[Federal Register Volume 84, Number 207 (Friday, October 25, 2019)]
[Notices]
[Pages 57535-57538]
[FR Doc No: 2019-23255]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87369; File No. SR-Phlx-2019-45]

Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Make Permanent
Certain Options Market Rules That Are Linked to the Equity Market Plan
To Address Extraordinary Market Volatility

October 21, 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 October 18, 2019, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by the Exchange. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
---------------------------------------------------------------------------

    \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 make permanent certain options market
rules that are linked to the equity market Plan to Address
Extraordinary Market Volatility.
    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 purpose of the proposed rule change is to make permanent
certain options market rules in connection with the equity market Plan
to Address Extraordinary Market Volatility (the ``Limit Up-Limit Down
Plan'' or the ``Plan''). This change is being proposed in connection
with the recently approved amendment to the Limit Up-Limit Down Plan
that allows the Plan to continue to operate on a permanent basis
(``Amendment 18'').\3\ This proposed rule change is substantially
similar to a recently-approved rule change by Cboe Exchange, Inc.
(``Cboe'').\4\
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 85623 (April 11,
2019), 84 FR 16086 (April 17, 2019) (Order Approving Amendment No.
18).
    \4\ See Securities Exchange Act Release Nos. 86744 (August 23,
2019), 84 FR 45565 (August 29, 2019) (SR-CBOE-2019-049) (Notice of
Filing); and 87311 (October 15, 2019) (SR-CBOE-2019-049) (Notice of
Filing of Amendment No. 2 and Order Granting Accelerated Approval of
a Proposed Rule Change, as Modified by Amendment Nos. 1 and 2). The
Exchange understands that the other national securities exchanges
will also file similar proposals to make permanent their respective
pilot programs.
---------------------------------------------------------------------------

    In an attempt to address extraordinary market volatility in NMS
Stocks, and, in particular, events like the severe volatility on May 6,
2010, U.S. national securities exchanges and the Financial Industry
Regulatory Authority, Inc. (collectively, ``Participants'') drafted the
Plan pursuant to Rule 608 of Regulation NMS and under the Act.\5\ On
May 31, 2012, the Commission approved the Plan, as amended, on a one-
year pilot basis.\6\ Though the Plan was primarily designed for equity
markets, the Exchange believed it would, indirectly, potentially impact
the options markets as well. Thus, the Exchange has previously adopted
and amended Rule 1047(d) to ensure the option markets were not harmed
as a result of the Plan's implementation and has implemented such rules
on a pilot basis that has coincided with the pilot period for the Plan
(the ``Options Pilots'').\7\ Rule 1047(d) addresses the interplay of
the Exchange's rules in response to the Plan, and includes provisions
on how the Exchange will treat certain options orders during a limit or
straddle state as well as options market maker quoting obligations
during a limit or straddle state. In addition, Rule 1047(d)(v) provides
that during a limit or straddle state, electronic trades are not
subject to obvious and catastrophic error review. A limit or straddle
state occurs when at least one side of the National Best Bid (``NBB'')
or Offer (``NBO'') bid/ask is priced at a non-tradable level.
Specifically, a straddle state exists when the NBB is below the lower
price band while the NBO is inside the prices band or when the NBO is
above the upper price band and the NBB is within the band, while a
limit state occurs when the NBO equals the lower price band (without
crossing the NBB), or the NBB equals the upper price band (without
crossing the NBO). The Exchange adopted the Options Pilots to protect
investors because when an underlying security is in a limit up-limit
down state, there will not be a reliable price for the security to
serve as a benchmark for the price of the option. Specifically, the
Exchange adopted Rule 1047(d)(v) because the application of the obvious
and catastrophic error rules would be impracticable given the potential
for lack of a reliable NBBO in the options market during limit and
straddle states. When adjusting or busting a trade pursuant to the
obvious error rule, the determination of theoretical value of a trade
generally references the NBB (for erroneous sell transactions) or NBO
(for erroneous buy transactions) just prior to the trade in question,
and is therefore not reliable when at least one side of the NBBO is
priced at a non-tradeable level, as is the case in limit and straddle
states. In such a situation, determining theoretical value may often
times be a very subjective rather than an objective determination and
could give rise to additional uncertainty and confusion for investors.
As a result, application of the obvious and catastrophic error rules
would be impracticable given the lack of a reliable NBBO in the options
market during limit and straddle states, and may produce undesirable
effects or unanticipated consequences. As noted above, the Exchange
adopted additional measures via other Options Pilot rules that are
designed to protect investors during limit and straddle states.\8\ For
example, the Exchange will reject Market Orders (as defined in Options
8,

Section 32(a)) and cancel Stop Orders \9\ (as defined in Options 8,
Section 32(c)(2)) during a Limit Up-Limit Down state to ensure that
only those orders with a limit price will be executed during a limit or
straddle state given the uncertainty of market prices during such a
state. Furthermore, the Exchange believes that eliminating the
application of obvious error rules during a limit or straddle state
eliminates the re-evaluation of a transaction executed during such a
state that could potentially create an unreasonable adverse selection
opportunity due to the lack of a reliable reference price on one side
of the market or another and discourage participants from providing
liquidity during limit and straddle states, which is contrary to the
goal in limiting participants' adverse selection with the application
of the obvious error rule during normal trading states. For these
reasons, the Exchange believes the Options Pilots and related rules are
designed to add certainty on the options markets, which encourages more
investors to participate in light of the changes associated with the
Plan. The Plan was originally implemented on a pilot-basis in order to
allow the public, the participating exchanges, and the Commission to
assess the operation of the Plan and whether the Plan should be
modified prior to approval on a permanent basis. As stated, the
Exchange adopted the Option Pilots to coincide with this pilot; to
continue the protections therein while the industry gains further
experience operating the Plan.
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release No. 64547 (May 25,
2011), 76 FR 31647 (June 1, 2011) (File No. 4-631).
    \6\ See Securities and Exchange Act Release No. 67091 (May 31,
2012) 77 FR 33498 (June 6, 2012).
    \7\ See Securities Exchange Act Release Nos. 69118 (March 12,
2013), 78 FR 16723 (March 18, 2013) (SR-Phlx-2013-20); 69332 (April
5, 2013), 78 FR 22009 (April 12, 2013) (SR-Phlx-2013-21); and 69141
(March 15, 2013), 78 FR 17262 (March 20, 2013) (SR-Phlx-2013-29).
    \8\ As set forth in Rule 1047(d), this includes rules in
connection with special handling for Market Orders and Stop Orders,
and options market maker quoting obligations during a limit or
straddle state.
    \9\ The Exchange will elect Stop Orders, but, because they
become Market Orders, will then cancel them back. See Rule
1047(d)(iii). The Exchange will also make a non-substantive change
to update the cross reference to Stop Orders contained in Rule
1047(d)(iii) from Options 8, Section 32(c)(1) to Options 8, Section
32(c)(2).
---------------------------------------------------------------------------

    In connection with the order approving the establishment of the
obvious error pilot, as well as the extensions of the obvious error
pilot, the Exchange committed to submit monthly data regarding the
program and to submit an overall analysis of the obvious error pilot in
conjunction with the data submitted under the Plan and any other data
as requested by the Commission. Pursuant to a rule filing, approved on
April 8, 2014, each month, the Exchange committed to provide the
Commission, and the public, a dataset containing the data for each
straddle and limit state in optionable stocks that had at least one
trade on the Exchange.\10\ The Exchange has continued to provide the
Commission with this data on a monthly basis. For each trade on the
Exchange, the Exchange provides (a) the stock symbol, option symbol,
time at the start of the straddle or limit state, an indicator for
whether it is a straddle or limit state, and (b) for the trades on the
Exchange, the executed volume, time-weighted quoted bid-ask spread,
time-weighted average quoted depth at the bid, time-weighted average
quoted depth at the offer, high execution price, low execution price,
number of trades for which a request for review for error was received
during straddle and limit states, an indicator variable for whether
those options outlined above have a price change exceeding 30% during
the underlying stock's limit or straddle state compared to the last
available option price as reported by OPRA before the start of the
limit or straddle state. In addition, to help evaluate the impact of
the pilot program, the Exchange has provided to the Commission, and the
public, assessments relating to the impact of the operation of the
obvious error rules during limit and straddle states including: (1) An
evaluation of the statistical and economic impact of limit and straddle
states on liquidity and market quality in the options markets, and (2)
an assessment of whether the lack of obvious error rules in effect
during the straddle and limit states are problematic. The Exchange has
concluded that the Options Pilots do not negatively impact market
quality during normal market conditions,\11\ and that there has been
insufficient data to assess whether a lack of obvious error rules is
problematic, however, the Exchange believes the continuation of the
Options Pilots function to protect against any unanticipated
consequences in the options markets during a limit or straddle state
and add certainty on the options markets.
---------------------------------------------------------------------------

    \10\ See Securities Exchange Act Release No. 71901 (April 8,
2014), 79 FR 20955 (April 14, 2014) (SR-Phlx-2014-21); see also Phlx
LULD Reports, available at: https://www.nasdaq.com/solutions/options/LULD.
    \11\ See also Phlx LULD Reports, available at: https://www.nasdaq.com/solutions/options/LULD. During the most recent Review
Period the Exchange did not receive any obvious error review
requests for Limit-Up-Limit Down trades, and Limit Up-Limit Down
trade volume accounted for nominal overall trade volume.
---------------------------------------------------------------------------

    The Commission recently approved the Plan on a permanent basis
(Amendment 18).\12\ In connection with this approval, the Exchange now
proposes to amend Rule 1047(d) that currently implements provisions of
the Plan on a pilot basis to eliminate the pilot basis, which
effectiveness expires on October 18, 2019, and to make such rules
permanent. In its approval order to make the Plan permanent, the
Commission recognized that, as a result of the Participants' and
industry analysis of the Plan's operation, the Limit Up-Limit Down
mechanism effectively addresses extraordinary market volatility.
Indeed, the Plan benefits markets and market participants by helping to
ensure orderly markets, but also, the Exchange believes, based on the
data made available to the public and the Commission during the pilot
period, that the obvious error pilot does not negatively impact market
quality during normal market conditions.\13\ Rather, the Exchange
believes the obvious error pilot functions to protect against any
unanticipated consequences in the options markets during a limit or
straddle state and add certainty on the options markets. The Exchange
also believes the other Options Pilots rules provide additional
measures designed to protect investors during limit and straddle
states. For example, the Exchange will reject Market Orders and cancel
Stop Orders during a Limit Up-Limit Down state to ensure that only
those orders with a limit price will be executed during a limit or
straddle state given the uncertainty of market prices during such a
state.\14\ This removes impediments to and perfects the mechanism of a
free and open market and national market system by encouraging more
investors to participate in light of the changes associated with the
Plan. The Exchange believes that if approved on a permanent basis, the
Options Pilots would permanently provide investors with the above-
described additional certainty of market prices and mitigation of
unanticipated consequences and unreasonable adverse selection risk
during limit and straddle states.
---------------------------------------------------------------------------

    \12\ See supra note 3.
    \13\ See supra note 11.
    \14\ See supra notes 8 and 9.
---------------------------------------------------------------------------

    Since the Commission's approval of Amendment 18 allowing the Plan
to operate on a permanent basis, the Exchange and other national
securities exchanges have determined that no further amendments should
be made to the Options Pilots;\15\ the current Options Pilots
effectively address extraordinary market volatility, are reasonably
designed to comply with the requirements of the Plan, facilitate
compliance with the Plan and should now operate on a permanent basis,
consistent with the Plan. The Exchange

does not propose any substantive or additional changes to Rule 1047(d).
---------------------------------------------------------------------------

    \15\ See Securities Exchange Act Release No. 85629 (April 11,
2019), 84 FR 16068 (April 17, 2019) (SR-Phlx-2019-11).
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with
the requirements of Section 6(b) of the Act,\16\ in general, and
Section 6(b)(5) of the Act,\17\ in particular, in that it is designed
to remove impediments to and perfect the mechanism of a free and open
market and a national market system, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest and not to permit unfair discrimination between
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In particular, the Exchange believes that the proposed rule
supports the objectives of perfecting the mechanism of a free and open
market and the national market system because it promotes transparency
and uniformity across markets concerning rules for options markets
adopted to coincide with the Plan. The Exchange believes that
eliminating the pilot basis for the Options Pilots and making such
rules permanent facilitates compliance with the Plan by adding
certainty to the markets during periods of market volatility, which has
been approved and found by the Commission to be reasonably designed to
prevent potentially harmful price volatility in NMS Stocks. It has been
determined by the Commission that the Plan benefits markets and market
participants by helping to ensure orderly markets, and, based on the
data made available to the public and the Commission during the pilot
period for Rule 1047(d)(v), the Plan does not negatively impact options
market quality during normal market conditions. Rather, the Plan, as it
is implemented under the obvious error pilot, functions to protect
against any unanticipated consequences in the options markets during a
limit or straddle state and add certainty on the options markets.
During a limit or straddle state, determining theoretical value of an
option may be a subjective rather than an objective determination given
the lack of a reliable NBBO, which may create an unreasonable adverse
selection opportunity and discourage participants from providing
liquidity during limit and straddle states. Therefore, the Exchange
believes eliminating obvious error review in such states would, in
turn, eliminate uncertainty and confusion for investors and benefit
investors by encouraging more participation in light of the changes
associated with the Plan. As stated, the Exchange believes the other
Options Pilots rules provide additional measures designed to protect
investors during limit and straddle states. For example, the Exchange
will reject Market Orders and cancel Stop Orders during a Limit Up-
Limit Down state to ensure that only those orders with a limit price
will be executed during a limit or straddle state given the uncertainty
of market prices during such a state.\18\ Accordingly, the Exchange
believes that making the Options Pilots permanent will further the
goals of investor protection and fair and orderly markets as the rules
effectively address extraordinary market volatility pursuant to the
Plan.
---------------------------------------------------------------------------

    \18\ See supra notes 8 and 9.
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change would
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The proposed rule change is
necessary to reflect that the Plan no longer operates as a pilot and
has been approved to operate on a permanent basis by the Commission. As
such, Rule 1047(d), which implements protections in connection with the
Plan, should be amended to operate on a permanent basis. The Exchange
understands that the other national securities exchanges will also file
similar proposals to make permanent their respective pilot
programs.\19\ Thus, the proposed rule change will help to ensure
consistency across market centers without implicating any competitive
issues.
---------------------------------------------------------------------------

    \19\ In addition, the Exchange's proposal is substantially
similar to Cboe's recently approved rule change. See supra note 4.
---------------------------------------------------------------------------

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

    No written comments were either solicited or received.

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

    Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \20\ and Rule 19b-
4(f)(6) thereunder.\21\
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78s(b)(3)(A).
    \21\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) \22\ normally
does not become operative prior to 30 days after the date of the
filing. However, Rule 19b-4(f)(6)(iii) \23\ permits the Commission to
designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay so that the proposed
rule change may become effective and operative immediately upon filing.
The Commission believes that waiving the 30-day operative delay is
consistent with the protection of investors and the public interest, as
it will allow the current Options Pilots to continue on a permanent
basis without any changes, prior to the pilot expiration on October 18,
2019. For this reason, the Commission hereby waives the 30-day
operative delay and designates the proposed rule change as operative
upon filing.\24\
---------------------------------------------------------------------------

    \22\ 17 CFR 240.19b-4(f)(6).
    \23\ 17 CFR 240.19b-4(f)(6)(iii).
    \24\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule change should be approved or
disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number SR-Phlx-2019-45 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-2019-45. 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-2019-45 and should be submitted on
or before November 15, 2019.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
---------------------------------------------------------------------------

    \25\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-23255 Filed 10-24-19; 8:45 am]
BILLING CODE 8011-01-P