[Federal Register Volume 79, Number 211 (Friday, October 31, 2014)]
[Notices]
[Pages 64862-64872]
[FR Doc No: 2014-25890]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73441; File No. SR-Phlx-2014-66]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing of Proposed Rule Change To Adopt New Exchange Rule 1081,
Solicitation Mechanism, To Introduce a New Electronic Solicitation
Mechanism

October 27, 2014.
    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 14, 2014, NASDAQ OMX PHLX LLC (``Phlx'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I and II, below, which Items have been prepared by the Exchange.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange proposes to adopt new Exchange Rule 1081, Solicitation
Mechanism, to introduce a new electronic solicitation mechanism
pursuant to which a member can electronically submit all-or-none orders
of 500 contracts or more (or, in the case of mini options, 5000
contracts or more) the member represents as agent against contra orders
the member solicited. The Exchange is also proposing a corresponding
amendment to the definition of ``professional'' in Rule 1000(b)(14) and
a clarification to Rule 1080, Phlx XL and Phlx XL II.
    The text of the proposed rule change is available on the Exchange's
Web site at http://nasdaqomxphlx.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 proposal is to introduce an electronic
solicitation mechanism. Currently, under Phlx Rule 1080(c)(ii)(C)(2),
Order Entry Firms \3\ must expose orders they represent as agent for at
least one second before such orders may be automatically executed, in
whole or in part, against orders solicited from members and non-member
broker-dealers to transact with such orders.\4\ The proposed rule
change would provide an alternative, enabling a member to
electronically execute orders it represents on behalf of a public
customer, broker-dealer, or any other entity (an ``Agency Order'') \5\
against solicited limit orders of a public customer, broker-dealer, or
any other entity (a ``Solicited Order'') through a solicitation
mechanism designed for this purpose.\6\
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    \3\ Rule 1080(c)(ii)(A)(1) defines ``Order Entry Firm'' as a
member organization of the Exchange that is able to route orders to
AUTOM. (AUTOM is the Exchange's electronic quoting and trading
system, which has been denoted in Exchange rules as XL II, XL and
AUTOM.)
    \4\ Section (c), Solicited Orders, of Exchange Rule 1064,
Crossing, Facilitation and Solicited Orders, governs execution of
solicited orders by open outcry, on the Exchange trading floor, and
is unaffected by proposed Rule 1081. Additionally, many aspects of
the functionality of the proposed solicitation mechanism are similar
to those provided for in Rule 1080(n), PIXL, and certain of the
rules proposed herein consequently track the existing PIXL rules.
The Exchange adopted PIXL in October 2010 as a price-improvement
mechanism that is a component of the Exchange's fully automated
options trading system, Phlx XL, now known as XL II. Like the
solicitation mechanism, PIXL is a mechanism whereby an initiating
member submits a two-sided (buy and sell) order into an auction
process soliciting price improvement. See Securities Exchange Act
Release Nos. 63027 (October 1, 2010), 75 FR 62160 (October 7, 2010)
(order approving SR-Phlx-2010-108, for purposes of this proposed
rule change, the ``PIXL Filing'') and 69845 (June 25, 2013), 78 FR
39429 (July 1, 2013) (SR-Phlx-2013-46 and, for purposes of this
proposed rule change, the ``Complex PIXL Filing'') (Order Granting
Approval To Proposed Rule Change, as Modified by Amendment No. 1,
Regarding Complex Order PIXL).
    \5\ Rule 1080(b)(i)(A) provides in part that ``[f]or purposes of
Exchange options trading, an agency order is any order entered on
behalf of a public customer, and does not include any order entered
for the account of a broker-dealer, or any account in which a
broker-dealer or an associated person of a broker-dealer has any
direct or indirect interest.'' However, that provision did not
contemplate, and is not applicable to, the capitalized and defined
term ``Agency Order'' as used in proposed Rule 1081.
    \6\ To be clear, participants must ensure that their records
adequately demonstrate the solicitation of an order that is entered
into the mechanism for execution against an Agency Order as a
Solicited Order prior to entry of such order into this mechanism.
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    The new mechanism is a process by which a member (the ``Initiating
Member'') can electronically submit all-or-none orders \7\ of 500
contracts or more (or, in the case of mini options,\8\ 5000 contracts
or more) that it represents as agent against contra orders that it has
solicited, and initiate an auction (the ``Solicitation Auction'').\9\
As explained below, at the end of the Solicitation Auction, allocation
will occur with all contracts of the Agency Order trading at an
improved price against non-solicited contra-side interest or at the
stop price, defined below, against the Solicited Order. The
solicitation mechanism would accommodate both simple orders and Complex
Orders.\10\ Prior to the first time a member enters an Agency Order
into the solicitation mechanism on behalf of a customer, the member
would be required to deliver to the customer a written notification
informing the customer that its Agency Orders may be executed using the
Phlx's solicitation mechanism. Such written notification would be
required to disclose the terms

and conditions contained in Rule 1081 and to be in a form approved by
the Exchange.\11\
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    \7\ Exchange Rule 1066(c)(4) defines an ``all-or-none'' order as
a market or limit order which is to be executed in its entirety or
not at all.
    \8\ A given Solicitation Auction may be for options contracts
exclusively or for mini options contracts exclusively, but cannot be
used for a combination of both options contracts and mini options
contracts together.
    \9\ Similar electronic functionality is offered today by
competing exchanges. See Chicago Board Options Exchange (``CBOE'')
Rule 6.74B, Solicitation Auction Mechanism (the ``CBOE Mechanism''),
and International Securities Exchange (``ISE'') Rule 716(e),
Solicited Order Mechanism (the ``ISE Mechanism'').
    \10\ A Complex Order is any order involving the simultaneous
purchase and/or sale of two or more different options series in the
same underlying security, priced at a net debit or credit based on
the relative prices of the individual components, for the same
account, for the purpose of executing a particular investment
strategy. A Complex Order may also be a stock-option order, which is
an order to buy or sell a stated number of units of an underlying
stock or exchange-traded fund (``ETF'') coupled with the purchase or
sale of options contract(s). Complex Orders on Phlx are discussed in
Commentary .08 to Rule 1080.
    \11\ See Rule 1081(i)(H). The rule would require delivery of
this disclosure only prior to the first submission of an Agency
Order on behalf of a customer rather than prior to the submission of
each and every Agency Order on behalf of such customer.
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Solicitation Auction Eligibility Requirements
    All options traded on the Exchange, including mini options, are
eligible for the Solicitation Auction. Proposed Rule 1081(i) describes
the circumstances under which an Initiating Member may initiate a
Solicitation Auction.
    Proposed Rule 1081(i)(A) provides that the Agency Order and the
Solicited Order must each be limit orders for at least 500 contracts
(or, in the case of mini options, at least 5000 contracts) and be
designated as all-or-none. The orders must match in size, and their
limit prices must match or cross in price.\12\ If the orders cross in
price, the price at which the Agency Order and the Solicited Order may
be considered for submission pursuant to Rules 1081(i)(B) and (C) shall
be the limit price of the Solicited Order.\13\ The orders may not be
stop or stop limit orders, must be marked with a time in force of day,
good till cancelled or immediate or cancel, and will not be routed
regardless of routing strategy indicated on the order.\14\
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    \12\ In the case of Complex Orders, the underlying components of
both Complex Orders must also match. Additionally, all the option
legs of each Complex Order must consist entirely of options or
entirely of mini options.
    \13\ For example, assume an Agency Order to buy 1000 contracts
for $2.00 and a Solicited Order to sell 1000 contracts at $1.90 are
entered into the solicitation mechanism. Since the limits of these
orders cross in price, the Agency Order and Solicited Order are
considered to be submitted into the mechanism with a stop price
equal to the Solicited Order price of $1.90.
    \14\ Whether an order is marked with a time in force of day as
opposed to, for example, good till cancelled or immediate or cancel
is irrelevant to the manner in which they will be treated once they
are entered into the solicitation mechanism.
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    Pursuant to Rule 1081(i)(B) the Initiating Member must stop the
entire Agency Order at a price (the ``stop price'') that is equal to or
better than the National Best Bid/Offer (``NBBO'') on both sides of the
market, provided that such price must be at least $0.01 better than any
public customer non-contingent limit order on the Phlx order book and
must be equal to the Agency Order's limit price or provide the Agency
Order with a better price than its limit price. Stop prices may be
submitted in $0.01 increments, regardless of the applicable Minimum
Price Variation (the ``MPV''). Contingent orders \15\ (including all-
or-none, stop or stop-limit orders) on the book will not be considered
when checking the acceptability of the stop price. Contingent orders
are not represented as part of the Exchange Best Bid/Offer since they
may only be executed if specific conditions are met. Given these orders
are not represented as part of the Exchange Best Bid/Offer, they are
not included in the NBBO and thus not considered when checking the
acceptability of the stop price.\16\
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    \15\ A contingent order is a limit or market order to buy or
sell that is contingent upon a condition being satisfied. PIXL also
does not consider contingent orders on the book when checking the
acceptability of the stop price.
    \16\ Rule 1081(i)(B) does not apply if the Agency Order is a
Complex Order (a ``Complex Agency Order''). Rather, Rule 1081(i)(C)
applies to Complex Agency Orders and requires them to be of a
conforming ratio, as defined in Commentary.08(a)(ix) to Rule 1080. A
Complex Agency Order which is not of a conforming ratio will be
rejected. Rule 1081(i)(C) requires all component option legs of the
order to be for at least 500 contracts (or, in the case of mini
options, at least 5000 contracts). It also provides that the
Initiating Member must stop the entire Complex Agency Order at a
price that is better by at least $0.01 than the best net price
(debit or credit) (i) available on the Complex Order book regardless
of the Complex Order book size; and (ii) achievable from the best
Phlx bids and offers for the individual options (an ``improved net
price'') regardless of size, provided in either case that such price
is equal to or better than the Complex Agency Order's limit price.
Stop prices for Complex Agency Orders may be submitted in $0.01
increments, regardless of MPV, and contingent orders on the book
will not be considered when checking the acceptability of the stop
price. See proposed Rule 1081(i)(C).
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    Orders which are submitted which do not comply with the eligibility
requirements set forth in proposed Rule 1081(i)(A) through (C) will be
rejected upon receipt and ineligible to initiate a Solicitation
Auction.\17\ In addition, Agency Orders submitted at or before the
opening of trading are not eligible to initiate a Solicitation Auction
and will be rejected.\18\ Orders submitted during a specified period of
time, as determined by the Exchange and communicated to Exchange
membership on the Exchange's Web site, prior to the end of the trading
session in the affected series \19\ (including, in the case of Complex
Orders, in any series which is a component of the Complex Order) are
not eligible to initiate a Solicitation Auction and will be
rejected.\20\ Agency Orders which are not Complex Orders received while
another electronic auction (including any Solicitation Auction, PIXL
auction, or any other kind of auction) involving the same option series
is in progress are not eligible to initiate a Solicitation Auction and
will be rejected.\21\ Similarly, a Complex Agency Order received while
another auction in the same Complex Order strategy is in progress is
not eligible to initiate a Solicitation Auction and will be
rejected.\22\
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    \17\ See Rule 1081(i)(D).
    \18\ See Rule 1081(i)(E).
    \19\ The term ``series'' of options means all option contracts
of the same class having the same expiration date and exercise
price. A ``class'' of options means all option contracts of the same
``type'' of option covering the same underlying stock. A ``type'' of
option means the classification of an option contract as a put or a
call. See Rule 1000, Applicability, Definitions and References.
    \20\ See Rule 1081(i)(F).
    \21\ A similar restriction applies with respect to PIXL
auctions. See PIXL Rule 1080(n)(ii) which provides that ``[o]nly one
Auction may be conducted at a time in any given series or
strategy.''
    \22\ However, a simple Agency Order in one series that is
submitted while an electronic auction is already in process with
respect to a Complex Agency Order that includes the same series will
not be rejected. Instead, a Solicitation Auction will be initiated
for that incoming Agency Order offering each unique strategy or
individual series the same opportunity to initiate an auction. This
behavior is consistent with the handling of overlapping PIXL and
Complex PIXL auctions. See PIXL Rule 1080(n)(ii). Complex Orders
submitted during normal trading hours in a strategy which has not
yet opened under Commentary .08 of Exchange Rule 1080 will cause the
strategy to immediately open and a Solicitation Auction may be
initiated. See Rule 1081(i)(E). In addition, neither a Solicitation
Auction for a simple Agency Order or Complex Agency Order may be
initiated prior to the regular opening of all individual components
of the Solicited simple or Complex Agency Order.
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    Finally a solicited order for the account of any Exchange
specialist, streaming quote trader (``SQT''), remote streaming quote
trader (``RSQT'') or non-streaming registered options trader (``ROT'')
assigned in the affected series may not be a Solicited Order.\23\
Consistent with the explanation the Exchange made in the PIXL Filing,
the Exchange believes that in order to maintain fair and orderly
markets, a market maker assigned in an option should not be solicited
for participation in a Solicitation Auction by an Initiating

Member. The Exchange believes that market makers interested in
participating in transactions on the Exchange should do so by way of
his/her quotations, and should respond to Solicitation Auction
notifications rather than create them by having an Initiating Member
submitting Solicited Orders on the market maker's behalf.
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    \23\ See Rule 1081(i)(G). An SQT is an Exchange Registered
Options Trader (``ROT'') who has received permission from the
Exchange to generate and submit option quotations electronically
through AUTOM in eligible 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. See Exchange Rule
1014(b)(ii)(A). A RSQT is defined in Exchange Rule 1014(b)(ii)(B) as
an ROT that is a member affiliated with a Remote Streaming Quote
Trader Organization (``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. An RSQT may only submit such
quotations electronically from off the floor of the Exchange. An
RSQT may not submit option quotations in eligible options to which
such RSQT is assigned to the extent that the RSQT is also approved
as a Remote Specialist in the same options. An RSQT may only trade
in a market making capacity in classes of options in which he is
assigned or approved as a Remote Specialist. An RSQTO is a member
organization in good standing that satisfies the SQTO readiness
requirements in Rule 507(a).
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Solicitation Auction Process
    Pursuant to Rule 1081(ii)(A)(1), to begin the process the
Initiating Member must mark the Agency Order and the Solicited Order
for Solicitation Auction processing, and specify the stop price at
which it seeks to cross the Agency Order with the Solicited Order. Once
the Initiating Member has submitted an Agency Order and Solicited Order
for processing pursuant to this subparagraph, such Agency Order and
Solicited Order may not be modified or cancelled.\24\
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    \24\ For clarity, Rule 1080(ii)(A)(l) does not apply to Complex
Agency Orders. Rather, in a parallel provision, proposed Rule
1081(ii)(A)(2) provides that to initiate a Solicitation Auction in
the case of a Complex Agency Order and Complex Solicited Order (a
``Complex Solicitation Auction''), the Initiating Member must mark
the orders for Solicitation Auction processing, and specify the
price (``stop price'') at which it seeks to cross the Complex Agency
Order with the Complex Solicited Order. Once the Initiating Member
has submitted the orders for processing pursuant to this
subparagraph, they may not be modified or cancelled.
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Crossing Two Public Customer Orders Without a Solicitation Auction
    As noted above, the proposed rule change would enable a member to
electronically execute an Agency Order, which is an order it represents
on behalf of a public customer, broker-dealer, or any other entity,
against a Solicited Order, which is a solicited limit order of a public
customer, broker-dealer, or any other entity through the solicitation
mechanism.
    However, pursuant to Rule 1081(v), if a member enters an Agency
Order for the account of a public customer paired with a Solicited
Order for the account of public customer and if the paired orders
adhere to the eligibility requirements of Rule 1081(i), such paired
orders will be automatically executed without a Solicitation
Auction.\25\ The execution price for such paired public customer orders
(except if they are Complex Orders) must be expressed in the minimum
quoting increment applicable to the affected series.\26\ Such an
execution may not trade through the NBBO or at the same price as any
resting public customer order. If all-or-none orders are on the order
book in the affected series, the public customer-to-public customer
order may not be executed at a price at which the all-or-none order
would be eligible to trade based on its limit price and size. \27\
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    \25\ The eligibility requirements require the orders to each be
limit orders for at least 500 contracts (or, in the case of mini
options, at least 5000 contracts) and be designated as all-or-none.
The orders must match in size, and the limit prices must match or
cross in price. The orders may not be stop or stop limit orders,
must be marked with a time in force of day, good till cancelled or
immediate or cancel, In the case of Complex Orders, the orders must
be of a conforming ratio, and all component option legs of the order
must be for at least 500 contracts (or, in the case of mini options,
at least 5000 contracts). See Rule 1081(i). The Exchange also
accommodates the crossing of two public customer orders in PIXL. See
Rule 1080(n).
    \26\ The execution price for a Complex Order may be in $.01
increments.
    \27\ All-or-none orders can only be submitted for non-broker
dealer customers. As stated above, all-or-none orders are not
considered when checking the acceptability of the stop price of an
Agency Order.
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    In the case of a Complex Order, a public customer-to-public
customer cross may only occur at a price which improves the calculated
Phlx Best Bid/Offer or ``cPBBO'' and improves upon the net limit price
of any Complex Orders (excluding all-or-none) on the Complex Order book
in the same strategy.\28\ If all-or-none Complex Orders \29\ are on the
Complex Order book in the same strategy, the public customer-to-public
customer Complex Order may not be executed at a price at which the all-
or-none Complex Order would be eligible to trade based on its limit
price and size.
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    \28\ The term ``cPBBO'' means the best net debit or credit price
for a Complex Order Strategy based on the PBBO for the individual
options components of such Complex Order Strategy, and, where the
underlying security is a component of the Complex Order, the
National Best Bid and/or Offer for the underlying security. See Rule
1080.08(a)(iv).
    \29\ The Exchange's trading system is capable of accepting all-
or-none Complex Orders which are not, however, affirmatively
permitted to be submitted under Exchange rules. Rule 1080.08(b)(v)
provides in part that ``Complex Orders may be submitted as: All-or-
none orders--to be executed in its entirety or not at all.'' See
Securities Exchange Act Release No. 72351 (June 9, 2014), 79 FR
33977 (June 13, 2014) (SR-Phlx-2014-39). Nevertheless, all-or-none
Complex Orders may not be submitted at this time. The Exchange
anticipates that it will file a proposed rule change to provide for
the handling and execution of all-or-none Complex Orders and
thereafter permit the trading system to accept them. The instant
proposed rule change describes how the solicitation mechanism will
deal with all-or-none Complex Orders once they are permitted under
Exchange rules. Complex Agency Orders and Complex Solicited Orders
provided for herein are not Complex Orders that will require filing
of a proposed rule change in order to be submitted into the system.
Complex Agency Orders and Complex Solicited Orders, while all-or-
none in character, are unique to the solicitation mechanism and are
explicitly provided for herein.
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    The Exchange believes that permitting such executions will benefit
public customers on both sides of the crossing transaction by providing
speedy and efficient executions to public customer orders in this
circumstance while maintaining the priority of public customer interest
on the book. The proposed handling of a public customer Agency Order
paired with a public customer Solicited Order is similar to the
handling of a public customer PIXL Order paired with a public customer
Initiating Order which is submitted into the PIXL mechanism.\30\
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    \30\ See Rule 1080(n)(vi).
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Solicitation Auction Notification
    Pursuant to proposed Rule 1081(ii)(A)(3), when the Exchange
receives an order for Solicitation Auction processing, a Request for
Response with the option details (meaning, the security, strike price,
and expiration date), size and stop price, but not the side \31\ of the
Agency Order and the Solicitation Auction start time is then sent over
the PHLX Orders data feed \32\ and Specialized Quote Feed
(``SQF'').\33\ The Exchange believes that providing option details,
size, and stop price is sufficient information for participants to
determine whether to submit responses to the Solicitation Auction.\34\
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    \31\ By omitting the side in the Request for Response, the
system avoids disclosure of potentially material information that
could move the market in the event the Agency Order does not trade
at the conclusion of the Solicitation Auction. Market participants
may enter Responses on both sides of the market.
    \32\ The PHLX Orders data feed is designed to provide the real-
time status of simple and Complex Orders on the Phlx order book
directly to subscribers. This includes new orders and changes to
orders resting on the Phlx book for all Phlx listed options. PHLX
Orders also includes opening imbalance information, PIXL information
and Complex Order Live Auction (``COLA'') data.
    \33\ SQF is an interface that allows specialists and market
makers to connect and send quotes into Phlx XL and assists them in
responding to auctions and providing liquidity to the market.
    \34\ CBOE Rule 6.74B(b)(1)(B) suggests that Agency Orders
submitted to its Solicitation Auction Mechanism include the proposed
price at which an Agency Order is to be crossed with a solicited
order as well as the size of the order. The rule does not specify
that the side is to be indicated on the order. See also C2 Rule
6.52(b)(1)(B), which is similar.
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Solicitation Auction
    The Solicitation Auction process is described in proposed Rules
1081(ii)(A)(4)-(10). Following the issuance of the Request for
Response, the Solicitation Auction will last for a period of 500
milliseconds \35\ unless it is

concluded as the result of any of the circumstances described
below.\36\
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    \35\ In April/May 2014, to determine whether the proposed
Solicitation Auction timer would provide sufficient time to respond
to a Request for Response, the Exchange polled all Phlx market
makers, 20 of which responded. Of those that responded to the
survey, 15 are currently responding to auctions on Phlx or intend to
do so. 100% of those respondents indicated that their firm could
respond to auctions with a duration of at least 50 milliseconds.
Thus, the Exchange believes that the proposed Solicitation Auction
duration of 500 milliseconds would provide a meaningful opportunity
for participants on Phlx to respond to a Solicitation Auction,
whether initiated by an Agency Order or a Complex Agency Order,
while at the same time facilitating the prompt execution of orders.
The Exchange notes that both ISE and Miami International Securities
Exchange LLC (``MIAX'') rules provide for a 500 millisecond response
time. See ISE Rule 716, Supplementary Material .04 and MIAX Rule
515A(b)(2)(i)(C).
    \36\ Rule 1080(c)(ii)(C)(2), which states that Order Entry Firms
must expose orders they represent as agent for at least one second
before such orders may be automatically executed against solicited
orders, is being amended to clarify that it does not apply to Rule
1081, Solicitation Mechanism. See also Rule 1081(ii)(A)(4).
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    Any person or entity may submit Responses to the Request for
Response, provided such Response is properly marked specifying the
price, size and side of the market at which it would be willing to
participate in the execution of the Agency Order. The Exchange believes
that permitting any person or entity to submit Responses to the Request
for Response should attract Responses from all sources, maximizing the
potential for liquidity in the Solicitation Auction and thus affording
the Agency Order the best opportunity for price improvement. Responses
will not be visible to Solicitation Auction participants, and will not
be disseminated to the Options Price Reporting Authority (``OPRA''). A
Response may be for any size up to the size of the Agency Order.\37\
The minimum price increment for Responses will be $0.01. A Response
must be equal to or better than the NBBO on both sides of the market at
the time of receipt of the Response. A Response with a price that is
outside the NBBO at the time of receipt will be rejected.\38\ Multiple
Responses from the same member may be submitted at different prices on
either or both sides of the market during the Solicitation Auction.
Responses may be modified or cancelled during the Solicitation Auction.
The acceptance and handling of Responses to a Solicitation Auction is
the same as the acceptance and handling of Responses today for a PIXL
Auction.\39\
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    \37\ Responses may not be submitted with an all-or-none
contingency. (Note, however, that all-or-none orders entered and
present in the system at the end of the Solicitation Auction will be
considered for execution, as discussed below.)
    \38\ Similarly, in the case of Complex Order Responses, the
Response must be equal to or better than the cPBBO on both sides, as
defined in Commentary .08(a)(iv) of Rule 1080 at the time of receipt
of the Complex Order Response but need not improve upon the limit of
orders on the CBOOK. A Complex Order Response submitted with a price
that is outside the cPBBO at the time of receipt will be rejected.
See proposed Rule 1081(ii)(A)(9).
    \39\ See Exchange Rule 1080(n).
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Conclusion of the Solicitation Auction
    Rules 1081(ii)(B)(1)-(4) describe a number of circumstances that
will cause the Solicitation Auction to conclude. Generally, it will
conclude at the end of the Solicitation Auction period, except that it
may conclude earlier: (i) Any time the Phlx Best Bid/Offer (``PBBO'')
on the same side of the market as the Agency Order crosses the stop
price (since further price improvement will be unlikely and any
Responses offering improvement are likely to be cancelled),\40\ or (ii)
any time there is a trading halt on the Exchange in the affected series
(or, in the case of a Complex Solicitation Auction, any time there is a
trading halt on the Exchange in any component of a Complex Agency
Order).\41\
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    \40\ In the case of a Complex Solicitation Auction, it would end
any time the cPBBO or the Complex Order book, excluding all-or-none
Complex Orders, on the same side of the market as the Complex Agency
Order, crosses the stop price. See Rule 1081(ii)(B)(3).
    \41\ Trading on the Exchange in any option contract is halted
whenever trading in the underlying security has been paused or
halted by the primary listing market. See Exchange Rule 1047(e). See
also Securities Exchange Act Release No. 62269 (June 10, 2010), 75
FR 34491 (June 17, 2010) (SR-Phlx-2010-82). Any executions that
occur during any latency between the pause or halt in the underlying
security and the processing of the halt on the Exchange are
nullified pursuant to Exchange Rule 1092(c)(iv)(B).
---------------------------------------------------------------------------

    Pursuant to proposed Rule 1081(ii)(C), if the Solicitation Auction
concludes before the expiration of the Solicitation Auction period as
the result of the PBBO, cPBBO or Complex Order book (excluding all-or-
none Complex Orders) crossing the stop price as described in Rules
1081(ii)(B)(2) and 1081(ii)(B)(3), the entire Agency Order will be
executed using the allocation algorithm set forth in Rule 1081(ii)(E).
The algorithm is described below under the heading ``Order
Allocation''.
    Also pursuant to proposed Rule 1081(ii)(C), if the Solicitation
Auction concludes before the expiration of the Solicitation Auction
period as the result of a trading halt, the entire Agency Order or
Complex Agency Order will be executed solely against the Solicited
Order or Complex Solicited Order at the stop price and any unexecuted
Responses will be cancelled.\42\ Responses and other interest present
in the system will not be considered for trade against the Agency Order
in the case of a trading halt. The Exchange believes this is
appropriate since the participants representing tradable interest in
the Solicitation Auction have not `stopped' the Agency Order in its
entirety and would have no means after the auction executions occur to
offset the trading risk they would incur because the market is halted
if they were permitted to execute against the Agency Order in this
instance. However, the Solicited Order `stopped' the Agency Order when
the order was submitted into the Solicitation Auction and will
therefore execute against the Agency Order if the Solicitation Auction
concludes before the expiration of the Solicitation Auction period as
the result of a trading halt.
---------------------------------------------------------------------------

    \42\ The Exchange's PIXL auction features similar functionality.
Pursuant to Exchange Rule 1080(n)(ii)(C), in the case of a trading
halt on the Exchange in the affected series, a PIXL Order will be
executed solely against the Initiating Order at the stop price and
any unexecuted PAN responses will be cancelled.
---------------------------------------------------------------------------

    Furthermore, when Agency and Solicited Orders are submitted into
the Solicitation Auction, the stop price must be equal to or improve
the NBBO and be at least $0.01 better than any public customer non-
contingent limit orders on the Phlx order book. The Exchange believes
that public customer interest submitted to Phlx after submission of the
Agency and Solicited Orders but prior to the trading halt should not
prevent the Agency Order from being executed at the stop price since
such public customer interest was not present at the time the Agency
Order was `stopped' by the Solicited Order.
    Entry of an unrelated market or marketable limit order on the
opposite side of the market from the Agency Order received during the
Solicitation Auction will not cause the Solicitation Auction to end
early. Rather, the unrelated order will execute against interest
outside the Solicitation Auction (if marketable against the PBBO) or
will post to the book and then route if eligible for routing (in the
case of an order marketable against the NBBO but not against the PBBO),
pursuant to Rule 1081(ii)(D). If contracts remain from such unrelated
order at the time the Solicitation Auction ends, the total unexecuted
volume of such unrelated interest will be considered for participation
in the order allocation process, regardless of the number of contracts
in relation to the Solicitation Auction size, described in Rule
1081(ii)(E).\43\ The handling of unrelated

opposite side interest which is received during the Solicitation
Auction is the same as the handling of unrelated opposite side interest
which is received during a PIXL Auction.\44\ Participants submitting
such unrelated interest may not be aware that an auction is in progress
and should therefore be able to access firm quotes that comprise the
NBBO without delay. Considering such unrelated interest which remains
unexecuted upon receipt for participation in the order allocation
process described in Rule 1081(ii)(E) will increase the number of
contracts against which an Agency Order could be executed, and should
therefore create more opportunities for the Agency Order to be executed
at better prices.
---------------------------------------------------------------------------

    \43\ Similarly, pursuant to Rule 1081(ii)(D), in the case of a
Complex Solicitation Auction, an unrelated market or marketable
limit Complex Order on the opposite side of the market from the
Complex Agency Order as well as orders for the individual components
of the unrelated Complex Order received during the Complex
Solicitation Auction will not cause the Complex Solicitation Auction
to end early and will execute against interest outside of the
Complex Solicitation Auction. If contracts remain from such
unrelated Complex Order at the time the Complex Solicitation Auction
ends, the total unexecuted volume of such unrelated interest will be
considered for participation in the order allocation process,
regardless of the number of contracts in relation to the Complex
Solicitation Auction size, described in Rule 1081(ii)(E).
    \44\ See Exchange Rule 1080(n)(ii)(D).
---------------------------------------------------------------------------

Order Allocation
    The allocation of orders executed upon the conclusion of a
Solicitation Auction will depend upon whether the Solicitation Auction
has yielded sufficient improving interest to improve the price of the
entire Agency Order. As noted above, all contracts of the Agency Order
will trade at an improved price against non-solicited contra-side
interest or, in the event of insufficient improving interest to improve
the price of the entire Agency Order, at the stop price against the
Solicited Order.
    Consideration of All-or-None Interest. All-or-none interest of a
size which could potentially be executed consistent with its all-or-
none contingency is considered when determining whether there is
sufficient size to execute Agency Orders which are not Complex Agency
Orders at price(s) better than the stop price. However, pursuant to
proposed Rule 1081(ii)(E)(5), when determining if there is sufficient
size to execute Complex Agency Orders at a price(s) better than the
stop price, no all-or-none interest of any size will be considered. If
there is sufficient size to execute the entire Complex Agency Order at
a price(s) better than the stop price irrespective of any all-or-none
interest that may be present, then all-or-none interest will be
considered for trade and executed if possible. This difference in
behavior is due to a system limitation relating to all-or-none Complex
Orders.\45\ The Exchange believes this behavior is not impactful since
all-or-none Complex Orders are rare \46\ and if sufficient size exists
to execute the entire Complex Agency Order at an improved price, the
all-or-none Complex Order will be considered for trade and executed if
possible.
---------------------------------------------------------------------------

    \45\ All-or-none simple orders reside with simple orders on the
book. By contrast, all-or-none Complex Orders reside in a separate
book, in a different part of the trading system. Thus aggregation of
all-or-none Complex Orders with other Complex Orders is a more
difficult process than aggregation of all-or-none simple orders with
other simple orders.
    \46\ The Exchange reviewed six months of data which showed that
all-or-none Complex Orders represented only 0.12% of all Complex
Orders.
---------------------------------------------------------------------------

    In all Solicitation Auctions, all-or-none interest will be executed
pursuant to normal priority rules, except that it will not be executed
if the all-or-none contingency cannot be satisfied. If an execution
which can adhere to the all-or-none contingency is not possible, such
all-or-none interest will be ignored and will remain on the order book
or be cancelled if such interest is an immediate or cancel order.
    For example, assume an Agency Order to buy 1000 contracts stopped
by a Solicited Order at $2.00 is entered when the PBBO is $1.90--$2.10.
Assume that during the Solicitation Auction, Responses are received to
sell 700 contracts at $1.97 and sell 150 contracts at $1.99. In
addition, assume an order to sell 300 contracts at $1.98 with an all-
or-none contingency is received. At the end of the Solicitation
Auction, the system will consider the all-or-none order when
determining if there is sufficient size to execute the Agency Order at
a price(s) better than the stop price since the all-or-none contingency
can be satisfied by an execution. In this example, at the end of the
Solicitation Auction, the Agency Order will execute against improving
interest with 700 contracts executing at $1.97 and 300 contracts
(representing the all-or-none order) executing at $1.98. Consider a
similar scenario whereby the Responses received were to sell 700
contracts at $1.97 and sell 300 contracts at $1.99 and an all-or-none
order to sell 500 contracts at $1.98 was received. In this scenario,
the system will not consider the all-or-none order when determining if
there is sufficient size to execute the Agency Order at a price(s)
better than the stop price since the all-or-or none contingency cannot
be satisfied by an execution. However, excluding the all-or-none order,
the Agency Order can still be satisfied at a price(s) better than the
stop price. In this scenario, at the end of the Solicitation Auction,
the Agency Order will execute against improving interest with 700
contracts executing at $1.97 and 300 contracts executing at $1.99. The
500 contract all-or-none order does not execute because the all-or-none
contingency cannot be satisfied.
    Similarly, assume a Complex Agency Order to buy 1000 contracts
stopped by a Complex Solicited Order at $2.00 is entered when the cPBBO
is $1.90--$2.10. Assume that during the Solicitation Auction a Response
is received to sell 900 contracts at $1.98 and an all-or-none Complex
Order is received to sell 150 contracts at $1.99. At the end of the
Solicitation Auction involving a Complex Order, the system does not
consider all-or-none interest in determining whether it can execute the
Complex Agency Order at a better price than the stop price. In this
case, excluding the all-or-none Complex Order, only 900 contracts are
available to sell at a better price than the stop price. Therefore the
Complex Agency Order would trade against the Solicited Order at the
$2.00 stop price. The all-or-none contracts would not be included
because although more than 1000 contracts are offered at a better price
than the $2.00 stop price, the system cannot both trade best prices
first and adhere to the contingency of the all-or-none order while
ensuring that the Agency Order trades 1000 contracts. If however, the
example is changed and Responses are received to sell 900 contracts at
$1.98 and sell 100 contracts at $1.99 and an order to sell 100
contracts at $1.98 all-or-none is received, at the end of the
Solicitation Auction involving this Complex Order, there is enough
interest which is not all-or-none to satisfy the Complex Agency Order
at a better price than the $2.00 stop price. Therefore the Agency Order
would be executed against the 900 lot at $1.98 and the remaining 100
contracts executed against the all-or-none Complex Order at $1.98.
    Solicitation Auction with Sufficient Improving Interest. Pursuant
to the Rule 1081(ii)(E)(1) algorithm, if there is sufficient size
(considering all resting orders, quotes and Responses) to execute the
entire Agency Order at a price or prices better than the stop price,
the Agency Order will be executed against such better priced interest
with public customers having priority at each price level. After public
customer interest at a particular price level has been satisfied,
including all-or-none orders with a size which can be satisfied,
remaining contracts will be allocated among all Exchange quotes, orders
and Responses in accordance with Exchange Rules

1014(g)(vii)(B)(1)(b) and (d), and the Solicited Order will be
cancelled.\47\
---------------------------------------------------------------------------

    \47\ Similarly, pursuant to Rule 1081(ii)(E)(3), in the case of
a Complex Solicitation Auction, if there is sufficient size
(considering resting Complex Orders and Responses) to execute the
entire Complex Agency Order at a price(s) better than the stop
price, the Complex Agency Order will be executed against better
priced Complex Orders, Responses, as well as quotes and orders which
comprise the cPBBO at the end of the Complex Solicitation Auction.
(The cPBBO is not considered in determining whether there is
sufficient improving size because the market and/or size of the
individual components can change between the calculation of
sufficient size and the actual execution.) Such interest will be
allocated at a given price in the following order: (i) to public
customer Complex Orders and Responses in time priority; (ii) to SQT,
RSQT, and non-SQT ROT Complex Orders and Responses on a size pro-
rata basis; (iii) to non-market maker off-floor broker-dealer
Complex Orders and Responses on a size pro-rata basis, and (iv) to
quotes and orders which comprise the cPBBO at the end of the Complex
Solicitation Auction with public customer interest being satisfied
first in time priority, then to SQT, RSQT, and non-SQT ROT interest
satisfied on a size pro-rata basis, and lastly to non-market maker
off-floor broker-dealers on a size pro-rata basis. This allocation
methodology is consistent with the allocation methodology utilized
for a Complex Order executed in PIXL. In addition, providing public
customer's with priority over SQT, RSQT, and non-SQT ROTs, who in
turn have priority over non-market maker off-floor broker-dealers is
the same priority scheme used for regular orders. See Exchange Rule
1014(g).
     When determining if there is sufficient size to execute the
entire Complex Agency Order at a price(s) better than the stop
price, if the short sale price test in Rule 201 of Regulation SHO is
triggered for a covered security, Complex Orders and Responses which
are marked ``short'' will not be considered because of the
possibility that a short sale price restriction may apply during the
interval between assessing for adequate size and the execution of
the Complex Agency Order. However, if there is sufficient size to
execute the entire Complex Agency Order at a price(s) better than
the stop price irrespective of any covered securities for which the
price test is triggered that may be present, then all Complex Orders
and Responses which are marked ``short'' will be considered for
allocation in accordance with Rule 1081(ii)(J)(3).
---------------------------------------------------------------------------

    Example of Solicitation Auction with Sufficient Improving Interest.
To illustrate a case where a Solicitation Auction yields enough
improving interest to better the stop price and the application of the
Rule 1081(ii)(E)(1) algorithm, assume the NBBO is $0.95--$1.03, and a
buy side Agency Order for 1000 contracts is submitted with a contra-
side Solicited Order to stop the Agency Order at $1.00. During the
Solicitation Auction, assume a market maker (``MM1'') Response is
submitted to sell 800 contracts at $0.97, a broker-dealer Response is
submitted to sell 100 contracts at $0.99, and a public customer sends
in an order, outside of the Solicitation Auction, to sell 100 contracts
at $0.99. Upon receipt of the public customer order, the NBBO changes
to $0.95--$0.99. In addition, assume two market makers send in quotes
of $0.95--$0.99 during the Solicitation Auction. Market Maker 2
(``MM2'') quotes $0.95--$0.99 with 100 contracts and Market Maker 3
(``MM3'') quotes $0.95--$0.99 with 50 contracts. At the end of the
Solicitation Auction, since there is enough interest to execute the
entire Agency Order at a price(s) better than the stop price, the
Agency Order will be executed against the better priced interest as
follows:
    -- the Agency Order trades 800 contracts at $0.97 against MM1
Response;
    -- the Agency Order trades 100 contracts at $0.99 against public
customer;
    -- the Agency Order trades 67 contracts at $0.99 against MM2 quote
(pro-rata allocation); and
    -- the Agency Order trades 33 contracts at $0.99 against MM3 quote
(pro-rata allocation).
    The broker-dealer does not trade any contracts since broker-dealer
orders execute only after all public customer and market maker interest
is satisfied. The unexecuted Solicited Order and broker-dealer Response
are cancelled back to the sending participants.\48\
---------------------------------------------------------------------------

    \48\ To illustrate a Complex Solicitation Auction with enough
improving interest and the operation of Rule 1081(ii)(E)(3), assume
that a Complex Order to buy one of option A and sell one of option
B, 1000 times, with a cPBBO of $0.40 bid, $0.70 offer, is submitted
with a stop price of $0.65. Assume that during the Solicitation
Auction, the following Responses and order interest are received: a
market maker (``MM1'') responds to sell the strategy 100 times at a
price of $0.55; MM1 responds to sell the strategy 100 times at a
price of $0.60; a broker-dealer responds to sell the strategy 400
times at a price of $0.60; a public customer Complex Order to sell
the strategy 300 times at a price of $0.60; and another market maker
(``MM2'') responds to sell the strategy 200 times at $0.60.
    After all these Responses and orders are received, option A of
the simple market moves causing the cPBBO to become offered 200
times at $0.60. Option A is quoted in the simple market as $1.00--
$1.10 and Option B is quoted in the simple market as $0.50--$0.60.
At the end of the Solicitation Auction, the Complex Agency Order
will be executed as follows: the Complex Agency Order trades 100
contracts at $0.55 against MM1; the Complex Agency Order trades 300
contracts at $0.60 against public customer; the Complex Agency Order
trades 100 contracts at $0.60 against MM1; the Complex Agency Order
trades 200 contracts at $0.60 against MM2; the Complex Agency Order
trades 300 contracts at $0.60 against the broker-dealer; and the
Solicited Order and the residual unexecuted contracts of the broker-
dealer Response are cancelled.
---------------------------------------------------------------------------

    Solicitation Auction with Insufficient Improving Interest. Pursuant
to proposed Rule 1081(ii)(E)(2), if there is not sufficient size
(considering all resting orders, quotes and Responses) to execute the
entire Agency Order at a price(s) better than the stop price, the
Agency Order will be executed against the Solicited Order at the stop
price provided such price is better than the limit of any public
customer order (excluding all-or-none) on the limit order book, on
either the same side as or the opposite side of the Agency Order, and
equal to or better than the contra-side PBBO.\49\ Otherwise, both the
Agency Order and Solicited Order will be cancelled without a trade
occurring. This proposed behavior ensures non-contingent public
customer orders on the limit order book maintain priority. While the
Exchange recognizes that at least one other solicitation mechanism
offered by another exchange considers public customer orders on the
limit order book at the stop price when determining if there is
sufficient improving interest to satisfy the Agency Order, the proposed
solicitation mechanism offered on Phlx will not consider such
interest.\50\ The Exchange believes that requiring the stop price to be
at least $0.01 better than any public customer interest on the limit
order book ensures public customer priority of existing interest and in
turn provides the Solicited Order participant certainty that if an
execution occurs at the stop price, such execution will represent the
Solicited Order and not interest which arrived after the Solicited
Order participant stopped the Agency Order for its entire size.
---------------------------------------------------------------------------

    \49\ Rule 1081(ii)(E)(2) does not apply to Complex Solicitation
Auctions. Rather, a parallel provision, Rule 1081(ii)(E)(4),
provides that in a Complex Solicitation Auction, if there is not
sufficient size (considering resting Complex Orders and Responses)
to execute the entire Complex Agency Order at a price(s) better than
the stop price, the Complex Agency Order will be executed against
the Solicited Order at the stop price, provided such stop price is
better than the limit of any public customer Complex Order
(excluding all-or-none) on the Complex Order book, better than the
cPBBO when a public customer order (excluding all or none) is
resting on the book in any component of the Complex Agency Order,
and equal to or better than the cPBBO on the opposite side of the
Complex Agency Order. This proposed behavior ensures non-contingent
public customers on the limit order book maintain priority.
Otherwise, both the Complex Agency Order and the Solicited Order
will be cancelled with no trade occurring.
    \50\ See ISE Rule 716(e)(1) [sic] which provides in part that in
the case of insufficient improving interest ``[i]f there are
Priority Customer Orders on the Exchange on the opposite side of the
Agency Order at the proposed execution price and there is sufficient
size to execute the entire size of the Agency Order, the Agency
Order will be executed against the bid or offer, and the solicited
order will be cancelled.''
---------------------------------------------------------------------------

    Example of Solicitation Auction with Insufficient Improving
Interest. To illustrate a case where the Solicitation Auction has not
yielded sufficient interest to improve the price for the entire Agency
Order, assume the NBBO is $0.97--$1.03, and a buy side Agency Order for
1000 contracts is submitted with a contra-side Solicited Order to stop
the Agency Order at $1.00. During the Solicitation Auction, assume a

Response is submitted to sell 100 contracts at $0.97 and another to
sell 100 contracts at $0.99. At the end of the Solicitation Auction
period, since there is not enough interest to execute the entire Agency
Order at a price(s) better than the stop price, the Agency Order will
be executed at $1.00 against the Solicited Order. The unexecuted
Responses are then cancelled back to the sending participant. \51\
---------------------------------------------------------------------------

    \51\ To illustrate a Complex Solicitation Auction that yields
insufficient improving interest and the operation of Rule
1081(ii)(E)(4), assume a Complex Order to buy one of option A and
sell one of option B, 1000 times, with a cPBBO of $0.40 bid, $0.70
offer, is submitted with a stop price of $0.65. Assume that during
the Complex Solicitation Auction, the following Responses and order
interest are received: a market maker (``MM1'') responds to sell the
strategy 100 times at a price of $0.55; MM1 responds to sell the
strategy 100 times at a price of $0.60; a broker-dealer responds to
sell the strategy 300 times at a price of $0.60; and another market
maker (``MM2'') responds to sell the strategy 200 times at $0.60.
    At the end of the Complex Solicitation Auction, since there is
not sufficient size to execute the entire Complex Agency Order at a
price(s) better than the stop price, the Complex Agency Order
executes at the stop price of $0.65 against the Solicited Order. All
unexecuted Responses are cancelled back to the sending participants.
---------------------------------------------------------------------------

    Proposed Rule 1081(ii)(E)(6) provides that a single quote, order or
Response shall not be allocated a number of contracts that is greater
than its size.
    Finally, Rule 1081(ii)(E)(7) provides that a Complex Agency Order
consisting of a stock/ETF component will not execute against interest
comprising the cPBBO at the end of the Complex Solicitation
Auction.\52\ Legging of a stock/ETF component would introduce the risk
of a participant not receiving an execution on all components of the
Complex Order and is therefore not considered as a means of executing a
Complex Order which includes a stock/ETF component. The Exchange
believes that introducing the risk of inability to fully execute a
complex strategy is counterproductive to, and inconsistent with, the
effort to allow Complex Orders in the solicitation mechanism.
---------------------------------------------------------------------------

    \52\ This provision parallels PIXL Rule 1080(n)(ii)(E)(2)(g) and
is being proposed for the same reasons explained in the Complex PIXL
Filing. This limitation is also consistent with the handling of
Complex Orders that include a stock/ETF component and are entered
into the Phlx XL system. Commentary .08(a)(i) to Rule 1080 states,
for example, that stock-option orders can only be executed against
other stock-option orders and cannot be executed by the System
against orders for the individual components.
---------------------------------------------------------------------------

Miscellaneous Provisions
    Proposed Rules 1081(ii)(F) through (I) address the handling of the
Agency Order and other orders, quotes and Responses when certain
conditions are present. Pursuant to Rule 1081(ii)(F), if the market
moves following the receipt of a Response, such that there are
Responses that cross the then-existing NBBO (provided such NBBO is not
crossed) at the time of the conclusion of the Solicitation Auction,
such Responses will be executed, if possible, at their limit
price(s).\53\ Since Responses may be cancelled at any time prior to the
conclusion of the Solicitation Auction, the Exchange believes that this
behavior is, at best, highly unlikely as participants will cancel
Responses when better priced interest that they could trade against is
present in the marketplace. This behavior is consistent with the
current handling of PAN Responses in a PIXL Auction.
---------------------------------------------------------------------------

    \53\ Similarly, in the case of a Complex Solicitation Auction,
if there are Responses that cross the then-existing cPBBO at the
time of conclusion of the Complex Solicitation Auction, such
Responses will be executed, if possible, at their limit prices. This
provision parallels PIXL Rule 1080(n)(ii)(F).
---------------------------------------------------------------------------

    Rule 1081(ii)(G) provides that if the Solicitation Auction price
when trading against non-solicited interest (except if it is a Complex
Solicitation Auction) would be the same as or cross the limit of an
order (excluding an all-or-none order) on the limit order book on the
same side of the market as the Agency Order, the Agency Order may only
be executed at a price that is at least $0.01 better than the resting
order's limit price provided such execution price improves the stop
price. If such execution price would not improve the stop price, the
Agency Order will be executed at a price which is $0.01 better for the
Agency Order than the stop price provided the price does not equal or
cross a public customer order and is equal to or improves upon the PBBO
on the opposite side of the Agency Order.\54\ If such price is not
possible, the Agency Order and Solicited Order will be cancelled with
no trade occurring. For example, assume the NBBO is $1.03-$1.10 when an
order is submitted into the Solicitation Auction, that the Agency Order
is buying and that the order is stopped at $1.05. The $1.03 bid is an
order on Phlx. During the Solicitation Auction a Response arrives to
sell at $1.03. At the end of the Solicitation Auction, if the Response
to sell at $1.03 can fully satisfy the Agency Order, the auction price
would be $1.03 but, since that price is the same as the price of a
resting order on the book, the Agency Order will trade against the
Response at $1.04 (an improvement of $0.01 over the resting order's
limit). By contrast, assume a case where the NBBO is $1.03-$1.10 and
where during the Auction an unrelated noncustomer order to pay $1.04 is
received. This order rests on the book and the NBBO becomes $1.04-
$1.10. Assume the same stop price of $1.05 for an Agency Order to buy,
and the receipt of a Response to sell at $1.04 which can fully satisfy
the Agency order. At the end of the Solicitation Auction, the auction
price would be $1.04 which equals the resting order on the book. In
this case, if the trade were executed with $0.01 improvement over the
resting order limit (that is, if the trade were executed at $1.05) the
execution would be at the stop price. The system does not consider the
origin of the resting order but ensures the priority of such order,
regardless of origin by requiring that any execution occur at a price
which improves upon the limit of a resting order by at least $0.01. In
addition, the system only permits the Solicited Order and no other
interest to trade against the Agency Order at the stop price since the
Solicited Order stopped the entire size Agency Order at a price which
was required upon receipt to be equal to or improve the NBBO and to be
at least $0.01 improvement over any public customer orders resting on
the Phlx limit order book, thereby establishing priority at the stop
price. Therefore the execution price in this case ($1.04) will be $0.01
better than the stop price. This system logic ensures that the Agency
Order receives a better priced execution than the stop price when
trading against interest other than the Solicited Order.
---------------------------------------------------------------------------

    \54\ See also PIXL Rule 1080(n)(ii)(H). Proposed Rule
1081(ii)(G) does not apply to Complex Solicitation Auctions. Rather,
a parallel provision, Rule 1081(ii)(H), provides that if the Complex
Solicitation Auction price when trading against non-solicited
interest would be the same as or cross the limit of that of a
Complex Order (excluding all-or-none) on the Complex Order Book on
the same side of the market as the Complex Agency Order, the Complex
Agency Order may only be executed at a price that improves the
resting order's limit price by at least $0.01, provided such
execution price improves the stop price. If such execution price
would be equal to or would not improve the stop price, the Agency
Order will be executed $0.01 better than the stop price provided the
price does not equal or cross a non-all-or-none public customer
Complex Order or a non-all-or-none public customer order present in
the cPBBO on the same side as the Complex Agency Order in a
component of the Complex Order Strategy and is equal to or better
than the cPBBO on the opposite side of the Complex Agency Order. If
such price is not possible, the Agency Order and Solicited Order
will be cancelled with no trade occurring. This functionality is
consistent with that of Complex PIXL auctions.
---------------------------------------------------------------------------

    Rule 1081(ii)(I) provides that any unexecuted Responses or
Solicited Orders will be cancelled at the end of the Solicitation
Auction. This behavior is consistent with the handling of unexecuted
PAN Responses and Initiating Orders in PIXL.\55\ Both Responses and
Solicited Orders are specifically entered into the Solicitation Auction
to trade against the Agency

Order. The Exchange believes that cancelling the unexecuted portion of
Responses and Solicited Orders is consistent with the expected behavior
of such interest by the submitting participants.
---------------------------------------------------------------------------

    \55\ See Exchange Rule 1080(n)(ii)(I).
---------------------------------------------------------------------------

Complex Agency Orders With Stock/ETF Components
    Rule 1081(ii)(J) deals with Complex Agency Orders with stock or ETF
components and generally tracks Rule 1080(n)(ii)(J) applicable to PIXL.
Rule 1081(ii)(J)(1) states that member organizations may only submit
Complex Agency Orders, Complex Solicited Orders, Complex Orders and/or
Responses with a stock/ETF component if such orders/Responses comply
with the Qualified Contingent Trade Exemption from Rule 611(a) of
Regulation NMS pursuant to the Act. Member organizations submitting
such orders with a stock/ETF component represent that such orders
comply with the Qualified Contingent Trade Exemption. Members of FINRA
or the NASDAQ Stock Market (``NASDAQ'') are required to have a Uniform
Service Bureau/Executing Broker Agreement (``AGU'') with Nasdaq
Execution Services LLC (``NES'') in order to trade orders containing a
stock/ETF component; firms that are not members of FINRA or NASDAQ are
required to have a Qualified Special Representative (``QSR'')
arrangement with NES in order to trade orders containing a stock/ETF
component.
    New Rule 1081(ii)(J)(2) provides that where one component of a
Complex Agency Order, Complex Solicited Order, Complex Order or
Response is the underlying security, the Exchange shall electronically
communicate the underlying security component of the Complex Agency
Order (together with the Complex Solicited Order or Response, as
applicable) to NES, its designated broker-dealer, for immediate
execution.
    Such execution and reporting will occur otherwise than on the
Exchange and will be handled by NES pursuant to applicable rules
regarding equity trading.
    Finally, new Rule 1081(ii)(J)(3) states that when the short sale
price test in Rule 201 of Regulation SHO \56\ is triggered for a
covered security, NES will not execute a short sale order in the
underlying covered security component of a Complex Agency Order,
Complex Solicited Order, Complex Order or Response if the price is
equal to or below the current national best bid.\57\ However, NES will
execute a short sale order in the underlying covered security component
of a Complex Agency Order, Complex Solicited Order, Complex Order or
Response if such order is marked ``short exempt,'' regardless of
whether it is at a price that is equal to or below the current national
best bid.\58\ If NES cannot execute the underlying covered security
component of a Complex Agency Order, Complex Solicited Order, Complex
Order or Response in accordance with Rule 201 of Regulation SHO, the
Exchange will cancel back the Complex Agency Order, Complex Solicited
Order, Complex Order or Response to the entering member organization.
For purposes of this paragraph, the term ``covered security'' has the
same meaning as in Rule 201(a)(1) of Regulation SHO.\59\
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    \56\ 17 CFR 242.201. See Securities Exchange Act Release No.
61595 (February 26, 2010), 75 FR 11232 (March 10, 2010). See also
Division of Trading and Markets: Responses to Frequently Asked
Questions Concerning Rule 201 of Regulation SHO, January 20, 2011
(``SHO FAQs'') at www.sec.gov/divisions/marketreg/mrfaqregsho1204.htm.
    \57\ The term ``national best bid'' is defined in SEC Rule
201(a)(4). 17 CFR 242.201(a)(4).
    \58\ The Exchange notes that a broker or dealer may mark a sell
order ``short exempt'' only if the provisions of SEC Rule 201(c) or
(d) are met. 17 CFR 242.200(g)(2). Since NES and the Exchange do not
display the stock or ETF portion of a Complex Order, however, a
broker-dealer should not mark the short sale order ``short exempt''
under Rule 201(c). See SHO FAQs Question and Answer Nos. 4.2, 5.4,
and 5.5. See also Securities Exchange Act Release No. 63967
(February 25, 2011), 76 FR 12206 (March 4, 2011) (SR-Phlx-2011-27)
(discussing, among other things, Complex Orders marked ``short
exempt'') and the Complex PIXL Filing. The system will handle short
sales of the orders and Responses described herein the same way it
handles the short sales discussed in the Complex PIXL Filing.
    \59\ 17 CFR 242.201(a)(4).
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Regulatory Issues
    The proposed rule change contains two paragraphs describing
prohibited practices when participants use the solicitation mechanism.
These new provisions track similar provisions in the PIXL rule.\60\
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    \60\ See Rules 1080(n)(iii) and (iv).
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    Proposed Rule 1081(iii) states that the Solicitation Auction may be
used only where there is a genuine intention to execute a bona fide
transaction. It will be considered a violation of Rule 1081 and will be
deemed conduct inconsistent with just and equitable principles of trade
and a violation of Exchange Rule 707 if an Initiating Member submits an
Agency Order (thereby initiating a Solicitation Auction) and also
submits its own Response in the same Solicitation Auction. The purpose
of this provision is to prevent Solicited Members from submitting an
inaccurate or misleading stop price or trying to improve their
allocation entitlement by participating with multiple expressions of
interest.
    Proposed Rule 1081(iv) states that a pattern or practice of
submitting unrelated orders or quotes that cross the stop price causing
a Solicitation Auction to conclude before the end of the Solicitation
Auction period will be deemed conduct inconsistent with just and
equitable principles of trade and a violation of Rule 707.
Definition of Professional in Rule 1000(b)(14)
    In addition to adopting Rule 1081, the Exchange is amending Rule
1000(b)(14). In 2010 the Exchange amended its priority rules to give
certain non-broker-dealer orders the same priority as broker-dealer
orders. In so doing, the Exchange adopted a new defined term, the
``professional,'' for certain persons or entities.\61\ Rule 1000(b)(14)
defines professional as a person or entity that (i) is not a broker or
dealer in securities, and (ii) places more than 390 orders in listed
options per day on average during a calendar month for its own
beneficial account(s). A professional account is treated in the same
manner as an off-floor broker-dealer for purposes of Phlx Rule 1014(g),
to which the trade allocation algorithm described in proposed Rule
1081(ii)(E)(1) refers. However, Rule 1000(b)(14) also currently states
that all-or-none professional orders will be treated like customer
orders. The Exchange proposes to amend Rule 1000(b)(14) by (i)
specifying that orders submitted pursuant to Rule 1081 for the accounts
of professionals will be treated in the same manner as off-floor
broker-dealer orders for purposes of Rule 1014(g), and (ii) adding
proposed Rule 1081 to the list of rules for the purpose of which a
professional will be treated in the same manner as an off-floor broker-
dealer. The effect of these changes to Rule 1014(b)(14) [sic] is that
professionals will not receive the same priority afforded to public
customers in a Solicitation Auction under new Rule 1081, and instead
will be treated as broker-dealers in this regard.
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    \61\ See Securities Exchange Act Release No. 61802 (March 30,
2010), 75 FR 17193 (April 5, 2010) (approving SR-Phlx-2010-05).
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Deployment
    The Exchange anticipates that it will deploy the solicitation
mechanism within 30 days of the Commission's approval of this proposed
rule change. Members will be notified of the deployment date by an
Options Trader Alert posted on the Exchange's Web site.

2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section
6(b) of the Act \62\ in general, and furthers the objectives of Section
6(b)(5) of the Act \63\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest by providing new functionality that offers the potential for
price improvement. Specifically, the new functionality may lead to an
increase in Exchange volume and should allow the Exchange to better
compete against other markets that already offer an electronic
solicitation mechanism, while providing an opportunity for price
improvement for Agency Orders.
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    \62\ 15 U.S.C. 78f(b).
    \63\ 15 U.S.C. 78f(b)(5).
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    As discussed below, the proposed solicitation mechanism on Phlx is
similar in relevant respects to solicitation mechanisms on other
exchanges. The Commission previously has found such mechanisms
consistent with the Act, stating that they should allow for greater
flexibility in pricing large-sized orders and may provide a greater
opportunity for price improvement.\64\ The Exchange believes that its
proposal will allow the Exchange to better compete for solicited
transactions, while providing an opportunity for price improvement for
Agency Orders and assuring that public customers on the book are
protected. The new solicitation mechanism should promote and foster
competition and provide more options contracts with the opportunity for
price improvement, which should benefit market participants, investors,
and traders.
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    \64\ See Securities Exchange Act Release Nos. 49141 (January 28,
2004), 69 FR 5625 (February 5, 2004) (SR-ISE-2001-22) (approval of
ISE Solicited Order Mechanism); and 57610 (April 3, 2008), 73 FR
19535 (April 10, 2008) (SR-CBOE-2008-14) (approval of CBOE
Solicitation Auction Mechanism).
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    Section 11(a)(1) of the Act \65\ prohibits a member of a national
securities exchange from effecting transactions on that exchange for
its own account, the account of an associated person, or an account
over which it or its associated person exercises discretion
(collectively, ``covered accounts'') unless an exception applies. Rule
11a2-2(T) under the Act,\66\ known as the ``effect versus execute''
rule, provides exchange members with an exemption from the Section
11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member,
subject to certain conditions, to effect transactions for covered
accounts by arranging for an unaffiliated member to execute
transactions on the exchange. To comply with Rule 11a2-2(T)'s
conditions, a member: (i) Must transmit the order from off the exchange
floor; (ii) may not participate in the execution of the transaction
once it has been transmitted to the member performing the execution;
\67\ (iii) may not be affiliated with the executing member; and (iv)
with respect to an account over which the member has investment
discretion, neither the member nor its associated person may retain any
compensation in connection with effecting the transaction except as
provided in the Rule. The Exchange believes that this proposed rule
change is consistent with Section 11(a)(1) of the Act and the
Commission's regulations thereunder.
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    \65\ 15 U.S.C. 78k(a)(1).
    \66\ 17 CFR 240.11a2-2(T).
    \67\ The member may, however, participate in clearing and
settling the transaction.
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    The Rule's first condition is that orders for covered accounts be
transmitted from off the exchange floor. In the context of automated
trading systems, the Commission has found that the off-floor
transmission requirement is met if a covered account order is
transmitted from a remote location directly to an exchange's floor by
electronic means.\68\ Only specialists and on-floor SQTs \69\ have the
ability to submit orders into the solicitation mechanism from on the
floor of the Exchange. These members, however, would be subject to the
``market maker'' exception to Section 11(a) of the Act and Rule 11a2-
2(T)(a)(1) thereunder.\70\ RSQTs may only submit orders into the
solicitation mechanism from off the floor of the Exchange.\71\ While
Floor Brokers have the ability to submit orders they represent as agent
to the electronic limit order book through the Exchange's Options Floor
Broker Management System (``FBMS''), there is no mechanism by which
such Floor Brokers can directly submit orders to the solicitation
mechanism or send orders to off-floor broker-dealers through FBMS for
indirect submission into the solicitation mechanism.\72\ Because no
Exchange members, other than specialists and SQTs, may submit orders
into the solicitation mechanism from on the floor of the Exchange, the
Exchange believes that the solicitation mechanism satisfies the off-
floor transmission requirement.
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    \68\ See, e.g., Securities Exchange Act Release Nos. 61419
(January 26, 2010), 75 FR 5157 (February 1, 2010) (SR-BATS-2009-031)
(approving BATS options trading); 59154 (December 23, 2008), 73 FR
80468 (December 31, 2008) (SR-BSE-2008-48) (approving equity
securities listing and trading on BSE); 57478 (March 12, 2008), 73
FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-
080) (approving NOM options trading); 53128 (January 13, 2006), 71
FR 3550 (January 23, 2006) (File No. 10-131) (approving The Nasdaq
Stock Market LLC); 44983 (October 25, 2001), 66 FR 55225 (November
1, 2001) (SR-PCX-00-25) (approving Archipelago Exchange); 29237 (May
24, 1991), 56 FR 24853 (May 31, 1991) (SR-NYSE-90-52 and SR-NYSE-90-
53) (approving NYSE's Off-Hours Trading Facility); and 15533
(January 29, 1979), 44 FR 6084 (January 31, 1979) (``1979
Release'').
    \69\ As discussed above, an SQT is an Exchange Registered
Options Trader (``ROT'') who has received permission from the
Exchange to generate and submit option quotations electronically
through AUTOM in eligible 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. See Exchange Rule
1014(b)(ii)(A).
    \70\ See 15 U.S.C. Section 78k(a)(1)(A); 17 CFR 240.11a2-
2(T)(a)(1). There are no other on-floor members, other than Exchange
specialists and SQTs, who have the ability to submit orders into the
Solicitation Auction.
    \71\ As discussed above, an RSQT is defined in Exchange Rule
1014(b)(ii)(B) as an ROT that is a member affiliated with a Remote
Streaming Quote Trader Organization (``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. An RSQT may only
submit such quotations electronically from off the floor of the
Exchange. An RSQT may not submit option quotations in eligible
options to which such RSQT is assigned to the extent that the RSQT
is also approved as a Remote Specialist in the same options. An RSQT
may only trade in a market making capacity in classes of options in
which he is assigned or approved as a Remote Specialist. An RSQTO is
a member organization in good standing that satisfies the SQTO
readiness requirements in Rule 507(a). While RSQTs may only submit
orders into the Auction from off the Exchange floor, RSQTs also
would be subject to the ``market maker'' exception to Section 11(a)
of the Act and Rule 11a2-2(T)(a)(1) thereunder.
    \72\ Because FBMS does not have the coding required to enter
orders into the Solicitation Auction, it is impossible for such
Floor Brokers to submit orders into the Solicitation Auction.
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    Second, the Rule requires that the member not participate in the
execution of its order. At no time following the submission of an order
is a member organization able to acquire control or influence over the
result or timing of an order's execution. The execution of a member's
order is determined by what other orders are present in the
solicitation mechanism and the priority of those orders.\73\
Accordingly, the

Exchange believes that a member does not participate in the execution
of an order submitted to the solicitation mechanism.
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    \73\ A member may cancel or modify the order, or modify the
instruction for executing the order, but only from off the floor.
The Commission has stated that the non-participation requirement is
satisfied under such circumstances, so long as such modifications or
cancellations are also transmitted from off the floor. See
Securities Exchange Act Release No. 14713 (April 27, 1978), 43 FR
18557 (May 1, 1978) (``1978 Release'') (stating that the ``non-
participation requirement does not prevent initiating members from
canceling or modifying orders (or the instructions pursuant to which
the initiating member wishes orders to be executed) after the orders
have been transmitted to the executing member, provided that any
such instructions are also transmitted from off the floor'').
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    Third, Rule 11a2-2(T) requires that the order be executed by an
exchange member who is unaffiliated with the member initiating the
order. The Commission has stated that this requirement is satisfied
when automated systems, such as the solicitation mechanism, are used,
as long as the design of these systems ensures that members do not
possess any special or unique trading advantages in handling their
orders after transmitting them to the exchange.\74\ The design of the
solicitation mechanism ensures that no member organization has any
special or unique trading advantage in the handling of its orders after
transmitting its orders to the solicitation mechanism. The Exchange
therefore believes the solicitation mechanism satisfies this
requirement.
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    \74\ In considering the operation of automated execution systems
operated by an exchange, the Commission has noted that, while there
is not an independent executing exchange member, the execution of an
order is automatic once it has been transmitted into the system.
Because the design of these systems ensures that members do not
possess any special or unique trading advantages in handling their
orders after transmitting them to the exchange, the Commission has
stated that executions obtained through these systems satisfy the
independent execution requirement of Rule 11a2-2(T).
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    Fourth, in the case of a transaction effected for an account with
respect to which the Initiating Member or an associated person thereof
exercises investment discretion, neither the Initiating Member nor any
associated person thereof may retain any compensation in connection
with effecting the transaction, unless the person authorized to
transact business for the account has expressly provided otherwise by
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T) thereunder.\75\ Member organizations relying on Rule 11a2-2(T) for
transactions effected through the solicitation mechanism must comply
with this condition of the Rule.
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    \75\ See 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written
contract to retain compensation, in connection with effecting
transactions for covered accounts over which such member or
associated persons thereof exercises investment discretion, to
furnish at least annually to the person authorized to transact
business for the account a statement setting forth the total amount
of compensation retained by the member in connection with effecting
transactions for the account during the period covered by the
statement. See 17 CFR 240.11a2-2(T)(d). See also 1978 Release
(stating ``[t]he contractual and disclosure requirements are
designed to assure that accounts electing to permit transaction-
related compensation do so only after deciding that such
arrangements are suitable to their interests'').
---------------------------------------------------------------------------

    For all of the foregoing reasons and as discussed in the proposal,
the Exchange believes the proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to the Exchange.

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. To the contrary, the Exchange
believes the proposal is pro-competitive. The proposal would diminish
the potential for foregone market opportunities on the Exchange by
allowing Agency Orders to be entered into the solicitation mechanism by
all members. The solicitation mechanism is similar to electronic
solicitation mechanism functionality that is allowed on two other
options exchanges. The Exchange believes that the new solicitation
mechanism functionality should help it compete with these other
exchanges.
    With respect to intra-market competition, the solicitation
mechanism will be available to all Phlx members for the execution of
Agency Orders. Moreover, as explained above, the proposal should
encourage Phlx participants to compete amongst each other by responding
with their best price and size for a particular Solicitation Auction.

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 up to 90 days (i) as the
Commission may designate 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 will:
    (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-2014-66 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2014-66. 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-2014-66 and should be
submitted on or before November 21, 2014.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\76\
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    \76\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-25890 Filed 10-30-14; 8:45 am]
BILLING CODE 8011-01-P