[Federal Register Volume 75, Number 102 (Thursday, May 27, 2010)]
[Notices]
[Pages 29792-29793]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-12748]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62147; File No. SR-Phlx-2010-43]
Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Order
Approving a Proposed Rule Change Relating to Quote Spread Parameters
and Batching of Violations
May 21, 2010.
On March 26, 2010, NASDAQ OMX PHLX, Inc. (``Phlx'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change
relating to quote spread parameters and batching of violations. The
proposed rule change was published for comment in the Federal Register
on April 16, 2010.\3\ The Commission did not receive any comment
letters on the proposed rule change. This order approves the proposed
rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 61862 (April 16,
2010), 75 FR 20016.
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The Exchange proposed to update Advice F-6 to reflect language
requiring options quoted electronically to be quoted with a $5 quote
spread after the opening that was previously inadvertently omitted from
Advice F-6. With respect to the proposed changes to Advice F-6, the
Exchange represented that those who are quoting verbally (in open
outcry) must, throughout the trading day, comply with the regular quote
spread parameters that apply at the opening. The language of quote
spreads not exceeding $5 after the opening for those quoting options
electronically was inadvertently not incorporated into Advice F-6 in a
previous rule filing.\4\ The Exchange proposed to correct this
oversight by inserting this language regarding electronically quoted
options into Advice F-6.
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\4\ See Securities Exchange Act Release No. 50728 (November 23,
2004), 69 FR 69982 (December 1, 2004) (SR-Phlx-2004-74).
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The Exchange also proposed to amend the Exchange's fine schedule
applicable to Advice F-6, which is administered pursuant to the
Exchange's minor rule plan (``MRP''). As amended, the fine schedule
would now consist of Warning Letters for the first three violations,
and three fines thereafter ($250, $500 and $1,000). A seventh violation
would result in referral to the Exchange's Business Conduct Committee
(``BCC'') for disciplinary action. In addition, the Exchange proposed
that the fine schedule would be administered on a one-year running
calendar basis, such that violations within one year of the last
``occurrence'' would count as the next ``occurrence.'' Currently, the
fine schedule is administered on a two-year running calendar basis.
Finally, the Exchange proposed amendments to Rules 960.2 and 970 to
permit the aggregation or ``batching'' of quote spread parameter
violations. Phlx notes that quoting on the Exchange has become entirely
electronic; thus, when there is a quoting error, the error can affect
every series that a firm is quoting, generating multiple instances of
quote spread violations. The Exchange believes that, rather than taking
each
[[Page 29793]]
event to the BCC as a fourth violation under the current rule, such
violations should be batched together and treated as one violation.
This way, pursuant to the revised rules, the firm would receive a
warning letter for the first three batched violations before being
subject to a monetary fine. The Exchange further noted that it could,
in any particular situation, deem the violations to be egregious rather
than ``minor'' and refer the matter directly to the BCC for
disciplinary action. The Exchange believes that this approach is
appropriate because the relevant warning letters or monetary fines
should serve as a deterrent against future violations, while
recognizing that a single programming error can have a widespread
effect. In addition, the Exchange believes that Advice F-6 (and its
corresponding rule) is appropriate for batching because the automated
surveillance for quote spread parameter compliance,\5\ as well as the
issuance of sanctions pursuant to the minor rule plan,\6\ will be
conducted daily.
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\5\ Confidential letters from Stephen M. Pettibone, Managing
Director Surveillance, Phlx, to Michael Gaw, Assistant Director,
Division of Trading and Markets, and Tina Barry, Assistant Director,
Office of Compliance Inspections and Examinations, Commission, dated
October 6, 2009 and December 30, 2009.
\6\ See letter from Charles Rogers, Chief Regulatory Officer,
Phlx, to Tina Barry, Assistant Director, Office of Compliance
Inspections and Examinations and Michael Gaw, Assistant Director,
Division of Trading and Markets, Commission, dated February 18,
2010.
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After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange.\7\
In particular, the Commission finds that the proposed rule change is
consistent with Section 6(b)(5) of the Act,\8\ which requires, among
other things, that the rules of a national securities exchange be
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. The Commission also believes that the proposal is
consistent with Sections 6(b)(1) and 6(b)(6) of the Act,\9\ which
require that the rules of an exchange enforce compliance with, and
provide appropriate discipline for, violations of Commission and
Exchange rules. Furthermore, the Commission believes that the proposed
changes to the MRP should strengthen the Exchange's ability to carry
out its oversight and enforcement responsibilities as a self-regulatory
organization in cases where full disciplinary proceedings are
unsuitable in view of the minor nature of the particular violation. In
addition, the Commission finds that the proposal is consistent with the
public interest, the protection of investors, or otherwise in
furtherance of the purposes of the Act, as required by Rule 19d-1(c)(2)
under the Act,\10\ which governs minor rule violation plans.
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\7\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\8\ 15 U.S.C. 78f(b)(5).
\9\ 15 U.S.C. 78f(b)(1) and 78f(b)(6).
\10\ 17 CFR 240.19d-1(c)(2).
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The Commission believes that the Exchange's proposal to amend
Advice F-6 to add rule text referencing quote spread parameters for
options that are quoted electronically is appropriate because the text
was inadvertently omitted. In addition, the Commission believes that
batching of violations of the quote spread parameter rule, under the
MRP, reasonably addresses quoting violations on an electronic market,
where one inadvertent error can potentially result in multiple quotes
that fall outside the quote spread parameters.
The Exchange has represented it will conduct automated surveillance
for quote spread parameter compliance on a daily basis, and will issue
sanctions for quote spread violations pursuant to the MRP also on a
daily basis. The Commission further notes that pursuant to Rules
960.2(f)(ii) and 970.01, the batching program will continue to require
that the violations be determined based on an exception-based
surveillance program. Any further proposal by the Exchange to permit
the batching of violations of any Exchange rule would be subject to
Commission approval.
In approving this proposed rule change, the Commission in no way
minimizes the importance of compliance with Exchange rules and all
other rules subject to the imposition of fines under the MRP. The
Commission believes that the violation of any self-regulatory
organization's rules, as well as Commission rules, is a serious matter.
However, the MRP provides a reasonable means of addressing rule
violations that do not rise to the level of requiring formal
disciplinary proceedings, while providing greater flexibility in
handling certain violations. The Commission expects that the Exchange
will continue to conduct surveillance with due diligence and make a
determination based on its findings, on a case-by-case basis, whether a
fine of more or less than the recommended amount is appropriate for a
violation under the MRP, whether it might not be appropriate to batch a
series of actions as a single violation under the MRP, or whether a
violation or series of violations may require formal disciplinary
action.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\11\ and Rule 19d-1(c)(2) under the Act,\12\ that the proposed rule
change (SR-Phlx-2010-43) be, and hereby is, approved and declared
effective.
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\11\ 15 U.S.C. 78s(b)(2).
\12\ 17 CFR 240.19d-1(c)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12) and 200.30-3(a)(44).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-12748 Filed 5-26-10; 8:45 am]
BILLING CODE 8010-01-P