[Federal Register Volume 84, Number 99 (Wednesday, May 22, 2019)]
[Notices]
[Pages 23595-23607]
[FR Doc No: 2019-10643]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85876; File No. SR-Phlx-2019-20]

Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
of Proposed Rule Change Relating to the Allocation and Prioritization
of Automatically Executed Trades

May 16, 2019.
    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 May 15, 2019, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
the proposed rule change as described in Items I, II, and III, 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 reserve Rule 1014(g)(vii) and (viii),
which describes the allocation of automatically executed trades, and
adopt a new Rule 1089 and title that rule ``Electronic Execution
Priority and Processing in the System.''
    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 remove the current rule text describing
the allocation of automatically executed trades from Phlx Rule
1014(g)(vii) and (viii) \3\ and, in its place, adopt new Phlx Rule 1089
titled ``Electronic Execution Priority and Processing in the System.''
This relocated new proposed rule would describe in greater detail the
manner in which Phlx will process, prioritize and allocate transactions
in the System.\4\

The Exchange will explain this process as a timeline. The current Phlx
rule describes the allocation process in a general fashion indicating
how different market participants may be allocated. The proposed new
rule would sequentially describe the manner in which an order would be
allocated in the System, including the allocation method, rounding and
all potential allocation scenarios. The proposed rule explains the
order in which market participants will be allocated. The Exchange
believes that the new proposed rule text would be more easily
understood. The proposal codifies the Exchange's current practices
while adding more explicit language to the rule text. In adopting Rule
1089, the Exchange proposes to model the format of the rule on Nasdaq
BX, Inc.'s (``BX'') ``Book Processing'' rule at Chapter VI, Section 10.
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    \3\ The Exchange proposes to reserve Phlx Rule 1014(g)(vii) and
(viii).
    \4\ The term ``System'' shall mean the automated system for
order execution and trade reporting owned and operated by the
Exchange which comprises: (A) An order execution service that
enables members to automatically execute transactions in System
Securities; and provides members with sufficient monitoring and
updating capability to participate in an automated execution
environment; (B) a trade reporting service that submits ``locked-
in'' trades for clearing to a registered clearing agency for
clearance and settlement; transmits last-sale reports of
transactions automatically to the Options Price Reporting Authority
(``OPRA'') for dissemination to the public and industry; and
provides participants with monitoring and risk management
capabilities to facilitate participation in a ``locked-in'' trading
environment; and (C) the data feeds described at Rule 1070. See Phlx
Rule 1000(b)(45).
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Proposed Amendments to Current Practice
    This proposal codifies the Exchange's current allocation
methodology. Phlx is not proposing to amend its current electronic
allocation process, except in one specific circumstance. The Exchange
proposes herein to amend the current allocation a Specialist is
entitled to receive when a Specialist is also the Directed Registered
Option Trader (``DROT''). In the situation where the Specialist is the
DROT, the proposal provides that the Specialist would be entitled to
the greater of: (1) The Enhanced Specialist Priority; (2) the
allocation for Orders of 5 contracts or fewer (``Entitlement for Orders
of 5 contracts or fewer'') or (3) the DROT allocation. Specifically,
this proposal would amend the current practice of allocating Orders of
5 contracts or fewer. Today, a Specialist is only entitled to
allocation for Orders of 5 contracts or fewer when such order is
received and such order is either not a Directed Order or is a Directed
Order for 5 contracts or fewer, but the DROT is not quoting at the
Exchange's price. If the DROT is also the Specialist, then the
Specialist is only be entitled to receive the DROT allocation of 40%
rather than the full size of the allocation of the Order for 5
contracts or fewer. This is explained below in greater detail within
this proposal. The Exchange notes that the other functionality
described in this proposal reflects current practice.
Proposed Rule 1089
    Today, Rule 1014(g)(vii) provides that after public customer market
and marketable limit orders have been executed, trades automatically
executed in such options shall be allocated automatically in the
following manner:

    (A) If the specialist, an SQT, RSQT or a non-SQT ROT that has
placed a limit order on the limit order book (``Phlx XL
Participant'') is quoting alone at the disseminated price and their
quote is not matched by another Phlx XL participant prior to
execution, such Phlx XL Participant shall be entitled to receive a
number of contracts up to the size associated with his/her
quotation.
    (B) Parity. Quotations entered electronically by the specialist,
an RSQT or an SQT that do not cause an order resting on the limit
order book to become due for execution may be matched at any time by
quotations entered electronically by the specialist and/or other
SQTs and RSQTs, and by ROT limit orders and shall be deemed to be on
parity, subject to the requirement that orders of controlled
accounts must yield priority to customer orders as set forth in Rule
1014(g)(i)(A).

    The Exchange proposes new rule text at proposed Rule 1089(a) which
would state that the Exchange would apply a Size Pro-Rata execution
algorithm \5\ to electronic orders, unless otherwise specified. The
Exchange's proposal also provides that ``The System shall execute
trading interest within the System in price priority, meaning it will
execute all trading interest at the best price level within the System
before executing trading interest at the next best price. If the result
is not a whole number, it will be rounded down to the nearest whole
number, unless otherwise specified. Generally, and as described in this
proposal below, the Exchange would execute interest in price priority
at each level of priority separately, other than Public Customers,\6\
unless otherwise specified.\7\ Public Customers would continue to
retain priority over other market participants. For purposes of this
rule, a Public Customer shall be defined as a person or entity that is
not a broker or dealer in securities.\8\
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    \5\ The Exchange describes Size Pro-Rata Priority at proposed
Rule 1089(a) to mean resting orders and quotes in the order book are
prioritized according to price. If there are two or more resting
orders or quotes at the same price, the System allocates contracts
from an incoming order or quote to resting orders and quotes
proportionally according to size, based on the total number of
contracts available to be executed at that price.
    \6\ Public Customer orders have a different priority as compared
to other market participants. Orders are allocated such that the
highest bid and lowest offer shall have priority, except that Public
Customer orders have priority over non-Public Customer orders at the
same price, provided the Public Customer order is executable. If
there are two or more Public Customer orders for the same options
series at the same price, priority shall be afforded to such Public
Customer orders in the sequence in which an order is received by the
System.
    \7\ For example, Size Pro-Rata allocation is applied to market
maker priority and separately for all other remaining interest. On
Phlx, market makers include Specialists and Registered Options
Traders (``ROTs'') (which includes Streaming Quote Traders
(``SQTs'') and Remote Streaming Quote Traders (``RSQTs'')) and floor
market makers. A Specialist is an Exchange member who is registered
as an options specialist. See Phlx Rule 1020(a). A ROT is a regular
member or a foreign currency options participant of the Exchange who
has received permission from the Exchange to trade in options for
his own account. An SQT is an ROT who has received permission from
the Exchange to generate and submit option quotations electronically
in options to which such SQT is assigned. An SQT may only submit
such quotations while such SQT is physically present on the floor of
the Exchange. An SQT may only trade in a market making capacity in
classes of options in which the SQT is assigned. An RSQT is an ROT
that is a member affiliated with an RSQT with no physical trading
floor presence who has received permission from the Exchange to
generate and submit option quotations electronically in options to
which such RSQT has been assigned. A qualified RSQT may function as
a Remote Specialist upon Exchange approval. A floor market maker is
known as a non-SQT ROT in Rule 1014(b)(ii)(C). A non-SQT ROT is an
ROT who is neither an SQT nor an RSQT.
    \8\ Professionals are separately defined at Phlx Rule
1000(b)(14) and not included in the definition of a Public Customer.
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    Proposed Rule 1089(a)(1)(A) describes priority overlays. The
Exchange proposes to state within proposed Rule 1089(a)(1) that ``No
participant shall be entitled to receive a number of contracts that is
greater than the displayed size \9\ that is associated with their
quotation or order.'' Current Rule 1014(g)(vii)(A) provides the same
restriction for market making participants. Also, current Rule
1014(g)(vii)(B)(1)(e) generally provides for this size limitation for
purposes of allocation.
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    \9\ The Exchange notes that All-or-None Orders are eligible for
execution, but remain non-displayed and are not part of Phlx's best
bid or offer. An All-or-None Order is a limit or market order that
is to be executed in its entirety or not at all.
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    Today, the Exchange allocates contracts utilizing a Public Customer
Priority Size Pro-Rata allocation model. Public Customer contracts are
allocated first in Price-Time priority at a given price level.\10\
After all Public Customer contracts have been allocated, Specialist
electronic orders/quotes are allocated utilizing a Size Pro-Rata
allocation model \11\ or the DROT Priority is applied.\12\ Orders for 5
contracts or

fewer are separately considered for allocation to the Specialist or as
remaining contracts as specified in the proposed rule text.\13\ ROT
priority is applied after Public Customer and Specialist/DROT interest
is handled.\14\ Remaining interest is allocated to broker dealer orders
\15\ utilizing a Size Pro-Rata allocation model, which includes orders
of all market participants, excluding Public Customers and Specialists
because they have already been allocated. The Exchange also accounts
for odd lot allocation and rounding within this rule. Each step is
described below in greater detail along with proposed new language. The
Exchange believes that its proposed allocation language within Rule
1089 is consistent with the Act because it brings greater transparency
to the Exchange's rules. The Exchange believes the proposed rule will
protect investors and the public interest by providing clear
expectations on the manner in which interest will be electronically
allocated within Phlx's System.
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    \10\ Price-Time allocations are filled among Public Customer
orders in time priority as described below in this Purpose section.
See Rule 1014(g)(vii).
    \11\ The Specialist allocation or Enhanced Specialist Priority
is described below in the Purpose section. See Rule
1014(g)(vii)(B)(1)(c). See also DROT priority at Rule 1014(g)(viii).
    \12\ A Specialist or ROT that receives a Directed Order is a
DROT as defined above. The term ``Directed Order'' means any order
(other than a stop or stop-limit order as defined in Rule 1066) to
buy or sell which has been directed to a particular specialist,
Remote Streaming Quote Trader or ``RSQT'', or Streaming Quote Trader
or ``SQT'' by an Order Flow Provider. See Phlx Rule 1068.
    \13\ See Phlx Rule 1014(g)(vii)(B)(1)(a) and (b).
    \14\ See Phlx Rule 1014(g)(vii)(B).
    \15\ See Phlx Rule 1014(g)(vi)(B)(1)(d). The term ``off-floor
broker-dealer order'' means an order delivered from off the floor of
the Exchange by or on behalf of a broker-dealer for the proprietary
account(s) of such broker-dealer, including an order for a market
maker located on an exchange or trading floor other than the
Exchange's trading floor delivered for the proprietary account(s) of
such market maker. See Phlx Rule 1000(b)(50).
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Public Customer Priority
    As is the case today, Public Customer orders are always allocated
first at a given price. Public Customer orders will continue to have
priority over non-Public Customer interest at the same price, provided
the Public Customer order is an executable order.\16\ If there are two
or more Public Customer orders for the same options series at the same
price, priority shall be afforded to such Public Customer orders in the
sequence in which they are received by the System.\17\
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    \16\ An executable order would be for example a non-contingent
order or a contingent order that can have its contingency satisfied.
The Phlx contingency orders, which are non-displayed, are
exclusively: (i) All-or-none orders; and (ii) stop orders. An all-
or-none order is a limit or market order that is to be executed in
its entirety or not at all. A stop order is a limit or market order
to buy or sell at a limit price when a trade or quote on the
Exchange for a particular option contract reaches a specified price.
A stop-market or stop-limit order shall not be triggered by a trade
that is reported late or out of sequence or by a complex order
trading with another complex order.
    \17\ See proposed Phlx Rule 1089(a)(1)(A).
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    Currently, Public Customer priority is described at Rule
1014(g)(vii). The current rule text simply states, ``After public
customer market and marketable limit orders have been executed, trades
automatically executed in such options shall be allocated automatically
in the following manner. . . .'' The manner in which Public Customer
orders are allocated is not being amended; it is simply restated for
clarity.\18\ As noted within proposed Rule 1089(a)(1)(A), a Public
Customer order does not include a Professional Order.\19\ The Exchange
believes that it is consistent with the protection of investors and the
public interest to allocate Public Customer orders ahead of all other
interest. Public Customer liquidity benefits all market participants by
providing opportunities for order interaction.
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    \18\ Proposed Rule 1089(a)(1)(A) states, ``Public Customer
Priority: The highest bid and lowest offer shall have priority
except that Public Customer orders shall have priority over non-
Public Customer interest at the same price, provided the Public
Customer order is an executable order. If there are two or more
Public Customer orders for the same options series at the same
price, priority shall be afforded to such Public Customer orders in
the sequence in which they are received by the System. For purposes
of this rule a Public Customer shall be defined as a person or
entity that is not a broker or dealer in securities. Professionals
are separately defined at Phlx Rule 1000(b)(14) and not included in
the definition of a Public Customer.''
    \19\ The term Professional means any person or entity that (i)
is not a broker or dealer in securities, and (ii) places more than
390 orders in listed options per day on average during a calendar
month for its own beneficial account(s). A professional will be
treated in the same manner as an off-floor broker-dealer for
purposes of Rules 1014(g) (except with respect to all-or-none
orders, which will be treated like customer orders, except that
orders submitted pursuant to Phlx Rule 1080(n) for the beneficial
account(s) of professionals with an all-or-none designation will be
treated in the same manner as off-floor broker-dealer orders),
1033(e), 1064.02 (except professional orders will be considered
customer orders subject to facilitation), 1080(n) and 1080.07 as
well as Options Floor Procedure Advices B-6 and F-5. Member
organizations must indicate whether orders are for professionals.
See Phlx Rule 1000(b)(14).
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Enhanced Specialist Participation
    The proposed rule describes how Specialists will be specifically
allocated. Current Rule 1014(g)(vii)(B)(1)(c) describes Enhanced
Specialist Participation as follows, ``For options subject to the
Enhanced Specialist Participation as set forth in Rule 1014(g)(ii), the
specialist shall be entitled to receive a number of contracts (not to
exceed the size of the specialist's quote) that is the greater of the
amount he would be entitled to receive pursuant to Rule 1014(g)(ii), or
the amount he would otherwise receive pursuant to the operation of the
algorithm. . . .''
    The Exchange notes that in proposed Rule 1089(a)(1)(B), the
allocation described in current Rule 1014(g)(vii)(B)(1)(c) is being
amended to permit the Specialist to receive the greater of the 3
allocations proposed within Rule 1089(a)(1)(B)(i) as noted at the
beginning of the Purpose section. Today, after all Public Customer
orders have been fully executed, provided the Specialist's quote is at
the better of the internal PBBO,\20\ excluding all-or-none orders \21\
that cannot be satisfied, or the NBBO the Specialist may be afforded a
participation entitlement. As is the case today, the Specialist shall
not be entitled to receive a number of contracts that is greater than
the displayed size associated with such Specialist.\22\ The Exchange's
current rule specifically notes that the Specialist is entitled to the
Enhanced Specialist Enhancement if quoting at the disseminated
price.\23\ The proposed rule adds more granularity to the current rule
text with respect to the price at which the quote may execute. The
Exchange's proposed rule provides, ``After all Public Customer orders
have been fully executed, provided the Specialist's quote is at the
better of the internal PBBO, excluding all-or-none orders that cannot
be satisfied, or the NBBO, the Specialist may be afforded a
participation entitlement.'' The Exchange notes that a quote will not
be executed at a price that trades through another market or displayed
at a price that would lock or cross another market.\24\ Certain Phlx
contingency orders are non-displayed and are

exclusively: (i) All-or-None Orders and (ii) stop orders \25\
(collectively ``Non-Displayed Contingency Orders''). These Non-
Displayed Contingency Orders are not protected orders generally. An
All-or-None Order would not be protected, unless the size of the
contingency may be satisfied.\26\ Similar to other markets, a stop
order would be unprotected until such order is triggered. The Exchange
notes that these Non-Displayed Contingency Orders are distinct from
other order types. The ``NBBO'' is the best Protected Bid and Protected
Offer as defined in the Options Order Protection and Locked/Crossed
Markets Plan; Protected Bids and Protected Offers that are displayed at
a price but available on the Exchange at a better non-displayed price
shall be included in the NBBO at their better non-displayed price for
purposes of this rule.\27\ Rule 1083(o) defines a ``Protected Bid'' or
``Protected Offer'' as a Bid or Offer in an options series,
respectively, that: (i) is disseminated pursuant to the OPRA Plan; \28\
and (ii) is the Best Bid or Best Offer, respectively, displayed by an
Eligible Exchange. Non-Displayed Contingency Orders are not
disseminated to OPRA and not part of the displayed PBBO. The Exchange
proposes to note that the Order Book may include a Non-Displayed
Contingency Order with a price that is better than the displayed NBBO
(``internal PBBO''). The Exchange therefore proposes to note that the
Specialist's quote must be at the better of the internal PBBO or the
NBBO. This rule text will make clear that the Specialist must quote at
the best price. Further, with respect to locked and crossed markets,
certain orders are repriced on Phlx because the order locks or crosses
the ABBO.\29\ The System will automatically re-price that order from
its one minimum price variation inferior to the original away best bid/
offer price to one minimum trading increment away from the new away
best bid/offer price or its original limit price.\30\ Therefore, the
Exchange may have a quote or order that will not be displayed at its
actual better price.
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    \20\ The words ``internal PBBO'' refer to the actual better
price of an order resting on Phlx's order book that is not
displayed, but available for execution.
    \21\ 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 Rule 1099(a) is not applied to
All-Or-None Orders. See Phlx Rule 1078.
    \22\ See proposed Rule 1089(a)(1)(B).
    \23\ Current Rule 1014(vii)(A) provides, ``If the specialist, an
SQT, RSQT or a non-SQT ROT that has placed a limit order on the
limit order book (``Phlx XL Participant'') is quoting alone at the
disseminated price and their quote is not matched by another Phlx XL
participant prior to execution, such Phlx XL Participant shall be
entitled to receive a number of contracts up to the size associated
with his/her quotation.''
    \24\ The Exchange notes that ISO orders may be routed pursuant
to Rule 1083(h). An ``Intermarket Sweep Order'' or ``ISO'' order is
defined within Phlx Rule 1083(h) as a limit order for an options
series that meets the following requirements: (i) When routed to an
Eligible Exchange, the order is identified as an ISO; (ii)
Simultaneously with the routing of the order, one or more additional
ISOs, as necessary, are routed to execute against the full displayed
size of any Protected Bid, in the case of a limit order to sell, or
any Protected Offer, in the case of a limit order to buy, for the
options series with a price that is superior to the limit price of
the ISO, with such additional orders also marked as ISOs.
    \25\ A stop order is a limit or market order to buy or sell at a
limit price when a trade or quote on the Exchange for a particular
option contract reaches a specified price. A stop-market or stop-
limit order shall not be triggered by a trade that is reported late
or out of sequence or by a complex order trading with another
complex order.
    \26\ A ``Protected Bid'' or ``Protected Offer'' means a Bid or
Offer in an options series, respectively, that: (i) Is disseminated
pursuant to the Options Price Reporting Authority (``OPRA'') Plan;
and (ii) Is the Best Bid or Best Offer, respectively, displayed by
an Eligible Exchange. See Phlx Rule 1083(o). Phlx Rule 1083 defines
a ``Protected Bid'' or ``Protected Offer'' as a Bid or Offer in an
options series, respectively, that: (i) is disseminated pursuant to
the Options Price Reporting Authority (``OPRA'') Plan; and (ii) is
the Best Bid or Best Offer, respectively, displayed by an Eligible
Exchange. Once triggered, stop orders are treated as any other
disseminated orders and would be displayed on OPRA.
    \27\ See Reg. NMS Rule 600(a)(42). National best bid and
national best offer means, with respect to quotations for an NMS
security, the best bid and best offer for such security that are
calculated and disseminated on a current and continuing basis by a
plan processor pursuant to an effective national market system plan;
provided, that in the event two or more market centers transmit to
the plan processor pursuant to such plan identical bids or offers
for an NMS security, the best bid or best offer (as the case may be)
shall be determined by ranking all such identical bids or offers (as
the case may be) first by size (giving the highest ranking to the
bid or offer associated with the largest size), and then by time
(giving the highest ranking to the bid or offer received first in
time).
    \28\ ``OPRA Plan'' means the plan filed with the SEC pursuant to
Section 11Aa(1)(C)(iii) of the Act, approved by the SEC and declared
effective as of January 22, 1976, as from time to time amended.
    \29\ ABBO shall mean the away best bid or offer.
    \30\ See Phlx Rule 1093(a)(iii)(A), (B)(4), (C)(4).
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    Specialist Participation Entitlements are applied throughout the
trading day as well as during the Opening Process,\31\ except that, the
entitlement for orders of 5 contracts or fewer shall only apply after
the Opening Process and shall not apply to auctions. The allocation for
Orders of 5 contracts or fewer will be separately described below. The
Exchange is adding clarifying language to provide more detail to the
current rule as to Enhanced Specialist Priority.
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    \31\ See proposed Rule 1089(a)(1)(D). The Opening Process is
described within Rule 1017.
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    Proposed Rule 1089(a)(1)(B)(i) provides, that when the Specialist
is at the same price as an SQT, RSQT or non-SQT ROT and the number of
contracts is greater than 5, the Specialist shall receive the greater
of: (i) 60% of remaining interest if there is one other ROT at that
price; (ii) 40% of remaining interest if there are two other ROTs at
that price; or 30% of remaining interest if there are more than two
other ROTs at that price (the ``Specialist Participation
Entitlement''); or the Specialist's Size Pro-Rata share under
subparagraph (a)(1)(E) (``ROT Priority''); or the Directed ROT
(``DROT'') participation entitlement, if any, set forth in subparagraph
(a)(1)(C) to proposed Rule 1089 below (if the order is a Directed Order
\32\ and the Specialist is also the DROT) (``DROT Priority'').
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    \32\ See note 12 above.
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    The addition of proposed Rule 1089(a)(1)(B)(i)(c), which describes
allocation when a Specialist is also DROT, is a proposed change to the
current practice; the remainder of the rule reflects current practice.
Today, Rule 1014(g)(vii)(B)(1)(c) only provides that the Specialist
could obtain the Specialist Participation Entitlement or the ROT
Priority. With this proposal, if the Specialist is the DROT, the
proposal provides that the Specialist would be entitled to the greater
of; (1) the Enhanced Specialist Priority; (2) the allocation for Orders
of 5 contracts or fewer (``Entitlement for Orders of 5 contracts or
fewer); or (3) the DROT allocation. Specifically, this proposal would
amend the current practice of allocating Orders of 5 contracts or
fewer. Today, a Specialist is only entitled to Orders of 5 contracts or
fewer when such order is received and the order is either not a
Directed Order or is a Directed Order for 5 contracts or fewer, but the
DROT is not quoting at the Exchange's price. If the DROT is also the
Specialist, then the Specialist is only entitled to receive the DROT
allocation of 40% rather than the full size of the 5 lot allocation.
    Finally, the Exchange proposes to note that, ``When the Specialist
is also the DROT the Specialist/DROT does not participate in the ROT
Priority at (a)(i)(E).'' This removal of volume is described in current
Rule 1014(g)(viii)(B)(2).\33\ The Exchange notes that after the DROT
Priority is applied, the System excludes the Specialist/DROT from the
total number of contracts that is utilized (denominator) in calculating
the ROT Priority in Rule 1089(a)(1)(E).
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    \33\ (2) (a) A Directed RSQT or SQT (where applicable) shall be
allocated a number of contracts that is the greater of the
proportion of the aggregate size at the NBBO associated with such
Directed SQT or RSQT's quote, the specialist's quote, other SQT and
RSQT quotes, and non-SQT ROT limit orders entered on the book via
electronic interface at the disseminated price represented by the
size of the Directed RSQT or SQT's quote at the NBBO, or (b) 40% of
the remaining contracts. (c) Thereafter, the specialist, SQTs and
RSQTs (excluding the Directed SQT or RSQT) quoting at the
disseminated price, and non-SQT ROTs that have placed limit orders
on the limit order book via electronic interface at the Exchange's
disseminated price, shall be allocated a number of contracts
according to the following formula:
    Equal percentage based on the Number of SQTs, RSQTs, specialist
and Non-SQT ROTs quoting or with limit orders at BBO (Component A) +
Pro rata percentage based on size of SQT, RSQT, specialist and Non-
SQT quotes and limit orders (Component B) x Remaining Order Size
    Where:
    Component A: The percentage to be used for Component A shall be
an equal percentage, derived by dividing 100 by the number of SQTs,
RSQTs (other than the Directed SQT or RSQT) specialist and non-SQTs
quoting or with limit orders at the BBO.
    Component B: Size Pro Rata Allocation. The percentage to be used
for Component B of the allocation algorithm formula is that
percentage that the size of each SQT, RSQT RSQTs (other than the
Directed SQT or RSQT), specialist or non-SQT ROT's quote or limit
order at the best price represents relative to the total number of
contracts in the disseminated quote.

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Example Number 1:
ABBO = 1.00-1.10
PBBO = 1.00-1.10

    Orders/Quotes entered into Trading System in the following order of
receipt:

Specialist: 1.00 bid (10 contracts)-1.10 offer (15 contracts)
Public Customer A: 5 contracts offered at 1.10
Firm: 5 contracts offered at 1.10
ROT 1: 1.00 bid (10 contracts)-1.10 offer (20 contracts)
ROT 2: 1.00 bid (10 contracts)-1.10 offer (10 contracts)
Public Customer B: 2 contracts offered at 1.10
Incoming Order to pay 1.10 for 40 contracts

    Allocated as follows:
    Size Pro-Rata results in Public Customer A trading 5 contracts,
Public Customer B trading 2 contracts, Specialist trading 11 contracts
(15/45 * 33 remaining), ROT1 trading 14 contracts (20/45 * 33 = 15.67
rounded down), ROT2 trading 7 contracts (10/45 * 33 = 7.33 rounded
down), and then Specialist receiving an additional 1 lot based on
random assignment.
    Specialist Participation Entitlement would result in Public
Customer A trading 5 contracts, Public Customer B trading 2 contracts,
and Specialist trading 40% of remaining 33 contracts = 13 (13.2 rounded
down); then Size Pro-Rata for remaining with ROT1 trading 13 contracts
(20/30 * 20 = 13.33 rounded down) and ROT2 trading 6 contracts (10/30 *
20 = 6.67 rounded down) and Specialist trading an additional 1 lot
based on random assignment.
    The Specialist Participation Entitlement would prevail in this
example, pursuant to proposed Rule 1089(A)(1)(ii)(1), because the
Specialist Participation Enhancement receives greater allocation.
Example Number 2
ABBO = 1.00-1.10
PBBO = 1.00-1.10

    Orders/Quotes entered into Trading System in the following order of
receipt:

ROT 1: 1.00 bid (10 contracts)-1.10 offer (10 contracts)
Public Customer A: 10 contracts offered at 1.10
Firm: 15 offered at 1.10
Specialist: 1.00 bid (10 contracts)-1.10 offer (10 contracts)
ROT 2: 1.00 bid (10 contracts)-1.10 offer (10 contracts)
Public Customer B: 10 contracts offered at 1.10
Incoming Order to pay 1.10 for 40 contracts

    Allocated as follows:
    Size Pro-Rata results in Public Customer A trading 10 contracts,
Public Customer B trading 10 contracts, Specialist trading 6 contracts
(10/30 * 20 remaining rounded down), ROT1 trading 6 contracts (10/30 *
20 = 6.67 rounded down), ROT2 trading 6 contracts (10/30 * 20 = 6.67
rounded down), and then ROT1 and Specialist each receiving an
additional 1 lot based on random assignment.
    Specialist Participation Entitlement would result in Public
Customer A trading 10 contracts, Public Customer B trading 10
contracts, and Specialist trading 40% of remaining 20 contracts = 8;
then normal pro rata resumes with ROT1 and ROT2 each being allocated 6
contracts.
    Pursuant to proposed Rule 1089(A)(1)(ii)(1), the Specialist
Participation Entitlement would prevail in this example because the
Specialist Participation Entitlement receives greater allocation.
Example Number 3
ABBO = 1.00-1.10
PBBO = 1.00-1.10

    Orders/Quotes entered into Trading System in the following order of
receipt:

ROT 1: 1.00 bid (10 contracts)-1.10 offer (10 contracts)
Firm: 25 contracts offered at 1.10
Specialist: 1.00 bid (10 contracts)-1.10 offer (20 contracts)
ROT 2: 1.00 bid (5 contracts)-1.10 offer (10 contracts)
ROT 3 1.00 bid (10 contracts)--1.10 offer (20 contracts)
Public Customer B: 2 contracts offered at 1.10
Incoming Order to pay 1.10 for 40 contracts

    Allocated as follows:
    Size Pro-Rata results in Public Customer B trading 2 contracts,
ROT1 trading 6 contracts (10/60 * 38 = 6.33 rounded down), Specialist
trading 12 (20/60 * 38 = 12.67 rounded down), ROT2 trading 6 contracts
(10/60 * 38 = 6.33 rounded down), and ROT3 trading 12 contracts (20/60
* 38 = 12.67 rounded down) and then ROT1 and Specialist each trading an
additional 1 contract by random assignment.
    Specialist Participation Entitlement would result in Public
Customer B trading 2 contracts and Specialist trading 30% of remaining
38 contracts = 11 (11.4 rounded down); then normal pro rata resumes and
ROT1 trades 6 contracts (10/40 * 27 = 6.75 rounded down), ROT2 trades 6
(10/40 * 27 = 6.75 rounded down), and ROT3 trades 13 contracts (20/40 *
27 = 13.5 rounded down) and ROT1 and Specialist each trade an
additional 1 lot by random assignment.
    Pursuant to proposed Rule 1089(A)(1)(ii)(1), the Specialist
Participation Entitlement would prevail in this example because the
Specialist Participation Entitlement receives greater allocation.
Rounding
    Current Rule 1014(g)(vii) does not address the manner in which the
System handles rounding. The Exchange proposes to memorialize the
manner in which rounding will be handled in proposed Rule
1089(a)(1)(C)(i). Phlx rounds down to the nearest integer with one
exception which is described below.
    The Exchange proposes to state within proposed Rule
1089(a)(1)(C)(i), with respect to a DROT, ``If rounding would result in
an allocation of less than one contract, the DROT shall receive one
contract.'' The Exchange notes that when allocating pursuant to
proposed Rule 1089(a)(1)(C), a DROT is entitled to a percentage
allocation based on the method described within proposed Rule
1089(a)(1)(C)(i). As stated above, DROT volume does not participate in
the ROT Priority at (a)(1)(E). The Exchange notes that for example if
there is 1 contract to be allocated at 40% pursuant to proposed Rule
1089(a)(1)(C)(i)(a) the DROT would receive a full contract because the
result would yield a fractional amount of less than one contract. The
Exchange notes that this provision only applies where the full
allocation is less than one contract; thereby not applying to
remainders. This aforementioned allocation of a full contract (1
contract) when rounding yields a fractional amount of less than one
contract only applies when allocating pursuant to DROT Priority and
does not apply with respect to the Specialist Participation Entitlement
or the Specialist entitlement for Orders of 5 contracts or fewer. The
Exchange believes that the proposed rounding permits the DROT to
receive an allocation where there is a possibility that a fractional
share would otherwise yield no allocation to the DROT where the DROT
was quoting at the NBBO. The Exchange believes that this methodology is
consistent with the Act because the Exchange seeks to reward the
Directed Market Maker for bringing order flow to the Exchange. The
Exchange notes that while the Specialist will be rounded down, the
Specialist is entitled to Orders of 5 Contracts or fewer, provided the
Specialist is quoting at the NBBO and no higher interest is present.
Also, the Specialist volume is entitled to participate in the ROT

Priority as proposed in Rule 1089(a)(1)(E).
    The Exchange believes that otherwise rounding down uniformly is
consistent with the Act because it provides for the equitable
allocation of contracts among the Exchange's market participants. The
Exchange proposes to provide market participants with transparency as
to the number of contracts that they are entitled to receive as the
result of rounding. Further, the Exchange believes that this
methodology produces an equitable outcome during allocation that is
consistent with the protection of investors and the public interest
because all market participants are aware of the methodology that will
be utilized to calculate outcomes for allocation purposes.
Examples With Rounding and Remainders
Example Number 1
    Presume an order of 200 contracts is being allocated in the
Exchange's Order Book. Allocation will first occur with Public Customer
orders at the best price filled in time priority, since Public
Customers always have priority on the Exchange. Presume there are 63
contracts remaining after Public Customer orders are filled. Assume no
Specialist is present thus ROTs would be allocated next pursuant to
Rule 1089 in Size Pro-Rata fashion. Presume 5 ROTs are at the best
price and the allocation of the remaining 63 contracts, after Public
Customer orders have been satisfied, is as follows:

ROT A 1.10 (30) x 1.20 (30)--25.2 rounded down to 25 contracts
ROT B 1.10 (15) x 1.20 (15)--12.6 rounded down to 12 contracts
ROT C 1.10 (10) x 1.20 (10)--8.4 rounded down to 8 contracts
ROT D 1.10 (10) x 1.20 (10)--8.4 rounded down to 8 contracts
ROT E 1.10 (10) x 1.20 (10)--8.4 rounded down to 8 contracts

    After this Size Pro-Rata allocation, 2 contracts remain to be
allocated. Presume for this trading day these ROTs are assigned the
following order of assignment: First is ROT A, second is ROT B, third
is ROT C, fourth is ROT D and fifth is ROT E. The 2 remaining contracts
would be allocated as follows:

ROT A 1.10 (30) x 1.20 (30)--1 contract
ROT B 1.10 (15) x 1.20 (15)--1 contract
ROT C 1.10 (10) x 1.20 (10)--zero
ROT D 1.10 (10) x 1.20 (10)--zero
ROT E 1.10 (10) x 1.20 (10)--zero

    The next order which results in contracts remaining after the Size
Pro-Rata allocation to ROTs will have such remaining contracts
allocated one at a time beginning with ROT C since he was next in line
based on that trading day's order of assignment, provided ROT C is at
the best price with remaining interest.
Example Number 2
    Presume an order of 200 contracts is being allocated in the
Exchange's Order Book. Presume all Public Customer orders and ROT
interest that was at the best price have been filled and there are 9
contracts remaining to be executed.
    Broker-dealers would be allocated next pursuant to Rule 1089 in a
Size Pro-Rata fashion. Presume 3 broker-dealers are at the best price
and their interest had arrived in the following order. The allocation
of the remaining 9 contracts is as follows:

Broker-dealer C 1.10 (5) x 1.20 (5)--4.09 contracts rounded down to 4
Broker-dealer B 1.10 (3) x 1.20 (3)--2.45 contracts rounded down to 2
Broker-dealer A 1.10 (3) x 1.20 (3)--2.45 contracts rounded down to 2

    After this Size Pro-Rata allocation, there remains one contract to
be allocated. This residual contract will be allocated in time priority
as follows:

Broker-dealer C 1.10 (5) x 1.20 (5)--1 contract
Broker-dealer B 1.10 (3) x 1.20 (3)--zero
Broker-dealer A 1.10 (3) x 1.20 (3)--zero
Parity
    Current Rule 1014(g)(vii)(B) includes a parity concept.
Specifically, current Rule 1014(g)(vii)(B) states, ``[q]uotations
entered electronically by the specialist, an RSQT or an SQT that do not
cause an order resting on the limit order book to become due for
execution may be matched at any time by quotations entered
electronically by the specialist and/or other SQTs and RSQTs, and by
ROT limit orders and shall be deemed to be on parity, subject to the
requirement that orders of controlled accounts must yield priority to
customer orders as set forth in Rule 1014(g)(i)(A).'' The Exchange
believes that the parity provision is unnecessary if the proposed rule
is approved because the Exchange has drafted the rule to describe the
order in which allocations will occur among different classes of market
participants. The proposed rule is intended to provide a timeline
approach to the manner in which the System will consider each group of
market participant and allocate accordingly. The priority for ROTs and
Specialists in current Rule 1014(g)(vii)(A) is described differently
than proposed within proposed Rule 1089, however the priority treatment
remains unchanged from how the System functions today. The outline of
the new rule describes the manner in which the System will allocate
orders to various market participants based on a Size Pro-Rata model.
The Exchange notes that the concept of priority is detailed within each
section when describing similarly situated market participants. The
Exchange believes that removing the rule text related to parity from
the proposed rule is consistent with the Act because while the Exchange
is not specifically describing parity within the proposed rule, the
Exchange will allocate based on parity as described in more detail
within the specific allocations provided for within the proposed rule.
DROT Priority
    As noted herein, a Specialist or ROT who receives a Directed Order
is a ``DROT'' with respect to that Directed Order.\34\ Today, the
Exchange allocates Directed Orders first to Public Customers orders.
After all Public Customer orders have been fully executed, upon receipt
of a Directed Order pursuant to Rule 1068, provided the DROT's quote or
market maker order is at the better of the internal PBBO excluding all-
or-none orders that cannot be satisfied, or the NBBO,\35\ the DROT

receives a participation entitlement (``DROT Priority''). DROT
participation entitlements will be permitted only after the Opening
Process. When the DROT is at the same price as an SQT, RSQT or non-SQT
ROT (collectively ``ROTs''), pursuant to the DROT participation
entitlement, the DROT shall receive, with respect to a Directed Order,
the greater of: (a) 40% of remaining interest; or (b) the DROT's Size
Pro-Rata share under subparagraph (a)(1)(E) (``ROT Priority''); or (c)
the Specialist Participation Entitlement in subparagraph (a)(1)(B), if
the DROT is also the Specialist. When a DROT Priority is applied, the
DROT does not participate in the ROT Priority at (a)(i)(E) as
illustrated in example number 4 below as described in this proposal.
---------------------------------------------------------------------------

    \34\ The term ``Directed Order'' means any order (other than a
stop or stop-limit order as defined in Rule 1066) to buy or sell
which has been directed to a particular Specialist, RSQT, or SQT by
an Order Flow Provider, as defined below. To qualify as a Directed
Order, an order must be delivered to the Exchange via the System.
See Rule 1068(a)(i)(A). When the Exchange's disseminated price is
the NBBO at the time of receipt of the Directed Order, and the
Directed Specialist, SQT or RSQT is quoting at the Exchange's best
price, the Directed Order shall be automatically executed and
allocated in accordance with Rule 1014(g)(viii). See Rule
1068(a)(ii). When the Exchange's disseminated price is the NBBO, and
the quotation disseminated by the Directed Specialist, RSQT, or SQT
on the opposite side of the market from the Directed Order is
inferior to the NBBO at the time of receipt of the Directed Order,
the Directed Order shall be automatically executed and allocated to
those quotations and orders at the NBBO in accordance with Exchange
Rule 1014(g)(vii). See Rule 1068(a)(iii). If the Exchange's
disseminated price is not the NBBO at the time of receipt of the
Directed Order, the Directed Order shall be handled in accordance
with Exchange rules. See Rule 1068(a)(iv).
    \35\ The ``NBBO'' is the best Protected Bid and Protected Offer
as defined in the Options Order Protection and Locked/Crossed
Markets Plan; Protected Bids and Protected Offers that are displayed
at a price but available on the Exchange at a better non-displayed
price shall be included in the NBBO at their better non-displayed
price for purposes of this rule. See Reg. NMS Rule 600(a)(42).
National best bid and national best offer means, with respect to
quotations for an NMS security, the best bid and best offer for such
security that are calculated and disseminated on a current and
continuing basis by a plan processor pursuant to an effective
national market system plan; provided, that in the event two or more
market centers transmit to the plan processor pursuant to such plan
identical bids or offers for an NMS security, the best bid or best
offer (as the case may be) shall be determined by ranking all such
identical bids or offers (as the case may be) first by size (giving
the highest ranking to the bid or offer associated with the largest
size), and then by time (giving the highest ranking to the bid or
offer received first in time).
---------------------------------------------------------------------------

    Current Rule 1014(g)(viii) describes the manner in which Directed
Orders are allocated. Directed Orders (as defined in Rule
1080(l)(i)(A)) other than Directed Complex Orders that are executed
electronically shall be automatically allocated as follows:

    (A) First, to customer limit orders resting on the limit order
book at the execution price. (B) Thereafter, contracts remaining in
the Directed Order, if any, shall be allocated automatically as
follows: (1) The Directed Specialist (where applicable), shall be
allocated a number of contracts that is the greater of: (a) the
proportion of the aggregate size at the NBBO associated with such
Directed Specialist's quote, SQT and RSQT quotes, and non-SQT ROT
limit orders entered on the book at the disseminated price
represented by the size of the Directed Specialist's quote; (b) the
Enhanced Specialist Participation as described in Rule 1014(g)(ii);
or (c) 40% of the remaining contracts.
* * * * *
    (2) (a) A Directed RSQT or SQT (where applicable) shall be
allocated a number of contracts that is the greater of the
proportion of the aggregate size at the NBBO associated with such
Directed SQT or RSQT's quote, the specialist's quote, other SQT and
RSQT quotes, and non- SQT ROT limit orders entered on the book via
electronic interface at the disseminated price represented by the
size of the Directed RSQT or SQT's quote at the NBBO, or (b) 40% of
the remaining contracts.

    As is the case today, if there are multiple quotes or orders \36\
for the same DROT at the same price \37\ which are at the better of the
internal PBBO, excluding all-or-none orders that cannot be satisfied,
or the NBBO when the Directed Order is received, the DROT participation
entitlement applies only to the DROT quote or order which has the
highest priority.\38\ The DROT quote or order that received the
Directed Order may not receive any further allocation of the Directed
Order, except as described in the ROT Priority section within proposed
Rule 1080(a)(1)(E). If rounding would result in an allocation of less
than one contract, the DROT shall receive one contract.
---------------------------------------------------------------------------

    \36\ A member may have multiple DROT quotes or orders submitted
into the System.
    \37\ There may be multiple DROTs within the same member
organization, for example multiple SQTs or RSQTs at Firm A.
    \38\ Orders are time-stamped and quotes receive an order
assignment for that trading day.
---------------------------------------------------------------------------

    As is the case today, if the DROT Priority is not awarded at the
time of receipt of the Directed Order pursuant to Rule 1063, no DROT
priority will apply and the order will be handled as though it were not
a Directed Order for the remainder of the life of the order.\39\ The
Exchange is not amending the DROT Priority. The proposed rule text
reflects current practice. As is the case today, under no circumstances
would the DROT quote receive an allocation of greater than 40% of an
order at a price at which they receive a directed entitlement.
---------------------------------------------------------------------------

    \39\ See Phlx Rule 1068(a)(iv).
---------------------------------------------------------------------------

    Below are some examples of DROT Participation Entitlement under
Size Pro-Rata Algorithm. Examples 1 through 3 below illustrate the
manner in which a DROT will be allocated pursuant to the Size Pro-Rata
model.
Example Number 1
Assume a Specialist is assigned and the DROT is not the Specialist.

ABBO = 1.00-1.10
PBBO = 1.00-1.10 comprised of the following in order of receipt:
    Specialist: 1.00 (10)-1.10 (15)
    Public Customer A: 5 offered at 1.10
    Firm: 5 offered at 1.10
    DROT: 1.00 (10)-1.10 (20)
    ROT1: 1.00 (10)-1.10 (10)
    Public Customer B: 2 offered at 1.10
Incoming Directed Order to pay 1.10 for 40 contracts

    Determination of Allocation:
    Size Pro-Rata would result in Public Customer A trading 5, Public
Customer B trading 2, DROT trading 14 contracts due to rounding
down(20/45 * 33), Specialist trading 11 due to rounding down (15/25 *
19) ROT1 trading 7 (10/25 * 19), and then Specialist receiving the
residual 1 lot based on random assignment.
    DROT Priority would result in Public Customer A trading 5, Public
Customer B trading 2, and DROT trading 40% of remaining 33 = 13 (13.2
rounded down); then normal Size Pro-Rata for remaining with the
Specialist trading 12 (15/25 * 20) and ROT1 trading 8 (10/25 * 20).
    The Specialist Participation Entitlement would not be calculated
since the Specialist is not the DROT.
    In this example, the Size Pro-Rata allocation would prevail since
the DROT would receive the greater allocation this way.
Example Number 2
    Assume that no Specialist is present.

ABBO = 1.00-1.10
PBBO = 1.00-1.10
    DROT: 1.00 (10)-1.10 (15)
    Public Customer A: 5 offered at 1.10
    Firm: 5 offered at 1.10
    ROT1: 1.00 (10)-1.10 (20)
    ROT2: 1.00 (10)-1.10 (10)
    Public Customer B: 2 offered at 1.10
Incoming Directed Order to pay 1.10 for 40 contracts

    Determination of Allocation:
    Size Pro-Rata would result in Public Customer A trading 5, Public
Customer B trading 2, DROT trading 11 (15/45 * 33 remaining), ROT1
trading 14 (20/30 * 22 = 14.67 rounded down), ROT2 trading 7 (10/30 *
22 = 7.33 rounded down), and the DROT receiving the residual 1 lot
based on random assignment.
    DROT Priority would result in Public Customer A trading 5, Public
Customer B trading 2, and DROT trading 40% of remaining 33 = 13 (13.2
rounded down); then normal Size Pro-Rata for remaining with ROT1
trading 13 (20/30 * 20 = 13.33 rounded down) and ROT2 trading 6 (10/30
* 20 = 6.67 rounded down), and the DROT receiving the residual 1 lot
based on random assignment.
    The Specialist Participation Entitlement would not be calculated
since the Specialist is not the DROT.
    In this example, the DROT Priority would prevail since the DROT
would receive the greater allocation this way.
Example Number 3
    Assume that the DROT is also the Specialist.

ABBO = 1.00-1.10
PBBO = 1.00-1.10 comprised of the following in order of receipt:
    DROT/Specialist: 1.00 (10)-1.10 (15)
    Public Customer A: 5 offered at 1.10
    Firm: 5 offered at 1.10
    ROT1: 1.00 (10)--1.10 (30)
    Public Customer B: 2 offered at 1.10
Incoming Directed Order to pay 1.10 for 40 contracts

    Determination of Allocation:

    Size Pro-Rata would result in Public Customer A trading 5, Public
Customer B trading 2, DROT/Specialist trading 11 (15/45 * 33
remaining), ROT1 trading 22 remaining contracts.
    DROT Priority would result in Public Customer A trading 5, Public
Customer B trading 2, and DROT/Specialist trading 40% of remaining 33 =
13 (13.2 rounded down); then Size Pro-Rata for remaining with ROT1
trading full size of 20.
    The Specialist Participation Entitlement would result in Public
Customer A trading 5, Public Customer B trading 2, and DROT/Specialist
entitled to 60% of remaining 33 = 19 (19.8 rounded down) but capped at
his size of 15 thus trading 15; then normal Size Pro-Rata for remaining
with ROT1 trading 18.
    In this example, the Specialist Participation Entitlement would
prevail since the DROT is the Specialist and would receive a greater
allocation this way.
Example Number 4
    Assume that the DROT is also the Specialist.
    Scenario 3:

ABBO = 1.00 - 1.10
PBBO = 1.00 - 1.10 comprised of the following in order of receipt:
    ROT1: 31 contracts offered at 1.10
    ROT2: 7 contracts offered at 1.10
    DROT: 51 contracts offered at 1.10
Contra-side Directed Order to pay 1.10 for 63 contracts
DROT gets Size Pro Rata allocation of 36 contracts (51/89 of 63 = 36.1
rounded down [better than 40% Directed/Specialist allocation = 25.2
contracts])
(ROT1 gets 31/38 of 27 = 22.02 rounded down to 22)
ROT2 gets 4 contracts (7/38 of 27 = 4.97 rounds down to 4)
Odd lot of 1 contract goes to whoever is 1st in odd lot priority

    In this example, the DROT received the Size Pro Rata allocation,
which was the greater of the entitlements pursuant to proposed Rule
1089(a)(1)(C). The DROT volume would be excluded from ROT priority in
1089(a)(1)(E).
Entitlement for Orders of 5 Contracts or Fewer
    Current Rule 1014(g)(vii)(B)(1)(a) contains the following language
for Orders of 5 contracts or fewer:

orders for 5 contracts or fewer shall be allocated first to the
specialist, provided, however, that on a quarterly basis, the
Exchange will evaluate what percentage of the volume executed on the
Exchange is comprised of orders for 5 contracts or fewer allocated
to specialists, and will reduce the size of the orders included in
this provision if such percentage is over 25%. In order to be
entitled to receive the 5 contract or fewer order preference set
forth in this sub-paragraph (B)(1)(a), the specialist must be
quoting at the Exchange's disseminated price, and shall not be
entitled to receive a number of contracts that is greater than the
size that is associated with its quote. If the specialist is not
quoting at the Exchange's disseminated price at the time of
execution, orders for 5 contracts or fewer shall be allocated to
Phlx XL Participants on parity as set forth in paragraph (b) below.

    The provision for Orders of 5 contracts or fewer is carried over
into new proposed Rule 1089(a)(1)(D). The Exchange proposes to provide
the Entitlement for Orders of 5 contracts or fewer shall be allocated
to the Specialist as described below. The allocation may only apply
after the Opening Process and shall not apply to auctions. A Specialist
is not entitled to receive a number of contracts that is greater than
the size that is associated with its quote. On a quarterly basis, the
Exchange will evaluate what percentage of the volume executed on the
Exchange is comprised of orders for 5 contracts or fewer allocated to
Specialists, and will reduce the size of the orders included in this
provision if such percentage is over 25%.\40\
---------------------------------------------------------------------------

    \40\ The Exchange monitors the percentage of the volume for
Orders of 5 contracts or fewer executed on the Exchange on a
quarterly basis.

    (i) A Specialist is entitled to priority with respect to Orders
of 5 contracts or fewer, including when the Specialist is also the
DROT, if the Specialist has a quote at the better of the internal
PBBO, excluding all-or-none orders that cannot be satisfied, or the
NBBO, with no other Public Customer or DROT interest with a higher
priority.
    (ii) If the Specialist's quote is at the better of the internal
PBBO, excluding all-or-none orders that cannot be satisfied, or the
NBBO, with other Public Customer (including when the Specialist is
also the DROT) or other DROT interest with a higher priority at the
time of execution, a Specialist is not entitled to priority with
respect to Orders of 5 contracts or fewer, however the Specialist is
eligible to receive such contracts pursuant to Rule 1089(a)(1)(E);
thereafter orders will be allocated pursuant to Rule 1089(a)(1)(F).

    In order to be entitled to receive Orders for 5 contracts or fewer,
the Specialist's quote must be at the better of the internal PBBO,
excluding all-or-none orders that cannot be satisfied, or the NBBO with
no other Public Customer or DROT interest which has a higher priority.
If the Specialist is quoting at the better of the internal PBBO,
excluding all-or-none orders that cannot be satisfied, or the NBBO with
other Public Customer or DROT interest present which has a higher
priority at the time of execution, a Specialist is not entitled to
priority with respect to Orders of 5 contracts or fewer, however the
Specialist is eligible to receive such contracts pursuant to ROT
Priority as described in Rule 1089(a)(1)(E), thereafter orders will be
allocated pursuant to Rule 1089(a)(1)(F).
    With this proposal, the Specialist would be entitled to the entire
allocation of the Order of 5 contracts or fewer where the Specialist is
also the DROT and the Specialist receives the Directed Order and has a
quote at the best price (described as the better of the internal PBBO
or the NBBO) at the time the Directed Order was received. This means
that no other interest, including Public Customer or DROT interest is
present with a higher priority, if the Specialist is to receive the
allocation. If, for example, a Public Customer is resting at the NBBO
at the time of execution, a Specialist is not entitled to priority with
respect to Orders of 5 contracts or fewer. The Exchange believes that
this proposed change is consistent with the Act because the Specialist
will not be entitled to priority with respect to allocation of Orders
of 5 contracts or fewer because there is interest present with a higher
priority or because the Specialist is not quoting at the NBBO. In these
situations, the Specialist will receive the ROT Priority, and be
treated on par with other ROTs, pursuant to proposed Rule
1089(a)(1)(E). This Entitlement for Orders of 5 contracts or fewer
shall only apply after the Opening Process and shall not apply to
auctions.\41\
---------------------------------------------------------------------------

    \41\ For example, the Exchange's PIXL auction and the Opening
Process would not be subject to proposed Rule 1089(A)(1)(ii)(2). The
Opening Process is explained in Phlx Rule 1017.
---------------------------------------------------------------------------

Elimination of Current Rule Text
    Current Rule 1014(g)(vii)(B)(1)(b) provides that:

    Respecting orders for greater than 5 contracts (regardless of
whether the specialist is quoting at the Exchange's disseminated
price), or orders for 5 contracts or fewer when the specialist is
not quoting at the Exchange's disseminated price, inbound electronic
orders shall be allocated pursuant to the following allocation
algorithm:

[GRAPHIC] [TIFF OMITTED] TN22MY19.036

Where:

Component A: The percentage to be used for Component A shall be an
equal percentage, derived by dividing 100 by the number of Phlx XL
participants quoting at the BBO.
Component B: Size Pro Rata Allocation. The percentage to be used for
Component B of the allocation algorithm formula is that percentage
that the size of each Phlx XL Participant's quote at the best price
represents relative to the total number of contracts in the
disseminated quote.
Final Weighting: The final weighting formula for equity options,
which shall be determined by a three-member special committee of the
Board of Directors, chaired by the President of the Exchange, and
two Directors (the ``Special Committee''), and apply uniformly
across all equity options, shall be a weighted average of the
percentages derived for Components A and B multiplied by the size of
the incoming order. Initially, the weighting of components A and B
shall be equal, represented mathematically by the formula:
(Component A Percentage + Component B Percentage)/2) * incoming
order size.
The final weighting formula for index options and options on
Exchange Traded Fund Shares (as defined in Rule 1000(b)(42) shall be
established by the Special Committee. The final weighting formula
for options on U.S. dollar-settled foreign currency options shall be
established by a three- member special committee of the Board of
Directors, chaired by the President of the Exchange, and two
Governors. The final weighting formula may vary by product. Changes
made to the percentage weightings of Components A and B shall be
announced to the membership on the Exchange's website at least one
day before implementation of the change.

    The Exchange proposes to replace the formula described within Rule
1014(g)(vii)(B)(1)(b) with a more streamlined description of the manner
in which interest is allocated, and the sequence of that allocation
within the System. At this time, the Exchange proposes to eliminate the
formula, the weighting process and the ability to determine values for
the weighting and simply state that it will apply a Size Pro-Rata
execution algorithm to electronic orders.\42\ The Exchange notes that
the method in which Phlx applies Size Pro-Rata allocation is not
changing, only the manner in which this allocation is described in the
rule text. Today, the Exchange utilizes a calculation to describe what
the Exchange seeks to express today within proposed Rule 1089. Today,
all resting orders and quotes in the order book are prioritized
according to price. If there are two or more resting orders or quotes
at the same price, the System allocates contracts from an incoming
order or quote to resting orders and quotes proportionally according to
size, based on the total number of contracts available and to be
executed at that price. Proposed Rule 1089 describes the how interest
is allocated among market participants and the manner in which
allocation occurs. The Exchange's current rule does not order the rule
as a timeline to explain the order in which allocation is occurring.
Also, specificity is lacking in the current rule, which the Exchange is
proposing to add within proposed Rule 1089.
---------------------------------------------------------------------------

    \42\ Phlx offers both an electronic and floor model for the
execution of options transactions. Floor transactions are subject to
Phlx Rule 1014(g)(v).
---------------------------------------------------------------------------

    Today, as noted above, Directed Orders are first allocated to
Public Customers, then to the Directed Specialist as specified in Rule
1014(g)(viii)(A) and (B).\43\ The Exchange today applies a Size Pro-
Rata execution algorithm to electronic orders, as described herein,
other than Public Customers, including for Directed Orders. Currently,
Rule 1014(g)(viii)(B)(1) and (2) describes the allocation algorithm
utilizing a formula to explain the manner in which SQTs and RSQTs
quoting at the disseminated price, and non-SQT ROTs that have placed
limit orders on the limit order book via electronic interface at the
Exchange's disseminated price shall be allocated contracts:
---------------------------------------------------------------------------

    \43\ Phlx Rule 1014(g)(viii)(B) currently states that after
Public Customer limit orders resting on the book are allocated, the
contracts remaining in the Directed Order, if any, shall be
allocated automatically as follows: (1) The Directed Specialist
(where applicable), shall be allocated a number of contracts that is
the greater of: (a) The proportion of the aggregate size at the NBBO
associated with such Directed Specialist's quote, SQT and RSQT
quotes, and non-SQT ROT limit orders entered on the book at the
disseminated price represented by the size of the Directed
Specialist's quote; (b) the Enhanced Specialist Participation as
described in Rule 1014(g)(ii); or (c) 40% of the remaining
contracts.

Equal percentage based on the Number of SQTs, RSQTs and Non-SQT ROTs
quoting or with limit orders at BBO (Component A)+ Pro rata percentage
based on size of SQT, RSQT and Non-SQT quotes and limit orders
---------------------------------------------------------------------------
(Component B) x Remaining Order Size

    Current Rule 1014(g)(viii)(B)(1) and (2) describes the weighting.
The Exchange proposes to eliminate this formula and process for setting
the final weighting and instead utilize the allocation rule text
described herein, which the Exchange believes provides more clarity and
consistency to the manner in which the allocation method is described
for Directed Orders.
ROT Priority
    Current Rule 1014(g)(vii)(A) provides that ``if the specialist, an
SQT, RSQT or a non-SQT ROT that has placed a limit order on the limit
order book (``Phlx XL Participant'') is quoting alone at the
disseminated price and their quote is not matched by another Phlx XL
participant prior to execution, such Phlx XL Participant shall be
entitled to receive a number of contracts up to the size associated
with his/her quotation.''
    The Exchange notes that it is not amending the manner in which ROTs
are allocated. Proposed Rule 1089(a)(1)(E) describes ROT Priority.
After all Public Customer orders have been fully executed at a given
price, provided the Public Customer order is an executable order, and
Specialist Participation Entitlement or DROT Priority are applied, if
applicable, remaining ROT interest shall have priority over all other
orders at the same price. If there are two or more ROT quotes or orders
for the same options series at the same price, those shall be executed
based on the Size Pro-Rata execution algorithm. As noted herein, the
Exchange would not include DROT volume if the DROT Priority applied.
Odd Lot Allocation
    The Exchange proposes to indicate the manner in which remaining
contracts are allocated among market participants within proposed Rule

1080(a)(1)(F). The Odd Lot Allocation is not codified in the current
rule. The Exchange proposes to describe the handling of odd lots by
stating that remaining contracts shall be allocated among equally
priced ROTs, by random assignment of ROTs, each trading day in
accordance with the trading day's order assignment, provided the ROT is
at the price at which the order is being traded. Specifically, the
Exchange proposes to state, if there are contracts remaining after ROT
Priority is applied, such contracts shall be allocated by randomly
assigning all ROTs (including the Specialist or DROT) an order of
allocation each trading day, and allocating orders, quotes and sweeps
in accordance with the trading day's order assignment, provided the
ROT, DROT or Specialist is at the best price at which the order, quote
or sweep is being traded.\44\
---------------------------------------------------------------------------

    \44\ Phlx has a random approach for allocating remainders to
ROTs.
---------------------------------------------------------------------------

    Specifically, with respect to the proposed new text regarding Odd
Lot Allocation, the Exchange utilizes a round robin approach to the
allocation. This allocation methodology for ROTs exists today on Phlx.
Rule text similar to that proposed herein is codified within the Price
Improvement XL \45\ or ``PIXL'' rule to describe this approach.\46\ If
remaining shares result from the allocation of simple interest among
equally priced ROTs, remaining shares are allocated by daily random
assignments of ROTs. Each ROT is assigned an order of allocation, each
trading day. Trading interest is allocated in accordance with the
trading day's order assignment, provided the ROT is at the best price
at which the order, quote or sweep is being traded. The assignment
continues throughout the trading day for each allocation, picking up
where it dropped off from the last allocation, provided the ROT is
entitled to an allocation. There is no new priority being introduced,
rather the Exchange is allocating remaining contracts to ROTs after ROT
Priority is applied pursuant to proposed Rule 1089(a)(1)(E) before
considering other remaining interest of lower priority pursuant to
proposed Rule 1089(a)(1)(G).
---------------------------------------------------------------------------

    \45\ PIXL\SM\ is the Exchange's price improvement mechanism
known as Price Improvement XL or PIXL. See Phlx Rule 1087.
    \46\ PIXL rules provides, ``. . .Where the allocation of
contracts results in remaining amounts, the number of contracts to
be allocated shall be rounded down to the nearest integer. If
rounding would result in an allocation of less than one contract,
then one contract will be allocated to the Initiating Member only if
the Initiating Member did not otherwise receive an allocation. If
there are contracts remaining, such contracts shall be allocated for
simple interest after rounding by randomly assigning all ROTs an
order of allocation each trading day, and allocating orders, quotes
and sweeps in accordance with the trading day's order assignment,
provided the ROT is at the best price at which the order, quote or
sweep is being traded, except with respect to Complex Orders, which
allocation is described in Phlx Rule 1098. In the event that there
are remaining contracts to be allocated for interest after rounding,
such remaining contacts will be allocated in time priority, provided
the off-floor broker-dealers are at the best price at which the
order is being traded. Remaining shares will be allocated in time
priority for Complex Orders . . .'' See Phlx Rule 1087(b)(5)(B)(vi).
---------------------------------------------------------------------------

    The Exchange believes that this method results in a fair and
equitable allocation of contracts to these market participants because
each trading day the Exchange creates a new order of assignment to
allocate ROTs and that order provides an independent method to assign
evenly among ROTs. Also, each trading day that assignment changes so
that no one ROT would have the ability to receive a greater allocation
than another ROT. The Exchange believes that the allocation of odd lots
among ROTs is consistent with the Act because it provides for the
equitable allocation of contracts among the Exchange's market
participants. Specifically, with respect to the allocation method for
odd lots for ROTs, this random assignment is basically a round robin
approach to the allocation. The Exchange believes that this method
results in a fair and equitable allocation of contracts to these market
participants because each trading day the Exchange creates a new order
of assignment to allocate ROTs and that order provides an independent
method to assign evenly among ROTs. Also, each trading day that
assignment changes so that no one ROT would have the ability to receive
a greater allocation than another ROT. The Exchange believes that its
assignment method is not subject to gaming since it is random and
therefore complies with the Act because it is aimed at the protection
of investors. Also, this rule change will provide market participants
with transparency as to the number of contracts that they are entitled
to receive as the result of the allocation of odd lots.
All Other Remaining Interest
    Current Rule 1014(g)(vii)(B)(1)(d) provides, with respect to
Broker-Dealer Orders: \47\

    \47\ As this rule applies to electronic allocations, the
Exchange proposes to change references to ``Off Floor Broker
Dealers'' to simply ``Broker Dealers.''
---------------------------------------------------------------------------

    If any contracts remain to be allocated after the Phlx XL
Participants have received their respective allocations, off-floor
broker-dealers (as defined in Rule 1080(b)(i)(C)) that have placed
limit orders on the limit order book which represent the Exchange's
disseminated price shall be entitled to receive a number of
contracts that is the proportion of the aggregate size associated
with off-floor broker-dealer limit orders on the limit order book at
the disseminated price represented by the size of the limit order
they have placed on the limit order book. Such off-floor broker-
dealers shall not be entitled to receive a number of contracts that
is greater than the size that is associated with each such limit
order.

    Proposed Rule 1089(a)(1)(G) provides, with respect to all other
remaining interest, if there are contracts remaining after all ROT
interest has been fully executed, such contracts shall be executed
based on the Size Pro-Rata execution algorithm. In the event that there
are remaining contracts to be allocated for interest after rounding,
which includes orders of all remaining market participants, such
remaining contracts will be allocated in time priority provided the
interest is at the best price at which the order is being traded. This
provision would apply to any remaining market participant that has not
been previously allocated pursuant to proposed Rule 1089(a)(1)(A)-(F).
This practice of allocation is not being amended; rather the rule text
is being amended to make the current practice clear.
    The Exchange believes that this proposed new text that addresses
allocation of remaining contracts, which is being applied uniformly to
all remaining market participants, is consistent with the Act because
it provides for the equitable allocation of contracts among the
Exchange's market participants of similar priority. This method is
consistent with the Act because it relies simply on time priority, an
accepted method of allocation utilized by many options exchange to
prioritize orders.
    Below are examples representing consecutive executions and
allocations within the Order Book that demonstrate rounding and the Odd
Lot Allocation of remaining shares.
Example Number 1
    Presume an order of 200 contracts is being allocated in the
Exchange's Order Book. Allocation will first occur with Public Customer
orders at the best price filled in time priority, since Public
Customers always have priority on the Exchange. Presume there are 63
contracts remaining after Public Customer orders are filled. ROTs would
be allocated next in Size Pro-Rata fashion. Presume 5 ROTs are at the
best price and the allocation of the remaining 63 contracts, after
Public Customer orders have been satisfied, is as follows:

ROT A 1.10(30) x 1.20 (30)--25.2 rounded down to 25 contracts
ROT B 1.10(15) x 1.20 (15)--12.6 rounded down to 12 contracts
ROT C 1.10(10) x 1.20 (10)--8.4 rounded down to 8 contracts
ROT D 1.10 (10) x 1.20 (10)--8.4 rounded down to 8 contracts
ROT E 1.10 (10) x 1.20 (10)--8.4 rounded down to 8 contracts

    After this Size Pro-Rata allocation, 2 contracts remain to be
allocated. Presume for this trading day these ROTs are assigned the
following order of assignment: First is ROT A, second is ROT B, third
is ROT C, fourth is ROT D and fifth is ROT E. The 2 remaining contracts
would be allocated as follows:

ROT A 1.10(30) x 1.20 (30)--1 contract
ROT B 1.10(15) x 1.20 (15)--1 contract
ROT C 1.10(10) x 1.20 (10)--zero
ROT D 1.10 (10) x 1.20 (10)--zero
ROT E 1.10 (10) x 1.20 (10)--zero

    The next order which results in contracts remaining after the Size
Pro-Rata allocation to ROTs will have such remaining contracts
allocated one at a time beginning with ROT C since he was next in line
based on that trading day's order of assignment, provided ROT C is at
the best price with remaining interest.
Example Number 2
    Presume an order of 200 contracts is being allocated in the
Exchange's Order Book. Presume all Public Customer orders and ROT
interest that was at the best price have been filled and there are 9
contracts remaining to be executed.
    Remaining interest would be allocated next in a Size Pro-Rata
fashion. Presume 3 broker-dealers are at the best price and their
interest had arrived in the following order. The allocation of the
remaining 9 contracts is as follows:

Broker-dealer C 1.10 (5) x 1.20 (5)--4.09 contracts rounded down to 4
Broker-dealer B 1.10 (3) x 1.20 (3)--2.45 contracts rounded down to 2
Broker-dealer A 1.10 (3) x 1.20 (3)--2.45 contracts rounded down to 2

    After this Size Pro-Rata allocation, there remains one contract to
be allocated. This residual contract will be allocated in time priority
as follows:

Broker-dealer C 1.10 (5) x 1.20 (5)--1 contract
Broker-dealer B 1.10 (3) x 1.20 (3)--zero
Broker-dealer A 1.10 (3) x 1.20 (3)--zero

    Finally, the Exchange proposes to note at proposed Rule 1089(a)(2),
``A market maker is entitled only to an Enhanced Specialist Allocation
pursuant to Rule 1089(a)(1)(B) or the Entitlement for Orders of 5
contracts or fewer pursuant to Rule 1089(a)(1)(D) on a quote or the
DROT Priority pursuant to Rule 1089(a)(1)(C) on a quote or market maker
order.'' The Exchange notes that Specialists submit quotes at the NBBO
to be allocated the Enhanced Specialist Allocation pursuant to proposed
Rule 1089(a)(1)(B) or the Entitlement for Orders of 5 contracts or
fewer pursuant to Rule 1089(a)(1)(D), while a DROT may submit either a
quote or market maker order at the NBBO to be entitled to DROT Priority
pursuant to proposed Rule 1089(a)(1)(C).\48\ The Exchange believes the
proposed rule will make clear what type of interest may receive an
enhanced allocation.
---------------------------------------------------------------------------

    \48\ This includes orders of market makers in options series in
which the market maker is assigned on Phlx.
---------------------------------------------------------------------------

Other Sections Being Eliminated
    Rule 1014(g)(vii)(B)(1)(e) provides, ``No Phlx XL Participant shall
be entitled to receive a number of contracts that is greater than the
size that is associated with their quotation or limit order.'' This
concept is expressed within proposed Rule 1089 throughout the proposed
rule text rather than in a lone standing rule. The Exchange believes
that this additional language is no longer necessary because this
concept is embedded in the new proposed language.
    Rule 1014(g)(vii)(B)(2) entitled ``No Split-Price Executions,''
provides, ``If the size associated with a market order or an electronic
quotation to be executed is received for a greater number of contracts
than the Exchange's disseminated size, the portion of such an order or
quotation executed automatically at the Exchange's disseminated size
shall be allocated automatically in accordance with Rule 1014(g)(vii).
Contracts remaining in such an order shall be represented by the
specialist and handled in accordance with Exchange Rules.'' The
Exchange notes that this language is obsolete and not in effect today.
The Exchange does not permit any manual handling of orders; rather the
orders will be allocated the same as all other trading interest. The
Exchange believes that it is consistent with the Act and the protection
of investors and the public interest to eliminate this obsolete
language to provide clarity to members as to the manner in which the
System allocates trades.
    Current Rule 1014(g)(vii)(B)(3) provides, ``Notwithstanding the
first sentence of Rule 1014(g)(i), neither Rule 119(a)-(d) and (f), nor
Rule 120 (insofar as it incorporates those provisions by reference)
shall apply to the allocation of automatically executed trades.'' The
Exchange notes that Rules 119 and 120 will be disconnected from the
electronic allocation model. The Exchange is proposing to create a new
Rule 1089 for electronic allocation, as compared to floor allocation.
Proposed Phlx Rule 1089 will not rely on concepts of controlled
accounts or parity and therefore the application to Rules 119 and 120
is unnecessary. The proposed Rule 1089 is structured to indicate the
manner in which market participants will be allocated in reference to
each other in a more streamlined manner. The Exchange believes that
deleting this rule text is consistent with the Act, specifically the
protection of investors and the public interest because this rule text
does not serve to describe in a clear manner the method in which the
Exchange would allocate electronic transactions.
Cross-References
    The Exchange is proposing to amend the references to Rule 1014 in
Rule 1082, Commentary .02 and .03 to update the references to the new
proposed rule.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section
6(b) of the Act \49\ in general, and furthers the objectives of Section
6(b)(5) of the Act \50\ 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, by providing more specificity within proposed Rule 1089
regarding the manner in which the Exchange allocates. The Exchange's
proposal seeks to protect investors and the public interest by
providing greater transparency as to the sequence in which allocation
occurs as it relates to various market participants. The Exchange is
memorializing its current practice within proposed new Rule 1089 with
one amendment proposed herein.
---------------------------------------------------------------------------

    \49\ 15 U.S.C. 78f(b).
    \50\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

Entitlement for Orders of 5 Contracts or Fewer
    The Exchange's proposed amendment to permit the Specialist, who is
also the DROT, to be allocated the entire Order of 5 contracts or
fewer, provided the Specialist has a quote at the better of the
internal PBBO, excluding all-or-none orders that cannot be satisfied,
or the NBBO, with no other Public Customer or DROT interest with a
higher priority,

is consistent with the Act. As is the case today, the Specialist, who
is also the DROT must continue to have (1) a Directed Order directed to
him/herself; (2) a quote or order at the better of the internal PBBO
(excluding all-or-none orders which cannot be satisfied) or NBBO at the
time the Directed Order was received; and (3) no other interest,
including Public Customer and DROT interest, present with a higher
priority. The proposed amendment continues to provide Public Customers
with the highest priority in that the Specialist would not be entitled
to the allocation of Orders of 5 contracts or fewer in the event that
other interest was present with a higher priority. If, for example, a
Public Customer order is resting at the NBBO at the time of execution,
a Specialist is not entitled to priority with respect to Orders of 5
contracts or fewer. The Exchange believes that this proposed change is
consistent with the Act because the Specialist will not be entitled to
priority with respect to Orders of 5 lot allocation if there is
interest of higher priority resting at the Exchange's disseminated best
price or if the Specialist is not quoting at the NBBO. In these
situations, the Specialist would be entitled to be allocated pursuant
to ROT Priority on par with other ROTs, pursuant to proposed Rule
1089(a)(1)(E).
    The Exchange notes that Specialists, unlike other market
participants, have obligations in the marketplace. Specialists are
required to submit Valid Width Quotes during the Opening Process
pursuant to Phlx Rule 1017. Further, Specialists have heightened
quoting obligations pursuant to Phlx Rule 1081. In contrast to
Specialists, DROTs have no quoting obligations during the Opening
Process and must quote with a heightened Directed SQT/RSQT quoting
obligation only during the period in which they receive a Directed
Order in any option in which they are assigned and shall be considered
a Directed SQT or Directed RSQT until such time as they are no longer
directed pursuant to Rule 1081(c)(ii)(C).

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. The Exchange does not believe
the proposed change will cause any unnecessary burden on intra-market
competition because all Exchange members may apply to be either
Specialists or ROTs and, presuming all requirements are met, would be
entitled to receive participation entitlements provided they receive
direct orders and those orders are executed by those DROTs.
    With respect to rounding, all rounding is down to the nearest
integer, unless otherwise specified. The Exchange does not believe that
the proposal to round all remaining contracts down to the nearest
integer imposes an undue burden on competition because the Exchange
will uniformly round in this matter.
    With respect to allocating remaining contracts, the Exchange does
not believe that the proposal to allocate remaining contracts for ROTs
by random assignment creates an undue burden on competition because the
method results in a fair and equitable allocation of shares to these
market participants. The Exchange does not believe that allocating
remaining contracts to off-floor broker-dealers in time priority
creates an undue burden on competition because the method will be
applied uniformly among these participants.
    Permitting Specialists to receive an allocation over ROTs when the
Specialist is the DROT does not create an undue burden on competition
because today Phlx permits the Specialist to be ahead of ROTs generally
within its allocation method. Specialists have higher quoting
obligations as compared to ROTs (90% versus 60% of the series in which
assigned).\51\
---------------------------------------------------------------------------

    \51\ See Phlx Rule 1081.
---------------------------------------------------------------------------

    The Exchange's proposed amendment to permit the Specialist, who is
also the DROT, to be allocated the entire Order of 5 contracts or fewer
provided the Specialist's quote is at the better of the internal PBBO
(excluding all-or-none orders which cannot be satisfied) or NBBO does
not create an undue burden on inter-market competition because the
ability to become a Directed ROT is available to all market maker
participants including Specialists. Further, the Exchange does not
believe the proposal will negatively impact quote competition on Phlx
and create an unfair burden on competition. Directed Orders are
allocated based on the competitive bidding of market participants. A
DROT must have a quote or market maker order at the NBBO at the time
the order is received to capitalize on the DROT entitlement. Also,
other options markets permit this type of allocation today.\52\ This
proposal does not create an undue burden on intra-market competition
because all members may compete for order flow by contributing to price
and size discovery for the entire market. Further, Specialists must
enter orders that assume the risk of trading with all participants at
NBBO without knowing the details of the particular order. Specialists
are incentivized to aggressively quote at the NBBO with this proposal
to the benefit of all market participants, while maintaining their
quoting obligations.\53\ The Exchange believes the proposal will
encourage greater order flow to be sent to the Exchange through
Directed Orders and that this increased order flow will benefit all
market participants on Phlx. The Exchange is not limiting the class of
market participants that receive a Directed Order, any ROT may apply to
receive Directed Orders.
---------------------------------------------------------------------------

    \52\ See BX Chapter VI, Section 10.
    \53\ See Phlx Rule 1081.
---------------------------------------------------------------------------

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

    Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission shall: (a) By order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be 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_ADDRESS>Please include
File Number SR-Phlx-2019-20 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-2019-20. 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-2019-20 and
should be submitted on or before June 12, 2019.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\54\
---------------------------------------------------------------------------

    \54\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-10643 Filed 5-21-19; 8:45 am]
 BILLING CODE 8011-01-P


[Federal Register Volume 85, Number 221 (Monday, November 16, 2020)]
[Notices]
[Pages 73124-73125]
[FR Doc No: 2020-25165]

=======================================================================
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DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

[Docket No. FAA-2020-1061]

Agency Information Collection Activities: Requests for Comments;
Clearance of a Renewed Approval of Information Collection: Advanced
Qualification Program (AQP)

AGENCY: Federal Aviation Administration (FAA), DOT.

ACTION: Notice and request for comments.

-----------------------------------------------------------------------

SUMMARY: In accordance with the Paperwork Reduction Act of 1995, FAA
invites public comments about our intention to request the Office of
Management and Budget (OMB) approval to renew an information
collection. The Advanced Qualification Program uses data driven quality
control processes for validating and maintaining the effectiveness of
air carrier training program curriculum content.

DATES: Written comments should be submitted by January 15, 2021.

ADDRESSES: Please send written comments:
    By Electronic Docket: www.regulations.gov (Enter docket number into
search field).
    By mail: Sandra Ray, Federal Aviation Administration, Policy
Integration Branch AFS-270, 1187 Thorn Run Road, Suite 200, Coraopolis,
PA 15108.
    By fax:<PHONE_NUMBER>

FOR FURTHER INFORMATION CONTACT: Ryan Rachfalski by email at:
<EMAIL_ADDRESS>phone:<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION: Public Comments Invited: You are asked to
comment on any aspect of this information collection, including (a)
Whether the proposed collection of information is necessary for FAA's
performance; (b) the accuracy of the estimated burden; (c) ways for FAA
to enhance the quality, utility and clarity of the information
collection; and (d) ways that the burden could be minimized without
reducing the quality of the collected information. The agency

will summarize and/or include your comments in the request for OMB's
clearance of this information collection.
    OMB Control Number: 2120-0701.
    Title: Advanced Qualification Program (AQP) Subpart Y to 14 CFR
121.
    Form Numbers: N/A.
    Type of Review: Renewal of an information collection.
    Background: Under Special Federal Aviation Regulation No. 58,
Advanced Qualification Program (AQP), the FAA provides certificated air
carriers, as well as training centers they employ, with a regulatory
alternative for training, checking, qualifying, and certifying aircrew
personnel subject to the requirements of 14 CFR parts 121 and 135. Data
collection and analysis processes ensure that the certificate holder
provides performance information on its crewmembers, flight
instructors, and evaluators that will enable them and the FAA to
determine whether the form and content of training and evaluation
activities are satisfactorily accomplishing the overall objectives of
the curriculum.
    Respondents: 25 Respondents with approved Advanced Qualification
Programs.
    Frequency: Monthly.
    Estimated Average Burden per Response: 7 hours.
    Estimated Total Annual Burden: 2,100 hours.

    Issued in Washington, DC, on November 9, 2020.
Sandra L. Ray,
Aviation Safety Inspector, FAA, Policy Integration Branch, AFS-270.
[FR Doc. 2020-25165 Filed 11-13-20; 8:45 am]
BILLING CODE 4910-13-P