[Federal Register Volume 86, Number 9 (Thursday, January 14, 2021)]
[Notices]
[Pages 3217-3225]
[FR Doc No: 2021-00591]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90880; File No. SR-Phlx-2021-03]

Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
of Proposed Rule Change To Modify Phlx Options 8, Section 26, ``Trading
Halts, Business Continuity and Disaster Recovery''

January 8, 2021.
    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 January 7, 2021 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange proposes to modify Phlx Options 8, Section 26,
``Trading Halts, Business Continuity and Disaster Recovery'' to permit
a Virtual Trading Crowd in the event that the Trading Floor is
unavailable.
    The text of the proposed rule change is available on the Exchange's
website at https://listingcenter.nasdaq.com/rulebook/phlx/rules, at the
principal office of the Exchange, and at the Commission's Public
Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Phlx proposes to modify Phlx Options 8, Section 26, ``Trading
Halts, Business Continuity and Disaster Recovery.'' This proposal
creates an additional contingency within Phlx's Business Continuity
Plan (``BCP'') to prepare for potential closure of its physical Trading
Floor in light of COVID-19. Specifically, the Exchange proposes to
amend Options 8, Section 26(g) to permit Phlx to operate a newly
proposed Virtual Trading Crowd in the event the physical Trading Floor
is unavailable.
Background
    Currently, Options 8, Section 26(g) describes certain actions the
Exchange may take as part of its BCP, if its Trading Floor became
inoperable, so that it may maintain fair and orderly markets if unusual
circumstances were to occur which may impact the Exchange's ability to
conduct its options floor business. Specifically, in the event of loss
of the Trading Floor, if the physical location \3\ designated as the
``Trading Floor'' becomes unavailable Phlx will enact its BCP and
designate the Philadelphia Navy Yard as its ``Back-Up Trading Floor.''
Further, in the event that the Back-Up Trading Floor becomes
unavailable or inoperable, the Exchange will only operate its
electronic market and will not operate a Trading Floor. The Exchange
will operate only its electronic market until the Exchange's Trading
Floor facility is operational. Open outcry trading will not be
available in the interim.\4\
---------------------------------------------------------------------------

    \3\ Phlx's physical Trading Floor is located at 2929 Walnut
Street, Philadelphia, PA.
    \4\ This Rule does not preclude the Exchange from conducting
business, in the event the Trading Floor and Back-Up Trading Floor
are rendered inoperable, pursuant to Options 4, Section 10. Current
Options 4, Section 10, Backup Trading Arrangements, outlines rules
applicable to hosting Phlx at another exchange in the event Phlx is
disabled.
---------------------------------------------------------------------------

    Phlx's Trading Floor closed on March 17, 2019,\5\ as a result of
precautions taken with respect to COVID-19.\6\ The Exchange continued
to operate in an all-electronic configuration during this time period.
Since that time, Phlx has been exploring alternatives to permit open
outcry trading in the event of an extended closure related to COVID-19
or potentially a second closure in 2020 and/or 2021 given the
uncertainty related to the ongoing pandemic. Phlx notes that an all-
electronic trading environment cannot fully replicate open outcry
trading, and therefore, the Exchange continues to evaluate potential
enhancements that it believes would permit trading, in the event the
Trading Floor is inoperable, to more closely replicate its trading
environment that exists during normal operations.\7\
---------------------------------------------------------------------------

    \5\ See Options Trader Alert #2020-07. Phlx's Trading Floor did
not re-open until June 3, 2020. See Options Trader Alert #2020-08.
    \6\ On March 11, 2020, the World Health Organization
characterized COVID-19 as a pandemic and to slow the spread of the
disease, federal and state officials implemented social-distancing
measures, placed significant limitations on large gatherings,
limited travel, and closed non-essential businesses.
    \7\ Certain aspects of open outcry trading, particularly the
ability for persons to negotiate pricing and to facilitate
executions of larger orders in a trading crowd as well as the
handling of high-risk and complicated strategies, are not easily
replicated in electronic markets.
---------------------------------------------------------------------------

    Phlx proposes to amend Options 8, Section 26(g)(2) to provide,

    Back-up Trading Floor Unavailable. In the event that the Back-Up
Trading Floor becomes inoperable, or the Exchange otherwise
determines not to operate its Back-Up Trading Floor the Exchange
will operate its electronic market and may elect to enact a Virtual
Trading Crowd pursuant to subsection (g)(3).

    Today, Options 8, Section 26(g)(2) provides that if the Back-Up
Trading Floor becomes inoperable, the Exchange will only operate its
electronic market and will not operate a Trading Floor. Further, the
rule provides the Exchange will operate only its electronic market
until the Exchange's Trading Floor facility is operational. Open outcry
trading will not be available in the interim.
    At this time, the Exchange desires to adopt a virtual option in the
event the physical Trading Floor is unavailable, the Back-Up Trading
Floor becomes inoperable or the Exchange otherwise determines not to
operate the Back-Up Trading Floor.\8\ Specifically, Phlx's proposal
would permit certain aspects of open outcry trading, which are normally
conducted in-person on the Trading Floor, to be conducted in a virtual
trading crowd (``Virtual Trading Crowd''). This proposal is intended to
enhance Phlx's BCP by offering an alternative which comports with
shelter-in-place and social distancing guidelines and would provide
institutional investors with a means to execute orders that are unable
to meet guidelines of the electronic market.\9\ Specifically, this
proposal would further enhance the Exchange's trading environment when
the Trading Floor is unavailable, the Back-up Trading Floor is
inoperable or the Exchange otherwise determines not to operate the
Back-Up Trading Floor, by permitting market participants that generally
operate on the physical Trading Floor to continue to interact in a
substantially similar manner as they do on the Trading Floor.
Specifically, the Exchange proposes to further amend Options 7, Section
26(g) to permit it to make available an audio and video communication
program to serve as a ``Virtual Trading Crowd'' if the physical Trading
Floor is unavailable, the Back-Up Trading Floor becomes inoperable or
the Exchange otherwise determines not to operate the Back-Up Trading
Floor. The Exchange would create ``Virtual Trading Crowds,'' in each of
which the Exchange will determine which options class(es) will be
available for trading. This is similar to the Exchange's authority with
respect to open outcry trading on the Trading Floor.\10\ Phlx members
will access a Virtual Trading Crowd via ``zones.'' \11\ Multiple
classes may trade in a single Virtual Trading Crowd available for
trading in a single zone. This is similar to the physical Trading Floor
today. The Exchange may determine to have only one zone or several
zones as necessary to ensure a fair and orderly market. The Exchange
will assign each Floor Market Maker to a zone and Floor Brokers may
determine in which zone(s) they will be present. This is similar to the
arrangement on the Exchange's physical Trading Floor. Unlike Cboe, Phlx
has a requirement that each trading crowd have a Floor Market Maker
present.\12\ Phlx ensures that this requirement is met by assigning
Floor Market Makers to a trading crowd.\13\ If a Floor Market

Maker hears a Floor Broker located in another trading crowd represent
an order, the Floor Market Maker may attempt to trade with that order.
The Exchange intends that the concept of a zone replicate a crowd on
the physical Trading Floor.
---------------------------------------------------------------------------

    \8\ The proposed rule regarding the Virtual Trading Crowd is
located in the Exchange's broader rule regarding disaster recovery
and business continuity, as the Exchange currently only plans to use
the Virtual Trading Crowd for business continuity purposes if the
physical Trading Floor becomes unavailable, the Back-Up Trading
Floor becomes inoperable or the Exchange otherwise determines not to
operate the Back-Up Trading Floor. If the Exchange were to determine
to use the Virtual Trading Crowd in more permanent manner, it would
submit a separate rule filing.
    \9\ For example, there are certain aspects of trading where the
rules differ electronically and on the Trading Floor. Complex Orders
are traded differently electronically versus on the Trading Floor
based on Exchange rules.
    \10\ See Options 8, Section 25(l) which provides, ``In the
interest of fair and orderly markets, the Exchange may adopt
policies affecting the location of members in the trading crowd on a
crowd-by-crowd basis.''
    \11\ A ``zone'' is a virtual room representing a Virtual Trading
Crowd. For example, each trading crowd will have its own zoom
password-protected log-in.
    \12\ See Options 8, Section 28, ``. . . An Options Floor Broker
shall ascertain that at least one Floor Market Maker is present at
the trading post prior to representing an order for execution. . .
.''
    \13\ The Exchange notes that as a result of COVID-19, the
Exchange implemented various safety protocols including socially
distancing floor members by assigning spaces to all floor market
participants on the physical Trading Floor.
---------------------------------------------------------------------------

    Phlx proposes to replicate the open outcry features on the physical
Trading Floor within a Virtual Trading Crowd. The Exchange will use a
communication program that has audio, video, and ``chat''
functionality.\14\ Floor members would log into the Virtual Trading
Crowd, as described in more detail below, and would communicate trades
within the conferencing feature. This will allow the same communication
capabilities floor members generally have on the physical Trading Floor
so that they may conduct open outcry trading in the Virtual Trading
Crowd in the same manner as they do on the physical Trading Floor.
---------------------------------------------------------------------------

    \14\ Currently available programs with this functionality
include Zoom, Webex, Microsoft Teams, and others.
---------------------------------------------------------------------------

    All Options 8 Rules will apply to open outcry trading in the
Virtual Trading Crowd, in the same manner as they apply to open outcry
trading on the physical Trading Floor, except as otherwise provided for
in proposed Options 8, Section 26(g)(3)(E). The proposed changes are
described below. The Exchange proposes to adopt a new Options 8,
Section 26(g)(3) to permit the Exchange to make available an audio and
video communication program to serve as a ``Virtual Trading Crowd'' if
the physical Trading Floor is not available.
    Proposed Options 8, Section 26(g)(3)(A) lists certain terms in the
Rules related to open outcry trading on the physical Trading Floor that
will be deemed to refer to corresponding terms related to trading in
the Virtual Trading Crowd. Specifically,
     References in the Rules to the ``floor,'' ``Trading
Floor,'' and ``Exchange floor'' (and any other terms with the same
meaning) will be deemed to refer to the ``Virtual Trading Crowd''; and
     References in the Rules to ``physical presence'' or ``on-
floor'' or ``floor'' (and any other terms with the same meaning) will
be deemed to refer to ``presence'' in a Virtual Trading Crowd.
    The proposal does not amend or replace any aspects of Phlx's
Options Floor Based Management System (``FBMS'') or order execution
functionalities.\15\ Today, FBMS is designed to execute orders entered
by Floor Brokers,\16\ including multi-leg orders up to 15 legs, after
representation in the trading crowd. When a Floor Broker submits an
order for execution through FBMS, the order will be executed based on
market conditions at the time of execution and in accordance with Phlx
rules. FBMS execution functionality checks the Order Book to ensure
compliance with priority rules. Orders that do not comply with priority
and trade-through rules will not be executed. All FBMS order and
transaction data that would normally be available from the physical
Trading Floor would continue to be captured by FBMS and the System.
These compliance checks, which are crucial to ensuring compliance with
Exchange rules, will continue with the Virtual Trading Crowd model.
---------------------------------------------------------------------------

    \15\ FBMS, an order management system, is the gateway for the
electronic execution of equity, equity index and U.S. dollar-settled
foreign currency option orders represented by Floor Brokers on the
Exchange's Options Floor. Floor Brokers contemporaneously upon
receipt of an order and prior to the representation of such an order
in the trading crowd, record all options orders represented by such
Floor Broker to FBMS, which creates an electronic audit trail. The
execution of orders to Phlx's electronic trading system also occurs
via FBMS. The FBMS application is available on hand-held tablets and
stationary desktops.
    \16\ The term ``Floor Broker'' means an individual who is
registered with the Exchange for the purpose, while on the Options
Floor, of accepting and handling options orders. See Options 8,
Section 2(2).
---------------------------------------------------------------------------

    Access to the Virtual Trading Crowd will be substantially similar
to access to the physical Trading Floor. Only members registered to
access Phlx's Trading Floor would be permitted to participate. The
Exchange is not proposing to amend its membership requirements with
respect to virtual open outcry trading. Currently, admission to the
physical Trading Floor is limited to members and member organizations,
Exchange employees, clerks employed by members and member
organizations, Inactive Nominees, and Exchange visitors that receive
authorized admission to the Trading Floor pursuant to Exchange policy,
and any other persons that the Exchange authorizes admission to the
Trading Floor.\17\ Persons and entities may apply to become a Phlx
member by complying with the membership requirements noted within Phlx
General 3, Membership and Access. Proposed Options 8, Section
26(g)(3)(B) provides, ``Admission to the Virtual Trading Crowd is
limited to members and member organizations, Clerks, Exchange
employees, and any other persons the Exchange authorizes admission to
the Virtual Trading Crowd.''
---------------------------------------------------------------------------

    \17\ See General 3, Section 1, Options 8, Sections 5-9, and
Options 8, Sections 11 and 12.
---------------------------------------------------------------------------

    The Exchange proposes to limit the number of members, per member
organization, that may participate in a Virtual Trading Crowd based on
the ability of Phlx to accommodate members within the remote
conferencing feature in an orderly fashion. The Exchange would limit
personnel in a fair and equitable manner ensuring there is fair and
equal representation from each member and member organization. This
proposal would allow each of the trading crowds that exist on Phlx's
physical Trading Floor to participate in this ``Virtual Trading Crowd''
in one or more separate zones as described above.
    While clerks may access the Virtual Trading Crowd, they may only
perform the same functions for their associated member organizations in
connection with open outcry trading in the Virtual Trading Crowd as
they do for open outcry trading on the physical Trading Floor. The
Exchange understands permitting access to Clerks to access the Virtual
Trading Crowd will provide them with access to the information that
they normally have access to on the physical Trading Floor, which will
make it more efficient for them to perform their tasks. Also, the
Exchange would not permit visitors into the Virtual Trading Crowd as
the Exchange believes that allowing these types of persons to have
access to the Virtual Trading Crowd is unnecessary as these persons are
not essential to the functioning of the Virtual Trading Crowd. As is
the case with the physical Trading Floor, the Exchange will provide
access to the Virtual Trading Crowd to members the Exchange has
approved to perform a Trading Floor function (including Floor Brokers
and Floor Market Makers).
    While floor members would not be required to display badges,
pursuant to Options 8, Section 39 at Regulation 3, in the Virtual
Trading Crowd, as the size of the view on the communication program may
not permit badges to be visible, members would be required to join the
Virtual Trading Crowd in a manner that clearly identifies the member or
member's employee.
    Pursuant to proposed Options 3, Section 26(g)(3)(E)(8)(a), prior to
speaking on remote conferencing, each member must announce themselves
each time.\18\ As specified within

proposed Options 8, Section 26(g)(3)(E)(2), members must join via a
computer and either (a) computer audio; (b) cell phone; or (c) hard-
wired phone, as determined by Nasdaq. Phlx will send a password-
protected invitation to each floor participant permitted access to the
Virtual Trading Crowd. This invitation will permit each permitted
participant to access the Virtual Trading Crowd in a safe and secure
manner. Any floor member may access any zone within the Virtual Trading
Crowd, although Floor Market Makers will be required to be present in
their assigned zone if present within the Virtual Trading Crowd. Any
unidentified attendee will be removed from the Virtual Trading Crowd.
The Exchange will have an audit trail of the telephone numbers that
have joined each remote conferencing session in order to ensure that
only members join the remote conferencing feature. Every member in the
Virtual Trading Crowd must provide Market Operations with a contact
number where Market Operations will be able to reach them during the
trading day. The contact number may not be the same number that is
being used to connect to the Virtual Trading Crowd. Floor members are
responsible for maintaining updated contact information. This number
must be updated immediately if it changes. Nasdaq staff must be able to
reach a member if there is an issue with trading.\19\ Nasdaq non-
regulatory staff would be responsible for the operation of the remote
conferencing feature, which includes monitoring members to ensure that
only floor members and member's employees are admitted into remote
conferencing and are properly identified.
---------------------------------------------------------------------------

    \18\ Members would also be visible on video, however the
Exchange will still require members to announce themselves.
    \19\ The conferencing room would be password protected and
equipped with audio, video and text capabilities. Attendance control
requirements would be in place. Private chat features will not be
permitted on the platform. Unknown callers would be removed from the
conferencing room. Nasdaq non-regulatory staff would be in control
of the conference room.
---------------------------------------------------------------------------

    As specified within proposed Options 3, Section 26(g)(3)(E)(1),
every member and the member's employees in the Virtual Trading Crowd
must consent to video and audio recording in order to participate in
the Virtual Trading Crowd. Members and members' employees will be asked
to provide this consent, as well as other consents, before being
permitted to join the Virtual Trading Crowd. For example, member
organizations would be required to execute an addendum to the Nasdaq
Services Agreement regarding their use of the remote conferencing
feature in addition to consenting to voice recording.
    Today, pursuant to Options 8, Section 38, floor members must
register their means of communication with the Exchange.\20\ Pursuant
to proposed Options 8, Section 26(g)(3)(E)(4), members and member
organizations may use any equipment to access the Virtual Trading Crowd
and do not need to register devices they use while in the Virtual
Trading Crowd. Floor members and member organizations would be
permitted remote access to FBMS when the Virtual Trading Floor is
enacted.\21\ The Exchange proposes to provide within Options 8, Section
26(g)(3)(C) that, ``. . . Notwithstanding Options 8, Section 28(g) and
Options 8, Section 30(e), members and member organizations would be
permitted remote access to the Options Floor Based Management System
(``FBMS'') when the Virtual Trading Floor is enacted for the purpose of
executing transactions which require exposure in open outcry.'' Floor
members must use Exchange-provided FBMS, to the extent applicable,
while transacting in the Virtual Trading Crowd. As noted above, prior
to using a communications device for business purposes on the Trading
Floor of the Exchange, members and member organizations must register
the communications device in a form and manner prescribed by the
Exchange. Because individuals in the Virtual Trading Crowd will not be
on the Exchange's premises (and thus will not be using Exchange-
provided bandwidth to be shared with all market participants and do not
pose the same security risks), the proposed rule change will not
require members and member organizations to register devices they use
while in the Virtual Trading Crowd. Options 8, Section 38 will
otherwise apply in the same manner to the Virtual Trading Crowd as it
does to the physical Trading Floor (to the extent the context
requires). This includes requirements related to audit trail and record
retention, prohibition on using any device for the purpose of recording
activities in the Virtual Trading Crowd or maintaining an open line of
continuous communication whereby a person not located in the trading
crowd may continuously monitor the activities in the trading crowd, and
the prohibition on using devices to disseminate quotes or last sale
reports. Surveillance staff will be present in each Virtual Trading
Crowd to monitor the activity of each participant, who must be present
by video, and to observe participant behavior. The Exchange will
continue to surveil options transactions, as it does today, to identify
transactions which are violative of Phlx Rules.\22\ Phlx surveils for
transactions which have been executed on its market to determine if
those transactions utilized information which would have been available
in open outcry trading and was not yet public or otherwise
ascertainable due to the execution of a transaction. The Exchange notes
that in both the electronic market and on the trading floor, members
and member organizations must ensure that they have procedures
reasonably designed to prevent the misuse of material, non-public
information by employees.\23\ Further, the Exchange proposes to provide
within proposed Options 8, Section 26(g)(3)(E)(8)(g) that ``A member
may not permit any unauthorized other person to gain audio or video
access to the Virtual Trading Crowd. A member shall not record any
trading sessions,'' to make clear that the Exchange will enforce the
prohibitions of Options 8, Section 38 with respect to the remote
conferencing aspects as well. Finally, the Exchange represents that it
has the proper security infrastructure in place to offer FBMS remotely
and securely to floor participants.
---------------------------------------------------------------------------

    \20\ Options 8, Section 38(a) provides, ``No member or member
organization shall establish or maintain any private wire
connection, private radio, television or wireless system, between
the Exchange Trading Floor and a nonmember without application to
and approval by the Exchange. Every such means of communication
shall be registered with the Exchange. Notice of the discontinuance
of any such means of communication shall be promptly given to the
Exchange.''
    \21\ At the time of the Phlx Trading Floor closure in March
2020, the Exchange permitted Floor Brokers, who otherwise had no
means of trading on Phlx in an electronic environment, to utilize
FBMS remotely, solely for the purpose of submitting limit orders to
the electronic limit order book pursuant to Options 8, Section
28(g), or submitting a Floor Qualified Contingent Cross Order to the
System pursuant to Options 8, Section 30(e). See Options Trader
Alert #2020-8.
    Recently, the Exchange filed a proposal to amend Options 8,
Section 28(g) and Options 8, Section 30(e) to continue to allow
Floor Brokers the ability to submit limit orders to the electronic
limit order book and Floor Qualified Contingent Cross Orders to the
System via FBMS remotely, notwithstanding the existence of BCP
measures. See SR-Phlx-2021-01. This recent proposal did not permit
FBMS to be utilized remotely for the purpose of executing
transactions which require exposure in open outcry.
    \22\ See Phlx Options 9, Section 1; and Options 9, Section 5.
See also Options 3, Section 22(d).
    \23\ See Phlx General 9, Section 21.
---------------------------------------------------------------------------

    Today, members on the physical Trading Floor only verbalize their
interest to trade against a represented order, so not requiring bids
and offers to be included in a chat conforms to current practice on the
Trading Floor. However, given potential limitations of communication
software (such as

limitations on how many people may be heard at the same time in a
Virtual Trading Crowd or potential buffering or echoing), the Exchange
believes it may be appropriate to require members to use a chat tool in
the communication program to indicate their interest in participating
in a trade so that the representing Floor Broker is able to know the
market from the trading crowd and fairly allocate the trade pursuant to
the Rules.\24\ The Exchange would require members to utilize the chat
function if Surveillance determines that increased volume or activity
in the Virtual Trading Crowd warrant mandatory use of the chat feature
for members to maintain a fair and orderly market. Chats will be
visible to all participants in a zone and will not be permitted
directly between individual participants (i.e., the Exchange will
disable direct messaging functionality within the communication
program). The Exchange believes the flexibility to impose this
requirement in a Virtual Trading Crowd is appropriate, as these
limitations may ultimately not interfere with a Floor Broker's ability
to hear all interest (particularly in Virtual Trading Crowd) and thus
the additional requirement may potentially slow down executions.
Flexibility will permit the Exchange to balance system limitations with
the additional burden of a new workflow step for each class, some of
which have different open outcry trading environments than others.
---------------------------------------------------------------------------

    \24\ The Exchange would issue an Options Trader Alert announcing
any determination to require bids and offers to be expressed in a
chat within the communication program pursuant to proposed Options
8, Section 26(g)(3)(D). The Exchange will provide such notice with
sufficient advance notice.
---------------------------------------------------------------------------

    The Exchange will retain records of the chats as well as consents,
and any other records related to the Virtual Trading Crowds that are
subject to the Exchange's record retention obligations under the
Exchange Act.
    Pursuant to Options 3, Section 26(g)(3)(E)(8)(b), if a member
experiences a technical issue accessing the remote conferencing, the
Exchange will not be responsible for unexecuted trades. Also, pursuant
to Options 3, Section 26(g)(3)(E)(8)(c), Floor Market Maker quotes will
be considered firm in the event the Floor Market Maker is disconnected
from the Virtual Trading Crowd and the parties have a meeting of the
minds with respect to the terms of the transaction. A ``Meeting of the
Minds'' means the contra-side(s) verbally confirmed participation in
the trade. In the event that a Floor Market Maker is disconnected from
the Virtual Trading Crowd, a Floor Market Maker quote would not be
considered firm if the quote were provided and the parties did not have
a Meeting of the Minds with respect to the terms of the transaction.
    Today, Floor Market Maker quotes are considered firm when announced
in open outcry \25\ and once accepted the transaction may be
effectuated within FBMS. A Floor Market Maker may declare he or she is
``out'' prior to a Meeting of the Minds occurring in open outcry and
the Floor Broker submitting the trade into FBMS.\26\ Today, a Floor
Market Maker that experiences issues with internet connection,\27\
makes an error or otherwise is unaware of recent news in a particular
option, would be held to a quote verbalized in open outcry. In the
event that the negotiation continues and the terms change, the Floor
Marker Maker would not be held to the new terms without additional
acceptance of those terms. In the event that the transaction is not
effectuated in FBMS, the trade would not stand. To that end, the
Exchange believes continuing to require quotes to remain firm once the
parties have arrived at a Meeting of the Minds with respect to the
terms of the transaction creates fair and equitable expectations for
members trading in the Virtual Trading Crowd.
---------------------------------------------------------------------------

    \25\ See Options 8, Section 22(c) Public Outcry--Pursuant to
Options 8, Section 24 (this citation is being amended in this rule
change from Section 35 to the correct Section 24) at Supplementary
Material .01, bids and offers must be made in an audible tone of
voice. A member shall be considered ``in'' on a bid or offer, while
he remains at the post, unless he shall distinctly and audibly say
``out.'' A member bidding and offering in immediate and rapid
succession shall be deemed ``in'' until he shall say ``out'' on
either bid or offer. Once the trading crowd has provided a quote, it
will remain in effect until: (A) A reasonable amount of time has
passed, or (B) there is a significant change in the price of the
underlying security, or (C) the market given in response to the
request has been improved. In the case of a dispute, the term
``significant change'' will be interpreted on a case-by-case basis
by an Options Exchange Official based upon the extent of the recent
trading in the option and, in the case of equity and index options,
in the underlying security, and any other relevant factors.
    \26\ Id at 25.
    \27\ The Exchange notes that today members are responsible for
the operation of their own equipment while on the Trading Floor.
---------------------------------------------------------------------------

    Today, FLEX transactions are permitted on the Trading Floor in
accordance with Options 3, Section 34. With this proposal, FLEX Trade
tickets must be sent by email to the Phlx Correction Post pursuant to
proposed Options 8, Section 26(g)(3)(E)(8)(d). This proposal would
allow the Exchange to receive these in a timely manner.
    The Exchange notes within proposed Options 8, Section
26(g)(3)(E)(8)(e) that a break-out room may be utilized to declare a
dispute or otherwise notify an Options Floor Official of any required
notifications. The Exchange would establish a break-out room within the
remote conferencing for each dispute. This would provide an effective
manner in which to communicate disputes and maintain a record of those
disputes.
    Pursuant to proposed Options 8, Section 26(g)(3)(E)(8)(f)
disruptive or unnecessary conversations or comments in the remote
conferencing or on chat feature will not be permitted. This type of
behavior would subject a member to disciplinary action. Today,
disruptive behavior on the Trading Floor is subject to Options 8,
Section 39 at Regulation 4.\28\
---------------------------------------------------------------------------

    \28\ Options 8, Section 39, Regulation 4(a) provides, ``Members
and associated persons shall not conduct themselves in a disorderly
manner on the trading floor or on the premises immediately adjacent
to the trading floor. Further, members, participants and associated
persons shall not conduct themselves in an indecorous manner that is
disruptive to the conduct of business on the trading floor,
including but not limited to the use of profanity.''
---------------------------------------------------------------------------

    As noted above, the Exchange may determine to make the Virtual
Trading Crowd available if the physical Trading Floor is unavailable,
the Back-Up Trading Floor becomes inoperable or the Exchange otherwise
determines not to operate the Back-Up Trading Floor. Proposed Options
8, Section 26(g)(3) provides that ``The Exchange may elect to permit
open outcry trading to take place in a Virtual Trading Crowd if the
Trading Floor becomes unavailable, the Back-Up Trading Floor becomes
inoperable or the Exchange otherwise determines not to operate the
Back-Up Trading Floor.'' These amendments to the Options 8 Rules are
intended to make trading in a Virtual Trading Crowd similar to open
outcry trading when open outcry trading is not available by replicating
certain features of open outcry trading in the Virtual Trading Crowd.
The Virtual Trading Crowd will permit open outcry trading to continue
in a separate environment if the physical Trading Floor becomes
unavailable, the Back-Up Trading Floor becomes inoperable or the
Exchange otherwise determines not to operate the Back-Up Trading Floor.
Therefore, trading opportunities that are generally only available in
open outcry trading will continue to be available in the Virtual
Trading Crowd.
    All trading in the Virtual Trading Crowd will occur in the same
manner, including priority and allocation rules.\29\ The Exchange will
make the same order types and instructions available in the Virtual
Trading Crowd as it makes available on the physical Trading Floor.\30\
Floor Brokers will be subject to the responsibilities in each

environment.\31\ Additionally, members and member organizations
participating in the Virtual Trading Crowd will be subject to the same
regulatory requirements as they are on the physical Trading Floor.\32\
Orders must be systematized, and represented, and transactions
reported, in connection with the Virtual Trading Crowd floor in the
same manner as they are when trading on the physical Trading Floor.\33\
Therefore, the audit trail for open outcry trading in the Virtual
Trading Crowd will capture the same information that it does for open
outcry trading on the physical Trading Floor.
---------------------------------------------------------------------------

    \29\ See Options 8, Sections 25 and 30.
    \30\ See Options 8, Section 32.
    \31\ See Options 8, Sections 18 and 28.
    \32\ See Options 8 generally.
    \33\ See Options 8 generally.
---------------------------------------------------------------------------

Surveillance
    Phlx Surveillance staff would remotely surveil transactions in the
Virtual Trading Crowd, in real-time. Specifically, there would be an
Options Floor Official present in each Virtual Trading Crowd. Nasdaq
Surveillance would conduct real-time surveillance for violations of
Phlx rules, as is the case with physical open outcry. Floor
Surveillance Procedures would be updated to account for the
conferencing and chat requirements, as well as any changes to surveil a
Virtual Trading Crowd. All surveillance patterns would be operable and
function normally.
    The Exchange also proposes to re-number current Options 3, Section
26(g)(3) as (4). The Exchange notes that this proposal does not amend
the manner in which fees or other pricing incentives, such as caps,
apply to floor participants. Any transaction originating from open
outcry on the Trading Floor is considered a floor transaction and would
continue to be considered a floor transaction for purposes of the
Virtual Trading Crowd. With offering FBMS remotely, the Exchange does
not propose to amend the manner in which fees are assessed or rebates
are paid for purposes of Options 7 pricing to Floor Brokers.
    The Exchange has conducted several town halls with floor members in
which the Exchange presented the functionality of the Virtual Trading
Crowd and has made the Virtual Trading Crowd available for testing so
that the Exchange will be ready to implement it if necessary. The
Exchange has received positive feedback from floor members regarding
the Virtual Trading Crowd and will continue to make updates as
necessary and appropriate in response to comments it receives to make
the Virtual Trading Crowd replicate the open outcry trading experience
on the physical Trading Floor as much as possible. The Exchange
believes this will provide the opportunity for as seamless a rollout as
possible if circumstances cause the Exchange to make the Virtual
Trading Crowd available.
Technical Amendments
    The Exchange proposes to amend Options 8, Section 22, Execution of
Options Transactions on the Trading Floor, to correct two citations in
Options 8, Sections 22(b) and (c). The citations to Options 8, Section
35 should be to Options 8, Section 24. These corrections will ensure
the rule text is accurate.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\34\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\35\ in particular, in that it is designed to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, 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.
---------------------------------------------------------------------------

    \34\ 15 U.S.C. 78f(b).
    \35\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In particular, the Exchange believes the proposed rule change will
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, as it will permit open outcry
trading to continue in the event the Exchange's Trading Floor is
unavailable, the Back-Up Trading Floor becomes inoperable or the
Exchange otherwise determines not to operate the Back-Up Trading Floor.
As discussed above, there are certain features of open outcry trading
that are difficult to replicate in an electronic trading environment.
The Exchange has observed, and understands from various market
participants, that they have had difficulty executing certain orders,
such as larger orders and high-risk and complicated strategies, in an
all-electronic trading configuration without the element of human
interaction to negotiate pricing for these orders. The proposed rule
change would provide an environment in which this interaction would be
available despite the potential unavailability of the physical Trading
Floor. The Exchange believes the proposed rule change may facilitate
continued trading of these orders if and when the physical Trading
Floor is unavailable, the Back-Up Trading Floor becomes inoperable or
the Exchange otherwise determines not to operate the Back-Up Trading
Floor. As a result, the Exchange believes providing continuous access
to open outcry trading when the physical Trading Floor is unavailable,
the Back-Up Trading Floor becomes inoperable or the Exchange otherwise
determines not to operate the Back-Up Trading Floor will remove
impediments to a free and open market and will ultimately benefit
investors, particularly those desiring to execute high-risk and complex
trading strategies.
    The Virtual Trading Crowd would have the same capability to utilize
FBMS as the primary Trading Floor today with the availability of remote
FBMS.\36\ The Exchange also believes the proposed rule change will
promote just and equitable principles of trade as open outcry trading
in a Virtual Trading Crowd will occur in accordance with the same
trading rules and be subject to the same regulatory requirements that
apply to open outcry trading on the physical Trading Floor, all of
which have previously been filed with the Commission. The proposed rule
change will merely permit this open outcry trading to occur in a
virtual setting rather than a physical setting (which may be
appropriate for health and safety purposes). For the Virtual Trading
Crowd, open outcry trading will occur while market participants operate
remotely as they do when they trade electronically. Open outcry trading
on a physical Trading Floor or in a Virtual Trading Crowd will be
subject to the same priority and allocation rules as open trading on
the physical Trading Floor, as set forth in Options 8, Sections 25 and
30.
---------------------------------------------------------------------------

    \36\ See note 15 above.
---------------------------------------------------------------------------

    As is the case for open outcry trading on a physical Trading Floor,
open outcry trading in a Virtual Trading Crowd is consistent with
Section 11(a) of the Act, as Rule 5.85(a)(2)(E) (which will apply to
open outcry trading in a Virtual Trading Crowd) requires members and
member organizations relying on Section 11(a)(1)(G) of the Act and Rule
11a1-1(T) thereunder (the so called ``G exemption rule'') as an
exemption must yield priority to any bid (offer) at the same price of
Public Customer orders and broker-dealer orders resting in the Order
Book, as well as any other bid (offer) that has priority over those
broker-dealer orders under this Rule.

    The Exchange further believes the proposed rule change will 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 permitting the Exchange to establish zones. As
discussed above, the zones are intended to replicate the physical
Trading Floor's organization and will permit floor members to interact
in a substantially similar way as they do on the physical Trading
Floor. The zones will also encourage interaction of a reasonable number
of people within the communication program. While the zones will
include additional functionality that is not otherwise available on the
physical Trading Floor, such as the chat functionality, the Exchange
believes the creation of zones and inclusion of this functionality will
create a virtual environment that promotes fair and orderly trading
given the potential limitations of communication software.
    The Exchange will make the same order types and instructions
available in a Virtual Trading Crowd as it makes available on a
physical Trading Floor pursuant to Options 8, Section 32. Floor Brokers
will be subject to the responsibilities set forth in Options 8,
Sections 18 and 28 in a Virtual Trading Crowd, as they are on a
physical Trading Floor. Additionally, members and member organizations
participating in a Virtual Trading Crowd will be subject to the same
regulatory requirements in a Virtual Trading Crowd as they are on a
physical Trading Floor, including those set forth generally within
Options 8. Orders must be systematized and represented, and
transactions reported, in connection with a Virtual Trading Crowd in
the same manner as they are when trading on a physical Trading Floor.
The Exchange will retain records of the chats as well as consents, and
any other records related to the Virtual Trading Crowd that are subject
to the Exchange's record retention obligations under the Exchange Act.
    Pursuant to Options 3, Section 26(g)(3)(E)(8)(c), Floor Market
Maker quotes will be considered firm in the event the Floor Market
Maker is disconnected from the Virtual Trading Crowd and the parties
have a Meeting of the Minds with respect to the terms of the
transaction. A ``Meeting of the Minds'' means the contra-side(s)
verbally confirmed participation in the trade. In the event that a
Floor Market Maker is disconnected from the Virtual Trading Crowd, a
Floor Market Maker quote would not be considered firm if the quote were
provided and the parties did not have a Meeting of the Minds with
respect to the terms of the transaction. Today, Floor Market Maker
quotes are considered firm when announced in open outcry \37\ and once
accepted the transaction may be effectuated within FBMS. A Floor Market
Maker may declare he or she is ``out'' prior to a Meeting of the Minds
occurring in open outcry and the Floor Broker submitting the trade into
FBMS.\38\ Today, a Floor Market Maker that experiences issues with
internet connection,\39\ makes an error or otherwise is unaware of
recent news in a particular option, would be held to a quote verbalized
in open outcry. In the event that the negotiation continues and the
terms change, the Floor Marker Maker would not be held to the new terms
without additional acceptance of those terms. In the event that the
transaction is not effectuated in FBMS, the trade would not stand. To
that end, the Exchange believes continuing to require quotes to remain
firm once the parties have arrived at a Meeting of the Minds with
respect to the terms of the transaction is consistent with the Act as
it creates fair and equitable expectations for members trading in the
Virtual Trading Crowd as a Meeting of the Minds was arrived out between
the parties, each of whom had an opportunity to participate in the
trade.
---------------------------------------------------------------------------

    \37\ See Options 8, Section 22(c) Public Outcry--Pursuant to
Options 8, Section 35 at Supplementary Material .01, bids and offers
must be made in an audible tone of voice. A member shall be
considered ``in'' on a bid or offer, while he remains at the post,
unless he shall distinctly and audibly say ``out.'' A member bidding
and offering in immediate and rapid succession shall be deemed
``in'' until he shall say ``out'' on either bid or offer. Once the
trading crowd has provided a quote, it will remain in effect until:
(A) A reasonable amount of time has passed, or (B) there is a
significant change in the price of the underlying security, or (C)
the market given in response to the request has been improved. In
the case of a dispute, the term ``significant change'' will be
interpreted on a case-by-case basis by an Options Exchange Official
based upon the extent of the recent trading in the option and, in
the case of equity and index options, in the underlying security,
and any other relevant factors.
    \38\ Id at 25.
    \39\ The Exchange notes that today members are responsible for
the operation of their own equipment while on the Trading Floor.
---------------------------------------------------------------------------

    The audit trail for open outcry trading in a Virtual Trading Crowd
will capture the same information that it does for open outcry trading
on a physical Trading Floor. The FBMS execution checks for compliance
with priority and trade-through rules remain intact. The Exchange's
proposal only seeks to replace the open outcry negotiations with a
Virtual Trading Crowd. FBMS compliance checks were adopted to protect
investor and the general public by automated enforcement of priority
and trade-through rules. The Exchange would continue to cancel orders
that failed to meet these compliance checks, as is the case today.
These compliance checks ensure that allocation rules are complied with
and that the proposed execution would not cause Phlx to trade-through
an away market. Surveillance staff would remotely surveil transactions
in a Virtual Trading Crowd, in real-time. Specifically, there would be
an Options Floor Official present in each Virtual Trading Crowd. Nasdaq
Surveillance would conduct real-time surveillance for violations of
Phlx rules, as is the case with physical open outcry. Floor
Surveillance Procedures would be updated to account for the
conferencing and chat requirements, as well as any changes to surveil a
Virtual Trading Crowd. All surveillance patterns would be operable and
function normally. The Exchange believes that the proposed rule change
would remove impediments to and perfect the mechanism of a free and
open market and a national market system because it would promote fair
and orderly trading. The Exchange believes it will promote just and
equitable principles of trading for all open outcry trading to occur in
substantially the same manner, whether it occurs while market
participants are in the same physical setting or in remote settings
being connected through a technological solution.
    Controls and security features are proposed to ensure that the
appropriate market participants are participating in trades and to
minimize any disruptions. Nasdaq non-surveillance staff would be
responsible for the operation of the remote conferencing feature, which
includes monitoring members to ensure that only floor members and
members' employees are admitted into remote conferencing and are
properly identified. Member organizations would be required to execute
an addendum to the Nasdaq Services Agreement regarding their use of the
remote conferencing feature in addition to consenting to voice
recording.
    In addition, the Exchange believes the proposed rule change will
not be designed to permit unfair discrimination between customers,
issuers, brokers, or dealers, as all individuals authorized to act on
the physical Trading Floor (both member organizations authorized at the
time the physical Trading Floor becomes unavailable, the Back-Up
Trading Floor becomes inoperable or the Exchange otherwise determines
not to operate the Back-Up Trading Floor and any member organization
that becomes authorized

after the physical Trading Floor becomes unavailable) will be provided
with access to the Virtual Trading Crowd. Additionally, the proposed
rule change to permit the Exchange to elect a Virtual Trading Crowd if
the physical Trading Floor is unavailable will provide individuals
unable to trade on the physical Trading Floor as a result of certain
restrictions to participate in open outcry trading remotely.
    Surveillance staff will be present in each Virtual Trading Crowd to
monitor the activity of each participant, who must be present by video,
and to observe participant behavior. The Exchange will continue to
surveil options transactions, as it does today, to identify
transactions which are violative of Phlx Rules.\40\ Phlx surveils for
transactions which have been executed on its market to determine if
those transactions utilized information which would have been available
in open outcry trading and was not yet public or otherwise
ascertainable due to the execution of a transaction. The Exchange notes
that in both the electronic market and on the trading floor, members
and member organizations must ensure that they have procedures
reasonably designed to prevent the misuse of material, non-public
information by employees.\41\
---------------------------------------------------------------------------

    \40\ See Phlx Options 9, Section 1; and Options 9, Section 5.
See also Options 3, Section 22(d).
    \41\ See Phlx General 9, Section 21.
---------------------------------------------------------------------------

    The Exchange has conducted several town halls with floor members in
which the Exchange presented the functionality of the Virtual Trading
Crowd and has made the Virtual Trading Crowd available for testing so
that the Exchange will be ready to implement it if necessary. The
Exchange has received positive feedback from floor members regarding
the Virtual Trading Crowd and will continue to make updates as
necessary and appropriate in response to comments it receives to make
the Virtual Trading Crowd replicate the open outcry trading experience
on the physical Trading Floor as much as possible. The Exchange
believes this will provide the opportunity for as seamless a rollout as
possible if circumstances cause the Exchange to make the Virtual
Trading Crowd available.
    Finally, this proposal does not amend the manner in which fees or
other pricing incentives, such as caps, apply to floor participants.
Any transaction originating from open outcry on the Trading Floor is
considered a floor transaction. With offering FBMS remotely, the
Exchange has not amended the manner in which fees are assessed or
rebates are paid for purposes of Options 7 pricing to floor
participants.
Technical Amendments
    The Exchange's proposal to update citations to Options 8, Section
35 to Options 8, Section 24 are consistent with the Act as these non-
substantive amendments will ensure the rule text is accurate.

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
that the proposed rule change will impose any burden on intra-market
competition that is not necessary or appropriate in furtherance of the
purposes of the Act, as all member organizations authorized by the
Exchange, or that become authorized by the Exchange, to transact on the
Trading Floor will receive access to the Virtual Trading Crowd.
    The Exchange does not believe that the proposed rule change will
impose any burden on inter-market competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as it relates
solely to the location of open outcry trading on the Exchange. The
proposed rule change will merely permit open outcry trading that
generally occurs while market participants are located in the same
physical setting to occur while market participants are in a remote
setting, connected by a technological solution (as electronic trading
does).
    The Exchange believes that the proposed rule change will relieve
any burden on, or otherwise promote, competition. The Exchange believes
the proposed rule change will provide market participants with
continuous access to open outcry trading when the physical Trading
Floor is unavailable, the Back-Up Trading Floor becomes inoperable or
the Exchange otherwise determines not to operate the Back-Up Trading
Floor. The Exchange believes this may facilitate continued, competitive
price negotiations and trading of orders that the Exchange understands
are more difficult to execute in an all-electronic trading environment
without human interaction. Additionally, the proposed rule change will
provide customer orders represented for open outcry execution with
access to the same pool of liquidity when the Trading Floor is
unavailable to which those orders would have access when the Trading
Floor is operating in its normal state. Maintenance of this level of
liquidity at all times, even when the Trading Floor is unavailable, may
promote competition by providing these customer orders with increased
liquidity than may otherwise be available, and thus increased execution
opportunities and price discovery. Every Floor Market Maker and Floor
Broker is permitted access to FBMS.
    With respect to inter-market competition, the Exchange notes that
each options market has a business continuity plan. Because the options
markets are physically located in different regions of the United
States, the conditions under which a business continuity plan is
deployed may differ, based on regional differences. In addition, any
options exchange with a trading floor could amend its rules to adopt
similar business continuity plans that engaged similar controls.
Technical Amendments
    The Exchange's proposal to update citations to Options 8, Section
35 to Options 8, Section 24 do not impose an undue burden on
competition as these non-substantive amendments will ensure the rule
text is accurate.

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-2021-03 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-2021-03. 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-2021-03 and should be submitted on
or before February 4, 2021.
---------------------------------------------------------------------------

    \42\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\42\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-00591 Filed 1-13-21; 8:45 am]
BILLING CODE 8011-01-P