[Federal Register Volume 76, Number 43 (Friday, March 4, 2011)]
[Notices]
[Pages 12206-12208]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-4885]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63967; File No. SR-Phlx-2011-27]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by NASDAQ OMX PHLX LLC Relating
to Amendments to Rules 200(g) and 201 of Regulation SHO Applicable to
Complex Orders
February 25, 2011.
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 February 23, 2011, NASDAQ OMX PHLX LLC (``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 substantially 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 proposes to amend Rule 1080.08 respecting complex
orders to reflect the marking requirements of Regulation SHO and to
address the handling of certain orders marked ``short'' in compliance
with Rule 201 of Regulation SHO, as explained further below.
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
Recently, the Exchange received approval from the Commission to
make various enhancements to its complex orders system, including to
accept complex orders where one component is the underlying security of
the options components.\3\ Specifically, the underlying stock or ETF
can now be one component of a complex order.\4\ Nasdaq Options Services
LLC (``NOS''), a registered broker-dealer and member of Financial
Industry Regulatory Authority, is responsible for the execution of the
stock or ETF component of a complex order as agent of the stock or ETF
component.\5\ This is described in Rule 1080.08(h). A complex order
with one component that is a stock or ETF is received by the Exchange
with a net debit or credit price. The individual option leg(s) and
stock/ETF component prices are not specified; rather, there is a single
net debit or credit price on the order which is used by Phlx and NOS to
determine the price of each component, including the stock/ETF.
Specifically, although Phlx is calculating the price of the options
components, a sophisticated algorithm is simultaneously causing NOS to
calculate and execute the stock or ETF component of the Complex Order,
which has been electronically communicated to NOS by the Exchange.
Thus, because the execution of one component is contingent upon the
execution of all others, the entire package is processed as a single
transaction and both the option leg and stock/ETF components are
simultaneously processed.
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\3\ See Securities Exchange Act Release No. 63777 (January 26,
2011), 76 FR 5630 (February 1, 2011) (SR-Phlx-2010-157) (``Complex
Order rule filing'').
\4\ A complex order is a an order involving the simultaneous
purchase and/or sale of two or more different options series in the
same underlying security or a stock-option order, priced as a net
debit or credit, based on the relative prices of the individual
components, for the same account, for the purpose of executing a
particular investment strategy. See Rule 1080.08(a).
\5\ The NASDAQ OMX Group, Inc. owns both the Exchange and NOS;
therefore, the Exchange and NOS are affiliates.
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In the Complex Order rule filing, the Exchange explained that with
respect to short sale regulation, the proposed handling of the stock/
ETF component of a complex order did not raise any issues of compliance
with the currently operative provisions of Regulation SHO.\6\ When a
complex order has a
[[Page 12207]]
stock/ETF component, member organizations must mark, pursuant to
Regulation SHO, whether that order involves a long or short sale.\7\
The Phlx trading System will accept complex orders with a stock/ETF
component marked to reflect either a long or short position;
specifically, orders not currently marked as ``long'' or ``short'' are
rejected by the Phlx trading System.
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\6\ 17 CFR 242.200 et seq.
\7\ 17 CFR 242.200(g).
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In 2010, the Commission amended Rule 201 and Rule 200(g) of
Regulation SHO under the Act.\8\ The amendments to Rule 201 adopt a
short sale-related circuit breaker that, if triggered, imposes a
restriction on the prices at which covered securities may be sold short
(``short sale price test restriction'').\9\ Specifically, Rule 201
requires a trading center \10\ to establish, maintain, and enforce
written policies and procedures reasonably designed to prevent the
execution or display of a short sale order of a covered security \11\
at a price that is less than or equal to the current national best bid
\12\ if the price of that covered security decreases by 10% or more
from the covered security's closing price as determined by the listing
market \13\ for the covered security as of the end of regular trading
hours on the prior day; \14\ and impose these requirements for the
remainder of the day and the following day when a national best bid for
the covered security is calculated and disseminated on a current and
continuing basis by a plan processor pursuant to an effective national
market system plan.\15\ The amendments to Rule 200(g) provide that a
broker-dealer may mark certain qualifying short sale orders ``short
exempt.'' \16\ Thereafter, the Commission extended the compliance date
for the amendments to Rule 201 and Rule 200(g) until February 28,
2011.\17\ The Exchange is filing this proposed rule change to address
the new amendments to Regulation SHO.
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\8\ See Securities Exchange Act Release No. 61595 (February 26,
2010), 75 FR 11232 (March 10, 2010). See also Division of Trading
and Markets: Responses to Frequently Asked Questions Concerning Rule
201 of Regulation SHO.
\9\ 17 CFR 242.201.
\10\ The term ``trading center'' is defined in Rule 201(a)(9) of
Regulation SHO. 17 CFR 242.201(a)(9). Both the Exchange and NOS are
``trading centers'' within the definition of Rule 201(a)(9).
\11\ The term ``covered security'' is defined in Rule 201(a)(1)
as any NMS stock as defined in Rule 600(b)(47) of Regulation NMS. 17
CFR 242.201(a)(1). See also 17 CFR 242.600(b)(47).
\12\ The term ``national best bid'' is defined in Rule
201(a)(4). 17 CFR 242.201(a)(4).
\13\ The term ``listing market'' is defined in Rule 201(a)(3).
17 CFR 242.201(a)(3).
\14\ 17 CFR 242.201(b)(1)(i).
\15\ 17 CFR 242.201(b)(1)(ii).
\16\ 17 CFR 242.200(g)(2).
\17\ See Securities Exchange Act Release No. 63247 (November 4,
2010), 75 FR 68702 (November 9, 2010) (extending the compliance date
of the amendments to Rules 201 and 200(g) of Regulation SHO from
November 10, 2010 until February 28, 2011).
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Accordingly, the purpose of the proposed rule change is to explain
the Exchange's handling of stock/ETF sell components entered as part of
a complex order in accordance with the amendments to Regulation SHO. In
particular, the Exchange is proposing to provide that, if the stock/ETF
leg of a complex order submitted to the Phlx trading System is a sell
order, then the stock/ETF leg must be marked ``long,'' ``short,'' or
``short exempt'' in compliance with Rule 200(g) of Regulation SHO; if
it is not so marked, the order will be rejected. Thus, the Exchange
will now accept complex orders marked ``short exempt'' and Rule
1080.08(b)(iv) is being adopted to reflect this.\18\ The Exchange and
NOS, as trading centers, must comply with Rule 201(b)(1)(iii)(B), which
provides that a trading center must establish, maintain, and enforce
written policies and procedures reasonably designed to permit the
execution or display of a short sale order of a covered security marked
``short exempt'' without regard to whether the order is at a price that
is less than or equal to the current national best bid.\19\
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\18\ The Exchange notes that a broker or dealer may mark a sell
order ``short exempt'' only if the provisions of Rule 201(c) or (d)
are met. See 17 CFR 242.200(g)(2). Since NOS and the Exchange do not
display the stock or ETF portion of a complex order, see infra note
20, a broker-dealer should not mark the short sale order ``short
exempt'' under Rule 201(c). See also Division of Trading and
Markets: Responses to Frequently Asked Questions Concerning Rule 201
of Regulation SHO, Q&A Nos. 4.2, 5.4 and 5.5.
\19\ 17 CFR 242.201(b)(1)(iii)(B).
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Furthermore, the Exchange proposes to amend Rule 1080.08(h) to
describe the handling of short sales involving the stock/ETF leg of a
complex order submitted to its Phlx trading System. When the short sale
price test restriction is triggered for a covered security, NOS will
not execute or display \20\ a short sale order in the underlying
covered security component of a complex order if the price is equal to
or below the current national best bid. However, NOS will execute a
short sale order in the underlying covered security component of a
complex order if such order is marked ``short exempt,'' regardless of
whether it is at a price that is equal to or below the current national
best bid. If NOS cannot execute the underlying covered security
component of a complex order in accordance with Rule 201 of Regulation
SHO, the Exchange will cancel back the complex order to the entering
member organization. When a short sale price test restriction is
triggered in a covered security, orders in that security marked
``short'' may be executed by NOS if the order is at a price above the
current national best bid at the time of execution. Thus, the proposal
is narrowly tailored to address Rule 201 by only cancelling orders
marked ``short'' when a short sale price test restriction is triggered
in the covered security and the sell order is at a price equal to or
below the current national best bid at the time of execution.
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\20\ The stock or ETF portion of a complex order is not
displayed as an order, because the complex order as a whole is
handled as a single order with multiple contingencies.
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The Exchange believes that this approach is consistent with Rule
201. Under this proposal, the Exchange and NOS, as trading centers,
will prevent the execution or display of a short sale of the stock/ETF
component of a complex order priced at or below the current national
best bid when the short sale price test restriction is triggered.
Specifically, while the Exchange and NOS are determining, respectively,
the prices of the options component and of the stock or ETF component
of the complex order, as described above, NOS will check the current
national best bid of the stock or ETF component at the time of
execution. The execution of one component is contingent upon the
execution of all other components and once a complex order is accepted
and validated by the Phlx trading System, the entire package is
processed as a single transaction and both the option leg and stock/ETF
components are simultaneously processed.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \21\ in general, and furthers the objectives of Section
6(b)(5) of the Act \22\ in particular, in that it is designed to
promote just and equitable principles of trade, and, in general to
protect investors and the public interest, by providing clarity on the
short sale order handling procedures of the stock/ETF component of a
complex order when a short sale price test restriction is in effect for
a covered security. Furthermore, the Exchange believes that the
proposed rule change is consistent with Regulation SHO in that it
provides for the handling of short exempt orders as well as short sale
orders when the short sale price test restriction is triggered.
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\21\ 15 U.S.C. 78f(b).
\22\ 15 U.S.C. 78f(b)(5).
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[[Page 12208]]
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
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days after the date of the filing, or such
shorter time as the Commission may designate, it has become effective
pursuant to 19(b)(3)(A) of the Act \23\ and Rule 19b-4(f)(6) \24\
thereunder. The Exchange has requested that the Commission waive the
30-day pre-operative waiting period contained in Exchange Act Rule 19b-
4(f)(6)(iii) \25\ so that the Exchange may implement the change no
later than February 28, 2011 to coincide with the compliance date for
the amendments to Rules 200(g) and 201 of Regulation SHO. The
Commission believes that waiver of the operative delay is consistent
with the protection of investors and the public interest because the
proposed rule change, among other things, implements the amendments to
Rules 200(g) and 201 of Regulation SHO which have a February 28, 2011
compliance date.\26\ For this reason, the Commission designates the
proposed rule change to be operative upon filing with the
Commission.\27\
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\23\ 15 U.S.C. 78s(b)(3)(A).
\24\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
\25\ 17 CFR 240.19b-4(f)(6)(iii).
\26\ See supra note 17.
\27\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule change's impact on
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or 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-2011-27 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-2011-27. 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-2011-27
and should be submitted on or before March 25, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
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\28\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-4885 Filed 3-3-11; 8:45 am]
BILLING CODE 8011-01-P