[Federal Register Volume 82, Number 135 (Monday, July 17, 2017)]
[Notices]
[Pages 32741-32743]
[FR Doc No: 2017-14886]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81116; File No. SR-Phlx-2017-48]

Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change Regarding Quote
Mitigation

July 11, 2017.
    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 June 30, 2017, 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 amend Phlx Rule 1082, regarding quote
mitigation.
    The text of the proposed rule change is available on the Exchange's
Web site at http://nasdaqphlx.cchwallstreet.com/, at the principal
office of the Exchange, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to amend Phlx Rule 1082, entitled ``Firm
Quotations,'' to specifically remove Phlx Rule 1082(a)(ii)(C)(4), which
process is not currently in effect on Phlx.
    Today, Phlx Rule 1082(a)(ii)(C) sets forth the conditions under
which Phlx disseminates updated quotations based on changes in the
Exchange's disseminated price and/or size. Phlx disseminates an updated
bid and offer price, together with the size associated with such bid
and offer, when: (1) Phlx's disseminated bid or offer price increases
or decreases; (2) the size associated with Phlx's disseminated bid or
offer decreases; or (3) the size associated with Phlx's bid (offer)
increases by an amount greater than or equal to a percentage (never to
exceed 20%) \3\ of the size associated with the previously disseminated
bid (offer); \4\ and (4) automatic executions will decrement the
disseminated size by the amount of the automatic execution.
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    \3\ Phlx has set its percentage to 10%. See http://www.nasdaqtrader.com/content/phlxmemos/2007/jan/0197-07.pdf.
    \4\ Such percentage, which would never exceed 20%, would be
determined on an issue-by-issue basis by the Exchange and announced
to membership via Exchange circular. The percentage size increase
necessary to give rise to a refreshed quote may vary from issue to
issue, depending, without limitation, on the liquidity, average
volume, and average number of quotations submitted in the issue.
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    The Exchange notes that it is removing Phlx Rule 1082(a)(ii)(C)(4)
because this functionality is not necessary today. By way of
background, the Exchange initially adopted the quote mitigation rule
text in Phlx Rule 1082(a)(ii)(C)(4) to enhance the ability of Exchange
Streaming Quote Traders (``SQTs''),\5\ Remote Streaming Quote Traders
(``RSQTs''),\6\ non-SQT ROTs,\7\ and specialists \8\ (collectively,
``Phlx XL participants'') to better manage risk by modifying the legacy
Phlx XL system \9\ such that when a trade occured [sic], the Exchange
caused the Phlx XL system to decrement the quote size by the number of
contracts traded in the affected option series on the side of the
market that has traded (i.e., bid size for sell transactions and offer
size for buy transactions). At that time, the Exchange did not
decrement quotation size in real time,\10\ rather it updated quotes and
executions separately in two applications. The Exchange would update
the quote sent to OPRA with each decrement. However with a size
increase the Exchange would only update the quote sent to OPRA if it
was beyond the 10% threshold. At this time, a Phlx XL participant, who
controlled his or her quotation size, could refresh the size (and
price) for which he or she was firm at the disseminated price. Phlx
adopted the rule because participants experienced situations where they
executed more contracts at a particular price than they intended due to
the fact that Phlx XL

did not decrement quote size in real time. The rule was intended to
ensure that the Exchange's disseminated size was decremented after each
trade automatically executed in Phlx XL. Receipt of a revised quote
from the affected Phlx XL participant would reset the price and size
for that series.\11\
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    \5\ 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. See Rule
1014(b)(ii)(A).
    \6\ An RSQT is an ROT that is a member affiliated with and RSQTO
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. See Rule 1014(b)(ii)(B).
    \7\ A non-SQT ROT is an ROT who is neither an SQT nor an RSQT.
See Rule 1014(b)(ii)(C).
    \8\ A Specialist is an Exchange member who is registered as an
options specialist pursuant to Rule 501(a). An options Specialist
includes a Remote Specialist which is defined as an options
specialist in one or more classes that does not have a physical
presence on an Exchange floor and is approved by the Exchange
pursuant to Rule 501.
    \9\ See Securities Exchange Act Release No. 58582 (September 18,
2008), 73 FR 55190 (September 24, 2008) (SR-Phlx-2008-66) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change Relating
to Quotation Size Decrementation).
    \10\ The Exchange was disseminating a size which was not
necessarily on the Exchange's book.
    \11\ See note 5, supra.
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    Phlx subsequently began operating on INET in 2009.\12\ With the
migration to INET functionality, the Exchange began to decrement
quotation size in real time. The Exchange's system considered both
updated quotes and executions within the same process in updating OPRA
when considering a decrement. Because of the manner in which the INET
system architecture decrements on INET, the language in Phlx Rule
1082(a)(ii)(C)(4) is no longer a correct representation of the function
of the quote mitigation in place on Phlx.
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    \12\ See Options Trader Alert #2009-17.
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    By way of example, presuming the Phlx quote mitigation is set to
10% and the following sequence occurs:

If Market Maker (MM)1 has a quote of 1.00 (100) x 1.10 (100)
OPRA quote disseminated--1.00 (100) x 1.10 (100)

    A new MM2 sends a quote of 1.00 (5) x 1.10 (5). Because the
quote is not increased by 10%, no new OPRA Quote is disseminated.
The new Phlx book would be 1.00 (105) x 1.10 (105) pursuant to Phlx
Rule 1082(a)(ii)(C) both before and after the system was migrated to
INET.
    Case (1): Presuming an incoming buy order of 5 contracts trades
on INET with MM1 trading a 4 lot and MM2 trading a 1 lot. If Phlx
Rule 1082(a)(ii)(C)(4) did not exist, with net disseminated size at
100, no OPRA quote update would be disseminated because the current
offer did not change as it is not over 10% and the last update
remains at 1.00 (100) x 1.10 (100). This would be the manner in
which the system would continue to work with this rule proposal. The
new Phlx book would be 1.00 (100) x 1.10 (100) pursuant to Phlx Rule
1082(a)(ii)(C)(4). This scenario would be same for any buy order of
5 contracts or less since any execution of 5 contracts or less would
not decrement the last OPRA quote size of 100 contracts.
    With Phlx Rule 1082(a)(ii)(C)(4) employed on legacy PHLX (prior
to INET), the incoming buy order of 5 contracts would cause the
disseminated size to be decremented by the amount of the automatic
execution. Since the prior OPRA quote was 1.00 (100) x 1.10 (100),
the OPRA quote update would have been disseminated at 1.00 (100) x
1.10 (95) to reflect the automatic execution of 5 contracts at 1.10.
    Case (2): Presuming an incoming buy order of 6 contracts total
trades with MM1 trading a 5 lot and MM2 trading a 1 lot, this
execution causes the net book size to be decremented from 105
contracts to 99 contracts and the OPRA quote would be disseminated
because the size associated with Phlx's disseminated offer
decreased. The new updated OPRA quote would be 1.00 (105) x 1.10
(99) which also reflects the new Phlx book of 1.00 (105) x 1.10 (99)
pursuant to Phlx Rule 1082(a)(ii)(C)(2). This scenario would be same
for any buy order of more than 5 contracts since an execution of
more than 5 contracts would cause the Phlx disseminated offer to
decrease.
    With Phlx Rule 1082(a)(ii)(C)(4) employed on the legacy Phlx
system, the OPRA quote update in Case 2 would have been disseminated
at 1.00 (100) x 1.10 (94).
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\13\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\14\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest, by continuing to reduce the number of options quotations
required to be submitted to OPRA and, therefore, mitigating the
Exchange's quote message traffic and capacity. By removing Phlx Rule
1082(a)(ii)(C)(4), the Exchange will update its rule to better describe
the current functionality and remove obsolete language. By way of
background, when the Exchange initially adopted the rule text in Phlx
Rule 1082(a)(ii)(C)(4) Phlx XL, its operating system at the time, did
not decrement quotation size in real time meaning that the Exchange's
legacy XL system did not consider both updated quotes and executions
within the same process when updating OPRA. Phlx Rule 1082(a)(ii)(C)(4)
ensured the Exchange's disseminated size was decremented after each
trade automatically executed in Phlx XL. Phlx subsequently began
operating on INET, thereby rendering Phlx Rule 1082(a)(ii)(C)(4) no
longer necessary because of the real-time features which exist on INET
which dynamically update and/or purge quotes. At the time of the
migration, the Exchange's system considered both updated quotes and
executions within the same process in updating OPRA. This represents
the current functionality today. The Exchange believes that the
amendment to the rule will provide greater clarity as to the Exchange's
plan for quote mitigation.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that deleting the provision in Phlx Rule
1082(a)(ii)(C)(4) is consistent with the Act in that it removes
impediments to and perfect the mechanism of a free and open market and
a national market system because the Exchange may have unintentionally
disseminated a size which was not necessarily on the Exchange's book.
The Exchange believes that Phlx's quote mitigation process has
successfully controlled Phlx's quote capacity. The Exchange believes
that the removal of the rule text is consistent with the Act because
the removal of this rule text will align the functionality of quote
mitigation with the language of the rule and properly update OPRA. With
the removal of the language, the Exchange's rule properly represents
its current function which decrements from a quote actually on the
Exchange's book.
    Notwithstanding the removal of this provision from the rule, the
Exchange will continue to mitigate quotes and monitor its quote
capacity, as is the case today. The Exchange believes that Phlx's quote
mitigation process has successfully controlled Phlx's quote capacity.
The Exchange believes that the removal of the rule text will not impact
the effectiveness of quote mitigation.

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 proposal will
better reflect its current quote mitigation process which applies to
all options trading on Phlx. All options exchanges have a quote
mitigation process in place in connection with their participation in
the Penny Pilot Program.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \15\ and

subparagraph (f)(6) of Rule 19b-4 thereunder.\16\
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    \15\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \16\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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    At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is: (i)
Necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission shall institute proceedings to determine whether the
proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number SR-Phlx-2017-48 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-2017-48. 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 Web site (http://www.sec.gov/rules/sro.shtml).
    Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for Web site viewing and printing in
the Commission's Public Reference Room, 100 F Street NE., Washington,
DC 20549, on official business days between the hours of 10:00 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; the Commission does not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly.
    All submissions should refer to File Number SR-Phlx-2017-48 and
should be submitted on or before August 7, 2017.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2017-14886 Filed 7-14-17; 8:45 am]
 BILLING CODE 8011-01-P