[Federal Register Volume 76, Number 43 (Friday, March 4, 2011)]
[Notices]
[Pages 12191-12193]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-4897]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63979; File No. SR-Phlx-2011-21]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change Relating to
Quality Opening Markets
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 16, 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 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 Rule 1017, Openings in Options,
to reflect a system change under which the PHLX XL[supreg] automated
options trading system \5\ will initiate an opening ``imbalance
process'' during the opening of trading in an option series when: (i)
No other U.S. options exchange has opened the affected series for
trading, and (ii) there is not a ``quality opening market'' (as defined
below) present on the Exchange in such option series.
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\3\ 15 U.S.C. 78s(b)(1).
\4\ 17 CFR 240.19b-4.
\5\ This proposal refers to ``PHLX XL'' as the Exchange's
automated options trading system. In May, 2009 the Exchange enhanced
the system and adopted corresponding rules referring to the system
as ``Phlx XL II.'' See Securities Exchange Act Release No. 59995
(May 28, 2009), 74 FR 26750 (June 3, 2009) (SR-Phlx-2009-32). The
Exchange intends to submit a separate technical proposed rule change
that would change all references to the system from ``Phlx XL II''
to ``PHLX XL'' for branding purposes.
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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 improve the quality
of executions that take place on the Exchange during the Opening
Process when no other market center is open for trading in the affected
series, by amending Exchange Rule 1017. Specifically, the Exchange's
PHLX XL system will initiate an imbalance process when marketable
opening orders on the Exchange could be executed against valid width
quotes (defined in Exchange Rule 1014) \6\ but there is not a ``quality
opening market''
[[Page 12192]]
(as set forth in a table posted on the Exchange's Web site).
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\6\ A ``valid width quote'' for options on equities and index
options means bidding and/or offering so as to create differences of
no more than $.25 between the bid and the offer for each option
contract for which the prevailing bid is less than $2; no more than
$.40 where the prevailing bid is $2 or more but less than $5; no
more than $.50 where the prevailing bid is $5 or more but less than
$10; no more than $.80 where the prevailing bid is $10 or more but
less than $20; and no more than $1 where the prevailing bid is $20
or more, provided that, in the case of equity options, the bid/ask
differentials stated above shall not apply to in-the-money series
where the market for the underlying security is wider than the
differentials set forth above. For such series, the bid/ask
differentials may be as wide as the quotation for the underlying
security on the primary market, or its decimal equivalent rounded up
to the nearest minimum increment. The Exchange may establish
differences other than the above for one or more series or classes
of options. See Exchange Rule 1014(c)(i)(A)(1)(a).
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Quality Opening Market
A ``quality opening market '' is a bid and offer on the Exchange
comprised of the highest bid of all valid width opening quotes on the
Exchange and the lowest offer of all valid width opening quotes on the
Exchange, with a specific bid/ask differential that is narrower than
the bid/ask differential of a valid width quote.
A quality opening market is calculated by determining the bid/ask
differential of the best available bid and the best available offer on
the Exchange. If such bid/ask differential is equal to or less than a
specific range as defined in a table published by the Exchange, the
available top of book quotation is considered to be a ``quality opening
market''.
For example, currently for options priced under $2.00, a valid
width quote is defined as a quote with a bid/ask differential that is
not greater than $0.25. Assume at the opening on the Exchange, the
Exchange's market is $0.00 bid, $0.25 offer for 500 contracts in an
option that is quoted and traded in increments of $0.01 (a ``penny
pilot option''). Despite having a ``valid width'' quote on the
Exchange, a market or marketable limit order to buy with equal or
smaller size than the valid width quote size would be executed against
the valid width quote offer of $0.25 if there were no other options
markets open for trading in the affected series.\7\ An execution of
$0.25 in a penny pilot option that is normally quoted with, for
example, a $0.03 or $0.04 bid/ask differential, may be considered
unacceptable. The Exchange has experienced situations where, following
such an execution, additional PHLX market participants submit quotes in
the affected series at a significantly better level than the opening
price. This result is unacceptable to both the Exchange and its
customers. The Exchange believes that the ``quality opening market''
requirement should reduce, the number of occurrences of, or preclude,
this result, especially in the case of out-of-the-money options series
and relatively illiquid options.
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\7\ If there are other options markets open for trading in the
affected series, the Exchange would route the order to better-priced
away markets following a one-second ``Route Timer.'' See, e.g.,
Exchange Rule 1017(l)(iv)(B).
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Another example of the result the proposed rule change addresses
concerns options having up to thirty-nine months from the time they are
listed until expiration.\8\ Strike price interval, bid/ask differential
and continuity rules do not apply to such options series until the time
to expiration is less than nine months.\9\ Options series with
expirations of nine months or more may be quoted with any bid/ask
differential. Assume at the opening on the Exchange, the Exchange's
market in such an option series is $0.00 bid, $5.00 offer for 50
contracts. A market or marketable limit order to buy with a size of 50
or fewer contracts would execute at $5.00, absent an imbalance process
seeking a ``quality opening market'' on the Exchange.
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\8\ Such options are referred to as Long Term Equity
AnticiPation Securities (``LEAPS'').
\9\ See Exchange Rule 1012, Commentary .03.
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In order to ensure quality opening executions in this circumstance,
proposed Rule 1017(l)(v)(B) would state that, if there is no imbalance,
and (1) no other U.S. options exchange has opened the affected series
for trading, and (2) there is no ``quality opening market'' (as defined
in a table to be determined by the Exchange and published on the
Exchange's Web site), present on the Exchange in such option series,
the PHLX XL system will begin the imbalance process \10\ in order to
seek additional valid width quotes that result in a ``quality opening
market'' on the Exchange. During the imbalance process, the Exchange
broadcasts ``Imbalance Notices'' seeking fresh quotations from
participants at up to 3-second intervals.\11\
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\10\ Although there is not a true ``imbalance'' in this
situation, the Exchange believes that the imbalance process is the
most efficient way to communicate to participants that it is seeking
fresh quotations that would result in a quality opening market on
the Exchange.
\11\ See current Exchange Rule 1017(l)(v).
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In this situation, the PHLX XL system will execute contra-side
interest when either: (i) A ``quality opening market '' is present on
the Exchange, (ii) another options exchange opens for trading in the
affected series, or (iii) the imbalance process is complete. Once a
``quality opening market'' is present on the Exchange, or another
options exchange opens for trading in the affected series, the
imbalance process will be terminated and the contra-side marketable
order interest will be executed in accordance with Exchange Rule 1017.
If no ``quality opening market'' is present during the imbalance
process, and no other options exchange has opened for trading in the
affected series during the imbalance process, contra-side marketable
order interest will be executed against valid width quotes present on
the Exchange in accordance with Exchange Rule 1017 upon the termination
of the imbalance process.\12\ The Exchange believes that, if no
``quality opening market'' is present during the imbalance process (and
no other options exchange has opened for trading in the affected
series), the valid width quote is the best opening price and therefore
it is appropriate to execute at the valid width quote price.
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\12\ The PHLX XL system may repeat the imbalance process up to
three times (as established by the Exchange). See current Exchange
Rule 1017(l)(v)(C)(6).
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The Exchange also proposes technical re-numbering changes to Rule
1017 to address proposed new Rule 1017(l)(v).
The Exchange believes that this proposal to ``force'' an imbalance
process when there are no other markets open for trading in the
affected series, and there is no ``quality opening market'' present on
the Exchange, will enhance the opening price discovery process and
encourage participants to submit high quality quotes at the opening of
trading. This in turn should enhance the quality of executions at the
opening of trading on the Exchange, all to the benefit of the investing
public. The Exchange further believes that the proposal will promote
increased customer confidence in the PHLX opening process, and should
attract more opening order flow to the Exchange.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \13\ in general, and furthers the objectives of Section
6(b)(5) of the Act \14\ 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 improving prices and market efficiency at the
opening of trading.
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\13\ 15 U.S.C. 78f(b).
\14\ 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 on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
[[Page 12193]]
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Pursuant to Section 19(b)(3)(A) \15\ of the Act and Rule 19b-
4(f)(6) \16\ thereunder, the Exchange has designated this proposal as
one that effects a change that: (i) Does not significantly affect the
protection of investors or the public interest; (ii) does not impose
any significant burden on competition; and (iii) by its terms, does not
become operative for 30 days after the date of the filing, or such
shorter time as the Commission may designate if consistent with the
protection of investors and the public interest.
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\15\ 15 U.S.C. 78s(b)(3)(A).
\16\ 17 CFR 240.19b-4(f)(6).
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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.
The Exchange notes that the instant proposal to establish a
``quality opening market'' and to publish a table of acceptable opening
bid/ask differentials on its Web site is substantially similar to its
previously approved proposed rule change to establish an Opening Quote
Range and an Acceptable Quote Range, and to publish those ranges in a
table on its Web site.\17\ The Opening Quote Range and the Acceptable
Quote Range substantially track the quality opening market standard.
Furthermore, because the table that describes the bid/ask differential
required for a quality opening market is intended to be dynamic and
subject to market conditions, the Exchange believes that it is
appropriate to display the table on its Web site, just as it does with
the Opening Quote Range and the Acceptable Quote Range.
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\17\ See Securities Exchange Act Release No. 59995 (May 28,
2009), 74 FR 26750 (June 3, 2009) (SR-Phlx-2009-32).
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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-2011-21 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-2011-21. 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-2011-21 and should be
submitted on or before March 25, 2011.
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\18\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-4897 Filed 3-3-11; 8:45 am]
BILLING CODE 8011-01-P