[Federal Register Volume 75, Number 167 (Monday, August 30, 2010)]
[Notices]
[Pages 53010-53012]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-21474]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62760; File No. SR-Phlx-2010-112]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by NASDAQ OMX PHLX, Inc. Relating to Trade Reporting
August 24, 2010.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given
that on August 10, 2010, NASDAQ OMX PHLX, Inc. (``Phlx'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I and II 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
The Exchange, pursuant to Section 19(b)(1) of the Act \3\ and Rule
19b-4 thereunder,\4\ proposes to amend Exchange Options Floor Procedure
Advice (``OFPA'') F-2 Allocation, Time Stamping, Matching and Access to
Matched Trades, and Exchange Rule 1051, General Comparison and
Clearance Rule, to state that late reports of transactions in complex
spread transactions executed in open outcry may be considered
``exceptional circumstances'' under the rule.
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\3\ 15 U.S.C. 78s(b)(1).
\4\ 17 CFR 240.19b-4.
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The text of the proposed rule change is available on the Exchange's
Web site at http://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings,
at the principal office of the Exchange, and at the Commission's Public
Reference Room.
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 purpose of the proposed rule change is to codify certain
factors that the Exchange may consider to be ``exceptional
circumstances'' when determining whether an Exchange member has engaged
in a pattern or practice of late trade reporting.\5\
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\5\ The proposal is not intended to limit the Exchange to these
factors in determining whether exceptional circumstances exist.
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Currently, OFPA F-2 and Rule 1051 require a member or member
organization initiating an options transaction, whether acting as
principal or agent, to report or ensure that the transaction is
reported within 90 seconds of the execution to the tape. Each also
states that a pattern or practice of late reporting without exceptional
circumstances may be considered conduct inconsistent with just and
equitable principles of trade.
The Exchange proposes to modify OFPA F-2 and Rule 1051 to state
that, in determining whether exceptional circumstances exist, the
Exchange may consider late reports resulting from open outcry
executions in: (i) A hedge order (as defined in Rule 1066(f)); \6\ (ii)
[[Page 53011]]
a synthetic option (as defined in Rule 1066(g)); \7\ or (ii) any other
order consisting of multiple option and/or stock components.
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\6\ Rule 1066(f) defines a hedge order is any spread type order
(including a spread, straddle and combination order) for the same
account or tied hedge order as defined below:
(1) Spread Order. A spread order is an order to buy a stated
number of option contracts and to sell a stated number of option
contracts in a different series of the same option and may be bid
for or offered on a total net debit or credit basis.
(A) Inter-Currency Spread Order. In the case of foreign currency
options, a spread order may consist of an order to buy a stated
number of option contracts in one foreign currency and to sell the
same number of option contracts in a different foreign currency
option.
(2) Straddle Order. A straddle order is an order to buy a number
of call option contracts and the same number of put option contracts
with respect to the same underlying security (in the case of options
on a stock or Exchange-Traded Fund Share) or the same underlying
foreign currency (in the case of options on a foreign currency) and
having the same exercise price and expiration date; or an order to
sell a number of call option contracts and the same number of put
option contracts with respect to the same underlying security (in
the case of options on a stock or Exchange-Traded Fund Share) or the
same underlying foreign currency (in the case of options on a
foreign currency) and having the same exercise price and expiration
date (e.g., an order to buy two XYZ July 50 calls and to buy two XYZ
July 50 puts is a straddle order). In the case of adjusted stock
option contracts, a straddle order need not consist of the same
number of put and call contracts if such contracts both represent
the same number of shares at option.
(3) Combination Order. A combination order is an order involving
a number of call option contracts and the same number of put option
contracts in the same underlying security and representing the same
number of shares at option (if the underlying security is a stock or
Exchange-Traded Fund Share) or the same number of foreign currency
units (if the underlying security is a foreign currency). A
combination order includes a conversion (generally, buying a put,
selling a call and buying the underlying stock or Exchange-Traded
Fund Share) and a reversal (generally, selling a put, buying a call
and selling the underlying stock or Exchange-Traded Fund Share). In
the case of adjusted option contracts, a combination order need not
consist of the same number of shares at option.
(4) Tied Hedge Order. A tied hedge order is an option order that
is tied to a hedge transaction as defined in Commentary .04 to Rule
1064, following the receipt of an option order in a class determined
by the Exchange as eligible for ``tied hedge'' transactions.
A tied hedge order involves buying or selling a stock, security
futures or futures position following receipt of an option order,
including a complex order, but prior to announcing such order to the
trading crowd, provided that certain conditions are met. See Rule
1064, Commentary .04.
\7\ Rule 1066(g) defines a synthetic option order as an order to
buy or sell a stated number of units of an underlying stock or a
security convertible into the underlying stock (``convertible
security'') coupled with either (i) the purchase or sale of option
contract(s) on the opposite side of the market representing either
the same number of units of the underlying stock or convertible
security or the number of units of the underlying stock or
convertible security necessary to create a delta neutral position,
or (ii) the purchase or sale of an equal number of put and call
option contracts, each having the same exercise price, expiration
date, and each representing the same number of units of stock as,
and on the opposite side of the market from, the stock or
convertible security portion of the order.
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Currently, in order to establish whether a member or member
organization has engaged in a pattern or practice of violating a
specific order handling rule the Exchange may aggregate, or ``batch,''
individual violations of order handling OFPAs, and consider such
``batched'' violations as a single occurrence of a violation by a
member or member organization over a specific time period.\8\ Late
trade reporting is currently included in the Exchange's ``batching''
program. The Exchange has observed that a disproportionate number of
late trade reports are due to transactions in complex spread
transactions executed in open outcry.\9\
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\8\ Exchange Rule 970.01 states that, for purposes of imposing
fines under the Options Floor Procedure Advices (``OFPAs''), when
the number of violations under Exchange Rules is determined based
upon an exception-based surveillance program the Exchange may
aggregate, or ``batch,'' individual violations of order handling
OFPAs, and consider such ``batched'' violations as a single
Occurrence only in accordance with the guidelines set forth in the
Exchange's Numerical Criteria for Bringing Cases for Violations of
Phlx Order Handling Rules. In addition, the Exchange may batch
individual violations of Rule 1014(c)(i)(A) pertaining to quote
spread parameters (and corresponding Options Floor Procedure Advice
F-6). In the alternative, the Exchange may refer the matter to the
Business Conduct Committee for possible disciplinary action when (i)
the Exchange determines that there exists a pattern or practice of
violative conduct without exceptional circumstances, or (ii) any
single instance of violative conduct without exceptional
circumstances is deemed to be so egregious that referral to the
Business Conduct Committee for possible disciplinary action is
appropriate.
\9\ This proposal applies only to executions in open outcry, and
not to complex orders executed and reported automatically by the
Exchange's Complex Order System. See Exchange Rule 1080.08.
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Hedge orders and synthetic options are presented as a single order
[sic] in the crowd, often including multiple option and/or stock
components, on a net debit or credit basis. It is not unusual for the
individual components of such an order to be executed at different
times (especially in situations involving the execution of a stock
component on an away equity market). Therefore, some components of the
order may be executed while other components are pending execution. In
many cases execution of the entire hedge or synthetic option order
takes longer than 90 seconds to complete, resulting in late reporting
for the individual components upon completion of the entire order at
the net debit or credit price.
The Exchange believes that the inclusion of late trade reporting
violations in the ``batch'' of violations respecting hedge or synthetic
order transactions in open outcry unfairly penalizes a member or member
organization engaging in legitimate hedge and synthetic option orders
and thus proposes, when determining whether exceptional circumstances
exist, to consider late reports of transactions in such orders executed
in open outcry to be ``exceptional circumstances'' under the rule.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \10\ in general, and furthers the objectives of Section
6(b)(5) of the Act \11\ 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. Specifically, the Exchange believes that the proposal
benefits customers by encouraging Exchange Floor Brokers, market makers
and specialists to introduce and/or participate in legitimate complex
transactions in open outcry without being penalized for late trade
reporting in the specific instances described above.
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\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(5).
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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.
C. Self-Regulatory Organization's Statement on Comments Regarding 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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate 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 or disapprove the 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 proposed rule
change 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 Number SR-Phlx-2010-112 on the subject line.
[[Page 53012]]
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 Number SR-Phlx-2010-112. 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 also will 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 publicly available. All
submissions should refer to File Number SR-Phlx-2010-112 and should be
submitted on or before September 20, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-21474 Filed 8-27-10; 8:45 am]
BILLING CODE 8010-01-P