[Federal Register Volume 76, Number 15 (Monday, January 24, 2011)]
[Notices]
[Pages 4141-4144]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-1297]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63717; File No. SR-Phlx-2010-145]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing of Amendment No. 1 and Order Granting Accelerated Approval to a
Proposed Rule Change, as Modified by Amendment No. 1 Thereto, Relating
to the Establishment of Remote Specialists
January 14, 2011.
I. Introduction
On October 14, 2010, NASDAQ OMX PHLX LLC (``Phlx'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to allow certain Phlx exchange members to act as
option specialists that are not physically present on the option
trading floor. The proposed rule change was published for comment in
the Federal Register on November 2, 2010.\3\ On January 11, 2011, the
Exchange filed Amendment No. 1 to the proposed rule change.\4\ The
Commission received no comments on the proposal. This order provides
notice of filing of Amendment No. 1 and grants accelerated approval to
the proposed rule change, as modified by Amendment No. 1.
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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. 63192 (October 27,
2010), 75 FR 67427 (``Notice'').
\4\ On December 16, 2010, the Exchange extended the period for
Commission consideration of its proposal to January 14, 2011. See 15
U.S.C. 78s(b)(2)(A)(ii)(II) (concerning the ability of the self-
regulatory organization that filed a proposed rule change to extend
the time period for Commission consideration of its proposal).
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II. Description of the Proposal
The Exchange proposes to amend Phlx Option Rules 501, 506, 507,
1014, and 1020 to provide for remote specialists under limited
circumstances and amend its Option Floor Procedure Advices \5\ B-3 and
E-1 to reflect the new category of remote specialist.
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\5\ Phlx's Options Floor Procedure Advices (``OFPAs'' or
``Advices'') are part of the Exchange's minor rule plan (``MRP'' or
``Minor Rule Plan''), which consists of Advices with preset fines,
pursuant to Rule 19d-1(c) under the Act (17 CFR 240.19d-1(c)). See
e.g., Securities Exchange Act Release No. 50997 (January 7, 2005),
70 FR 2444 (January 13, 2005) (SR-Phlx-2003-40) (order approving the
Exchange's Options Floor Broker Management System). As this time,
Phlx is not proposing to change any of the fines that are applicable
under any of the Advices.
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Currently, Phlx has several types of Registered Options Traders
(``ROTs'') \6\ that can register as market makers on the Exchange,
including specialists, Streaming Quote Traders (``SQTs''),\7\ and
Remote Streaming Quote Traders (``RSQTs'').\8\ Specialists are floor-
based Exchange members who are registered as options specialists
pursuant to Rule 1020(a). An SQT has a physical presence on the options
floor (though they may be ``in-crowd'' or ``out-of-crowd'') and is
authorized to generate and submit option quotations electronically in
options to which such SQT is assigned, but may only do so when he or
she is physically present on the floor of the Exchange. An RSQT, on the
other hand, has no physical trading floor presence and instead is
authorized to generate and submit option quotations electronically in
options to which such RSQT has been assigned. The various market making
requirements applicable to each category of market maker are set forth
in Rule 1014. Rules 500 through 599 (the ``Allocation and Assignment
Rules'') generally describe the process for application and appointment
of specialists, SQTs and RSQTs, as well as the allocation of classes of
options to them.\9\
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\6\ A ROT is a member who has received permission from the
Exchange to trade in options for his own account. Phlx also has
Directed SQTs and Directed RSQTs, which receive Directed Orders as
defined in Rule 1080(l)(i)(A). Specialists may likewise receive
Directed Orders. Further, Phlx rules also provide for non-streaming
ROTs (``non-SQT ROT''), which can make markets in certain options on
an issue-by-issue basis. See Rule 1014(b)(ii)(C).
\7\ See Rule 1014(b)(ii)(A).
\8\ See Rule 1014(b)(ii)(B).
\9\ The Allocation and Assignment Rules also indicate under what
circumstances new allocations may not be made. See, e.g.,
Supplementary Material .01 to Rule 506.
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Accordingly, while Phlx's rules provide for remote market-making
ROTs (i.e., RSQTs), they do not provide for remote specialists. Rather,
Phlx's rules currently require that each options class and series
listed on the Exchange have a specialist physically present on the
[[Page 4142]]
options floor (``floor-based specialist'').\10\ The Exchange notes
that, historically, a floor-based specialist was required for each
options class and series, consistent with the traditional model of an
open outcry auction market featuring trading crowds at physical trading
posts on the floor and Floor Brokers \11\ that represent orders on the
floor on behalf of others.\12\ In addition to its floor-based trading
environment, Phlx also operates an electronic system to execute option
orders,\13\ resulting in a hybrid-model options market that combines a
traditional open outcry auction market trading floor with electronic
trading (the ``current Phlx market'').\14\
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\10\ The Exchange states in the Notice that at least one
exchange that uses a specialist system has allowed certain option
series to trade without a designated lead market maker (specialist).
\11\ See Rule 1060.
\12\ See Notice, supra note 3, at 75 FR 67428.
\13\ See Rule 1080 regarding the Exchange's electronic order,
trading, and execution system.
\14\ The current Phlx market model combining open outcry and
electronic trading is also used by other options exchanges, such as
Chicago Board Options Exchange, Inc., NYSE Amex LLC and NYSE Arca,
Inc. Only electronic options trading is done on other exchanges,
such as the International Securities Exchange, LLC and The NASDAQ
Stock Market LLC.
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The Exchange notes that it has found it to be difficult at times,
if not impossible, to allocate certain option products. For example,
the Exchange has found that specialists may, at times, relinquish their
options privileges, when, for example, the underlying securities are
involved in a takeover, a merger/acquisition situation, or some type of
rights offering.\15\ Without a floor-based specialist that is willing
to retain (or accept) allocation of an option, the Exchange may not
list such options pursuant to its current rules. This, in turn, may
negatively impact market participants and investors to the extent that
the sudden delisting of a Phlx option limits their choice of execution
venues. As discussed below, Phlx's proposed rule change is intended to
address the difficulty that Phlx has faced in allocating options where
no floor-based specialists are willing to accept the allocation.
Specifically, Phlx proposes to allow for remote specialists, as it
currently does for RSQTs, in order to expand the universe of market
participants that could assume the role of specialist and help ensure
the listing, or continued listing, of options on Phlx.
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\15\ See Notice, supra note 3, at 75 FR 67428.
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III. Discussion
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 1, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange.\16\ Specifically, the
Commission finds that the proposal is consistent with Section 6(b)(5)
of the Act,\17\ in that the proposal has been designed to promote just
and equitable principles of trade, and to protect investors and the
public interest.
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\16\ In approving the proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\17\ 15 U.S.C. 78f(b)(5).
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By providing for Remote Specialists, the Commission believes that
Phlx's proposal will allow it to list, or continue listing, an option
in which it does not have a registered floor-based specialist. The
concept of a Remote Specialist would be similar to the existing class
of RSQTs, and several rules that are presently applicable or unique to
RSQTs would be expanded to encompass Remote Specialists. Such
provisions are generally reflective of the ``remote'' nature of a
Remote Specialist and are intended to accommodate the unique
circumstances of a remote quoting specialist. However, the quoting
obligations applicable to a Remote Specialist would be heightened over
that which is applicable to RSQTs to reflect their status as
``specialists'' under Exchange rules. Accordingly, all specialists,
whether floor-based or remote, would be subject to similar requirements
and similar privileges. Specific details of various provisions in the
Exchange's proposed rule change are discussed further below.
Specialist Rights and Obligations
Phlx proposes to define ``remote specialist'' by amending Rule 1020
to state that a remote specialist is a qualified RSQT approved by the
Exchange to function as a specialist in one or more options, if the
Exchange determines that it cannot allocate such options to a non-
remote (i.e., floor-based) specialist. As provided in proposed Rule
501(f)(iii), a Remote Specialist would have all the rights and
obligations of a specialist, unless Exchange rules provide otherwise.
Further, Phlx proposes to underscore this principle by indicating in
Rule 1020(a) that the term ``specialist'' includes a Remote Specialist,
as defined in Rule 1020(a)(ii), that is registered pursuant to Rule 501
and that a Remote Specialist has all the rights and obligations of an
options specialist on the Exchange.
Becoming a Remote Specialist
The Exchange also proposes to amend Rule 501, which generally deals
with the process of applying for approval to be a specialist, to
indicate that in certain circumstances RSQTs may seek to register as
Remote Specialists. Specifically, the process for becoming a Remote
Specialist would be a two-step process.\18\ A member would first need
to qualify and register as a market maker on the Exchange by becoming
approved as an RSQT pursuant to Rule 507.\19\ Then, if the RSQT wished
to become a Remote Specialist, it would need to apply separately to
become a Remote Specialist pursuant to the separate process set forth
in Rule 501. Proposed Rule 501(f) provides that RSQTs may submit an
application to be an approved specialist unit \20\ and the Exchange may
approve such application in one or more options. Under Rule 501(f)(i),
a Remote Specialist could function as a specialist in one or more
options only if the Exchange determines that it cannot allocate such
option(s) to a floor-based specialist.\21\
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\18\ Proposed Rule 507(f) would state that nothing in Rule 507
shall be construed to automatically qualify an RSQT to be a Remote
Specialist on the Exchange.
\19\ For all RSQT application and approval criteria, see Rule
507(a)(i)(A) through (a)(i)(G).
\20\ A ``specialist unit,'' including a Remote Specialist unit,
may have one or more individual ``specialists.''
\21\ Additionally, in light of the proposed off-floor Remote
Specialist, Phlx proposes to modify Rule 506(c) to require that the
Exchange's decisions regarding allocation of specialist privileges
be not only communicated in writing to floor members, but also
communicated in writing to all Exchange members (both floor-based
and off-floor).
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The proposed rule would require that each Remote Specialist be
available and reachable at all times during trading hours for the
product(s) allocated to such specialist.\22\ Accordingly, a Remote
Specialist would be required to provide Exchange staff and members with
telephonic and/or electronic communication access to such specialist
and its associated staff at all times during trading hours.\23\
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\22\ See Proposed Rule 501(f)(ii). See also OFPA E-1 (Required
Staffing of Options Floor). A Remote Specialist would be required to
have a representative available during the times required by that
OFPA.
\23\ To the extent necessary, the Exchange represents that it
would announce such communication arrangements to its members via an
Options Trading Alert (``OTA'') or Options Regulatory Alert
(``ORA'').
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Additionally, Phlx proposes to amend Rule 501 and 506 to indicate
that back-up specialist arrangements and assistant specialist
requirements are not applicable to Remote Specialists.\24\ In support
of this provision, the Exchange notes its belief that the rationale for
[[Page 4143]]
requiring designation of an assistant specialist and a back-up
specialist in the floor-based context is antiquated in the context of
the Exchange's electronic-based trading system, in which assigned
RSQTs, in conjunction with other assigned market makers on the
Exchange, are able to provide liquidity in the event of a specialist's
temporary absence.\25\ Further, a similar class of remote market makers
on Phlx (RSQTs) does not have back-up personnel requirements.\26\
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\24\ The Exchange also proposes to clarify in Advice E-1 that a
Remote Specialist is exempt from the obligation to have personnel on
the trading floor, while retaining the obligation to have a
representative available telephonically.
\25\ In addition, the Exchange notes that nearly all option
issues traded on Phlx are traded on multiple exchanges. As such, the
historical risk that is addressed by the assistant/backup
requirement (namely, the ability of the Exchange to foster the
provision of liquidity) is diminished. See Notice, supra note 3, at
75 FR 67429.
\26\ See Notice, supra note 3, at 75 FR 67429, n.20.
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Quoting Obligations and Priority
Remote Specialists would be subject to all of the obligations of a
floor-based specialist on the Exchange, except where otherwise noted in
the Exchange's rules.\27\ Specifically, the Exchange proposes to amend
Rule 1014(b)(ii)(D)(2) to provide that Remote Specialists in a
particular option shall be responsible to quote two-sided markets in
that option to the same extent as on-floor specialists would be
required to do. The Exchange further proposes to amend Rule
1014(b)(ii)(D)(1) to state that the RSQT quoting requirements are not
applicable to RSQTs when they are acting in the capacity of Remote
Specialist. The intent of this provision is to establish equivalent
quoting requirements as between on-floor specialists and Remote
Specialists.
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\27\ See Proposed Rule 501(f)(iii).
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Currently, Rule 1014 provides that quoting obligations do not apply
to RSQTs in certain types of options products and establishes an
exemption for RSQTs and other market makers from the obligations set
forth in Rule 1014 in certain categories of products. The Exchange
proposes to add new language to indicate that these exemptions apply to
RSQTs only when they are acting as RSQTs, and would not apply to RSQTs
when they are functioning as Remote Specialists in particular options.
Further, the Exchange proposes to amend sub-paragraph (b)(ii)(B) of
Rule 1014 to clarify that an RSQT cannot simultaneously quote both as
RSQT and as Remote Specialist in a particular security. That is, if an
RSQT is a Remote Specialist in a particular security, the Remote
Specialist must make a market as a specialist and may not make a market
as an RSQT in that particular security.\28\ Additionally, the Exchange
proposes to add Remote Specialists to Commentary .05(c)(ii) of Rule
1014 to reflect that Remote Specialists will be treated similar to
RSQTs and out-of-crowd SQTs for priority purposes under that Rule
because they do not engage in open outcry floor trading.
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\28\ As an example of the operation of the proposed rules
wherein an RSQT may function as a traditional RSQT and also function
as a Remote Specialist, if an RSQT is allocated two option classes
as a Remote Specialist, in those two classes the Remote Specialist
will have the very same quoting (market making) requirements that
are currently applicable to all specialists, including continuous
quoting obligations. In the remaining classes to which an RSQT is
appointed, the RSQT will have the same quoting (market making)
requirements that are applicable to all RSQTs. The RSQT will not be
able to submit quotes or act as RSQT in the two allocated Remote
Specialist classes. See Amendment No. 1 to File No. SR-Phlx-2010-145
at 15 n.29 (January 11, 2011).
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In addition, Commentary .05(b) to Rule 1014 states that SQTs and
RSQTs can submit orders electronically. The Exchange is amending
Commentary .05(b) to provide that Remote Specialists also may submit
quotes electronically. Further, Commentary .05(c)(i) provides that if a
Floor Broker presents a non-electronic order in an option assigned to
an RSQT or an off-floor SQT, such RSQT or SQT may not participate in
trades stemming from the non-electronic order unless the order is
executed at the price quoted by the non-crowd RSQT or SQT at the time
of execution. The Exchange proposes to include Remote Specialists in
Commentary .05(c)(i) to establish priority for Remote Specialists that
is coextensive with the priority afforded in that Rule to RSQTs and
out-of-crowd SQTs.
The Commission believes that these provisions are appropriate to
set forth equivalent obligations and standards applicable to Remote
Specialists that are equivalent to the obligations and standards
applicable to floor-based specialists. The Commission believes that a
specialist must have an affirmative obligation to hold itself out as
willing to buy and sell options for its own account on a regular or
continuous basis to justify receiving unique benefits available to the
specialist. The Commission believes that Phlx's rules impose such
affirmative obligations on Remote Specialists that choose to operate
remotely and notes that, under the proposal, Remote Specialists acting
from a remote location would still be required to meet the obligations
of a floor-based specialist.\29\ Furthermore, the Commission believes
that RSQTs that act as Remote Specialists where no on-floor specialists
are willing to accept, or retain, an option allocation, would provide
or continue to provide a market that would not otherwise exist on the
Exchange, which should benefit traders, investors, and public customers
making hedging and trading decisions. Further, the proposed rules
clearly provide that an RSQT that becomes a Remote Specialist in a
particular security must make a market in that security as a specialist
and may not make a market as an RSQT in that particular security.
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\29\ See id.
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OFPA and Advices
The Exchange also proposes to clarify several OFPAs regarding a
Remote Specialist's off-floor electronic quoting and trading
capabilities. Particularly, the Exchange is amending Advice B-3 to
state that a Remote Specialist is exempted from the requirement that an
ROT, including a specialist, trade a certain percentage of volume on
the Exchange in person. The change reflects the fact that a Remote
Specialist would not be physically present on the Exchange's trading
floor and would instead submit quotes and orders remotely.
Additionally, the Exchange is deleting Advice A-7 (specialist
responsibilities for cancellations) and Advice A-10 (specialists
trading the book) as specialists are no longer agents for the book with
respect to Advice A-10, and both Advices are no longer required in
light of subsequent developments in the Exchange's electronic trading
and communication capabilities.\30\
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\30\ See id. at 17.
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Surveillance
Finally, the Exchange represents that it has developed surveillance
procedures for its auction and electronic markets and will use the
surveillance procedures now in place to perform surveillance of Remote
Specialists.\31\
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\31\ See Notice, supra note 3, at 75 FR 67431.
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Accelerated Approval
In Amendment No. 1, the Exchange clarifies the role of a RSQT
acting in the capacities of both a RSQT and a Remote Specialist to
state that when acting as a Remote Specialist in specifically allocated
classes the Remote Specialist will have all the same obligations that
are applicable to Specialists, including continuous quoting
obligations.\32\ Amendment No. 1 also amended proposed Rule 501(f)(ii)
to require a Remote Specialist to provide Exchange staff with either
telephonic or electronic communication access (as originally proposed,
only telephonic access was specified). Finally, Amendment No. 1
[[Page 4144]]
proposes to delete (rather than amend, as originally proposed) Advices
A-7 and A-10, which the Exchange believes are no longer necessary for
the reasons discussed above. Because the changes proposed in Amendment
No. 1 are minor changes to the proposal that do not raise material
issues, the Commission finds that good cause exists, consistent with
Section 19(b) of the Act,\33\ for approving the proposed rule change,
as modified by Amendment No. 1, prior to the thirtieth day after
publication of notice of filing of Amendment No. 1 in the Federal
Register.
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\32\ See Amendment No. 1, supra note 28, at 15 n.29.
\33\ 15 U.S.C. 78s(b).
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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. 1, 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-2010-145 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-2010-145. 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 the 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-2010-145 and should be
submitted on or before February 14, 2011.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\34\ that the proposed rule change (SR-Phlx-2010-145), as modified
by Amendment No. 1, be, and it hereby is, approved.
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\34\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\35\
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\35\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-1297 Filed 1-21-11; 8:45 am]
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