of the market at the start of the
auction; and (2) on the opposite side of the market at the time the
Response is received.\53\ These entry checks would prevent potential
auction manipulation which can occur when an order/quote is entered at
a price that improves the price of the Agency Order but does not have
enough size to satisfy the Agency Order. By utilizing the better of the
internal PBBO or the NBBO at the start of the auction, the Exchange
believes that better priced Responses would be permitted to trade with
the Agency Order. Other Responses to that auction may be entered at a
price that improves the price of Agency Order, but is inferior to such
other quote/order Responses which improved upon the internal PBBO or
NBBO. Utilizing the price of the market at the start of the auction,
for the same side check, would prevent an order or quote from
potentially manipulating the final auction price by changing the
internal PBBO/NBBO while not fully satisfying the Agency Order, thus
preventing Responses from being entered at a price that improves the
stop price of the auction, but remains inferior to the price of such
initial order or quote. The entry checks differ for the same and
opposite sides of the market because manipulation may not occur on the
opposite side of the Response because only interest on the same side of
the Response will be eligible to trade with the auctioned order. The
proposed amendments would allow Agency Orders to potentially trade at
improved prices. The proposed rule is intended to prevent potential
auction manipulation which can occur when an order/quote is entered at
a price that improves the price of the order to be solicited.\54\ At
the end of the period given members to enter Responses, the Agency
Order will be automatically executed in full or cancelled.\55\
---------------------------------------------------------------------------
\52\ See proposed Options 3, Section 11(d)(2). The time given to
members to enter Responses shall be designated by the Exchange via
Options Trader Alert, but will be no less than 100 milliseconds and
no more than 1 second.
\53\ See proposed Options 3, Section 11(d)(2). ISE added an
identical sentence to ISE Options 3, Section 11(d)(2).
\54\ See supra Example 2, which applies to orders entered into
the Solicited Order Mechanism as well.
\55\ See proposed Options 3, Section 11(d)(3). The time given to
members to enter Responses shall be designated by the Exchange via
Options Trader Alert, but will be no less than 100 milliseconds and
no more than 1 second.
---------------------------------------------------------------------------
If at the time of execution there is insufficient size to execute
the entire Agency Order at an improved price (or prices), the Agency
Order will be executed against the solicited order at the proposed
execution price so long as, at the time of execution: (i) the execution
price is equal to or better than the best bid or offer on Phlx, and
(ii) there are no Public Customer Orders or Public Customer Responses
on the Exchange that are priced equal to the proposed execution price.
The execution would comply with the general prohibition on trade-
throughs in Options 5, Section 2(a). If there are Public Customer
Orders or Public Customer Responses on Phlx on the opposite side of the
Agency Order at the proposed execution price and there is sufficient
size to execute the entire size of the Agency Order, the Agency Order
would be executed against the bid or offer, and the solicited order
will be cancelled.\56\ The aggregate size of all orders, quotes and
Responses at the bid or offer will be used to determine whether the
entire Agency Order can be executed. Both the solicited order and
Agency Order would be cancelled if an execution would take place at a
price: (1) that is inferior to the best bid or offer on the Exchange;
(2) if there is a Public Customer Order or Public Customer Response on
the Exchange at the proposed execution price but there is insufficient
size on Phlx to execute the entire Agency Order; (3) if there is a
Public Customer Order on the same side Exchange best bid (offer) at the
same price as the solicitation price unless the Solicited Order can
execute at a price that is better than the same side Public Customer
Order.
---------------------------------------------------------------------------
\56\ See proposed Options 3, Section 11(d)(3)(A).
---------------------------------------------------------------------------
However, if at the time of execution there is sufficient size to
execute the entire Agency Order at an improved price (or prices), the
Agency Order will
[[Page 39050]]
be executed at the improved price(s), provided the execution price is
equal to or better than the best bid or offer on Phlx, and the
solicited order will be cancelled. The aggregate size of all orders,
quotes and Responses at each price will be used to determine whether
the entire agency order can be executed at an improved price (or
prices).\57\
---------------------------------------------------------------------------
\57\ See proposed Options 3, Section 11(d)(3)(B).
---------------------------------------------------------------------------
The Exchange notes that when executing the Agency Order against the
bid or offer in accordance with subparagraph (A) of Options 3, Section
11(d)(3), or at an improved price in accordance with subparagraph (B)
of Options 3, Section 11(d)(3), Public Customer Orders and Public
Customer Responses will be executed first. Thereafter, non-Public
Customer Orders, non-Public Customer Responses, and quotes will execute
pursuant to the priority allocations in Options 3, Section 10(a)(1)(E)
and (F),\58\ as is the case with transactions on the order book at
Options 3, Section 10.\59\ This allocation methodology is the same
allocation methodology utilized for order book allocation at Options 3,
Section 10.\60\ Phlx will utilize its allocation methodology whereas
ISE's SOM utilizes ISE's allocation methodology in ISE Options 3,
Section 10. Phlx's allocation methodology differs from ISE's allocation
methodology in that Phlx will allocate to Market Makers ahead of all
other non-Public Customer interest whereas ISE does not have an
additional market maker allocation. This is consistent with the
Exchange's standard allocation methodology in its PIXL auction. Phlx
believes it is consistent with the Act to retain its allocation model
in these auctions in the same way that it utilizes its allocation model
in its PIXL auction in Phlx Options 3, Section 13 and ISE utilizes its
allocation model in its PIM auction in ISE Options 3, Section 13.
Phlx's allocation model is consistent with the Act as it maintains the
priority of orders and protects Public Customer orders by allocating
them prior to other interest.
---------------------------------------------------------------------------
\58\ See supra note 3.
\59\ See proposed Options 3, Section 11(d)(3)(C).
\60\ Id.
---------------------------------------------------------------------------
Identical to all other auctions on Phlx, if a trading halt is
initiated after an order is entered into the SOM, such auction will be
automatically terminated without execution.\61\ Prior to entering
Agency Orders into the SOM on behalf of a customer, members must
deliver to the customer a written notification informing the customer
that its order may be executed using the Phlx's SOM. Such written
notification must disclose the terms and conditions contained in this
rule and must be in a form approved by the Exchange.\62\
---------------------------------------------------------------------------
\61\ See proposed Options 3, Section 11(d)(4).
\62\ See proposed Options 3, Section 11(d)(5).
---------------------------------------------------------------------------
The Exchange proposes adding text at proposed Supplementary
Material .03 to Options 3, Section 11 to make clear that the SOM
provides a facility for members that locate liquidity for their
customer orders, and that members may not use the SOM to circumvent
Exchange rules limiting principal transactions as provided for in
Options 3, Section 22(b).\63\ This would include a member entering
contra-orders that are solicited from affiliated broker-dealers or
broker-dealers with which the member has an arrangement that allows the
member to realize similar economic benefits from the solicited
transaction as it would achieve by executing the order in whole or in
part as principal. Finally, any solicited contra orders entered by
members to trade against Agency Orders may not be for the account of a
Phlx Market Maker that is assigned to the options class.
---------------------------------------------------------------------------
\63\ Currently, Options 3, Section 22(b) provides that member
organizations may not execute as principal against orders on the
Limit Order book they represent as agent unless: (i) agency orders
are first exposed on the Limit Order book for at least 1 second;
(ii) the member has been bidding or offering on the Exchange for at
least 1 second prior to receiving an agency order that is executable
against such order; (iii) the orders are entered into Price
Improvement XL or ``PIXL'' pursuant to Options 3, Section 13; (iv)
the orders are entered into the Complex Order Live Auction or
``COLA'' pursuant to Options 3, Section 14(e); or (v) the orders are
entered into the Qualified Contingent Cross or ``QCC'' mechanism
pursuant to Options 3, Section 12 or Options 8, Section 30(e).
---------------------------------------------------------------------------
The Exchange proposes to note in Options 3, Section 7(x) that a SOM
order is a paired order entered into the SOM as described in Options 3,
Section 11(d).\64\
---------------------------------------------------------------------------
\64\ Options 3, Section 7 was revised by 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.
---------------------------------------------------------------------------
Complex Solicited Order Mechanism
The Exchange proposes to offer a Complex SOM that is substantially
identical to ISE's Complex SOM except that Phlx will allocate the
Complex SOM pursuant to Options 3, Section 10 \65\ as explained below.
---------------------------------------------------------------------------
\65\ See supra note 3.
---------------------------------------------------------------------------
The Complex SOM is a process by which a member can attempt to
execute Complex Orders it represents as agent (the ``Agency Complex
Order'') against contra orders that it solicited according to
subparagraph (d), the SOM, of Options 3, Section 11. Each Complex Order
entered into the SOM shall be designated as all-or-none, and each
options leg must meet the minimum contract size requirement contained
in subparagraph (d) of the SOM.\66\
---------------------------------------------------------------------------
\66\ See proposed Options 3, Section 11(e).
---------------------------------------------------------------------------
Proposed Options 3, Section 11(e)(1) describes certain criteria for
transacting Complex Solicited Orders. Proposed Options 3, Section
11(e)(1) provides that, Complex Orders must be entered into the Complex
SOM at a price that is (A) equal to or better than the best bid or
offer on the Complex Order Book on both sides of the market; and (B)
equal to or better than the best net price achievable from the best
Phlx bids and offers for the individual legs on both sides of the
market; provided that, if there is a Public Customer order on the best
bid or offer for any leg, the order must be entered at an improved
price consistent with Options 3, Section 14(c)(2).\67\ Complex Orders
that do not meet these requirements are not eligible for the Complex
SOM and will be rejected.\68\
---------------------------------------------------------------------------
\67\ See supra note 31.
\68\ See proposed Options 3, Section 11(e)(1).
---------------------------------------------------------------------------
Proposed Options 3, Section 11(e)(2) provides that a Complex Order
entered into the Complex SOM will be rejected if any component of the
Complex Order has not opened for trading, or if there is a trading halt
in any series underlying the Complex Order. If a trading halt is
initiated after the order is entered into the Complex SOM, such auction
will be automatically terminated without execution. This is identical
to the proposed treatment of halts in a single-leg SOM at Options 3,
Section 11(d)(4).
Identical to a single-leg SOM at proposed Options 3, Section
11(d)(2), upon entry of both orders into the Complex SOM at a proposed
execution net price, a broadcast message that includes the net price,
side and size of the Agency Complex Order will be sent and members will
be given an opportunity to enter Responses with the net prices and
sizes at which they would be willing to participate in the execution of
the Agency Complex Order.\69\ The time given to members to enter
Responses shall be designated by the Exchange via Options Trader Alert,
but will be no less than 100 milliseconds and no more than 1 second,
which is identical to the proposed single-leg SOM. Responses are only
executable against the Complex Order with respect to which they are
entered, and will only be considered up to the size of the Agency
Complex Order identical to the proposed single-leg SOM. Responses must
be entered in the
[[Page 39051]]
increments provided in Options 3, Section 14(c)(1) \70\ at the proposed
execution net price or at a price that is at least one cent better for
the Agency Order.\71\
---------------------------------------------------------------------------
\69\ See proposed Options 3, Section 11(d)(3).
\70\ See supra note 35.
\71\ See proposed Options 3, Section 11(d)(3).
---------------------------------------------------------------------------
Responses submitted by members shall not be visible to other
auction participants during the exposure period and can be modified or
deleted before the exposure period has ended. At the end of the period
given for the entry of Responses, the Agency Complex Order will be
automatically executed in full, as explained further below, or
cancelled.\72\
---------------------------------------------------------------------------
\72\ See proposed Options 3, Section 11(d)(4).
---------------------------------------------------------------------------
First, if at the time of execution there is insufficient size to
execute the entire Agency Complex Order at an improved net price(s)
pursuant to paragraph (e)(4)(C) as discussed below, the Agency Complex
Order will be executed against the solicited Complex Order at the
proposed execution net price so long as, at the time of execution: (i)
the execution net price is equal to or better than the best net price
achievable from the best Phlx bids and offers for the individual legs,
(ii) the Complex Order can be executed in accordance with Options 3,
Section 14(c)(2) \73\ with respect to the individual legs, (iii) the
execution net price is equal to or better than the best bid or offer on
the Complex Order Book, and (iv) there are no Public Customer Complex
Orders or Responses that are priced equal to or better than the
proposed execution price.\74\
---------------------------------------------------------------------------
\73\ See supra note 31.
\74\ See proposed Options 3, Section 11(d)(4)(A).
---------------------------------------------------------------------------
Second, if there are Public Customer Complex Orders or Responses on
the opposite side of the Agency Complex Order at the proposed execution
net price and there is sufficient size to execute the entire size of
the Agency Complex Order, the Agency Complex Order will be executed
against such interest, and the solicited Complex Order will be
cancelled, provided that: (i) the execution net price is equal to or
better than the best net price achievable from the best Phlx bids and
offers for the individual legs, and (ii) the Complex Order can be
executed in accordance with Options 3, Section 14(c)(2) \75\ with
respect to the individual legs. The aggregate size of all Complex
Orders, Responses and, for Complex Options Orders, the aggregate size
available from the best bids and offers for the individual legs, will
be used to determine whether the entire Agency Complex Order can be
executed as is the case for the proposed SOM at Options 3, Section
11(d)(3)(A).\76\
---------------------------------------------------------------------------
\75\ See supra note 31.
\76\ See proposed Options 3, Section 11(d)(4)(B).
---------------------------------------------------------------------------
Third, if at the time of execution there is sufficient size to
execute the entire Agency Complex Order at an improved net price(s),
the Agency Complex Order will be executed at the improved net price(s),
and the solicited Complex Order will be cancelled, provided that: (i)
the execution net price is equal to or better than the best net price
achievable from the best Phlx bids and offers for the individual legs,
and (ii) the Complex Order can be executed in accordance with Options
3, Section 14(c)(2) \77\ with respect to the individual legs. The
aggregate size of all Complex Orders, Responses, and the aggregate size
available from the best bids and offers for the individual legs for a
Complex Options Order, will be used to determine whether the entire
Agency Complex Order can be executed as is the case for the proposed
SOM at Options 3, Section 11(d)(3)(A).\78\
---------------------------------------------------------------------------
\77\ Id.
\78\ See proposed Options 3, Section 11(d)(4)(C).
---------------------------------------------------------------------------
Fourth, as is the case for the SOM at Options 3, Section
11(d)(3)(C) when executing the Agency Complex Order against other
interest in accordance with Options 3, Section 14(d)(2)(ii), Public
Customer Complex Orders and Public Customer Responses will be executed
first. Thereafter, non-Public Customer Complex Orders, and non-Public
Customer Responses will execute pursuant to the priority allocations in
Options 3, Section 10(a)(1)(E) and (F).\79\ Finally, for Complex
Options Orders, bids and offers for the individual legs will be
executed pursuant to Options 3, Section 10 and the Supplementary
Material thereto.\80\ Non-Public Customer Complex Orders and non-Public
Customer Responses participate in the execution of the Agency Complex
Order based upon the percentage of the total number of contracts
available at the best price that is represented by the size of the non-
Public Customer Complex Order or non-Public Customer Response.
---------------------------------------------------------------------------
\79\ See supra note 3.
\80\ See proposed Options 3, Section 11(d)(4)(D).
---------------------------------------------------------------------------
Identical to proposed rule text in the single-leg SOM at Options 3,
Section 11(d)(5), prior to entering Agency Orders into the Complex SOM
on behalf of a customer, members must deliver to the customer a written
notification informing the customer that its order may be executed
using Phlx's SOM. Such written notification must disclose the terms and
conditions contained in Section 11(d)(5) and must be in a form approved
by the Exchange.\81\
---------------------------------------------------------------------------
\81\ See proposed Options 3, Section 11(d)(5).
---------------------------------------------------------------------------
The Exchange proposes to note in Options 3, Section 14(b)(17) that
a Complex SOM Order is an order entered into the Complex SOM as
described in Options 3, Section 11(e).
Split Prices
The Exchange proposes to add rule text at Supplementary Material
.04 to Options 3, Section 11 related to Split Prices, which is
identical to ISE Supplementary Material .04 to Options 3, Section 11.
The proposed rule text for Split Price would permit Orders and
Responses to be entered into the Facilitation and Solicited Order
Mechanisms and receive executions at the mid-price between the standard
minimum trading increments for the options series (``Split Prices'').
This means that orders and Responses for options with a minimum
increment of 5 cents may be entered into the Facilitation and Solicited
Order Mechanisms and receive executions in 2.5 cent increments (e.g.,
$1.025, $1.05, $1.075, etc.), and that orders and Responses for options
with a minimum increment of 10 cents may be entered into the
Facilitation and Solicited Order Mechanism and receive executions at 5
cent increments (e.g., $4.05, $4.10, $4.15). The Exchange notes that
Orders and Responses in the market that receive the benefit of the
facilitation price under subparagraph (b)(3)(i) of Options 3, Section
11 may also receive executions at Split Prices. Orders executed at a
Split Price would be reported to the Options Price Reporting Authority
(``OPRA'') and cleared by The Options Clearing Corporation (``OCC'') at
the Split Price. The Exchange believes that the ability to utilize
split price would provide members with greater flexibility in the
pricing of their auction trades and allow a greater opportunity for
price improvement for large-size orders. Additionally, the proposed
rule change would provide for mechanisms that are competitive with
floor-based exchange models, such as Phlx's trading floor, where Split
Prices are permitted.\82\
---------------------------------------------------------------------------
\82\ See Phlx Options 8, Section 25(m), which states that Floor
brokers are able to achieve split price priority in accordance with
Options 8, Section 25(a)(2), provided, however, that a floor broker
who bids (offers) on behalf of a non-market-maker Phlx member
broker-dealer (``Phlx member BD'') must ensure that the Phlx member
BD qualifies for an exemption from Section 11(a)(1) of the Exchange
Act or that the transaction satisfies the requirements of Exchange
Act Rule 11a2-2(T), otherwise the floor broker must yield priority
to orders for the accounts of non-members.
---------------------------------------------------------------------------
[[Page 39052]]
ISO
The Exchange proposes to add a Facilitation ISO order at Options 3,
Section 11(b) that is identical to ISE's Facilitation ISO order at ISE
Options 3, Section 11(b).
The Exchange proposes to permit a Facilitation ISO order to be
entered into the Facilitation Mechanism for single-leg orders,
identical to ISE Options 3, Section 11(b), at Supplementary Material
.06 to Options 3, Section 11.\83\ An ISO is defined in Options 3,
Section 7(b)(4) as a limit order that meets the requirements of Options
5, Section 1(h) and trades at allowable prices on the Exchange without
regard to the ABBO. Simultaneously with the routing of the ISO to the
Exchange, one or more additional ISOs, as necessary, are routed to
execute against the full displayed size of any Protected Bid, in the
case of a limit order to sell, or any Protected Offer, in the case of a
limit order to buy, for the options series with a price that is
superior to the limit price of the ISO.\84\ A member may submit an ISO
to the Exchange only if it has simultaneously routed one or more
additional ISOs to execute against the full displayed size of any
Protected Bid, in the case of a limit order to sell, or Protected
Offer, in the case of a limit order to buy, for an options series with
a price that is superior to the limit price of the ISO.
---------------------------------------------------------------------------
\83\ A Facilitation ISO order (``Facilitation ISO'') is the
transmission of two orders for crossing pursuant to paragraph (b)
above without regard for better priced Protected Bids or Protected
Offers (as defined in Options 5, Section 1) because the member
transmitting the Facilitation ISO to the Exchange has,
simultaneously with the transmission of the Facilitation ISO, routed
one or more ISOs, as necessary, to execute against the full
displayed size of any Protected Bid or Protected Offer that is
superior to the starting Facilitation auction price. Any
execution(s) resulting from such sweeps shall accrue to the agency
order.
\84\ ``Protected Bid'' or ``Protected Offer'' means a Bid or
Offer in an options series, respectively, that: (a) is disseminated
pursuant to the Options Order Protection and Locked/Crossed Market
Plan; and (b) is the Best Bid or Best Offer, respectively, displayed
by an Eligible Exchange. See Options 5, Section 1(o).
---------------------------------------------------------------------------
The Exchange proposes to accept a Facilitation ISO into the
Facilitation Mechanism provided the order adheres to the current order
entry requirements for the Facilitation Mechanism as set forth in
proposed Options 3, Section 11(b)(1),\85\ but without regard to the
ABBO (identical to a regular ISO in Options 3, Section 7(b)(4)).
Therefore, Facilitation ISOs must be entered at a price that is equal
to or better than the Exchange best bid or offer on the same side of
the market as the agency order unless there is a Public Customer order
on the same side Exchange best bid or offer, in which case the
Facilitation ISO must be entered at an improved price. The Exchange
does not check the Exchange best bid or offer on the opposite side of
the Facilitation ISO because the underlying Facilitation Mechanism does
not check the opposite side Exchange best bid or offer. As discussed
above, the Facilitation Mechanism only requires that the opposite side
of the agency order be equal to or better than the ABBO.\86\ The
Facilitation Mechanism does not check the opposite side Exchange best
bid or offer because any interest that is available on the opposite
side of the market would allocate against the Facilitation agency order
and provide price improvement. As an example of the current underlying
Facilitation Mechanism:
---------------------------------------------------------------------------
\85\ Proposed Options 3, Section 11(b)(1) provides that orders
must be entered into the Facilitation Mechanism at a price that is
(A) equal to or better than the NBBO and the internal BBO on the
same side of the market as the agency order unless there is a Public
Customer order on the BBO or internal BBO on the same side of the
market as the agency order, in which case the order must be entered
at an improved price over the Public Customer order; and (B) equal
to or better than the ABBO on the opposite side. Orders that do not
meet these requirements are not eligible for the Facilitation
Mechanism and will be rejected.
\86\ Id.
---------------------------------------------------------------------------
Assume the following market:
Exchange BBO: 1 x 2 (also NBBO)
CBOE: 0.75. x 2.25 (next best exchange quote)
Agency order is entered to buy 50 contracts @2.05
No Responses are received.
The agency order executes with resting 50 lot quote @2. In this
instance, the agency order is able to be crossed with the contra side
Exchange BBO because in execution, the resting 50 lot quote @2 is able
to provide price improvement to the agency order.
Given that the Facilitation ISO is accepted so long as it adheres
to the order entry requirements of the underlying Facilitation
Mechanism, but without regard to the ABBO, the Exchange believes that
it is appropriate and logical to align the order entry checks of the
Facilitation ISO in the manner discussed above.
The Exchange processes the Facilitation ISO in the same manner that
it processes any other Facilitation Orders, except that it will
initiate a Facilitation Mechanism without protecting prices away.
Instead, the member entering the Facilitation ISO will bear the
responsibility to clear all better priced interest away simultaneously
with submitting the Facilitation ISO to the Exchange. The Exchange
believes that offering this order type is beneficial for members as it
provides them with an efficient method to initiate a Facilitation
Mechanism while preventing trade-throughs.
The following example illustrates how Facilitation ISO operates:
Example 8
Assume:
ABBO: 1 x 1.20
Exchange BBO: 0.90 x 1.30
A member enters Facilitation ISO with Agency side to buy 50
@1.25 and simultaneously routes multiple ISOs to execute against the
full displayed size of any Protected Bids priced better than the
starting Facilitation Mechanism price.
Facilitation ISO auction period concludes with no Responses
arriving.
Facilitation ISO executes with contra side 50 @1.25 because the
away market Best Offer of 1.20 has been cleared by the ISOs clearing
the way for the Agency side to trade with the counter-side order at
1.25.
The Exchange proposes adding a Solicitation ISO order at Options 3,
Section 11(d) that is identical to ISE's Solicitation ISO order at ISE
Options 3, Section 11(d).
The Exchange proposes to amend Supplementary Material .07 to
Options 3, Section 11 to permit a Solicitation ISO Order
(``Solicitation ISO'') to be entered into the SOM for single-leg
orders, identical to ISE Options 3, Section 11(d). A Solicitation ISO
is the transmission of two orders for crossing pursuant to proposed
paragraph (d) of Options 3, Section 11 without regard for better priced
Protected Bids or Protected Offers (as defined in Options 5, Section 1)
because the member transmitting the Solicitation ISO to the Exchange
has, simultaneously with the transmission of the Solicitation ISO,
routed one or more ISOs, as necessary, to execute against the full
displayed size of any Protected Bid or Protected Offer that is superior
to the starting Solicited auction price and has swept all interest in
the Exchange's book priced better than the proposed auction starting
price. Any execution(s) resulting from such sweeps shall accrue to the
Agency Order.
The Exchange proposes to accept a Solicitation ISO provided the
order adheres to the current order entry requirements for the SOM as
set forth in Options 3, Section 11(d)(1),\87\ but
[[Page 39053]]
without regard to the ABBO (similar to a regular ISO in Options 3,
Section 7(b)(4)). Therefore, Solicitation ISOs must be entered at a
price that is equal to or better than the Exchange best bid or offer on
both sides of the market; provided that, if there is a Public Customer
order on the Exchange best bid or offer, the Solicitation ISO must be
entered at an improved price.
---------------------------------------------------------------------------
\87\ Proposed Options 3, Section 11(d)(1) states, orders must be
entered into the Solicited Order Mechanism at a price that is equal
to or better than the NBBO and the internal BBO on both sides of the
market; provided that, if there is a Public Customer order on the
BBO or internal BBO, the order must be entered at an improved price
over the Public Customer order. Orders that do not meet these
requirements are not eligible for the Solicited Order Mechanism and
will be rejected.
---------------------------------------------------------------------------
The Exchange would process the Solicitation ISO in the same manner
that it processes other orders entered in the SOM, except that it would
initiate a Solicited Order auction without protecting away prices.
Instead, the member entering the Solicitation ISO will bear the
responsibility to clear all better priced interest away simultaneously
with submitting the Solicitation ISO to the Exchange. The Exchange
believes that offering this order type is beneficial for members as it
provides them with an efficient method to initiate an auction in the
SOM while preventing trade-throughs. The following example illustrates
how the Solicitation ISO operates:
Example 9
Assume:
ABBO: 1 x 1.20
Exchange BBO: 0.90 x 1.30
A member enters Solicitation ISO with Agency side to buy 500
@1.25 and simultaneously routes multiple ISOs to execute against the
full displayed size of any Protected Bids priced better than the
starting Solicitation auction price.
Solicitation ISO auction period concludes with no Responses
arriving.
Solicitation ISO executes with contra side 500 @1.25.
Note that in the case a Solicitation ISO was entered with the
Agency side to buy 500 @1.35, it would be rejected because it was
not at or better than the NBBO on both sides (which is inclusive of
an Exchange book check). While the 1.20 away Best Offer was cleared
by the simultaneously routed ISOs, the Exchange Best Offer of 1.30
would now be viewed as the National Best Offer for purposes of the
Solicitation ISO.
Further note that a Facilitation ISO entered with the agency
side to buy 50 @1.35 can start in the same example above because it
does not have a contra-side (from the agency order perspective)
Exchange book check to begin. The Facilitation ISO would go on to
allocate against the 1.30 offer on the Exchange book upon the
conclusion of the auction.
The Exchange proposes to amend Options 3, Section 7(b)(2) to note
that ISOs may be entered into the Facilitation Mechanism or SOM
pursuant to Supplementary Material .06 and .07 to Options 3, Section
11. ISE Options 3, Section 7(b)(2) has identical rule text.
Complex Facilitation and Complex SOM Orders With Stock/ETF Components
The Exchange proposes to add rule text at Supplementary Material
.08 to Options 3, Section 11 related to Complex Facilitation and
Complex SOM Orders with stock/ETF components which is identical to ISE
Supplementary Material .08 to Options 3, Section 11. The Exchange
proposes to state,
(a) members may only submit Complex Facilitation Orders, Complex
SOM Orders, and/or Responses with a stock/ETF component if such
orders/Responses comply with the Qualified Contingent Trade
Exemption from Rule 611(a) of Regulation NMS. members submitting
such 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 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
orders containing a stock/ETF component.
(b) Where one component of a Complex Facilitation Order, Complex
SOM Order, and/or Response is the underlying security, the Exchange
shall electronically communicate the underlying security component
of a Complex Facilitation Order or Complex SOM Order to NES, its
designated broker-dealer, for immediate execution. Such execution
and reporting will not occur on the Exchange and will be handled by
NES pursuant to applicable rules regarding equity trading. The
execution price must be within a certain price from the current
market, as determined by the Exchange pursuant to Options 3, Section
16(a). If the stock price is not within these parameters, the
Complex Facilitation Order, Complex SOM Order, and/or Response is
not executable and would be cancelled.
(c) 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
Facilitation Order, Complex SOM Order and/or Response 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 Facilitation Order, Complex SOM Order and/or
Response 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. When a Response or an unrelated limit complex
order on the complex order book includes a short sale order in the
underlying covered security, NES will execute such order at (1) its
stated limit price if the facilitating member's contra order or the
contra-side solicited Complex Order does not include a short sale
order in the underlying security; or (2) its stated limit price or
better if the facilitating member' contra order or the solicited
contra-side Complex Order includes a short sale order in the
underlying covered security. If NES cannot execute the underlying
covered security component of a Complex Facilitation Order, Complex
SOM Order and/or Response in accordance with Rule 201 of Regulation
SHO, the Exchange will cancel back the Complex Facilitation Order,
Complex SOM Order and/or Response to the entering member. For
purposes of this paragraph, the term ``covered security'' shall have
the same meaning as in Rule 201(a)(1) of Regulation SHO.
Today, on Phlx NES performs the same functions with respect to
execution, reporting and submission of the underlying stock or ETF
component of a Complex Order that it would perform with these
amendments for the underlying stock or ETF component of a Complex Order
that is entered into any of the proposed new auction mechanisms. The
proposed language describing NES is not new language, rather the
existing NES language in Options 3, Section 13 regarding PIXL and
Options 3, Section 14 regarding Complex Orders is simply being extended
to other auction mechanisms to make clear that NES would likewise
execute, report and submit of the underlying stock or ETF component of
a Complex Order for those auctions. By way of background, NES is a
registered broker-dealer and member of various exchanges and the
Financial Industry Regulatory Authority (``FINRA''). Today, NES is
responsible for the proper execution, trade reporting, and submission
to clearing of the underlying stock or ETF component of a Complex Order
for Phlx members transacting Complex Orders with a stock or ETF
component.\88\ Because these trades with a stock component occur off-
exchange, the principal regulator is FINRA; \89\ the execution and
reporting of the stock/ETF piece occur otherwise than on Phlx
[[Page 39054]]
or any other exchange. The stock execution is handled by NES pursuant
to applicable rules regarding equity trading,\90\ including the rules
governing trade reporting, trade-throughs and short sales.
Specifically, NES reports the trades to the Trade Reporting
Facility.\91\ Firms that are members of FINRA are required to have a
Uniform Service Bureau/Executing Broker Agreement (``AGU'') with NES in
order to trade Complex Orders containing a stock/ETF component. Firms
that are not members of FINRA are required to have a Qualified Special
Representative (``QSR'') arrangement with NES in order to trade Complex
Orders containing a stock/ETF component. This requirement is codified
in proposed Supplementary Material .08 to Options 3, Section 11.
Accordingly, this process is available to all Phlx members and the
stock/ETF component of a Complex Order, once executed, is properly
processed for trade reporting purposes. Phlx has identical requirements
within its current Options 3, Sections 13(b)(10) and current 14(a)(i)
with respect to PIXL and Complex Orders.\92\
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\88\ In particular, NES has in place policies and procedures
designed to prevent the misuse of material non-public information
related to stock-tied executions. Of note, NES only receives
information about the stock or ETF portion of the order from the
Exchange. Today, NES is responsible for the proper execution, trade
reporting, and submission to clearing of the underlying stock or ETF
component of a Complex Order on Phlx.
\89\ NES is responsible for compliance with FINRA rules
generally and is subject to examination by FINRA. Specifically, NES
is subject to FINRA Rule 3110, which generally requires that the
policies and procedures and supervisory systems of a broker-dealer
be reasonably designed to achieve compliance with applicable
securities laws and regulations and with applicable FINRA rules,
including those relating to the misuse of material non-public
information. To this end, today, NES has in place policies related
to confidentiality and the potential for informational advantages
relating to its affiliates, intended to protect against the misuse
of material nonpublic information. Phlx establishes and maintains
procedures and internal controls reasonably designed to adequately
restrict the flow of confidential and proprietary information
between the Exchange and NES.
\90\ Once the orders are communicated to the broker-dealer for
execution, the broker-dealer has complete responsibility for
determining whether the orders may be executed in accordance with
all of the rules applicable to execution of equity orders.
\91\ Specifically, the trades will be reported to the FINRA/
Nasdaq TRF which is a facility of FINRA that is operated by Nasdaq,
Inc. and utilizes Automated Confirmation Transaction (``ACT'')
Service technology.
\92\ The Exchange amended Complex Orders in SR-Phlx-2025-17. See
Securities Exchange Act Release No. 102862 (April 15, 2025), 90 FR
16731 (April 21, 2025) (SR-Phlx-2025-17) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change to Amend Phlx's
Complex Order Functionality). SR-Phlx-2025-17 proposed the same
operative date as this proposal as they are both part of the same
technology migration.
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With respect to trade-throughs, the Exchange believes that the
stock/ETF component of a Complex Order is eligible for the Qualified
Contingent Trade Exemption from Rule 611(a) of Regulation NMS. A
Qualified Contingent Trade is a transaction consisting of two or more
component orders, executed as agent or principal, that satisfy the six
elements in the Commission's order exempting Qualified Contingent
Trades (``QCTs'') from the requirements of Rule 611(a),\93\ which
requires trading centers to establish, maintain, and enforce written
policies and procedures that are reasonably designed to prevent trade-
throughs.\94\ The Exchange believes that the stock/ETF portion of a
Complex Facilitation or Solicited Order under this proposal complies
with all six requirements. Moreover, as explained below, Phlx's System
would validate compliance with each requirement such that any matched
order received by NES under this proposal has been checked for
compliance with the exemption, as follows:
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\93\ 17 CFR 242.611(a).
\94\ See Securities Exchange Act Release Nos. 57620 (April 4,
2008), 73 FR 19271 (April 9, 2008) (``QCT Exemptive Order''). See
also Securities Exchange Act Release No. 54389 (August 31, 2006), 71
FR 52829 (September 7, 2006) (``Initial QCT Exemption Order''). The
QCT Exemption applies to trade-throughs caused by the execution of
an order involving one or more NMS stocks that are components of a
``qualified contingent trade.'' As described more fully in the QCT
Exemptive Order, a qualified contingent trade is a transaction
consisting of two or more component orders, executed as principal or
agent, where: (1) At least one component order is an NMS stock; (2)
all components are effected with a product or price contingency that
either has been agreed to by the respective counterparties or
arranged for by a broker-dealer as principal or agent; (3) the
execution of one component is contingent upon the execution of all
other components at or near the same time; (4) the specific
relationship between the component orders (e.g., the spread between
the prices of the component orders) is determined at the time the
contingent order is placed; (5) the component orders bear a
derivative relationship to one another, represent different classes
of shares of the same issuer, or involve the securities of
participants in mergers or with intentions to merge that have been
announced or since cancelled; and (6) the Exempted NMS Stock
Transaction is fully hedged (without regard to any prior existing
position) as a result of the other components of the contingent
trade.
(1) At least one component order is in an NMS stock: The stock/
ETF component must be an NMS stock, which is validated by the
System;
(2) all components are effected with a product or price
contingency that either has been agreed to by the respective
counterparties or arranged for by a broker-dealer as principal or
agent: A Complex Order, by definition consists of a single net/debit
price and this price contingency applies to all the components of
the order, such that the stock price computed and sent to NES allows
the stock/ETF order to be executed at the proper net debit/credit
price based on the execution price of each of the option legs, which
is determined by the Phlx System;
(3) the execution of one component is contingent upon the
execution of all other components at or near the same time: Once a
Complex Order is accepted and validated by the System, the entire
package is processed as a single transaction and each of the option
leg and stock/ETF components are simultaneously processed;
(4) the specific relationship between the component orders
(e.g., the spread between the prices of the component orders) is
determined at the time the contingent order is placed: Complex
Orders, upon entry, must have a size for each component and a net
debit/credit, which the System validates and processes to determine
the ratio between the components; an order is rejected if the net
debit/credit price and size are not provided on the order;
(5) the component orders bear a derivative relationship to one
another, represent different classes of shares of the same issuer,
or involve the securities of participants in mergers or with
intentions to merge that have been announced or since cancelled:
under this proposal, the stock/ETF component must be the underlying
security respecting the option legs, which is validated by the
System; and
(6) the transaction is fully hedged (without regard to any prior
existing position) as a result of the other components of the
contingent trade: Under this proposal, the ratio between the options
and stock/ETF must be a conforming ratio (8 contracts per 100
shares), which the System validates, and which under reasonable risk
valuation methodologies, means that the stock/ETF position is fully
hedged.\95\
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\95\ A trading center may demonstrate that an Exempted NMS Stock
Transaction is fully hedged under the circumstances based on the use
of reasonable risk-valuation methodologies. See Initial QCT
Exemption Order at footnote 9. The Initial QCT Exemption Order
stated that, ``To effectively execute a contingent trade, its
component orders must be executed in full or in ratio at its
predetermined spread or ratio.'' See Initial QCT Exemption Order, 71
FR at 52830. The Initial QCT Order further stated that, ``In ratio''
clarifies that component orders of a contingent trade do not
necessarily have to be executed in full, but any partial executions
must be in a predetermined ratio.'' See id at footnote 11.
Furthermore, proposed Supplementary Material .08 to Options 3,
Section 11, provides that members may only submit Complex Facilitation
or Solicitation Orders with a stock/ETF component if such orders comply
with the Qualified Contingent Trade Exemption. Members submitting such
Complex Facilitation or Solicitation Orders with a stock/ETF component
represent that such orders comply with the Qualified Contingent Trade
Exemption. Thus, the Exchange believes that Complex Facilitation or
Solicitation Orders consisting of a stock/ETF component will comply
with the exemption and that Phlx's System will validate such compliance
to assist NES in carrying out its responsibilities as agent for these
orders. The Exchange proposes to add this rule text at Supplementary
Material .08 to Options 3, Section 11 to reflect that this requirement
to comply with the Qualified Contingent Trade Exemption would be
applied to Complex Facilitation or Solicitation Orders the same way it
applies today with respect to all other Complex Orders executed on
Phlx.
With respect to short sale regulation, the proposed handling of the
stock/ETF component of a Complex Facilitation or Solicited Order under
this proposal should not raise any issues of compliance with the
currently operative provisions of Regulation SHO.\96\ When a Complex
Facilitation or Solicited Order
[[Page 39055]]
has a stock/ETF component, members must indicate, pursuant to
Regulation SHO, whether that order involves a long or short sale. The
System will accept Complex Facilitation or Solicitation Orders with a
stock/ETF component marked to reflect either a long or short position;
specifically, orders not marked as buy, sell or sell short will be
rejected by Phlx's System.\97\ The System will electronically deliver
the stock/ETF component to NES for execution. Simultaneous with the
options execution on Phlx's System, NES will execute and report the
stock/ETF component, which will contain the long or short indication as
it was delivered by the member to Phlx's System. Accordingly, NES, as a
trading center under Rule 201, will be compliant with the requirements
of Regulation SHO. Of course, broker-dealers, including both NES and
the members submitting orders to Phlx with a stock/ETF component, must
comply with Regulation SHO. NES' compliance team currently updates,
reviews and monitors NES' policies and procedures including those
pertaining to Regulation SHO on an annual basis and it will continue to
review and monitors NES' policies and procedures annually.
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\96\ 17 CFR 242.200 et seq.
\97\ The Exchange also accepts short sell exempt orders as
described herein.
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Further, proposed Supplementary Material .08(c) to Options 3,
Section 11 provides that when the short sale price test in Rule 201 of
Regulation SHO \98\ is triggered for a covered security, NES will not
execute a short sale order in the underlying covered security component
\99\ 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 Facilitation or
Solicited 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 Facilitation or Solicited Order in accordance
with Rule 201 of Regulation SHO, the Exchange will hold the Complex
Facilitation or Solicited Order on the Complex Order Book, if
consistent with member instructions (members may always elect to cancel
the order).\100\ The order may execute at a price that is not equal to
or below the current national best bid.\101\ Phlx will not cancel back
the Complex Order to the entering member unless the member requests
that the order be cancelled. However, NES will execute a short sale
order in the underlying covered security component of a Complex
Facilitation Order, Complex Solicited Order and/or Response 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.\102\
Further, if NES cannot execute the underlying covered security
component of a Complex Facilitation Order, Complex Solicited Order and/
or Response in accordance with Rule 201 of Regulation SHO, the Exchange
will cancel back the Complex Facilitation Order, Complex SOM Order and/
or Response to the entering member.
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\98\ See Securities Exchange Act Release No. 61595 (February 26,
2010), 75 FR 11232 (March 10, 2010) (``Rule 201 Adopting Release'').
\99\ For purposes of this paragraph, the term ``covered
security'' shall have the same meaning as in Rule 201(a)(1) of
Regulation SHO.
\100\ See proposed Options 3, Section 16(e). In contrast,
Complex Orders in an auction mechanism that cannot be executed in
accordance with Regulation SHO will be cancelled back and will not
rest on the Complex Order Book as provided in Supplementary Material
.08 to Options 3, Section 11 and Supplementary Material .09 to
Options 3, Section 13.
\101\ Options 3, Section 16(e) was amended by SR-Phlx-2025-17.
See Securities Exchange Act Release No. 102862 (April 15, 2025), 90
FR 16731 (April 21, 2025) (SR-Phlx-2025-17) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change to Amend Phlx's
Complex Order Functionality). SR-Phlx-2025-17 proposed the same
operative date as this proposal as they are both part of the same
technology migration.
\102\ See ISE Supplementary Material .08(c) to Options 3,
Section 11 and ISE Supplementary Material .09(c) to Options 3,
Section 13.
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When a member submits a Complex Facilitation or Complex
Solicitation auction Response that includes a short sale order, their
short sale order will execute at its stated limit price, but not at a
better price if the facilitating member's contra-order or the solicited
contra-side Complex Order does not include a short sale order. However,
their short sale order will execute at its stated limit price or better
if the facilitating member's contra-order or the solicited contra-side
Complex Order includes a short sale order. Thus, whether a short sale
order included in a Facilitation or Solicitation auction Response
receives its stated limit price, or potentially receives a better price
than its limit price, depends on whether the contra-side order
submitted to the auction with an agency order also included a short
sale order. Although the availability of the potential for price
improvement for the responder's short sale order will vary, depending
on whether the contra-order also included a short sale order, the
Exchange notes that for the reasons described below the alternative
would be to exclude auction orders that include a short sale order from
the Complex Facilitation or Complex Solicitation altogether, which
would decrease competition in the auction and potentially reduce
opportunities for the agency order to receive price improvement in the
auctions. Below are some examples of Complex Facilitation Auction
Responses executing within a Complex Facilitation Auction.\103\
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\103\ The same examples apply to a Complex Solicitation Order
Mechanism.
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Example 10
Complex Facilitation Auction utilizing stated limit price
Phlx BBO for option leg is 0.05 x 0.10
Underlying equity NBBO is 1.05 x 1.10
Reg SHO short sale price test is triggered in the underlying
Stock-Option Strategy is created to buy 1 put, buy 100 shares (cBBO
for this strategy is 1.10 x 1.20)
Complex Facilitation to buy strategy, 100 @1.13 (buy stock @1.08 and
options @0.05) \104\; Counter-Side Order does not include a short
sale order
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\104\ The Exchange notes that different combinations of stock
and options prices could determine the strategy prices in this
Example 1 as well as Examples 2 and 3. The Exchange is assuming the
noted prices for the examples, however the Exchange notes that
multiple price points could achieve the net prices in these
examples. In this particular case in Example 1, the agency order
could buy stock @1.07 and buy options @0.06 in lieu of the prices
noted.
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Response 1 is a Public Customer Order to sell, sell short stock leg,
100 @1.11 (sell stock @1.06 and options @0.05)
Response 2 to sell, sell short stock leg, 100 @1.12 (sell stock
@1.07 and options @0.05)
Complex Facilitation auction timer concludes
Response 1 trades with Complex Facilitation agency order, option
@0.05 and stock @1.06 for net price of 1.11. Response 1 may not
trade the underlying equity at 1.05 because it cannot execute a
short sale order at a price that is equal to the NBB of the
underlying equity.
Example 11
Complex Facilitation Auction utilizing stated limit price
Phlx BBO for option leg is 0.05 x 0.10
Underlying equity NBBO is 1.05 x 1.10
Reg SHO short sale price test is triggered in the underlying
Stock-Option Strategy is created to buy 1 put, buy 100 shares (cBBO
for this strategy is 1.10 x 1.20)
Complex Facilitation to buy strategy, 100 @1.13 (buy stock @1.08 and
options @0.05); Counter-Side Order does not include a short sale
order
Response 1 is a Public Customer Order to sell, sell short stock leg,
100 @1.10 (sell stock @1.05 and options @0.05)
Response 2 to sell, sell short stock leg, 100 @1.12 (sell stock
@1.06 and options @0.06)
Complex Facilitation auction timer concludes
Response 2 trades with Complex Facilitation agency order, option
@0.06 and stock @1.06 for net price of 1.12. Since the Counter-Side
Order does not include a short
[[Page 39056]]
sale order, Response 1 is considered for execution at its stated
limit price of 1.10; since it cannot trade at 1.10 (specifically it
cannot sell the stock @1.05) due to Reg SHO, it does not trade with
the Complex Facilitation agency order.
Example 12
Complex Facilitation Auction where Counter-Side is also short
selling
Phlx BBO for option leg is 0.05 x 0.10
Underlying equity NBBO is 1.05 x 1.20
Counter-Side Order includes a short sale order
Reg SHO short sale price test is triggered in the underlying
Stock-Option Strategy is created to buy 1 put, buy 100 shares (cBBO
for this strategy is 1.10 x 1.30)
Complex Facilitation to Buy strategy, 100 @1.13, Counter-Side
Order is a Market Order that is willing to auto-match at any price
point within Reg SHO price restriction bound and has `sell short'
stock leg instructions and therefore cannot trade the stock
component at any price less than or equal to the underlying best bid
of 1.05. In this example, if the Counter-Side Order did not have a
``sell short'' instruction it would not be required to trade at a
price that is better than the NBB for security (1.05) and could
execute at a price equal to or less than the underlying best bid of
1.05. The price of 1.10 is the cBB (net of option and underlying
NBB).
Response 1 is to sell, sell short stock leg, 100 @1.10 (selling
stock at 1.05 and options at 0.05; note it cannot trade at 1.10
(specifically it cannot sell stock @1.05) due to Reg SHO)
Response 2 to sell, sell short stock leg, 100 @1.12 (selling stock
at 1.06 and options at 0.06)
Complex Facilitation auction timer concludes
The Complex Facilitation agency order first executes 40
contracts with the Counter-Side Market Order, the option leg at 0.05
and stock leg at 1.06 for a net price of 1.11. The remaining 60
contracts from the Complex agency order then execute with Response 1
at the same price. In this example, both the Complex Counter-Side
Order and the Response are marked short sale, which permits the
Response to trade at a price that is better than its stated limit
price.
In this example, Response 1 traded at its next available price
in lieu of its stated limit price because both the Counter-Side
Order and the Response included a short sale order in the underlying
component security. In contrast, if the Counter-Side Order did not
include a short sale order then the Counter-Side Order and Response
2 would trade with the Complex Facilitation agency order for a net
price of 1.12 (option @0.06 and stock @1.06).
In such case where a Response or an unrelated limit complex order
on the complex order book includes a short sale order in the underlying
covered security, NES would execute the order at its stated limit price
if the facilitating member's contra order or contra-side solicited
Complex Order does not include a short sale order in the underlying
covered security because the Exchange desires to foster competition by
including Responses that have a short sale order in the underlying
covered security. In this scenario, the Exchange would consider all
prices submitted by responders at which the auction may execute because
the member's contra order or contra-side solicited Complex Order does
not need to comply with the short sale price test in Rule 201 of
Regulation SHO because the order is not short. By using the order's
stated limit price in this case, the Exchange would allow the responder
with a short sale order to participate in the relevant auction and
allocate the best price possible to the agency order while complying
with the short sale price test.\105\ The Exchange believes that
including Responses with a short sale order in the underlying covered
security may create additional competition in the Complex Facilitation
and Complex Solicitation auction while also providing additional
opportunity for potential price improvement for the agency order.
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\105\ For example, utilizing a Complex Facilitation auction with
a BBO of 0.05 x 0.10 and an NBBO for the underlying security
component of 1.05 x 1.10, if the Initiating Member submitted an
agency order to buy @1.13 and a contra-order to sell @1.13, with
auto-match at any price point, and Responder 1 was long @1.10, and
Responder 2 was short @1.10 (in this scenario 1.10 would not comply
with the short sale price test), pursuant to the proposed amendment,
the agency order would receive a price improvement allocation @1.10.
In this scenario the improved price of 1.11 would not be allocated
to the responder with a short sale rather the price improvement
would be applied to the agency order. The Exchange believes it is
important to offer price improvement to the agency order over the
responder to the auction. Of note, Response 2 that was short @1.10
would be cancelled.
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When a Response or an unrelated limit complex order on the complex
order book includes a short sale order in the underlying covered
security, NES would execute the order at its stated limit price or
better if the facilitating member contra order or solicited contra-side
Complex Order includes a short sale order in the underlying security
component. In this case, each short sale compliant price would be
considered in determining the price at which the auction order may
execute, which would be at its stated limit price or better. In this
scenario, because the facilitating member's contra order or solicited
contra-side Complex Order are short, the Exchange will only consider
prices that comply with the short sale price test in Rule 201 of
Regulation SHO. In this case, all prices that are compliant with the
short sale price test are considered when allocating the auction, and
both the agency order and responders may receive a better price. The
auction would allocate at the agency order's stated limited price or
better depending on the prices of the Responses. The auction Responses
may execute at their stated limited price or better depending on the
final auction price. This is in contrast to the prior scenario where
the facilitation member's contra order or contra-side solicited Complex
Order does not need to comply with the short sale price test. Utilizing
the proposed stated limit price or better where a facilitating member's
contra order or contra-side solicited Complex Order includes a short
sale order allows the Exchange to potentially provide price improvement
opportunity to the agency order.
For these reasons, the processing of the stock/ETF component of a
Facilitation or Solicited Complex Order under this proposal will comply
with applicable rules regarding equity trading, including the rules
governing trade reporting, trade-throughs and short sales. NES's
responsibilities respecting these equity trading rules will be
documented in NES's written policies and procedures. NES's compliance
team currently updates, reviews and monitors NES's policies and
procedures regarding equity trading rules on an annual basis and will
continue to do so. NES is regulated by FINRA and as such, NES policies
and procedures are subject to review and examinations by FINRA.
Offering a seamless, automatic execution for both the options and
stock/ETF components of a Facilitation or Solicited Complex Order is an
important feature that should promote just and equitable principles of
trade and remove impediments to and perfect the mechanism of a free and
open market and a national market system by deeply enhancing the sort
of complex order processing available on options exchanges today.
Nevertheless, members could, in lieu of this proposed arrangement with
NES, choose, instead, the following alternatives: (i) avoid using a
Facilitation or Solicited Complex Order that involves stock/ETFs, (ii)
use a trading floor to execute a Complex Order with stock, or (iii) go
to another options venue, several of which offer a similar
feature.\106\
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\106\ Existing Complex Order mechanisms at Cboe, Inc. (``Cboe'')
offers a similar end result. See Cboe 5.33(l).
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The Exchange proposes to amend Options 3, Section 10 to add an
applicability section identical to ISE Options 3, Section 10(c) at
subparagraph (b).\107\ This paragraph would make clear
[[Page 39057]]
that auctions are not subject to Options 3, Section 10 allocation
unless Options 3, Section 10 is specifically referenced in the auction
rule. Specifically, the Exchange proposes to state ``Applicability.
This rule does not apply to the Block Order Mechanism described within
Options 3, Section 11(a), the Facilitation Mechanism described within
Options 3, Section 11(b), the Solicited Order Mechanism described
within Options 3, Section 11(d), PIXL described within Options 3,
Section 13, and orders described within Options 3, Section 12, unless
Options 3, Section 10 is specifically referenced within ISE rules
applicable to the aforementioned functionality.''
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\107\ The Exchange would re-letter Options 3, Section 10(b) to
``c.''
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The Exchange proposes to add rule text about concurrent auctions at
Options 3, Section 11(f) that is identical to ISE Options 3, Section
11(f). Specifically, the Exchange proposes to note at Options 3,
Section 11(f) the limitations on concurrent Complex Strategy auctions
as follows:
Only one Exposure Auction at Supplementary Material .01 to
Options 3, Section 14, Complex PIXL auction at Options 3, Section
13, Complex Facilitation Mechanism auction at Options 3, Section
11(c), or Complex Solicited Order Mechanism auction at Options 3,
Section 11(e), respectively, will be ongoing at any given time in a
Complex Strategy, and such auctions will not queue or overlap in any
manner. The Exchange will not initiate an Exposure Auction, Complex
PIXL auction, Complex Facilitation Mechanism auction, or Complex
Solicited Order Mechanism auction in a Complex Strategy while
another Exposure Auction, Complex PIXL auction, Complex Facilitation
Mechanism auction, or Complex Solicited Order Mechanism auction in
that Complex Strategy is ongoing. If a Complex PIXL auction, Complex
Facilitation Mechanism auction, or Complex Solicited Order Mechanism
auction for a Complex Strategy has been initiated, an Exposure
Auction for that Complex Strategy will not be initiated, and an
Exposure Only Complex Order for the Complex Strategy will be
cancelled back to the member. An Exposure Order for the Complex
Strategy will be processed as an order that is not marked for price
improvement.
These proposed limitations are identical to limitations in ISE at
Options 3, Section 11(f).
The Exchange proposes to add rule text about concurrent Complex
Order and single-leg auctions at Options 3, Section 11(g) that is
identical to ISE Options 3, Section 11(g). Specifically, the Exchange
proposes to add the following rule text to Options 3, Section 11(g),
Concurrent Complex Order and single leg auctions. An auction in
the Block Order Mechanism at Options 3, Section 11(a), Facilitation
Mechanism at Options 3, Section 11(b), Solicited Order Mechanism at
Options 3, Section 11(d), or PIXL at Options 3, Section 13,
respectively, for an option series may occur concurrently with a
Complex Order Exposure Auction at Supplementary Material .01 to
Options 3, Section 14, Complex Facilitation Auction at Options 3,
Section 11(c), Complex Solicited Order Auction at Options 3, Section
11(e), or Complex PIXL auction at Options 3, Section 13,
respectively, for a Complex Order that includes that series. To the
extent that there are concurrent Complex Order and single leg
auctions involving a specific option series, each auction will be
processed sequentially based on the time the auction commenced. At
the time an auction concludes, including when it concludes early,
the auction will be processed pursuant to Options 3, Section 11(a),
(b), (d), or Section 13, as applicable, for the single option, or
pursuant to Supplementary Material .01 to Options 3, Section 14,
Options 3, Section 11(c), 11(e), Options 3, Section 13, as
applicable, for the Complex Order, except as provided for at Options
3, Section 13.
This proposed new rule text makes clear that the Exchange will not
permit multiple Complex Order auctions to be ongoing in a complex
strategy, but will permit concurrent Complex Order strategy auctions to
be ongoing with single leg auctions as explicitly noted in the new rule
text. The Exchange believes that permitting single leg auctions to
occur at the same time as a Complex Order auction as specified above
would encourage market participants to utilize the single leg order
auction mechanisms as well as the Complex Order mechanisms and, thereby
remove impediments to, and perfect the mechanism of, a free and open
market and national market system. A member that has auction-eligible
interest to execute when another Complex Order auction is ongoing can
either re-submit that order to the Exchange after the auction has
concluded, or submit the order to another options market that provides
similar auction functionality. Phlx market data feeds provide
information to members about when a Complex Order auction is ongoing,
and members can therefore use this information to make appropriate
routing decisions.
With the adoption of the Facilitation and Solicited Order
Mechanisms, the Exchange proposes to amend Options 3, Section 16,
Complex Order Risk Protections.\108\ The proposed Complex Order Risk
Protections are identical to ISE Options 3, Section 16. Specifically,
the Exchange proposes to provide that the strategy protections in
Options 3, Section 16(b), which includes a Vertical Spread Protection,
a Calendar Spread Protection, a Butterfly Spread Protection, and a Box
Spread Protection, will not apply to Complex Orders being auctioned and
auction Responses in the Facilitation Mechanism, Solicited Order
Mechanism within Options 3, Section 11. This rule text is identical to
ISE Options 3, Section 16(b). Complex orders executed in these
mechanisms are two-sided orders where the contra-side order is willing
to trade with the agency order at an agreed upon price thus removing
the risk that the order was executed erroneously outside its intrinsic
value.
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\108\ SR-Phlx-2025-17 proposed rule text at Options 3, Section
16(b) that provides, Strategy Protections. The following 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
PIXL within Options 3, Section 13. Additionally, the following
protections will not apply when a Complex Order includes at least
one P.M.-settled leg and at least one A.M.-settled leg. See
Securities Exchange Act Release No. 102862 (April 15, 2025), 90 FR
16731 (April 21, 2025) (SR-Phlx-2025-17) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change to Amend Phlx's
Complex Order Functionality). SR-Phlx-2025-17 proposed the same
operative date as this proposal as they are both part of the same
technology migration.
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Options 3, Section 12
Options 3, Section 12 is currently titled, ``Electronic Qualified
Contingent Cross Order.'' The Exchange proposes to retitle the section
``Crossing Orders'' identical to the title of ISE Options 3, Section
12.
Customer Cross Orders
The Exchange proposes a Customer Cross Order at Options 3, Section
12 that is identical to ISE Options 3, Section 12. Currently, the
Exchange offers market participants the ability to enter Public
Customer-to-Public Customer Cross Order via its PIXL Mechanism at
Options 3, Section 13(a) and (f) (``Public Customer-to-Public Customer
Cross Order''). At this time, the Exchange proposes to relocate the
placement of this functionality to Options 3, Section 12, identical to
ISE. The Exchange believes that placing the Public Customer-to-Public
Customer Cross Order with other crossing mechanisms in Options 3,
Section 12 will make the functionality easier to locate in the
Rulebook. The Exchange is not amending the current functionality of
Public Customer-to-Public Customer Cross Order, rather the
functionality is being relocated and the rule text is being harmonized
to ISE's Customer Cross Order rules.\109\
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\109\ Of note, the proposed Customer Cross Order and current
Public Customer-to-Public Customer Cross Order do not require
exposure like a PIXL Order. Placing this order type in a new rule
where other order types that do not require order exposure are
located will reduce confusion as to the order type.
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[[Page 39058]]
Currently, the execution of a PIXL Order that is comprised of a
Public Customer order to buy and a Public Customer to sell at the same
price and for the same quantity is governed by Options 3, Section 13(a)
and (f).\110\ The Exchange proposes to remove the ability to enter such
Public Customer-to-Public Customer Cross Orders directly into the PIXL
auction for automatic execution. These orders would continue to be
entered through FIX \111\ but would not execute as a PIXL cross order.
The Exchange notes that it recently adopted an ``Ouch to Trade
Options'' or ``OTTO'' order entry protocol \112\ that Phlx members may
utilize to submit orders. Customer Cross Orders will also be able to be
entered through the new OTTO protocol as well. Today, a Public
Customer-to-Public Customer Cross Order may only be entered into PIXL
and will receive the treatment described within current Options 3,
Section 13(f).\113\ With this proposal, the manner in which Public
Customer-to-Public Customer Cross Order are being processed by the
System is changing in that they will not execute through PIXL. Members
would otherwise receive the same executions with a Customer Cross Order
that Public Customer-to-Public Customer Cross Orders receive today when
entered through PIXL.
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\110\ See current Options 3, Section 13.
\111\ ``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).
\112\ OTTO was adopted in SR-Phlx-2025-05. See Securities
Exchange Act Release No. 102337 (February 4, 2025), 90 FR 9267
(February 10, 2025) (SR-Phlx-2025-05). SR-Phlx-2025-05 will be
implemented at the same time as this proposal.
\113\ In lieu of the procedures in paragraphs (a)-(b) of Options
3, Section 13, an Initiating member may enter a PIXL Order for the
account of a Public Customer paired with an order for the account of
a Public Customer and such paired orders will be automatically
executed without a PIXL Auction, provided there is not currently an
Auction in progress in the same series or same strategy, in which
case the orders will be rejected. The execution price for such a
PIXL Order (except if it is a Complex Order) must be expressed in
the quoting increment applicable to the affected series. Such an
execution may not trade through the better of the NBBO or Reference
BBO or at the same price as any resting Public Customer order. The
execution price for such a Complex Order PIXL may be in .01
increments and may not trade at a price equal to or through the
cPBBO including Reference BBO or at the same price as a resting
Public Customer Complex Order. See current Options 3, Section 13(f).
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The Exchange proposes to amend Options 3, Section 12, which is
currently reserved, to adopt the title ``Crossing Orders'' to describe
this process. The Exchange proposes to adopt Customer Cross Orders,
within Options 3, Section 12(a), which is identical to ISE Options 3,
Section 12(a).
In particular, the Exchange proposes to add a definition of a
Customer Cross Order at Options 3, Section 7(i) specifying that a
Customer Cross Order is comprised of a Public Customer Order to buy and
a Public Customer Order to sell at the same price and for the same
quantity and such order will trade in accordance with Options 3,
Section 12(a). This definition is identical to ISE Options 3, Section
7(i). The Exchange proposes to adopt Options 3, Section 12(a) to
specify that Customer Cross Orders are automatically executed upon
entry provided that the execution is at or between the best bid and
offer on the Exchange and (i) is not at the same price as a Public
Customer Order on the Exchange's limit order book and (ii) will not
trade through the NBBO. Further, Customer Cross Orders will be
automatically canceled if they cannot be executed. Customer Cross
Orders may only be entered in the regular trading increments applicable
to the options class under Options 3, Section 3. Current Options 3,
Section 22(b)(1) \114\ describes the entry and execution of Customer
Cross Orders.
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\114\ Current Options 3, Section 22(b)(1) prevents a member from
executing agency orders to increase its economic gain from trading
against the order without first giving other trading interest on the
Exchange an opportunity to either trade with the agency order or to
trade at the execution price when the Member was already bidding or
offering on the book. However, the Exchange recognizes that it may
be possible for an member to establish a relationship with a
customer or other person (including affiliates) to deny agency
orders the opportunity to interact on the Exchange and to realize
similar economic benefits as it would achieve by executing agency
orders as principal. It will be a violation of this Rule for a
member to be a party to any arrangement designed to circumvent this
Rule by providing an opportunity for a customer or other person
(including affiliates) to regularly execute against agency orders
handled by the member immediately upon their entry into the System.
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With this proposal, the execution of a Customer Cross Order would
continue to neither execute at the same price as a Public Customer
Order on the Exchange's limit order book, nor trade through the NBBO.
In connection with this proposed change, the Exchange proposes to
remove the last sentence of the first paragraph of Options 3, Section
13 that notes that the execution of a PIXL Order that is comprised of a
Public Customer order to buy and a Public Customer is governed by
Options 3, Section 13(a) and (f). The Exchange also proposes to remove
the sentence in current Options 3, Section 13(a) that states,
``Pursuant to paragraph (f), the Exchange will allow a Public Customer-
to-Public Customer PIXL Order to trade on either the bid or offer, if
the NBBO is $0.01 wide, provided (1) the execution price is equal to or
within the NBBO, (2) there is no resting Public Customer at the
execution price, and (3) $0.01 is the Minimum Price Variation (MPV) of
the option.'' Finally, the Exchange proposes to remove current Options
3, Section 13(f) which describes the manner in which a PIXL Order for
the account of a Public Customer paired with an order for the account
of a Public Customer and such paired orders will be automatically
executed without a PIXL Auction.
The Exchange would re-letter Options 3, Section 13(g) as ``f.'' The
Exchange is eliminating current Options 3, Section 13(f) because paired
Public Customer Orders would no longer be entered as PIXL Orders. The
Exchange notes that Customer Cross Orders would continue to be executed
in the same manner as today within PIXL with paired Public Customer
Orders. Today, the execution price may not trade through the better of
the NBBO or Reference BBO or at the same price as any resting Public
Customer order. Today, the execution price for such a PIXL Order must
be expressed in the quoting increment applicable to the affected series
or stated otherwise, the minimum increments noted in Options 3, Section
3. Finally, today the paired Public Customer Orders would cancel if not
executed.
The prohibition expressed within current Phlx Options 3, Section
13(f) provided that a paired Public Customer Order may be entered
provided there is not currently an Auction in progress in the same
series or same strategy.\115\ Today, to initiate the Auction, the
Initiating member must mark the PIXL Order for Auction processing. With
this proposal, paired Public Customer Orders would not be tagged as a
PIXL Auction. The paired Public Customer Orders would be entered as a
separate cross and therefore would not potentially cause more than one
PIXL Auction to occur in the same series. In conjunction with this
change, Phlx proposes to add Customer Cross Orders to Options 3,
Section 22(b) and (c) as an exception to the rules for limitations on
principal transactions and solicitation orders, which require members
to expose trading interest to the market before executing agency orders
as principal or before executing agency orders against orders that were
solicited from other broker-dealers.
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\115\ Id.
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The Exchange proposes to add a sentence to the end of current
Options
[[Page 39059]]
3, Section 22(b)(1), which currently exists within Options 3, Section
13(f).\116\ Specifically, the Exchange proposes to add ``Further, it
would be a violation of this Rule for an Options Participant to
circumvent this Rule by providing an opportunity for (A) a Public
Customer affiliated with the Participant, or (B) a Public Customer with
whom the Participant has an arrangement that allows the Participant to
realize similar economic benefits from the transaction as the
Participant would achieve by executing agency orders as principal, to
regularly execute against agency orders handled by the firm immediately
upon their entry as Public Customer-to-Public Customer immediate
crosses.'' The addition of this sentence to Options 3, Section 22(b)(1)
will continue to make clear the type of behavior that is prohibited
when executing Customer Cross Orders and for any other functionality in
Phlx's rules. The Exchange would surveil Customer Cross Orders in the
same fashion that it already surveils for these orders on ISE. ISE
Supplementary Material .01 to Options 3, Section 22 and proposed Phlx
Options 3, Section 22(b)(1) both prevent a executions of agency orders
to increase its economic gain from trading against the order without
first giving other trading interests on the exchange an opportunity to
either trade with the agency order or to trade at the execution price
when a market participant was already bidding or offering on the book.
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\116\ Id.
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Additionally, the Exchange proposes to offer Complex Customer Cross
Orders at proposed Options 3, Section 12(b) that is identical to ISE
Options 3, Section 12(b).
Today, Complex paired Public Customer Orders are executed in PIXL.
With this proposal, similar to single-leg Customer Cross Orders, the
Exchange proposes to remove the ability to enter Complex paired Public
Customer orders as a PIXL cross although they will continue to be
entered through FIX (and OTTO as noted above) directly as Complex
Customer Cross Orders.
As is the case today within PIXL, with this proposal Complex
Customer Cross Orders would be automatically executed upon entry so
long as: (i) the price of the transaction is at or within the best bid
and offer for the same complex strategy on the Complex Order Book; (ii)
there are no Public Customer Complex Orders for the same strategy at
the same price on the Complex Order Book; and (iii) the options legs
can be executed at prices that comply with the provisions of Options 3,
Section 14(c)(2).\117\ Complex Customer Cross Orders will be rejected
if they cannot be executed. As is the case for single-leg Customer
Cross Orders, Options 3, Section 22(b)(1) applies to Complex Customer
Cross Orders.
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\117\ See supra note 31.
---------------------------------------------------------------------------
As is the case for any Complex Order with a stock/ETF component,
and as described in this proposal, members may only submit Complex
Customer Cross Orders with a stock/ETF component if such orders comply
with the Qualified Contingent Trade Exemption from Rule 611(a) of
Regulation NMS. Members submitting such 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 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 orders containing a stock/ETF component.
Also, as described herein with respect to any Complex Order with a
stock/ETF component, where one component of a Complex Customer Cross
Order is the underlying security, the Exchange shall electronically
communicate the underlying security component of a Complex Customer
Cross Order to NES, its designated broker-dealer, for immediate
execution. Such execution and reporting will not occur on the Exchange
and will be handled by NES pursuant to applicable rules regarding
equity trading. The execution price must be within a certain price from
the current market, as determined by the Exchange. If the stock price
is not within these parameters, the Complex Customer Cross Order is not
executable. Finally, as described in this proposal, 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 Customer Cross 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 Customer Cross 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 Customer Cross Order
in accordance with Rule 201 of Regulation SHO, the Exchange will cancel
back the Complex Customer Cross Order to the entering member. For
purposes of this paragraph, the term ``covered security'' shall have
the same meaning as in Rule 201(a)(1) of Regulation SHO.
With the adoption of Customer Cross Orders, the Exchange proposes
to amend Options 3, Section 16, Complex Order Risk Protections.\118\
Specifically, the Exchange proposes to provide that the strategy
protections in Options 3, Section 16(b), which include a Vertical
Spread Protections, a Calendar Spread Protection, a Butterfly Spread
Protection, and a Box Spread Protection, will not apply to Complex
Customer Cross Orders pursuant to Options 3, Section 12. This rule text
is identical to ISE Options 3, Section 16(b). A Customer Cross Order is
a two-sided order where the contra-side order is willing to trade with
the agency order at an agreed upon price. The Exchange believes that
because paired orders are negotiated in advance by both parties it is
unlikely that the parties would agree to transact at prices that would
necessitate these protections.
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\118\ Options 3, Section 16 was amended in SR-Phlx-2025-71. See
Securities Exchange Act Release No. 102862 (April 15, 2025), 90 FR
16731 (April 21, 2025) (SR-Phlx-2025-17) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change to Amend Phlx's
Complex Order Functionality). SR-Phlx-2025-17 proposed the same
operative date as this rule change as they are both part of the same
technology migration.
---------------------------------------------------------------------------
Qualified Contingent Cross Orders
The Exchange proposes to relocate and amend the description of a
Qualified Contingent Cross Order or ``QCC Order'' from Options 3,
Section 7(b)(8) which states that a QCC Order is as that term is
defined in Options 3, Section 12. The Exchange proposes to harmonize
the rule text at Options 3, Section 12 to ISE Options 3, Section 12.
Specifically, the Exchange proposes to provide more detail and
instead provide at Options 3, Section 7(j), that a Qualified Contingent
Cross Order is comprised of an originating order to buy or sell at
least 1000 contracts that is identified as being part of a qualified
contingent trade, as that term is defined in Supplementary Material .01
below, coupled with a contra-side order or orders totaling an equal
number of contracts. QCC Orders will trade in accordance with Options
3, Section 12(c). QCC Orders may only be entered through FIX. This
description is identical to ISE Options 3, Section 7(j), except that
Phlx does not offer Precise and ISE offers that Precise in addition to
FIX.
The Exchange proposes aligning its QCC functionality to that of ISE
at
[[Page 39060]]
Options 3, Section 12. Today, Phlx offers QCC Orders electronically and
on its trading floor. The amendments to Options 3, Section 12 solely
relate to electronic trading. The amendments to Options 3, Section 8
apply to floor trading. Phlx separately received approval for
electronic QCC Orders \119\ and Floor QCC Orders.\120\ Phlx will
describe its Floor QCC below.
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\119\ See Securities Exchange Act Release No. 64249 (April 7,
2011), 76 FR 20773 (April 13, 2011) (SR-Phlx-2011-47) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change by NASDAQ
OMX PHLX LLC To Establish a Qualified Contingent Cross Order).
\120\ See Securities Exchange Act Release No. 64415 (May 5,
2011), 76 FR 27732 (May 12, 2011) (SR-Phlx-2011-56) (Notice of
Filing of Proposed Rule Change To Establish a Qualified Contingent
Cross Order for Execution on the Floor of the Exchange).
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Phlx's QCC Order facilitates the execution of stock/option
Qualified Contingent Trades that satisfy the requirements of the trade
through exemption in connection with the QCT Trade Exemption. A Phlx
member may effect a QCC Order provided the QCC Order: (i) is at least
1,000 contracts, (ii) meets the QCT Trade Exemption, (iii) is executed
at a price at or between the better of the PBBO \121\ or the NBBO; and
(iv) is rejected if a Public Customer order is resting on the Exchange
book at the same price. Phlx Options 3, Section 12(a) currently
provides that,
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\121\ The PBBO represents Phlx's best bid and offer.
A Qualified Contingent Cross Order is comprised of an
originating electronic order to buy or sell at least 1,000 contracts
that is identified as being part of a qualified contingent trade, as
that term is defined in subsection (3) below, coupled with a contra-
side order or orders totaling an equal number of contracts.
(1) Qualified Contingent Cross Orders are immediately executed
upon entry into the System by an Order Entry Firm provided that (i)
no Public Customer orders are at the same price on the Exchange's
Limit Order book and (ii) the price is at or between the better of
the PBBO and the NBBO.
(A) Qualified Contingent Cross Orders will be automatically
cancelled if they cannot be executed.
(B) Qualified Contingent Cross Orders may only be entered in the
regular trading increments applicable to the options class under
Options 3, Section 3.
(2) Qualified Contingent Cross Orders shall only be submitted
electronically from off the Floor to the System. Order Entry Firms
must maintain books and records demonstrating that each Qualified
Contingent Cross Order was routed to the Exchange System from off of
the Floor. Any Qualified Contingent Cross Order that does not have a
corresponding record required by this subsection shall be deemed to
have been entered from on the Floor in violation of this Rule.
Current Options 3, Section 12(a)(3) describes a ``qualified
contingent trade.'' The Exchange proposes to relocate the QCT Trade
Exemption described in Options 3, Section 12(a)(3) to Supplementary
Material .01 to Options 3, Section 7 \122\ without change. ISE also
describes the QCT Trade Exemption in Supplementary Material .01 to
Options 3, Section 7. The QCT Trade Exemption applies to trade-throughs
caused by the execution of an order involving one or more NMS stocks
that are components of a ``qualified contingent trade.'' The Exchange
also proposes to amend Options 8, Section 30(e)(3), related to a Floor
QCC, to refer to the description of a ``qualified contingent trade'' at
proposed to Supplementary Material .01 to Options 3, Section 7. Also,
current Supplementary Material .01 to Options 3, Section 12 notes that
Stop Orders which have not been elected are not protected orders and
are thus not considered for the acceptance or execution of QCC Orders.
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\122\ See supra note 94.
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Options 8, Section 32(e) describes a Floor QCC Order as a Floor
Qualified Contingent Cross Order comprised of an originating order to
buy or sell at least 1,000 contracts, as provided in Options 8, Section
30(e), that is identified as being part of a qualified contingent
trade, as that term is defined in subsection Options 8, Section
30(e)(3), coupled with a contra-side order or orders totaling an equal
number of contracts. Phlx Options 8, Section 30(e) similarly provides
that a Floor QCC Order is comprised of an originating order to buy or
sell at least 1,000 contracts that is identified as being part of a
qualified contingent trade, coupled with a contra-side order or orders
totaling an equal number of contracts. Also, Options 8, Section
30(e)(1) provides that Floor QCC Orders are immediately executed upon
entry into the System by an Options Floor Broker provided that (i) no
Public Customer Orders are at the same price on the Exchange's limit
order book and (ii) the price is at or between the better of the PBBO
and the NBBO. Floor QCC Orders shall be submitted into the System by
Floor Brokers on the Floor or remotely via the Options Floor Based
Management System. Pursuant to Options 8, Section 30(e)(1)(a), a Floor
Broker does not have to be present on the Exchange's Trading Floor to
submit a Floor QCC Order to the System. A Floor Broker may remotely
submit a Floor QCC Order to the System through the Options Floor Based
Management System. Pursuant to Options 8, Section 30(e)(1)(b), Floor
QCC Orders will be automatically cancelled if they cannot be executed.
Pursuant to Options 8, Section 30(e)(1)(c), Floor QCC Orders may only
be entered in the regular trading increments applicable to the options
class under Options 3, Section 3.
Pursuant to Options 8, Section 30(e)(2), Options Floor Brokers may
not enter Floor QCC Orders for their own account, the account of an
associated person, or an account with respect to which it or an
associated person thereof exercises investment discretion. Options
Floor Brokers must maintain books and records demonstrating that each
Floor QCC Order was not entered for a prohibited account. Any Floor QCC
Order that does not have a corresponding record required by this
subsection shall be deemed to have been entered for a prohibited
account in violation of Options 8, Section 30(e)(2).
At this time, the Exchange proposes to remove the rule text at
Options 3, Section 12(a) related to a QCC Order as well as the rule
text in Supplementary Material .01 to Options 3, Section 12 and replace
that language in new Options 3, Section 12(c) with rule text identical
to ISE Options 3, Section 12(c) as follows:
Qualified Contingent Cross Orders. Qualified Contingent Cross
Orders are automatically executed upon entry provided that the
execution (i) is not at the same price as a Public Customer Order on
the Exchange's limit order book and (ii) is at or between the better
of the internal PBBO or the NBBO.
(1) Qualified Contingent Cross Orders will be automatically
canceled if they cannot be executed.
(2) Qualified Contingent Cross Orders may only be entered in the
regular trading increments applicable to the options class under in
Options 3, Section 3.
The Exchange notes that QCC Orders that are currently offered on
Phlx are identical to QCC Orders offered on ISE. The Exchange seeks to
harmonize the rule text across its Nasdaq affiliated exchanges to
reflect the harmonized functionality. Phlx would continue to comply
with its current QCC Order requirements.
With respect to QCC Complex Orders, the Exchange proposes to adopt
rule text identical to ISE Options 3, Section 12(d) which provides,
Complex Qualified Contingent Cross Orders. Complex Options
Orders may be entered as Qualified Contingent Cross Orders, as
defined in Options 3, Section 7(j). Such orders will be
automatically executed upon entry so long as: (i) the price of the
transaction is at or within the best bid and offer for the same
complex options strategy on the Complex Order Book; (ii) there are
no Public Customer Complex Options Orders for the same strategy at
the same price on the Complex Order Book; and (iii) the options
[[Page 39061]]
legs can be executed at prices that (A) are at or between the better
of the internal PBBO or the NBBO for the individual series, and (B)
comply with the provisions of Options 3, Section 14(c)(2)(i),
provided that no legs of the Complex Options Order can be executed
at the same price as a Public Customer Order on the Exchange in the
individual options series. Complex Qualified Contingent Cross Orders
will be rejected if they cannot be executed. Complex Qualified
Contingent Cross Orders may be entered in one cent increments. Each
leg of a Complex Options Order must meet the 1,000 contract minimum
size requirement for Qualified Contingent Cross Orders.
As proposed, Phlx Complex QCC Orders would automatically executed
upon entry so long as: (i) the price of the transaction is at or within
the best bid and offer for the same complex options strategy on the
Complex Order Book; (ii) there are no Public Customer Complex Options
Orders for the same strategy at the same price on the Complex Order
Book; and (iii) the options legs can be executed at prices that (A) are
at or between the better of the internal PBBO or the NBBO for the
individual series, and (B) comply with the provisions of Options 3,
Section 14(c)(2)(i),\123\ provided that no legs of the Complex Options
Order can be executed at the same price as a Public Customer Order on
the Exchange in the individual options series. Complex QCC Orders will
be rejected if they cannot be executed. Also, each leg of a Complex
Options Order must meet the 1,000 contract minimum size requirement for
QCC Orders. The Exchange notes that Complex QCC Orders that are
currently offered on Phlx are identical to Complex QCC Orders offered
on ISE with one distinction, with this proposal, Complex QCC Orders may
be entered in one cent increments.\124\
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\123\ Phlx Options 3, Section 14(c)(2)(i) states, 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 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. Phlx separately filed a proposal to
adopt Complex Order functionality identical to ISE Options 3,
Section 14 with SR-Phlx-2025-17. See Securities Exchange Act Release
No. 102862 (April 15, 2025), 90 FR 16731 (April 21, 2025) (SR-Phlx-
2025-17) (Notice of Filing and Immediate Effectiveness of Proposed
Rule Change to Amend Phlx's Complex Order Functionality). SR-Phlx-
2025-17 proposed the same operative date as this proposal as they
are both part of the same technology migration.
\124\ See ISE Options 3, Section 12(b).
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Today, Complex QCC Orders may only be entered in the regular
trading increments applicable to the options class under Options 3,
Section 3, Minimum Increments.\125\ The Exchange proposes to amend the
minimum increments for Complex QCC Orders from the minimum increments
standard within Options 3, Section 3 to the minimum increments
allowable for Complex Orders at Options 3, Section 14(c)(1),\126\ which
permit bids and offers for Complex Options Strategies to 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. The Exchange
notes that Cboe Rule 5.4(b) similarly permits a Complex QCC Order \127\
to trade in $0.01 increments. The Exchange's proposed Complex QCC
Orders should be permitted to be entered in $0.01 increments, identical
to ISE Options 3, Section 14(c)(1). This amendment would place Complex
QCC Orders on the same footing as other types of Complex Orders that
would trade on Phlx and with Complex QCC Orders traded on Cboe and
ISE.\128\ The pricing of a Complex Order, whether or not it is a QCC
Order, is based on the relative price of one option leg to another (as
opposed to the outright price of a single option). In this case the
standard increment of trading of the individual legs of a Complex Order
is less relevant to the pricing of the Complex Order. In addition, each
option leg of a Complex QCC Order would continue to meet the same
requirements as today for execution as a Complex QCC Order. The
Exchange proposes to harmonize the rule text across its Nasdaq
affiliated exchanges to reflect the harmonized functionality.
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\125\ Options 3, Section 3(a) provides, except as provided in
Supplementary Material to Options 3, Section 3 below, all options on
stocks, index options, and Exchange Traded Fund Shares trading at a
price of $3.00 or higher shall have a minimum increment of $.10, and
all options on stocks and index options trading at a price under
$3.00 shall have a minimum increment of $.05.
\126\ Phlx separately filed a proposal to adopt Complex Order
functionality identical to ISE Options 3, Section 14 with SR-Phlx-
2025-17. See also supra note 35.
\127\ Cboe defines a Complex QCC Order as a QCC Order with more
than one option leg. See Cboe 5.6(b).
\128\ See Cboe Rule 5.4(b) and ISE Options 3, Section 3. Phlx
separately filed a proposal to adopt Complex Order functionality
identical to ISE Options 3, Section 14 with SR-Phlx-2025-17. See
Securities Exchange Act Release No. 102862 (April 15, 2025), 90 FR
16731 (April 21, 2025) (SR-Phlx-2025-17) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change to Amend Phlx's
Complex Order Functionality). SR-Phlx-2025-17 proposed the same
operative date as this proposal as they are both part of the same
technology migration.
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The proposed changes to QCC Orders at Options 3, Section 12 and
Complex QCC Orders at Options 3, Section 12 would apply equally to
electronic QCC Orders and Floor QCC Orders. The proposal will not amend
the System handling of Floor QCC Orders other than to amend the minimum
increments as described above for electronic QCC Orders.
Further, the Phlx Floor QCC order granting approval \129\ noted
that Phlx analyzed the application to Floor QCC Orders of Section 11(a)
of the Act \130\ and the rules thereunder. Section 11(a) \131\ contains
multiple exemptions, including exemptions for those acting in the
capacity of market makers, as odd-lot dealers, and those engaged in
stabilizing conduct; there are also rule-based exemptions such as the
``effect vs. execute'' exception under SEC Rule 11a2-2(T) \132\ under
the Act. In analyzing Floor QCC Orders, the Commission found that the
proposed rule change to establish a Floor QCC Order was consistent with
Section 11A(a)(1)(C) \133\ of the Act.\134\ The Exchange notes that it
will continue to prohibit Options Floor Brokers from entering Floor QCC
Orders for their own accounts, the account of an associated person, or
an account with respect to which it or an associated person thereof
exercises investment discretion.\135\ Phlx Options 8, Section 30(e)(2)
\136\ continues to be designed to remove even a theoretical time and
place advantage available to an Options Floor Broker on the Floor of
the Exchange that is reflected in the prohibitions of Section
[[Page 39062]]
11(a) \137\ of the Exchange Act and the rules thereunder. The Floor QCC
Order does not differ from the electronic QCC Order due to the Options
Floor Broker's presence on the Floor.
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\129\ See Securities Exchange Act Release No. 64688 (June 16,
2011), 76 FR 36606 (June 22, 2011) (SR-Phlx-2011-56) Order Granting
Approval of Proposed Rule Change Establishing a Qualified Contingent
Cross Order for Execution on the Floor of the Exchange).
\130\ 15 U.S.C. 78k(a)(1). Generally, Section 11(a)(1) of the
Act restricts any member of a national securities exchange from
effecting any transaction on such exchange for: (i) the member's own
account, (ii) the account of a person associated with the member, or
(iii) an account over which the member or a person associated with
the member exercises discretion, unless a specific exemption is
available.
\131\ Id.
\132\ See 17 CFR 240.11a2-2(T).
\133\ 15 U.S.C. 78k-1(a)(1)(C).
\134\ 76 FR 36606 at 36607.
\135\ See Options 8, Section 30(e)(2).
\136\ Options 8, Section 30(e)(2) states, Options Floor Brokers
shall not enter Floor Qualified Contingent Cross Orders for their
own account, the account of an associated person, or an account with
respect to which it or an associated person thereof exercises
investment discretion. Options Floor Brokers must maintain books and
records demonstrating that each Floor Qualified Contingent Cross
Order was not entered for a prohibited account. Any Floor Qualified
Contingent Cross Order that does not have a corresponding record
required by this subsection shall be deemed to have been entered for
a prohibited account in violation of Options 8, Section 30(e)(2).
\137\ 15 U.S.C. 78k(a)(1).
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At this time, the Exchange proposes to remove the current rule text
in Options 8, Section 30(e) and (e)(1), (e)(1)(b) and (c), applicable
to Floor QCC Orders and provide that a Floor QCC Order shall be
transacted as specified in Options 3, Section 12(c) and (d). The
Exchange proposes to retain the rule text in Options 8, Section
30(e)(1)(a) and renumber that rule text as Options 8, Section 30(e)(1).
The Exchange also proposes to retain the rule text at Options 8,
Section 30(e)(2) and (3) with the change noted above for the citation
to the qualified contingent trade description to Supplementary Material
.01 to Options 3, Section 7. The Exchange believes these amendments to
Options 8, Section 30(e) will harmonize the electronic and floor rule
text related to QCC functionality.
Finally, the Exchange notes that it is removing the rule text
concerning Stop Orders from Supplementary Material .01 to Options 3,
Section 12 and Supplementary Material .03 to Options 8, Section 30 that
address QCC Order and Floor QCC Order. Today, Stop Orders which have
not been elected are not protected orders and are thus not considered
for acceptance or execution. Stop Orders behave in this manner across
all functionalities on Phlx, not just QCC functionalities. For this
reason, the Exchange proposed to adopt the descriptions of Stop Order
and Stop Limits Order identical to ISE Options 3, Section 7(d) and (e)
in a separate rule change.\138\ The election process for a Stop Order
is described in Options 3, Section 7(d) and therefore the rule text in
Supplementary Material .01 to Options 3, Section 12 and Supplementary
Material .03 to Options 8, Section 30 is unnecessary, as a Stop Order
behaves the same throughout all trading functionalities.
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\138\ Options 3, Section 7(d) was revised by 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.
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Options 3, Section 13
The Exchange proposes to amend certain rule text in Options 3,
Section 13, related to PIXL, to align its rule ISE Options 3, Section
13 in certain respects.\139\
---------------------------------------------------------------------------
\139\ See supra note 6.
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In the first paragraph of Options 3, Section 13, the Exchange
proposes to amend the reference to sub-paragraph (a)(6) to (a)(7) as
explained further below. The Exchange already noted that it was
removing references to Options 3, Section 13(a) and (f) in connection
with its proposal to adopt Customer Crossing Orders at Options 3,
Section 12.
The Exchange proposes to amend its order entry check for PIXL
Orders for less than 50 options contracts at Options 3, Section
13(a)(1) to align this entry check to ISE Options 3, Section 13(b)(1).
Today, on Phlx, if the PIXL Order (except if it is a Complex Order) is
for less than 50 option contracts, and if the difference between the
National Best Bid and National Best Offer (``NBBO'') is $0.01, the
Initiating Member must stop the entire PIXL Order at a price that is:
(A) $0.01 better than the NBBO on the opposite side of the market from
the PIXL Order, and (B) on the same side of the market as the PIXL
Order, (i) equal to or better than the NBBO and (ii) better than any
Limit Order on the Limit Order book. If the PIXL Order is for a Non-
Public Customer, the PIXL Order must also be better than any quote on
the same side of the market as the PIXL Order.
At this time, the Exchange proposes to instead provide, that if the
PIXL Order (except if it is a Complex Order) is for less than 50 option
contracts, and if the difference between the National Best Bid and
National Best Offer (``NBBO'') or the difference between the internal
best bid and the internal best offer (``internal PBBO'') is $0.01, the
Initiating Member must stop the entire PIXL Order at a price that is:
(A) equal to or better than the NBBO and the internal market PBBO on
the opposite side of the market from the PIXL Order, and(B) on the same
side of the market as the PIXL Order, (i) equal to or better than the
NBBO and (ii) better than any Limit Order on the Limit Order book. If
the PIXL Order is for a Non-Public Customer, the PIXL Order must also
be better than any quote on the same side of the market as the PIXL
Order. Today, Phlx re-prices orders that would otherwise lock or cross
an away market.\140\ Specifically, an order 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 MPV above (for
offers) or below (for bids) the national best price.\141\ With this re-
pricing, an Exchange order could be available at a price that is better
than the NBBO, but is non-displayed (i.e., the Exchange's non-displayed
order book or ``internal PBBO''). Accordingly, the Exchange proposes to
add the concept of the internal best bid and the internal best offer or
``internal PBBO'' in the order entry checks for a PIXL Auction in
Options 3, Section 13(a)(1) to account for a non-displayed better price
that may be available on the Exchange order book. The Exchange proposes
a similar change to Options 3, Section 13(a)(1)(A) which currently
provides, ``(A) $0.01 better than the NBBO on the opposite side of the
market from the PIXL Order . . .''. The Exchange would also add ``and
the internal PBBO.''
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\140\ See current Phlx Options 3, Section 5(d), an order will
not be executed at a price that trades through another market or
displayed at a price that would lock or cross another market. An
order that is designated by the member as routable will be routed in
compliance with applicable Trade-Through and Locked and Crossed
Markets restrictions. An order that is designated by a member as
non-routable will be re-priced in order to comply with applicable
Trade-Through and Locked and Crossed Markets restrictions. If, at
the time of entry, an order that the entering party has elected not
to make eligible for routing would cause a locked or crossed market
violation or would cause a trade-through violation, it will be re-
priced to the current national best offer (for bids) or the current
national best bid (for offers) as non-displayed, and displayed at
one minimum price variance above (for offers) or below (for bids)
the national best price.
\141\ Id.
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Example 13
Assume Phlx Market Maker quotes an option series at 1.09 (10) x 1.15
(10)
Next assume ABBO quotes that option series at 1.10 (10) x 1.11 (10)
Assume an order locks the ABBO quote with a buy order in that
options series of 5 @1.11
With the proposed repricing, this order would book at 1.11 and
display 1 MPV (Penny in this case) away at 1.10 on the order book
In this scenario:
[ssquf] the PIXL to buy 49 @1.10 would be rejected because it is not
priced better than the limit order on the limit order book on the
same side of the market
[ssquf] the PIXL to buy 49 @1.11 would be rejected because it is not
priced better than the limit order on the limit order book on the
same side of the market;
[ssquf] the PIXL to sell 49 @1.10 would be rejected because it is
not priced better than the NBBO or internal BBO on the opposite side
of the market; and
[ssquf] the PIXL to sell 49 @1.11 would be rejected because it is
not priced better than the internal BBO on the opposite side of the
market
The Exchange proposes similar changes within Options 3, Section
13(a)(2), if the PIXL Order is for the account of a Public Customer and
such order is for 50 options contracts or more, to add references to
``difference between the internal PBBO.'' Additionally, the Exchange
proposes to remove the words ``Reference BBO'' as
[[Page 39063]]
that term is no longer necessary. This proposed change aligns Phlx
Options 3, Section 13(a)(2) to ISE Options 3, Section 13(b)(2). Below
is an example of how the System would treat an order for 50 contracts
or more where the internal PBBO is greater than the NBBO with respect
to the rule text within Options 3, Section 13(a)(2).
Example 14
Assume Phlx Market Maker quotes an option series at 1.09 (10) x 1.15
(10)
Next assume ABBO quotes that option series at 1.10 (10) x 1.11 (10)
Assume an order locks the ABBO quote with a buy order in that option
series at 5 @1.11
With the proposed repricing this order would book at 1.11 and
display 1 MPV (penny in this case) away at 1.10 on the order book
In this scenario:
[ssquf] the PIXL to buy 50 @1.10 would be rejected because it is not
priced better than the limit order on the limit order book on the
same side of the market.
[ssquf] the PIXL to buy 50 @1.11 would be rejected because it is not
priced better than the limit order on the limit order book on the
same side of the market.
[ssquf] the PIXL to sell 50 @1.10 would be rejected because it is
not priced equal to better than the internal BBO on the opposite
side of the market; and
[ssquf] the PIXL to sell 50 @1.11 would be accepted because it is
equal to the internal BBO on the opposite side of the market and
would begin a PIXL auction.
Assuming no other interest arrives during the PIXL auction
timer, this order would trade at the end of the auction timer,
thereby filling the order 5 @1.11 and the remainder would allocate
to the contra side/counter side order.
Finally, the Exchange proposes to also amend Options 3, Section
13(a)(3) for a PIXL Order for the account of a broker dealer or any
other person or entity that is not a Public Customer and such order is
for 50 option contracts or more. Similar to the proposed changes to
Options 3, Section 13(a)(1), (a)(1)(A) and (a)(2), the Exchange would
add references to ``difference between the internal PBBO'' and remove
the term ``Reference BBO.'' Further, with respect to Options 3, Section
13(a)(3), the Exchange proposes to align the rule text to ISE Options
3, Section 13(b)(3) for the same side entry checks. The Exchange
proposes to state, if the PIXL Order (except if it is a Complex Order)
is for the account of a broker dealer or any other person or entity
that is not a Public Customer and such order is for 50 option contracts
or more, or if the difference between the NBBO or the difference
between the internal PBBO is greater than $0.01, the Initiating Member
must stop the entire PIXL Order (except if it is a Complex Order) at a
price that is: . . . on the same side of the market as the PIXL Order
(i) at least $0.01 better than any Limit Order or quote on the Phlx
order book, and (ii) equal to or better than the NBBO. With this
proposed change, the Exchange is relocating ``the better of'' and the
reference to the $0.01 to proposed Options 3, Section 13(a)(3)(B)(i).
This proposal aligns Phlx Options 3, Section 13(a)(3) to ISE Options 3,
Section 13(b)(3).
The Exchange proposes to amend Options 3, Section 13(a)(4) to
remove a reference to conforming ratios because that requirement is
covered in Options 3, Section 13(b)(4)(B). The Exchange also proposes
to amend Options 3, Section 13(b)(4)(A) and (B) to add the phrase ``on
both sides of the market'' to the Complex Order entry checks. Today,
Phlx's System checks to see if a PIXL Order is at a price that is
better than the best net price (debit or credit) available on the
Complex Order Book on both sides of the market, regardless of the
Complex Order book size, and also improves the net price that is
achievable from the best Phlx bids and offers for the individual
options on both sides of the market. The System check on both sides of
the market ensures a robust entry price to start a Complex PIXL
Auction. Also, the Exchange believes that noting ``both sides of the
market'' in the entry check provides greater transparency as to the
current System functionality. Additionally, the Exchange proposes to
remove the phrase ``provided in either case that such price is equal to
or better than the PIXL Order's limit price'' in Options 3, Section
13(b)(4)(B). The Exchange notes that this rule text is unnecessary
because with any two-sided order, it is a given that the prices must be
marketable to allow for execution of both sides.
Today, pursuant to Options 3, Section 13(a)(7), PIXL Orders
submitted during the final two seconds of the trading session in the
affected series are not eligible to initiate an Auction and will be
rejected. The Exchange proposes to remove this rule text and not
restrict the submission of a PIXL Order in the final two seconds of
trading.\142\ The Exchange believes that permitting orders in the final
two seconds would allow for the execution of additional PIXL auction
orders in a manner identical to ISE. To remain competitive with these
other options markets (ISE and Nasdaq MRX, LLC), Phlx would no longer
restrict these executions. The Exchange proposes to renumber current
Options 3, Section 13(a)(8) as ``7.''
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\142\ ISE Options 3, Section 13 PIM functionality does not
restrict the submission of a PIXL Order in the final two seconds of
trading.
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Currently, Phlx Options 3, Section 13(b)(1)(A) provides that once
commenced, an Auction may not be cancelled and shall proceed as
follows: (1) Auction Period and PIXL Auction Notification (``PAN'').
To initiate the Auction (except if it is a Complex Order), the
Initiating Member must mark the PIXL Order for Auction processing,
and specify either: (i) a single price at which it seeks to execute
the PIXL Order (a ``stop price''); (ii) that it is willing to
automatically match as principal or as agent on behalf of an
Initiating Order the price and size of all PAN responses, and
trading interest (``auto-match'') in which case the PIXL Order will
be stopped at the better of the NBBO or the Reference BBO on the
Initiating Order side; or (iii) that it is willing to either: a)
stop the entire order at a single stop price and auto-match PAN
responses and trading interest at a price or prices that improve the
stop price to a specified price (a ``Not Worse Than'' or ``NWT''
price); b) stop the entire order at a single stop price and auto-
match all PAN responses and trading interest at or better than the
stop price; or c) stop the entire order at the better of the NBBO or
Reference BBO on the Initiating Order side, and auto-match PAN
responses and trading interest at a price or prices that improve the
stop price up to the NWT price. In all cases, if the PBBO on the
same side of the market as the PIXL Order represents a Limit Order
on the book, the stop price must be at least $0.01 better than the
booked Limit Order's limit price. Once the Initiating Member has
submitted a PIXL Order for processing pursuant to this subparagraph,
such PIXL Order may not be modified or cancelled. Under any of the
circumstances described in subparagraphs (i)-(iii) above, the stop
price or NWT price may be improved to the benefit of the PIXL Order
during the Auction, but may not be cancelled. Under no circumstances
will the Initiating Member receive an allocation percentage, at the
final price point, of more than 50% with one competing quote, order
or PAN response or 40% with multiple competing quotes, orders or PAN
responses, when competing quotes, orders or PAN responses have
contracts available for execution.
Today, a member may specify (1) a single price at which it seeks to
execute the PIXL Order, (2) an instruction to auto-match at the market
price, or (3) an instruction to auto-match at a specified limit price.
The current language provides these options, but then goes on to
specify the variety of limit prices at which the order would stop the
PIXL Order.
With these amendments, Phlx proposes to simplify this language,
which is currently overcomplicated. The Exchange proposes to amend
Options 3, Section 13(b)(1)(A) to instead provide that to initiate the
Auction (except if it is a Complex Order), the Initiating member must
mark the PIXL
[[Page 39064]]
Order for Auction processing, and specify either: (i) a single price at
which it seeks to execute the PIXL Order (a ``stop price''); or (ii)
that it is willing to either: (a) stop the entire order at a single
stop price and automatically match as principal or as agent on behalf
of an Initiating Order the price and size of all PAN responses and
trading interest (``auto-match''); or (b) stop the entire order at a
single stop price and auto-match PAN responses and trading interest at
a price or prices that improve the stop price to a specified price (a
``Not Worse Than'' or ``NWT'' price). The Exchange believes that this
amended language is clear and concise.
As is the case today, if the PBBO on the same side of the market as
the PIXL Order represents a Limit Order on the book, the stop price
must be at least $0.01 better than the booked Limit Order's limit
price. Once the Initiating member has submitted a PIXL Order for
processing pursuant to this subparagraph, such PIXL Order may not be
modified or cancelled. Today, under any of the circumstances described
in subparagraphs (b)(i)-(iii) of Options 3, Section 13(b)(1)(A), the
stop price or NWT price may be improved to the benefit of the PIXL
Order during the Auction, but may not be cancelled. The Exchange
proposes to amend this sentence to provide, ``Under any of the
circumstances described in subparagraphs (i)-(ii) \143\ above, the NWT
price may be improved to the benefit of the PIXL Order during the
Auction, but may not be cancelled.'' The Exchange proposes to remove
the words ``stop price'' because this sentence is referring to auto-
match instructions being able to be modified to the benefit of the PIXL
Agency Order. Because the auto-match instructions cannot be canceled,
the Exchange believes it is more accurate to refer to NWT price only,
as that is the price that will be used when auto-matching.
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\143\ The Exchange proposes a technical amendment to change
``(iii)'' to ``(ii)'' given the amendments to the rule text.
---------------------------------------------------------------------------
The Exchange proposes to amend Phlx Options 3, Section 13(b)(1)(A)
to clarify that, under no circumstances will the Initiating member
receive an allocation percentage, at the final price point, of more
than 50% with one competing quote, order or PAN response or 40% with
multiple competing quotes, orders or PAN responses, except for
rounding, when competing quotes, orders or PAN responses have contracts
available for execution. The Exchange notes that rounding is an
exception to the applicable maximum percentage. This proposed rule text
aligns to current ISE PIM functionality. The Exchange also proposes to
note at proposed new Supplementary Material .01 to Options 3, Section
13 that if an allocation would result in less than one contract, then
one contract will be allocated. This new rule text aligns to ISE
Supplementary .03 to Options 3, Section 13. Of note, ISE rounds up
identical to Phlx's proposal. ISE Options 3, Section 13(d)(7) notes
that under no circumstances will the Initiating Member receive an
allocation percentage, at the final price point, of more than 40% of
the original size of the PIM Order with one or multiple competing
quote(s), order(s), or Improvement Order(s), except for rounding, when
competing quotes, orders, or Improvement Orders have contracts
available for execution.
The Exchange proposes to amend Options 3, Section 13(b)(1)(B) to
amend the sentence which states, ``Under any of the circumstances
described in sub-paragraphs (i)-(ii) above, the stop price or NWT price
may be improved to the benefit of the PIXL Order during the Auction,
but may not be cancelled.'' The Exchange proposes to remove the words
``stop price'' because this sentence is referring to auto-match
instructions being able to be modified to the benefit of the PIXL
Agency Order. Because the auto-match instructions cannot be canceled,
the Exchange believes it is more accurate to refer to NWT price only,
as that is the price that will be used when auto-matching.
The next paragraph within Options 3, Section 13(b)(1)(B) concerns
Surrender. When starting an Auction, the Initiating member may submit
the Initiating Order with a designation of ``surrender'' to the other
PIXL participants (``Surrender''), which will result in the Initiating
member forfeiting the priority and trade allocation privileges which
the participant is otherwise entitled to as per Options 3, Section
13(b)(5)(B)(i) and (ii). If Surrender is specified, the Initiating
Order will
[…truncated; see source link]Indexed from Federal Register on August 13, 2025.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.