[Federal Register Volume 75, Number 142 (Monday, July 26, 2010)]
[Notices]
[Pages 43597-43606]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-18159]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62519; File No. SR-Phlx-2010-79]
Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Notice of
Filing of Proposed Rule Change Relating to the Establishment of NASDAQ
OMX PSX as a Platform for Trading NMS Stocks
July 16, 2010.
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 June 8, 2010, NASDAQ OMX PHLX, Inc. (the ``Exchange'' or ``PHLX'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
PHLX is filing a proposed rule change to establish NASDAQ OMX PSX,
a new electronic platform for trading NMS stocks. The text of the
proposed rule change is available at http://nasdaqomxphlx.cchwallstreet.com, on the Commission's Web site at http://www.sec.gov, at the Exchange's principal office, and at the
Commission's Public Reference Room. PHLX will implement the proposed
rule change as soon as practicable following approval by the
Commission.
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
a. Introduction and Background
PHLX proposes to introduce NASDAQ OMX PSX (``PSX'' or the
``System''), a new fully integrated order display and execution system
for all NMS stocks (as defined in SEC Rule 600(b)(47) under Regulation
NMS).\3\ Like the NASDAQ Market Center and the NASDAQ OMX BX Equities
System, PSX will be an open-access, fully electronic system that
accommodates diverse business models and trading preferences, using
technology to aggregate and display liquidity and make it available for
execution. PSX will not list stocks, but rather will trade only stocks
listed on other exchanges.
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\3\ 17 CFR 242.600(b)(47).
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PSX will allow PSX Participants to enter unlimited orders at
multiple price levels. Orders of all PSX Participants will be
integrated and displayed via data feeds to Participants and other data
subscribers. PSX Participants will be able to access the aggregated
trading interest of all other PSX Participants in accordance with non-
discretionary order execution algorithms. In contrast with most
markets, which use a price-time algorithm, however, PSX will use a
price-display-pro rata size algorithm. Incoming orders will be
allocated first to resting orders with the best price. As among orders
with the same price, incoming orders will be allocated first to resting
Displayed Orders and then to resting Non-Displayed Orders. As among
Displayed Orders at the same price or Non-Displayed Orders at the same
price, incoming orders will be
[[Page 43598]]
allocated among resting orders pro rata based on the size of the
resting orders.\4\
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\4\ The allocation methodology for odd-lot orders is discussed
in greater detail below.
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Existing PHLX rules that apply to members and member organizations
with respect to their activities on PSX are listed in Rule 3202. In
addition, two existing PHLX rules, Rule 160 and Rule 188, are being
deleted and their content moved into the new 3300 series.\5\
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\5\ Proposed Rules 3301(a), 3305(a)(1), 3309.
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b. System Access
PSX will be open to all member organizations of PHLX that comply
with the rules governing PSX.\6\ There will not be separate classes of
membership. Specifically, unlike the NASDAQ Market Center, PSX will not
have a separate class of market makers. Accordingly, PHLX expects that
all PSX Participants will participate on consistent terms by entering
orders into PSX for the purpose of posting available liquidity and
accessing that liquidity.
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\6\ Through a separate filing, PHLX will amend Rule 604 to
require all member organizations trading on PSX to register
representatives and principals in accordance with rules similar to
those governing registration of associated persons of members of the
NASDAQ Stock Market. PHLX will, at a later date, amend its rules
governing registration of associated persons of member organizations
that trade options but not cash equities through PHLX, to reflect
consistent registration standards being developed by various self-
regulatory organizations in consultation with the Commission.
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As provided in proposed Rule 3223, however, PSX will make its
facilities available to any electronic communications network (``ECN'')
or alternative trading system (``ATS'') that (i) wishes to use PSX as a
means to display the best prices and sizes of orders entered into the
ECN or ATS by subscribers of the ECN or ATS, if the ECN or ATS so
chooses or is required by SEC Rule 301(b)(3) to display a subscriber's
order, and (ii) allow any PHLX member organization the electronic
ability to effect a transaction with such priced orders that is
equivalent to the ability to effect a transaction with other orders
displayed by PSX. Any such ECN or ATS would be required to comply with
the terms and conditions of PSX Rule 3223.\7\
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\7\ Specifically, the ATS or ECN must be a PHLX member
organization, enter into and comply with applicable agreements,
agree that PHLX may disseminate the ECN's or ATS's best priced
orders, demonstrate that it is compliance with applicable regulatory
requirements, and accept automated executions against orders that it
enters into the System.
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Participants will gain access to PSX via direct or indirect
electronic linkages utilizing the Financial Information Exchange, or
FIX, protocol, as well as proprietary RASH and OUCH protocols. Each
protocol is already used and widely accepted by market participants in
the NASDAQ Market Center and the NASDAQ OMX BX Equities System, and may
be used by Participants for order entry, modification and cancellation,
and message transmittal for all securities traded through PSX.
Participants will have the ability to establish connectivity to PSX
directly or through third-party connectivity providers, including a
range of extranets and service bureaus. All of the communications
protocols will be publicly available to allow Participants and services
bureaus to develop their own front-end software.
As provided in proposed Rule 3211, Participants must execute all
applicable agreements with PHLX (including the NASDAQ OMX U.S. Services
Agreement \8\); maintain membership in, or access arrangements with a
participant of, a clearing agency registered with the Commission that
maintains facilities through which PSX compared trades may be settled;
comply with all applicable rules and operating procedures of PHLX and
the Commission in the use of the System; maintain the physical security
of the equipment located on the Participant's premises to prevent the
improper use or access to PHLX systems, including unauthorized entry of
information into PSX; accept and settle each PSX trade that PSX
identifies as having been effected by such Participant, or if
settlement is to be made through another clearing member, guarantee the
acceptance and settlement of such identified PSX trade by the clearing
member on the regularly scheduled settlement date; and input accurate
information into the System, including, but not limited to, whether the
member organization acted in a principal, agent, or riskless principal
capacity. Each PSX Participant will be under a continuing obligation to
inform PHLX of noncompliance with any of its registration requirements,
and must make such reports to PHLX as it may require.\9\ In addition,
each Participant must provide such information relating to a specific
PHLX rule, SEC rule, or term of a joint industry plan as PHLX
regulatory staff may request.\10\ PHLX may impose on Participants such
temporary restrictions on order entry as PHLX may determine to be
necessary to protect the integrity of PSX or other PHLX systems.\11\ In
addition to proposed rules specific to the operation of PSX, member
organizations must comply with existing PHLX rules governing member
conduct, to the extent that they are relevant to trading on PSX. PHLX
rules applicable to activities of member organizations on PSX are
listed in proposed rule 3202.
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\8\ http://www.nasdaqtrader.com/content/AdministrationSupport/AgreementsTrading/nasdaq_access_agreement.pdf.
\9\ Proposed Rules 3211(b), 3216.
\10\ Proposed Rule 3225.
\11\ Proposed Rule 3211(c).
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Failure by a PSX Participant to comply with any of the rules or
registration requirements applicable to PSX shall subject such
Participant to censure, fine, suspension or revocation of its
registration as a PSX Participant, or any other fitting penalty under
the rules of the Exchange.\12\ In accordance with the procedures of
PHLX's Disciplinary Rules (Rules 960.1 through 960.12), PHLX may
suspend, condition, limit, prohibit or terminate the authority of a
Participant to enter orders in one more securities for violations of
applicable requirements or prohibitions, or may terminate access to the
System if a Participant fails to meet standards of eligibility or to
pay for services rendered.\13\
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\12\ Proposed Rule 3228(a).
\13\ Proposed Rules 3221, 3222.
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PHLX disclaims liability for any losses, damages or other claims
arising from the use of PSX; however, it may compensate users for
losses directly resulting from PSX's actual failure to correctly
process an order, message, or other data, in an amount not to exceed
the larger of $500,000 per month or the amount of recovery obtained by
PHLX under any applicable insurance policy.\14\
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\14\ Proposed Rule 3226. Accordingly, existing PHLX Rule 652(a)
is not applicable to activity on PSX.
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When it commences operation, PSX will allow sponsored access in
accordance with rules identical to those currently in effect at the
NASDAQ Stock Market (``NASDAQ''), which are reflected in proposed Rule
3211(d). When NASDAQ implements recently approved rules governing
sponsored access,\15\ PSX will adopt and implement identical rules to
govern sponsored access. Under the current rules, a Sponsored
Participant may obtain authorized access to PSX only if such access is
authorized in advance by one or more member organizations as follows:
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\15\ Securities Exchange Act Release No. 61345 (January 13,
2010), 75 FR 32631 (January 20, 2010) (SR-NASDAQ-2008-104). If
NASDAQ's rules are superseded by rules adopted by the Commission,
then both NASDAQ and PSX will operate in accordance with such rules.
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Sponsored Participants must enter into and maintain
customer agreements with one or more Sponsoring Member
[[Page 43599]]
Organizations, establishing proper relationship(s) and account(s)
through which the Sponsored Participant may trade on PSX. Such customer
agreement(s) must incorporate the following Sponsorship Provisions:
The Sponsoring Member Organization must acknowledge and
agree that:
All orders entered by a Sponsored Participant and any
person acting on behalf of or in the name of such Sponsored Participant
and any executions occurring as a result of such orders are binding in
all respects on the Sponsoring Member Organization; and
The Sponsoring Member Organization is responsible for any
and all actions taken by a Sponsored Participant and any person acting
on behalf of or in the name of such Sponsored Participant.
A Sponsoring Member Organization must comply with the PHLX
Certificate of Incorporation, Bylaws, Rules and procedures with regard
to PSX, and a Sponsored Participant must comply with the PHLX
Certificate of Incorporation, Bylaws, Rules and procedures with regard
to PSX, as if the Sponsored Participant were a PHLX Member
Organization.
A Sponsored Participant must maintain, keep current and
provide to the Sponsoring Member Organization a list of individuals
authorized to obtain access to PSX on behalf of the Sponsored
Participant.
A Sponsored Participant must familiarize its authorized
individuals with all of the Sponsored Participant's obligations and
assure that they receive appropriate training prior to any use or
access to PSX.
A Sponsored Participant may not permit anyone other than
authorized individuals to use or obtain access to PSX.
A Sponsored Participant must take reasonable security
precautions to prevent unauthorized use or access to PSX, including
unauthorized entry of information into PSX, or the information and data
made available therein. A Sponsored Participant must understand and
agree that it is responsible for any and all orders, trades and other
messages and instructions entered, transmitted or received under
identifiers, passwords and security codes of authorized individuals,
and for the trading and other consequences thereof.
A Sponsored Participant must acknowledge its
responsibility to establish adequate procedures and controls that
permit it to effectively monitor its employees', agents', and
customers' use and access to PSX for compliance with the terms of the
Sponsorship Provisions.
A Sponsored Participant must pay when due all amounts, if
any, payable to the Sponsoring Member Organization, PSX, or any other
third parties that arise from the Sponsored Participant's access to and
use of PSX. Such amounts include, but are not limited to applicable
exchange and regulatory fees.
The Sponsoring Member Organization must provide PHLX with
a Notice of Consent acknowledging its responsibility for the orders,
executions and actions of its Sponsored Participants.
The Sponsored Participant and its Sponsoring Member
Organization must have entered into and maintained a User Agreement
with PHLX. The Sponsoring Member Organization must designate the
Sponsored Participant by name in its User Agreement as such.
c. Trading of Securities Pursuant to Unlisted Trading Privileges
With the launch of PSX, PHLX will not resume its listings business.
PSX will, however, trade all NMS stocks on an unlisted trading
privileges (``UTP'') basis; accordingly, all securities that it trades
will be registered under Section 12(a) of the Act unless they are
subject to an exemption by the Commission that allows them to be listed
on a national securities exchange in the absence of such registration.
As provided by SEC Rule 12f-5,\16\ PHLX may extend unlisted trading
privileges to any security for which PHLX has in effect rules providing
for transactions in such class or type of security.\17\ Accordingly, to
support UTP trading of all NMS stocks, existing PHLX Rule 803 is being
amended in several respects. First, Rule 803(o) will clearly state that
PHLX will not list any securities, and that provisions of Rules 800
through 868 that permit listings will not be effective until PHLX files
a proposed rule change under Section 19(b)(2) of the Act to amend its
rules to make any changes needed to comply with SEC Rule 10A-3 \18\ and
to incorporate additional qualitative listing standards, and such
proposed rule change is approved by the Commission. Second, PHLX is
adopting new standards for securities linked to the performance of
indexes and commodities (including currencies) and managed fund shares,
to reflect the fact that PHLX may engage in UTP trading of these
securities,\19\ and is modifying Rule 803(f) (Other Securities) to
adopt continued listing standards that would be applicable to
securities listed under that provision if PHLX resumed its listing
business and that contain provisions that are complementary to the new
standards for securities linked to commodities. Third, PHLX is deleting
current Rules 803(m) and (n), which contain standards for index-linked
exchangeable notes and index-linked securities; these security types
are covered more comprehensively by the adoption of a standard for
securities linked to the performance of indexes and commodities
(including currencies). Fourth, PHLX is deleting certain restrictions
in Rule 803(o) on the activities of market makers, since PSX's market
structure will not allow for a class of market makers.
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\16\ 17 CFR 240.12f-5.
\17\ Notably, with respect to new derivative securities products
(as defined in SEC Rule 19b-4(e), 17 CFR 240.19b-4(e)) trading on
the Exchange, Rule 803(o) requires the distribution of an
information circular that includes information on the (1) the
special risks of trading the new derivative securities product
(``NDSP''); (2) the Exchange's rules that will apply to the NDSP,
including the suitability rule (proposed Rule 763); (3) information
about the dissemination of value of the underlying assets or
indexes; and (4) the risk of trading during the period from 9 a.m.
to 9:30 a.m. and from 4 p.m. to 5 p.m. due to the lack of
calculation or dissemination of the underlying index value, the
Intraday Indicative Value, the Indicative Optimized Portfolio Value
or other comparable estimate of the value of a share of the NDSP.
Rule 803(o) also requires that members and member organizations
adhere to applicable prospectus delivery requirements of the
Securities Act of 1933, and requires that the Exchange enter into
comprehensive surveillance sharing agreements with markets trading
components of the index or portfolio on which the NDSP is based to
the same extent as the listing market of the NDSP.
\18\ 17 CFR 240.10A-3.
\19\ Rule 803(m) and (n) (as proposed to be amended). As with
other standards, however, PHLX will not list these securities until
the filing and approval of a proposed rule change to authorize such
listing.
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PHLX is also adopting Rule 3230 to establish additional rules to
govern UTP trading of Commodity-Related Securities on PSX. The term
``Commodity-Related Security'' includes any security that is issued by
a trust, partnership, commodity pool or similar entity that invests,
directly or through another entity, in any combination of commodities,
futures contracts, options on futures contracts, forward contracts,
commodity swaps, or other related derivatives, or the value of which is
determined by the value of commodities, futures contracts, options on
futures contracts, forward contracts, commodity swaps, or other related
derivatives. The term ``commodity'' has the meaning given to it under
the Commodity Exchange Act. The rule provides that members and member
organizations must provide all purchasers of a newly issued Commodity-
Related Security a prospectus for such Commodity-Related
[[Page 43600]]
Security.\20\ The rule further provides that unless otherwise noted, a
Commodity-Related Security is eligible for trading during all PSX
market sessions (i.e. from 9 a.m. through 5 p.m.) if member
organizations comply with Rule 3231 when accepting Commodity-Related
Security orders for execution in the pre-market session (9 a.m. through
9:30 a.m.) or post-market session (4 p.m. through 5 p.m.).
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\20\ Provisions from the corresponding NASDAQ rule, Rule 4630,
that govern the conduct of market makers in Commodity-Related
Securities have been omitted because PSX will not have market
makers.
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Rule 3231 provides that no member organization may accept an order
from a customer for execution in the pre-market session or post-market
session without disclosing to such customer that extended hours trading
involves material trading risks, including the possibility of lower
liquidity, high volatility, changing prices, unlinked markets, an
exaggerated effect from news announcements, wider spreads and any other
relevant risk. The absence of an updated underlying index value or
intraday indicative value is an additional trading risk in extended
hours for Derivative Securities Products (as defined in Rule 3100).
With these changes, as well as the adoption of the other rules
contained in this filing, PHLX believes that it will have rules in
place to allow the UTP trading of all NMS stocks.
d. Entry and Processing of Orders
Only orders for NMS stocks may be entered and executed through
PSX.\21\ PSX is the only venue on the Exchange for the entry and
execution of orders in NMS stocks.\22\ Participants may submit multiple
orders at multiple price levels, which PSX will manage and display,
consistent with the parameters of each order.\23\ PSX will time-stamp
each order upon receipt, although as discussed below, the time stamp
does not determine the order's ranking for execution purposes.\24\ The
System does not allow Participants to display orders on an attributable
basis.\25\ However, orders may be entered either as Displayed Orders,
in which case they will be displayed as individual orders, each with an
identical anonymous identifier, in market data disseminated by PSX
concerning resting orders, or may be entered as Non-Displayed Orders,
in which case they will not be displayed but nevertheless remain
available for potential execution against incoming orders.\26\
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\21\ Proposed Rule 3305(a)(1).
\22\ Id.
\23\ Proposed Rule 3306.
\24\ Id.
\25\ Proposed Rule 3301(a).
\26\ Proposed Rule 3301(e).
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Displayed Orders will be displayed to Participants through a system
book feed. In addition, the aggregate size of all orders at the best
price to buy and sell resident in the System will be transmitted for
display to the appropriate network processor unless the aggregate size
is less than one round lot.\27\ However, Non-Displayed Orders and
reserve size will not be displayed.\28\
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\27\ Proposed Rule 3306(c)(1) and (2).
\28\ Proposed Rule 3306(c)(3).
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Marketable orders are directed to resting orders for execution.
Non-marketable orders are made available for execution by incoming
orders, and either displayed or not displayed, as directed by the
entering party. Upon entry of a marketable order, PSX will identify the
order(s) against which the incoming order will be executed, based on
the algorithm described below. The System will automatically execute
against such orders and send the relevant Participant(s) an execution
report.
e. Order Types and Time-in-Force Designations
An order may be of a size up to 999,999 shares \29\ and must
indicate whether it is a buy, long sale, or short sale.\30\ The minimum
increment for orders priced at $1.00 or above will be $0.01.\31\ The
minimum increment for orders priced below $1.00 will be $0.0001.\32\
All orders are firm and automatically executable for their displayed
and non-displayed size in the System.\33\ The System will operate from
9 a.m. through 5 p.m. Eastern Time, and except as noted below, all
orders types and times-in-force may be entered during that period.\34\
PSX will not have any specialized opening or closing processes. Rather,
the System will be open for order entry at 9 a.m., and will immediately
start processing orders as they are entered.\35\
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\29\ Proposed Rule 3301(g).
\30\ Proposed Rule 3305.
\31\ Proposed Rule 3213(a).
\32\ Id.
\33\ Proposed Rule 3213(b).
\34\ Proposed Rules 3217 and 3306(a)(3).
\35\ Proposed Rule 3302.
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The following order types will be available in PSX: \36\
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\36\ Proposed Rule 3301(e) and (f).
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``Limit Orders'' are orders to buy or sell a stock at a
specified price or better.
``Pegged Orders'' are orders that, after entry, have their
price automatically adjusted by the System in response to changes in
either the PSX inside bid or offer or the best bid or offer in the
national market system, as appropriate. A Pegged Order can specify that
its price will equal the inside quote on the same side of the market
(``Primary Peg''), the opposite side of the market (``Market Peg''), or
the midpoint of the national best bid and offer (``Midpoint Peg''). A
Pegged Order may have a limit price beyond which the order shall not be
executed. In addition, the Primary Peg and Market Peg Orders may also
establish their pricing relative to the appropriate bids or offers by
the selection of one or more offset amounts that will adjust the price
of the order by the offset amount selected. A Midpoint Peg Order is
priced based upon the national best bid and offer, excluding the effect
that the Midpoint Peg Order itself has on the inside bid or inside
offer. Midpoint Peg Orders will never be displayed. A Midpoint Peg
Order may be executed in sub-pennies if necessary to obtain a midpoint
price. A Pegged Order may be entered only between 9:30 a.m. and 4
p.m.\37\
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\37\ Proposed Rule 3305(a)(1)(C).
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``Minimum Quantity Orders'' are orders that require that a
specified minimum quantity of shares be obtained, or the order is
cancelled. Minimum Quantity Orders may only be entered with a time-in-
force designation of System Hours Immediate or Cancel.
``Intermarket Sweep Orders'' or ``ISOs'' are limit orders
that are executed by the System at multiple price levels, without
consideration of protected quotations of other market centers within
the meaning of Rule 600(b) of Regulation NMS under the Act.\38\
Simultaneously with the routing of an ISO to the System, one or more
additional limit orders, as necessary, must be routed by the entering
party to execute against the full displayed size of any protected bid
or protected offer (as defined in Rule 600(b) of Regulation NMS under
the Act) in the case of a limit order to sell or buy with a price that
is superior to the limit price of the limit order identified as an ISO.
These additional routed orders must also be identified as ISOs.
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\38\ 17 CFR 242.600(b).
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``Price to Comply Orders'' are orders that if, at the time
of entry, would lock or cross the quotation of an external market, the
order will be priced to the current low offer (for bids) or to the
current best bid (for offers) and displayed at a price one minimum
price increment lower than the offer (for bids) or higher than the bid
(for offers). The displayed and undisplayed prices of a Price to Comply
order may be adjusted once or multiple times depending upon the method
of order entry and changes
[[Page 43601]]
to the prevailing national best bid or offer.
``Post-Only Orders'' are orders that if, at the time of
entry, would lock an order on the System, the order will be re-priced
and displayed by the System to one minimum price increment (i.e., $0.01
or $0.0001) below the current low offer (for bids) or above the current
best bid (for offers).
``Non-Displayed Orders'' are limit orders that are not
displayed in the System, but nevertheless remain available for
potential execution against all incoming orders until executed in full
or cancelled. All orders that are not designated as Non-Displayed
Orders will be displayed, but without attribution to the entering
Participant.
In addition to the any of the foregoing designations, an
order may also be designated as a ``Reserve Order.'' Reserve Orders
have both a round-lot displayed size and an additional non-displayed
share amount. Both the displayed and non-displayed portions of the
Reserve Order are available for potential execution against incoming
orders. If the round-lot displayed portion of a Reserve Order is
reduced to less than a normal unit of trading, the System will
replenish the display portion from reserve up to at least a single
round-lot amount.
The following times-in-force will be available in PSX.\39\ Except
as noted above in connection with Minimum Quantity Orders, any time-in-
force may be combined with any order type.
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\39\ Proposed Rule 3301(h).
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``System Hours Immediate or Cancel'' or ``SIOC'' means
that if, after entry into the System, an order (or a portion thereof)
is not marketable, the order (or unexecuted portion thereof) will be
canceled and returned to the entering Participant.
``System Hours Day'' or ``SDAY'' means that if, after
entry into the System, an order is not fully executed, the order (or
the unexecuted portion thereof) will remain available for potential
display and/or execution from 9 a.m. until 5 p.m. Eastern Time on the
day it was submitted unless cancelled by the entering party.
``System Hours Expire Time'' or ``SHEX'' means that if,
after entry into the System, an order is not fully executed, the order
(or the unexecuted portion thereof) will remain available for potential
display and/or execution for the amount of time specified by the
entering Participant (up until 5 p.m. on the day entered) unless
canceled by the entering Participant.
``Good-til-market close'' or ``GTMC'' means that if, after
entry into the System, an order is not fully executed, the order (or
unexecuted portion thereof) will remain available for potential display
and/or execution until cancelled by the entering party, or until 4
p.m., after which it shall be returned to the entering party. GTMC
orders entered after 4 p.m. will be treated as SIOC orders.
f. Execution of Transactions
Incoming orders that are not marketable against posted interest in
the System book will be cancelled or posted to the book, depending on
the time-in-force for the order.\40\ Incoming marketable orders are
executed against orders on the book, and the posted orders are
decremented accordingly.\41\ To determine the allocation of incoming
marketable orders against orders on the book, the System uses a price/
display/pro-rata allocation to size that is designed to encourage
Participants to display large orders in transparent markets, thereby
enhancing the quality of price discovery processes.\42\ The algorithm
executes trading interest in the System in the following order:
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\40\ Proposed Rule 3301(h).
\41\ Proposed Rule 3307(a)(2).
\42\ Proposed Rule 3307(a)(1).
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Price--Better priced trading interest will be executed
ahead of inferior-priced trading interest.
Display--Displayed Orders at a particular price with a
size of at least one round lot will be executed ahead of Non-Displayed
Orders, the reserve portion of Reserve Orders, and odd-lot orders at
the same price. Thus, an order receives priority to the extent of the
Participant's willingness to display liquidity: Undisplayed liquidity
receives lower priority.
Pro-Rata Allocation to Size Among Displayed Orders With a
Size of One Round Lot or More--As among equally priced Displayed Orders
with a size of at least one round lot, the System will allocate round
lot portions of incoming executable orders to displayed trading
interest within the System pro rata based on the size of the Displayed
Orders. Portions of an order that would be executed in a size other
than a round lot if they were allocated on a pro rata basis will be
allocated for execution against available displayed trading interest on
the basis of a random function that assigns probability of execution
based on the size of displayed interest. For example, if Displayed
Orders to buy at 10 reside on the PSX book with sizes of 6,000
(Participant A) and 4,000 (Participant B), and an incoming order to
sell 1,100 at 10 comes into the System, the System will allocate 600
shares of the incoming order to Participant A and 400 shares of the
incoming order to Participant B. The remaining 100 shares of the
incoming order will be allocated on the basis of a random function that
assigns a 60% probability of executing the 100 shares to Participant A
and a 40% probability to Participant B.
Displayed Odd-Lot Orders--As among equally priced
Displayed Orders with a size of less than one round lot, the System
will allocate incoming orders based on the size of the Displayed
Orders, but not in pro rata fashion. Thus, a resting order with a size
of 90 shares would get filled in full before an order with a size of 50
shares. If there are two or more odd lot orders of equal size, the
System will determine the order of execution on the basis of a random
function that assigns each order an equal probability of execution.
Pro-Rata Allocation to Size Among Non-Displayed Interest
With a Size of One Round Lot or More--As among equally priced Non-
Displayed Orders and the reserve portion of Reserve Orders
(collectively, ``non-displayed interest'') with a size of at least one
round lot, the System will allocate round lot portions of incoming
executable orders to non-displayed interest within the System pro rata
based on the size of non-displayed interest. Portions of an order that
would be executed in a size other than a round lot if they were
allocated on a pro rata basis will be allocated for execution against
available non-displayed interest on the basis of a random function that
assigns probability of execution based on the size of non-displayed
interest.
Non-Displayed Odd-Lot Orders--As among equally priced Non-
Displayed Interest with a size of less than one round lot, the System
will allocate incoming orders based on the size of the Non-Displayed
Interest, but not in pro rata fashion. Thus, a larger odd-lot order
would be filled before a smaller odd-lot order. If there are two or
more odd lot orders of equal size, the System will determine the order
of execution on the basis of a random function that assigns each order
an equal probability of execution.
An incoming order with a price that crosses the price of a posted
order will execute at the price of the posted order. Accordingly, any
potential price improvement resulting from an execution in the System
will accrue to taker of liquidity.\43\ For example, if a buy order
resides on the PSX book at 10 and an incoming sell order priced at 9
comes into the System, the orders will
[[Page 43602]]
execute at 10, with the seller getting $1.00 price improvement.
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\43\ Proposed Rule 3307(a)(3).
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g. Reporting, Clearance and Settlement; Anonymity
As provided by Rule 3309, executions occurring as a result of
orders matched on PSX shall be reported by PHLX to an appropriate
consolidated transaction reporting system. The System will identify
trades executed pursuant to an exception to or exemption from Rule 611
of Regulation NMS in accordance with specifications approved by the
operating committee of the relevant national market system plan for an
NMS stock. If a trade is executed pursuant to both the ISO exception of
Rule 611(b)(5) or (6) of Regulation NMS and the self-help exception of
Rule 611(b)(1) of Regulation NMS, such trade shall be identified as
executed pursuant to the ISO exception. PHLX will promptly notify PSX
Participants of all executions of their orders as soon as the Exchange
is notified that such executions have taken place.
For each execution, PSX will submit a transaction report using
PHLX's existing ``X'' market identifier. The transaction reports
produced by the System will indicate the price and size of the
transaction, but will not reveal contra party identities.\44\ PHLX will
reveal a Participant's identity in the following circumstances: (i)
When National Securities Clearing Corporation (``NSCC'') ceases to act
for a Participant, or the Participant's clearing firm, and NSCC
determines not to guarantee the settlement of the Participant's trades;
(ii) for regulatory purposes or to comply with an order of an
arbitrator or court; (iii) if both Participants to the transaction
consent; or (iv) unless otherwise instructed by a member organization,
PHLX will reveal to a member organization, no later than the end of the
day on the date an anonymous trade was executed, when the member
organization's order has been decremented by another order submitted by
that same member organization.
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\44\ Proposed Rule 3310.
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Transactions will be cleared and settled through NSCC and
Depository Trust Corporation (``DTC''), using an exchange omnibus
account established at NSCC.\45\ All Participants must be members of
NSCC, or clear their trades through a clearing firm that is both a
member organization of PHLX and a member of NSCC. Member organizations
failing to maintain the required clearing arrangements may be removed
from access to PSX until such time as a clearing arrangement is
reestablished.\46\ If a Participant, or a clearing member acting on a
Participant's behalf, is reported as constituting a side of a System
trade, the Participant or the clearing member must honor the trade on
the scheduled settlement date.\47\
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\45\ Proposed Rule 3218. In the event that a registered clearing
agency other than NSCC began offering continuous net settlement
services, participants would also be permitted to use that clearing
agency rather than NSCC.
\46\ Proposed Rule 3228.
\47\ Proposed Rule 3227.
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h. Trading Halts and Clearly Erroneous Transactions
PSX's provisions on trading halts will mirror those of the NASDAQ
Market Center, but will include only those provisions pertinent to
securities traded on an unlisted trading privileges basis.
PSX may halt trading on PSX of a security listed on
another exchange: (i) During a trading halt imposed by such exchange to
permit the dissemination of material news; or (ii) when such exchange
imposes a trading halt in that security because of an order imbalance
or influx (``operational trading halt'').\48\
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\48\ Proposed Rule 3100(a)(1).
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PSX may halt trading in an index warrant whenever
regulatory staff concludes that such action is appropriate in the
interests of a fair and orderly market and to protect investors. Among
the factors that may be considered are the following: (i) Trading has
been halted or suspended in underlying stocks whose weighted value
represents 20% or more of the index value; (ii) the current calculation
of the index derived from the current market prices of the stocks is
not available; or (iii) other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are
present.\49\
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\49\ Proposed Rule 3100(a)(2).
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In the case of trust shares, index fund shares, managed
fund shares or trust issued receipts, a series of commodity-related
securities, securities representing interests in unit investment trusts
or investment companies, or any other derivative security
(collectively, ``Derivatives Security Products'') for which an
underlying index, indicative optimized portfolio value, intraday
indicative value, net asset value, disclosed portfolio, or other
comparable estimate of the value of a share is disseminated, PSX will
halt trading if there is a temporary interruption in the calculation or
wide dissemination of the value. PSX will maintain the trading halt
until such time as trading resumes in the listing market.\50\ Trading
may continue in the case of interruptions that occur outside of regular
market hours. However, if an interruption occurs or continues during
regular market hours and a halt is called by the listing market, or if
a halt occurs after the close of regular market hours and continues the
following day, the affected security will be halted and remain halted
until the listing market resumes trading.\51\
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\50\ Proposed Rule 3100(a)(3).
\51\ Proposed Rule 3100(b).
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PSX will halt trading in a Derivative Security Product for
which a net asset value or disclosed portfolio is disseminated if staff
becomes aware that the net asset value or disclosed portfolio is not
being disseminated to all market participants at the same time. The
halt will remain in effect until the listing market resumes
trading.\52\
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\52\ Proposed Rule 3100(a)(3).
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Following the initiation of an operational trading halt,
PSX Participants may immediately resume order entry and trading.\53\ In
other cases, Participants must wait until PSX releases the security for
resumed trading, at a time announced by PSX through Web sites and wire
services.\54\
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\53\ Proposed Rule 3100(a)(1).
\54\ Proposed Rule 3100(c)(2).
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During a pilot period ending on December 10, 2010, if a
primary listing market issues an individual stock trading pause in any
of the securities covered by the pilot, the Exchange will pause trading
in that security until trading has resumed on the primary listing
market. If, however, trading has not resumed on the primary listing
market and ten minutes have passed since the individual stock trading
pause message has been received from the responsible single plan
processor, the Exchange may resume trading in such stock. The
securities covered by the pilot are those stocks included in the S&P
500[supreg] Index.
PSX will also halt trading upon SEC request, including in
accordance with standing requests for ``circuit breaker''market-wide
halts in the event of a major market break.\55\
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\55\ PLHX [sic] Rule 133. As a result of precipitous declines in
the prices of certain securities on May 6, 2010, the Commission and
the national securities exchanges are currently evaluating the
advisability of modifying marketwide rules on trading halts due to
extraordinary market volatility, such as those reflected in PHLX
Rule 133. PHLX will modify Rule 133 to maintain consistency with
corresponding rules of other exchanges as soon as consensus is
reached concerning the appropriate marketwide standard.
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PHLX will adopt a rule to govern breaking of clearly erroneous
transactions.\56\
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\56\ Proposed Rule 3312. The proposed PSX rule is identical to
the rules recently adopted by NASDAQ and other exchanges to provide
a consistent and comprehensive framework for reviewing and breaking
trades. As a result of precipitous declines in the prices of certain
securities on May 6, 2010, however, the Commission and the national
securities exchanges are currently evaluating the advisability of
further changes to clearly erroneous rules. PHLX will modify its
clearly erroneous rule to maintain consistency with the
corresponding NASDAQ Stock Market rule as soon as consensus is
reached concerning the appropriate marketwide standard.
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[[Page 43603]]
As was true for XLE, PHLX's former cash equity trading platform,
appeals from determination regarding trades made by PHLX staff will be
made to the Options Trade Review Committee (``OTRC''), a committee of
industry and non-industry experts established under the PHLX By-Laws.
As reflected in Section 10-10 of the By-Laws, 20% of the members of the
OTRC must represent PHLX member organizations, but no more than 50% of
the committee's members may be employed by firms that are market makers
or that derive more than 10% of their revenues from market making. This
is identical to the compositional requirements of NASDAQ's Market
Operations Review Committee, which performs a comparable function under
NASDAQ rules.\57\
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\57\ By-Laws of The NASDAQ Stock Market LLC, Article III,
Section 6.
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i. Regulation NMS Compliance
As provided in Rules 3301(a) and 3306(c)(4), with respect to the
operation of PSX, PHLX will implement such systems, procedures, and
rules as are necessary to render it capable of meeting the requirements
for automated quotations,\58\ and immediately to identify its
quotations as manual whenever it has reason to believe it is not
capable of displaying automated quotations. PHLX will adopt policies
and procedures for notifying member organizations and other trading
centers that it has reason to believe it is not capable of displaying
automated quotations or, once manual, that it has restored the ability
to display automated quotations and is preparing to identify its
quotation as automated. In addition, PHLX will adopt policies and
procedures for responding to notices that it receives from other
trading centers indicating that they have elected to use the ``self-
help'' exception of Rule 611(b)(1) of Regulation NMS under the Act.\59\
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\58\ As defined in Rule 600(b) of Regulation NMS under the Act,
17 CFR 242.600(b), the term ``quotation''includes the ``bid price or
the offer price communicated by a member of a national securities
exchange * * * to any broker or dealer, or to any customer, at which
it is willing to buy or sell one or more round lots of an NMS
security, either as principal or agent.'' Thus, the term
``quotation''includes orders entered into the System by PSX
Participants, notwithstanding the fact that PSX will not have market
makers with obligations to maintain continuous two-sided quotations.
Under Rule 602 of Regulation NMS, brokers and dealers are required
to communicate to a national securities exchange or national
securities association their best bids, best offers, and quotation
sizes. By displaying orders communicated to it by its members and
complying with the requirements for automation described in Rule
600(b)(3), PSX will display ``automated quotations'' within the
meaning of that rule, and therefore its best bid and best offer will
constitute ``protected quotations'' entitled to trade-through
protection under Regulation NMS.
\59\ 17 CFR 242.611(b)(1).
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PSX will not route orders to other market centers. Rather, to
ensure compliance with Regulation NMS, PSX Rule 3305 provides that in
addition to such other designations as may be chosen by a Participant,
all orders that are not entered with a time in force of ``System Hours
Immediate or Cancel'' \60\ must be designated as an Intermarket Sweep
Order, a Pegged Order, a Price to Comply Order, or a Post-Only Order,
and all orders will be processed in a manner that avoids trading
through protected quotations and avoids locked and crossed markets.
Specifically, any orders that are entered into the System that would
lock or cross another order in the System will be executed to avoid a
lock or cross.\61\
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\60\ A ``System Hours Immediate or Cancel'' order is an
immediate or cancel order that may be entered between 9 a.m. and 5
p.m. Eastern Time, PSX's hours of operation. If a System Hours
Immediate or Cancel order (or a portion thereof) is not marketable,
the order (or unexecuted portion thereof) is canceled and returned
to the entering Participant.
\61\ Proposed Rule 3213(c). In addition, as discussed below,
members may enter orders that are re-priced if they would lock or
cross so as to avoid executing.
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A System Hours Immediate or Cancel Order is compliant with
Regulation NMS because it will not, by its terms, execute or post at a
price that would result in a trade-through of a protected quotation or
lock or cross another market.
A Pegged Order is compliant with Regulation NMS because it
is continually re-priced to avoid locking or crossing.
In entering an Intermarket Sweep Order, the Participant
represents that it is simultaneously routing one or more additional
limit orders, as necessary, to execute against the full displayed size
of any protected bid or offer (as defined in Rule 600(b) of Regulation
NMS) in the case of a limit order to sell or buy with a price that is
superior to the limit price of the order identified as an Intermarket
Sweep Order.\62\ These additional routed orders must also be identified
as Intermarket Sweep Orders. As provided by Regulation NMS, PSX will
automatically execute orders identified as Intermarket Sweep Orders.
Member organizations will be responsible for ensuring that their use of
Intermarket Sweep Orders complies with Regulation NMS, and PHLX's T+1
surveillance program, administered by the Financial Industry Regulatory
Authority (``FINRA'') under a regulatory services agreement (the
``FINRA RSA'') will monitor member organizations' use of Intermarket
Sweep Orders.
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\62\ Proposed Rule 3301(f)(6).
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If, at the time of entry, a Price to Comply Order would
lock or cross the quotation of an external market, the order will be
priced to the current low offer (for bids) or to the current best bid
(for offers) but displayed at a price one minimum price increment lower
than the offer (for bids) or higher than the bid (for offers). Thus, an
incoming order priced to execute against the displayed price will
receive the superior undisplayed price.\63\ The displayed and
undisplayed prices of a Price to Comply order may be adjusted once or
multiple times depending upon the method of order entry and changes to
the prevailing national best bid/best offer.\64\
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\63\ For example, if the national best bid and best offer is
$9.97 x $10.00, and a participant enters a price to comply order to
buy 10,000 shares at $10.01, the order will display at $9.99, but
will reside on the System book at $10.00. If a seller then enters an
order at $9.99, it will execute at $10.00, up to the full 10,000
shares of the order. Proposed Rule 3301(f)(8).
\64\ Proposed Rule 3301(f)(8).
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If, at the time of entry, a Post-Only Order would lock an
order on the System, the order will be re-priced and displayed by the
System to one minimum price increment (i.e., $0.01 or $0.0001) below
the current low offer (for bids) or above the current best bid (for
offers).\65\
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\65\ For example, if the System best bid and best offer is $9.97
x $10.00, and a participant enters a Post-Only Order to buy at
$10.01, the order will be repriced and displayed at $9.99. If a
seller enters an order at $9.96, the order will be repriced and
displayed at $9.98. Proposed Rule 3301(f)(10).
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By requiring all orders to be entered with one of these
designations, PSX will ensure that all orders will either be priced or
cancelled in a manner consistent with avoidance of trade-throughs and
locked and crossed markets, or will execute as Intermarket Sweep Orders
along with other Intermarket Sweep Orders sent to protected quotes.
Because PSX will not route to other market centers,\66\ its policies
and procedures under Rule 611(a) under Regulation NMS \67\ will
contemplate reliance on information provided by the NASDAQ Market
Center for purposes of determining whether another trading center is
experiencing a failure, material delay, or
[[Page 43604]]
malfunction of its systems or equipment within the meaning of Rule
611(b)(1).\68\
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\66\ Proposed Rule 3305(b).
\67\ 17 CFR 242.611(a).
\68\ 17 CFR 242.611(b)(1).
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Rule 3213(c)(2) contains PSX's rules adopted pursuant to SEC Rule
610(d) under Regulation NMS \69\ with respect to inter-market locks and
crosses. Although the System-enforced requirements with respect to
order entry and execution generally prevent locked and crossed markets,
adoption of the rule is needed to comply with the requirements of Rule
610(d) and to provide a clear rule barring conduct that could evade the
System-enforced requirements, such as entry of an incorrectly marked
Intermarket Sweep Order. Terms used in the rule have the meanings
assigned to them by Rule 600 under Regulation NMS.\70\ Subject to
certain exceptions, the Rule 3213(c) provides that member organizations
shall reasonably avoid displaying, and shall not engage in a pattern or
practice of displaying any quotations \71\ that lock or cross a
protected quotation, and any manual quotations that lock or cross a
quotation previously disseminated pursuant to an effective national
market system plan. Exceptions exist for instances where (i) the
locking or crossing quotation was displayed at a time when the trading
center displaying the locked or crossed quotation was experiencing a
failure, material delay, or malfunction of its systems or equipment;
(ii) the locking or crossing quotation was displayed at a time when a
protected bid was higher than a protected offer in the NMS stock; (iii)
the locking or crossing quotation was an automated quotation, and the
Exchange member organization displaying such automated quotation
simultaneously routed an Intermarket Sweep Order to execute against the
full displayed size of any locked or crossed protected quotation; and
(iv) the locking or crossing quotation was a manual quotation that
locked or crossed another manual quotation, and the Exchange member
organization displaying the locking or crossing manual quotation
simultaneously routed an Intermarket Sweep Order to execute against the
full displayed size of the locked or crossed manual quotation. If a
member organization displays a manual quotation that locks or crosses a
quotation previously disseminated pursuant to an effective national
market system plan, such member organization shall promptly either
withdraw the manual quotation or route an Intermarket Sweep Order to
execute against the full displayed size of the locked or crossed
quotation.
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\69\ 17 CFR 242.610(d).
\70\ 17 CFR 242.600.
\71\ As defined in SEC Rule 600, the term ``quotation''includes
an order.
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j. Regulatory Framework
Under the FINRA RSA, FINRA will provide a range of regulatory
services, including T+1 surveillance, investigation, and enforcement
with respect to PHLX rules, arbitration services, and membership
services. PHLX will perform other regulatory services, such as real-
time market surveillance, using personnel employed by NASDAQ OMX or one
of its subsidiaries, including PHLX. NASDAQ OMX, PHLX, NASDAQ, and
NASDAQ OMX BX (PHLX, NASDAQ, and NASDAQ OMX BX collectively, the ``SRO
Subsidiaries'') are parties to a regulatory services agreement (the
``Intercompany RSA'') pursuant to which employees and contractors of
each party (``Personnel'') may perform regulatory services for each of
the SRO Subsidiaries. All regulatory services performed for PHLX under
the Intercompany RSA are subject to the direction, authority, and
oversight of PHLX's chief regulatory officer (``CRO'') and the
regulatory oversight committee (``ROC'') of its Board of Governors. All
Personnel are subject to the jurisdiction, authority and oversight of
the CRO and ROC of PHLX to the extent of the services that they provide
to PHLX. Notwithstanding the FINRA RSA and the Intercompany RSA, PHLX
retains ultimate legal responsibility for, and control of, functions
performed for PHLX under such agreements.
Under the FINRA RSA, FINRA will conduct T+1 market surveillance and
examine member organizations to monitor compliance with applicable PHLX
and SEC rules. Moreover, many aspects of compliance with PSX rules,
such as avoidance of locked and crossed markets and trade throughs,
will be enforced by the System itself. PHLX will periodically test
operations of PSX to determine that the System is operating in
accordance with applicable rules.
PSX will operate out of the same New York metropolitan data center
as the NASDAQ Market Center and the NASDAQ OMX BX Equities System, but
will use equipment that is separate from the equipment used by those
exchanges. In addition, PSX will have a backup data center in the
Washington, DC metropolitan area. To ensure sufficient capacity with
respect to the System, PHLX developed a baseline forecast of volume of
usage, which will be updated regularly based on actual volumes. The
System will use NASDAQ OMX's flexible INET technology, which is easily
scalable to higher volumes through the addition of more equipment in
the data center. The System will be protected from unauthorized access
through the same robust firewall protections already in use at NASDAQ
OMX's data centers.
As provided in proposed Rules 3401-3407, PSX will adopt rules
implementing a version of the Order Audit Trail System (``OATS''). PHLX
believes that as an affiliate of NASDAQ, it should ensure that its
regulatory requirements are generally consistent with those of NASDAQ.
Accordingly, PHLX member organizations that are also FINRA members must
comply with the FINRA OATS rules requiring daily reporting of audit
trail information for transactions in securities listed on NASDAQ. In
addition, as provided in NASDAQ rules, PHLX member organizations that
are not FINRA members must compile and maintain audit trail information
for securities listed on NASDAQ, but are required to transmit this
information to FINRA only if requested.\72\ Similarly, if PHLX resumes
operations as a listing market in the future, the rule will require all
member organizations to maintain audit trail information for securities
listed on PHLX, and to transmit the information to FINRA upon request,
but would not require daily OATS reporting for such securities. As is
true with respect to NASDAQ, OATS data will be used by PHLX for
regulatory purposes only.\73\
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\72\ Proposed Rule 3405.
\73\ See Securities Exchange Act Release No. 53128 (January 13,
2006); 71 FR 3350 (January 23, 2006) (File No. 10-131).
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Finally, PHLX is adopting rules addressing recommendations to
customers (also known as suitability) and best execution and
interpositioning, based on NASD Rules 2310 and 2320.\74\ Member
organizations would become subject to these rules by virtue of having
public customers, and brokers with public customers are required to be
members of FINRA; accordingly, adoption of these rules by PHLX could be
seen as unnecessary. However, PHLX believes that the requirements of
these rules are sufficiently important that they should be reinforced
through explicit inclusion in the PHLX rulebook.
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\74\ Proposed Rules 763 and 764.
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k. Affiliation With NASDAQ Execution Services, LLC
Although PSX will not route to other market centers, it will
receive orders routed to it by other market centers, including NASDAQ.
Nasdaq Execution Services, LLC (``NES'') is the approved outbound
routing facility of NASDAQ for cash equities. Rules 4751 and 4758
[[Page 43605]]
of NASDAQ establish the conditions under which NASDAQ is permitted to
own and operate NES in its capacity as a facility of NASDAQ that routes
orders from NASDAQ to other market centers. These conditions include
requirements that: (1) NES is operated and regulated as a facility of
NASDAQ; (2) NES will not engage in any business other than as an
outbound router for NASDAQ and any other activities as approved by the
Commission; \75\ (3) the primary regulatory responsibility for NES lies
with an unaffiliated self-regulatory organization; (4) use of NES for
outbound routing is optional for other NASDAQ members; and (5) NASDAQ
will not route orders to an affiliated exchange, such as PHLX, unless
they check the NASDAQ book prior to routing.
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\75\ Because only NASDAQ members may enter orders into NASDAQ,
it also follows that routing by NES is conducted only with respect
to orders of NASDAQ members.
---------------------------------------------------------------------------
In connection with PHLX's resumption of equity trading pursuant to
this filing, NASDAQ will file a proposed rule change to modify the last
of these conditions to allow it to route all forms of orders, including
Directed Orders, to PSX during a twelve-month pilot period. Directed
Orders are orders that route directly to other exchanges on an
immediate-or-cancel basis without first checking the NASDAQ book for
available liquidity. In order to appropriately address concerns
previously raised by the Commission regarding the potential for
conflicts of interest and informational advantages that may arise from
the use of affiliated members to route orders between exchanges owned
by a common parent, PHLX is proposing certain restrictions and
undertakings.
In order to manage the concerns raised by the Commission regarding
conflicts of interest in instances where a member firm is affiliated
with an exchange to which it is routing orders, PHLX notes that, with
respect to orders routed to PHLX by NES in its capacity as a facility
of NASDAQ, NES is subject to independent oversight and enforcement by
FINRA, an unaffiliated SRO that is NES's designated examining
authority. In this capacity, FINRA is responsible for examining NES
with respect to its books and records and capital obligations and also
has the responsibility for reviewing NES's compliance with intermarket
trading rules such as SEC Regulation NMS. In addition, under the FINRA
RSA, FINRA staff will review NES's compliance with PHLX's rules through
FINRA's examination program. FINRA and PHLX \76\ will also monitor NES
for compliance with PHLX's trading rules, subject, of course, to SEC
oversight of the regulatory program of PHLX and FINRA. PHLX will,
however, retain ultimate responsibility for enforcing its rules with
respect to NES.
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\76\ Personnel performing real-time oversight of equity trading
on NASDAQ will also perform similar functions with respect to PSX.
Such work is performed pursuant to the Intercompany RSA under the
direction, authority, and oversight of PHLX's CRO and the ROC of its
Board of Governors.
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Furthermore, in order to minimize the potential for conflicts of
interest, PHLX and FINRA will collect and maintain all alerts,
complaints, investigations and enforcement actions in which NES (in its
capacity as a facility of NASDAQ, routing orders to PSX) is identified
as a participant that has potentially violated applicable SEC or PHLX
rules. PHLX and FINRA will retain these records in an easily accessible
manner in order to facilitate any potential review conducted by the
SEC's Office of Compliance Inspections and Examinations. FINRA will
then provide a report to the PHLX's CRO, on at least a quarterly basis,
which (i) quantifies all alerts (of which PHLX and FINRA become aware)
that identify NES as a participant that has potentially violated PHLX
or SEC rules and (ii) quantifies the number of all investigations that
identify NES as a participant that has potentially violated PHLX or SEC
rules.\77\
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\77\ PHLX, FINRA, and SEC staff may agree going forward to
reduce the number of applicable or relevant surveillances that form
the scope of the agreed upon report.
---------------------------------------------------------------------------
In order to address the Commission's concerns about potential for
information advantages that could place an affiliated member of an
exchange at a competitive advantage vis-[agrave]-vis other non-
affiliated members, PHLX is proposing Rule 985(c)(2). Rule 985(c)(2)
will require the implementation of policies and procedures that are
reasonably designed to prevent NES from acting on non-public
information regarding PHLX systems prior to the time that such
information is made available generally to all members of such entity
performing inbound routing functions. These policies and procedures
would include systems development protocols to facilitate an audit of
the efficacy of these policies and procedures.
Specifically, new Rule 985(c)(2) shall provide as follows:
The NASDAQ OMX Group, Inc., which owns NASDAQ Execution
Services, LLC and the Exchange, shall establish and maintain
procedures and internal controls reasonably designed to ensure that
NASDAQ Execution Services, LLC does not develop or implement changes
to its system on the basis of non-public information regarding
planned changes to Exchange systems, obtained as a result of its
affiliation with the Exchange, until such information is available
generally to similarly situated members and member organizations of
the Exchange in connection with the provision of inbound routing to
the Exchange.
In addition, NASDAQ Rule 4758 provides that NES will establish and
maintain procedures and internal controls reasonably designed to
adequately restrict the flow of confidential and proprietary
information between NASDAQ and its facilities (including the NES), and
any other entity (including PHLX). The Exchange believes these measures
will effectively address the concerns identified by the Commission
regarding the potential for informational advantages favoring NES vis-
[agrave]-vis other non-affiliated PHLX members.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6 of the Act,\78\ in general, and with
Section 6(b)(1) and (b)(5) of the Act,\79\ in particular, in that the
proposal enables the Exchange to be so organized as to have the
capacity to be able to carry out the purposes of the Act and to comply
with and enforce compliance by members, member organizations, and
persons associated with members and member organizations with
provisions of the Act, the rules and regulations thereunder, and the
rules of the Exchange; and is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, 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. PSX will operate in
accordance with the high standards that PHLX believes to be in evidence
at all of NASDAQ OMX's exchanges, providing its Participants with
opportunities to trade NMS stocks through a fair, open, and well-
regulated market. Furthermore, PHLX believes that PSX's price-size
allocation methodology will promote further development of the national
market system by encouraging Participants to display liquidity, thereby
contributing more fully to price discovery and
[[Page 43606]]
providing a counterbalance to increased use of dark trading venues.
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\78\ 15 U.S.C. 78f.
\79\ 15 U.S.C. 78f(b)(1), (5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
PHLX 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. As a new entrant into the market for
executions of NMS stocks, PSX will further enhance competition in this
space.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (1) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
A. By order approve such proposed rule change, or
B. Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposal is
consistent with the Act. Comments may be submitted by any of the
following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File No. SR-Phlx-2010-79 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File No. SR-Phlx-2010-79. This file
number should be included on the subject line if e-mail 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 Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of such filing will also be available for
inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File No. SR-Phlx-2010-79 and should be
submitted on or before August 16, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\80\
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\80\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-18159 Filed 7-23-10; 8:45 am]
BILLING CODE 8010-01-P