Notice2026-02004
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Electronic FLEX 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
February 2, 2026
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 91 Issue 21 (Monday, February 2, 2026)</title>
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[Federal Register Volume 91, Number 21 (Monday, February 2, 2026)]
[Notices]
[Pages 4677-4690]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-02004]
[[Page 4677]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-104733; File No. SR-Phlx-2026-05]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend Electronic
FLEX Rules
January 28, 2026.
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 January 27, 2026, 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 introduce enhancements to electronic FLEX
trading by (i) allowing prices to be expressed as a percentage, (ii)
adopting a Delta-Adjusted at Close order instruction, and (iii)
adopting rules to permit the legs of a complex FLEX Order to include a
combination of FLEX Option series and non-FLEX Option series (``FLEX v.
Non-FLEX Order'').
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 introduce FLEX enhancements by (i)
allowing prices to be expressed as a percentage, (ii) adopting a Delta-
Adjusted at Close (``DAC'') order instruction, and (iii) adopting rules
to permit the legs of a complex FLEX Order to include a combination of
FLEX Option series and non-FLEX Option series (``FLEX v. Non-FLEX
Order''). As discussed in detail below, the proposed changes would
align the Exchange's FLEX rules with the FLEX rules of Cboe Exchange,
Inc. (``Cboe''), and therefore raise no novel issues for the
Commission. Each change will be described below.
FLEX Percentages
The Exchange proposes to allow prices to be expressed as percentage
of the closing value of the underlying equity security or index, which
would align with the Cboe's FLEX rules. Prices in FLEX trading are
allowed to be expressed as a fixed dollar and decimal amount. For
example, Options 3A, Section 3(c)(6) stipulates that the exercise price
for a FLEX Option \3\ may be in increments no smaller than $0.01. In
addition, Options 3A, Section 4(a) stipulates that bids and offers for
FLEX Options must be expressed in U.S. dollars and decimals in the
applicable minimum increment as set forth in Options 3A, Section 5(a).
Options 3A, Section 5(a), in turn, provides that the Exchange
determines 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.
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\3\ 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,'' and a FLEX Option on an index may be referred to as
a ``FLEX Index Option.'' See Options 3A, Section 1(b)(1).
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The Exchange now proposes to allow prices in FLEX trading to be
expressed using a percentage-based methodology that will be materially
identical to Cboe. The proposed percentage-based methodology would be
an alternative to the fixed dollar and decimal amount that was adopted
by the Exchange for FLEX trading. As proposed, the Exchange would allow
prices for FLEX trading (e.g., exercise price, bids/offers, and minimum
increments) to be expressed as a percentage of the underlying security
or index, and limit the percentage increment to be no smaller than
0.01%. Accordingly, the Exchange proposes to update its FLEX rule
provisions throughout Options 3A to reflect this enhancement. The
Exchange believes that the proposed enhancement would provide greater
flexibility in terms of describing an option contract tailored to the
needs of the investor.
Specifically, the exercise price provisions in Options 3A, Section
3(c)(6) would be amended to provide that the exercise price of a FLEX
Option may be in increments no smaller than (i) $0.01, if expressed as
a fixed price in terms of dollars and decimals or a specific index
value, as applicable, or (ii) 0.01%, if expressed as a percentage of
the closing value of the underlying equity security or index, as
applicable, on the trade date (the System rounds the actual exercise
price to the nearest fixed price minimum increment for bids and offers
in the class (as set forth in Options 3A, Section 5(a)).\4\ The
proposed changes in Section 3(c)(6) differentiates between the
expression of bids and offers of FLEX Options as a fixed price or as a
percentage of the closing value of the underlying. As described above,
the Exchange is also proposing to add a parenthetical regarding the
System rounding the actual exercise price to the nearest fixed price
minimum increment for bids and offers in the class (as set forth in
Options 3A, Section 5(a)), which would only be applied to exercise
prices expressed as a percentage. The dollar value of an exercise price
expressed as a percentage would be rounded to the nearest minimum
dollar value increment, which dollar value would represent the
ultimate, ``actual'' exercise price. For example, suppose a member
organization enters a percentage bid of 0.27 for a FLEX Equity Option,
which is the price at which the order for that option ultimately
trades, and the underlying security has a closing value of 24.52 on the
trade date. Following the close on the trade date, the System
calculates the transaction price to be 6.6204 (0.27 x 24.52). Assuming
the minimum increment for bids and offers in a FLEX Option class is
$0.01, the System rounds 6.6204 to the nearest penny, which would be a
transaction price of $6.62. The dollar value of the transaction price
of a FLEX Option for which the bids and offers were expressed as a
percentage (the ``final'') determined after the closing value is
available would be rounded to the nearest fixed price minimum increment
for the class (e.g., the nearest $0.01, if
[[Page 4678]]
that is the minimum determined for the class).\5\
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\4\ See Cboe Rule 4.21(b)(6)(A) for materially identical
provisions.
\5\ With respect to this example and rounding, if the price was
$6.625, the System would round to $6.63.
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The Exchange also proposes to amend Options 3A, Section 4(a)
(``Units of Trading'') as follows: \6\
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\6\ See Cboe Rule 5.3(e)(3) for substantially similar
provisions, except the Exchange will not incorporate Cboe's language
relating to FLEX Index Options with an index multiplier of one
(i.e., micro FLEX Index Options) because the Exchange does not offer
this capability today.
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(a) Bids and offers for FLEX Options must be expressed in (A) U.S.
dollars and decimals, if the exercise price for the FLEX Option series
is a fixed price; or (B) a percentage per unit of the underlying
security or index, as applicable, if the exercise price for the FLEX
Option series is a percentage of the closing value of the underlying
equity security or index on the trade date, each in the applicable
minimum increment as set forth in Section 5(a) below.
(1) If the exercise price of a FLEX Option series is a fixed price,
a bid of ``0.50'' represents a bid of (A) $50 (0.50 times 100 shares)
for a FLEX Equity Option; and (B) $50 (0.50 times an index multiplier
of 100) for a FLEX Index Option with a multiplier of 100.
(2) If the exercise price of a FLEX Option series is a percentage
of the closing value of the underlying equity security or index, a bid
of ``0.50'' represents a bid of (A) 50% (0.50 times 100 shares) of the
closing value of the underlying equity security on the trade date if a
FLEX Equity Option; and (B) 50% (0.50 times an index multiplier of 100)
of the closing value of the underlying index on the trade date if a
FLEX Index Option with a multiplier of 100.
(3) Following application of the designated percentage to the
closing value of the underlying security or index, the System rounds
the final transaction prices to the nearest minimum fixed price
increment for the class as set forth in Section 5(a) below.
Like Cboe, the Exchange is making clear with the proposed changes
in Section 4(a) that bids and offers must be in the same format as the
exercise price, as it would be difficult to apply a dollar price for a
FLEX Option series with a percentage-based exercise price.
Additionally, the proposed changes in Section 4(a) described above add
examples describing the expression of bids and offers of FLEX Options
as a fixed price or as a percentage of the closing value of the
underlying. The proposed changes also specify how the System would
round the final transaction price once the designated percentage value
is applied. The changes proposed in Options 3A, Section 4(a) are
intended to provide a clear, transparent description of how the
Exchange would apply the fixed price and percentage value methodology
for FLEX Options, and how the Exchange would round the final
transaction prices once the designated percentage is applied.
Further, the Exchange proposes to amend Options 3A, Section 5(a)
(``Minimum Trading Increments'') to reflect the alternative percentage
methodology as follows: \7\
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\7\ See Cboe Rule 5.4(c)(4) for materially identical provisions.
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The Exchange determines the minimum increment for bids and offers
on FLEX Options on a class-by-class basis, which may not be smaller
than (A) $0.01, if the exercise price for the FLEX Option series is a
fixed price, or (B) 0.01%, if the exercise price for the FLEX Option
series is a percentage of the closing value of the underlying equity
security or index on the trade date. Following application of the
designated percentage to the closing value of the underlying security
or index, the System rounds the final transaction prices to the nearest
fixed price minimum increment for the class as set forth in this
Section 5(a), in each case for the options leg of a FLEX Option.
The proposed changes in Options 3A, Section 5(a) are similar to
proposed changes described above for Options 3A, Sections 3(c)(6) and
4(a), and delineate between the expression of minimum increments for
bids and offers on FLEX Options as a fixed price or as a percentage of
the closing value of the underlying. The proposed changes also
similarly specify how the System would round the final transaction
price once the designated percentage value is applied.
The Exchange also proposes to make corresponding changes to its
FLEX auction rules to reflect that the prices of FLEX Orders \8\ and
FLEX auction responses submitted into any of the FLEX auctions must be
expressed either as a fixed dollar price or a percentage, and that such
price must be in the same format (i.e., fixed dollar price or
percentage) as the exercise price of the FLEX Option series.
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\8\ The term ``FLEX Order'' means an order submitted in a FLEX
Option pursuant to Options 3A. See Options 3A, Section 1(b)(2).
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Specifically for electronic FLEX Auctions in Options 3A, Section
11(b), the Exchange proposes in subparagraph (b)(1)(G)(iii) that the
minimum price increment for a FLEX Order must in the same format (i.e.,
price or percentage) as the exercise price of the FLEX Option
series.\9\ The Exchange proposes to add a similar requirement in
subparagraph (b)(2)(D)(vi) with respect to the minimum price increments
for FLEX responses by stipulating that the minimum price increment for
FLEX responses is the same as the one the Exchange determines for a
class pursuant to subparagraph (b)(1)(G) of this Rule, and must be in
the same format (i.e., price or percentage) as the exercise price of
the FLEX Option series.\10\ The System rejects a FLEX response that is
not in the applicable minimum increment or format.\11\ The Exchange
also proposes to amend the allocation provisions for electronic FLEX
Auctions in subparagraph (b)(3)(A) to provide that for purposes of
ranking FLEX responses when determining how to allocate a FLEX Order
against those responses, the term ``price'' refers to (i) the dollar
and decimal amount of the response bid or offer or (ii) the percentage
value of the response bid or offer, as applicable.\12\ The Exchange
also proposes to amend Options 3A, Section 12(e)(1)(B)(ii) related to
FLEX PIXL to add rule text that states, ``Member organizations may
elect for the Initiating Order to have less than their guaranteed
allocation as described in subparagraph (e)(4) below.'' \13\ The
Exchange proposes to
[[Page 4679]]
add this sentence as a guidepost and reminder that a member
organization may elect less than their guaranteed allocation.
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\9\ Cboe Rules 5.73(a)(5) (governing minimum price increments
for Cboe's FLEX Automated Improvement Mechanism (``FLEX AIM'')) and
5.74(a)(5) (governing minimum price increments for Cboe's FLEX
Solicited Auction Mechanism (``FLEX SAM'')) similarly require that
the minimum price increment be in the same format (i.e., price or
percentage) as the exercise price of the FLEX Option series. The
Exchange notes that Cboe's electronic FLEX Auction in Cboe Rule
5.72(c), which is the analogue to this particular electronic FLEX
Auction in Options 3A, Section 11(b), is silent on minimum price
increments. However, the Exchange will add the minimum price
increment requirement described above in the rules for its
electronic FLEX Auction for transparency and clarity.
\10\ While Cboe's electronic FLEX Auction response requirements
in Cboe Rule 5.72(c)(2)(D) are silent on minimum increments, the
auction response requirements for Cboe's FLEX AIM and FLEX SAM in
Cboe Rules 5.73(c)(5)(A) and 5.74(c)(5)(A), respectively, similarly
require that the minimum price increment for FLEX AIM and FLEX SAM
responses must be in the same format (i.e., price or percentage) as
the exercise price of the FLEX Option series. The Exchange believes
it will be helpful to add a similar requirement in the rules for the
Exchange's electronic FLEX Auction responses for transparency and
clarity.
\11\ See id.
\12\ See Cboe Rule 5.72(c)(3)(A) for materially identical
language.
\13\ Options 3A, Section 12(e)(4) is related to 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 organization or 40% if there are responses from two or
more member organizations) 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.
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The Exchange proposes similar changes for FLEX PIXL auctions in
Options 3A, Section 12. Specifically, the Exchange proposes in
subparagraph (a)(5)(C) that the price of the Agency Order \14\ and the
Initiating Order \15\ must be in the same format (i.e., price or
percentage) as the exercise price of the FLEX Option series.\16\ In
paragraph (b), the Exchange proposes to provide that the Initiating
Order must stop the entire Agency Order at a specified price in the
same format (i.e., price or percentage) as the exercise price of the
FLEX Option series.\17\ In subparagraph (c)(5)(A), the Exchange
proposes that the minimum price increment for FLEX PIXL responses shall
be the same as the Exchange determines for a class pursuant to
subparagraph (a)(5) of this Rule, and must be in the same format (i.e.,
price or percentage) as the exercise price of the FLEX Option
series.\18\ The System rejects a FLEX PIXL response that is not in the
applicable minimum increment or format.\19\ Lastly, in paragraph (e),
the Exchange proposes that 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 (1) the dollar and decimal amount of the order or
response bid or offer or (2) the percentage value of the order or
response bid or offer, as applicable.\20\
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\14\ Pursuant to Options 3A, 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.
\15\ See id.
\16\ See Cboe Rule 5.73(a)(5) for materially identical language.
\17\ See Cboe Rule 5.73(b) for materially identical language.
\18\ See Cboe Rule 5.73(c)(5)(A) for materially identical
language.
\19\ See id.
\20\ See Cboe Rule 5.73(e) for materially identical language.
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Likewise for FLEX SOM auctions in Options 3A, Section 13, the
Exchange proposes in subparagraph (a)(5)(C) that the price of the
Agency Order \21\ and the Solicited Order \22\ must be in the same
format (i.e., price or percentage) as the exercise price of the FLEX
Option series.\23\ In paragraph (b), the Exchange proposes that the
Solicited Order must stop the entire Agency Order at a specified price
in the same format (i.e., price or percentage) as the exercise price of
the FLEX Option series.\24\ In subparagraph (c)(5)(A), the Exchange
proposes that the minimum price increment for FLEX SOM responses shall
be the same increment as the Exchange determines for a class pursuant
to subparagraph (a)(5) of this Rule, and must be in the same format
(i.e., price or percentage) as the exercise price of the FLEX Option
series.\25\ The System rejects a FLEX SOM response that is not in the
applicable minimum increment or format.\26\ Lastly, the Exchange
proposes in paragraph (e) that 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 (1) the dollar and decimal amount of the order or
response bid or offer or (2) the percentage value of the order or
response bid or offer, as applicable.\27\
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\21\ Pursuant to Options 3A, 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.
\22\ See id.
\23\ See Cboe Rule 5.74(a)(5) for materially identical language.
\24\ See Cboe Rule 5.74(b) for materially identical language.
\25\ See Cboe Rule 5.74(c)(5)(A) for materially identical
language.
\26\ See id.
\27\ See Cboe Rule 5.74(e) for materially identical language.
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FLEX DAC
The Exchange proposes to adopt a DAC order instruction that an
Exchange member organization (``Member'') may apply to a FLEX Order
when entering it into the System \28\ for execution in a FLEX auction.
The proposed DAC order instruction is substantially similar to the DAC
order instruction offered by Cboe.\29\
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\28\ The term ``System'' means the electronic system operated by
the Exchange that receives and disseminates quotes, executes orders
and reports transactions. See Options 1, Section 1(a)(50).
\29\ See Cboe Rules 5.6(c) (definition of simple DAC order),
5.33(b)(5) (definition of complex DAC order), 5.34(c)(11) (DAC order
reasonability check), and 5.70(a)(2) (availability of DAC order
instruction). See also Securities Exchange Act Release Nos. 90319
(November 3, 2020), 85 FR 71361 (November 9, 2020) (SR-CBOE-2020-
014) (Order approving DAC order instructions for FLEX ETF and index
options); and 95707 (September 8, 2022), 87 FR 56477 (September 14,
2022) (SR-CBOE-2022-036) (Order approving DAC order instructions for
FLEX equity options).
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In particular, if a DAC order executes during the trading day, upon
receipt of the official closing price or value for the underlying from
the primary listing exchange or index provider, respectively, the
System will adjust the original execution price of a DAC order based on
a delta value applied to the change in the underlying reference price
between the time of execution and the market close. As proposed, DAC
orders will allow Members the opportunity to incorporate into the
pricing of their FLEX Options the closing price or the value of the
underlying on the transaction date based on how much the price or value
changed during the trading day.
Near the market close, the Exchange has observed that significant
numbers of market participants interact in the equity markets, which
may substantially impact the price or value, as applicable, of the
underlying at the market close. For example, shares of exchange-traded
funds (``ETFs'') that track indexes, which are increasingly popular,
often trade at or near the market close in order to better align with
the indexes they track and attempt to align the market prices of ETF
shares as close to the net asset value (``NAV'') \30\ per share as
possible. Further, the Exchange understands that market makers and
other liquidity providers seek to balance their books before the market
close and contribute to increased price discovery surrounding the
market close. The Exchange also believes it is common for other market
participants to seek to offset intraday positions and mitigate exposure
risks based on their predictions of the closing underlying prices or
underlying indexes (which represent the settlement prices of options on
those underlyings). The Exchange understands this substantial activity
near the market close may create wider spreads and increased price
volatility, which may attract further trading activity from those
participants seeking arbitrage opportunities and further drive prices.
[[Page 4680]]
In light of the significant liquidity and price/value movements in
equity shares that can occur near the market close, options closing and
settlement prices may deviate significantly from options execution
prices earlier that trading day.
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\30\ The NAV is an ETF's total assets minus its total
liabilities. ETFs generally must calculate their NAV at least once
every business day, and typically do so after market close. See 17
CFR 270.2a-4.
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The proposed DAC order instruction is designed to allow investors
to incorporate any upside market moves that may occur following
execution of the order up to the market close while limiting downside
risk. Additionally, the Exchange has noted that there have been a
number of managed funds that recognize benefits to their investors in
employing certain strategies that allow for their investors to mitigate
risk at the market close while also participating in beneficial market
moves at the close. The proposed DAC order would provide such funds
with an additional method to attempt to meet their objectives through
FLEX options strategies, thereby benefitting their investors. The
Exchange understands that, for example, defined-outcome ETF issuers
\31\ often times use multi-leg strategy orders when seeding their
funds. The goal of these strategies is to price the execution of these
orders at the close of the underlying; however, there is operational
execution risk in attempting to fill an order late in the day to
capture the underlying closing price. As such, a DAC complex order
would allow the Member to execute the order prior to the close and have
its price adjusted at the close. Because multi-leg strategies
themselves have delta offsets, the Member is hedged, meaning that the
Member may realize a negative movement versus the initial execution on
some legs, which is offset by a positive move in other legs. The
Exchange notes that the strategies may or may not define an exact delta
offset (``delta neutrality'' occurs where the strategy defines an exact
delta offset). Given the delta neutral nature of an order with an exact
offset, a Member would be indifferent to any movement in the underlying
from the time of execution to the close. Whether or not a Member
defines an exact delta offset, a Member would anticipate a given amount
of market exposure, either partial or none, depending on the strategy
and combinations of buy/sell, call/put, and quantity. A DAC complex
order allows the order to be executed anytime, eliminating the
execution risk, while realizing the objective of pricing based on the
exact underlying close for those strategies that require pricing at the
close or a defined amount of market exposure through the close.
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\31\ The Exchange notes that defined outcome ETF issuers do not
buy stocks directly, but instead, use options contracts to deliver
the price gain or loss of an index (such as the S&P 500) over the
course of a year, up to a preset cap.
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As stated, the System will adjust the original execution price of a
DAC order based on a delta value applied to the change in the price of
the underlying from the time of order execution to the market close.
Delta is the measure of the change in the option price as it relates to
a change in the price of the underlying security or value of the
underlying index, as applicable. The Exchange notes that 1.0000 is the
equivalent of a 100 delta. For example, an option with a 50 delta
(which is generally represented as 0.50) would result in the option
moving $0.50 per $1.00 move in the underlying (i.e., the price in the
underlying x delta value = anticipated price move in the option). Delta
changes as the price or value of the underlying stock or index changes
and as time changes, thus giving a Member an estimation of how an
option will behave if the price of the underlying moves in either
direction. Call option deltas are positive (ranging from 0 to 1),
because as the underlying increases in price so does a call option.
Conversely, put option deltas are negative (ranging from -1 to 0),
because as the underlying increases in price the put option decreases
in price. The Exchange understands that investors use delta as an
important hedging and risk management tool in options trading. For
example, by trading an option with a lower delta, an investor's
underlying position will be exposed to more downside risk if price or
value of the underlying fall. Therefore, the Exchange believes the
proposed DAC order instruction will allow a market participant to
maintain a full hedge of its position taken upon intraday execution of
a DAC order throughout the remainder of the trading day, which
ultimately reduces the market participants' portfolio risk.
The Exchange proposes to make DAC pricing instructions available
for simple and complex FLEX Orders pursuant to Options 3A, Sections
6(c) and 7(c), respectively. As proposed, Options 3A, Section 6(c)(1)
would provide that a DAC order is an order for which the System delta-
adjusts its execution after the market close. Specifically, the delta-
adjusted execution price equals the original execution price plus the
delta value times the difference between the official closing price or
value of the underlying on the transaction date and the reference price
or index value of the underlying (``reference price''). Upon order
entry for electronic execution, a Member must designate a delta value
and may designate a reference price. If no reference price is
designated, the System will include the price or value, as applicable
of the underlying at the time of order entry as the reference
price.\32\
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\32\ See Cboe Rule 5.6(c)(1) and (2) for materially identical
provisions.
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Likewise, the proposed definition in Options 3A, Section 7(c)(1)
provides for essentially the same definition, differing only in that it
applies to complex FLEX Orders, and upon order entry for electronic
execution a Member must designate a delta value per leg.\33\
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\33\ See Cboe Rule 5.33(b)(5)(A) and (B) for materially
identical provisions.
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As set forth in proposed Options 3A, Sections 6(c)(2) and 7(c)(2),
DAC orders and DAC complex orders may only be submitted for execution
in an electronic FLEX Auction pursuant to Options 3A, Section 11(b), a
FLEX Price Improvement Mechanism (``FLEX PIXL'') Auction pursuant to
Options 3A, Section 12, or a FLEX Solicited Order Mechanism (``FLEX
SOM'') Auction pursuant to Options 3A, Section 13.\34\ As it relates to
simple DAC orders only, proposed Options 3A, Section 6(c)(2) would also
provide that a DAC order submitted in a single stock equity option may
not be submitted until 45 minutes prior to the market close. A DAC
order may not be submitted in a single stock equity option on its
expiration day.\35\
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\34\ Cboe also delineates the submission of DAC orders and DAC
complex orders in their various FLEX auction mechanisms. See Cboe
Rules 5.6(c) and 5.33(b)(5) for similar provisions, except the
Exchange is not proposing to adopt the provisions in Cboe's rules
related to open outcry as the Exchange does not have a trading
floor. The Exchange is also not proposing to adopt Cboe's language
related to designating DAC orders and DAC complex orders as All
Sessions or RTH and Curb (i.e., order instructions on when certain
orders are eligible to trade during Cboe's various trading
sessions). Unlike Cboe, the Exchange does not offer different
trading sessions and therefore does not offer such order
instructions.
\35\ See Cboe Rule 5.6(c) for materially identical provisions.
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As a general rule, attempted manipulation of the price of a
security encounters greater difficulty the more volume that is traded,
and, generally, single name equity securities tend to be less liquid
and experience greater price sensitivity and larger market moves than
indexes or ETPs. The Exchange notes that on expiration day in
particular, underlying equity securities may experience more price
sensitivity than on non-expiration days and may be more susceptible to
incentive to manipulate given that the exercise value of overlying
options are contingent on the underlying closing price on expiration
day. Options holders on expiration day, whether their positions
[[Page 4681]]
were taken via a DAC execution or not, are subject to the risk of price
swings in the underlying prior to the final close; however, options
holders of positions taken via a DAC execution may potentially be more
susceptible to such risk given the price adjustment at close. For
example, if a market participant executes a DAC order to buy calls on
expiration day and a large price swing follows, in that, the underlying
price is pushed significantly higher before the close, the DAC option
holder would be forced to pay a much higher premium upon adjustment,
and ultimately expiration. Therefore, in order to mitigate the
potential risk associated with expiration day price swings, which may
potentially expose DAC order users the gamma effect of options as they
become more sensitive to underlying price changes as they approach
expiration, particularly in options overlying less liquid securities,
the proposed rule change restricts trading (regardless of opening or
closing) in simple DAC orders in single stock options on expiration
day. In addition to this, the proposed rule to require simple DAC
orders in single stock options to be submitted no earlier than 45
minutes before the market close will reduce the amount of time during
which the underlying price could potentially move; movements which, as
stated above, may pose greater risk upon price adjustment at close to
holders of DAC options. The Exchange notes that the same potential
incentive to ``push'' the price of the underlying on expiration day in
connection with the exercise price of an option is greatly diminished
for multi-leg orders given that parties to multi-leg transactions are
focused on the spread or ratio between the transaction prices for each
of the legs (i.e., the net price of the entire complex trade).
Members will enter into the System all DAC orders as they would any
other FLEX Order pursuant to Options 3A, Section 11(a) (governing the
order entry of FLEX Orders) and the applicable FLEX auction rules in
Options 3A, Sections 11(b), 12, and 13. As such, the Exchange points
out that DAC orders (like any FLEX Order) may only be submitted in
permissible FLEX Option series that comply with Options 3A, Section 3.
As defined above, a Member may designate the reference price of the
underlying upon submitting a DAC order. The Exchange proposes that a
Member-designated reference price will be subject to a reasonability
check. Specifically, proposed Options 3A, Section 14(d) will provide
that if a Member submits a DAC order to the System with a reference
price more than an Exchange-determined amount \36\ away from the
underlying price or value at the time of submission of the DAC order,
the System rejects the order.\37\ Moreover, if a Member chooses to
submit a DAC order without a reference price, the System will
automatically input the price or value of the underlying at the time of
order entry as the reference price.
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\36\ The Exchange will review market activity to determine the
Exchange-determined amount and, thereafter, amend that amount from
time-to-time. The Exchange will disclose the amount on its web page
at: <a href="https://www.nasdaq.com/docs/PHLXSystemSettings">https://www.nasdaq.com/docs/PHLXSystemSettings</a>.
\37\ The System will use the most recent last sale (or
disseminated index value) as the reference price. See Cboe Rule
5.34(c)(11) for materially identical provisions.
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As set forth in proposed Options 3A, Sections 6(c)(1) and 7(c)(1),
for a DAC order submitted into a FLEX electronic auction, a Member will
be required to designate a delta value upon order entry (including for
each leg of a DAC complex order). As noted above, delta is either
between 0 and 1 for calls, and 0 and -1 for puts.\38\ The Exchange
notes that 1.0000 is the equivalent of a 100 delta. Pursuant to the
general principles by which deltas function, the delta for a call
options leg(s) must be greater than zero and the delta for a put
options leg(s) must be less than zero. Additionally, the delta for call
(put) legs must be less (greater) than or equal to the delta for the
adjacent call (put) leg (i.e., the leg with the next largest strike
price) of the same expiration as the strike price increases. This is
also consistent with the general manner in which deltas function, and
ensures that the deltas on the same leg type within the same expiration
trend away from zero as the strike value increases.
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\38\ Note the Exchange will permit delta values to be input up
to four decimals, as prices for the underlying securities and index
values may be expressed in four decimals. However, bids and offers
may only be input in accordance with Options 3A, Section 5, which
bids and offers the System will use to rank and allocate orders and
auction responses.
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Typically, a Member submits a complex order (including a DAC
complex order, as proposed) with a net price, and, for a complex FLEX
Order, a Member must include a price for each leg upon electronic
submission.\39\ Therefore, upon electronic submission a Member must
also designate a delta value per leg along with the leg prices. At
market close, the System will then be able to apply the delta value per
each of the leg prices to properly calculate the DAC by adjusting the
execution price of each leg.
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\39\ See Options 3A, Section 11(a)(2)(B).
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A Member may apply the DAC order instruction (which must be a value
greater than 0) to a FLEX Order submitted into an electronic FLEX
Auction pursuant to Options 3A, Section 11(b), FLEX PIXL Auction
pursuant to Options 3A, Section 12, or FLEX SOM Auction pursuant to
Options 3A, Section 13. A DAC order will be handled and executed in the
FLEX auctions in the same manner as any other FLEX Order pursuant to
the applicable FLEX auction rules, including pricing, priority, and
allocation rules.\40\ The Exchange also notes that DAC orders submitted
to the Exchange will have unique message characteristics, indicative
that the order is a DAC order. Therefore, contra-side interest will be
aware of the specific order type and may then choose whether or not
they wish to interact with DAC orders.
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\40\ See Options 3A, Sections 11(b), 12, and 13.
---------------------------------------------------------------------------
Pursuant to Options 3A, Section 11(a), FLEX Orders (including
proposed DAC orders) may only be submitted for execution in an
electronic FLEX Auction, FLEX PIXL Auction, and FLEX SOM Auction. As
such, the Exchange believes it is appropriate for DAC orders to only
execute in FLEX auctions. The delta and reference price appended to a
DAC order would be based on data regarding the underlying at the time
of order entry. As those values change as the price or value of the
underlying change, the reference price and delta at the time of
submission would achieve the desired delta-adjusted price result only
if the DAC order executes almost immediately upon submission. To allow
a DAC order to potentially execute after a significant amount of time
has passed since entry, underlying price and related delta at the time
a DAC order would eventually execute would be different and thus not
achieve the Member's desired result. If a DAC order executes in an
auction, it will do so within a short time following submission.
Indeed, the Exchange's FLEX auctions last for a defined period, the
length of which is between three seconds to five minutes as designated
by the submitting Member.\41\ As such, the Exchange believes that the
execution of DAC orders in FLEX auctions is consistent with the
intended purpose of a DAC order.
---------------------------------------------------------------------------
\41\ See Options 3A, Sections 11(b)(1)(F), 12(c)(3), and
13(c)(3).
---------------------------------------------------------------------------
For any DAC order that executes during a trading day, upon receipt
of the official closing price for the underlying from the primary
listing exchange or index provider, the System will adjust the original
execution price based on the delta applied to the absolute change in
the underlying between the time of
[[Page 4682]]
execution and the market close. The Exchange notes that, like the
execution price of any option, a delta-adjusted price may never be zero
or negative. If this occurs as a result of the DAC calculation, the
System will set the delta-adjusted price to the minimum permissible
increment.
The delta adjustment formula that will be applied at the close will
be as follows:
The delta-adjusted price = the original execution price + (the
change in the underlying price x delta) or P2 = P1 + (U-R) * D,
where:
<bullet> P1 = Original execution price
<bullet> P2 = Delta-adjusted price calculated at the close
<bullet> R = Reference price
<bullet> U = Price of the underlying at the market close
<bullet> D = Delta
Example 1: A DAC call order is submitted for execution in an
electronic FLEX auction and the price of the underlying increases from
the time of the execution to the market close.
<bullet> P1 = $1.00
<bullet> R = $100
<bullet> U = $101.00
<bullet> D = .4000
Therefore, P2 = $1.00 + (($101-$100) * .4000) = $1.40.
Example 2: A DAC put order in a penny increment is submitted for
execution in a FLEX auction and the price of the underlying increases
from the time of execution to the market close.
<bullet> P1 = $1.00
<bullet> R = $100
<bullet> U = $103.00
<bullet> D = -.4000
Therefore, P2 = $1.00 + (($103--$100) * -.4000) = -$0.20. However,
because an execution price, including a delta-adjusted execution price,
may not be negative, the System would adjust P2 = $0.01 (the minimum
permissible increment).
Example 3: A DAC complex order has two legs, where leg 1 is buy
call and leg 2 is buy put (straddle).
Leg 1
<bullet> P1 = $18.00
<bullet> R = $2875.00
<bullet> U = $2878.00
<bullet> D = .5000
Therefore, P2 = ($18.00 + (($2878-$2875) * .5000) = $19.50
Leg 2
<bullet> P1 = $42.00
<bullet> R = $2875.00
<bullet> U = $2878.00
<bullet> D = -.5000
Therefore, P2 = ($42.00 + (($2878-$2875) * -.5000) = $40.50.
As described above, the Member would be indifferent to the move in
the underlying due to the offsetting nature of the two legs. The
initial execution price for the DAC complex order (P1) would be $18.00
+ $42.00 = $60.00, and the adjusted price calculated at the close (P2)
for the DAC complex order would be $19.50 + $40.50 = $60.00. As a
result, the Member in this Example 3 would be able to execute a hedged
strategy earlier in the trading day and have it priced exactly in line
with the underlying close without incurring any market risk or
operational risk of trying to time the execution exactly at the close.
Example 4: A defined outcome ETF uses a simple buffer protect
strategy in connection with a seed trade. The Member buys the at the
money put and sells the 10% out of the money put while selling the 5%
out of the money call.
Leg 1: Buy SPX May 2875 put at $69.00 with 50 delta.
<bullet> P1 = $69.00
<bullet> R = $2875.00
<bullet> U = $2878.00
<bullet> D = -.5000
Therefore, P2 = ($69.00 + (($2878-$2875) * -.5000) = $67.50.
Leg 2: Sell SPX May 2590 put at $15.00 with 12 delta.
<bullet> P1 = $15.00
<bullet> R = $2875.00
<bullet> U = $2878.00
<bullet> D = -.1200
Therefore, P2 = ($15.00 + (($2878-$2875) * -.1200) = $14.64.
Leg 3: Sell SPX May 3020 call at $11.50 with 16 Delta.
<bullet> P1 = $11.50
<bullet> R = $2875.00
<bullet> U = $2878.00
<bullet> D = .1600
Therefore, P2 = ($11.50 + (($2878-$2875) * .1600) = $11.98.
The initial execution price for the order would be $69.00-$15.00-
$11.50 = $42.50. The adjusted execution price would be $67.50-$14.64-
$11.98 = $40.88. The strategy would have an overall delta of -.46
(-.5000 + -.1200 +.16). As a result, the fund would be seeded exactly
at the closing price with exactly the delta exposure defined by the
strategy, without incurring any operational execution risk. The Member
would be able to execute a hedged strategy earlier in the trading day
and have it priced exactly in line with the underlying close without
incurring any unanticipated market risk or operational risk of trying
to time the execution exactly at the close.
A Member may only apply the DAC order instruction to a FLEX Order
for a FLEX Option series with an exercise price expressed as a fixed
price in dollars and decimals. The proposed changes in Options 3A,
Sections 6(c) and 7(c) will therefore provide that the Exchange may
determine to make DAC orders and DAC complex orders available for FLEX
trading, except for FLEX Options with an exercise price that is a
percentage of the closing value of the underlying equity security or
index value, as applicable on the trade date.\42\ A Member may not
apply the DAC order instruction to a FLEX Order for a FLEX Options
series with an exercise price formatted as a percentage of the closing
value of the underlying on the trade date, as this functionality is not
compatible with the DAC order instruction. The System will need a fixed
execution price at the time of order execution that will be delta-
adjusted (which delta value is based on dollar price movements in the
underlying) following the market close. However, a FLEX Order for a
series with an exercise price formatted as a percentage of the closing
value will execute at a percentage rather than a fixed price, which
would not be determined until the market close. Therefore, the
execution price of such a FLEX Order will incorporate the closing price
or value of the underlying in a different manner, and the System would
not have an execution price to adjust.
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\42\ This proposed limitation in Options 3A, Sections 6(c) and
7(c) is substantially similar to the limitation currently in Cboe
Rule 5.70(a)(2), except the Exchange will not adopt Cboe's
limitation on Asian- and Cliquet-settled FLEX Options. The Exchange
does not offer those settlement types today.
---------------------------------------------------------------------------
Similar to Cboe, the reference price and delta value, as well as
the execution price, will be provided to all transaction parties on all
fill reports at the time of the execution of a DAC order (i.e., an
``unadjusted DAC trade''). Unadjusted DAC trade information will also
be sent to the Options Clearing Corporation (``OCC'') and disseminated
to the Options Price Reporting Agency (``OPRA''). Specifically for FLEX
DAC orders, like for all FLEX Orders, trade information will be
reported via a text message to OPRA.
The Exchange notes that the text message for FLEX DAC orders will
contain an indicator that the order was executed as DAC, as well as the
delta and the reference price. The Exchange also notes that individual
legs of a FLEX DAC complex order will be reported with an identifier
that they are part of a complex order just like any complex order legs
are reported today. Initial
[[Page 4683]]
execution will be reported to OPRA as a FLEX text message and will
include a DAC identifier, delta value and reference price. The adjusted
DAC price will be reported to OPRA as a price correction similar to any
other adjusted trade, and will include a cancel for the initial
execution followed by a new trade containing the adjusted price. At
Market Close, when the execution price is delta-adjusted, all
transaction parties will be sent the adjusted prices. Finally, the
delta-adjusted price will also be sent to the OCC and OPRA once the
restatement process is complete. The prior unadjusted DAC trade report
that was sent to the OCC and disseminated to OPRA will be cancelled and
replaced with a trade report reflecting the delta-adjusted execution
price.\43\
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\43\ The Exchange notes that this restatement process is the
same for an order that has been adjusted or nullified and
subsequently restated pursuant to the Exchange's obvious error
rules. See Options 3, Section 20.
---------------------------------------------------------------------------
The Exchange has analyzed its capacity and believes the Exchange
has the necessary systems capacity to handle additional order traffic
and the associated restatements that may result from the adoption of
DAC orders. The Exchange also has consulted with OPRA and understands
that they have the necessary system capacity as well. Further, the
Exchange represents it has an adequate surveillance program in place to
monitor orders with DAC pricing and that the proposed pricing
instruction will not have an adverse impact on surveillance capacity.
Also, the Exchange does not believe the proposed order instruction will
have any impact on pricing or price discovery at or near the market
close. A DAC order will execute intraday in the same manner as any
other order, and its price will merely be automatically adjusted
following determination of the final closing price or value of the
underlying security or index, respectively.
FLEX v. Non-FLEX
FLEX Options are customized equity or index option contracts that
allow investors to tailor contract terms for exchange-listed equity and
index options. The Exchange may make simple FLEX Orders and complex
FLEX Orders pursuant to Options 3A, Section 3, available for FLEX
trading. Currently, the legs of a Complex FLEX Order are limited to
FLEX Option series only. An investor wishing to trade a complex
strategy containing both FLEX Option series and non-FLEX Option series
must execute such strategy using two or more separate orders.
At this time, the Exchange proposes to amend its rules to allow for
the legs of a complex FLEX Order to include a combination of FLEX
Option series and non-FLEX Option series (``FLEX v. Non-FLEX Order'')
identical to Cboe's rules.\44\ The Exchange notes that, with exception
of the rules proposed in this rule filing, FLEX v. Non-FLEX Orders will
be subject to the same trading rules and procedures that currently
govern the trading of other Complex FLEX Orders on the Exchange. To
permit the trading of FLEX v. Non-FLEX Orders, the Exchange proposes to
amend its rules as follows.
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\44\ See Securities Exchange Act Release No. 102297 (January 28,
2025), 90 FR 8822 (February 3, 2025) (SR-Cboe-2024-047) (Notice of
Filing of Amendment No. 2 and Order Granting Accelerated Approval of
a Proposed Rule Change, as Modified by Amendment No. 2, Regarding
the Types of Complex Orders Available for Flexible Exchange Options
(``FLEX'') Trading on the Exchange).
---------------------------------------------------------------------------
The Exchange proposes to add FLEX v. Non-FLEX Orders to the types
of complex orders available for FLEX trading.\45\ The proposed rule
text is substantially similar to Cboe Rule 5.70(b) and (e).\46\
---------------------------------------------------------------------------
\45\ Complex orders, including a Complex Options Order, Stock-
Options Order, and Stock-Complex Order are each as defined in
Options 3, Section 14(a)).
\46\ The Exchange is not adopting language similar to Cboe
5.70(d) which states that in classes determined by the Exchange, a
nonconforming FLEX v. Non-FLEX Order is not eligible for electronic
processing, in which case the nonconforming FLEX v. Non-FLEX Order
may only be submitted for manual handling and open outcry trading.
On Phlx, a nonconforming FLEX v. Non-FLEX Order would be eligible
for electronic processing.
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As part of the proposed changes, the Exchange proposes to add a
``FLEX Option series'' as a defined term in Options 3, Section 3, FLEX
Option Listing, at paragraph (b). Further, to enhance comprehension,
the Exchange proposes to amend Options 3A, Section 3(b)(2) to add the
word ``new'' before FLEX Options series for clarity.
Next, the Exchange proposes to amend Options 3A, Section 7, Complex
Orders. Specifically, the Exchange proposes to amend Options 3A,
Section 7(a) to state that the legs of a Complex FLEX Order may be for
FLEX Option series only or a combination of FLEX Option series and non-
FLEX Option series (``FLEX v. Non-FLEX Order'').\47\ As noted above,
FLEX v. Non-FLEX Orders will be considered complex FLEX instruments,
which will be subject to the same trading rules and procedures that
govern the trading of other FLEX Orders on the Exchange (unless
otherwise noted herein). The Exchange also proposes to amend Options
3A, Section 7(a) to remove the requirements set forth in subparagraphs
(1) and (2). Options 3, Section 7(a) provides that each leg(s) of a
Complex FLEX Order must be for a FLEX Option series authorized for FLEX
trading with the same underlying equity security or index. The Exchange
proposes to delete this requirement, as such requirement is already
contained within the definition of a Complex Options Strategy in
Options 3, Section 14(a)(1), a Stock-Options Strategy in Options 3,
Section 14(a)(2) and a Stock-Complex Strategy in Options 3A, Section
14(a)(3). Options 3A, Section 7(a)(2) provides that each leg(s) of a
Complex FLEX Order must have the same exercise style. The Exchange
proposes to delete this requirement to allow for the trading of the
proposed FLEX v. Non-FLEX Orders and will, in general, provide FLEX
Traders with more flexibility and opportunities for customization via
FLEX trading. Further, deletion of this requirement that each leg of a
Complex FLEX Order (whether comprised of all FLEX Option legs or FLEX
and non-FLEX Option legs) must have the same exercise style will expand
investors' choices and flexibility, and provide FLEX Traders with a
mechanism by which to manage the positions and associated risk in their
portfolios more precisely, based on exercise style.\48\ As amended,
Options 3A, Section 7(a)(1) and (2) are being deleted and Options 3A,
Section 7(a)(3) is being amended to provide that for an Index Option,
each leg may have a different settlement type (a.m.-settled or p.m.-
settled). Also, Options 3A, Section 7(a)(3) is being renumbered as
7(a)(1).
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\47\ Under the proposed rule change, Complex FLEX Orders could
include both listed instruments as well as FLEX instruments (if at
least one leg is for a FLEX Option series), with an optional stock
leg. Per the definition of complex order, the legs of all complex
FLEX Orders (including FLEX v. Non-FLEX options) must have the same
underlying security or index. See Options 3A, Section 7(a)(1).
\48\ This rule text is identical to Cboe Rule 5.70(b).
---------------------------------------------------------------------------
The Exchange also proposes to add rule text at Options 3A, Section
7(d) that provides that the non-FLEX Option leg(s) of a FLEX v. Non-
FLEX Order may not Leg into the simple order book. The Exchange
believes that this amendment will provide for more efficient execution
and processing of FLEX v. Non-FLEX Orders.
Today, FLEX and Non-FLEX Order are subject to different trading
settings and parameters (e.g., allocation, entitlements) pursuant to
their respective Rules. Non-FLEX Orders have separate market data
inputs, as the System must read market data for each options class in
connection with potential executions in non-FLEX options classes. If
the System receives a FLEX v. Non-FLEX Order, it would need to trade
the Non-FLEX leg against the
[[Page 4684]]
appropriate leg in the respective order book (FLEX Order Book vs. Non-
FLEX Order Book). This is because execution opportunities for FLEX v.
Non-FLEX Orders may be prevented. For example, if the Non-FLEX leg(s)
of the FLEX v. Non-FLEX Order would execute against interest in the
standard order book, there would be no execution opportunities for the
FLEX leg(s) of the FLEX v. Non-FLEX Order. As discussed below, the Non-
FLEX legs of FLEX v. Non-FLEX Orders will protect Priority Customer
orders in the simple order book for the Non-FLEX classes.
The Exchange proposes to amend Options 3A, Section 9, Trading
Halts. Identical to Cboe Rule 4.21(a)(4), the Exchange proposes a new
subparagraph (b) that states that the Exchange may halt trading in a
FLEX Options complex strategy (whether comprised of all FLEX Option
legs or FLEX and non-FLEX Option legs) if any leg of the strategy is
halted. Further, the System does not accept a Complex FLEX Order for a
series while trading in the class is halted. A FLEX Options complex
strategy may not execute until all legs are no longer halted.
The Exchange proposes to amend Options 3, Section 11, FLEX Options
Trading, to distinguish criteria for a complex order with only FLEX
Option legs and to add criteria for FLEX and non-FLEX Option legs of a
FLEX v. Non-FLEX Order similar to Cboe Rule 5.70. First, the Exchange
proposes to amend Options 3A, Section 11(a)(2) to specify that each
FLEX Option leg of the FLEX Option complex strategy must include all
terms for a FLEX Option series set forth in Options 3A, Section 3
(including that a non-FLEX Option series with identical terms is not
listed for trading), subject to the order entry requirements set forth
in Options 3A, Section 11.\49\
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\49\ This rule text is identical to Cboe Rule 5.72(b)(2).
---------------------------------------------------------------------------
Additionally, the Exchange proposes changes to distinguish the
criteria for a complex order with only FLEX Option leg(s) from that
proposed for FLEX v. Non-FLEX Orders, noting that there are no changes
to the criteria to those FLEX Orders containing only FLEX Option leg(s)
as a result of the proposed rule change other than removing the
requirement that all legs must have the same exercise style. The
Exchange proposes to amend Options 3A, Section 11(a)(2) to add a new
(B) titled ``FLEX Options Legs Only.'' The Exchange proposes to amend
the existing rule text in current Options 3A, Section 11(a)(2)(B) to
add ``with only FLEX legs'' and re-letter this section as Options 3A,
Section 11(a)(2)(B)(i).\50\
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\50\ Cboe Rule 5.72(b)(2)(A) distinguishes electronic FLEX
trading from open outcry FLEX trading for FLEX Options Legs. ISE
does not have a trading floor so that distinction is not necessary.
---------------------------------------------------------------------------
Next, the Exchange proposes to add a new Options 3A, Section
11(a)(2)(C) to provide the requirements for a complex FLEX Order with
only FLEX Option legs submitted into the System for an electronic FLEX
Auction pursuant to paragraph (b) below, a FLEX PIXL pursuant to
Section 12 below, or a FLEX SOM pursuant to Section 13, which must
include a bid or offer price for each FLEX Option leg but no bid or
offer price for each non-FLEX Option leg, and a net price. Proposed
Options 3A, Section 11(a)(2)(C)(i) would note that to achieve the
desired net execution price for a FLEX v. Non-FLEX Order: the execution
price of each non-FLEX Option leg may not be worse than the NBBO, worse
than the BBO, or equal to the BBO if there is a Priority Customer
order(s) on the simple order book. This requirement along with proposed
Options 3A, Section 11(a)(2)(C)(ii) are together required to achieve
the desired net execution price for a FLEX v. Non-FLEX Order. Proposed
Options 3A, Section 11(a)(2)(C)(ii) notes that the execution price of
each FLEX Option leg(s) may be adjusted so that the prices of the FLEX
legs combined with the prices of the non-FLEX legs add together to
equal the net price.\51\
---------------------------------------------------------------------------
\51\ This rule text is identical to Cboe Rule 5.72(b)(2)(B).
---------------------------------------------------------------------------
Thus, the non-FLEX Option legs of a FLEX v. Non-FLEX Order would be
able to trade at the same price as non-Priority Customer interest at
the BBO, which is consistent with complex orders comprised of solely
non-FLEX Options.\52\ In addition, no non-FLEX component of a FLEX v.
Non-FLEX Order would be able to trade at the same price as resting
Priority Customer interest at the BBO.\53\ If a non-FLEX Option leg of
a FLEX v. Non-FLEX Order cannot execute at a price permissible that
meets the requirements set forth in proposed Options 3A, Section
11(a)(2)(C)(i) the entire FLEX v. Non-FLEX Order will be cancelled.
---------------------------------------------------------------------------
\52\ See Cboe Rule 5.33(f)(2)(A)(ii).
\53\ See proposed Options 3A, Section 11(a)(2)(C)(i).
---------------------------------------------------------------------------
The below examples are designed to illustrate the pricing of a FLEX
v. Non-FLEX Order. Assume for each example a FLEX Trader wishes to
execute a Complex FLEX Order with two legs (one FLEX Option leg and one
non-FLEX Option leg).
Example 1
Listed (i.e., non-FLEX) legs are adjusted to their NBBO, FLEX
Option leg is adjusted residually to meet net execution price.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Instrument ID Legs Symbol Side Ratio Expiration Strike Type
--------------------------------------------------------------------------------------------------------------------------------------------------------
CI0001........................ Leg 1............... XYZ................. Buy................. 1 December............ 10 Call.
Leg 2............... 1 XYZ............... Sell................ 1 November............ 10.01 Call.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Market for Non-FLEX Leg
Away BBO: 2.15 x 2.35
BBO: 2.20 x 2.30
NBBO: 2.20 x 2.30
FLEX Order Auction (``FOA''): Buy 10 CI0001 @1.25
Leg 1 (Non-FLEX Option Leg) Price: N/A
Leg 1 Market: (Exchange Market-Maker) 2.20 x 2.30 (Exchange Market-
Maker) Leg 2 (FLEX Option Leg) Price: 1.00
Response 1: Sell 5 CI0001 @1.19
Response 2: Sell 5 CI0001 @1.25
FOA trades 5 CI0001 with Response 1 at 1.19. The legs print at 2.20
and 1.01.\54\
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\54\ In this example, the Leg 1 market is 2.2x 2.30; the System
would ensure that the Exchange does not trade through this market.
The transaction price is $1.19 (Response 1). With a Leg 2 price of
$1.00, Leg 1 would have to trade at $2.19, however, because this
would be outside the NBBO, Leg 1 will execute at $2.20. As a result,
Leg 2 would have to be adjusted to as close to the stipulated price
of $1.00 as possible--$1.01. The final transaction would price Leg 1
at $2.20 and Leg 2 at $1.01 for a next price of $1.19 (Response 1).
---------------------------------------------------------------------------
FOA trades 5 CI0001 with Response 2 at 1.25. The legs print at 2.25
and 1.00.\55\
---------------------------------------------------------------------------
\55\ In this example, the net price is $1.25, and the market for
Leg 1 is $2.20 x $2.30. The System cannot print Leg 2 at the
stipulated price of $1.00 because it would trade through. The
transaction price is $1.25 (Response 2). With a Leg 2 price of
$1.00, Leg 1 would have to trade at $2.25. Leg 1 is able to execute
at $2.25 since this is between the NBBO and Leg 2 would be allowed
to execute t $1.00. The final transaction would price Leg 1 at $2.25
and Leg 2 at $1.00 for a next price of $1.25 (Response 2).
---------------------------------------------------------------------------
Example 2
Listed (i.e., Non-FLEX) legs are adjusted up/down to their NBBO,
FLEX Option leg retains specified price, as no
[[Page 4685]]
further adjustment is needed to meet net price.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Instrument ID Legs Symbol Side Ratio Expiration Strike Type
--------------------------------------------------------------------------------------------------------------------------------------------------------
CI0001........................ Leg 1............... XYZ................. Buy................. 1 December............ 10 Call.
Leg 2............... 1 XYZ............... Sell................ 1 November............ 10.01 Call.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Market for Non-FLEX Leg
Away BBO: 2.10 x 2.35
BBO: 2.15 x 2.30
NBBO: 2.15 x 2.30
FOA: Buy 10 CI0001 @1.25.
Leg 1 (Non-FLEX Option Leg) Price: N/A
Leg 1 Market: (Exchange Market-Maker) 2.15 x 2.30 (Exchange Market-
Maker) Leg 2 (FLEX Option Leg) Price: 1.00
Response 1: Sell 5 CI0001 @1.19
Response 2: Sell 5 CI0001 @1.25
FOA trades 5 CI0001 with Response 1 at 1.19. The legs print at 2.19
and 1.00.\56\ FOA trades 5 CI0001 with Response 2 at 1.25. The legs
print at 2.25 and 1.00.\57\
---------------------------------------------------------------------------
\56\ In this example, the Leg 1 market is $2.15 x $2.30; the
System would ensure that the Exchange does not trade through this
market. The transaction price is $1.19 (Response 2). With a Leg 2
price of $1.00, Leg 1 would have to trade at $2.19 because this
would be inside the NBBO, Leg 1 will execute at $2.19. Therefore,
Leg 2 would not have to be adjusted and would execute at $1.00. The
final transaction would price Leg 1 at $2.19 and Leg 2 at $1.00.
\57\ In this example, the price is $1.25, and the market for Leg
1 is $2.15 x $2.30. The next transaction price is $1.25 (Response
2). With a Leg 2 price of $1.00, Leg 1 would have to trade at $2.25
and because this would be inside the NBBO, Leg 1 will execute at
$2.25. Therefore, Leg 2 would not have to be adjusted and would
execute at $1.00. The final transaction would price Leg 1 at $2.25
and Leg 2 at $1.00.
---------------------------------------------------------------------------
While the System followed the same process in both examples,
because the leg market was wider in the second example, the System was
able to execute the non-FLEX leg in that example at a price within that
market without the need to adjust the entered price of the FLEX leg.
Finally, the Exchange proposes to adopt a new Options 3A, Section
20 titled ``Nullification and Adjustment of Options Transactions
including Obvious Errors.'' Today, obvious errors related to complex
orders are described in Supplementary .05 to Options 3, Section 20. The
Exchange proposes to provide in this new section that in addition to
the language in Supplementary .05 to Options 3, Section 20, the
following paragraph will apply as it relates to FLEX Orders.
Specifically, the Exchange proposes to add rule text to this new
Options 3A, Section 20 to state that if a non-FLEX Option leg of a FLEX
v. Non-FLEX Order qualifies as an Obvious Error under Options 3,
Section 20(c)(1) or a Catastrophic Error under Options 3, Section
20(d)(1), then the non-FLEX Option leg that is an Obvious or
Catastrophic Error will be adjusted in accordance with Options 3,
Section 20(c)(4)(A) or (d)(3), respectively, regardless of whether one
of the parties is a Customer. However, the non-FLEX Option leg of any
Customer order subject to proposed paragraph (a) of Options 3A, Section
20 will be nullified if the adjustment would result in an execution
price higher (for buy transactions) or lower (for sell transactions)
than the Customer's net execution price for the non-FLEX Option leg. If
any leg of a FLEX v. Non-FLEX Order is nullified, the entire
transaction is nullified. This is consistent with the Exchange's
handling of other complex orders, including stock-option orders, and
ensures protections in the event of an Obvious or Catastrophic error.
The below example is designed to illustrate how a FLEX v. Non-FLEX
Order will be processed in the event of an Obvious Error. Assume in the
example that a FLEX Trader wishes to execute a Complex FLEX Order with
three legs (one FLEX Option leg and two non-FLEX Option leg).
Example 3: Listed Leg 1 Qualifies as Obvious Error
Leg 1: Buy 1 Call 1.00 x 1.20
Leg 2: Buy 1 Call 2.00 x 2.25
Leg 3: Buy 1 FLEX Call (Note: the FLEX leg is not considered in
determining obvious error adjustments)
cNBBO \58\ of listed legs: 3.00 x 3.45
---------------------------------------------------------------------------
\58\ The term ``cNBBO'' means the best net debit or credit price
for a Complex Order Strategy based on the NBBO for the individual
options components of a Complex Order Strategy, and, where the
underlying security is a component of the Complex Order, the
National Best Bid and/or Offer for the underlying security. See
Options 3, Section 14(a)(vi).
---------------------------------------------------------------------------
Assume Leg 1 updates to 1.00 x 4.00; Listed Leg cNBBO updates to 3.00 x
6.25
1 millisecond later
Complex Order trades at 5.45
Leg 1 trades @2.25
Leg 2 trades @2.20
FLEX leg trades @1.00. This order, specifically the execution on
Leg 1, qualifies as Obvious Error, based on prices prior to Leg 1
market going wide.\59\ In this example the prior market was $1.00 x
$1.20 before the market widened and Leg 1 traded at $2.25, therefore
this qualifies as Obvious Error.
---------------------------------------------------------------------------
\59\ See proposed paragraph (a) of Options 3A, Section 20. See
also Options 3, Section 20(c)(1). An Obvious Error will be deemed to
have occurred when the Exchange receives a properly submitted filing
where the execution price of a transaction is higher or lower than
the Theoretical Price for the series by an amount equal to at least
the amount shown in a table at Options 3, Section 20(c)(1).
---------------------------------------------------------------------------
Obvious error adjustment: Leg 1 is adjusted to trade at 1.60.
Theoretical Price \60\ (``TP'') = 1.10 \61\
---------------------------------------------------------------------------
\60\ Upon receipt of a request for review and prior to any
review of a transaction execution price, the ``Theoretical Price''
for the option must be determined. If the applicable option series
is traded on at least one other options exchange, then the
Theoretical Price of an option series is the last NBB just prior to
the trade in question with respect to an erroneous sell transaction
or the last NBO just prior to the trade in question with respect to
an erroneous buy transaction unless one of the exceptions in
subparagraphs (b)(1) through (3) below exists. For purposes of this
provision, when a single order received by the Exchange is executed
at multiple price levels, the last NBB and last NBO just prior to
the trade in question would be the last NBB and last NBO just prior
to Exchange's receipt of the order. See Options 3, Section 20(b).
\61\ The Theoretical Price is 1.10 because it is the midpoint
between the market (1.00 x 1.20).
---------------------------------------------------------------------------
theoretical offer \62\ = 1.45
---------------------------------------------------------------------------
\62\ The theoretical offer shown above represents the offer for
purposes of this example.
---------------------------------------------------------------------------
theoretical offer (1.45) + 0.15 adjustment \63\ = 1.60.
---------------------------------------------------------------------------
\63\ See proposed paragraph (a) of Options 3A, Section 20. See
also Options 3, Section 20(c)(4)(A). Where neither party to the
transaction is a Customer, the execution price of the transaction
will be adjusted by the Official pursuant to the table at Options 3,
Section 20(c)(4)(A). Any non-Customer Obvious Error exceeding 50
contracts will be subject to the Size Adjustment Modifier defined in
sub-paragraph (a)(4) of Options 3, Section 20. For purposes of this
Rule, an Official is an Options Exchange Official as defined in
Options 1, Section 1(b)(38).
The Exchanges notes that the counterparties to an execution of a FLEX
v. Non-FLEX Order trade all of the component legs of the order.
The Exchange believes that its existing surveillance and reporting
safeguards in place are adequate to deter and detect possible
manipulative behavior which might arise from trading FLEX v. Non-FLEX
Orders and will support the protection of investors and the public
interest. The Exchange also represents that it has the necessary system
capacity to support the new complex FLEX Order type. Finally, the
[[Page 4686]]
Exchange does not believe that any market disruptions will be
encountered with the introduction of this complex FLEX Order type. The
Exchange currently allows for trading of several types of complex
orders, including Stock-Option Orders, and has not experienced any
market disruptions or issues with capacity. Rather, the Exchange
believes the introduction of this complex FLEX Order type may promote
more efficient trading, as investors wishing to trade a complex
strategy containing both FLEX Option series and non-FLEX Option series
would no longer be required to execute such strategy using two or more
separate orders.
Other FLEX Changes
The Exchange proposes to amend Options 3A, Section 11(b)(2)(D)(vi)
related to FLEX Options Trading to add the following language to the
rule, ``Complex FLEX responses must be entered in 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 for a
Stock-Option Strategy or a Stock-Complex Strategy.'' The minimum price
increment for FLEX responses must adhere to the allowable price
increments for FLEX. A response to a FLEX Auction of a Complex Order
must have a net price. The System will reject a FLEX response that is
not in the applicable minimum increment. 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. A similar change is also proposed for Options 3A,
Section 12(c)(5)(G) that provides, ``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'' and at proposed Options
3A, Section 13(c)(5)(G) that provides, ``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.'' Additionally, the
same change is proposed for FLEX SOM at Options 3, Section
13(c)(5)(G).\64\
---------------------------------------------------------------------------
\64\ As proposed, Options 3, Section 13(c)(5)(G) would state
that 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.
---------------------------------------------------------------------------
The Exchange proposes to amend Options 3A, Section 14(b) related to
Risk Protections to provide that certain complex order risk protections
in Options 3, Section 16 are available to FLEX, such as Options
Strategy Protections (only to FLEX Auctions and FLEX responses in
Section 11(b) above), Size Limitation, the Price Limit for Complex
Orders protections as applicable to the stock component (as described
in Options 3, Section 16(a), (except that DNTT is not available for the
stock component), the Stock-Tied NBBO protections (only to FLEX
Auctions and FLEX responses in Section 11(b) above) (as described in
Options 3, Section 16(d)), and the Stock-Tied Reg SHO protections (as
described in Options 3, Section 16(e)). The Exchange proposes this rule
text to make clear that ``Do-Not-Trade-Through'' or ``DNTT'' will not
apply to the stock component of the order. This additional language
provides greater clarity to the risk protections. The Exchange notes
that DNTT applies only to options transactions. The stock component of
the order is not executed on the Exchange and therefore would not be
subject to DNTT.
Implementation
The Exchange proposes to implement the rule changes on or before Q3
2027. The Exchange will issue an Options Trader Alert notifying Members
of each implementation date.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\65\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\66\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest.
---------------------------------------------------------------------------
\65\ 15 U.S.C. 78f(b).
\66\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
FLEX Percentages
The Exchange believes that the proposed enhancement to allow prices
in FLEX trading to be expressed using a percentage-based methodology
would remove impediments to and perfect the mechanism of a free and
open market as this change would provide greater flexibility in terms
of describing an option contract tailored to the needs of the investor.
In addition, the Exchange believes that the related changes to specify
how exercise prices and bids/offers will be rounded, and how they will
be stated using the proposed percentage-based methodology should
provide greater clarity and allow market participants to specify
contracts that meet their particular needs. In addition, the proposed
changes would align the Exchange's FLEX rules with the FLEX rules of
Cboe as noted throughout the ``Purpose--FLEX Percentages'' subsection
above, and therefore raises no novel issues.
FLEX DAC
The Exchange believes that the proposed DAC order will promote just
and equitable principles of trade and will remove impediments to and
perfect the mechanism of a free and open market and national market
system, as it will allow market participants to incorporate into the
pricing of their options the closing price of the underlying on the
transaction date based on the amount in which the price or value of the
underlying change intraday, thus, allowing investors to incorporate
potential market moves that may occur following the execution of an
order up to the market close. As described above, the market close is a
time in which a significant numbers of participants interact on the
equity markets. This activity may contribute to substantially increased
liquidity and significant price volatility near the close of the equity
markets, which can potentially cause the closing prices of the
underlyings and, therefore, the settlement prices of options on those
underlyings to greatly deviate from the average option execution prices
traded earlier that trading day. The Exchange believes DAC orders will
serve to protect investors by allowing them, through use of the
underlying reference prices and delta, to fully hedge their options
positions taken during the trading day through the market close and
potentially benefit from price movements at the close. Also, as managed
funds have begun utilizing strategies at the close in order to
[[Page 4687]]
mitigate risk at the close and participate in beneficial market moves
at the same time, the Exchange believes that DAC orders will offer an
additional method by which these funds will be able to meet these
objectives through the execution of FLEX options strategies, thereby
benefiting investors that hold shares of these funds.
Additionally, the proposed restrictions in Options 3A, Section
6(c)(2) in connection with the submission of simple DAC orders in
equity options are designed to prevent fraudulent and manipulative acts
and practices and protect investors by mitigating the potential risk
associated with expiration day price swings, which may potentially
expose DAC order users to the gamma effect of options as they become
more sensitive to underlying price changes as such options approach
expiration, and reducing the amount of time during which the underlying
price could potentially move. As described above, single-name
securities may experience greater price sensitivity and may experience
larger price swings than compared to indexes and ETFs, and DAC option
holders in particular may potentially be subject to a greater risk of
paying much higher premiums given the price adjustment at close. The
Exchange believes the proposed restrictions will minimize any potential
incentive to attempt to manipulate the equities that may underlie a DAC
order, particularly those securities that may experience relatively
lower volume, and will mitigate potential risk to holders of DAC
options in single-name securities.
The Exchange further believes that the adoption of DAC orders on
the Exchange will promote just and equitable principles of trade,
remove impediments to and perfect the mechanism of a free and open
market and a national market system because DAC orders will be entered,
priced, prioritized, allocated and execute as any other FLEX Order
would when submitted into any FLEX auction. Like any FLEX Order, a FLEX
DAC order may only be submitted into FLEX Options series eligible for
trading pursuant to the FLEX Rules. As such, market participants would
not be subject to any new or novel order entry, pricing, allocation,
and execution processes in relation to their DAC orders as such orders
will be handled pursuant to the Exchange Rules in Options 3A governing
the applicable FLEX auction processes, which have been previously
approved by the Commission.
The Exchange believes that the general delta value requirements are
in line with just and equitable principles or trading and with the
protection of investors because they are consistent with the manner in
which a delta is commonly known to function and generally used in
options trading. Further, the Exchange believes that proposed Options
3A, Section 14(d) provides a System control in connection with DAC
orders that is designed to protect investors. The Exchange believes the
proposed reference price reasonability check will mitigate risks
associated submitting a DAC order with a reference price unintended by
the Member as a likely result of human or operational error. The
Exchange also notes that the proposed DAC order reasonability check in
Options 3A, Section 14(d) is materially identical to Cboe's DAC order
reasonability check in Cboe Rule 5.34(c)(11).
In addition, the Exchange believes that permitting a DAC order to
execute only in a FLEX auction will protect investors and serve to
remove impediments to and perfect the mechanism of a free and open
market and national market system, because it is consistent with the
intended purpose of DAC orders. This would ensure that DAC orders that
can execute would do so within a short time following submission and
therefore in a manner that achieves a Member's desired delta-adjusted
price. As described above, the goal of a DAC order is to adjust the
execution price based on a delta value applied to the change in the
underlying price between the market close and the time of the trade.
Therefore, a DAC order must be able to execute as close in time as
possible to the time of order submission (i.e., the point in time a
Member designates a reference price and delta) so as to allow the
reference price and related delta to remain in line with the underlying
price information at the time of submission and achieve the User's
desired result. As such, a DAC order submitted to a FLEX auction, like
any FLEX Order submitted in a FLEX auction, will be executed within a
short time following submission. Thus, the Exchange believes that the
proposed limitation to FLEX auctions would protect investors by
allowing DAC orders to execute in line with Members' expectations and a
DAC order's intended purpose.
The Exchange believes that by providing that a User may not apply
the DAC order instruction to a FLEX Order for a FLEX Option series with
an exercise price formatted as a percentage of the closing value of the
underlying on the trade date will remove impediments to and perfect the
mechanism of a free and open market and national market system and
generally protect investors because these FLEX terms are inconsistent
with the DAC order instruction and would conflict with the manner in
which the System calculates the delta-adjusted price upon the market
close.
The Exchange notes that it has discussed with the OCC and OPRA its
plan to adopt DAC orders and to apply the restatement process described
above to FLEX DAC orders. Moreover, the Exchange represents that it has
the necessary systems capacity to handle any additional order traffic
and the related restatements that may result from the adoption of DAC
orders, thereby ensuring the protection of investors. The Exchange also
has consulted with OPRA and understands that they have the necessary
system capacity as well. The Exchange also believes that its existing
surveillances are adequate to monitor trading of DAC orders thereby
helping to ensure the maintenance of a fair and orderly market.
Finally, as noted in the purpose section, the proposed DAC changes
are substantially similar to Cboe's DAC order instruction. As discussed
above, there are minor differences in the Exchange's proposed
implementation of DAC orders. Notably, the Exchange will not adopt
Cboe's DAC rule provisions related to open outcry trading, designations
for different trading sessions, or Asian- and Cliquet-settled FLEX
Options, as the Exchange does not offer these capabilities today. The
Exchange therefore does not believe that the proposed changes raise any
novel issues that have not already been considered by the Commission,
notwithstanding these minor differences.
FLEX v. Non-FLEX
Specifically, the Exchange believes the proposed rule change will
benefit investors by expanding investors' choices and flexibility with
respect to the trading of FLEX Options. The Exchange believes that
introducing FLEX v. Non-FLEX Orders will increase order flow to the
Exchange, increase the variety of options products available for
trading, and provide a valuable tool for investors to manage risk.
The Exchange believes that the proposed rule change would remove
impediments to and perfect the mechanism of a free and open market as
FLEX v. Non-FLEX Orders would enable market participants to execute a
complex strategy including a combination of FLEX Option series and non-
FLEX Option series, which would, in turn, provide greater opportunities
for market participants to manage risk through the use of a complex
FLEX
[[Page 4688]]
Order to the benefit of investors and the public interest. The proposed
rule change will benefit Members by providing a more efficient
mechanism for Members to provide and seek liquidity for customized or
complex FLEX strategies which include a non-FLEX Option leg(s).
Further, trading FLEX Options, including FLEX v. Non-FLEX Orders,
on an exchange is an alternative to trading customized options in OTC
markets and carries with it the advantages of exchange markets such as
transparency, parameters and procedures for clearance and settlement,
and a centralized counterparty clearing agency. Therefore, the Exchange
believes the proposed rule change will promote these same benefits for
the market as a whole by providing an additional venue for market
participants to seek liquidity for customized, large-sized, or Complex
FLEX option orders, including those with a non-FLEX Option leg(s). The
Exchange believes that providing an additional venue for these FLEX
orders, rather than potentially splitting the orders across OTC and
exchange markets, will benefit investors by increasing competition for
order flow and executions, and thereby potentially result in more
competitive pricing related to FLEX Options.
The Exchange believes that the proposed changes to Options 3A,
Section 7 to add FLEX v. Non-FLEX Orders to the list of complex orders
available for FLEX trading, are consistent with the Act and remove
impediments to and perfect the mechanism of a free and open market and
a national market system because the changes will allow investors to
trade in a more efficient manner, allowing investors to better
customize their trading strategies and implement more precise trading
strategies which are not available under current rules. Currently, a
market participant is unable to trade a FLEX Option and a listed option
as part of the same complex strategy; such user must submit an order
containing the FLEX Option(s) and an order containing the listed
option. This may introduce additional complexities such as price and
legging risk, which would be eliminated under the proposed rule change.
These complexities may unnecessarily limit market participants' ability
to trade in an exchange environment that offers the added benefits of
transparency, price discovery, liquidity, and financial stability.
These investors may have improved capability under the proposed rule
change to execute strategies to meet their specific investment
objectives by using a single order with customized FLEX Option legs
with FLEX and Non-FLEX Orders.
The Exchange's proposal to amend Options 3A, Section
12(e)(1)(B)(ii) related to FLEX PIXL to add rule text concerning
guaranteed allocation is consistent with the Act as this is case today
and this rule text will serve as a guidepost and reminder that a Member
may elect less than their guaranteed allocation in non-FLEX Option
legs.
Similarly, the Exchange also believes the proposed changes to
Options 3A, Section 7(a), to remove the requirement that each leg of a
complex FLEX Order must have the same exercise style, will remove
impediments to and perfect the mechanism of a free and open market and
benefit investors, because it will provide Members with additional
flexibility and precision in their investment strategies, by allowing
Members to trade complex strategies that would otherwise be required to
split into multiple, separate orders.
The Exchange believes the proposed addition of Options 3A, Section
9(b) which address when the Exchange may halt trading in a FLEX Options
complex strategy (whether comprised of all FLEX Option legs or FLEX and
non-FLEX Option legs), are consistent with the Act and promotes the
public interest and the protection of investors by clarifying the
Exchange's authority with respect to FLEX Options complex strategies
comprised of all FLEX Option legs and providing a consistent and
transparent procedure with respect to FLEX Options complex strategies
comprised of FLEX and non-FLEX Option legs, that would be applied by
the Exchange, similar to trading halt authority under current
rules.\67\ Further, the proposed change to add the defined term ``FLEX
Option series'' provides further clarity within the Rules and
eliminates potential confusion by providing a definition of ``FLEX
Option series'' to the benefit of investors.
---------------------------------------------------------------------------
\67\ See, e.g., Options 3A, Section 9.
---------------------------------------------------------------------------
The Exchange believes the proposed changes to Options 3A, Section
11(a)(2), which provide clarity with respect to the criteria required
for Complex FLEX Orders with FLEX Option legs only in new (B), helps
will help promote a fair and orderly national options market system. As
such, the changes proposed under Options 3A, Section 11(a)(2)(C), to
separate out the requirements for Complex FLEX Orders with FLEX Option
legs only, provide clarity regarding the requirements for Complex FLEX
Orders with FLEX Option legs only, as compared to the proposed
requirements for Complex FLEX Orders with FLEX and non-FLEX Option
legs.
The Exchange believes the proposed pricing requirements for FLEX v.
Non-FLEX Orders, set forth in proposed Options 3A, Section 11(a)(2)(C),
would remove impediments to and perfect the mechanism of a free and
open market, as the proposed trading process for FLEX v. Non-FLEX
Orders will provide the ability for investors to achieve the desired
net package price for those orders while protecting customers with
resting interest in the non-FLEX simple order book. By requiring a FLEX
v. Non-FLEX Order submitted into a FLEX Auction to include a bid or
offer price for each FLEX Option leg, but no bid or offer for each non-
FLEX Option leg, and a net price, the requirements ensure that the non-
FLEX Option leg will be subject to the same pricing requirements as
they would if not part of a FLEX v. Non-FLEX Order. Specifically, the
price of any non-FLEX Option leg that is part of a FLEX v. Non-FLEX
Order may not be outside of the BBO or NBBO. The Exchange's proposal
will continue to protect Priority Customer interest on the Exchange, as
the non-FLEX Option legs of a FLEX v. Non-FLEX Order will always trade
at a price better than BBO if there is a Customer on a leg. Further,
the price of a FLEX Option leg(s) that is part of a FLEX v. Non-FLEX
Order must, following execution of the Non-FLEX Option leg(s), serve to
achieve the net execution price (which may not be worse than the
desired net price included at order submission), which the Exchange
believes will protect investors by ensuring the price of the FLEX
Option leg(s) adhere to the agreed upon execution prices and the
order's limit price.
The Exchange believes this proposed trading process will ensure
that a user who chooses to submit a listed (i.e., Non-FLEX) leg as part
of a FLEX v. Non-FLEX Order is subject to the same pricing requirements
as they would be if the listed leg was not submitted with FLEX Option
legs for execution. Ultimately, FLEX v. Non-FLEX Orders will trade in
the same manner as Complex FLEX Orders do today, and execution of the
non-FLEX Option legs of these orders will continue to comply with
linkage requirements (by not permitting trade-throughs of the NBBO) and
protect resting customer interest in the simple order book. Further,
the Exchange believes that the proposal to not permit the non-FLEX
Option legs of a FLEX v. Non-FLEX Order to leg into the simple order
book is consistent with the Act and promotes the public interest and
the protection of investors, because it will provide for more efficient
execution and processing of FLEX v.
[[Page 4689]]
Non-FLEX Orders, as legging would prevent execution opportunities for
these orders (as discussed above).
Finally, the Exchange believes that the proposed rule change is
designed to not permit unfair discrimination among market participants
as all Members may, but are not required to, trade FLEX v. Non-FLEX
Orders.
Other FLEX Changes
The Exchange's proposal to amend Options 3A, Section
11(b)(2)(D)(vi) and Options 3A, Section 12(c)(5)(G) to describe the
minimum increments is consistent with the Act because 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.
The Exchange's proposal to amend Options 3A, Section 14(b) to
provide that certain complex order risk protections in Options 3,
Section 16 are not available for the stock component is consistent with
the Act as the risk protections are for the options.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. The proposed enhancements with
respect to FLEX percentages and FLEX DAC will not impose an undue
burden on intra-market competition because the use of both the
percentage methodology and the DAC order instruction will be optional
and available to all Members on the same terms. For example, any Member
may determine whether to apply a DAC order instruction to its FLEX
Order, and the System will handle FLEX DAC orders submitted by Members
in the same manner pursuant to the proposed rule change.
The proposed percentage methodology will not impose an undue burden
on inter-market competition as it is intended to provide greater
flexibility in terms of describing an option contract tailored to the
needs of the investor. Further, the proposed DAC order instruction will
not impose an undue burden on inter-market competition because it is
intended to provide market participants with an additional means to
manage risks in connection with potential volatility and downside price
swings that may occur near the market close, while allowing them to
receive potential benefits associated with any market moves near the
market close. As noted above, the proposed enhancements to FLEX are
substantially similar to Cboe's FLEX rules. As such, the Exchange
believes that its proposal may foster competition among options
exchanges, as it would provide additional choices for investors and
market participants who seek to utilize the proposed percentage
methodology or the proposed DAC functionality. Moreover, the Commission
has repeatedly expressed its preference for competition over regulatory
intervention in determining prices, products, and services in the
securities markets. Specifically, in Regulation NMS, the Commission
highlighted the importance of market forces in determining prices and
SRO revenues and, also recognized that current regulation of the market
system ``has been remarkably successful in promoting market competition
in its broader forms that are most important to investors and listed
companies.'' \68\
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\68\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, 37499 (June 29, 2005).
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The Exchange does not believe that the proposed rule changes for
FLEX v. Non-FLEX will impose any burden on intramarket competition that
is not necessary or appropriate in furtherance of the purposes of the
Act, as all Members that are registered as FLEX Traders in accordance
with the Exchange's Rules will be able to trade FLEX v. Non-FLEX Orders
in the same manner.
The Exchange does not believe that the proposed rule change will
impose any burden on intermarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as the proposal
is designed to increase competition for order flow on the Exchange in a
manner that is beneficial to investors because it is designed to
provide investors seeking to execute both a FLEX Option(s) and a listed
option(s) with a more effective method of executing the trades, which
may result in trade efficiencies (i.e., pricing or reporting (e.g.,
position limits) efficiencies) \69\ and reduced risk (i.e., pricing and
legging risk). The Exchange believes the proposed rule change will
encourage competition, as it may broaden the base of investors that use
FLEX Options to manage their trading and investment risk, including
investors that currently trade in the OTC market for customized
options. The Exchange believes the proposed rule change may increase
competition as it may lead to the migration of options currently
trading in the OTC market to trading on the Exchange. Also, any
migration to the Exchange from the OTC market would result in increased
market transparency and thus increased price competition.
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\69\ See, e.g., Options 3A, Section 18.
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The Exchange further notes that it operates in a highly competitive
market in which market participants can readily direct order flow to
competing venues who offer similar functionality. All Members may, but
are not required to, trade FLEX v. Non-FLEX Orders at the Exchange. The
Exchange does not believe the proposed rule change will impose any
burden on intermarket competition that is not necessary or appropriate
in furtherance of the purposes of the Act, as other exchanges could
adopt this order type if so desired.
Other FLEX Changes
The Exchange's proposal to amend Options 3A, Section
11(b)(2)(D)(vi) and Options 3A, Section 12(c)(5)(G) to describe the
minimum increments does not impose an undue burden on competition
because all Complex Orders trade in the increments described in Options
3, Section 14(c)(1) on Phlx uniformly.
The Exchange's proposal to amend Options 3A, Section 14(b) to
provide that certain complex order risk protections in Options 3,
Section 16 are not available for the stock component is does not impose
an undue burden on competition as the risk protections are for the
options.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
significantly affect
[[Page 4690]]
the protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative for 30
days from the date on which it was filed, or such shorter time as the
Commission may designate, it has become effective pursuant to Section
19(b)(3)(A)(iii) of the Act \70\ and subparagraph (f)(6) of Rule 19b-4
thereunder.\71\
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\70\ 15 U.S.C. 78s(b)(3)(A)(iii).
\71\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#c2b0b7aea7efa1adafafa7acb6b182b1a7a1eca5adb4"><span class="__cf_email__" data-cfemail="84f6f1e8e1a9e7ebe9e9e1eaf0f7c4f7e1e7aae3ebf2">[email protected]</span></a>. Please include
file number SR-Phlx-2026-05 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-Phlx-2026-05. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>). Copies of the filing will be available for inspection and
copying at the principal office of the Exchange. Do not include
personal identifiable information in submissions; you should submit
only information that you wish to make available publicly. We may
redact in part or withhold entirely from publication submitted material
that is obscene or subject to copyright protection. All submissions
should refer to file number SR-Phlx-2026-05 and should be submitted on
or before February 23, 2026.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\72\
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\72\ 17 CFR 200.30-3(a)(12) and (59).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2026-02004 Filed 1-30-26; 8:45 am]
BILLING CODE 8011-01-P
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