[Federal Register Volume 75, Number 64 (Monday, April 5, 2010)]
[Notices]
[Pages 17193-17196]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-7630]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-61802; File No. SR-Phlx-2010-05]
Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Notice of
Filing of Amendment No. 2 and Order Granting Accelerated Approval of
the Proposed Rule Change, as Modified by Amendment No. 2 Thereto,
Relating to Professional Orders
March 30, 2010.
I. Introduction
On January 12, 2010, the NASDAQ OMX PHLX, Inc. (``Phlx'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change pursuant to section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder \2\ to amend the Exchange's priority rules to treat certain
non-broker-dealers in the same manner as off-floor broker-dealers with
respect to priority. The proposed rule change was published for comment
in the Federal Register on February 2, 2010.\3\ The Exchange filed
Amendment No. 1 to the proposed rule change on March 26, 2010.\4\ The
Exchange filed Amendment No. 2 to the proposed rule change on March 30,
2010.\5\ This order provides notice of Amendment No. 2 and approves the
proposal, as modified by Amendment No. 2, on an accelerated basis.
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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. 61426 (January 26,
2010), 75 FR 5360 (February 2, 2010) (``Notice'').
\4\ Amendment No. 2 replaces and supersedes Amendment No. 1 in
its entirety.
\5\ Amendment No. 2 adds Phlx Rule 1033(e), which provides for
public customer priority in synthetic options orders in open outcry,
and Options Floor Procedure Advices (``Advices'') B-6, B-11 and F-5
to the list of Phlx rules in which a Professional (as defined below)
would be treated in the same manner as an off-floor broker-dealer.
In Amendment No. 2, Phlx also clarifies that Professional orders may
be considered customer orders subject to facilitation for purposes
of Phlx Rule 1064.02, and corrects a technical error by revising the
reference to Advice C-3 to Advice C-2. Phlx further states in this
amendment that it would issue a notice outlining the procedures for
the implementation of the proposal. Amendment No. 2 also deletes a
sentence in the Purpose section of the proposal, in which the
Exchange stated that Professional orders would be subject to the
same transactions fees as customers today; changes ``may'' to
``will'' in the parenthetical regarding the definition of
``professional'' for Phlx Rule 1064.02; and changes ``five days'' to
``five business days'' in footnote 8 in the Purpose Section and the
Exhibit.
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II. Description of Phlx's Proposal
Phlx proposes to adopt a new term, ``professional,'' which would be
defined in paragraph (b)(14) of Phlx Rule 1000
[[Page 17194]]
as a person or entity that (i) is not a broker or dealer in securities,
and (ii) places more than 390 orders in listed options per day on
average during a calendar month for its own beneficial account(s)
(``Professional''). Under the proposal, a Professional would be treated
in the same manner as an off-floor broker-dealer for purposes of
certain order execution rules of the Exchange. Specifically, the orders
of Professionals generally would be treated like off-floor broker-
dealer orders for the purposes of Phlx Rules 1014(g), which governs,
among other things, the allocation of orders and, thus, priority and
parity among orders and quotations; \6\ 1033(e), concerning synthetic
options orders; and 1064.02, concerning facilitation orders and firm
participation guarantees; \7\ in addition to other, mostly conforming
changes.\8\
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\6\ An exception is made, however, with respect to all-or-none
orders, which would be treated like customer orders.
\7\ Professional orders, however, would be considered customer
orders subject to facilitation.
\8\ These include changes to Rule 1080.08, concerning complex
orders, as well as to Advices B-6, B-11 and F-5. The Exchange is
also proposing to amend Rule 1063(e) and the corresponding Advice C-
2, Options Floor Broker Management System, to require Floor Brokers
to record a ``Professional'' designator in the Floor Broker
Management System. See also infra, note 10. Advice C-2 is part of
the Exchange's minor rule plan. See Phlx Rule 970.
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Under the proposal, Professionals would participate in Phlx's
allocation process on equal terms with off-floor broker-dealers--i.e.,
Professionals would not receive priority over broker-dealers in the
allocation of orders on the Exchange. The Exchange states that the
proposal would not otherwise affect non-broker-dealer individuals or
entities under Phlx rules. All customer orders, including non-broker-
dealer orders included in the definition of ``Professional'' orders,
would continue to be treated equally for purposes of the Exchange's
rules concerning routing of orders and order protection.\9\ The
Exchange, which currently routes only eligible customer orders, would
route eligible Professional orders.
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\9\ See Phlx Rules 1080(m), 1083, 1084, and 1086.
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In addition, the proposal would require members to indicate whether
customer orders are Professional orders.\10\ To comply with this
requirement, member organizations would be required to review their
customers' activity on at least a quarterly basis to determine whether
orders that are not for the account of a broker-dealer should be
represented as customer orders or Professional orders.\11\ The Exchange
states that it intends to file a separate proposed rule change to adopt
fees for professional orders.\12\
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\10\ See Phlx Rule 1000(b)(14). The Exchange states that it
intends to utilize a special order origin code for Professional
orders. The Exchange also proposes to disseminate the Professional
designator over its new Top of Phlx Options Plus Orders, which
includes disseminated Exchange top-of-market data (including orders,
quotes and trades) together with all of the data currently available
on the Specialized Order Feed. See Securities Exchange Act Release
No. 60877 (October 26, 2009), 74 FR 56255 (October 30, 2009) (SR-
Phlx-2009-92).
\11\ Orders for any customer that had an average of more than
390 orders per day during any month of a calendar quarter would be
required to be represented as Professional orders for the next
calendar quarter. Member organizations would be required to conduct
a quarterly review and make any appropriate changes to the way in
which they are representing orders within five business days after
the end of each calendar quarter. While member organizations would
only be required to review their accounts on a quarterly basis, if
during a quarter the Exchange identifies a customer for which orders
are being represented as customer orders but that has averaged more
than 390 orders per day during a month, the Exchange would notify
the member organization and the member organization would be
required to change the manner in which it is representing the
customer's orders within five business days. See Notice, supra note
3 at 5361, n. 8.
\12\ See Amendment No. 2, supra note 4 at 4.
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III. Commission Findings and Order Granting Approval of the Proposed
Rule Change as Modified by Amendment No. 2
After careful consideration of the proposed rule change, the
Commission finds that the proposed rule change is consistent with the
Act. Specifically, the Commission finds that the proposed rule change
is consistent with section 6(b) \13\ of the Act and the rules
thereunder,\14\ and in particular with:
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\13\ 15 U.S.C. 78f(b).
\14\ In approving the proposed rule change, the Commission notes
that it has considered the proposed rule's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
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Section 6(b)(5) of the Act, which requires that the rules of a
national securities exchange, among other things, be designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism for a free and open market and a national
market system, and, in general, to protect investors and the public
interest; and not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers;\15\ and
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\15\ 15 U.S.C. 78f(b)(5).
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Section 6(b)(8) of the Act, which requires the rules of an exchange
not to impose any burden on competition not necessary or appropriate in
furtherance of the Act.\16\
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\16\ 15 U.S.C. 78f(b)(8).
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Under the proposed rule change, customers who place orders on the
level of frequency specified in proposed Phlx Rule 1000(b)(14) would be
deemed Professionals and would no longer receive the priority treatment
currently granted to all public customers. The Commission has
previously approved similar proposals to give the orders of certain
customers, identified as ``Professional Orders'' \17\ or
``Professionals'',\18\ no greater priority than that given to broker-
dealer orders.\19\ Under the Professional Customer Approval Orders, the
orders of public customers that are deemed Professional orders are no
longer accorded the priority granted to the orders of all other public
customers.\20\ While Phlx Rule 1000(b)(14) differs slightly from the
rules adopted in the Professional Customer Approval Orders, the
Commission believes that the Exchange's proposed rule change is
comparable to rules of the ISE and CBOE, which the Commission found to
be consistent with the Act.
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\17\ See International Securities Exchange, LLC (``ISE'') Rule
100(a)(37C).
\18\ See Chicago Board Options Exchange, Incorporated (``CBOE'')
Rule 1.1 (ggg).
\19\ See Securities Exchange Act Release No. 59287 (January 23,
2009), 74 FR 5694 (January 30, 2009) (``ISE Approval Order''); 61198
(December 17, 2009), 74 FR 68880 (December 29, 2009) (``CBOE
Approval Order'') (together, the ``Professional Customer Approval
Orders'').
\20\ See ISE Approval Order, supra note 19 and CBOE Approval
Order, supra note 19.
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In the ISE Approval Order, the Commission reviewed the background
and history of customer order priority rules on national securities
exchanges, and analyzed the role played in the shaping of these rules
by various considerations and principles. In this regard, the
Commission discussed the requirement of section 6(b)(5) of the Act that
the rules of an exchange be designed to protect investors and the
public interest; traditional notions of customer priority in exchange
trading; the agency obligations of exchange specialists; and the
requirements of section 11(a) of the Act.\21\ In approving the ISE
proposal, the Commission articulated its view that priority for public
customer orders is not an essential attribute of an exchange,\22\ and
noted that in the past it has approved trading rules at options
exchanges that do not give priority to orders of public customers that
are priced no better than the orders of other market participants.\23\
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\21\ ISE Approval Order, supra note 16. For a brief synopsis of
the requirements of Section 11(a), see infra, note 25.
\22\ See ISE Approval Order, supra note 19, at 5697.
\23\ See ISE Approval Order, supra note 19, at 5697, n. 41-44.
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In the ISE Approval Order, the Commission concluded that section
6(b)(5) of the Act does not require an exchange to treat the orders of
public
[[Page 17195]]
customers who place orders at the frequency of more than 390 orders per
day on average identically to the orders of public customers who do not
meet that threshold.\24\ For the same reason, the Commission believes
that Phlx's proposed rule change is consistent with Section 6(b)(5) of
the Act.
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\24\ See ISE Approval Order, supra note 19, at 5697. See also
CBOE Approval Order, supra note 19.
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The Commission believes that its view with respect to the ISE
Approval Order is equally applicable to the Phlx proposal. In this
regard, the Commission does not believe that the Act requires that the
orders of a public customer or any other market participant be granted
priority. Historically, in developing their trading and business
models, exchanges have adopted rules, with Commission approval, that
grant priority to certain participants over others, in order to attract
order flow or to create more competitive markets. However, the Act does
not entitle any participant to priority as a right. The requirement of
section 6(b)(8) of the Act that the rules of an exchange not impose an
unnecessary or inappropriate burden upon competition does not
necessarily mandate that a Professional (as defined in the Phlx
proposal) be granted priority at a time that a broker-dealer is not
granted the same right. The Phlx proposal simply restores the treatment
of persons who would be deemed Professionals to a base line where no
special priority benefits are granted.\25\ Thus, the Commission
believes that it is consistent with the Act for Phlx to amend its rules
so that Professional orders, like the orders of broker-dealers, are not
granted special priority.\26\
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\25\ In its proposal, the Exchange addressed compliance with
Section 11(a) of the Act and the rules thereunder as applied to the
Exchange's electronic trading platform, Phlx XL II. Section 11(a)
prohibits a member of a national securities exchange from effecting
transactions on that exchange for its own account, the account of an
associated person, or an account over which it or its associated
person exercises discretion unless an exception applies. Section
11(a)(1) and the rules thereunder contain a number of exceptions for
principal transactions by members and their associated persons,
including the exceptions in subparagraph (G) of Section 11(a)(1) and
in Rule 11a1-1(T), as well as Rule 11a2-2(T) under the Act. The
Exchange represents that, as applied to Phlx XL II, it does not
believe that the proposal would affect the availability of the
exceptions to Section 11(a) of the Act, including the exceptions in
subparagraph (G) of Section 11(a) and in Rules 11a1-1(T) and 11a2-
2(T), as are currently available. See Notice, supra note 3.
\26\ The Commission notes that certain trading practices that
could be affected by the proposed rule change may raise issues
outside the scope of its review of the proposal itself.
Specifically, any entity that acts as ``dealer,'' as defined in
Section 3(a)(5) of the Act, 15 U.S.C. 78c(a)(5), is required to
register with the Commission under Section 15 of the Act, 15 U.S.C.
78o, and the rules and regulations thereunder, or qualify for any
exception or exemption from registration. Activity that may cause a
person to be deemed a dealer includes ```quoting a market in or
publishing quotes for securities (other than quotes on one side of
the market on a quotations system generally available to non-broker-
dealers, such as a retail screen broker for government
securities).'' See Definitions of Terms in and Specific Exemptions
for Banks, Savings Associations, and Savings Banks Under Sections
3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934,
Securities Exchange Act Release No. 47364, 68 FR 8686, 8689, note 26
(February 24, 2003) (quoting OTC Derivatives Dealers, Securities
Exchange Act Release No. 40594 (October 23, 1998), 63 FR 59362,
59370, note 61 (November 3, 1998)).
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Pursuant to section 19(b)(2) of the Act,\27\ the Commission may not
approve any proposed rule change, or amendment thereto, prior to the
30th day after the date of publication of notice of the filing thereof,
unless the Commission finds good cause for so doing and publishes its
reasons for so finding. The Commission hereby finds good cause for
approving the proposed rule change, as modified by Amendment No. 2,
before the 30th day after the date of publication of notice of filing
thereof in the Federal Register.\28\ The Commission notes that the
proposal was published for comment in the Federal Register on February
2, 2010. The Commission did not receive any comments on the proposed
rule change. The Commission does not believe that Amendment No. 2
significantly alters the proposal. In the amendment, the Exchange
deleted an Exchange rule from and added several Exchange rules and
Advices to the list of rules that would be affected by the proposal;
identified in one instance where a specific provision of a rule would
be affected by the proposal; and made a few technical or clarifying
changes to the rule text, Purpose section, and/or Exhibit to the
proposed rule change. The Commission believes that these revisions are
consistent with the proposal's purpose and raise no new significant
issues. The amendment also indicated that the Phlx intends to file a
separate proposed rule change to adopt fees for Professional orders.
Finally, Phlx noted that it would issue a notice outlining the
procedures for implementation of the proposal.
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\27\ 15 U.S.C. 78s(b)(2).
\28\ See supra note 3.
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As noted above, the Commission previously found that exchange rules
that distinguish between the orders of customers who place orders at
the frequency of more than 390 orders per day on average during a
calendar month for its own beneficial account(s) and the orders of
customers who do not meet that threshold are consistent with the
Act.\29\ Accordingly, pursuant to section 19(b)(2) of the Act,\30\ the
Commission finds good cause to approve the proposed rule change, as
modified by Amendment No. 2, on an accelerated basis.
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\29\ See Professional Customer Approval Orders, supra note 19.
\30\ 15 U.S.C. 78s(b)(2).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as modified by Amendment No. 2, 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-2010-05 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 Number SR-Phlx-2010-05. 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,\31\ 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 the filing also will be
available for inspection and copying at the principal office of the
Exchange. All comments received will
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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 Number SR-Phlx-2010-05 and should be submitted on
or before April 26, 2010.
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\31\ The text of the proposed rule change is available on
Exchange's Web site at http://nasdaqomxphlx.cchwallstreet.com/NASDAQOMXPHLX/Filings/, on the Commission's Web site at http://www.sec.gov, at the principal office of the Exchange, and at the
Commission's Public Reference Room.
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\32\ that the proposed rule change (SR-Phlx-2010-05), as modified
by Amendment No. 2, be, and it hereby is, approved on an accelerated
basis.
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\32\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\33\
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\33\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-7630 Filed 4-2-10; 8:45 am]
BILLING CODE 8011-01-P