[Federal Register Volume 75, Number 73 (Friday, April 16, 2010)]
[Notices]
[Pages 20016-20018]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-8683]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-61862; File No. SR-Phlx-2010-43]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by NASDAQ OMX PHLX, Inc. Relating to Quote Spread Parameters and
Batching of Violations
April 7, 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 March 26, 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, II,
and III, below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange, pursuant to Section 19(b)(1) of the Act \3\ and Rule
19b-4 thereunder,\4\ proposes to amend Options Floor Procedure Advice
(``Advice'') F-6, Option Quote Parameters, to copy from Rule
1014(c)(i)(A) a provision relating to $5 wide bid-ask differentials for
electronic quotes in equity, index and foreign currency options after
the opening, which was inadvertently omitted from Advice F-6. The
Exchange also proposes to change the fine schedule to add three warning
letters, implement the fine schedule on a one year running calendar
basis, and permit the ``batching'' of violations of both Advice F-6 and
the corresponding Rule 1014(c)(i)(A), pursuant to Rules 960 and 970,
for purposes of determining what is an occurrence.
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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 correct Advice F-6
and update it in order to reflect the current
[[Page 20017]]
trading environment, as well as to permit the batching of certain such
violations, as described below. Currently, Rule 1014(c)(i)(A) and its
corresponding Advice F-6, which is part of the Exchange's minor rule
plan,\5\ govern bid/ask differentials, which are also known as
quotation or quote spread parameters; quote spread parameters establish
the maximum permissible width between the bid and an offer in a
particular series.\6\ The Exchange proposes to update Advice F-6 to
reflect language permitting options quoted electronically to be quoted
with a $5 wide spread after the opening of an option. Those who are
quoting verbally (in open outcry) must, throughout the trading day,
comply with the regular quote spread parameters that apply on the
opening; those quote spread parameters appear in a chart in Advice F-6
and in the text of Rule 1014(c)(i)(A)(1)(a). The language permitting $5
wide quote spreads after the opening for those quoting electronically
was added to Rule 1014(c)(i)(A)(2) but, inadvertently, not to Advice F-
6.\7\ The Exchange proposes to correct this by inserting this language
into Advice F-6.
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\5\ The Exchange's minor rule plan consists of options floor
procedure advices (``OFPAs'' or ``Advices'') with preset fines,
pursuant to Rule 19d-1(c) under the Act. 17 CFR 240.19d-1(c). Most
OFPAs have corresponding options rules.
\6\ See Rule 1014(c)(i)(A)(1)(a).
\7\ See Securities Exchange Act Release No. 50728 (November 23,
2004), 69 FR 69982 (December 1, 2004) (SR-Phlx-2004-74).
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The Exchange also proposes to change the fine schedule applicable
to Advice F-6, which is administered pursuant to the Exchange's minor
rule plan. The fine schedule would now consist of warning letters
respecting the first three occurrences and three fines thereafter
($250, $500 and $1,000), before the seventh occurrence would result in
referral to the Business Conduct Committee (``BCC'') for disciplinary
action. In addition, the fine schedule would be administered on a one
year running calendar basis, such that violations within one year of
the last occurrence would count as the next ``occurrence,'' rather than
a two year running calendar basis.\8\
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\8\ A running calendar basis means that violations within a one
year period count as the next ``occurrence'' for purposes of the
fine schedule, regardless of the calendar year. A ``one-year running
calendar basis'' means that a violation of an Advice that occurs
within one year of the first violation of that Advice will be
treated as a second occurrence, and any violation of an Advice
within one year of the previous violation of that Advice will be
subject to the next highest fine specified in the Advice. See
Securities Exchange Act Release No. 41201 (March 22, 1999), 64 FR
15391 (March 31, 1999) (SR-Phlx-99-06). The terms ``running'' and
``rolling'' calendar basis are often used interchangeably. See,
e.g., Securities Exchange Act Release No. 33130 (November 2, 1993),
58 FR 29502 (November 9, 1993) (SR-Phlx-93-28).
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The Exchange believes that these changes are appropriate because
quoting has become entirely electronic; most Streaming Quote Traders
(``SQTs'') and Remote Streaming Quote Traders (``RSQTs'') \9\ quote
electronically, relying on their firm's quoting technology and computer
models to establish an option's price and generate the quote
electronically to the Exchange. Historically, when Registered Options
Traders (``ROTs'') \10\ quoting on the Exchange did so verbally (even
though they relied on computer models to produce a price), the quote
was subject to their own judgment and verbal delivery; sometimes an ROT
stated a quote that did not comply with the maximum quote spread
parameter, thus triggering a violation under Advice F-6 and a fine
under the minor rule plan. In contrast, today, the Exchange believes
that computer models do not make the sorts of individualized mistakes
that Advice F-6 was intended to deal with; instead, when there is a
quoting error today, electronically, it usually affects every series
that RSQT or SQT is quoting on that particular technology, generating,
potentially, hundreds of instances of quote spread parameter
violations. Rather than taking each event to the BCC as a fourth
occurrence under the current rule (because there may be hundreds), the
Exchange proposes to treat these as a single occurrence by ``batching''
the violations. This way, the firm would receive a warning letter for
the first three events, before being subject to a fine schedule. Of
course, the Exchange could in any particular situation deem it to be
egregious rather than ``minor'' and refer it directly to the BCC for
disciplinary action. The Exchange believes that this is appropriate
because the relevant warning letter or monetary fine should serve as a
deterrent against future violations, while recognizing that a single
programming error can have a widespread effect.
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\9\ See Rule 1014(b)(ii).
\10\ See Rule 1014(b)(i).
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Currently, Rules 960.2(f)(ii) and 970.01 permit the Exchange to
aggregate or ``batch'' multiple numbers of violations as one single
offense, for purposes of initiating disciplinary action under Exchange
rules, or imposing fines pursuant to fine schedules set forth in the
relevant Options Floor Procedure Advices under the Exchange's minor
rule plan.\11\ Violations that are currently eligible for batching are
listed on the Exchange's internal Numerical Criteria for Bringing Cases
for Violations of Phlx Order Handling Rules. At this time, the Exchange
proposes to permit batching with respect to Advice F-6 and Rule
1014(c)(i)(A), and proposes to amend Rules 960 and 970 accordingly.
Currently, the language in both rules limits batching to certain
Exchange order handling rules.
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\11\ The Exchange may also refer the matter to the Business
Conduct Committee (``BCC'') for possible disciplinary action when
the Exchange determines that there exists a pattern or practice of
violative conduct without exceptional circumstances or when any
single instance of violative conduct without exceptional
circumstances is deemed to be egregious. See Securities Exchange Act
Release No. 45570 (March 15, 2002), 67 FR 13395 (March 22, 2002)
(SR-Phlx-2001-114).
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Pursuant to Rules 960.2(f)(ii) and 970.01, the batching program
will continue to require that the violations be determined based on an
exception-based surveillance program, with the specific surveillance
guidelines (which are similar to compliance thresholds) maintained on
the Numerical Criteria for Bringing Cases for Violations of Phlx Order
Handling Rules.\12\ The Exchange believes that these changes should
result in a fine schedule that better fits the current electronic
trading environment. In addition, the Exchange believes that Advice F-6
(and its corresponding rule) is appropriate for batching because the
automated surveillance for quote spread parameter compliance,\13\ as
well as the issuance of sanctions pursuant to the minor rule plan,\14\
will be conducted daily. The Exchange believes that its representation
by regulatory staff that daily surveillance will be conducted and daily
sanctions will be administered should serve as a strong deterrent
against future violations.
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\12\ Such criteria can be updated subject to the Exchange
providing notice to the Commission's Office of Compliance
Inspections and Examinations. See Securities Exchange Act Release
No. 45570 (March 15, 2002), 67 FR 13395 (March 22, 2002) (SR-Phlx-
2001-114). Because neither is an ``order handling rule,'' the
Exchange is proposing herein to expressly permit batching of
violations of Advice F-6 and Rule 1014(c)(i)(A).
\13\ See confidential letters from Stephen M. Pettibone,
Managing Director Surveillance, Phlx, to Michael Gaw, Division of
Trading and Markets, and Tina Barry, Office of Compliance
Inspections and Examinations, Securities and Exchange Commission,
dated October 6, 2009 and December 30, 2009.
\14\ See letter from Charles Rogers, Chief Regulatory Officer,
Phlx, to Tina Barry, Office of Compliance Inspections and
Examinations and Michael Gaw, Division of Trading and Markets,
Securities and Exchange Commission, dated February 18, 2010.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b)
[[Page 20018]]
of the Act \15\ in general, and furthers the objectives of Section
6(b)(5) of the Act \16\ 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. The Exchange also believes that its proposal is consistent
with Sections 6(b)(1) and (6) of the Act,\17\ which require that the
rules of an exchange enforce compliance with, and provide appropriate
discipline for, violations of Commission and Exchange rules. In
addition, because existing Rule 970 provides procedural rights to a
person fined under the minor rule plan to contest the fine and permits
a hearing on the matter, the Exchange believes that the proposal is
consistent with Sections 6(b)(7) and 6(d)(1) of the Act,\18\ by
providing a fair procedure for the disciplining of members and persons
associated with members.
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\15\ 15 U.S.C. 78f(b).
\16\ 15 U.S.C. 78f(b)(5).
\17\ 15 U.S.C. 78f(b)(1) and (6).
\18\ 15 U.S.C. 78f(b)(7) and (d)(1).
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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 on the Proposed
Rule Change Received From Members, Participants or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) 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 Exchange consents, the Commission shall: (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 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-2010-43 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-2010-43. 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 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
available publicly. All submissions should refer to File Number SR-
Phlx-2010-43 and should be submitted on or before May 7, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12) and 200.30-3(a)(44).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-8683 Filed 4-15-10; 8:45 am]
BILLING CODE 8011-01-P