Notice2025-16290
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt Electronic FLEX Options Rules
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
August 26, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 163 (Tuesday, August 26, 2025)</title>
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[Federal Register Volume 90, Number 163 (Tuesday, August 26, 2025)]
[Notices]
[Pages 41636-41673]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-16290]
[[Page 41635]]
Vol. 90
Tuesday,
No. 163
August 26, 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 Adopt Electronic
FLEX Options Rules; Notice
Federal Register / Vol. 90, No. 163 / Tuesday, August 26, 2025 /
Notices
[[Page 41636]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-103759; File No. SR-Phlx-2025-38]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Adopt Electronic
FLEX Options Rules
August 21, 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 13, 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
The Exchange proposes to adopt rules that will govern the listing
and trading of electronic flexible exchange options (``FLEX Options'').
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
The Exchange proposes to adopt rules in new Options 3A that will
govern the listing and trading of FLEX Options on the Exchange's
electronic market.\3\
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\3\ FLEX Options include both single-leg and Complex Order
options. If a particular rule only applies to a Complex Order, the
Exchange has noted that distinction in the rule text. See infra
notes 71-73.
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Summary
The Exchange is proposing this new functionality be implemented in
connection with a technology migration to enhanced Nasdaq, Inc.
(``Nasdaq'') functionality that will result in higher performance,
scalability, and more robust architecture.\4\ The Exchange intends to
begin implementation of the proposed rule change on November 3,
2025.\5\ Phlx will migrate to the new platform on a symbol-by-symbol
basis over 5 week period. The delayed implementation of the proposed
FLEX rules will ensure that the Exchange will have the necessary
functionality in place to trade FLEX. The Exchange will issue a public
notice to Exchange Phlx members \6\ and members organizations \7\
(collectively ``Members'') \8\ to highlight the features for FLEX
proposed hereunder.
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\4\ The Exchange separately proposed a number of rule filings in
connection with this technology migration. 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. See also 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. See also Securities Exchange
Act Release No. 103667 (August 8, 2025), 90 FR 39042 (August 13,
2025) (SR-Phlx-2025-35) (Notice of Filing and Immediate
Effectiveness of Proposed Rule Change To Amend PIXL and Adopt New
Auctions).
\5\ See <a href="https://www.nasdaqtrader.com/MicroNews.aspx?id=OTA2024-17">https://www.nasdaqtrader.com/MicroNews.aspx?id=OTA2024-17</a>.
\6\ 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 Options 1, Section 1(16).
\7\ 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 Options 1, Section 1(17).
\8\ The Exchange will utilize the terms ``member'' and ``member
organization'' for purposes of the rule text. For ease of reference,
the Exchange proposes to use the word ``Member'' to signify members
and member organization in this proposal.
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As proposed, FLEX Options will be customized options contracts that
will allow investors to tailor contract terms for exchange-listed
equity and index options. FLEX Options will be designed to meet the
needs of investors for greater flexibility in selecting the terms of
options within the parameters of the Exchange's proposed rules. FLEX
Options will not be preestablished for trading and will not be listed
individually for trading on the Exchange. Rather, investors will select
FLEX Option terms and will be limited by the parameters detailed below
in their selection of those terms. As a result, FLEX Options would
allow investors to specify more specific, individualized investment
objectives than may be available to them in the standardized options
market.
Today, Phlx permits members located on Phlx's trading floor to
transact FLEX Options pursuant to its FLEX rules at Options 8, Section
34. FLEX trading on the trading floor takes place in open outcry
subject to the Options 8 Rules which are specific to the trading
floor.\9\ Today, only Phlx members who are approved for trading on the
trading floor may transaction FLEX Options. The proposed FLEX
electronic rules would permit electronic Phlx members and member
organizations to transact options pursuant to the proposed Options 3A
rules similar to the electronic rules of other options exchanges.\10\
Finally, the Exchange notes that while ISE does not transact FLEX
Currency Options, these products are currently traded on Phlx's trading
floor today and will continue to be offered on Phlx's trading floor.
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\9\ See infra note 22.
\10\ See infra note 23.
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Some key features of the new electronic FLEX Options functionality
are as follows:
<bullet> System Availability: The Exchange will not conduct an
Opening Process pursuant to Options 3, Section 8 in FLEX Options.\11\
Orders in FLEX Options may only be submitted through an electronic FLEX
Auction, a FLEX Price Improvement XL (``FLEX PIXL''),
[[Page 41637]]
or a FLEX Solicited Order Mechanism (``FLEX SOM''), each as discussed
in detail below.\12\ Accordingly, the Exchange's simple and complex
order books will not be available for transactions in FLEX Options.\13\
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\11\ See proposed Options 3A, Section 8(a). Rather, Members may
begin submitting orders in FLEX Options into one of the proposed
auction mechanisms (i.e., electronic FLEX Auction, FLEX PIXL, and
FLEX Solicited Order Mechanism) once the underlying security is open
for trading. See proposed Options 3A, Section 8(b).
\12\ See proposed Options 3A, Section 11(a).
\13\ See proposed Options 3A, Section 10(a).
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<bullet> Terms: FLEX Options will be a type of put or call, and
will allow investors the flexibility to choose an exercise style of
American or European, an expiration date, a settlement type, and an
exercise price, all within the parameters specified in the proposed
rules.\14\ As discussed further below, FLEX Options will not be
permitted with identical terms as an existing non-FLEX Option series
listed on the Exchange.\15\
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\14\ As discussed later in this filing, proposed Options 3A,
Section 3(c) will govern FLEX Options terms.
\15\ At least one of the following terms must differ between
FLEX Options and non-FLEX Options on the same underlying security:
exercise date, exercise price, or exercise style. See proposed
Options 3A, Section 3(b)(1).
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<bullet> Priority: As discussed in detail below within the
respective sections for FLEX Auctions, FLEX PIXL, and FLEX SOM, the
Exchange will apply the same priority order for FLEX Options as it
applies today in its standard non-FLEX market, particularly in its
standard auction mechanisms such as its standard Solicited Order
Mechanism and standard PIXL. Specifically, the System \16\ shall
execute trading interest at the best price level within the System
before executing at the next best price. Public Customers shall have
priority over non-Public Customer interest at the same price with time
priority meaning that priority shall be afforded to Public Customer
orders in the sequence in which they are received by the System. As set
out in Options 1, Section 1(b)(46), 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).\17\
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\16\ The term ``System'' shall mean the automated system for
order execution and trade reporting owned and operated by the
Exchange which comprises: (i) an order execution service that
enables members to automatically execute transactions in option
series; and provides members with sufficient monitoring and updating
capability to participate in an automated execution environment;
(ii) a trade reporting service that submits ``locked-in'' trades for
clearing to a registered clearing agency for clearance and
settlement; transmits last-sale reports of transactions
automatically to the Options Price Reporting Authority (``OPRA'')
for dissemination to the public and industry; and provides
participants with monitoring and risk management capabilities to
facilitate participation in a ``locked-in'' trading environment; and
(iii) the data feeds described at Options 3, Section 23. See Options
1, Section 1(b)(57).
\17\ The term ``Professional'' means any person or entity that
(i) is not a broker or dealer in securities, and (ii) places more
than 390 orders in listed options per day on average during a
calendar month for its own beneficial account(s). Member
organizations must indicate whether orders are for Professionals.
See Option 1, Section 1(b)(45).
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Because of their composition, the Exchange believes that FLEX
Options may allow investors to more closely meet their individual
investment and hedging objectives by customizing options contracts for
the purpose of satisfying particular investment objectives that could
not be met by the standardized markets.
Background
The Commission approved the trading of FLEX Options in 1993.\18\ At
the time, the Chicago Board Options Exchange, Inc., now Cboe Exchange,
Inc. (``Cboe''), proposed FLEX Options based on the Standard and Poor's
Corporation 500 and 100 Stock Indexes.\19\ These FLEX Options were
offered as an alternative to an over-the-counter (``OTC'') market in
customized equity options.\20\ Several years after the initial
approval, the Commission approved the trading of additional FLEX
Options on specified equity securities.\21\ In its order, the
Commission provided: ``The benefits of the Exchanges' options markets
include, but are not limited to, a centralized market center, an
auction market with posted transparent market quotations and
transaction reporting, parameters and procedures for clearance and
settlement, and the guarantee of the OCC [Options Clearing Corporation]
for all contracts traded on the Exchange.'' \22\
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\18\ See Securities Exchange Act Release No. 31920 (February 24,
1993), 58 FR 12280 (March 3, 1993) (SR-CBOE-92-17) (Order Approving
and Notice of Filing and Order Granting Accelerated Approval to
Amendment Nos. 1, 2, 3, and 4 to Proposed Rule Changes by the
Chicago Board Options Exchange, Inc., Relating to FLEX Options).
\19\ See id.
\20\ See id.
\21\ See Securities Exchange Act Release No. 36841 (February 14,
1996), 61 FR 6666 (February 21, 1996) (SR-CBOE-95-43) (SR-PSE-95-24)
(Order Approving Proposed Rule Changes and Notice of Filing and
Order Granting Accelerated Approval of Amendments by the Chicago
Board Options Exchange, Inc. and the Pacific Stock Exchange, Inc.,
Relating to the Listing of Flexible Exchange Options on Specified
Equity Securities).
\22\ See id. The Exchange notes that the Commission found
pursuant to Rule 9b-1 under the Act, that FLEX Options, including
FLEX Equity Options, are standardized options for purposes of the
options disclosure framework established under Rule 9b-1 of the Act.
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The Exchange notes that FLEX Options are currently traded on Cboe,
NYSE American LLC (``NYSE American''), NYSE Arca, Inc. (``NYSE Arca''),
Nasdaq PHLX LLC (``Phlx''), Nasdaq ISE, LLC (``ISE''), and FLEX Equity
Options on BOX Exchange LLC (``BOX'').\23\ The Exchange further notes
that Cboe and ISE offer electronic FLEX trading while Cboe, NYSE
American, NYSE Arca, Phlx and BOX offer only open outcry trading of
FLEX Options on their respective trading floors.\24\ The Exchange now
proposes to allow for the trading of FLEX Options on its electronic
market \25\ in a manner that is identical to ISE's electronic FLEX
Options, with two exceptions. First, Phlx will retain its allocation
methodology \26\ as provided in Options 3, Section 10(a)(1)(A), (E),
and (F) with respect to allocation for Public Customers, Market Makers
and all other interest. Phlx's allocation methodology differs from
ISE's allocation methodology at Options 3, Section 10.\27\ Phlx
proposes to align to its current System behavior with respect to its
allocation methodology to provide increased consistency for Members
[[Page 41638]]
trading FLEX Options and non-FLEX Options on Phlx, as discussed in
detail below. Second, Phlx offers FLEX Currency Options unlike ISE.
Today, Phlx offer FLEX Currency Options on its trading floor \28\
subject to Options 8 Rules. Phlx proposes to likewise offer FLEX
Currency Options electronically. The proposed rule text related to FLEX
Currency Options is identical to Phlx Options 8, Section 34(f)(1)(C),
(f)(4)(A), (f)(5)(A), (i)(4), and (j)(a).
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\23\ See Cboe Rules 4.20-4.22 and 5.70-5.75, NYSE American Rules
900G-910G, NYSE Arca Rules 5.30-O-5.41-O, Phlx Options 8, Section
34, and BOX Rules 5055 and 7605. The Exchange also notes that BOX
recently received approval from the Commission to allow for the
trading of FLEX equity options on the BOX trading floor. See
Securities Exchange Act Release No. 100156 (May 15, 2024), 89 FR
44721 (May 21, 2024) (SR-BOX-2023-20). ISE received approval to
trade FLEX on November 22, 2024. See also Securities Exchange
Release Act No. 101720 (November 22, 2024), 89 FR 94986 (November
29, 2024) (SR-ISE-2024-12).
\24\ See supra notes 18-21.
\25\ Today, Phlx offers open outcry FLEX Options as described in
Options 8, Section 34. Phlx has filed two rule changes to amend its
FLEX Rules at Options 8, Section 34, which rule changes are
effective but will not be operative until the Phlx migration. See
Securities Exchange Act Release Nos. 97658 (June 7, 2023), 88 FR
38562 (June 13, 2023) (SR-Phlx-2023-22); and 102977 (May 2, 2025),
90 FR 19546 (May 8, 2025) (SR-Phlx-2025-20). This proposed rule
change will be operative at the same time as these aforementioned
rule changes when Phlx conducts its technology migration in November
2025.
\26\ Phlx's allocation model is different than ISE in that Phlx
allocates to Market Makers before allocating to all other non-Public
Customer 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. The Exchange notes that Public Customers on Phlx,
similar to Priority Customers on ISE, will continue to have priority
over other market participants.
\27\ Phlx filed rule proposals to adopt order types in Options
3, Section 7 that are identical to ISE Options 3, Section 7 order
types. 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. Also, Phlx adopted a SOM at
Options 3, Section 11(d) and (e) that is nearly identical to ISE's
SOM at Options 3, Section 11, but for the allocation model which is
identical to Phlx's allocation methodology at Options 3, Section 10.
In contrast, ISE utilizes its allocation methodology at ISE Options
3, Section 10. See also Securities Exchange Act Release No. 103667
(August 8, 2025), 90 FR 39042 (August 13, 2025) (SR-Phlx-2025-35)
(Notice of Filing and Immediate Effectiveness of Proposed Rule
Change To Amend PIXL and Adopt New Auctions).
\28\ Today, Phlx permits members located on Phlx's trading floor
to transact FLEX Options pursuant to its FLEX rules at Options 8,
Section 34. FLEX trading on the trading floor take place in open
outcry subject to the Options 8 Rules which are specific to the
trading floor. Today, only Phlx members who are approved for trading
on the trading floor may transaction FLEX Options. The proposed FLEX
electronic rules would permit electronic Phlx members and member
organizations to transact options pursuant to the proposed Options
3A rules similar to the electronic rules of other options exchanges.
The Exchange notes that the rules for FLEX on the trading floor
differ than the rules for FLEX electronic in some respects as it
relates to the manner in which an order is entered, responsibilities
that are specific to floor trading and outlined in the Options 8
Rules and some position limit requirements for FLEX trading.
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Proposal
Transactions in FLEX Options traded on the Exchange will generally
be subject to the same rules that apply to the trading of equity
options and index options. In order, however, to provide investors with
the flexibility to designate certain of the terms of the options, and
to accommodate other special features of FLEX Options and the way in
which they are traded, the Exchange proposes new rules applicable to
FLEX Options in new Options 3A, Sections 1-19.
A. General Provisions (Section 1)
Proposed Section 1(a) will set forth the applicability of Exchange
Rules, and will provide that Options 3A Rules will apply only to FLEX
Options and that trading of FLEX Options will be subject to all other
Rules applicable to the trading of options on the Exchange, unless
otherwise provided in Options 3A. The Exchange has conducted a thorough
review of its existing trading rules to ensure that the proposed Rules
in Options 3A accurately reflects the application of the Exchange's
non-FLEX Option trading rules to FLEX Options,\29\ as well as those
non-FLEX Option trading rules that would not apply to FLEX Options.\30\
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\29\ For example, Options 3, Section 1 (Hours of Business) will
apply to FLEX and non-FLEX Options, except the Exchange may
determine to narrow or otherwise restrict the trading hours for FLEX
Options. See proposed Options 3A, Section 2. As another example,
Options 3, Section 9 (Trading Halts) will apply to FLEX and non-FLEX
Options. The Exchange notes that pursuant to proposed Options 3A,
Section 9, it will always halt trading in a FLEX Option class when
trading in a non-FLEX Option class with the same underlying equity
security or index is halted on the Exchange. Furthermore, the System
does not accept a FLEX Order for a FLEX Option series while trading
in a FLEX Option class is halted.
\30\ For example, the Exchange's simple and complex order books
will not be available for transactions in FLEX Options. See proposed
Options 3A, Section 10. In addition, FLEX Options may not trade via
the Block Order Mechanism (Options 3, Section 11(a)), simple and
complex Facilitation Mechanism (Options 3, Section 11(b) and (c)),
or as simple and complex Customer Cross Orders (Options 3, Section
12(a) and (b)), simple and complex Qualified Contingent Cross
(``QCC'') Orders (Options 3, Section 12(c) and (d)), and simple and
complex QCC with Stock Orders (Options 3, Section 12(e) and (f))).
See also Securities Exchange Act Release No. 103667 (August 8,
2025), 90 FR 39042 (August 13, 2025) (SR-Phlx-2025-35) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
PIXL and Adopt New Auctions). If the Exchange intends to allow FLEX
Options to trade via any of the foregoing auction mechanisms or as
any of the foregoing crossing orders, the Exchange would be required
to file a proposed rule change with the Commission to amend its FLEX
rules to allow for the use of the foregoing trading functionality
for FLEX Options.
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Proposed Section 1(b) will set forth the definitions used
specifically in Options 3A, namely that the term ``FLEX Option'' means
a flexible exchange option. A FLEX Option on an equity security may be
referred to as a ``FLEX Equity Option,'' a FLEX Option on an index may
be referred to as a ``FLEX Index Option,'' and a FLEX Option on any
foreign currency, which is options-eligible pursuant to Options 4,
Section 3 and which underlies non-FLEX U.S. dollar-settled foreign
currency options that are trading on the Exchange, may be referred to
as a ``FLEX Currency Option.'' Further, the term ``FLEX Order'' means
an order submitted in a FLEX Option pursuant to Options 3A.
The Exchange also proposes to add the definition of ``FLEX Order''
in Options 3, Section 7 (Order Types) in new paragraph (z). While FLEX
Orders will also be defined in (and governed by) Options 3A, the
Exchange believes that it will be useful to market participants to have
the order types available on Phlx centralized within one rule.
B. Hours of Business (Section 2)
Proposed Section 2(a) will provide that the trading hours for FLEX
Options will be the same as the trading hours for corresponding non-
FLEX Options as set forth in Options 3, Section 1, except the Exchange
may determine to narrow or otherwise restrict the trading hours for
FLEX Options.\31\ Therefore, the trading hours for FLEX Options will
generally be 9:30 a.m. to 4:00 p.m. Eastern time, except for certain
options products that trade until 4:15 p.m. Eastern time.\32\ This
would align the proposed trading hours for FLEX Options with the
current trading hours for corresponding non-FLEX Options.
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\31\ See ISE Options 3A, Section 2 for identical provisions.
\32\ See Options 3, Section 1(b)-(e). These products are
currently options on Exchange-Traded Fund Shares (as defined in
Options 4, Section 3(h), options on Index-Linked Securities (as
defined in Options 4, Section 3(k)(1)), and options on certain
broad-based indexes, as designated by the Exchange.
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As it relates to the Exchange's proposed discretion relating to the
trading hours for FLEX Options, this is consistent with ISE's FLEX
Options rules as noted above. The Exchange believes that given the
unique nature of FLEX, in contrast to the non-FLEX market, it is
reasonable to permit the Exchange, in its discretion, to narrow or
otherwise restrict the trading hours for FLEX Options, so long as such
trading hours occur within the normal options trading hours of the
Exchange described above. The Exchange would provide adequate advance
notification to its Members of such changes in FLEX trading hours.
C. FLEX Option Classes and Permissible Series (Section 3(a) and (b))
Pursuant to proposed Section 3(a), the Exchange may authorize for
trading a FLEX Option class on any equity security (except the Fidelity
Wise Origin Bitcoin Fund; the ARK21Shares Bitcoin ETF, VanEck Bitcoin
ETF the iShares Ethereum Trust ETF, the Fidelity Ethereum Fund, the
Bitwise Ethereum ETF, the Grayscale Ethereum Trust, and the Grayscale
Ethereum Mini Trust (collectively ``Spot Crypto ETPs'')) or index if it
may authorize for trading a non-FLEX Option class on that equity
security or index pursuant to Options 4, Section 3 and Options 4A,
Section 3,\33\ respectively, even if the Exchange does not list that
non-FLEX Option class for trading.\34\ The Exchange proposes to exclude
Spot Crypto ETPs from being eligible for trading as a FLEX Option on
Phlx consistent with ISE Options 3A, Section 3(a). As discussed in the
position limits section below, there will generally be no position
limits for FLEX Equity Options.\35\ The Exchange therefore proposes to
exclude options on Spot Crypto ETPs from being eligible
[[Page 41639]]
to trade as a FLEX Option (namely, a FLEX ETF option) to continue to
limit the position limits for these options. For clarity, this
exclusion will apply to both physically-settled and cash-settled FLEX
ETF options (as further described in this filing), such that options on
Spot Crypto ETPs will be excluded from being eligible to trade as a
physically-settled or a cash-settled FLEX ETF option. If the Exchange
determines to allow FLEX trading on all or any of the options on Spot
Crypto ETPs later date, it will do so by submitting a 19b-4 rule filing
with the Commission.
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\33\ Options 4, Section 3 provides the criteria for the listing
of options on several different underlying types of securities,
including, for example, securities registered with the SEC under
Regulation NMS of the Act (``NMS stock'') and exchange-traded funds
(``ETFs''). Options 4A, Section provides the criteria for the
listing of options on indexes.
\34\ See ISE, Options 3A, Section 3(a) for identical provisions.
\35\ See proposed Options 3A, Section 18(b)(1)(A).
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Proposed Section 3(b) will provide that the Exchange may approve a
FLEX Option series for trading in any FLEX Option class it may
authorize for trading pursuant to proposed Section 3(a). FLEX Option
series are not pre-established. A FLEX Option series is eligible for
trading on the Exchange upon submission to the System of a FLEX Order
for that series pursuant to proposed Sections 11 through 13,\36\
subject to the following stipulations.\37\ First, the Exchange will
only permit trading in a put or call FLEX Option series that does not
have the same exercise style, same expiration date, and same exercise
price as a non-FLEX Option series on the same underlying security or
index that is already available for trading. This would include
permitting trading in a FLEX Option series before a series with
identical terms is listed for trading as a non-FLEX Option series. If
the Exchange lists for trading a non-FLEX Option series with identical
terms as a FLEX Option series, the FLEX Option series will become
fungible with the non-FLEX Option series pursuant to proposed paragraph
(d) of Section 3. The System would not accept a FLEX Order for a put or
call FLEX Option series if a non-FLEX Option series on the same
underlying security or index with the same expiration date, exercise
price, and exercise style is already listed for trading.\38\ Second, a
FLEX Order for a FLEX Option series may be submitted on any trading day
prior to the expiration date.\39\ For proposed Section 3(b)(2), on the
expiration date a FLEX Order for the expiring FLEX Option series may
only be submitted to close out a position in such expiring FLEX Option
series.\40\
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\36\ Proposed Sections 11 through 13 of Options 3A will govern
the electronic FLEX Auction, FLEX PIXL, and FLEX SOM, respectively.
As discussed later in this filing, FLEX Orders may only be submitted
through an electronic FLEX Auction, FLEX PIXL, or FLEX SOM.
\37\ See proposed Options 3A, Section 3(b), which is identical
to ISE Options 3A, Section 3(b).
\38\ See proposed Options 3A, Section 3(b)(1), which is
identical to ISE Options 3A, Section 3(b)(1).
\39\ See proposed Options 3A, Section 3(b)(2), which is
identical to ISE Options 3A, Section 3(b)(2) The Exchange notes that
it will System enforce which options are eligible to be submitted as
FLEX Options. As such, the System will reject at the outset a FLEX
Option transaction that does not conform to the terms of the FLEX
rules.
\40\ The Exchange will System enforce this provision such that
it will reject an opening position in an expiring FLEX Option series
on the day of expiration.
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Third, in the event the relevant expiration is a holiday pursuant
to General 3 (which incorporates Nasdaq General 3, Rule 1030 by
reference),\41\ proposed Section 3(d) will apply to options with an
expiration date that is the business day immediately preceding the
holiday, except for Monday-expiring Weekly Expirations (as defined in
Options 4A, Section 3), in which case proposed Section 3(d) will apply
to options with an expiration date that is a business day immediately
following the holiday.\42\
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\41\ Phlx General 3 incorporates by reference Series 1000 in
General 3 of the Rules of The Nasdaq Stock Market, LLC (``Nasdaq'')
(including Nasdaq Rule 1030).
\42\ See proposed Options 3A, Section 3(b)(3), which identical
to ISE Options 3A, Section 3(b)(3).
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D. FLEX Options Terms (Section 3(c))
Proposed Section 3(c) will specify the terms that must be included
in a FLEX Order.\43\ Specifically, when submitting a FLEX Order for a
FLEX Option series to the System, the submitting Member must include
one of each of the terms detailed in proposed subparagraphs (1)-(6) of
Section 3(c) in the FLEX Order (all other terms of a FLEX Option series
are the same as those that apply to non-FLEX Options), provided that a
FLEX Equity Option overlying an ETF (cash- or physically-settled) may
not be the same type (put or call) and may not have the same exercise
style, expiration date, and exercise price as a non-FLEX Equity Option
overlying the same ETF,\44\ which terms constitute the FLEX Option
series.
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\43\ See ISE Options 3A, Section 3(c) for identical provisions.
\44\ The Exchange will discuss cash-settled FLEX Equity Options
overlying an ETF (``cash-settled FLEX ETFs'') later in this filing.
As discussed below, the Commission previously approved a rule filing
by NYSE American to permit the listing and trading of this product,
and Cboe recently filed an immediately effective rule change based
on NYSE American's filing. See infra notes 251 and 252. ISE also
received approval to list cash-settled FLEX ETFs. See also
Securities Exchange Release Act No. 101720 (November 22, 2024), 89
FR 94986 (November 29, 2024) (SR-ISE-2024-12).
---------------------------------------------------------------------------
As noted in proposed Options 3A, Section 3(b)(1), the Exchange only
permits trading in a put or call FLEX Option series that does not have
the same exercise style, same expiration date, and same exercise price
as a non-FLEX Option series on the same underlying security or index
that is already available for trading. Pursuant to proposed Options 3A,
Section 3(c)(5)(A)(ii), certain FLEX Equity Options where the
underlying security is an Exchange-Traded Fund are permitted to be
settled by delivery in cash if the underlying security meets prescribed
criteria. For FLEX ETF Options that qualify for cash-settlement
pursuant to proposed Options 3A, Section 3(c)(5)(A)(ii), at least one
of the following terms--exercise style, expiration date and exercise
price--must differ from standard options in the non-FLEX market. FLEX
Equity Options, which are not FLEX ETF Options that qualify for cash-
settlement pursuant to proposed Options 3A, Section 3(c)(5)(A)(ii), are
always settled with physical delivery of the underlying security
pursuant to proposed Options 3A, Section 3(c)(5)(A)(i). FLEX Index
Options are always cash-settled pursuant to proposed Options 3A,
Section 3(c)(5)(B).
As proposed, the submitting Member must specify the following terms
in the FLEX Order: (1) underlying equity security or index, as
applicable (the index multiplier for FLEX Index Options is 100); \45\
(2) type of option (i.e., put or call); \46\ (3) exercise style, which
may be American-style or European-style, except that for a FLEX
Currency Option the exercise style shall be European style; \47\ (4)
expiration date, which may be any business day (specified to the day,
month, and year) no more than 15 years from the date on which a Member
submits a FLEX Equity Option or FLEX Index Option to the System, and no
more than 3 years from the date on which an executed FLEX Currency
Option is submitted to the System with exercise settlement value on the
expiration date determined by reference to the reported level of the
index as derived from the opening prices of the component securities
(``a.m. settlement'') or closing prices (``p.m. settlement''); \48\ (5)
settlement type for the FLEX Equity Option, FLEX
[[Page 41640]]
Index Option, or FLEX Currency Option, as applicable; \49\ and (6)
exercise price, which may be in increments no smaller than $0.01.\50\
Further, the Exchange may determine the smallest increment for exercise
prices of FLEX Options on a class-by-class basis without going lower
than $0.01.\51\ The Exchange notes that the exercise price of the FLEX
Option would generally be dependent on the price of the underlying
security.
---------------------------------------------------------------------------
\45\ See proposed Options 3A, Section 3(c)(1), which is
identical to ISE Options 3A, Section 3(c)(1).
\46\ See proposed Options 3A, Section 3(c)(2), which is
identical to ISE Options 3A, Section 3(c)(2).
\47\ See proposed Options 3A, Section 3(c)(3), which is
identical to ISE Options 3A, Section 3(c)(3) and Phlx Options 8,
Section 34(f)(A) (FLEX Currency Options).
\48\ See proposed Options 3A, Section 3(c)(4), which is
identical to ISE Options 3A, Section 3(c)(4) and Phlx Options 8,
Section 34(f)(5)(A) (FLEX Currency Options). All FLEX Currency
Options will expire at 11:59 p.m. eastern time on their designated
expiration date
\49\ See proposed Options 3A, Section 3(c)(5), which is
identical to ISE Options 3A, Section 3(c)(5).
\50\ See proposed Options 3A, Section 3(c)(6), which is
identical to ISE Options 3A, Section 3(c)(6).
\51\ See proposed Options 3A, Section 3(c), which is identical
to ISE Options 3A, Section 3(c). As noted above, the Exchange does
not offer these capabilities today for non-FLEX index options. The
Exchange will also clarify that it would not go lower than $0.01
when determining the smallest increment for exercise prices of FLEX
Options to make clear that it would stay within the stated confines
of this Rule.
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As it relates to the settlement type for FLEX Equity Options, the
Exchange proposes in subparagraph (c)(5)(A)(i) of Options 3A, Section 3
that FLEX Equity Options, other than as permitted in proposed
subparagraphs (c)(5)(A)(ii) and (iii), are settled with physical
delivery of the underlying security. Proposed subparagraph
(c)(5)(A)(ii) will allow for the cash-settlement of certain qualifying
FLEX Equity Options with an underlying security that is an ETF.\52\
Proposed subparagraph (c)(5)(A)(iii) will provide that FLEX Equity
Options are subject to the exercise by exception provisions of OCC Rule
805.
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\52\ As discussed later in this filing, the Exchange is
proposing to list and trade cash-settled FLEX ETFs in the same
manner as ISE.
---------------------------------------------------------------------------
As it relates to the settlement type for FLEX Index Options, the
Exchange proposes in subparagraphs (c)(5)(B)(i) and (ii) of Options 3A,
Section 3 that FLEX Index Options are settled in U.S. dollars, and may
be either a.m.-settled (with exercise settlement value determined by
reference to the reported level of the index derived from the reported
opening prices of the component securities) or p.m.-settled (with
exercise settlement value determined by reference to the reported level
of the index derived from the reported closing prices of the component
securities). The Exchange notes that Cboe received approval of its
pilot program that permitted it to list p.m.-settled FLEX Index Options
whose exercise settlement value is derived from closing prices on the
last trading day prior to expiration that expire on or within two
business days of a third Friday-of-the-month expiration day for a non-
FLEX Option (``FLEX PM Third Friday Options'').\53\ Consistent with the
Commission's approval of Cboe's and ISE's proposal, the Exchange is
proposing to allow the listing of FLEX PM Third Friday Options on Phlx
as well, and will align proposed Section 3(c)(5)(B)(ii) with ISE
Options 3A, Section 3(c)(5)(B)(ii).\54\
---------------------------------------------------------------------------
\53\ See Securities Exchange Act Release No. 99222 (December 21,
2023), 88 FR 89771 (December 28, 2023) (SR-CBOE-2023-018) (``FLEX
Settlement Pilot Approval''). In support of making the pilot a
permanent program, Cboe cited to its own review of pilot data during
the course of the pilot program and a study by the Commission's
Division of Economic and Risk Analysis (``DERA'') staff. See FLEX
Settlement Pilot Approval, notes 18 and 35. ISE also received
approval to list FLEX PM Third Friday Options. See also Securities
Exchange Release Act No. 101720 (November 22, 2024), 89 FR 94986
(November 29, 2024) (SR-ISE-2024-12).
\54\ The only broad-based indexes option that would be able to
list as a FLEX PM Third Friday Option is the Nasdaq-100 Index option
(``NDX'' or ``NDX options'') and options based on 1/100 the value of
the Nasdaq-100 (``XND'' or ``XND options''). The Exchange notes that
Cboe lists both NDX and XND electronic FLEX options today pursuant
to a license agreement with Nasdaq. Phlx received approval to permit
the listing of a third-Friday-of-the-month p.m. expiration on NDX
and XND options its standardized market. See Securities Exchange Act
Release No. 98950 (November 15, 2023), 88 FR 81172 (November 21,
2023) (SR-Phlx-2023-45) (Order Approving a Proposed Rule Change To
Permit the Listing and Trading of P.M.-Settled Nasdaq-100 Index
Options With a Third-Friday-of-the-Month Expiration).
---------------------------------------------------------------------------
As it relates to the settlement type for FLEX Currency Options, the
Exchange proposes in subparagraphs (c)(5)(C) of Options 3A, Section 3
that the settlement value for FLEX Currency Options on the Australian
dollar, the Euro, the British pound, the Canadian dollar, the Swiss
franc, the Japanese yen, the Mexican peso, the Brazilian real, the
Chinese yuan, the Danish krone, the New Zealand dollar, the Norwegian
krone, the Russian ruble, the South African rand, the South Korean won,
and the Swedish krona shall be the Exchange Spot Price at 12:00:00
Eastern Time (noon) on expiration day, unless the Exchange determines
to apply an alternative closing settlement value as a result of
extraordinary circumstances. FLEX Currency Options are settled in U.S.
dollars. FLEX Currency Options will cease trading at 10:15 a.m. eastern
time on their designated expiration date. Phlx offers FLEX Currency
Options at Options 4C both electronically and on its trading floor. The
proposed rule text is identical to Phlx Options 8, Section
34(f)(6)(C).\55\
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\55\ Phlx amended Options 8, Section 34 in SR-Phlx-2025-20. See
Securities Exchange Act Release Nos. 97658 (June 7, 2023), 88 FR
38562 (June 13, 2023) (SR-Phlx-2023-22); and 102977 (May 2, 2025),
90 FR 19546 (May 8, 2025) (SR-Phlx-2025-20). This proposed rule
change will be operative at the same time as these aforementioned
rule changes when Phlx conducts its technology migration in November
2025.
---------------------------------------------------------------------------
E. FLEX Fungibility (Section 3(d))
Proposed Section 3(d)(1)(A) will provide that if the Exchange lists
for trading a non-FLEX Option series with identical terms as a FLEX
Option series, all existing open positions established under the FLEX
trading procedures will become fully fungible with transactions in the
identical non-FLEX Option series.\56\ In addition, proposed Section
3(d)(1)(B) will provide that any further trading in the series would be
as non-FLEX Options subject to non-FLEX trading procedures and
Rules.\57\ The foregoing provisions are identical to ISE Options 3A,
Section 3(d)(1)(A).
---------------------------------------------------------------------------
\56\ An open position resulting from a transaction on the
Exchange becomes fungible post-trade and is separate from the
execution occurring on the Exchange. For example, assume a Member
buys one (1) American style AAPL call option expiring on October 9,
2024, with a strike price of 150, which is a FLEX series because
there is no standard option listed with those same terms. Now
assume, while holding this position, a standard option with the same
terms is listed (American style AAPL call option expiring on October
9, 2024, with a strike price of 150). After this standard option is
listed, the Member purchases one (1) contract in this non-FLEX
option series. After this second transaction, the Participant will
have an open position of two (2) contracts in the standard AAPL call
expiring on October 9, 2024, with a 150 strike price.
\57\ This includes all priority and trade-through provisions on
the Exchange. See, e.g., Options 3, Section 10 and Options 5,
Section 2.
---------------------------------------------------------------------------
Notwithstanding the above, if a non-FLEX Option series \58\ is
added intraday, for the balance of that trading day, a position
established under the FLEX trading procedures may be closed using the
FLEX trading procedures in Options 3A against another closing only FLEX
position. No FLEX Orders may be submitted into an electronic auction
pursuant to Sections 11(b), 12, or 13 below for a FLEX Option series
with the same terms as the non-FLEX Option series, unless the FLEX
Order is a closing order, and it is the day on which the non-FLEX
Option series was added intraday. Members may only submit responses
that close out existing FLEX positions.\59\ In the event the non-FLEX
Option series is added on a trading day after the position is
established, the holder or writer of a FLEX Option position established
under the FLEX trading procedures would be permitted to close such
position as a non-FLEX transaction consistent with the
[[Page 41641]]
requirements of subsection (d)(1) of this rule.\60\ The Exchange will
notify Members when a FLEX Option series is restricted to closing only
transactions. The System will reject a transaction in such a restricted
series that does not conform to the requirements specified in proposed
Options 3A, Section 3(d).\61\
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\58\ Similar to ISE, the Exchange would apply the closing-only
provisions to all non-FLEX Option series (i.e., American-style and
European-style FLEX Option series). As such, the Exchange's proposed
language in Options 3A, Section 3(d)(2)(A) will provide that the
Exchange's closing-only provisions would apply ``if a non-FLEX
Option is added intraday.'' This is identical to ISE Options 3A,
Section 3(d)(2)(A).
\59\ See proposed Options 3A, Section 3(d)(2)(A), which is
identical to ISE Options 3A, Section 3(d)(2)(A).
\60\ See proposed Options 3A, Section 3(d)(2)(B), which is
identical to ISE Options 3A, Section 3(d)(2)(B). The Exchange is
adding this language to clarify how it would handle open FLEX
positions if an identical non-FLEX Option series is added on the day
after.
\61\ See proposed Options 3A, Section 3(d)(2), which is
identical to ISE Options 3A, Section 3(d)(2). The Exchange's System
will enforce the rejection of FLEX Options that are fully fungible
with a non-FLEX Option.
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F. Units of Trading; Minimum Trading Increments (Sections 4 and 5)
Proposed Section 4(a) of Options 3A will provide that bids and
offers for FLEX Options must be expressed in U.S. dollars and decimals
in the minimum increments as set forth in proposed Section 5.\62\
Proposed Section 5(a) will provide that the Exchange would determine
the minimum increment for bids and offers on FLEX Options on a class-
by-class basis, which may not be smaller than $0.01 for the options leg
of a FLEX Option.\63\ Proposed Section 5(b) will provide that for the
stock leg of a FLEX Option, the minimum increments are set forth in
Options 3A, Section 11(b)(1)(G), Section 12(a)(5), and Section
13(a)(5). As discussed later in this filing, the foregoing rules
specify how minimum increments for complex FLEX Orders (including
complex FLEX Orders with a stock component) would be handled. The
Exchange is adding these cross cites in the minimum increments rule in
proposed Options 3A, Section 5(b) for transparency and clarity.
---------------------------------------------------------------------------
\62\ See identical rule text at ISE Options 3A, Section 4(a).
\63\ See identical rule text at ISE Options 3A, Section 5(a).
---------------------------------------------------------------------------
G. Types of Orders; Order and Quote Protocols (Section 6)
Pursuant to proposed Section 6(a), the Exchange may determine to
make only the Limit Order and Cancel and Replace Order types \64\ and
Immediate-or-Cancel times-in-force,\65\ respectively, in Options 3,
Section 7 available on a class or System basis for FLEX Orders.\66\ The
Exchange notes that it currently has the authority to make certain
order types and TIFs available on a class or System basis for non-FLEX
Options pursuant to Options 3, Section 7, and therefore proposes to
have similar authority with respect to FLEX Options.
---------------------------------------------------------------------------
\64\ See Options 3, Sections 7(b) and 7(f) for a description of
Limit Orders and Cancel and Replace Orders, respectively. All of the
other order types listed in Options 3, Section 7 (such as Customer
Cross Orders, Qualified Contingent Cross Orders, QCC with Stock
Orders, Block Orders, and Facilitation Orders) do not apply to FLEX.
See Securities Exchange Act Release No. 101989 (December 30, 2024),
89 FR 106888 (December 30, 2024) (SR-Phlx-2024-71) which is
effective but not yet operative. SR-Phlx-2024-71 will be operative
at the same time as this rule change.
\65\ See Supplementary Material .02(d) to Options 3, Section 7
for a description of Immediate-or-Cancel. All of the other TIFs in
Supplementary Material .02 to Options 3, Section 7 will not apply to
FLEX. See Securities Exchange Act Release No. 101989 (December 30,
2024), 89 FR 106888 (December 30, 2024) (SR-Phlx-2024-71) which is
effective but not yet operative. SR-Phlx-2024-71 will be operative
at the same time as this rule change.
\66\ See Options 3, Section 7 for descriptions of these order
types and times-in-force. See Securities Exchange Act Release No.
101989 (December 30, 2024), 89 FR 106888 (December 30, 2024) (SR-
Phlx-2024-71) which is effective but not yet operative. SR-Phlx-
2024-71 will be operative at the same time as this rule change.
---------------------------------------------------------------------------
Proposed Section 6(b) will provide that only the following order
and quote protocols in Supplementary Material .03 to Options 3, Section
7 will be available for FLEX Orders, FLEX auction notifications, and
FLEX auction responses: \67\
---------------------------------------------------------------------------
\67\ Notes 63-65 below describe what features are available on
these protocols today for non-FLEX Options. The Exchange is
proposing to specify that some of these features (i.e., sending/
receiving FLEX Orders, FLEX notifications and FLEX responses) will
be available for FLEX Options through the specified protocols as
described above. While other basic features will be available for
FLEX Options (for example, the options symbol directory will be
available for FLEX Options), the Exchange is proposing to specify
the particular features in proposed Options 3A, Section 6(b) to
highlight the most important features that would be available
through these protocols for FLEX trading.
<bullet> FIX: \68\ FLEX Orders and FLEX auction responses
---------------------------------------------------------------------------
\68\ ``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; and (4) post trade
allocation messages. See Supplementary Material .03(a) to Options 3,
Section 7.
---------------------------------------------------------------------------
<bullet> OTTO: \69\ FLEX Orders, FLEX auction notifications, and FLEX
auction responses
---------------------------------------------------------------------------
\69\ ``Ouch to Trade Options'' or ``OTTO'' is an interface that
allows member organizations and their Sponsored Customers to
connect, send, and receive messages related to orders, auction
orders, and auction responses to the Exchange. Features include the
following: (1) options symbol directory messages (e.g., underlying
and complex instruments); (2) system event messages (e.g., start of
trading hours messages and start of opening); (3) trading action
messages (e.g., halts and resumes); (4) execution messages; (5)
order messages; (6) risk protection triggers and cancel
notifications; (7) auction notifications; (8) auction responses; and
(9) post trade allocation messages. See Supplementary Material
.03(b) to Options 3, Section 7.
---------------------------------------------------------------------------
<bullet> SQF: \70\ FLEX auction notifications and FLEX auction
responses
---------------------------------------------------------------------------
\70\ ``Specialized Quote Feed'' or ``SQF'' is an interface that
allows Lead Market Makers, Streaming Quote Traders (``SQTs'') and
Remote Streaming Quote Traders (``RSQTs'') to connect, send, and
receive messages related to quotes, Immediate-or-Cancel Orders, and
auction responses into and from the Exchange. Features include the
following: (1) options symbol directory messages (e.g., underlying
and complex instruments); (2) system event messages (e.g., start of
trading hours messages and start of opening); (3) trading action
messages (e.g., halts and resumes); (4) execution messages; (5)
quote messages; (6) Immediate-or-Cancel Order messages; (7) risk
protection triggers and purge notifications; (8) opening imbalance
messages; (9) auction notifications; and (10) auction responses. The
SQF Purge Interface only receives and notifies of purge requests
from the Lead Market Maker, SQT or RSQT. Lead Market Makers, SQTs
and RSQTs may only enter interest into SQF in their assigned options
series. Immediate-or-Cancel Orders entered into SQF are not subject
to the Order Price Protection, the Market Order Spread Protection,
or Size Limitation in Options 3, Section 15(a)(1), (a)(2) and
(b)(2), respectively. See Supplementary Material .03(c) to Options
3, Section 7.
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H. Complex Orders (Section 7)
Pursuant to proposed Section 7(a), the Exchange may make complex
orders, including a Complex Options Order,\71\ Stock-Options Order,\72\
and Stock-Complex Order \73\ available for FLEX
[[Page 41642]]
trading. Complex FLEX Orders may have up to the maximum number of legs
determined by the Exchange.\74\ Each leg of a complex FLEX Order: (1)
must be for a FLEX Option series authorized for FLEX trading with the
same underlying equity security or index; (2) must have the same
exercise style (American or European); and (3) for a FLEX Index Option,
may have a different settlement type (a.m.-settled or p.m.-
settled).\75\ The Exchange notes that a non-FLEX complex order can have
both a.m.-settled and p.m.-settled legs today. The Exchange received
approval to permit the listing and trading of p.m.-settled NDX and XND
options pursuant to Supplementary Material .07[sic] to Options 4A,
Section 12.\76\ Specifically, the Exchange is permitted to list p.m.-
settled NDX and XND options that expire (1) on any Monday, Tuesday,
Wednesday, Thursday, or Friday (other than the third Friday-of-the-
month or days that coincide with an end-of-month expiration) \77\ or
(2) on the last day of the trading month.\78\ In addition, NDX and XND
options are also currently allowed to be listed as p.m.-settled with a
standard expiration (i.e., the third-Friday-of-the-month) in addition
to a.m.-settled.\79\ Therefore, Phlx may currently list NDX and XND
options that are both a.m.-settled and p.m.-settled for its non-FLEX
market. As such, the Exchange's FLEX proposal for complex orders in
this respect will align with ISE's current FLEX complex order
functionality as noted above,\80\ but will also align with its own
current non-FLEX complex order functionality.
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\71\ A Complex Options Order is an order for a Complex Options
Strategy, which is the simultaneous purchase and/or sale of two or
more different options series in the same underlying security, for
the same account, in a ratio that is equal to or greater than one-
to-three (.333) and less than or equal to three-to-one (3.00) and
for the purpose of executing a particular investment strategy. See
Options 3, Section 14(a)(1) which was amended 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.
\72\ A Stock-Option Order is an order for a Stock-Option
Strategy, which is the purchase or sale of a stated number of units
of an underlying stock or a security convertible into the underlying
stock (``convertible security'') coupled with the purchase or sale
of options contract(s) on the opposite side of the market
representing either (A) the same number of units of the underlying
stock or convertible security, or (B) the number of units of the
underlying stock necessary to create a delta neutral position, but
in no case in a ratio greater than eight-to-one (8.00), where the
ratio represents the total number of units of the underlying stock
or convertible security in the option leg to the total number of
units of the underlying stock or convertible security in the stock
leg. See Options 3, Section 14(a)(2) which was amended 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.
\73\ A Stock-Complex Order is an order for a Stock-Complex
Strategy, which is the purchase or sale of a stated number of units
of an underlying stock or a security convertible into the underlying
stock (``convertible security'') coupled with the purchase or sale
of a Complex Options Strategy on the opposite side of the market
representing either (A) the same number of units of the underlying
stock or convertible security, or (B) the number of units of the
underlying stock necessary to create a delta neutral position, but
in no case in a ratio greater than eight-to-one (8.00), where the
ratio represents the total number of units of the underlying stock
or convertible security in the option legs to the total number of
units of the underlying stock or convertible security in the stock
leg. See Options 3, Section 14(a)(3) which was amended 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.
\74\ The Exchange will initially permit a maximum of 10 legs.
\75\ See identical rule text at ISE Options 3A, Section 7(a).
\76\ See Securities Exchange Act Release No. 98950 (November 15,
2023), 88 FR 81172 (November 21, 2023) (SR-Phlx-2023-45) (Order
Approving a Proposed Rule Change To Permit the Listing and Trading
of P.M.-Settled Nasdaq-100 Index Options With a Third-Friday-of-the-
Month Expiration).
\77\ See Options 4A, Section 12(b)(6)(A).
\78\ See Options 4A, Section 12(b)(6)(B).
\79\ See Options 4A, Section 12(a)(5).
\80\ See identical rule text at ISE Options 3A, Section 7(a).
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Pursuant to proposed Section 7(b), complex FLEX Orders will not
have to adhere to the ratio requirements in Options 3, Sections
14(a)(1)-(3). Options 3, Sections 14(a)(1)-(3) currently includes the
complex ratio requirements for Complex Options Strategies, Stock-
Options Strategies, and Stock-Complex Strategies.\81\ The Exchange is
not changing the complex ratio requirements for non-FLEX complex orders
under this proposal. Instead, it is proposing to offer this feature
only for complex FLEX Orders so that Members may submit complex FLEX
Orders with any ratio.\82\
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\81\ See supra notes 71-73.
\82\ For instance, the Exchange may permit Complex Options
Strategies with a ratio on the options legs less than one-to-three
(.333) or greater than three-to-one (3.00), and Stock-Option
Strategies with a ratio greater than eight-to-one (8.00), where the
ratio represents the total number of units of the underlying stock
or convertible security in the option leg(s) to the total number of
units of the underlying stock or convertible security in the stock
leg. See Options 3, Section 14 which 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.
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I. Opening of FLEX Trading (Section 8)
Proposed Section 8(a) will specify that there will be no Opening
Process \83\ pursuant to Options 3, Section 8 in FLEX Options. Instead,
as specified in proposed Section 8(b), Members may begin submitting
FLEX Orders into an electronic FLEX Auction pursuant to proposed
Section 11(b), a FLEX PIXL pursuant to proposed Section 12, or a FLEX
SOM pursuant to proposed Section 13 when the underlying security is
open for trading.\84\ The Exchange will also make clear in proposed
Section 8(b) that for FLEX Index Options, the term ``underlying
security'' will have the same meaning as defined in Options 4A, Section
2(a)(19).\85\
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\83\ As described in Options 3, Section 8(d)(i), Phlx's
``Opening Process'' for an option series will be conducted pursuant
to paragraphs (f)-(k) below on or after 9:30 a.m. Eastern Time if:
the ABBO, if any, is not crossed; and the System has received,
within two minutes (or such shorter time as determined by the
Exchange and disseminated to membership on the Exchange's website)
of the opening trade or quote on the market for the underlying
security, a Valid Width Quote. The System will accept a Lead Market
Maker's Valid Width Quote or the Valid Width Quote of at least one
Competitive Market Maker. The term ``Away Best Bid or Offer'' or
``ABBO'' means the displayed National Best Bid or Offer not
including the Exchange's Best Bid or Offer. See Options 1, Section
1(b)(5).
\84\ See proposed Options 3A, Section 8(a) and (b), which is
identical to ISE Options 3A, Section 8(a) and (b).
\85\ Options 4A, Section 2(a)(19) states that the term
``underlying security'' or ``underlying securities'' with respect to
an index options contract means any of the securities that are the
basis for the calculation of the index.
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Because market participants incorporate transaction prices of
underlying securities or the values of underlying indexes when pricing
options (including FLEX Options), the Exchange believes that it will
benefit investors for FLEX Options trading to not be available until
that information has begun to be disseminated in the market (i.e., when
the security opens for trading).
Additionally, the Exchange's Opening Process is used to open or
reopen a series of options on Phlx at a single opening price.\86\ There
is a period of time before an options series opens during which orders
placed on the Exchange's order book do not generate trade executions
but may participate in the Opening Process.\87\ As noted above, FLEX
Options will not be placed on the Exchange's simple and complex order
books and therefore will not have an Opening Process.\88\ FLEX Options
are created with terms unique to individual investment objectives. As
such, each investor may require FLEX Options with slightly different
terms than those already created. These individually defined FLEX
Options are customized for each investor, so the Opening Process may
not be useful for investors who may create their own FLEX Options
because the Opening Process is designed, in part, to determine a single
opening, or reopening, price based on orders and quotes from multiple
Members. With the bespoke nature of FLEX Options, there is not the
opportunity, nor the need, to bring together multiple orders and quotes
as part of an Opening Process.
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\86\ See Options 3, Section 8(i) and (k).
\87\ See Options 3, Section 8(d).
\88\ See proposed Options 3A, Section 10(a). Instead, Members
will be required to submit FLEX Orders into an electronic FLEX
Auction, FLEX PIXL, or FLEX SOM. See proposed Options 3A, Section
11(a).
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J. Trading Halts (Section 9)
Proposed Section 9 will provide that the Exchange may halt trading
in a FLEX Option class pursuant to Options 3, Section 9, and always
halts trading in a FLEX Option class when trading in a non-FLEX Options
class with the same underlying equity security or index is halted on
the Exchange. The System will not accept a FLEX Order for a FLEX
[[Page 41643]]
Option series while trading in a FLEX Option class is halted.\89\
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\89\ See ISE Options 3A, Section 9 for identical rule text.
---------------------------------------------------------------------------
K. Exchange Order Books (Section 10)
Proposed Section 10 will provide that the Exchange's simple and
complex order books will not be available for transactions in FLEX
Options. Accordingly, FLEX Options may only be traded on the Exchange
by submitting FLEX Orders into a FLEX Electronic Auction pursuant to
proposed Options[sic] 11(b), FLEX PIXL pursuant to proposed
Options[sic] 12, and FLEX SOM pursuant to proposed Options[sic] 13,
each as discussed further below. The Exchange notes that its proposal
is in line with other options exchanges' FLEX rules that do not
contemplate the interaction of their respective order books with FLEX
transactions.\90\
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\90\ See e.g., ISE Options 3A, Section 10 and NYSE Arca Rule
5.30-O(c). See also Securities Exchange Act Release No. 87235
(October 4, 2019), 84 FR 54671 (October 10, 2019) (SR-CBOE-2019-084)
(among other changes, eliminating the availability of an electronic
book for FLEX Options).
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L. FLEX Options Trading (Section 11)
Proposed Section 11 will describe the procedures for FLEX trading
on the Exchange. Specifically, a FLEX Option series will only be
eligible for trading if a Member submits a FLEX Order for that series
into an electronic FLEX Auction pursuant to proposed paragraph (b) of
Options[sic] 11, or submits the FLEX Order to a FLEX PIXL or FLEX SOM
Auction pursuant to proposed Section 12 or Section 13,
respectively.\91\
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\91\ See proposed Options 3A, Section 11(a), which is identical
to ISE Options 3A, Section 11(a).
---------------------------------------------------------------------------
Proposed Section 11(a)(1) and (2) will specify the requirements for
both simple and complex FLEX Orders.
<bullet> For a simple FLEX Order, a FLEX Order for a FLEX Option
series submitted to the System must include all terms for a FLEX Option
series set forth in proposed Section 3 as described above, size, side
of the market, and a bid or offer price.\92\ The Exchange also proposes
that the System will not accept a FLEX Order with identical terms as a
non-FLEX Option series that is already listed for trading to signify
that this requirement is System-enforced.
---------------------------------------------------------------------------
\92\ See ISE Options 3A, Section 11(a)(1) for identical rule
text.
---------------------------------------------------------------------------
<bullet> For a complex FLEX Order, a FLEX Order for a FLEX Option
complex strategy submitted to the System must satisfy the criteria for
a complex FLEX Order set forth in proposed Section 7(a) as described
above, and include size, side of the market, and a net debit or credit
price. Additionally, each leg of the FLEX Option complex strategy must
include all terms for a FLEX Option series set forth in proposed
Section 3.\93\ Similar to simple FLEX Orders, the Exchange proposes to
System enforce the stipulation that it will not accept a FLEX Option
complex strategy if a leg in the order has identical terms as a non-
FLEX Option series that is already listed for trading.\94\ The Exchange
also proposes to add similar language as ISE to describe what would
happen if there is a complex FLEX Order and subsequently, a non-FLEX
Option series is introduced for the component leg(s). Specifically,
proposed Section 11(a)(2)(A)(i) and (ii) will provide that if a non-
FLEX Option series is added intra-day for a component leg(s) of a
complex FLEX Order, the holder or writer of a FLEX Option position in
the component leg(s) resulting from such complex FLEX Order would be
permitted to close its position(s) under the FLEX trading procedures
against another closing only FLEX Option position for the balance of
the trading day on which the non-FLEX Option series is added. If a non-
FLEX Option series is added for a component leg(s) of a complex FLEX
Order on a trading day after the complex FLEX Order position is
established, the holder or writer of a FLEX Option position in the
component leg(s) resulting from such complex FLEX Order would be
required to execute separate FLEX Option and non-FLEX Option
transactions to close its position(s), such that FLEX Option component
leg(s) would trade under the FLEX trading procedures and non-FLEX
Option component leg(s) would trade subject to the non-FLEX trading
procedures and rules.\95\ Additionally, a complex FLEX Order submitted
into the System for an electronic FLEX Auction pursuant to proposed
Section 11(b), a FLEX PIXL pursuant to Section 12, or a FLEX SOM
pursuant to Section 13 must include a bid or offer price for each leg,
which leg prices when combined must equal the net price of the complex
FLEX Order.\96\
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\93\ See ISE Options 3A, Section 11(a)(2) for identical rule
text.
\94\ See proposed Options 3A, Section 11(a)(2)(A).
\95\ See proposed Options 3A, Section 11(a)(2)(A)(i) and (ii),
which is identical to ISE Options 3A, Section 11(a)(2)(A)(i) and
(ii).
\96\ See proposed Options 3A, Section 11(a)(2)(B), which is
identical to ISE Options 3A, Section 11(a)(2)(B).
---------------------------------------------------------------------------
Proposed Section 11(b) will describe the electronic FLEX Auction.
The proposed FLEX Auction will be identical to ISE Options 3A, Section
11(b) except that Phlx's allocation methodology at proposed Options 3A,
Section 11(b)(3)(A)(i) will be identical to its allocation methodology
in Options 3, Section 10 whereas ISE's allocation methodology is
identical to ISE Options 3, Section 10. Specifically, a Member may
electronically submit a FLEX Order (simple or complex) into an
electronic FLEX Auction for execution pursuant to this paragraph (b).
Pursuant to proposed subparagraph (b)(1), a FLEX Auction may be
initiated if all of the below conditions in proposed subparagraph
(b)(1)(A)-(G) are met; otherwise, the System rejects or cancels a FLEX
Order that does not meet the conditions in this subparagraph
(b)(1).\97\
---------------------------------------------------------------------------
\97\ Proposed paragraph (b)(1) is identical to ISE Options 3A,
Section 11(b)(1).
---------------------------------------------------------------------------
<bullet> Class: The FLEX Order is in a class of options the
Exchange is authorized to list for trading on the Exchange.
<bullet> Size: There is no minimum size for FLEX Orders.
<bullet> Terms: A simple or complex FLEX Order must comply with
proposed Section 11(a).
<bullet> Price: The bid or offer price, or the net debit or credit
price, as applicable, of the FLEX Order is the ``auction price.''
<bullet> Time: A FLEX Order may only be submitted for electronic
execution in a FLEX Auction after FLEX trading has opened pursuant to
proposed Section 8.
<bullet> Exposure Interval: The submitting Member must designate
the length of the ``exposure interval,'' which must be between three
seconds and five minutes.\98\ The Exchange would provide that the
designated time may not go beyond the market close pursuant to proposed
Section 11(b).\99\
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\98\ There will be no default setting to the FLEX Auction
exposure interval. As such, Members will be required to specify the
exposure interval; otherwise, their FLEX Order will be rejected by
the System.
\99\ ISE Options 3A, Section 11(b)(1) is identical.
---------------------------------------------------------------------------
<bullet> Minimum Increment: The price of a simple FLEX Order must
be in an increment the Exchange determines on a class basis (which may
not be smaller than the amounts set forth in proposed Section 5 (i.e.,
$0.01)). If the FLEX Order is a complex order, the price must be a net
price for the complex strategy.\100\
[[Page 41644]]
The Exchange would align the minimum increment requirements for stock-
tied FLEX complex strategies with the existing requirements for stock-
tied non-FLEX complex strategies as set forth in Options 3, Section
14(c)(1). As such, proposed Options 3A, Section 11(b)(1)(G) will
further provide that the prices of Complex Options Strategies (as
defined in Options 3, Section 14) may be expressed in no smaller than
one cent ($0.01) increments, and the options leg of Complex Options
Strategies may be executed in no smaller than one cent ($0.01)
increments, regardless of the minimum increments otherwise applicable
to the individual options legs of the order. Prices of Stock-Option
Strategies or Stock-Complex Strategies (each as defined in Options 3,
Section 14) may be expressed in any decimal price determined by the
Exchange,\101\ 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 no smaller than one cent ($0.01)
increments, regardless of the minimum increments otherwise applicable
to the individual options legs of the order. Similar to stock-tied
complex orders today, the Exchange believes that smaller minimum
increments are appropriate for complex FLEX Orders that contain a stock
component as the stock component can trade at finer decimal increments
permitted by the equity market.
---------------------------------------------------------------------------
\100\ See proposed subparagraph (G) of Section 11(b)(1). This
provision is identical to ISE Options 3A, subparagraph (G) of
Section 11(b)(1). Phlx will allow exercise prices to be expressed as
percentages. As discussed above, the Exchange is also incorporating
within proposed subparagraph (G) the minimum increment provisions
for non-FLEX complex orders that are stock-tied from Options 3,
Section 14(c)(1) which was amended by SR-Phlx-2025-17. See Options
3, Section 14 which 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.
\101\ The minimum increment for individual options leg of a FLEX
Order may not be smaller than $0.01, as required under proposed
Options 3A, Section 5. However, when a stock leg is included in a
complex strategy (i.e., Stock-Option Strategy or Stock-Complex
Strategy) for the FLEX Option, then the price for FLEX Stock-Option
Strategies and FLEX Stock-Complex Strategies can be expressed to
four decimal places in order to trade at finer decimal increments
permitted by the equity market. However, the options leg will not be
permitted to execute in increments smaller than one cent ($0.01).
This is identical to how a non-FLEX Stock-Option Strategy and a non-
FLEX Stock-Complex Strategy can be priced today. See Options 3,
Section 14(c)(1) for identical provisions. Options 3, Section 14
which 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.
---------------------------------------------------------------------------
Proposed subparagraph (b)(2) of Options[sic] 11 will describe the
FLEX Auction process, and will provide that upon receipt of a FLEX
Order that meets the conditions in subparagraph (a) as described above,
the FLEX Auction commences. Proposed subparagraph (b)(2)(A) will
describe the contents of the FLEX Auction message, and will provide
that the System initiates a FLEX Auction by sending a FLEX Auction
notification message to Members detailing the FLEX Option series or
complex strategy (as applicable), side, size, auction ID,\102\
capacity, and exposure interval. Similar to all other auction
notifications, FLEX Auction notification messages are not disseminated
to OPRA.\103\ Identical to ISE, the FLEX Auction message will not
include the price of the auctioned FLEX Order. The Exchange believes
not including the auction price in the notification message will
encourage Members to respond with the best prices at which they are
willing to trade against the auctioned FLEX Order. If the message
included the price, Members may only respond to trade at that price;
without the price, Members may respond at better prices, which may
result in price improvement opportunities for the auctioned FLEX Order.
---------------------------------------------------------------------------
\102\ As discussed below, this information on the proposed
auction message will permit responses to only execute at the
conclusion of the auction into which the responses were submitted.
\103\ See ISE Options 3A, Section 11(b)(2)(D)(iv) for identical
rule text.
---------------------------------------------------------------------------
Proposed subparagraph (b)(2)(B) will provide that one or more FLEX
Auctions in the same FLEX Option series or complex strategy (as
applicable) may occur at the same time. To the extent there is more
than one FLEX Auction in a FLEX Option series or complex strategy (as
applicable) underway at the same time, the FLEX Auctions conclude
sequentially based on the times at which each FLEX Auction's exposure
interval concludes. At the time each FLEX Auction concludes, the System
allocates the FLEX Order pursuant to proposed subparagraph (3) and
takes into account all FLEX responses submitted during the exposure
interval.\104\ Generally, if a Member attempts to initiate an
electronic FLEX Auction in a FLEX Option series while another auction
in that series is ongoing, the Exchange believes it will provide that
second FLEX Order with an opportunity for execution in a timely manner
by initiating another FLEX Auction, rather than having the Member wait
for the first auction to conclude. The second Member may not be able to
submit a response to trade in the ongoing FLEX Auction, because the
terms may not be consistent with that Member's order (for example,
there may not be sufficient size, and the Member may only receive a
share of the auctioned order depending on other responses). Therefore,
the Exchange believes providing this proposed functionality may
encourage Members to use electronic FLEX Auctions to execute their FLEX
Orders.
---------------------------------------------------------------------------
\104\ See ISE Options 3A, Section 11(b)(2)(B) for identical rule
text,
---------------------------------------------------------------------------
Proposed subparagraph (b)(2)(C) will provide that the submitting
Member may cancel a FLEX Auction prior to the end of the exposure
interval.\105\ Proposed subparagraph (b)(2)(D) will specify the
conditions for submitting responses to a FLEX Auction. Any Member
(including the submitting Member) may submit responses to a FLEX
Auction that are properly marked specifying the FLEX Option series or
complex strategy (as applicable), bid or offer price or net price
(respectively), size, side of the market, and the auction ID for the
FLEX Auction to which the Member is submitting the response. A FLEX
response may only participate in the FLEX Auction with the auction ID
specified in the response, which is why the auction notification
message described above will include an auction ID and responses must
identify the applicable auction ID.\106\ If there are concurrent FLEX
Auctions occurring, a Member may submit responses to all ongoing
auctions, and thus concurrent auctions will not hinder a Member's
ability to participate in any FLEX Auction.
---------------------------------------------------------------------------
\105\ See ISE Options 3A, Section 11(b)(2)(C) for identical rule
text.
\106\ See ISE Options 3A, Section 11(b)(2)(D) for identical rule
text.
---------------------------------------------------------------------------
A Member using the same badge/ \107\ mnemonic \108\ may only submit
a single FLEX response per auction ID to a FLEX Auction.\109\ If an
additional FLEX response is submitted for the same auction ID from the
same badge/mnemonic, then that FLEX response will automatically replace
the previous FLEX response.\110\ The System caps the size of a FLEX
response for the same badge/mnemonic at the size of the FLEX
[[Page 41645]]
Order (i.e., the System ignores the size in excess of the size of the
FLEX Order when processing the FLEX Auction).\111\ Given that the
Exchange is proposing below to apply a pro-rata allocation methodology
to executions at the conclusion of the FLEX Auction, this provision is
intended to prevent a Member from submitting a response with an
extremely large size into the electronic FLEX Auction in order to
obtain a larger pro-rata share of the FLEX Order.
---------------------------------------------------------------------------
\107\ A ``badge'' means an account number, which may contain
letters and/or numbers, assigned to Lead Market Makers and Market
Makers. A Lead Market Maker or Market Maker account may be
associated with multiple badges. See Options 1, Section 1(b)(6).
\108\ A ``mnemonic'' means an acronym comprised of letters and/
or numbers assigned to member organizations. A member organization
account may be associated with multiple mnemonics. See Options 1,
Section 1(b)(29).
\109\ A badge and mnemonic are essentially Member identifiers.
Every order that comes into the System is tied to a badge or
mnemonic.
\110\ In other words, the Member does not have to cancel the
previous FLEX response before submitting an additional one as the
previous response is automatically replaced. See proposed Options
3A, Section 11(b)(2)(D)(i), which is identical to ISE Options 3A,
Section 11(b)(2)(D)(i). While not specified in the Exchange's
current rules, this is consistent with current auction behavior,
including current PIXL and SOM behavior.
\111\ See proposed Options 3A, Section 11(b)(2)(D)(ii), which
identical to ISE Options 3A, Section 11(b)(2)(D)(ii).
---------------------------------------------------------------------------
Further, FLEX responses must be on the opposite side of the market
as the FLEX Order. The System rejects a FLEX response on the same side
of the market as the FLEX Order.\112\ FLEX responses are not visible to
Members or disseminated to OPRA.\113\ This is consistent with how ISE
treats FLEX responses pursuant to ISE Options 3A, Section
11(b)(2)(D)(iv). The proposed rule change is also consistent with the
Exchange's existing auctions, in which responses are not visible to the
market.\114\ Responses to electronic auctions are not firm prior to the
conclusion of the auction, at which time their price and size are firm.
For the same reason as the Exchange is proposing not to disseminate the
auction price on the auction notification message as discussed above,
the Exchange believes it will encourage Members to submit responses at
their best possible price if they do not know the prices at which other
Members are willing to trade.\115\
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\112\ See proposed Options 3A, Section 11(b)(2)(D)(iii), which
is identical to ISE Options 3A, Section 11(b)(2)(D)(iii).
\113\ See proposed Options 3A, Section 11(b)(2)(D)(iv), which is
identical to ISE Options 3A, Section 11(b)(2)(D)(iv).
\114\ See Supplementary Material .02 to Options 3, Section 11;
and Options 3, Section 13(c)(4).
\115\ For example, if during a FLEX Auction of a buy FLEX Order,
a Member submitted a response to sell at $1.05, if another Member
saw that response, it may merely respond to sell at $1.05, or maybe
$1.04, even though it may ultimately be willing to sell at $1.03.
Without seeing the other responses, the second Member may instead
submit a response to sell at $1.03, which could result in price
improvement for the auctioned order.
---------------------------------------------------------------------------
A Member may modify or cancel its FLEX Responses during the
exposure interval.\116\ The minimum price increment for FLEX responses
is the same as the one the Exchange determines for a class pursuant to
proposed subparagraph (b)(1)(G) above. A response to a FLEX Auction of
a complex order must have a net price. The System rejects a FLEX
response that is not in the applicable minimum increment.\117\ Complex
FLEX responses must be entered in the increments provided in Options 3,
Section 14(c)(1) at the proposed execution net price or at a price that
is at least one cent better for the Agency Order.\118\
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\116\ See proposed Options 3A, Section 11(b)(2)(D)(v), which is
identical to ISE Section 11(b)(2)(D)(v).
\117\ See proposed Options 3A, Section 11(b)(2)(D)(vi) which is
identical to ISE Options 3A, Section 11(b)(2)(D)(vi).
\118\ ISE does not currently have this rule text at Options 3A.
ISE will file to add identical rule text in a separate rule change.
The Exchange believes that this additional language will provide
members with additional information as all Complex Orders trade in
the increments described in Options 3, Section 14(c)(1) which states
that 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.
Options 3, Section 14 was amended 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) which is effective but not yet
operative. SR-Phlx-2024-71 will be operative at the same time as
this rule change.
---------------------------------------------------------------------------
Pursuant to proposed subparagraph (b)(3) of Section 11, the FLEX
Auction concludes at the end of the exposure interval, unless the
Exchange halts trading in the affected underlying or the submitting
Member cancels the FLEX Auction before the end of the exposure
interval, in which case the FLEX Auction concludes without
execution.\119\ At the conclusion of the FLEX Auction:
---------------------------------------------------------------------------
\119\ See ISE Options 3A, Section 11(b)(3) for identical rule
text.
---------------------------------------------------------------------------
<bullet> Pursuant to proposed subparagraph (b)(3)(A), the System
executes the FLEX Order against the FLEX responses at the best
price(s), to the price at which the balance of the FLEX Order or the
FLEX responses can be fully executed (the ``final auction price''). For
purposes of ranking FLEX responses when determining how to allocate a
FLEX Order, the term ``price'' refers to the dollar and decimal amount
of the response bid or offer.\120\
---------------------------------------------------------------------------
\120\ See ISE Options 3A, Section 11(b)(3)(A) for identical rule
text.
---------------------------------------------------------------------------
<bullet> Pursuant to proposed subparagraph (b)(3)(A)(i), if there
are multiple FLEX responses at the same price level, then the contracts
in those FLEX responses are allocated proportionally according to Size
Pro-Rata Priority \121\ with Public Customer \122\ overlay \123\ (as
described in Options 3, 10(a)(1)(A) and non-Public Customer interest
allocation described in 10(a)(1)(E) and (F)). The Exchange notes that
this is similar to ISE utilizes its allocation methodology in Options
3, Section 10 with respect to FLEX Options. Today, Phlx utilizes its
allocation methodology in Options 3, Section 10 in its SOM and PIXL for
non-FLEX Options where the Public Customer gets priority treatment over
non-Public Customers pursuant to Options 3, Section 10(a)(1)(A).\124\
After Public Customers responses are allocated, non-Public Customer
responses would be allocated pursuant to Options 3, Section 10(a)(1)(E)
and (F).\125\
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\121\ Size Pro-Rata Priority shall mean that if there are two or
more resting orders or quotes at the same price, the System
allocates contracts from an incoming order or quote to resting
orders and quotes beginning with the resting order or quote
displaying the largest size proportionally according to displayed
size, based on the total number of contracts displayed at that
price. See Options 3, Section 10(a). Phlx filed rule proposals to
amend 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.
\122\ The term ``Public Customer'' means a person or entity that
is not a broker or dealer in securities and is not a Professional as
defined within Options 1, Section (b)(45). See Option 1, Section
1(b)(46). The term ``Professional'' means any person or entity that
(i) is not a broker or dealer in securities, and (ii) places more
than 390 orders in listed options per day on average during a
calendar month for its own beneficial account(s). Member
organizations must indicate whether orders are for Professionals.
See Option 1, Section 1(b)(45).
\123\ Public Customer Priority: the highest bid and lowest offer
shall have priority except that Public Customer orders shall have
priority over non-Public Customer orders at the same price. If there
are two or more Public Customer orders for the same options series
at the same price, priority shall be afforded to such Public
Customer orders in the sequence in which they are received by the
System. Public Customer Priority is always in effect when the Price/
Time execution algorithm is in effect. See Options 3, Section
10(a)(1)(C)(1)(a).
\124\ See, e.g., Options 3, Section 11(d)(3)(C) (SOM allocation
methodology) and Options 3, Section 13(b)(5)(B) (PIXL allocation
methodology).
\125\ This is a distinction between ISE and Phlx. ISE allocates
pursuant to its allocation methodology in Options 3, Section 10 and
Phlx allocated pursuant to its Options 3, Section 10 methodology
which also is utilized in Phlx's SOM allocation methodology at
Options 3, Section 11(d)(3)(C) and PIXL allocation methodology at
Options 3, Section 13(b)(5)(B). Phlx's allocation model is different
than ISE in that Phlx allocates to Market Makers before allocating
to all other non-Public Customer 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. The Exchange notes that
Public Customers on Phlx and Priority Customers on ISE will continue
to have priority over other market participants.
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<bullet> Pursuant to proposed subparagraph (b)(3)(A)(ii), the
executable quantity is allocated to the nearest whole number, with
fractions rounded up for the FLEX
[[Page 41646]]
response with the higher quantity. Further, proposed subparagraph
(b)(3)(A)(iii) will provide that if an allocation would result in less
than one contract, then one contract will be allocated. The Exchange is
adopting language that is consistent with its current rounding and
allocation methodology as the Exchange does not allocate fractional
contracts and instead rounds up to the nearest whole number.\126\
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\126\ See Options 3, Section 10(a), Supplementary Material .09
to Options 3, Section 11, and Supplementary Material .10 to Options
3, Section 13. See Securities Exchange Act Release Nos. 101989
(December 30, 2024), 89 FR 106888 (December 30, 2024) (SR-Phlx-2024-
71). See also Securities Exchange Act Release No. 103667 (August 8,
2025), 90 FR 39042 (August 13, 2025) (SR-Phlx-2025-35) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
PIXL and Adopt New Auctions). ISE has identical rule text in Options
3, Section 10(c), Supplementary Material .09 to Options 3, Section
11, and Supplementary Material .10 to Options 3, Section 13.
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Pursuant to proposed subparagraph (b)(3)(B), the System cancels an
unexecuted FLEX Order (or unexecuted portion).\127\ Further, proposed
subparagraph (b)(3)(C) will provide that the System cancels any
unexecuted responses (or unexecuted portions).\128\
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\127\ See ISE Options 3A, Section 11(b)(3)(B) for identical rule
text.
\128\ See ISE Options 3A, Section 11(b)(3)(C) for identical rule
text.
---------------------------------------------------------------------------
M. FLEX PIXL (Section 12)
The Exchange proposes to establish PIXL auction functionality for
FLEX Options in Options 3A, Section 12. The proposed FLEX PIXL auction
will be substantially similar to ISE Options 3A, Section 12, except for
a difference related to the allocation methodology for all non-Public
Customers. Pursuant to proposed Section 12, a Member (the ``Initiating
Member'') may electronically submit for execution an order (which may
be a simple or complex order) it represents as agent (``Agency Order'')
against principal interest or a solicited order(s) (except for an order
for the account of any FLEX Market Maker with an appointment in the
applicable FLEX Option class on the Exchange) (an ``Initiating
Order''), provided it submits the Agency Order for electronic execution
into a FLEX PIXL auction pursuant to this Rule.\129\
---------------------------------------------------------------------------
\129\ See ISE Options 3A, Section 12 which has identical rule
text except for this phrase, ``if the Agency Order is a simple
order.'' The Exchange is not including this phrase because the FLEX
PIXL rule specifically states that any solicited contra-side orders
entered by member organizations to trade against Agency Orders may
not be for the account of an Exchange Market Maker that is assigned
to the options class. See Supplementary Material ..02 to Options 3A,
Section 12. ISE will separately file a rule change to amend this
language.
---------------------------------------------------------------------------
Proposed Section 12(a)(1)-(5) will set forth the FLEX PIXL auction
eligibility requirements. Specifically, the Initiating Member may
initiate a FLEX PIXL auction if all of the following conditions are
met:
<bullet> Class. An Agency Order must in a FLEX Option class the
Exchange designates as eligible for FLEX PIXL auctions.
<bullet> FLEX Option Series. The Agency Order and Initiating Order
must each be a FLEX Order that complies with proposed Section 11(a) in
a permissible FLEX Option series that complies with proposed Section 3
above. For a complex FLEX Order, each leg must be in a permissible FLEX
option series that complies with proposed Section 3 above.\130\
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\130\ See ISE Options 3A, Section 11(a)(2) which has identical
rule text.
---------------------------------------------------------------------------
<bullet> Marking. The Initiating Member must mark an Agency Order
for FLEX PIXL auction processing.
<bullet> Size. There will be no minimum size for Agency Orders. The
Initiating Order must be for the same size as the Agency Order.
<bullet> Minimum Increment. The price of the Agency Order and
Initiating Order for simple FLEX Orders must be in an increment the
Exchange determines on a class basis (which may not be smaller than the
amounts set forth in Section 5 above). If the Agency Order and
Initiating Order are complex orders, the price must be a net price for
the complex strategy.\131\ The Exchange will align the minimum
increment requirements for stock-tied FLEX complex strategies with the
existing requirements for stock-tied non-FLEX complex strategies as set
forth in Options 3, Section 14(c)(1). As such, proposed Options 3A,
Section 12(a)(5) will further provide that the prices of Complex
Options Strategies (as defined in Options 3, Section 14) may be
expressed in one cent ($0.01) increments, and the options leg of
Complex Options Strategies may be executed in no smaller than one cent
($0.01) increments, regardless of the minimum increments otherwise
applicable to the individual options legs of the order. Prices of
Stock-Option Strategies or Stock-Complex Strategies (each as defined in
Options 3, Section 14) may be expressed in any decimal price determined
by the Exchange,\132\ 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 no smaller than one cent
($0.01) increments, regardless of the minimum increments otherwise
applicable to the individual options legs of the order. Similar to
stock-tied complex orders today, the Exchange believes that smaller
minimum increments are appropriate for complex FLEX Orders that contain
a stock component as the stock component can trade at finer decimal
increments permitted by the equity market.
---------------------------------------------------------------------------
\131\ See ISE Option 3A, Section 12(a)(5) which has identical
rule text.
\132\ The prices of the FLEX Stock-Option Strategies and FLEX
Stock-Complex Strategies can be expressed to four decimal places,
which is identical to how the stock portion of a non-FLEX Stock-
Option Strategy and a non-FLEX Stock-Complex Strategy can be priced
today. However, the options leg will not be permitted to execute in
increments smaller than one cent ($0.01). See Options 3, Section 14
which was amended by SR-Phlx-2025-17. Phlx's Complex Order
functionality was amended 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. See also supra note 101.
---------------------------------------------------------------------------
<bullet> Time. An Initiating Member may only submit an Agency Order
to a FLEX PIXL auction after trading in FLEX Options is open pursuant
to proposed Section 8.
The System will reject or cancel both an Agency Order and
Initiating Order submitted to a FLEX PIXL auction that do not meet the
conditions in proposed paragraph (a) as described above. The proposed
FLEX PIXL eligibility requirements in proposed Section 12(a) are
identical to ISE Options 3A, Section 12(a).
Pursuant to proposed Section 12(b), the Initiating Order must stop
the entire Agency Order at a specified price. If the Agency Order and
Initiating Order are Complex Orders, the price must be a net price for
the complex strategy.\133\ In particular, the Initiating Member must
specify either of the below; otherwise, the System will reject or
cancel both an Agency Order and Initiating Order submitted to a FLEX
PIXL auction that do not meet the conditions in this proposed paragraph
(b).
---------------------------------------------------------------------------
\133\ See ISE Options 3A, Section 12(b) for identical rule text.
---------------------------------------------------------------------------
<bullet> Pursuant to proposed subparagraph (b)(1), a single price
at which it seeks to execute the Agency Order against the Initiating
Order (a ``single-price submission''), including whether it elects to
have less than its guaranteed allocation (as described in proposed
Section 12(e)(4) below). This is identical to ISE Options 3A, Section
12(b)(1).\134\
[[Page 41647]]
As further discussed below, the proposed guaranteed allocation process
will be based on the guaranteed allocation process available in non-
FLEX PIXL auctions, and therefore the proposed rule change will provide
further consistency across the Exchange's auction mechanism
processes.\135\
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\134\ The Exchange will allow the Initiating Member to customize
their guaranteed allocation percentage of the Initiating Order
anywhere from 0% up to 50% of the Agency Order (if there is a
response(s) from one other Member at the same price) or up to 40% of
the Agency Order (if there are responses from two or more Members at
the same price). For example, an Agency Order is entered into FLEX
PIXL for 100 contracts. If the Initiating Member only wants to have
a guaranteed allocation of 10% on the Initiating Order that was
entered with the Agency Order, the Initiating Member can stipulate
10% on the Initiating Order. If there are 4 FLEX PIXL responses for
a total of 200 contracts at the end of the auction, then the
Initiating Member will only get 10 contracts allocated on its
Initiating Order (i.e., the guaranteed 10% of 100 contracts). The
Exchange notes that the proposed guaranteed allocation percentages
of 50% (if there is a response(s) from one other Member) and 40% (if
there are responses from two or more Members) for FLEX PIXL will
differ from the current guaranteed allocation percentage of 40% for
standard PIXL. Phlx has a consistent guaranteed allocation
percentage for its non-FLEX price improvement auctions at Options 3,
Section 13(b)(5)(B).
\135\ See id.
---------------------------------------------------------------------------
<bullet> Pursuant to subparagraph (b)(2), an initial stop price and
instruction to automatically match the price and size of all FLEX PIXL
responses (``auto-match'') at each price, up to a designated limit
price, better than the price at which the balance of the Agency Order
can be fully executed (the ``final auction price''). This is identical
to ISE Options 3A, Section 12(b)(2).
Proposed Section 12(c) will govern the FLEX PIXL auction process.
Specifically, upon receipt of an Agency Order that meets the conditions
in paragraphs (a) and (b) as described above, the FLEX PIXL auction
process commences. Proposed subparagraphs (c)(1)(A) and (B) will
describe concurrent FLEX PIXL auctions for simple Agency Orders and
complex Agency Orders, respectively. One or more FLEX PIXL auctions in
the same FLEX Option series or same complex strategy (as applicable)
may occur at the same time.\136\ To the extent there is more than one
FLEX PIXL auction in a FLEX Option series or complex strategy (as
applicable) underway at the same time, the FLEX PIXL auctions will
conclude sequentially based on the times at which the FLEX PIXL auction
periods end. At the time each FLEX PIXL auction concludes, the System
allocates the Agency Order pursuant to proposed paragraph (e) as
described below, and takes into account all FLEX PIXL responses
received during the FLEX PIXL auction period. The concurrent FLEX PIXL
auction feature in proposed Section 12(c)(1)(A) and (B) is identical to
ISE Options 3A, Section 12(c)(1)(A) and (B), and is also consistent
with the concurrent auction feature proposed above for FLEX Auctions.
Similar to FLEX Auctions as proposed above, if a Member attempts to
initiate a FLEX PIXL Auction in a FLEX Option series while another
auction in that series in ongoing, the Exchange believes it will
provide that second FLEX Order with an opportunity for execution in a
timely manner by initiating another FLEX PIXL Auction, rather than
requiring the Member to wait for the first auction to conclude. The
second Member may not be able to submit a response to trade in the
ongoing FLEX PIXL Auction because the terms may not be consistent with
that Member's order (for example, there may not be sufficient size, and
the Member may only receive a share of the auctioned order depending on
other responses). Therefore, the Exchange believes that providing this
functionality for FLEX PIXL may provide additional opportunities for
execution of FLEX Orders by encouraging Members to use FLEX PIXL.
---------------------------------------------------------------------------
\136\ Further, for complex Agency Orders, PIXL auctions in
different complex strategies may be ongoing at any given time, even
if the complex strategies have overlapping components. A FLEX PIXL
auction in a complex strategy may be ongoing at the same time as a
FLEX PIXL auction in any component of the complex strategy. See
proposed subparagraph (c)(1)(B)(i) of Options 3A, Section 12 which
is identical to ISE subparagraph (c)(1)(B)(i) of Options 3A, Section
12.
---------------------------------------------------------------------------
Pursuant to proposed Section 12(c)(2), the System initiates the
FLEX PIXL auction process by sending a FLEX PIXL auction notification
message detailing the side, size, auction ID, the length of the FLEX
PIXL auction period, and FLEX Option series or complex strategy, as
applicable, of the Agency Order to all Members that elect to receive
FLEX PIXL auction notification messages. The Exchange may also
determine to include the stop price in FLEX PIXL auction notification
messages, which will apply to all FLEX PIXL auctions. Similar to all
other auction notifications, FLEX PIXL auction notification messages
will not be disseminated to OPRA.\137\
---------------------------------------------------------------------------
\137\ See ISE Options 3A, Section 12(c)(3) for identical rule
text.
---------------------------------------------------------------------------
Proposed Section 12(c)(3) will describe the ``FLEX PIXL Auction
period,'' and is identical to ISE Options 3A, Section 12(c)(3). The
FLEX PIXL Auction period will be defined as a period of time that must
be designated by the Initiating Member, which may be no less than three
seconds and no more than five minutes. Similar to the exposure interval
for electronic FLEX Auctions in Section 11(b) discussed above, the
Initiating Member will be required to identify a length of time within
the specified parameters for FLEX PIXL as there will be no default for
the FLEX PIXL Auction period. Otherwise, their FLEX Order will be
rejected by the System. The designated time may not go beyond the
market close, if an execution is permitted by this Section 12. The
Exchange's non-FLEX auctions currently allow executions (as permitted
by their respective rules) to occur in such scenarios, so the Exchange
proposes to be consistent with current System functionality in this
regard.\138\ In doing so, the Exchange's proposal will promote
executions in FLEX PIXL to the extent possible (instead of cancelling
the FLEX Order) and also prevent executions from occurring after the
market close.
---------------------------------------------------------------------------
\138\ While this behavior is not explicitly stated in the
current Rules, the Exchange's proposal will be consistent with
current non-FLEX auction behavior, including current PIXL and SOM
behavior.
---------------------------------------------------------------------------
Proposed Section 12(c)(4) will provide that an Initiating Member
may not modify or cancel an Agency Order or Initiating Order after
submission to a FLEX PIXL auction, except to improve the price of the
Initiating Order. This will be identical to ISE Options 3A, Section
12(c)(4); the Exchange will allow a limited exception by allowing
Initiating Members to improve the price of their Initiating Orders. The
Exchange notes that this will align to current non-FLEX PIXL behavior,
which allows entering Members to modify their PIXL Orders \139\ upon
entry into the PIXL by improving upon the initial price of the PIXL
Orders.\140\ Similar to allowing the initiating Member of a non-FLEX
PIXL to improve the initial price of its PIXL Orders, the Exchange
believes that it is appropriate to allow the Initiating Member of the
FLEX PIXL to improve the price of its Initiating Order (i.e., contra-
side to the Agency Order) because it would also improve the stop price
of the Agency Order that came in together with the Initiating
Order.\141\
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\139\ PIXL Orders (i.e., contra-side to the Agency Order) for
PIXL are functionally equivalent to Initiating Orders (i.e., contra-
side order to the Agency Order) for FLEX PIXL. See Options 3,
Section 13 for a description of PIXL Orders.
\140\ See Options 3, Section 13(b)(1)(A) (providing that a PIXL
Order may not be canceled or modified, but the stop price of the
PIXL Order may be improved during the exposure period).
\141\ As proposed, the Initiating Member enters a paired FLEX
Order into FLEX PIXL consisting of an Agency Order and an Initiating
Order (which is the contra-side of the Agency Order). This is
identical to how standard non-FLEX PIXL works today in that the
Initiating Member enters a paired order into standard PIXL
consisting of a Public Customer, broker-dealer, or any other entity
(``PIXL Order'') that would be contra an agency order (``Initiating
Order'') (i.e., the PIXL Agency Order's contra-side, and the
functional equivalent to an Initiating Order on FLEX PIXL).
---------------------------------------------------------------------------
[[Page 41648]]
Proposed Section 12(c)(5) will govern the requirements for FLEX
PIXL responses. Specifically:
<bullet> Any Member other than the Initiating Member (the System
rejects a response with the same badge/mnemonic as the Initiating
Order) may submit responses to a FLEX PIXL auction that are properly
marked specifying price, size, side, and the auction ID for the FLEX
PIXL auction to which the Member is submitting the response. A FLEX
PIXL response may only participate in the FLEX PIXL auction with the
auction ID specified in the response.\142\
---------------------------------------------------------------------------
\142\ See proposed Options 3A, Section 12(c)(5), which is
identical to ISE Options 3A, Section 12(c)(5).
---------------------------------------------------------------------------
<bullet> The minimum price increment for FLEX PIXL responses is the
same as the one the Exchange determines for a class pursuant to
proposed Section 12(a)(5) above. A response to a FLEX PIXL auction of a
complex Agency Order must have a net price. The System will reject a
FLEX PIXL response that is not in the applicable minimum
increment.\143\
---------------------------------------------------------------------------
\143\ See proposed Options 3A, Section 12(c)(5)(A), which
identical to ISE Options 3A, Section 12(c)(5)(A).
---------------------------------------------------------------------------
<bullet> A Member using the same badge/mnemonic may only submit a
single FLEX PIXL response per auction ID for a given auction. If an
additional FLEX PIXL response is submitted for the same auction ID from
the same badge/mnemonic, then that FLEX PIXL response will
automatically replace the previous FLEX PIXL response.\144\
---------------------------------------------------------------------------
\144\ See proposed Options 3A, Section 12(c)(5)(B), which is
identical to ISE Options 3A, Section 12(c)(5)(B).
---------------------------------------------------------------------------
<bullet> The System will cap the size of a FLEX PIXL response at
the size of the Agency Order (i.e., the System will ignore size in
excess of the size of the Agency Order when processing the FLEX PIXL
auction).\145\
---------------------------------------------------------------------------
\145\ See proposed Options 3A, Section 12(c)(5)(C), which is
identical to ISE Options 3A, Section 12(c)(5)(C). As noted above,
this will align to current non-FLEX auction functionality, including
PIXL auction functionality in Options 3, Section 13.
---------------------------------------------------------------------------
<bullet> FLEX PIXL responses must be on the opposite side of the
market as the Agency Order. The System rejects a FLEX PIXL response on
the same side of the market as the Agency Order.\146\
---------------------------------------------------------------------------
\146\ See proposed Options 3A, Section 12(c)(5)(D), which is
identical to ISE Options 3A, Section 12(c)(5)(D).
---------------------------------------------------------------------------
<bullet> FLEX PIXL responses will not be visible to PIXL auction
participants or disseminated to OPRA.\147\
---------------------------------------------------------------------------
\147\ See proposed Options 3A, Section 12(c)(5)(E), which is
identical to ISE Options 3A, Section 12(c)(5)(E).
---------------------------------------------------------------------------
<bullet> A Member may modify or cancel its FLEX PIXL responses
during the FLEX PIXL auction.\148\
---------------------------------------------------------------------------
\148\ See proposed Options 3A, Section 12(c)(5)(F), which is
identical to ISE Options 3A, Section 12(c)(5)(F).
---------------------------------------------------------------------------
<bullet> Finally, FLEX PIXL responses in a complex strategy with a
stock component that are through the Stop Price must improve such Stop
Price by at least one cent.\149\
---------------------------------------------------------------------------
\149\ See proposed Options 3A, Section 12(c)(5)(G). The Exchange
notes that ISE does not have a similar sentence but intends to file
a rule change to add this language to its corresponding rule.
---------------------------------------------------------------------------
Pursuant to proposed Section 12(d), a FLEX PIXL auction concludes
at the earliest to occur of the following times: (1) the end of the
FLEX PIXL auction period; and (2) any time the Exchange halts trading
in the affected underlying, provided, however, that in such instance
the FLEX PIXL auction concludes without execution.\150\
---------------------------------------------------------------------------
\150\ See ISE Options 3A, Section 12(e) for identical rule text.
---------------------------------------------------------------------------
Proposed Section 12(e) will govern how executions will occur in
FLEX PIXL. In particular, at the end of the FLEX PIXL auction, the
System allocates the Initiating Order or FLEX PIXL responses against
the Agency Order at the best price(s), to the price at which the
balance of the Agency Order can be fully executed (the ``final auction
price''), as follows. For purposes of ranking the Initiating Order and
FLEX PIXL responses when determining how to allocate the Agency Order
against the Initiating Order and those responses, the term ``price''
refers to the dollar and decimal amount of the order or response bid or
offer.\151\ Proposed subparagraphs (e)(1)-(4) details the FLEX PIXL
allocation methodology for the following scenarios:
---------------------------------------------------------------------------
\151\ See proposed Section 12(e)(1)(A), which is identical to
ISE Options 3A, Section 12(e)(1)(A).
---------------------------------------------------------------------------
<bullet> No Price Improvement: If the FLEX PIXL auction results in
no price improvement, the System executes the Agency Order at the stop
price in the following order:
[cir] Public Customer responses (in time priority); \152\
---------------------------------------------------------------------------
\152\ See proposed Section 12(e)(1)(A), which is identical to
ISE Options 3A, Section 12(e)(1)(A).
---------------------------------------------------------------------------
[cir] The Initiating Order for the greater of (1) one contract or
(2) up to 50% of the Agency Order if there is a response(s) from one
other Member at the same price or 40% of the Agency Order if there are
responses from two or more other Members at the same price (which
percentages are based on the original size of the Agency Order).\153\
Members may elect for the Initiating Order to have less than their
guaranteed allocation as described in subparagraph (e)(4) below.\154\
Unless there are remaining contracts after including all PIXL
responses, under no circumstances does the Initiating Member receive an
allocation percentage at the final auction price of more than 50% of
the initial Agency Order in the event there is a response(s) from one
other Member or 40% of the initial Agency Order in the event there are
responses from two or more other Members, except when rounding up. The
Exchange is specifying two limited scenarios in this Rule where the
Initiating Member may receive an allocation percentage greater than its
guaranteed allocation percentage, which is either when there are
remaining contracts after including all PIXL responses or when rounding
up.\155\ As an example of the first scenario, assume an Initiating
Member submitted a FLEX Order for 20 contracts into FLEX PIXL and there
are 2 PIXL responses (one for 3 contracts and one for 4 contracts).
After the 7 PIXL responses are allocated, the Initiating Member would
then receive the remaining 13 contracts (which is more than their 40%
allocation percentage) because there are remaining contracts after all
PIXL responses are included.
---------------------------------------------------------------------------
\153\ See proposed ISE Options 3A, Section 12(e)(1)(A) with
identical rule text. See infra note 134 for further discussion on
the 50%/40% allocation percentages.
\154\ This sentence does not appear in ISE Options 3A, Section
12(e)(1)(B). The Exchange proposes to add this sentence as a
guidepost and reminder that a Member may elect less than their
guaranteed allocation.
\155\ See proposed Section 12(e)(1)(B), which is identical to
ISE Options 3A, Section 12(e)(1)(B).
---------------------------------------------------------------------------
[cir] All other FLEX PIXL responses, allocated on a Size Pro-Rata
basis ((as defined in Options 3, Section 10(a)(1)(E) and (F)) \156\ and
---------------------------------------------------------------------------
\156\ See proposed Section 12(e)(1)(C). Phlx's allocation model
differs from ISE's allocation model, although the Exchange notes
that Size Pro-Rata as defined in Options 3, Section 10(a) is similar
to pro-rata as referenced in ISE Options 3, Section 10(c). Phlx's
allocation model allocates to Market Makers pursuant to Options 3,
Section 10(a)(1)(E), after allocating to Public Customers, and
thereafter allocates to all other remaining non-Public Customer,
non-Market Maker interest pursuant to Options 3, Section
10(a)(1)(F). The Exchange notes that Public Customers on Phlx will
continue to have priority over other market participants.
---------------------------------------------------------------------------
[cir] The Initiating Order to the extent there are any remaining
contracts.\157\
---------------------------------------------------------------------------
\157\ See proposed Section 12(e)(1)(D), which is identical to
ISE Options 3A, Section 12(e)(1)(D).
---------------------------------------------------------------------------
<bullet> Price Improvement with Single-Price Submission: If the
FLEX PIXL auction results in price improvement for the Agency Order and
the Initiating
[[Page 41649]]
Member selected a single-price submission, at each price better than
the final auction price, the System executes the Agency Order in the
following order:
[cir] Public Customer responses (in time priority); \158\
---------------------------------------------------------------------------
\158\ See proposed Section 12(e)(2)(A), which is identical to
ISE Options 3A, Section 12(e)(2)(A).
---------------------------------------------------------------------------
[cir] Other FLEX PIXL responses (in time priority) at prices better
than the final auction price; and
[cir] All other FLEX PIXL responses at the final auction price,
allocated on a Size Pro-Rata basis ((as defined in Options 3, Section
10(a)(1)(E) and (F)).\159\
---------------------------------------------------------------------------
\159\ See proposed Section 12(e)(2)(B). See infra note 156. Phlx
PIXL has the same allocation process pursuant to Options 3, Section
12(b)(5)(B)(i). See also Securities Exchange Act Release No. 103667
(August 8, 2025), 90 FR 39042 (August 13, 2025) (SR-Phlx-2025-35)
(Notice of Filing and Immediate Effectiveness of Proposed Rule
Change To Amend PIXL and Adopt New Auctions).
---------------------------------------------------------------------------
For example, assume a FLEX PIXL Agency Order is sent for 100
contracts with a price of $1.00 and the Initiating Member selected a
single-price submission. There are two PIXL responses for 5 contracts
each at $0.98, two PIXL responses for 20 contracts each at $0.99, and
two PIXL responses for 40 contracts each at $1.00. The PIXL responses
at $0.98 and $0.99 will be executed in their entirety. The PIXL
responses at $1.00 (final auction price) will be executed on a Size
Pro-Rata basis.
At the final auction price, the System executes any remaining
contracts from the Agency Order at that price in the order set forth in
proposed Section 12(e)(1), as described above.\160\
---------------------------------------------------------------------------
\160\ See proposed Section 12(e)(2), which is identical to ISE
Options 3A, Section 12(e)(2).
---------------------------------------------------------------------------
<bullet> Price Improvement with Auto-Match: If the FLEX PIXL
auction results in price improvement for the Agency Order and the
Initiating Member selected auto-match, at each price better than the
final auction price up to the designated limit price, the System
executes the Agency Order against the Initiating Order for the number
of contracts equal to the aggregate size of all FLEX PIXL responses and
then executes the Agency Order against those responses in the order set
forth in proposed subparagraph (e)(2) described above. At the final
auction price, the System executes contracts at that price in the order
set forth in proposed subparagraph (e)(1) described above.\161\
---------------------------------------------------------------------------
\161\ See proposed Section 12(e)(3), which is identical to ISE
Options 3A, Section 12(e)(3).
---------------------------------------------------------------------------
<bullet> Guaranteed Allocation: If the Initiating Member selects a
single-price submission, it may elect for the Initiating Order to have
less than their guaranteed allocation (50% if there is a response(s)
from one other Member or 40% if there are responses from two or more
Members) to trade against the Agency Order. The Initiating Member may
select a lesser percentage than their guaranteed allocation. If the
Initiating Member elects 0%, then notwithstanding subparagraphs (e)(1)
and (2), the System only executes the Initiating Order against any
remaining Agency Order contracts at the stop price after the Agency
Order is allocated to all FLEX PIXL responses at all prices equal to or
better than the stop price. Guaranteed allocation information is not
available to other market participants and may not be modified after it
is submitted.\162\
---------------------------------------------------------------------------
\162\ See proposed Section 12(e)(4), which is identical to ISE
Options 3A, Section 12(e)(4). The Exchange notes that the proposed
guaranteed allocation percentages of 50% (if there is a response(s)
from one other Member) and 40% (if there are responses from two or
more Members) for FLEX PIXL will differ from the current guaranteed
allocation percentage of 40% for standard PIXL. Phlx has a
consistent guaranteed allocation percentage for its non-FLEX price
improvement auctions at Options 3, Section 13(b)(5)(B).
---------------------------------------------------------------------------
Pursuant to proposed Section 12(e)(5), the System cancels any
unexecuted FLEX PIXL responses (or unexecuted portions) at the
conclusion of the FLEX PIXL auction.\163\
---------------------------------------------------------------------------
\163\ See ISE Options 3A, Section 12(e)(5) for identical rule
text.
---------------------------------------------------------------------------
Lastly, the Exchange proposes a number of policies applicable to
FLEX PIXL as Supplementary Materials to Options 3A, Section 12.
Specifically, proposed Supplementary Material .01 will provide that a
Member may only use a FLEX PIXL auction where there is a genuine
intention to execute a bona fide transaction.\164\ Proposed
Supplementary Material .02 will provide that it will be deemed conduct
inconsistent with just and equitable principles of trade and a
violation of General 9, Section 1(c) \165\ to engage in a pattern of
conduct where the Initiating Member breaks up an Agency Order into
separate orders for the purpose of gaining a higher allocation
percentage than the Initiating Member would have otherwise received in
accordance with the allocation procedures contained in proposed
paragraph (e) above.\166\ Lastly, proposed Supplementary Material .03
will provide that if an allocation would result in less than one
contract, then one contract will be allocated.\167\ This aligns to how
the Exchange currently allocates contracts in PIXL.\168\
---------------------------------------------------------------------------
\164\ See ISE Supplementary Material .01 to Options 3A, Section
12 for identical rule text.
\165\ General 9, Section 1(c) provides that no Member shall
engage in acts or practices inconsistent with just and equitable
principles of trade. Persons associated with Members shall have the
same duties and obligations as Members under the Rules of General 9.
\166\ See ISE Options 3A, Section 12(e) for identical rule text.
\167\ See ISE Supplementary Material .03 to Options 3A, Section
12 for identical rule text. The Exchange would System-enforce this
provision by rejecting a FLEX PIXL auction that does not comply with
the provisions in proposed Options 3A, Section 12.
\168\ See Supplementary Material .10 to Options 3, Section 13.
See also Securities Exchange Act Release No. 103667 (August 8,
2025), 90 FR 39042 (August 13, 2025) (SR-Phlx-2025-35) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
PIXL and Adopt New Auctions).
---------------------------------------------------------------------------
N. FLEX SOM (Section 13)
The Exchange proposes to establish SOM auction functionality for
FLEX Options in Options 3A, Section 13. The proposed FLEX SOM auction
will be substantially similar to ISE Options 3, Section 11(d) and (e),
except for the allocation methodology which aligns with the Exchange's
current System functionality for non-FLEX Options, as further described
below. Pursuant to proposed Section 13, a Member (the ``Initiating
Member'') may electronically submit for execution an order (which may
be a simple or complex order) it represents as agent (``Agency Order'')
against a solicited order (``Solicited Order'') if it submits the
Agency Order for electronic execution into a FLEX SOM auction pursuant
to this Rule.\169\
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\169\ See identical rule text at ISE Options 3A, Section 13. Of
note, facilitated orders cannot be entered into FLEX SOM (just like
they cannot be entered into standard SOM today). Since an order with
the capacity of Firm can be valid for a solicitation order, the
Exchange will not System enforce the rejection of Firm capacity
orders to avoid the rejection of contra-side orders that are entered
with a Firm capacity and are, in fact, solicitations at the outset.
Instead, it will monitor for compliance with the requirement that
the contra-side order be a solicitation rather than a facilitation
through surveillance, as it does today for non-FLEX SOM. The
applicable rule for the foregoing requirement will be set forth in
proposed Supplementary Material .02 to Options 3A, Section 13.
---------------------------------------------------------------------------
Proposed Section 13(a)(1)-(6) will set forth the FLEX SOM auction
eligibility requirements, and will be identical to ISE Options 3A,
Section 13(a)(1)-(6). Specifically, the Initiating Member may initiate
a FLEX SOM auction if all of the following conditions are met:
<bullet> Class. An Agency Order must be in a FLEX Option class the
Exchange designates as eligible for FLEX SOM auctions.
<bullet> FLEX Option Series. The Agency Order and Solicited Order
must each be a FLEX Order that complies with proposed Section 11(a) in
a permissible FLEX Option series that complies with proposed Section 3
above. For a complex FLEX Order, each leg must be
[[Page 41650]]
in a permissible FLEX option series that complies with Section 3
above.\170\
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\170\ See ISE Options 3A, Section 13(a)(2) for identical rule
text.
---------------------------------------------------------------------------
<bullet> Marking. The Initiating Member must mark an Agency Order
for FLEX SOM auction processing.
<bullet> Size. The Agency Order must be for at least the minimum
size designated by the Exchange (which may not be less than 500
standard option contracts). For complex FLEX Orders, this minimum size
requirement will apply to each leg. The Solicited Order must be for the
same size as the Agency Order. The System handles each of the Agency
Order and the Solicited Order as all-or-none.\171\
---------------------------------------------------------------------------
\171\ See ISE Options 3A, Section 13(a)(3) for identical rule
text. Of note, the Exchange will not allow the Solicited Order to be
comprised of multiple solicited orders in FLEX SOM to be consistent
with current non-FLEX SOM functionality in Options 3, Section 11(d).
---------------------------------------------------------------------------
<bullet> Minimum Increment. The price of the Agency Order and
Solicited Order for simple FLEX Orders must be in an increment the
Exchange determines on a class basis (which may not be smaller than the
amounts set forth in Section 5 above). If the Agency Order and
Solicited Order are complex orders, the price must be a net price for
the complex strategy.\172\ The Exchange proposes to align the minimum
increment requirements for stock-tied FLEX complex strategies with the
existing requirements for stock-tied non-FLEX complex strategies as set
forth in Options 3, Section 14(c)(1). As such, proposed Options 3A,
Section 12(a)(5) will further provide that the prices of Complex
Options Strategies (as defined in Options 3, Section 14) may be
expressed in one cent ($0.01) increments, and the options leg of
Complex Options Strategies may be executed in no smaller than one cent
($0.01) increments, regardless of the minimum increments otherwise
applicable to the individual options legs of the order. Prices of
Stock-Option Strategies or Stock-Complex Strategies (each as defined in
Options 3, Section 14) may be expressed in any decimal price determined
by the Exchange,\173\ 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 no smaller than one cent
($0.01) increments, regardless of the minimum increments otherwise
applicable to the individual options legs of the order. Similar to
stock-tied complex orders today, the Exchange believes that smaller
minimum increments are appropriate for complex FLEX Orders that contain
a stock component as the stock component can trade at finer decimal
increments permitted by the equity market.
---------------------------------------------------------------------------
\172\ See ISE Options 3A, Section 13(a)(5) for identical rule
text. The existing minimum increment requirements noted in this rule
text for non-FLEX complex orders align the proposed FLEX
functionality with non-FLEX functionality.
\173\ The prices for FLEX Stock-Option Strategies and FLEX
Stock-Complex Strategies can be expressed to four decimal places,
which is identical to how the stock portion of a non-FLEX Stock-
Option Strategy and a non-FLEX Stock-Complex Strategy can be priced
today. Phlx's Complex Order functionality was amended in SR-Phlx-
2025-17. See Options 3, Section 14 which 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. See supra note 101.
---------------------------------------------------------------------------
<bullet> An Initiating Member may only submit an Agency Order to a
FLEX SOM auction after trading in FLEX Options is open pursuant to
proposed Section 8.
The System will reject or cancel both an Agency Order and Solicited
Order submitted to a FLEX SOM auction that do not meet the conditions
in proposed paragraph (a) as described above.
Pursuant to proposed Section 13(b), the Solicited Order must stop
the entire Agency Order at a specified price. If the Agency Order and
Solicited Order are complex orders, the price must be a net price for
the complex strategy. The Initiating Member must specify a single price
at which it seeks to execute the Agency Order against the Solicited
Order. Otherwise, the System will reject or cancel both an Agency Order
and Solicited Order submitted to a FLEX SOM auction that do not meet
this condition.\174\
---------------------------------------------------------------------------
\174\ See ISE Options 3A, Section 13(b) for identical rule text.
---------------------------------------------------------------------------
Proposed Section 13(c) will govern the FLEX SOM auction process.
Specifically, upon receipt of an Agency Order that meets the conditions
in paragraphs (a) and (b) as described above, the FLEX SOM auction
process commences. Proposed subparagraphs (c)(1)(A) and (B) will
describe concurrent FLEX SOM auctions for simple Agency Orders and
complex Agency Orders, identical to ISE Options 3A, Section 13(c).
One or more FLEX SOM auctions in the same FLEX Option series or
same complex strategy (as applicable) may occur at the same time.\175\
To the extent there is more than one FLEX SOM auction in a FLEX Option
series or complex strategy (as applicable) underway at the same time,
the FLEX SOM auctions will conclude sequentially based on the times at
which the FLEX SOM auction periods end. At the time each FLEX SOM
auction concludes, the System allocates the Agency Order pursuant to
proposed paragraph (e) as described below, and takes into account all
FLEX SOM responses received during the FLEX SOM auction period. As
noted above, the proposed concurrent FLEX SOM auction feature are
identical to ISE concurrent FLEX SOM auction features in ISE Options
3A, Section 13(c)(1) and also consistent with the concurrent auction
feature proposed above for FLEX Auctions and FLEX PIXL. For the same
reasons stated above for FLEX Auctions and FLEX PIXL, the Exchange
believes that providing this concurrent auction functionality for FLEX
SOM may provide additional opportunities for execution of FLEX Orders
by encouraging Members to use FLEX SOM.
---------------------------------------------------------------------------
\175\ Further, for complex Agency Orders, SOM auctions in
different complex strategies may be ongoing at any given time, even
if the complex strategies have overlapping components. A FLEX SOM
auction in a complex strategy may be ongoing at the same time as a
FLEX SOM auction in any component of the complex strategy. See
proposed subparagraph (c)(1)(B)(i) of Options 3A, Section 13 which
is identical to ISE subparagraph (c)(1)(B)(i) of Options 3A, Section
13.
---------------------------------------------------------------------------
Pursuant to proposed Section 13(c)(2), the System initiates the
FLEX SOM auction process by sending a FLEX SOM auction notification
message detailing the side, size, price, capacity, auction ID, the
length of the FLEX SOM auction period, and FLEX Option series or
complex strategy, as applicable, of the Agency Order to all Members
that elect to receive FLEX SOM auction notification messages. Similar
to all other auction notifications, FLEX SOM auction notification
messages will not be disseminated to OPRA. These provisions are
identical to ISE Options 3A, Section 13(c)(2).
Proposed Section 13(c)(3) will describe the ``FLEX SOM Auction
period,'' and is based on an identical ISE rule at Options 3A, Section
13(c)(3). The FLEX SOM Auction period will be defined as a period of
time that must be designated by the Initiating Member, which may be no
less than three seconds and no more than five minutes. Similar to the
exposure interval for electronic FLEX Auctions in Section 11(b) and the
FLEX PIXL Auction period in Section 12(c)(3) as discussed above, the
Initiating Member will be required to identify a length of time within
the specified parameters for FLEX SOM as there will be no default for
the FLEX SOM Auction period. Otherwise, their FLEX Order will be
[[Page 41651]]
rejected by the System. If the auction time periods for a FLEX SOM
exceed the market close, the Exchange would accept the FLEX SOM order,
but the FLEX SOM auction would terminate at the market close without an
execution.\176\ In doing so, the Exchange's proposal will promote
executions in FLEX SOM (instead of cancelling the FLEX Order) while
also preventing executions from occurring after the market close.
---------------------------------------------------------------------------
\176\ While this behavior is not explicitly stated in the
current Rules, the Exchange's proposal will be consistent with
current non-FLEX auction behavior, including current PIXL and SOM
behavior.
---------------------------------------------------------------------------
Proposed Section 13(c)(4) will provide that an Initiating Member
may not modify an Agency Order or Solicited Order after submission to a
FLEX SOM auction. This will be identical to ISE Options 3A, Section
13(c)(4). In allowing Initiating Members to cancel their Agency Orders
and Solicited Orders upon submission into a FLEX SOM, this rule text
will align with current SOM functionality.\177\
---------------------------------------------------------------------------
\177\ This feature is not explicitly stated in the current SOM
rules in Options 3, Section 11(d), but it is consistent with current
SOM functionality.
---------------------------------------------------------------------------
Proposed Section 13(c)(5) will govern the requirements for FLEX SOM
responses. Specifically:
<bullet> Any Member other than the Initiating Member (the response
cannot have the same badge/mnemonic as the Agency Order) may submit
responses to a FLEX SOM auction that are properly marked specifying
size, side, price, and the auction ID for the FLEX SOM auction to which
the Member is submitting the response. A FLEX SOM response may only
participate in the FLEX SOM auction with the auction ID specified in
the response.\178\
---------------------------------------------------------------------------
\178\ See proposed Options 3A, Section 13(c)(5), which identical
to ISE Options 3A, Section 13(c)(5).
---------------------------------------------------------------------------
<bullet> The minimum price increment for FLEX SOM responses is the
same as the one the Exchange determines for a class pursuant to
proposed Section 12(a)(5) above. A response to a FLEX SOM auction of a
complex Agency Order must have a net price. The System will reject a
FLEX SOM response that is not in the applicable minimum increment.\179\
---------------------------------------------------------------------------
\179\ See proposed Options 3A, Section 13(c)(5)(A), which is
identical to ISE Options 3A, Section 13(c)(5)(A).
---------------------------------------------------------------------------
<bullet> A Member using the same badge/mnemonic may only submit a
single FLEX SOM response per auction ID for a given auction. If an
additional SOM response is submitted for the same auction ID from the
same badge/mnemonic, then that FLEX SOM response will automatically
replace the previous FLEX SOM response.\180\
---------------------------------------------------------------------------
\180\ See proposed Options 3A, Section 13(c)(5)(B), which is
identical to ISE Options 3A, Section 13(c)(5)(B). Of note, the
Exchange will not allow Members to submit multiple FLEX SOM
responses using the same badge/mnemonic, and will not aggregate all
of the Member's FLEX SOM responses similar to standard non-FLEX
rules at Options 3, Section 13(b)(1)(K). See also Securities
Exchange Act Release No. 103667 (August 8, 2025), 90 FR 39042
(August 13, 2025) (SR-Phlx-2025-35) (Notice of Filing and Immediate
Effectiveness of Proposed Rule Change To Amend PIXL and Adopt New
Auctions).
---------------------------------------------------------------------------
<bullet> The System will cap the size of a FLEX SOM response at the
size of the Agency Order (i.e., the System will ignore size in excess
of the size of the Agency Order when processing the FLEX SOM
auction).\181\
---------------------------------------------------------------------------
\181\ See proposed Options 3A, Section 13(c)(5)(C), which
identical to ISE Options 3A, Section 13(c)(5)(c). Of note, the
Exchange will not allow Members to submit multiple FLEX SOM
responses using the same badge/mnemonic, and will not aggregate all
of the Member's FLEX SOM responses. As noted above, this will align
to current non-FLEX auction functionality, including SOM auctions in
Options 3, Section 11(d).
---------------------------------------------------------------------------
<bullet> FLEX SOM responses must be on the opposite side of the
market as the Agency Order. The System rejects a FLEX SOM response on
the same side of the market as the Agency Order.\182\
---------------------------------------------------------------------------
\182\ See proposed Options 3A, Section 13(c)(5)(D), which is
identical to ISE Options 3A, Section 13(c)(5)(D).
---------------------------------------------------------------------------
<bullet> FLEX SOM responses will not be visible to FLEX SOM auction
participants or disseminated to OPRA.\183\
---------------------------------------------------------------------------
\183\ See proposed Options 3A, Section 13(c)(5)(E), which is
identical to ISE Options 3A, Section 13(c)(5)(E).
---------------------------------------------------------------------------
<bullet> A Member may modify or cancel its FLEX SOM responses
during a FLEX SOM auction.\184\
---------------------------------------------------------------------------
\184\ See proposed Options 3A, Section 13(c)(5)(F), which is
identical to ISE Options 3A, Section 13(c)(5)(F).
---------------------------------------------------------------------------
<bullet> FLEX SOM responses in a complex strategy with a stock
component that are through the Stop Price must improve such Stop Price
by at least one cent.\185\
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\185\ See proposed Options 3A, Section 13(c)(5)(G). The Exchange
notes that ISE does not have a similar sentence but intends to file
a rule change to add this language to its corresponding rule.
---------------------------------------------------------------------------
Pursuant to proposed Section 13(d), a FLEX SOM auction concludes at
the earliest to occur of the following times: (1) the end of the FLEX
SOM auction period; and (2) any time the Exchange halts trading in the
affected underlying, provided, however, that in such instance the FLEX
SOM auction concludes without execution.\186\
---------------------------------------------------------------------------
\186\ See ISE Options 3A, Section 13(d) for identical rule text.
---------------------------------------------------------------------------
Proposed Section 13(e) will govern how executions will occur in
FLEX SOM. In particular, at the end of the FLEX SOM auction, the System
will execute the Agency Order against the Solicited Order or FLEX SOM
responses at the best price(s) as follows. For purposes of ranking the
Solicited Order and FLEX SOM responses when determining how to allocate
the Agency Order against the Solicited Order and those responses, the
term ``price'' refers to the dollar and decimal amount of the order or
response bid or offer.\187\ Proposed subparagraphs (e)(1)-(3) details
the FLEX SOM allocation methodology for the following scenarios:
---------------------------------------------------------------------------
\187\ See ISE Options 3A, Section 13(e) for identical rule text.
---------------------------------------------------------------------------
<bullet> Execution Against Solicited Order: The System executes the
Agency Order against the Solicited Order at the stop price if there are
no Public Customer FLEX SOM responses and the aggregate size of FLEX
SOM responses at an improved price(s) is insufficient to satisfy the
Agency Order.\188\
---------------------------------------------------------------------------
\188\ See proposed Section 13(e)(1), which is identical to ISE
Options 3A, Section 13(e)(1).
---------------------------------------------------------------------------
<bullet> Execution Against FLEX SOM Responses: The System executes
the Agency Order against FLEX SOM responses if (1) there is a Public
Customer FLEX SOM response and the aggregate size of that response and
all other FLEX SOM responses is sufficient to satisfy the Agency Order
or (2) the aggregate size of FLEX SOM responses at an improved price(s)
is sufficient to satisfy the Agency Order. The Agency Order executes
against FLEX SOM responses at each price level. At the price at which
the balance of the Agency Order can be fully executed, in the following
order:
[cir] Public Customer FLEX SOM responses (in time priority); \189\
and
---------------------------------------------------------------------------
\189\ See proposed Section 13(e)(2)(A), which is materially
identical to Cboe Rule 5.74(e)(2)(A).
---------------------------------------------------------------------------
[cir] All other FLEX SOM responses, allocated on a Size Pro-Rata
basis (as defined in Options 3, Section 10(a)(1)(E) and (F)).\190\
---------------------------------------------------------------------------
\190\ See proposed Section 13(e)(2)(B). Phlx's allocation model
differs from ISE's allocation model, although the Exchange notes
that Size Pro-Rata (as defined in Options 3, Section 10(a)) is
similar to pro-rata as referenced in ISE Options 3, Section 10(c).
Phlx's allocation model allocates to Market Maker pursuant to
Options 3, Section 10(a)(1)(E), after allocating to Public
Customers, and thereafter allocates to all other remaining non-
Public Customer, non-Market Maker interest based on a size pro-rata
basis. The Exchange notes that Public Customers on Phlx will
continue to have priority over other market participants. Phlx SOM
has the same allocation process pursuant to Options 3, Section
11(d)(3)(C). See also Securities Exchange Act Release No. 103667
(August 8, 2025), 90 FR 39042 (August 13, 2025) (SR-Phlx-2025-35)
(Notice of Filing and Immediate Effectiveness of Proposed Rule
Change To Amend PIXL and Adopt New Auctions).
---------------------------------------------------------------------------
<bullet> No Execution: The System will cancel the Agency Order and
Solicited
[[Page 41652]]
Order with no execution if there is a Public Customer FLEX SOM response
and the aggregate size of that response and other FLEX SOM responses is
insufficient to satisfy the Agency Order.\191\
---------------------------------------------------------------------------
\191\ See proposed Section 13(e)(3), which is identical to ISE
Options 3A, Section 13(e)(3).
---------------------------------------------------------------------------
Pursuant to proposed Section 13(e)(4), the System cancels any
unexecuted FLEX SOM responses (or unexecuted portions) at the
conclusion of a FLEX SOM auction.\192\
---------------------------------------------------------------------------
\192\ See ISE Options 3A, Section 13(e)(4) for identical text.
---------------------------------------------------------------------------
Lastly, the Exchange proposes a number of policies applicable to
FLEX SOM as Supplementary Materials to Options 3A, Section 13.
Specifically, proposed Supplementary Material .01 will provide that
prior to entering Agency Orders into a FLEX SOM auction on behalf of
customers, Initiating Members must deliver to the customer a written
notification informing the customer that its order may be executed
using the FLEX SOM Auction. The written notification must disclose the
terms and conditions contained in this Rule and be in a form approved
by the Exchange.\193\ Proposed Supplementary Material .02 will provide
that under this Rule, Initiating Members may enter contra-side orders
that are solicited. FLEX SOM provides a facility for Members that
locate liquidity for their customer orders. Members may not use the
FLEX SOM auction to circumvent Options 3, Section 22(b) limiting
principal transactions. This may include, but is not limited to,
Members entering contra-side orders that are solicited from (1)
affiliated broker-dealers, or (2) 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 customer order in whole or in part as principal.
Additionally, any solicited contra-side orders entered by Members to
trade against Agency Orders may not be for the account of an Exchange
Market Maker that is assigned to the options class.\194\ Lastly,
proposed Supplementary Material .03 will provide that if an allocation
would result in less than one contract, then one contract will be
allocated. This aligns to how the Exchange currently allocates
contracts in SOM.\195\
---------------------------------------------------------------------------
\193\ See ISE Supplementary Material .01 to Options 3A, Section
13 for identical text.
\194\ See ISE Supplementary Material .03 to Options 3, Section
13 for identical text. The Exchange is also adding a prohibition
against solicited contra-side orders being for the account of an
Exchange Market Maker assigned to the options class to align with
the current prohibition in Supplementary Material .03 to Options 3,
Section 11.
\195\ See Supplementary Material .09 to Options 3, Section 11.
---------------------------------------------------------------------------
O. Risk Protections (Section 14)
The Exchange proposes in Options 3A, Section 14 to specify which of
the Exchange's risk protections apply to FLEX trading. Risk protections
are protections in our System to help minimize risk. The risk
protections specified in proposed Options 3A, Sections 14(a) and 14(b)
are mandatory whereas the risk protections specified in proposed
Options 3A, Section 14(c) are optional. Proposed Section 14(a) will
provide that the following simple order risk protections (as described
in Options 3, Section 15) are available to FLEX Options: Market Wide
Risk Protection at Options 3, Section 15(a)(3) and Size Limitation at
Options 3, Section 15(b)(2).\196\ The Market Wide Risk Protections are
mandatory activity-based protections that allow Members to establish
limits for order entry and execution rate during a specified period of
time. The System maintains separate counts for each of the thresholds
specified in the rule over rolling periods of time.\197\ Upon
triggering the specified limits, the System will either delete all open
orders and prevent entry of new orders for the Member, or prevent entry
of new orders for the Member. Similar to how Market Wide Risk
Protection assists Members in better managing their risk in the
standard non-FLEX market on ISE today, the Exchange believes that
applying Market Wide Risk Protection to its FLEX market will be
beneficial for Members using FLEX trading.
---------------------------------------------------------------------------
\196\ Size Limitation for simple orders is a limit on the number
of contracts an incoming order may specify. Orders that exceed the
maximum number of contracts are rejected. The maximum number of
contracts, which shall not be less than 10,000, is established by
the Exchange from time-to-time.
\197\ As set out in Options 3, Section 15(a)(3), the Market Wide
Risk Protection will have counting programs that will maintain
separate counts, over rolling time periods specified by the Member
for each count, of: (1) the total number of orders entered in the
regular order book; (2) the total number of Complex Option Orders
entered in the complex order book; (3) the total number of Stock-
Option and Stock-Complex Orders entered into the complex order book;
(4) the total number of contracts traded in regular orders; (5) the
total number of contracts traded in Complex Options Orders; and (6)
the total number of contracts traded in Stock-Option and Stock-
Complex Orders entered into the complex order book. 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.
---------------------------------------------------------------------------
Proposed Section 14(b) will provide that the following complex
order risk protections (as described in Options 3, Section 16) are
available to FLEX Options: Strategy Protections (only to FLEX Auctions
and FLEX responses in proposed Options 3A, Section 11(b)), Size
Limitation,\198\ the Price Limit for Complex Order protections as
appliable to the stock component (as described in Options 3, Section
16(a), except that DNTT will not apply for the stock component),\199\
the Stock-Tied NBBO protections (only to FLEX Auctions and FLEX
responses in Section 11(b) above) \200\ (as described in Options 3,
Section 16(d)),\201\ and the Stock-Tied Reg SHO protections (as
described in Options 3, Section 16(e)).\202\ The
[[Page 41653]]
Exchange notes that the phrase ``except that DNTT is not available for
the stock component'' does not appear at ISE Options 3A, Section 14(b).
The Exchange proposes this rule text to make clear that DNTT will not
apply to the stock component of the order.\203\ Since Complex Orders
have no NBBO, DNTT could only apply to the stock component and with a
FLEX Option there is no market to trade-through.
---------------------------------------------------------------------------
\198\ Size Limitation for complex orders is a limit on the
number of contracts (and shares in the case of a Stock-Option
Strategy or Stock-Complex Strategy) any single leg of an incoming
Complex Order may specify. Orders that exceed the maximum number of
contracts (or shares) are rejected. The maximum number of contracts
(or shares), which shall not be less than 10,000 (or 100,000
shares), is established by the Exchange from time-to-time. See
Options 3, Section 16 (c)(2) which was amended by SR-Phlx-2025-17.
See Options 3, Section 14 which 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.
\199\ The Exchange introduced the Price Limit for Complex Order
protections in Options 3, Section 16(a) for its standard non-FLEX
complex market as part of the technology migration to enhanced
Nasdaq functionality discussed above. Options 3, Section 16 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.
\200\ The language describing ``only to FLEX Auctions and FLEX
responses in Section 11(b) above'' is not currently in ISE Options
3A, Section 14(b). This additional language provides greater clarity
to the risk protections. ISE will separately file to add this rule
text.
\201\ The Exchange introduced the Stock-Tied NBBO protections in
Options 3, Section 16(d) for its standard non-FLEX complex market as
part of the technology migration to enhanced Nasdaq functionality
discussed above. See Options 3, Section 16 which 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.
\202\ The Exchange introduced the Stock-Tied Reg SHO protections
in Options 3, Section 16(e) for its standard non-FLEX complex market
as part of the technology migration to enhanced Nasdaq functionality
discussed above. See Options 3, Section 16 which 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.
\203\ ISE will add the identical rule text in a separate rule
change.
---------------------------------------------------------------------------
The Strategy Protections listed in Options 3, Section 16(b) are the
Vertical Spread Protection,\204\ Calendar Spread Protection,\205\
Butterfly Spread Protection,\206\ and Box Spread Protection.\207\ These
Strategy Protections are all aimed at preventing the potential
execution of the specified complex strategies (i.e., vertical spread,
calendar spread, butterfly spread, and box spread) outside of specified
price parameters in order to prevent executions at undesirable prices.
Today, Strategy Protections do not apply to orders and responses
submitted into non-FLEX PIXL and non-FLEX SOM.\208\ The Exchange will
align this application to FLEX such that Strategy Protections would
only apply to FLEX Auctions and FLEX responses in proposed Section
11(b) as described above, and not to FLEX Orders and responses
submitted into FLEX PIXL and FLEX SOM.
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\204\ The Vertical Spread Protection will apply to a vertical
spread. A vertical spread is an order to buy a call (put) option and
to sell another call (put) option in the same security with the same
expiration but at a higher (lower) strike price. See Options 3,
Section 16(b)(1) which 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.
\205\ The Calendar Spread Protection will apply to a Calendar
Spread. A calendar spread is an order to buy a call (put) option
with a longer expiration and to sell another call (put) option with
a shorter expiration in the same security at the same strike price.
See Options 3, Section 16(b)(2) which 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.
\206\ The Butterfly Spread Protection will apply to a butterfly
spread. A butterfly spread is a three legged Complex Order with the
following: (1) two legs to buy (sell) the same number of calls
(puts); (2) one leg to sell (buy) twice the number of calls (puts)
with a strike price at mid-point of the two legs to buy (sell); (3)
all legs have the same expiration; and (4) each leg strike price is
equidistant from the next sequential strike price. See Options 3,
Section 16(b)(3) which 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.
\207\ The Box Spread Protection will apply to a box spread. A
box spread is a four legged Complex Order with the following: (1)
one pair of legs with the same strike price with one leg to buy a
call (put) and one leg to sell a put (call); (2) a second pair of
legs with a different strike price from the pair described in (1)
with one leg to sell a call (put) and one leg to buy a put (call);
(3) all legs have the same expiration; and (4) all legs have equal
volume. See Options 3, Section 16(b)(4) which 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.
\208\ See Options 3, Section 16(b), which describes the non-
applicability of the Strategy Protections to certain auction
mechanisms. Options 3, Section 16(b) provides that the Strategy
Protections do not apply when a standard non-FLEX complex order
includes at least one p.m.-settled leg and at least one a.m.-settled
leg. This would likewise be true for complex FLEX Orders (i.e., the
Strategy Protections would not apply when a complex FLEX Order
includes at least one p.m.-settled leg and at least one a.m.-settled
leg). Options 3, Section 16 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.
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As noted above, the Exchange adopted the Price Limit for Complex
Order protections in Options 3, Section 16(a),\209\ the Stock-Tied NBBO
protections in Options 3, Section 16(d),\210\ and the Stock-Tied Reg
SHO protections in Options 3, Section 16(e) \211\ (collectively, the
``Stock-Tied Risk Protections'') as part of SR-Phlx-2025-17 for its
standard non-FLEX complex market. The Exchange is now proposing to
apply the Stock-Tied Risk Protections to complex FLEX Orders to the
extent the complex FLEX Order has a stock component. The Price Limits
for Complex Orders in Options 3, Section 16(a) seek to prevent complex
executions from occurring outside of certain price limits that are tied
to the NBBO for the options series or for any stock component. Because
there will be no book for FLEX trading (and therefore no NBBO for the
FLEX Options series),
[[Page 41654]]
the Exchange will not apply the price limit protection tied to the NBBO
for the options series for FLEX trading. To the extent the complex FLEX
Order has a stock component, the Exchange will only apply the price
limit protection tied to the NBBO for the stock component. The below is
an example of how the Exchange will apply the Options 3, Section 16(a)
price protection to complex FLEX Orders.
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\209\ Specifically, Options 3, Section 16(a) states that as
provided in Options 3, Section 14(d)(2), the legs of a complex
strategy may be executed at prices that are inferior to the prices
available on other exchanges trading the same options series.
Notwithstanding, the System will not permit any leg of a complex
strategy to trade through the NBBO for the series or any stock
component by a configurable amount calculated as the lesser of (i)
an absolute amount not to exceed $0.10, and (ii) a percentage of the
NBBO not to exceed 500%, as determined by the Exchange on a class,
series or underlying basis. A Member can also include an instruction
on a Complex Order that each leg of the Complex Order is to be
executed only at a price that is equal to or better than the NBBO
for the options series or any stock component, as applicable (``Do-
Not-Trade-Through'' or ``DNTT''). As discussed later in this filing,
the NBBO price limit for the option series will not apply to complex
FLEX orders; however, the NBBO price limit for the stock component
will apply. Options 3, Section 16 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.
\210\ Specifically, Options 3, Section 16(d) provides that for
Complex Orders in Stock-Option Strategies and Stock-Complex
Strategies, the Exchange shall electronically communicate the
underlying security component of a Complex Order to Nasdaq Execution
Services, LLC (``NES''), its designated broker dealer, for immediate
execution. Such execution and reporting will not occur on the
Exchange and will be handled by NES pursuant to applicable rules
regarding equity trading. NES will ensure that the execution price
is within the high-low range for the day in that stock at the time
the Complex Order is processed and within a certain price from the
current market pursuant to Options 3, Section 16(a). If the stock
price is not within these parameters, the Complex Order is not
executable and the Exchange will hold the Complex Order on the Order
Book, if consistent with Member instructions. This risk protection
will apply wholesale to complex FLEX Orders with a stock component.
Options 3, Section 16 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.
\211\ Specifically, Options 3, Section 16(e) provides that when
the short sale price test in Rule 201 of Regulation SHO is triggered
for a covered security, NES will not execute a short sale order in
the underlying covered security component of a Complex Order if the
price is equal to or below the current national best bid. However,
NES will execute a short sale order in the underlying covered
security component of a Complex Order if such order is marked
``short exempt,'' regardless of whether it is at a price that is
equal to or below the current national best bid. If NES cannot
execute the underlying covered security component of a Complex Order
in accordance with Rule 201 of Regulation SHO, the Exchange will
hold the Complex Order on the Complex Order Book, if consistent with
Member instructions. The order may execute at a price that is not
equal to or below the current national best bid. For purposes of
this paragraph, the term ``covered security'' shall have the same
meaning as in Rule 201(a)(1) of Regulation SHO. This risk protection
will apply wholesale to complex FLEX Orders with a stock component.
Options 3, Section 16 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.
---------------------------------------------------------------------------
Scenario illustrating applicability of the stock buffer described
in Options 3, Section 16(a) Price Limits for Complex Orders:
IBM Underlying/Stock NBBO is 1.00 x 2.00
Stock buffer is configured to the lesser of $0.05 or 5%
FLEX Option NBBO does not exist, but the minimum trading increment/
minimum price variation (MPV) for option leg executions is $0.01
<bullet> FLEX Auction is entered in a Stock-Complex Strategy
encompassing 2 IBM FLEX Put options: Buy 1 Put (FLEX option leg A) +
Buy 1 Put (FLEX option leg B) + Buy 100 shares IBM stock: Buy 110 units
of the A + B + Stock strategy @net price of $1.02
<bullet> A firm responds to Sell 110 @net price of $0.89
FLEX Auction timer passes & auction concludes
[rtarr8] The firm's response trades with the FLEX Auction order 110
@net price of $0.97 because the stock component cannot trade at any
price lower than $0.95 ($1.00 - $0.05 [price limit for stock component]
= $0.95) and the FLEX option legs cannot trade at any price lower than
$0.01 as this is the minimum trading increment for option legs;
therefore, the minimum stock price of $0.95 plus the $0.01 minimum
option leg price means that, despite the $0.89 limit price on the
response, the strategy cannot trade below $0.97 ($0.95 + [$0.01 * 2
legs])
As it relates to the other Stock-Tied Risk Protections (i.e., the
Stock-Tied NBBO protections and the Stock-Tied Reg SHO protections),
these will apply wholesale to complex FLEX Orders with a stock
component as noted above.
Proposed Section 14(c) will provide that the optional risk
protections in Options 3, Section 28 are available to FLEX
Options.\212\ In particular, the following are optional risk
protections in Options 3, Section 28: (1) notional dollar value per
order (which will be calculated as quantity multiplied by limit price
multiplied by number of underlying shares), (2) daily aggregate
notional dollar value, (3) quantity per order, and (4) daily aggregate
quantity. In sum, Members may set thresholds for each of the foregoing
protections in order to limit the quantity and notional value they can
send per order and on aggregate for the day.
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\212\ The Exchange introduced the optional risk protections in
Options 3, Section 28 as part of the technology migration to
enhanced Nasdaq functionality discussed above. 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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P. Data Feeds (Section 15)
The Exchange proposes to specify in Options 3A, Section 15 which
data feeds it will disseminate auction notifications for simple and
complex FLEX Orders. Proposed Section 15(a) will provide that auction
notifications for simple FLEX Orders will be disseminated through the
Nasdaq Phlx Order Feed, as described in Options 3, Section
23(a)(2).\213\ Proposed Section 15(b) will provide that auction
notifications for complex FLEX Orders will also be disseminated through
the Nasdaq Phlx Order Feed, as described in Options 3, Section
23(a)(2).\214\ Today, simple and complex auction notifications inform
Members that an auction order has been accepted by the System and that
an auction is commencing. Auction notifications also contain all of the
relevant information Members need to respond to that particular
auction.\215\ As proposed, the simple and complex FLEX auction
notifications will likewise inform Members that a FLEX auction order
has been accepted by the System, a FLEX auction is commencing, and will
also contain all of the relevant information Members need to respond to
that particular FLEX auction.\216\ The FLEX auction notifications will
specify that a particular auction is FLEX versus non-FLEX. As is the
case today for non-FLEX auctions, FLEX auction notifications
disseminated over the Nasdaq Phlx Order Feed will be available to all
Members that elect to receive such notification messages.
---------------------------------------------------------------------------
\213\ The Nasdaq Phlx Order Feed is a real-time full Limit Order
book data feed that provides pricing information for orders on the
Phlx Order book for displayed order types as well as market
participant capacity. Nasdaq Phlx Order Feed is currently provided
as part of the TOPO Plus Orders data product. The Nasdaq Phlx
Order[s] Feed provides real-time information to enable users to keep
track of the single and complex order book(s). The data provided for
each options series includes the symbols (series and underlying
security), put or call indicator, expiration date, the strike price
of the series, leg information on complex strategies and whether the
option series is available for trading on Phlx and identifies if the
series is available for closing transactions only. The feed also
provides auction and exposure notifications and order imbalances on
opening/reopening (size of matched contracts and size of the
imbalance). The Exchange amend the PHLX Orders Fee as part of the
technology migration to enhanced Nasdaq functionality discussed
above. 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.
\214\ The Nasdaq PHLX Order Feed provides single-leg and complex
order information.
\215\ For example, at the commencement of a standard, non-FLEX
PIXL auction, the Exchange sends a broadcast message (i.e., auction
notification) that includes the series, price and size of the Agency
Order, and whether it is to buy or sell, through the Order Feed. See
Options 3, Section 13(c).
\216\ For example, at the commencement of a FLEX PIXL Auction,
the Exchange would send FLEX PIXL Auction notification message
detailing the side, size, auction ID, the length of the FLEX PIXL
Auction period, and FLEX Option series or complex strategy, as
applicable, of the Agency Order to all Members that elect to receive
FLEX PIXL Auction notification messages. See proposed Options 3A,
Section 12(c)(2).
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Q. FLEX Market Makers (Section 16)
Proposed Section 16 will govern FLEX Market Makers on the Exchange.
Pursuant to proposed Section 16(a), a FLEX Market Maker will
automatically receive an appointment in the same FLEX option class(es)
as its non-FLEX class appointments selected pursuant to Options 2,
Section 3.\217\ Only the Lead Market Maker in the non-FLEX Option may
be the assigned Lead Market Maker in that FLEX Option.\218\ Today, in
order for Market Makers to submit auction responses in option classes
through SQF, they need to be appointed to that option class.\219\ As
such, the Exchange is automatically carrying over the FLEX Market
Maker's non-FLEX options class appointment as its FLEX option class
appointment in order to allow the FLEX Market Maker to respond to the
electronic FLEX Auction, FLEX PIXL, and FLEX SOM as described above.
---------------------------------------------------------------------------
\217\ See ISE Options 3A, Section 16(a) for identical text.
\218\ The Exchange notes that this requirement is based on Phlx
Options 8, Section 34(d)(1), Phlx's floor FLEX rule, which currently
states that only the Lead Market Maker in the non-FLEX option may be
the assigned Specialist in that FLEX option.
\219\ See supra note 64 describing SQF features available in the
Exchange's non-FLEX market today (including the ability for Market
Makers to currently send auction responses). As discussed above, the
Exchange is proposing to also allow FLEX auction responses through
SQF.
---------------------------------------------------------------------------
Proposed Section 16(b) will provide that each FLEX Market Maker
must fulfill all the obligations of a Market Maker under Options 2 and
must comply with the applicable provisions, except FLEX Market Makers
do not need
[[Page 41655]]
to provide continuous quotes in FLEX Options.\220\
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\220\ See ISE Options 3A, Section 16(b) for identical text.
---------------------------------------------------------------------------
R. Letters of Guarantee (Section 17)
The Exchange proposes in Options 3A, Section 17(a) to provide that
no FLEX Market Maker shall effect any transaction in FLEX Options
unless one or more effective Letter(s) of Guarantee has been issued by
a Clearing Member and filed with the Exchange accepting financial
responsibility for all FLEX transactions made by the FLEX Market Maker
pursuant to Options 6, Section 4.\221\
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\221\ Options 6, Section 4 provides that no Market Maker shall
make any transactions on the Exchange unless a Letter of Guarantee
has been issued for such Member by a Clearing Member and filed with
the Exchange, and unless such Letter of Guarantee has not been
revoked pursuant to paragraph (c) of this Rule. A Letter of
Guarantee shall provide that the issuing Clearing Member accepts
financial responsibilities for all Exchange Transactions made by the
guaranteed Member.
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S. Position Limits (Section 18)
The Exchange proposes to detail the position limits for FLEX
Options in Options 3A, Section 18. As discussed below, proposed Section
18 will be based on the FLEX Options position limit rules on ISE and
its own market.
Proposed Section 18(a) will govern the position limits for FLEX
Index Options. Specifically, proposed Section 18(a)(1) will provide
that except as provided in proposed Section 18(a)(2)-(4) below, FLEX
Index Options shall be subject to the same position limits governing
index options as provided for in Options 4A, Section 6.\222\ Proposed
Section 18(a)(2) will provide that except as otherwise provided in
subparagraph (a)(3) of this Rule, in no event shall the position limits
for broad-based FLEX Index Options exceed 25,000 contracts on the same
side of the market.\223\ Proposed Section 18(a)(3) will provide that
there shall be no position limits for broad-based index options listed
in Options 4A, Section 6(a).\224\ However, each Member (other than FLEX
Market Makers) that maintains a FLEX broad-based index option position
on the same side of the market in excess of 100,000 contracts in NDX or
Nasdaq-100 ESG Index Options,\225\ for its own account or for the
account of a customer, shall report information as to whether the
positions are hedged and provide documentation as to how such contracts
are hedged, in the manner and form required by the Exchange. In
calculating the applicable contract-reporting amount, reduced-value
contracts and micro index contracts will be aggregated with full-value
contracts and counted by the amount by which they equal a full-value
contract (e.g., 10 MNX options equal 1 NDX full-value contract). The
Exchange may impose other reporting requirements as well as the limit
at which the reporting requirement may be triggered.\226\ Whenever the
Exchange determines that additional margin is warranted in light of the
risks associated with an under-hedged FLEX NDX or Nasdaq-100 ESG Index
options \227\ position, the Exchange may impose additional margin upon
the account maintaining such under-hedged position pursuant to its
authority under Options 6C, Section 5. The clearing firm carrying the
account also will be subject to capital charges under Rule 15c3-1 under
the Exchange Act to the extent of any margin deficiency resulting from
the higher margin requirements.\228\
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\222\ Options 4A, Section 6 presently sets forth the position
limits for broad-based and industry index options, respectively.
\223\ This separate same side position limit for broad-based
FLEX Index Options (except for the ones noted below) is based on the
Exchange's same side position limit for its standard market as set
forth in Options 4A, Section 6(a).
\224\ As such the following broad-based index options listed in
Options 4A, Section 6(a) will have no position limits for FLEX Index
Options: options on Full Value Nasdaq 100 Options, the Reduced Value
Nasdaq 100 Options, the Nasdaq 100-Micro Index Options, and the
Nasdaq-100 ESG Index Options.
\225\ The Nasdaq-100 ESG Index Options are currently not listed
on Phlx.
\226\ See Options 4A, Section 9(a)(13) (setting forth the same
reporting requirements for the Exchange's standard non-FLEX index
options market). See also Cboe Rule 8.35(b) for similar reporting
requirements.
\227\ The Nasdaq-100 ESG Index Options are currently not listed
on Phlx.
\228\ See Options 4A, Section 6(c) (setting forth the same
stipulation for the Exchange's standard index options market). See
also ISE Options 4A, Section 9(a)(14).
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Proposed Section 18(a)(4) will provide that industry-based FLEX
Index Options shall be subject to separate position limits of 18,000,
24,000, or 31,500 contracts, depending on the position limit tier
determined pursuant to Options 4A, Section 7(a)(1).\229\
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\229\ The proposed position limits align to the Exchange's non-
FLEX position limits for industry index options in Options 4A,
Section 6(b)(i).
---------------------------------------------------------------------------
Proposed Section 18(b) will govern the position limits for FLEX
Equity Options. Pursuant to proposed Section 18(b)(1)(A), there will
generally be no position limits for FLEX Equity Options with the
exceptions noted below.\230\ Pursuant to proposed Section 18(b)(2),
each Member (other than a Market Maker) that maintains a position on
the same side of the market in excess of the standard limit under
Options 9, Section 13 for non-FLEX Equity Options of the same class on
behalf of its own account or for the account of a customer shall report
information on the FLEX Equity option position, positions in any
related instrument, the purpose or strategy for the position, and the
collateral used by the account. This report shall be in the form and
manner prescribed by the Exchange.\231\ Pursuant to proposed Section
18(b)(3), whenever the Exchange determines that a higher margin
requirement is necessary in light of the risks associated with a FLEX
Equity option position in excess of the standard limit for non-FLEX
Equity options of the same class, the Exchange may consider imposing
additional margin upon the account maintaining such under-hedged
position, pursuant to its authority under Options 6C, Section 5.\232\
Additionally, it should be
[[Page 41656]]
noted that the clearing firm carrying the account will be subject to
capital charges under Rule 15c3-1 under the Exchange Act to the extent
of any margin deficiency resulting from the higher margin
requirement.\233\
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\230\ See ISE Options 3A, Section 18(b) for identical text. Of
note, the Exchange's rule will have exceptions for the aggregation
of FLEX positions (proposed Section 18(c)) and for position limits
for cash-settled FLEX Equity Options where the underlying security
is an ETF (proposed Section 18(b)(1)(B), which will be discussed
later in this filing). Recently, Phlx received approval to eliminate
the 25,000 contract position and exercise limits and apply the
position and exercise limits in ISE Options 9, Sections 13 and 15 to
IBIT options. See Securities Exchange Act Release No. 103564 (July
29, 2025), 90 FR 36229 (SR-ISE-2024-62) (Order Approving a Proposed
Rule Change, as Modified by Amendment Nos. 2 and 3, Regarding
Position and Exercise Limits for Options on the iShares Bitcoin
Trust ETF). As a result, position limits for options on IBIT would
be subject to the criteria in Options 9, Section 13(d) as well as
subsequent six-month reviews to determine future position and
exercise limits. Additionally, Phlx adopted rules to eliminate the
current 25,000 contract position and exercise limit for options on
the Grayscale Bitcoin Mini Trust (``BTC''), on the Bitwise Bitcoin
ETF (``BITB'') and on Grayscale Bitcoin Trust ETF (``GBTC''). See
Securities Exchange Act Release No. 103678 (August 11, 2025) (SR-
Phlx-2025-34) (not yet published). In addition to the approval to
eliminate the current 25,000 contract position and exercise limit
for options on IBIT, Phlx adopted rules to permit IBIT options to
transact as FLEX Equity Options subject to the position limits set
forth in Options 9, Section 13, and subject to the exercise limits
set forth in Options 9, Section 15 which would be aggregated with
positions on the same non-FLEX underlying ETF for the purpose of
calculating the position limits set forth in Options 9, Section 13,
and the exercise limits set forth in Options 9, Section 15. See
Securities Exchange Act Release No. 103565 (July 29, 2025), 90 FR
36233 (August 1, 2025) (SR-Phlx-2024-72) (Order Approving a Proposed
Rule Change To Permit the Trading of FLEX Options on Shares of the
iShares Bitcoin Trust ETF). Additionally, Phlx adopted rules to
permit BTC, BITB, and GBTC options to transact as FLEX Equity
Options subject to the position limits set forth in Options 9,
Section 13, and subject to the exercise limits set forth in Options
9, Section 15 which would be aggregated with positions on the same
non-FLEX underlying ETF for the purpose of calculating the position
limits set forth in Options 9, Section 13, and the exercise limits
set forth in Options 9, Section 15. See Securities Exchange Act
Release No. 103678 (August 11, 2025) (SR-Phlx-2024-34) (not yet
published).
\231\ See ISE Options 3A, Section 18(b)(2) for identical text.
\232\ Options 6C, Section 5 provides that the amount of margin
prescribed by these Rules is the minimum which must be required
initially and subsequently maintained with respect to each account
affected thereby; but nothing in these Rules shall be construed to
prevent a Member from requiring margin in an amount greater than
that specified. Further, the Exchange may at any time impose higher
margin requirements with respect to such positions when it deems
such higher margin requirements to be advisable.
\233\ See ISE Options 3A, Section 18(b)(3) for identical text.
---------------------------------------------------------------------------
Proposed Section 18(c) will govern the aggregation of FLEX
positions. Specifically, for purposes of the position limits and
reporting requirements set forth in this Section 18, FLEX Option
positions shall not be aggregated with positions in non-FLEX Options
other than as provided in this Section 18(c) and in Section
18(b)(1)(B),\234\ positions in FLEX Index Options on a given index
shall not be aggregated with options on any stocks included in the
index or with FLEX Index Option positions on another index, and
positions in FLEX Currency Options shall be aggregated with positions
in non-FLEX Currency Options.\235\ Pursuant to proposed Section
18(c)(1), commencing at the close of trading two business days prior to
the last trading day of the calendar quarter, positions in P.M.-settled
FLEX Index Options (i.e., the settlement value for FLEX Index Options
is derived from closing prices on the expiration date) shall be
aggregated with positions in Quarterly Options Series on the same index
with the same expiration and shall be subject to the position limits
set forth in Options 4A, Section 6, as applicable.\236\ Pursuant to
proposed Section 18(c)(2), commencing at the close of trading two
business days prior to the last trading day of the week, positions in
FLEX Index Options that are cash settled \237\ shall be aggregated with
positions in Short Term Option Series on the same underlying (e.g.,
same underlying index as a FLEX Index Option) with the same means for
determining exercise settlement value (e.g., opening or closing prices
of the underlying index) and same expiration, and shall be subject to
the position limits set forth in Options 4A, Section 6 (for broad-based
index options and narrow-based index options), as applicable.\238\
Pursuant to proposed Section 18(c)(3), as long as the options positions
remain open, positions in FLEX Options that expire on a third Friday-
of-the-month expiration day shall be aggregated with positions in non-
FLEX Options on the same underlying, and shall be subject to the
position limits set forth in Options 4A, Section 6, or Options 9,
Section 13, as applicable, and the exercise limits set forth in Options
9, Section 15, as applicable.\239\
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\234\ Proposed Section 18(b)(1)(B) will set forth the position
limits for cash-settled FLEX ETF options and will be discussed later
in this filing.
\235\ See ISE Options 3A, Section 18(c) and Phlx Options 8,
Section 34(i)(4) (FLEX Currency Options), respectively, for
identical text.
\236\ See ISE Options 3A, Section 18(c)(1) for substantially
similar rule text. The citations for ISE are to Options 4A, Section
6 and 7.
\237\ The Exchange notes that all FLEX Index Options will be
cash settled.
\238\ See ISE Options 3A, Section 18(c)(2) for substantially
similar rule text. The citations for ISE are to Options 4A, Section
6 and 7.
\239\ See ISE Options 3A, Section 18(c)(3) for substantially
similar rule text. The citations for ISE are to Options 4A, Section
6 and 7.
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[…truncated; see source link]Indexed from Federal Register on August 26, 2025.
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