Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend and Relocate the Qualified Contingent Cross Orders Rules

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) and Rule 19b-4 thereunder, notice is hereby given that on March 27, 2019, Nasdaq PHLX LLC (“Phlx” or “Exchange”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) the proposed rule change as described in Items I, II, and III, below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

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

The Exchange proposes to relocate Qualified Contingent Cross (“QCC”) Orders which are submitted electronically (“Electronic QCC Orders”) and QCC Orders which are transacted on the Floor (“Floor QCC Orders”) (collectively “QCC Orders”). The Electronic QCC Orders would be relocated from Phlx Rule 1080(o) to new Phlx Rule 1088. The Floor QCC Orders are located at Rule 1064(e). Also, the Exchange proposes to amend the current rule text at Phlx Rule 1080(o) as well as the current rule text in Phlx Rule 1064(e) to more accurately reflect the manner in which contingency orders are handled with regard to stop orders and revise the Exchange's functionality with regard to how QCC Orders are handled with regard to All-or-None Orders. Finally, the Exchange proposes to update cross-references to Rule 1080(o) to reflect proposed Rule 1088.

The text of the proposed rule change is available on the Exchange's website at http://nasdaqphlx.cchwallstreet.com/,, at the principal office of the Exchange, and at the Commission's Public Reference Room.

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

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

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

1. Purpose

The Exchange proposes to: (i) Relocate Electronic QCC Orders, currently located at Phlx Rule 1080(o), to new Phlx Rule 1088; (ii) amend the current rule text at Phlx Rule 1080(o) and Phlx Rule 1064 to more accurately reflect the manner in which contingency orders are handled with regard to stop orders and revise the Exchange's functionality with regard to how QCC Orders are handled with regard to All-or-None Orders; and (iii) update cross-references to Rule 1080(o) to reflect proposed Rule 1088. The Exchange also proposes to delete “(p)” within Rule 1080, which is currently reserved.

Background

In 2011, Phlx adopted an Electronic QCC Order type for execution of orders within the System. The QCC order type facilitates the execution of stock/option Qualified Contingent Trades that satisfy the requirements of the trade through exemption in connection with Rule 611(d) of Regulation NMS (“QCT Trade Exemption”). Specifically, Phlx Rule 1080(o) provides that a Phlx Order Entry Firm effectuating a trade in the System pursuant to the Regulation NMS QCT Trade Exemption to Rule 611(a) can cross the options leg of the trade on Phlx as a QCC Order immediately upon entry and without order exposure if no Customer orders exist on the Exchange's order book at the same price. As set forth in Rule 1080(o), the Electronic QCC Order must: (i) Be for at least 1,000 contracts, (ii) meet the six requirements of Rule 1080(o)(3) which are modeled on the QCT Trade Exemption, (iii) be executed at a price at or between the National Best Bid and Offer (“NBBO”); and (iv) be rejected if a Customer order is resting on the Exchange book at the same price. Separately, the Exchange received approval to permit market participants to effectuate Floor QCC Orders.

Relocation

The Exchange is proposing to relocate the text relating to Electronic QCC Orders, currently located at Phlx Rule 1080(o), to new Phlx Rule 1088. The Exchange believes that this relocation will aid market participants in locating Phlx's Rule regarding Electronic QCC Orders which is currently within a much larger rule.

Amendments

The Exchange proposes to amend the rule text related to Electronic QCC Orders, currently contained in Rule 1080(o), which text is being relocated to Rule 1088, as well as the rule text related to Floor QCC Orders in Rule 1064(e) as noted below. Specifically, with respect to the current text of Rule 1080(o), which applies to Electronic QCC Orders, the Exchange proposes to amend the rule text which is being relocated to Rule 1088 to specifically note that an Electronic QCC Order is comprised of an originating electronic order. This will serve to further distinguish proposed Rule 1088, which applies to Electronic QCC Orders, from Rule 1064(e), which applies to Floor QCC Orders. Also, the Exchange proposes to remove the word “PHLX” from the current rule text in Rule 1080(o) before the word “System” when relocating the text to proposed Rule 1088(a)(2). The Exchange uses the defined term “System” elsewhere in the rule.

The Exchange proposes to add new rule text, which is currently not contained in Rule 1080(o) or Rule 1064(e), to make clear the handling of contingency orders with respect to QCC Orders. The Exchange proposes to add a new Commentary .01 to proposed Rule 1088, which contains the relocated text from Rule 1080(o) and also proposes to add a new Commentary .03 to Rule 1064 to provide for the interaction of certain contingency orders as they relate to QCC Orders. The new commentary seeks to address: (i) Certain order types on Phlx, which unlike other order types, are not displayed as part of Phlx's best bid or offer (“PBBO”); and (ii) repricing on the order book.

Non-Displayed Contingency Orders

The Phlx contingency orders, which are non-displayed are exclusively: (i) All-or-None Orders and (ii) stop orders (collectively “Non-Displayed Contingency Orders”). These Non-Displayed Contingency Orders are not protected orders generally. An All-or-None Order would not be protected, unless the size of the contingency may be satisfied. Similar to other markets, a stop order would be unprotected until such order is triggered by either the occurrence of a transaction or posting on the order book. The Exchange notes that these Non-Displayed Contingency Orders are distinct from other order types. As provided for in current Rule 1080(o)(1), QCC Orders are immediately executed upon entry into the System by an Order Entry Firm provided that (i) no Customer Orders are at the same price on the Exchange's limit order book and (ii) the price is at or between the better of the NBBO. The “NBBO” is the best Protected Bid and Protected Offer as defined in the Options Order Protection and Locked/Crossed Markets Plan; Protected Bids and Protected Offers that are displayed at a price but available on the Exchange at a better non-displayed price shall be included in the NBBO at their better non-displayed price for purposes of this rule. Rule 1083(o) defines a “Protected Bid” or “Protected Offer” as a Bid or Offer in an options series, respectively, that: (i) Is disseminated pursuant to the OPRA Plan; and (ii) is the Best Bid or Best Offer, respectively, displayed by an Eligible Exchange. Non-Displayed Contingency Orders are not disseminated to OPRA and not part of the displayed PBBO. The Exchange notes that a Non-Displayed Contingency Order would never trade with the paired QCC Order. A stop order would not impact the execution of a QCC Order until the stop order is elected by either the occurrence of a transaction or posting on the order book, at which point it would become a protected order and cause a rejection of the QCC Order provided it is a public customer order at the same price as the QCC Order and the price is at or between the NBBO. Today, an All-or-None Order would not cause a paired QCC Order to be automatically cancelled. The Exchange proposes to amend its current operation with respect to All-or-None Orders such that an All-or-None Order would cause a QCC Order to be automatically cancelled provided that the size of a QCC Order is greater than or equal to the size of the public customer All-or-None Order on the Exchange's limit order book and provided that the price of the public customer All-or-None Order locks or crosses the QCC Order. Below are some examples:

Example 1: QCC cancels back when QCC size is greater than public customer all-or-none (represented as “AON” for purposes of the below examples)

The PBBO used in QCC entry price validation does include resting AON orders when they could be satisfied by size of the incoming QCC

Minimum Price Variation (“MPV”): Penny

PBBO: $1.00 (10) × $1.20 (10)

Enter AON public customer Order to Sell 5 @$1.18

PBBO remains: $1.00 (10) × $1.20 (10)

PBBO (with AON): $1.00 (10) × $1.18 (5)

Enter single QCC for 1000 @$1.19

QCC cancels back to participant due to public customer AON @$1.18

Example 2: QCC trades through AON when QCC size is less than AON

The PBBO used in QCC entry price validation does include resting AON orders when they could be satisfied by size of the incoming QCC

MPV: Penny

PBBO: $1.00 (10) × $1.20 (10)

Enter AON public customer order to Sell 5000 @$1.18

PBBO remains: $1.00 (10) × $1.20 (10)

PBBO (with AON): $1.00 (10) × $1.18 (5000)

Enter single QCC for 1000 @$1.19

QCC prints @$1.19 (Note, the 5000 lot public customer AON cannot be satisfied by the 1000 lot QCC)

Example 3: QCC blocked by public customer order behind AON that could not be satisfied by QCC

The PBBO used in QCC entry price validation does include resting AON orders when they could be satisfied by size of the incoming QCC

MPV: Penny

PBBO: $1.00 (10) × $1.20 (10)

Enter AON public customer order to Sell 5000 @$1.18

Enter public customer Order to sell 1 @$1.19

PBBO adjusts: $1.00 (10) × $1.19 (1)

PBBO (with AON): $1.00 (10) × $1.18 (5000)

Enter single QCC for 1000 @$1.19

QCC cancels back to participant due to public customer order @$1.19 (Note, the 5000 lot public customer AON cannot be satisfied by the 1000 lot QCC and therefore this does not cause the cancel)

Example 4: QCC cancels back due to AON that could be satisfied by QCC

The PBBO used in QCC entry price validation does include resting AON orders when they could be satisfied by size of the incoming QCC

MPV: Penny

PBBO: $1.00 (10) × $1.20 (10)

Enter AON public customer order to Sell 5@$1.18

Enter public customer order to sell 1 @$1.19

PBBO adjusts: $1.00 (10) × $1.19 (1)

PBBO (with AON): $1.00 (10) × $1.18 (5)

Enter single QCC for 1000 @$1.19

QCC cancels back to participant due to public customer AON @$1.18

Example 5: Stop Order triggered by incoming QCC

MPV: Penny

PBBO: $1.00 (10) × $1.20 (10)

Enter Stop-Limit order to sell 10 contracts with a Stop price of $1.18 and a limit price of $1.19

Enter single QCC for 1000 @$1.18

QCC prints @$1.18 since the QCC price is better than the NBBO. The $1.18 execution of the QCC causes the sell stop order to be elected. Election of the stop order causes the order to be entered onto the book offered at $1.19. PBBO updates to be $1.00 (10) × $1.19 (10).

With respect to stop orders, the Exchange's proposal does not expand how Non-Displayed Contingency Orders are handled by the System, rather the Exchange is proposing to add transparency to its rules with respect to these non-protected order types. With the Exchange's proposal to amend the current handling of All-or-None Orders, if the size of a QCC Order is greater than or equal to the size of the resting public customer All-or-None Order, the QCC Order would be automatically cancelled provided that the price of the public customer All-or-None Order is the same as, or better than, the price of the QCC Order. A market participant that elects to enter an All-or-None Order is choosing to request that the order be executed only if a certain contingency is met. The Exchange provides market participants the opportunity to enter limit orders, which unlike All-or-None Orders, are protected and displayed. Market participants electing to utilize the All-or-None Order type will have no standing on the order book in relation to an incoming QCC Order because All-or-None Orders are not protected, unless the size of a public customer All-or-None Order could be satisfied by the size of the QCC Order, and provided that the price of the public customer All-or-None Order is the same as, or better than, the price of the QCC Order. The Exchange believes that it provides market participants with an array of order types and allows market participants to determine the manner in which they would like to be executed.

Repricing

Certain orders are repriced on Phlx because the order locks or crosses the ABBO. With respect to Do-Not-Route or “DNR” Orders, where the best away market is at an inferior price level to the PBBO, the System will automatically re-price that order from its one minimum price variation inferior to the original away best bid/offer price to one minimum trading increment away from the new away best bid/offer price or its original limit price, and expose such orders at the NBBO to Phlx XL II participants and other market participants only if the re-priced order locks or crosses the ABBO. With respect to the automatic re-pricing from its one minimum price variation inferior to the original away best bid/offer price the Exchange notes that other markets also re-price orders to avoid locked and/or crossed markets, and such repricing impacts the execution price of a QCC Order. The Exchange may have a quote or order that will not be displayed at its actual better price. For example, an order limit price may lock an away market, in which case the order is displayed one minimum increment away from the away market price but remains part of the Exchange's internal BBO at the locking price. The Exchange is proposing to add newly proposed Rule 1088(a)(1) and current Rule 1064(e)(1) to make clear that the price of the QCC Order must be at or between not just the NBBO, but the better of the PBBO and the NBBO to immediately execute. The Exchange notes that it protects re-priced orders that are part of the Exchange's internal BBO at the locked pricing with an away market. This preserves the priority of interest which may be available at an internal price, internal BBO, which is better than the displayed PBBO and NBBO and permits executions only at prices which are at or better than the best price available. Repricing does not expand how QCC Orders are handled by the System, rather the Exchange is proposing to add transparency to its rules with respect to how QCC Orders are handled when there are re-priced orders on the book which are available at a price better than the displayed PBBO and NBBO.

Public Customer

Specifying the term “public customer” in place of the term “customer” within the rule text will make clear the meaning of that term. For purposes of this rule change the term “public customer” shall mean a person or entity that is not a broker or dealer in securities and is not a professional as defined within Phlx Rule 1000(b)(14).

Cross-References

The Exchange proposes to update cross-references to Electronic QCC Orders within Rule 1080(o) within other Exchange rules to cite the new electronic rule.

Implementation

The Exchange would implement the changes proposed herein prior to May 31, 2019. The Exchange would issue an Options Trader Alert announcing the exact date of implementation in advance.

2. Statutory Basis

The Exchange believes that its proposal is consistent with Section 6(b) of the Act, in general, and furthers the objectives of Section 6(b)(5) of the Act, in particular, in that it is designed to promote just and equitable principles of trade and to protect investors and the public interest by amending the rule text relating to QCC Orders to correct and make clear the current rule text.

The Exchange believes that the amendments to add the word “electronic” in proposed Rule 1088(a) and the deletion of the word “PHLX” in proposed Rule 1088(a)(2) are non-substantive amendments which simply add specificity and conform the rule text, respectively. Further, the proposals to update the cross-references to Rule 1080(o) to proposed Rule 1088 will correct the citations within the Rulebook for accuracy.

The Exchange's proposal to add new Commentary .01 to Rule 1088 and new Commentary .03 to Rule 1064 for QCC Orders is consistent with the Act because the proposed functionalities are consistent with the public customer protection provisions Phlx provides when a QCC order is submitted to the System. The Exchange notes that Non-Displayed Contingency Order Types are distinct from other order types. The Exchange offers an array of order types which do not have similar limitations and would be protected orders and are displayed. Other markets have stop orders which require a triggering (or “electing”) event prior to being protected.

With respect to stop orders, the Exchange's proposal does not expand how Non-Displayed Contingency Orders are handled by the System, rather the Exchange is proposing to add transparency to its rules with respect to these non-protected order types. The proposal would clarify that stop orders which have not been elected are not protected orders and are thus not considered for the acceptance or execution of QCC Orders. With respect to All-or-None Orders, the Exchange's proposal to automatically cancel a QCC Order, provided the size of a QCC Order is greater than or equal to the size of the resting public customer All-or-None Order and the price of the public customer All-or-None Order is the same as, or better than, the price of the QCC Order, is consistent with Act. Today, QCC Orders are immediately executed upon entry into the System by an Order Entry Firm provided that (i) no Customer Orders are at the same price on the Exchange's limit order book and (ii) the price is at or between the better of the NBBO for all other order types, with the exception of All-or-None Orders. The Exchange is extending the same level of protection to public customer All-or-None Orders in the case of QCC Orders that today is provided to all other order types submitted by public customers. By automatically cancelling a QCC Order with a size greater than or equal to the size of a resting public customer All-or-None Order, provided the QCC price locks or crosses the All-or-None Order, will cause those public customer All-or-None orders to be prioritized.

The Exchange's proposal to add rule text to make clear that with respect to Non-Displayed Contingency Orders, the price of the QCC Order must be at or between not just the NBBO, but the better of the internal PBBO and the NBBO to immediately execute adds more transparency to the Exchange's Rules. The Exchange notes that other markets also re-price orders to avoid locked and/or crossed markets, and such repricing impacts the execution price of a QCC Order. The Exchange protects re-priced orders at their “actual” price rather than their displayed price which preserves the priority of interest which may be available at an internal price, internal BBO, which is better than the displayed PBBO and NBBO and permits executions only at prices which are at or better than the best price available and continues to facilitate the execution of qualified contingent trades, thereby benefitting the market as a whole. Repricing does not expand how QCC Orders are handled by the System. The proposed text adds transparency with respect to how QCC Orders are handled when there are re-priced orders on the book which are available at a price better than the displayed PBBO and NBBO.

Finally, specifying the term “public customer” in place of the term “customer” within the rule text will make clear the meaning of that term.

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

The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. The proposals to add the word “electronic” in proposed Rule 1088(a) and delete the word “PHLX” in proposed Rule 1088(a)(2) are non-substantive amendments which simply add specificity and conforms the rule text. The Exchange's proposal to amend cross-references will bring greater clarity to the Exchange's rules.

The Exchange's proposal to describe how Non-Displayed Contingency Orders are handled by the System does not impose an undue burden on competition, rather the rule text adds transparency to the rules because it describes how these non-protected order types are handled. The Exchange's proposal to automatically cancel a QCC Order, provided the size of a QCC Order is greater than or equal to the size of the resting public customer All-or-None Order and the price of the public customer All-or-None Order is the same as, or better than, the price of the QCC Order, does not impose an undue burden on competition because the Exchange will uniformly cancel all QCC Orders if there is a public customer All-or-None Order resting on the order book with eligible size. The Exchange is extending the same level of protection to public customer All-or-None Orders in the case of QCC Orders that today is provided to all other order types submitted by public customers and therefore uniformly prioritizing all public customer orders.

The Exchange's proposal to add rule text to make clear that with respect to Non-Displayed Contingency Orders, the price of the QCC Order must be at or between not just the NBBO, but the better of the internal PBBO and the NBBO to immediately execute does not impose an undue burden on competition. This rule text adds more transparency to the Exchange's Rules. The Exchange notes that other markets also re-price orders to avoid locked and/or crossed markets, and such repricing impacts the execution price of a QCC Order. Repricing does not expand how QCC Orders are handled by the System. The Exchange's proposal would add transparency to its rules with respect to how QCC Orders are handled when there are re-priced orders on the order book which are available at a price better than the displayed PBBO and NBBO. The Exchange uniformly reprices orders within the System. Specifying the term “public customer” in place of the term “customer” within the rule text will make clear the meaning of that term.

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

The Exchange has not solicited, and does not intend to solicit, comments on this proposed rule change. The Exchange has not received any unsolicited written comments from members or other interested parties.

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

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

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 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 rule-comments@sec.gov. Please include File Number SR-Phlx-2019-07 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-2019-07. 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-2019-07, and should be submitted on or before May 2, 2019.