[Federal Register Volume 85, Number 82 (Tuesday, April 28, 2020)]
[Notices]
[Pages 23564-23571]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-08939]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88728; File No. SR-Phlx-2020-20]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend Phlx Rules
at Options 3, Section 8, Titled Options Opening Process
April 22, 2020.
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 April 14, 2020, 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 a proposal to amend Phlx Rules at Options
3, Section 8, titled ``Options Opening Process.''
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
The Exchange proposes to amend Phlx Rules at Options 3, Section 8,
titled ``Options Opening Process.'' The proposal seeks to amend aspects
of the current functionality of the Exchange's System regarding the
opening of trading in an option series. Each amendment is described
below.
Definitions
The Exchange proposes to define the term ``imbalance'' at proposed
Options 3, Section 8(a)(xi) as the number of unmatched contracts priced
through the Potential Opening Price. The Exchange believes that the
addition of this defined term will bring greater clarity to the manner
in which the term ``imbalance'' is defined within the System. This
description is consistent with the current System operation. This is a
non-substantive rule change. In conjunction with this rule change, the
Exchange proposes to remove the text within Options 3, Section 8(k)(A)
which seeks to define an imbalance as an unmatched contracts. The
Exchange is proposing a description which is more specific than this
rule text and is intended to bring greater clarity to the term
``imbalance.''
Eligible Interest
The Exchange proposes to amend Options 3, Section 8(b)(ii) to amend
the current phrase, ``The System will aggregate the size of all
eligible interest for a particular participant category at a particular
price level for trade allocation purposes pursuant to Options 3,
Section 10.'' The Exchange proposes to instead provide, ``The System
will allocate interest pursuant to Options 3, Section 10.'' The
Exchange is proposing this amendment because Options 3, Section 10
explains how the Exchange will aggregate the size of all eligible
interest for a particular participant category at a particular price
level and the citation to that rule will provide that detail.
All-or-None Orders
The Exchange proposes to amend Options 3, Section 8(b) to remove
the phrase ``that can be satisfied'' in relation to All-or-None
Orders.\3\ The Exchange notes that all All-or-None Orders are
considered for execution and in determining the Opening Price
throughout the Opening Process. At this point in the Opening Process
the Exchange would be unable to determine which All-or-None Orders
could be satisfied, so all All-or-None Orders are eligible.
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\3\ An All-or-None Order is a limit order or market order that
is to be executed in its entirety or not at all. An All-or None
Order may only be submitted by a Public Customer. All-or-None Orders
are non-displayed and non-routable. All-or-None Orders are executed
in price-time priority among all Public Customer orders if the size
contingency can be met. The Acceptable Trade Range protection in
Options 3, Section 15(a) is not applied to All-Or-None Orders. See
Options 3, Section 7(b)(5).
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Similarly, the Exchange proposes to amend Options 3, Section 8(h)
to remove the phrase ``except All-or-None interest that cannot be
satisfied.'' The Exchange proposes to instead provide, ``To calculate
the Potential Opening Price, the System will take into consideration
all Valid Width Quotes and orders (including Opening Sweeps, including
All-or-None interest, for the option series and identify the price at
which the maximum number of contracts can trade (``maximum quantity
criterion'').'' Similarly, for purposes of determining the Potential
Opening Price, the Exchange will consider all All-or-None interest
because the Exchange would be unable to determine which All-or-None
Orders could be satisfied until the Opening Process concludes.
Valid Width Quotes
The Exchange proposes to amend the requirements for Phlx Electronic
Market Makers \4\ to enter Valid Width Quotes within Options 3, Section
8(d). Today, a Lead Market Maker is required to enter a Valid Width
Quote within two minutes (or such shorter time as determined by the
Exchange and disseminated to membership on the Exchange's website) of
the opening trade or quote on the market for the underlying security in
the case of equity options or, in the case of index options, within two
minutes of the receipt of the opening price in the underlying index (or
such shorter time as determined by the Exchange and disseminated to
membership on the Exchange's website), or within two minutes of market
opening for the underlying currency in the case of U.S. dollar-settled
FCO. Alternatively, the Valid Width Quote of at least two Phlx
Electronic Market Makers other than a Lead Market Maker entered within
the above-referenced timeframe would also open an option series.
Finally, if neither the Lead
[[Page 23565]]
Market Maker'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 may submit a Valid Width Quote to open the
options series.
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\4\ Phlx Electronic Market Makers are defined with Options 3,
Section 8 as a Lead Market Maker, Streaming Quote Trader (``SQT'')
or Remote SQT (``RSQT'') who is required to submit two sided
electronic quotations pursuant to Options 2, Section 5.
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The Exchange proposes to amend the requirement to submit Valid
Width Quotes in an effort to streamline its current process. The
Exchange proposes to continue to require a Lead Market Maker to submit
a Valid Width Quote, but also would permit the Valid Width Quote of one
Phlx Electronic Market Maker other than the Lead Market Maker to open
an option series without waiting for the two minute timeframe described
above to conclude. This effectively would take the 2 step process for
accepting quotes to a one step process. The Exchange believes this
proposal would allow the market to open more efficiently as well as
enable greater participation by SQTs and RSQTs in the Opening Process.
As is the case today, Lead Market Makers are required to ensure each
option series to which it is appointed is opened each day by submitting
a Valid Width Quote.\5\ Moreover, a Lead Market Maker has continuing
obligations to quote intra-day pursuant to Options 2, Section 5.
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\5\ Options 3, Section 8(d)(iii) provides, ``The Lead Market
Maker assigned in a particular equity or index option must enter a
Valid Width Quote, in 90% of their assigned series, not later than
one minute following the dissemination of a quote or trade by the
market for the underlying security or, in the case of index options,
following the receipt of the opening price in the underlying index.
The Lead Market Maker assigned in a particular U.S. dollar-settled
FCO must enter a Valid Width Quote, in 90% of their assigned series,
not later than 30 seconds after the announced market opening. The
Lead Market Maker must promptly enter a Valid Width Quote in the
remainder of their assigned series, which did not open within one
minute following the dissemination of a quote or trade by the market
for the underlying security or, in the case of index options,
following the receipt of the opening price in the underlying index
or, with respect to a U.S. dollar-settled FCO, following the
announced market opening.''
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Potential Opening Price
The Exchange proposes to amend Options 3, Section 8(h) to add an
introductory sentence to the Potential Opening Process paragraph which
provides, ``The Potential Opening Price indicates a price where the
System may open once all other Opening Process criteria is met.'' This
paragraph is not intended to amend the function of the Opening Process,
rather it is intended to provide context to the process and describe a
Potential Opening Price within Options 3, Section 8(h). This is a non-
substantive amendment.
An amendment is proposed to Options 3, Section 8(h)(C) to replace
the words ``Potential Opening Price calculation'' with the more defined
term ``Opening Price.'' The Opening Price is defined within Options 3,
Section 8(a)(iii) and provides, ``The Opening Price is described herein
in sections (i) and (k).'' The Exchange notes that ``Opening Price'' is
the more accurate terms that represents current System functionality as
compared to Potential Opening Price. Options 3, Section 8(h)(C)
provides that the Potential Opening Price calculation is bounded by the
better away market price that may not be satisfied with the Exchange
routable interest.'' In fact, the Opening Price is bounded by the
better away market price that may not be satisfied with the Exchange
routable interest pursuant to sections (i) and (k). The Potential
Opening Price indicates a price where the System may open once all
other Opening Process criteria is met. The Potential Opening Price is a
less accurate term and the Exchange proposes to utilize the more
precise term by changing the words in this sentence to ``Opening
Price'' for specificity. This amendment is not substantive, rather it
is clarifying.
Opening Quote Range
The Exchange proposes to add a sentence to Options 3, Section 8(j)
to describe the manner in which the Opening Quote Range or ``OQR'' is
bound. The Exchange proposes to provide, ``OQR is constrained by the
least aggressive limit prices within the broader limits of OQR. The
least aggressive buy order or Valid Width Quote bid and least
aggressive sell order or Valid Width Quote offer within the OQR will
further bound the OQR.'' The Exchange previously described \6\ the OQR
as an additional type of boundary beyond the boundaries mentioned in
Options 3, Section 8 at proposed paragraph (i). OQR is intended to
limit the Opening Price to a reasonable, middle ground price and thus
reduce the potential for erroneous trades during the Opening Process.
Although the Exchange applies other boundaries such as the Best Bid or
Best Offer (``BBO''), the OQR is outside of the BBO. It is meant to
provide a price that can satisfy more size without becoming
unreasonable. The Exchange proposes to add rule text within Options 3,
Section 8 to describe the manner in which today OQR is bound. This
proposed amendment does not change the manner in which Phlx's System
operates today. The Exchange believes that this rule text will bring
greater transparency to the manner in which the Exchange arrives at an
Opening Price. Below is an example of the manner in which OQR is
constrained.
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\6\ See Securities Exchange Commission Release No. 78408 (July
25, 2016), 81 FR 50026 (July 29, 2016) (SR-Phlx-2016-76).
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Assume the below pre-opening interest:
Lead Market Maker quotes 4.10 (100) x 4.20 (50)
Order 1: Public Customer Buy 300 @ 4.39
Order 2: Public Customer Sell 50 @ 4.13
Order 3: Public Customer Sell 5 @ 4.37
Opening Quote Range configuration in this scenario is +/-0.18
9:30 a.m. events occur, underlying opens
First imbalance message: Buy imbalance @ 4.20, 100 matched, 200
unmatched
Next 4 imbalance messages: Buy imbalance @ 4.37, 105 matched, 195
unmatched
Potential Opening Price calculation would have been 4.20 + 0.18 = 4.38,
but OQR is further bounded by the least aggressive Sell order @ 4.37
Order 1 executes against Order 2 50 @ 4.37
Order 1 executes against Lead Market Maker quote 50 @ 4.37
Order 1 executes against Order 3 5 @ 4.37
Remainder of Order1 cancels as it is through the Opening Price
Lead Market Maker quote purges as its entire offer side volume has been
exhausted
Similarly, the Exchange proposes to amend Options 3, Section
8(j)(3) which currently provides, ``If one or more away markets are
disseminating a BBO that is not crossed (the Opening Process will stop
and an options series will not open if the ABBO becomes crossed
pursuant to (d)(v)) and there are Valid Width Quotes on the Exchange
that are executable against each other or the ABBO:''. The Exchange
proposes to instead state, ``If one or more away markets are
disseminating a BBO that is not crossed (the Opening Process will stop
and an options series will not open if the ABBO becomes crossed
pursuant to (d)(v)) and there are Valid Width Quotes on the Exchange
that cross each other or are marketable against the ABBO:''. The
proposed language more accurately describes the current Opening
Process. Valid Width Quotes are not routable and would not execute
against the ABBO. This rule text is more specific than ``executable
against each other.'' A similar change is also proposed to Options 3,
Section 8(j)(4) to replace the words ``are executable against'' with
``cross''. The Exchange believes that the amended rule text adds
[[Page 23566]]
greater transparency to the Opening Process. These are non-substantive
amendments.
The Exchange proposes to make a non-substantive change to amend
Options 3, Section 8(j)(7) to amend the last sentence to change the
phrase ``consider routable'' with ``route routable.'' The Exchange also
proposes to replace the phrase ``in price/time priority to satisfy the
away market'' with the citation to Options 3, Section 10(a)(1)(A) which
describes price/time priority within Options 3, Section 8(j)(7). This
is a non-substantive amendment which is intended to bring greater
clarity to the Exchange's Rules.
Price Discovery Mechanism
The Exchange proposes to add new rule text to Options 3, Section
8(k)(A)(1) to describe the information conveyed in an Imbalance
Message. The Exchange proposes to provide at Options 3, Section
8(k)(A)(1),
An Imbalance Message will be disseminated showing a ``0'' volume
and a $0.00 price if: (i) No executions are possible but routable
interest is priced at or through the ABBO; (ii) internal quotes are
crossing each other; or (iii) there is a Valid Width Quote, but
there is no Quality Opening Market. Where the Potential Opening
Price is through the ABBO, an imbalance message will display the
side of interest priced through the ABBO.
This rule text is consistent with the current operation of the
System. The purpose of this proposed text is to provide greater
information to market participants to explain the information that is
being conveyed when an imbalance message indicates ``0'' volume. The
Exchange believes that explaining the potential scenarios which led to
the dissemination of a ``0'' volume, such as (i) when no executions are
possible and routable interest is priced at or through the ABBO; (ii)
internal quotes are crossing; and (iii) there is a Valid Width Quote,
but there is no Quality Opening Market, will provide greater detail to
the potential state of the interest available. The Exchange further
clarifies in this new rule text, ``Where the Potential Opening Price is
through the ABBO, an imbalance message will display the side of
interest priced through the ABBO.'' The Exchange believes that this
proposed text will bring greater transparency to the information
available to market participants during the Opening Process.
The Exchange proposes to amend Options 3, Section 8(k)(C)(2) to
remove the phrase ``at the Opening Price'' within the paragraph. The
current second sentence of paragraph 8(j)(3)(B) states, ``If during the
Route Timer, interest is received by the System which would allow the
Opening Price to be within OQR without trading through away markets and
without trading through the limit price(s) of interest within OQR which
is unable to be fully executed at the Opening Price, the System will
open with trades at the Opening Price and the Route Timer will
simultaneously end.'' The Exchange proposes to remove the words ``at
the Opening Price'' because while anything traded on Phlx would be at
the Opening Price, the trades that are routed away would be at an ABBO
price which may differ from the Phlx Opening Price. To avoid any
confusion, the Exchange is amending the sentence to remove the
reference to the Opening Price. In addition, the Exchange proposes to
add the phrase ``and orders'' to Options 3, Section 8(k)(C)(2) which
currently only references quotes. During the Price Discovery Mechanism,
both quotes and orders are considered.
The Exchange proposes to amend the last sentence of Options 3,
Section 8(k)(C)(5) to add the phrase ``if consistent with the Member's
instructions'' to the end of the paragraph at Options 3, Section
8(k)(C)(5) to make clear that the instructions provided by a member in
terms of order types and routing would be applicable to interest
entered during the Opening Process which remains eligible for intra-day
trading. This amendment brings greater clarity to the Exchange's Rules.
The Exchange proposes to add an introductory phrase to Options 3,
Section 8(k)(D) which provides, ``Pursuant to Options 3, Section
8(k)(C)(6) . . .'' the System will re-price Do Not Route orders (that
would otherwise have to be routed to the exchange(s) disseminating the
ABBO for an opening to occur) to a price that is one minimum trading
increment inferior to the ABBO, and disseminate the re-priced DNR Order
as part of the new PBBO.'' The addition of this sentence is intended to
provide a transition from the prior paragraph relating to the routing
of orders. The Exchange opens and routes simultaneously during its
Opening Process. This sentence is being added to indicate that at this
stage in the Opening Process, routable interest would have routed. The
manner in which the System will handle orders marked with the
instruction ``Do Not Route'' (``DNR Orders'') is described in Options
3, Section 8(k)(D). This rule text is consistent with the behavior of
the System. This non-substantive amendment is intended to add greater
clarity to the Exchange's Rules. The Exchange also proposes to add a
hyphen to the word ``re-price'' in this paragraph.
The Exchange proposes to add a new paragraph at Options 3, Section
8(k)(G) which provides, ``Remaining contracts which are not priced
through the Exchange Opening Price after routing a number of contracts
to satisfy better priced away contracts will be posted to the Order
Book at the better of the away market price or the order's limit
price.'' The Exchange notes that this paragraph describes current
System behavior. This rule text accounts for orders which have routed
away and returned unsatisfied and also accounts for interest that
remain unfilled during the Opening Process, provided it was not priced
through the Opening Price. This sentence is being included to account
for the manner in which all interest is handled and how certain
interest rests on the order book once the Opening Process is complete.
The Exchange notes that the posted interest will be priced at the
better of the away market price or the order's limit price. This
additional clarity will bring greater transparency to the Rules and is
consistent with the Exchange's current System operation. The Exchange
believes that this detail will provide market participants with all
possible scenarios that may occur once Phlx opens an options series.
Opening Process Cancel Timer
The Exchange proposes to adopt an Opening Process Cancel Timer
within Options 3, Section 8(l), similar to The Nasdaq Options Market
LLC's (``NOM'') and Nasdaq BX, Inc's (``BX'') Rules at Options 3,
Section 8(c).\7\ The Exchange proposes to add a process whereby if an
options series has not opened before the conclusion of the Opening
Process Cancel Timer, a member may elect to have orders returned by
providing written notification to the Exchange. The Opening Process
Cancel Timer would be established by the Exchange and posted on the
Exchange's website. Similar to NOM and BX, orders submitted through FIX
with a TIF of Good-Till-Canceled \8\ or ``GTC'' may not
[[Page 23567]]
be cancelled. Phlx has monitored the operation of the Opening Process
to identify instances where market efficiency can be enhanced. The
Exchange believes that adopting a cancel timer similar to NOM and BX
will increase the efficiency of Phlx's Opening Process. This provision
would provide for the return of orders for un-opened options symbols.
This enhancement will provide market participants the ability to elect
to have orders returned, except for non-GTC orders, when options do not
open. It provides members with choice about where, and when, thy can
send orders for the opening that would afford them the best experience.
The Exchange believes that this additional feature will attract
additional order flow to the Exchange. The proposed changes should
prove to be very helpful to market participants, particularly those
that are involved in adding liquidity during the Opening Cross. These
proposed enhancements will allow Phlx to continue to have a robust
Opening Process.
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\7\ NOM Options 3, Section 8(c) provides, ``Absence of Opening
Cross. If an Opening Cross in a symbol is not initiated before the
conclusion of the Opening Process Cancel Timer, a firm may elect to
have orders returned by providing written notification to the
Exchange. These orders include all non GTC orders received over the
FIX protocol. The Opening Process Cancel Timer represents a period
of time since the underlying market has opened, and shall be
established and disseminated by Nasdaq on its website.'' BX Options
3, Section 8 is worded similarly.
\8\ A Good Til Cancelled (``GTC'') Order entered with a TIF of
GTC, if not fully executed, will remain available for potential
display and/or execution unless cancelled by the entering party, or
until the option expires, whichever comes first. GTC Orders shall be
available for entry from the time prior to market open specified by
the Exchange until market close. See Options 3, Section 7(c)(4).
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Implementation
The Exchange proposes to implement the amendments proposed herein
prior to Q3 2020. The Exchange will issue an Options Trader Alert
announcing the date of implementation.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\9\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\10\ in particular, in that it is designed to
promote just and equitable principles of trade and to protect investors
and the public interest by enhancing its Opening Process. The Exchange
believes that the proposed changes significantly improve the quality of
execution of Phlx's opening.
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\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(5).
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Definitions
The Exchange's proposal to define the term ``imbalance'' at
proposed Options 3, Section 8(a)(xi) and remove the text within Options
3, Section 8(j)(1), which seeks to define an imbalance as an unmatched
contract, will bring greater clarity to the manner in which the term
``imbalance'' is defined within the System. This is a non-substantive
rule change and represents current System functionality. Today, the
term ``imbalance'' is simply defined as unmatched contracts. The
proposed definition is more precise in its representation of the
current System functionality.
Eligible Interest
The Exchange's proposal to amend Options 3, Section 8(b)(ii) to
amend the current phrase, ``The System will aggregate the size of all
eligible interest for a particular participant category at a particular
price level for trade allocation purposes pursuant to Options 3,
Section 10'' to instead provide, ``The System will allocate interest
pursuant to Options 3, Section 10'' will bring greater clarity to the
rule text. The Exchange is proposing this amendment because Options 3,
Section 10 explains how the Exchange will aggregate the size of all
eligible interest for a particular participant category at a particular
price level and the citation to that rule will provide that detail.
All-or-None Orders
The Exchange's proposal to amend Options 3, Section 8(b) to remove
the phrase ``that can be satisfied'' in relation to All-or-None Orders
and to amend Options 3, Section 8(h) to remove the phrase ``except All-
or-None interest that cannot be satisfied'' are consistent with the
Act. The Exchange would include all All-or-None Orders as eligible
interest and also consider all All-or-None Orders for purposes of
determining the Potential Opening Price, because the Exchange would be
unable to determine which All-or-None Orders could be satisfied.
Valid Width Quotes
The Exchange's proposal to amend the requirements within Options 3,
Section 8(d) for Phlx Electronic Market Makers to enter Valid Width
Quotes by permitting the Valid Width Quote of one Phlx Electronic
Market Maker other than the Lead Market Maker to open an option series
without waiting for the two minute timeframe is consistent with the
Act. This proposal would allow the market to open more efficiently as
well as enable greater participation by Phlx Electronic Market Makers
in the Opening Process. A Lead Market Maker has continuing obligations
to quote throughout the trading day pursuant to Options 2, Section 5.
In addition, Lead Market Makers are required to ensure each option
series to which it is appointed is opened each day Phlx is open for
business by submitting a Valid Width Quote.\11\ Primary Market Makers
will continue to remain responsible to open an options series, unless
it is otherwise opened by a Competitive Market Maker. A Competitive
Market Maker also has obligations to quote intra-day, once they
commence quoting for that day.\12\ The Exchange notes if Electronic
Market Makers entered quotes during the Opening Process to open an
option series, those quote must qualify as Valid Width Quotes. This
ensures that the quotations that are entered are in alignment with
standards that help ensure a quality opening. The Exchange believes
that allowing one Electronic Market Maker to enter a quotation
continues to protect investors and the general public because the
Electronic Market Maker will be held to the same standard for entering
quotes as a Lead Market Maker and the process will also ensure an
efficient and timely opening, while continuing to hold Lead Market
Makers responsible for entering Valid Width Quotes during the Opening
Process.
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\11\ See note 5 above.
\12\ See Options 2, Section 5.
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Potential Opening Price
The Exchange's proposal to amend Options 3, Section 8(h) to add an
introductory sentence to the Potential Opening Process which provides,
``The Potential Opening Price indicates a price where the System may
open once all other Opening Process criteria is met,'' is consistent
with the Act. This paragraph is not intended to amend the current
function of the Opening Process, rather it is intended to provide
context to the process described within Options 3, Section 8(h). The
Opening Price is bounded by the better ABBO in this case. This rule
text is consistent with the current operation of the System. This is a
non-substantive amendment.
Similarly, the proposed amendment to Options 3, Section 8(h)(C) to
replace ``Potential Opening Price calculation'' with the more accurate
defined term ``Opening Price'' will bring greater clarity to the
Exchange's Rule. This amendment is not substantive.
Opening Quote Range
The Exchange's proposal to add a sentence to Options 3, Section
8(j) to describe the manner in which the OQR is bound will bring
greater clarity to the manner in which OQR is calculated. OQR is an
additional type of boundary beyond the boundaries mentioned within the
Opening Process rule. The System will calculate an OQR for a particular
option series that will be utilized in the Price Discovery Mechanism if
the Exchange has not opened, pursuant to the provisions in
[[Page 23568]]
Options 3, Section 8(d)-(i). OQR would broaden the range of prices at
which the Exchange may open to allow additional interest to be eligible
for consideration in the Opening Process. OQR is intended to limit the
Opening Price to a reasonable, middle ground price and thus reduce the
potential for erroneous trades during the Opening Process. Although the
Exchange applies other boundaries such as the BBO, the OQR provides a
range of prices that may be able to satisfy additional contracts while
still ensuring a reasonable Opening Price. More specifically, the
Exchange's Opening Price is bounded by the OQR without trading through
the limit price(s) of interest within OQR, which is unable to fully
execute at the Opening Price in order to provide participants with
assurance that their orders will not be traded through. The Exchange
seeks to execute as much volume as is possible at the Opening Price.
The Exchange's method for determining the Potential Opening Price and
Opening Price is consistent with the Act because the proposed process
seeks to discover a reasonable price and considers both interest
present in System as well as away market interest. The Exchange's
method seeks to validate the Opening Price and avoid opening at
aberrant prices. The rule provides for opening with a trade, which is
consistent with the Act because it enables an immediate opening to
occur within a certain boundary without the need for the price
discovery process. The boundary provides protections while still
ensuring a reasonable Opening Price. The Exchange's proposal protects
investors and the general public by more clearly describing how the
boundaries are handled by the System. This proposed amendment does not
change the manner in which Phlx's System operates today. The Exchange
believes that this rule text will bring greater transparency to the
manner in which the Exchange arrives at an Opening Price.
The Exchange's proposal to amend Options 3, Section 8(j)(3) to
replace the phrase ``that are executable against each other or the
ABBO:'' with ``that cross each other or are marketable against the
ABBO:'' will more accurately describe the current Opening Process.
Valid Width Quotes are not routable and would not execute against the
ABBO. This rule text is more specific than ``executable against each
other.'' The Exchange believes that this rule text adds greater
transparency to the Opening Process. This is a non-substantive
amendment.
The Exchange's proposal to amend the phrase ``consider routable''
to ``route routable'' and replacing the phrase ``in price/time priority
to satisfy the away market'' with the citation to Options 3, Section
10(a)(1)(A), which describes price/time priority within Options 3,
Section 8(j)(7), are non-substantive rule changes. These proposals will
add greater clarity to the Exchange's Rules.
Price Discovery Mechanism
The Exchange's proposal to add new rule text at Options 3, Section
8(k)(A)(1) to describe the current operation of the System with respect
to imbalance messages is consistent with the Act. The propose of this
proposed text is to provide greater information to market participants
to explain the information that is being conveyed when an imbalance
message indicates ``0'' volume. An imbalance process is intended to
attract liquidity to improve the price at which an option series will
open, as well as to maximize the number of contracts that can be
executed on the opening. This process will only occur if the Exchange
has not been able to otherwise open an option series utilizing the
other processes available in Options 3, Section 8. The Imbalance Timer
is intended to provide a reasonable time for participants to respond to
the Imbalance Message before any opening interest is routed to away
markets and, thereby, maximize trading on the Exchange. The Exchange
believes that the proposed rule text provides market participants with
additional information as to the imbalance message. The following
potential scenarios, which may lead to the dissemination of a ``0''
volume, include (1) when no executions are possible and routable
interest is priced at or through the ABBO: (2) internal quotes are
crossing; and (3) there is a Valid Width Quote, but there is no Quality
Opening Market. The Exchange believes adding this detail will provide
greater information as to the manner in which Imbalance Messages are
disseminated today. The Exchange's process of disseminating zero
imbalance messages is consistent with the Act because the Exchange is
seeking to identify a price on the Exchange without routing away, yet
which price may not trade through another market and the quality of
which is addressed by applying the OQR boundary. Announcing a price of
zero will permit market participants to respond to the Imbalance
Message, which interest would be considered in determining a fair and
reasonable Opening Price.
The Exchange's proposal to amend Options 3, Section 8(k)(C)(2) to
remove the phrase ``at the Opening Price'' within the paragraph is
consistent with the Act because removing the current phrase will avoid
confusion. The Exchange notes that anything traded on Phlx would be at
the Opening Price, the trades that are routed away would be at an ABBO
price which differs from the Phlx Opening Price. To avoid any confusion
the Exchange is amending the sentence to remove the reference to the
Opening Price. In addition, the Exchange proposes to add the phrase
``and orders'' to Options 3, Section 8(j)(3)(B) which currently only
references quotes. During the Price Discovery Mechanism both quotes and
orders are considered.
The Exchange's proposal to amend the last sentence of Options 3,
Section 8(k)(C)(5) to amend the phrase ``Any unexecuted contracts'' to
``Any unexecuted interest'' will make clear that this includes orders,
quotes and sweeps. The Exchange's proposal to add the phrase ``if
consistent with the Member's instructions'' to the end of the paragraph
at Options 3, Section 8(k)(C)(5) will make clear that the instructions
provided by a member in terms of order types and routing would be
applicable to interest entered during the Opening Process which remains
eligible for intra-day trading. This proposal is consistent with the
Act and will add greater clarity to the Exchange's Rules.
The Exchange's proposal to add an introductory phrase to Options 3,
Section 8(k)(D) which provides, ``Pursuant to Options 3, Section
8(k)(C)(6),'' is consistent with the Act. The prior paragraph, Options
3, Section 8(k)(C)(6), describes how the System executes and routes
orders. This introductory sentence is being added as a transition from
the prior paragraph at Options 3, Section 8(k)(C)(6), relating to the
routing of orders. All routable interest would have routed and non-
routable interest, which does not route, is subsequently described.
This introductory paragraph is meant to be informative. This non-
substantive amendment is consistent with the Act because it adds
greater clarity to the Exchange's Rules.
The Exchange's proposal to add a new paragraph at Options 3,
Section 8(k)(G) which provides, ``Remaining contracts which are not
priced through the Exchange Opening Price after routing a number of
contracts to satisfy better priced away contracts will be posted to the
Order Book at the better of the away market price or the order's limit
price,'' will bring greater transparency to the handling of orders once
an option series is opened for trading. After away interest is cleared
by routable interest and the opening cross has occurred, DNR Orders are
handled by the System.
[[Page 23569]]
DNR Order interest will rest on the Order Book, provided it was not
priced through the Opening Price. This rule text accounts for orders
which have routed away and returned to Phlx unsatisfied and also
accounts for interest that remains unfilled during the Opening Process,
provided it was not priced through the Opening Price. The Exchange
notes that the posted interest will be priced at the better of the away
market price or the order's limit price. This additional clarity will
protect investors and the general public by adding greater transparency
to the Exchange's current System operation by explaining how all
interest is handled during the Opening Process. The Exchange believes
that this detail will provide market participants with all possible
scenarios that may occur once Phlx opens its options series. This
amendment represents the System's current function.
Opening Process Cancel Timer
The Exchange's proposal to adopt an Opening Process Cancel Timer
within Options 3, Section 8(l), similar to NOM's and BX's Rules at
Options 3, Section 8(c) is consistent with the Act. The Exchange's
proposal to add a process whereby if an options series has not opened
before the conclusion of the Opening Process Cancel Timer, a member may
elect to have orders returned by providing written notification to the
Exchange is consistent with the Act. Phlx believes that this amendment
will promote just and equitable principles of trade and to protect
investors and the public interest by enhancing its Opening Process.
Adopting a cancel timer similar to NOM and BX will increase the
efficiency of Phlx's Opening Process by providing Members with the
ability to elect to have orders returned, except for non-GTC orders.
This functionality provides members with choice, when symbols do not
open, about where, and when, they can send orders for the opening that
would afford them the best experience. The Exchange believes that this
additional feature will attract additional order flow to the Exchange.
The proposed changes should prove to be very helpful to market
participants, particularly those that are involved in adding liquidity
during the Opening Cross. These proposed enhancements will allow Phlx
to continue to have a robust Opening Process.
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. While the Exchange does not
believe that the proposal should have any direct impact on competition,
it believes the proposal will enhance the Opening Process by making it
more efficient and beneficial to market participants. Moreover, the
Exchange believes that the proposed amendments will significantly
improve the quality of execution of Phlx's Opening Process. The
proposed amendments provide market participants more choice about
where, and when, they can send orders for the opening that would afford
them the best experience. The Exchange believes that this should
attract new order flow.
Definitions
With respect to the amendment to the definition of ``imbalance'' at
proposed Options 3, Section 8(a)(xi) as the number of unmatched
contracts priced through the Potential Opening Price. The Exchange
believes that the addition of this defined term will bring greater
clarity to the manner in which the term ``imbalance'' is defined within
the System. This description is consistent with the current System
operation. This is a non-substantive rule change.
Eligible Interest
The Exchange's proposal to amend Options 3, Section 8(b)(ii) will
bring greater clarity to the rule text. This proposal does not impose
an undue burden on competition. The Exchange is proposing this
amendment because Options 3, Section 10 explains how the Exchange will
aggregate the size of all eligible interest for a particular
participant category at a particular price level and the citation to
that rule will provide that detail.
All-or-None Orders
The Exchange's proposal to amend Options 3, Section 8(b) to remove
the phrase ``that can be satisfied'' in relation to All-or-None Orders
and to amend Options 3, Section 8(h) to remove the phrase ``except All-
or-None interest that cannot be satisfied'' does not impose an undue
burden on competition. The Exchange would include all All-or-None
Orders as eligible interest and also consider all All-or-None Orders
for purposes of determining the Potential Opening Price, because the
Exchange would be unable to determine which All-or-None Orders could be
satisfied. Only Public Customers may submit All-or-None Orders.\13\
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\13\ See note 3 above.
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Valid Width Quotes
The Exchange's proposal to amend the requirements within Options 3,
Section 8(d) for Phlx Electronic Market Makers to enter Valid Width
Quotes by permitting the Valid Width Quote of one Phlx Electronic
Market Maker other than the Lead Market Maker to open an option series
without waiting for the two minute timeframe does not impose an undue
burden on competition. This proposal would allow the market to open
more efficiently as well as enable greater participation by Phlx
Electronic Market Makers in the Opening Process. Lead Market Makers
continue to remain obligated to open their appointed options series.
Electronic Market Maker may participate in the Opening Process, as is
the case today, provided they enter Valid Width Quotes, which is
intended to ensure a quality opening. The Exchange does not believe
this proposal would burden the ability of market participants who enter
quotes to participate in the Opening Process.
Potential Opening Price
The Exchange's proposal to amend Options 3, Section 8(h) to add an
introductory sentence to the Potential Opening Process does not impose
an undue burden on competition. This paragraph is not intended to amend
the current function of the Opening Process, rather it is intended to
provide context to the process described within Options 3, Section
8(h). The Opening Price is bounded by the better ABBO in this case.
This rule text is consistent with the current operation of the System.
This is a non-substantive amendment.
Similarly, the proposed amendment to Options 3, Section 8(h)(C) to
replace ``Potential Opening Price calculation'' with the more accurate
defined term ``Opening Price'' will bring greater clarity to the
Exchange's Rule. This amendment is not substantive.
Opening Quote Range
The Exchange's proposal to add a sentence to Options 3, Section
8(j) to describe the manner in which the OQR is bound does not impose
an undue burden on competition. OQR is intended to limit the Opening
Price to a reasonable, middle ground price and thus reduce the
potential for erroneous trades during the Opening Process. The
Exchange's method seeks to validate the Opening Price and avoid opening
at aberrant prices for the protection of all investors. This proposed
amendment does not change the manner in which Phlx's System operates
today. The Exchange believes that this rule text will bring greater
transparency to the manner
[[Page 23570]]
in which the Exchange arrives at an Opening Price.
The Exchange's proposal to amend Options 3, Section 8(j)(3) to
replace the phrase ``that are executable against each other or the
ABBO:'' with ``that cross each other or are marketable against the
ABBO:'' does not impose an undue burden on competition, rather, this
proposal will more accurately describe the current Opening Process.
Valid Width Quotes are not routable and would not execute against the
ABBO. This rule text is more specific than ``executable against each
other.'' The Exchange believes that this rule text adds greater
transparency to the Opening Process. This is a non-substantive
amendment.
The Exchange's proposal to amend the phrase ``consider routable''
to ``route routable'' and replacing the phrase ``in price/time priority
to satisfy the away market'' with the citation to Options 3, Section
10(a)(1)(A), which describes price/time priority within Options 3,
Section 8(j)(7), are non-substantive rule changes. These proposals will
add greater clarity to the Exchange's Rules.
Price Discovery Mechanism
The Exchange's proposal to add new rule text at Options 3, Section
8(k)(A)(1) to describe the current operation of the System with respect
to imbalance messages does not impose an undue burden on competition.
The propose of this proposed text is to provide greater information to
market participants to explain the information that is being conveyed
when an imbalance message indicates ``0'' volume. All market
participants are able to respond to an imbalance messages and have
their interest considered in determining a fair and reasonable Opening
Price.
The Exchange's proposal to amend Options 3, Section 8(k)(C)(2) to
remove the phrase ``at the Opening Price'' within the paragraph does
not impose an undue burden on competition, rather, removing the current
phrase will avoid confusion. In addition, the Exchange's proposal to
add the phrase ``and orders'' to Options 3, Section 8(j)(3)(B) which
currently only references quotes does not impose an undue burden on
competition. During the Price Discovery Mechanism both quotes and
orders are considered.
The Exchange's proposal to amend the last sentence of Options 3,
Section 8(k)(C)(5) to amend the phrase ``Any unexecuted contracts'' to
``Any unexecuted interest'' does not impose an undue burden on
competition, rather, it will make clear that this includes orders,
quotes and sweeps. The Exchange's proposal to add the phrase ``if
consistent with the Member's instructions'' to the end of the paragraph
at Options 3, Section 8(k)(C)(5) does not impose an undue burden on
competition. This rule text will make clear that the instructions
provided by a member in terms of order types and routing would be
applicable to interest entered during the Opening Process which remains
eligible for intra-day trading.
The Exchange's proposal to add an introductory phrase to Options 3,
Section 8(k)(D) which provides, ``Pursuant to Options 3, Section
8(k)(C)(6),'' does not impose an undue burden on competition. The prior
paragraph, Options 3, Section 8(k)(C)(6), describes how the System
executes and routes orders. This introductory sentence is being added
as a transition from the prior paragraph at Options 3, Section
8(k)(C)(6), relating to the routing of orders. This is a non-
substantive amendment.
The Exchange's proposal to add a new paragraph at Options 3,
Section 8(k)(G) which provides, ``Remaining contracts which are not
priced through the Exchange Opening Price after routing a number of
contracts to satisfy better priced away contracts will be posted to the
Order Book at the better of the away market price or the order's limit
price,'' does not impose an undue burden on competition, rather this
proposal will bring greater transparency to the handling of orders once
an option series is opened for trading. This rule text accounts for
orders which have routed away and returned to Phlx unsatisfied and also
accounts for interest that remains unfilled during the Opening Process,
provided it was not priced through the Opening Price. This additional
clarity will explain how all interest is handled during the Opening
Process.
Opening Process Cancel Timer
The Exchange's proposal to adopt an Opening Process Cancel Timer
within Options 3, Section 8(l), similar to NOM's and BX's Rules at
Options 3, Section 8(c) does not impose an undue burden on competition.
Adopting a cancel timer similar to NOM and BX will increase the
efficiency of Phlx's Opening Process for all market participants. All
market participants will have the ability to elect to have orders
returned, except for non-GTC Orders, when symbols do not open. This
feature provides Members with choice about where, and when, they can
send orders for the opening that would afford them the best experience.
The Exchange believes that this additional feature will attract
additional order flow to the Exchange.
The remainder of the proposed rule text is intended to bring
greater transparency to the Opening Process rule while also adding
additional detail and clarity and therefore does not have an impact on
competition.
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) of the Act \14\ and Rule 19b-
4(f)(6) thereunder.\15\
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\14\ 15 U.S.C. 78s(b)(3)(A).
\15\ 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 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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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 change 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
[[Page 23571]]
Send an email to [email protected]. Please include
File Number SR-Phlx-2020-20 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-2020-20. 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-2020-20 and should be submitted on
or before May 19, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-08939 Filed 4-27-20; 8:45 am]
BILLING CODE 8011-01-P