[Federal Register Volume 83, Number 238 (Wednesday, December 12, 2018)]
[Notices]
[Pages 63937-63939]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-26824]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84727; File No. SR-Phlx-2018-77]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change Relating to Bid/Ask
Differentials
December 6, 2018.
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 November 28, 2018, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed
with the Securities and Exchange Commission (``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 proposes to amend Phlx Rule 1017, entitled ``Openings
in Options,'' Phlx Rule 1014, entitled ``Obligations and Restrictions
Applicable to Specialists and Registered Options Traders,'' and Rule
1000, entitled ``Applicability, Definitions an References.''
The text of the proposed rule change is available on the Exchange's
website at http://nasdaqphlx.cchwallstreet.com/, 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
Phlx proposes several amendments in this rule change. First, the
Exchange proposes to amend Phlx Rule 1017, entitled ``Openings in
Options'' and Phlx Rule 1014, entitled ``Obligations and Restrictions
Applicable to Specialists and Registered Options Traders'' to correct
inconsistencies between the Exchange's rule text and the operation of
the System. Second, the Exchange proposes to add definitions to Phlx
Rule 1000 to define ``in-the-money'' and ``out-of-the-money'' option
series. Third, the Exchange proposes to amend Rule 1014 to correct an
error regarding rounding. Each amendment will be described in more
detail below.
Rule 1017
Today, Phlx Rule 1017(a)(ix) defines a Valid Width Quotes as a two-
sided electronic quotation submitted by a Phlx Electronic Market Maker
(which includes a Specialist \3\ and a Registered Options Trader \4\ or
``ROT'') that consists of a bid/ask differential that is compliant with
Rule 1014(c)(i)(A)(1)(a).\5\ Specifically, for the Opening Process,
Phlx Rule 1014(c)(i)(A)(1)(a) states that, for in-the-money series, the
bid/ask differentials may be as wide as the spread between the national
best bid and offer in the underlying security, or its decimal
equivalent rounded up to the nearest minimum increment. In practice,
however, the Exchange's System permits a Valid Width Quote in the
Opening Process to be as wide as the quotation for the underlying
security on the primary (listing) market.\6\
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\3\ A Specialist is an Exchange member who is registered as an
options Specialist. See Phlx Rule 1020(a).
\4\ Rule 1014(b) defines a ROT as ``a regular member or a
foreign currency options participant of the Exchange located on the
trading floor who has received permission from the Exchange to trade
in options for his own account.'' For purposes of Rule 1014, the
term ``ROT'' shall include a Streaming Quote Trader and a Remote
Streaming Quote Trader, as defined in Rule 1014.
\5\ Phlx Rule 1014(c)(i)(A)(1)(a) provides, ``[o]ptions on
equities and index options 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 spread between the national best
bid and offer in the underlying security, 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.''
\6\ The primary market has always been utilized on Phlx since
the migration to Phlx XLII.
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Proposal
The Exchange proposes to codify its current practice and correctly
reflect in its Rules that the Valid Width Quote in the Opening Process
apply a primary market analysis, not a national best bid or offer
(``NBBO'') analysis.\7\ Specifically, this proposal would conform the
current rule text to the current System by amending the definition of a
Valid Width Quote in Rule 1017, ``Opening in Options,'' so that, in the
case of in-the-money option series \8\ where the market for the
underlying security is wider than the differentials set forth above,
the bid/ask differential set forth in Phlx Rule 1017(a)(ix) may be as
wide as the quotation for the underlying security on the primary \9\
(listing) market, or its decimal equivalent rounded down to the nearest
minimum increment.
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\7\ The Exchange notes that today Phlx utilizes the primary
market in calculating the bid/ask differential during the Opening
Process. This rule change would amend the rule to reflect Phlx's
current practice.
\8\ An at-the-money option series would also qualify. An out-of-
the-money series would not qualify.
\9\ The term ``primary market'' means, in the case of securities
listed on The Nasdaq Stock Market, the market that is identified as
the listing market pursuant to Section X(d) of the approved national
market system plan governing the trading of Nasdaq-listed
securities, and, in the case of securities listed on another
national securities exchange, the market that is identified as the
listing market pursuant to Section XI of the Consolidated Tape
Association Plan. See Phlx Rule 1000(b)(31).
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The Exchange believes that utilizing the primary market in the
Opening Process is reasonable given the close connection between the
primary market and the Opening Process. For example, Phlx Rule
1017(d)(ii) provides, ``For all options, the underlying security,
including indexes, must be open on the primary market for a certain
time period as determined by the Exchange for the Opening Process to
commence. The time period shall be no less than 100 milliseconds and no
more than 5 seconds.''
Today, in order to open, the Exchange requires either: (i) The
Specialist's Valid
[[Page 63938]]
Width Quote; (ii) the Valid Width Quotes of at least two Phlx
Electronic Market Makers other than the Specialist; or (iii) if neither
the Specialist's Valid Width Quote nor the Valid Width Quotes of two
Phlx Electronic Market Makers have been submitted within such
timeframe, one Phlx Electronic Market Maker has submitted a Valid Width
Quote. The Exchange notes that it requires Specialists to submit Valid
Width Quotes during the Opening Process to guarantee liquidity, unlike
other markets which may not require market makers to quote during the
opening.\10\ Further, amending the rule text to conform to its current
practice will avoid confusion and continue to permit Phlx to remain one
of the strongest openings in the industry.
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\10\ The Nasdaq Options Market (``NOM'') permits a bid/ask
differential for options on equities and on index options to be
quoted with a difference not to exceed $5 between the bid and offer
regardless of the price of the bid, including before and during the
opening. See NOM Rules at Chapter VII, Section 6(d)(ii).
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Rule 1000
Phlx rules currently do not define an ``in-the-money'' or ``out-of-
the-money'' option series. As part of this rule change, the Exchange
proposes to define these above-referenced terms within Phlx Rule
1000(b) to bring greater transparency to its rules with respect to Phlx
Electronic Market Maker quoting. The Exchange proposes to define the
term ``in-the-money'' at Rule 1000(b)(51) as the following: For call
options, all strike prices at or below the offer in the underlying
security on the primary listing market; for put options, all strike
prices at or above the bid in the underlying security on the primary
listing market. The Exchange proposes to define the term ``out-of-the-
money'' option at Rule 1000(b)(52), which is currently reserved, to
mean the following: For call options, all strike prices above the offer
in the underlying security on the primary listing market; for put
options, all strike prices below the bid in the underlying security on
the primary listing market.\11\ Each of these definitions would apply
for purposes of Phlx Electronic Market Maker quoting obligations in
Rules 1014 and 1017. The Exchange notes that it specifically proposes
to reference the rules related to Phlx Electronic Market Maker quoting
obligations to avoid any confusion with the manner in which ``in-the-
money'' and ``out-of-the-money'' options series are defined for
purposes of other options rules.
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\11\ The Exchange notes that it does not utilize a last sale
calculation. The Exchange believes that the quotation for the
underlying security on the primary market provides an accurate
reflection of the market. A last sale calculation may not be an
accurate reflection of the market because the last sale may not be
representative of the primary market in all cases, particularly if a
halt were to occur.
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Rule 1014
The Exchange proposes to codify current rounding practice by
amending Rule 1014(c)(i)(A)(1)(a). Today, Rule 1014(c)(i)(A)(1)(a)
provides that rounding is up when referring to decimal equivalent.
Today, the decimal equivalent is rounded down not up. The Exchange
proposes to conform its rule text to the current practice. The Exchange
believes that the manner in which the Exchange rounds is immaterial,
however the Exchange believes that it is important to disclose its
method of rounding and uniformly apply such rounding. The Exchange
proposes this amendment to make clear the manner in which it rounds the
decimal equivalent. Today the Exchange uniformly applies this rounding
to all market maker participants and will continue to apply it in a
uniform manner.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\12\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\13\ 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 notes that today Phlx utilizes the primary
market in calculating the bid/ask differential during the Opening
Process, although the current rule does not reflect this practice. This
rule change would amend the rule to reflect Phlx's current practice.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
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Rule 1017
The Exchange's proposal to amend the Opening Process to conform to
current practice is consistent with the Act because while the Exchange
believes that relying on the primary market or the NBBO accurately
reflect the current trading environment and take into consideration
market conditions, the Exchange's current Opening Process is designed
to utilize the primary standard during the Opening Process.\14\
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\14\ Phlx Rule 1017(d)(ii) provides, ``For all options, the
underlying security, including indexes, must be open on the primary
market for a certain time period as determined by the Exchange for
the Opening Process to commence. The time period shall be no less
than 100 milliseconds and no more than 5 seconds.''
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Rule 1000
The Exchange's proposal to define the terms ``in-the-money'' and
``out-of-the-money'' for purposes of Phlx Electronic Market Maker
quoting obligations in Rules 1014 and 1017 is consistent with the Act
and protects investors and the public interest by bringing greater
transparency to the Rulebook. Each of these defined terms would apply
for purposes of Phlx Electronic Market Maker quoting obligations in
Rules 1014 and 1017. The Exchange notes that it specifically proposes
to reference the rules related to Phlx Electronic Market Maker quoting
obligations to avoid any confusion with the manner in which ``in-the-
money'' and ``out-of-the-money'' options series are defined for
purposes of other options rules.
Rule 1014
The Exchange's proposal to amend Rule 1014(c)(i)(A)(1)(a) to codify
the Exchange's current practice of rounding down when referring to
decimal equivalent is consistent with the protection of investor and
the public interest because the Exchange is adding transparency to its
current rule by disclosing its method of rounding.
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.
Rule 1017
The Exchange's proposal to codify its current practice of utilizing
the primary market in the Opening Process does not unduly burden
competition because the current practice maintains a close connection
between the primary market and the Opening Process. The primary market
reflects the current trading environment. The Exchange notes that the
proposal does not create an undue burden on intra-market competition
because Phlx Electronic Market Makers are the only market participants
subject to quoting requirements and these participants have valuable
information with respect to the underlying instrument under the current
process to make informed decisions and take calculated risks in the
marketplace when providing liquidity. Phlx Electronic Market Makers
remain responsible for maintaining fair and orderly markets.
[[Page 63939]]
Rule 1000
The Exchange's proposal to define the terms ``in-the-money'' or
``out-of-the-money'' for purposes of Phlx Electronic Market Maker
quoting obligations in Rules 1014 and 1017 does not unduly burden
competition, rather it adds greater transparency to the Rulebook and
makes clear the applicability of the definitions to avoid confusion
with respect to the remainder of the options rules.
Rule 1014
The Exchange's proposal to codify its current practice of rounding
down when referring to decimal equivalent within Rule
1014(c)(i)(A)(1)(a) does not impose an unduly burden competition
because the Exchange continues to uniformly apply its rounding
methodology with respect to its market making participants.
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 from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \15\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\16\
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\15\ 15 U.S.C. 78s(b)(3)(A)(iii).
\16\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and the text of 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.
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A proposed rule change filed under Rule 19b-4(f)(6) \17\ normally
does not become operative prior to 30 days after the date of the
filing. However, Rule 19b-4(f)(6)(iii) \18\ permits the Commission to
designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay so that the proposal
may become operative immediately upon filing. The Exchange states that
immediately codifying its current practice within its rules to
accurately reflect the operation of the Exchange's System will avoid
confusion. The Commission believes that waiver of the 30-day operative
delay is consistent with the protection of investors and the public
interest. Accordingly, the Commission hereby waives the operative delay
and designates the proposed rule change as operative upon filing.\19\
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\17\ 17 CFR 240.19b-4(f)(6).
\18\ 17 CFR 240.19b-4(f)(6)(iii).
\19\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 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: (i)
Necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) 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 email to [email protected]. Please include
File Number SR-Phlx-2018-77 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2018-77. This file
number should be included on the subject line if email 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 website (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 website 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 10:00 a.m. and
3:00 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. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-Phlx-2018-77 and should be submitted on
or before January 2, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-26824 Filed 12-11-18; 8:45 am]
BILLING CODE 8011-01-P