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 June 30, 2021, Nasdaq PHLX LLC (“Phlx” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
17 CFR 240.19b-4.
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The Exchange proposes to amend Options 2, Section 5, Electronic Market Maker Obligations and Quoting Requirements.
The text of the proposed rule change is available on the Exchange's website at https://listingcenter.nasdaq.com/rulebook/phlx/rules,, at the principal office of the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Phlx Rules at Options 2, Section 5, Electronic Market Maker Obligations and Quoting Requirements. Currently, the Exchange requires Market Makers and Lead Maker Makers to enter bids and offers for the options to which they are registered, except in an assigned options series listed intra-day on the Exchange. Quotations must meet the legal quote width requirements specified in Options 2, Section 4(c). On a daily basis, an electronic Market Maker must make markets consistent with the applicable quoting requirements. Market Makers (SQTs and RSQTs) associated with the same member organization are collectively required to provide two-sided quotations in 60% of the cumulative number of seconds, or such higher percentage as Phlx may announce in advance, for which that member organization's assigned options series are open for trading. Notwithstanding the foregoing, a member organization is not required to make two-sided markets pursuant to Options 2, Section 5(c)(2) in any Quarterly Option Series, any adjusted option series, and any option series with an expiration of nine months or greater. Lead Market Makers (including Remote Lead Market Makers), associated with the same member organization, are collectively required to provide two-sided quotations in 90% of the cumulative number of seconds, or such higher percentage as Phlx may announce in advance, for which that member organization's assigned options series are open for trading. Lead Market Makers are required to make two-sided markets pursuant to Options 2, Section 5 in any Quarterly Option Series, any Adjusted Option Series, and any option series with an expiration of nine months or greater. Finally, a Directed SQT or RSQT is subject to the requirements within Options 2, Section 5(c)(2)(C).
A “Market Maker” means a Streaming Quote Trader or a Remote Streaming Quote Trader who enters quotations for his own account electronically into the System. See Options 1, Section 1(b)(28). A “Streaming Quote Trader” or “SQT” means a Market Maker who has received permission from the Exchange to generate and submit option quotations electronically in options to which such SQT is assigned. An SQT may only submit such quotations while such SQT is physically present on the trading floor of the Exchange. An SQT may only submit quotes in classes of options in which the SQT is assigned. See Options 1, Section 1(b)(54). A “Remote Streaming Quote Trader” or “RSQT” means a Market Maker that is a member affiliated with an Remote Streaming Quote Trader Organization 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 Lead Market Maker upon Exchange approval. An RSQT is also known as a Remote Market Maker (“RMM”) pursuant to Options 2, Section 11. A Remote Streaming Quote Organization (“RSQTO”) or Remote Market Maker Organization (“RMO”) are Exchange member organizations that have qualified pursuant to Options 2, Section 1. See Options 1, Section 1(b)(49).
A “Lead Market Maker” means a member who is registered as an options Lead Market Maker pursuant to Options 2, Section 12(a). A Lead Market Maker includes a Remote Lead Market Maker which is defined as a Lead Market Maker in one or more classes that does not have a physical presence on an Exchange's trading floor and is approved by the Exchange pursuant to Options 2, Section 11. See Options 1, Section 1(b)(27).
See Options 2, Section 5(c).
Options 2, Section 4(c) describes the required bid/ask differentials.
The term “member organization” means a corporation, partnership (general or limited), limited liability partnership, limited liability company, business trust or similar organization, transacting business as a broker or a dealer in securities and which has the status of a member organization by virtue of (i) admission to membership given to it by the Membership Department pursuant to the provisions of General 3, Sections 5 and 10 or the By-Laws or (ii) the transitional rules adopted by the Exchange pursuant to Section 6-4 of the By-Laws. References herein to officer or partner, when used in the context of a member organization, shall include any person holding a similar position in any organization other than a corporation or partnership that has the status of a member organization. See General 1, Section 1(17).
Options 2, Section 5(c)(2)(A).
An adjusted option series is defined as an option series wherein one option contract in the series represents the delivery of other than 100 shares of underlying stock or Exchange-Traded Fund Shares (“Adjusted Options Series”). See Options 2, Section 5(c)(2)(A)(i).
Options 2, Section 5(c)(2)(A).
Options 2, Section 5(c)(2)(B).
Directed SQTs and Directed RSQTs, associated with the same member organization, are collectively required to provide two-sided quotations in 90% of the cumulative number of seconds, or such higher percentage as Phlx may announce in advance, for which that member organization's assigned options series are open for trading. A member organization shall be considered directed in all assigned options once the member organization receives a Directed Order in any option in which they are assigned and shall be considered a Directed SQT or Directed RSQT until such time as the member organization notifies the Exchange that they are no longer directed. Notwithstanding the foregoing, a member organization is not required to make two-sided markets pursuant to this paragraph (c)(2) above in any Quarterly Option Series, any Adjusted Option Series, and any option series with an expiration of nine months or greater. A Directed Order means any order to buy or sell which has been directed to a particular Lead Market Maker, RSQT, or SQT by an Order Flow Provider. To qualify as a Directed Order, an order must be delivered to the Exchange via the System. See also Options 2, Section 10(a)(i).
A member organization is required to meet each market making obligation separately. Currently, Options 2, Section 5(c) states, “An SQT and RSQT who is also the Lead Market Maker is held to the Lead Market Maker obligations in options series in which the Lead Market Maker is assigned and will be held to SQT and RSQT obligations in all other options series where assigned. An SQT or RSQT who receives a Directed Order shall be held to the standard of a Directed SQT or Directed RSQT, as appropriate.”
See Options 2, Section 5(c). Today, the Exchange aggregates all quotes submitted through the Specialized Quote Feed interface from the member organization, regardless of whether the quote was submitted by the member organization in its capacity as Lead Market Maker or Market Maker.
The Exchange notes that pursuant to a restriction within Options 2, Section 4(b)(2), only an SQT can simultaneously quote as a Lead Market Maker and an SQT. Options 2, Section 4(b)(2) provides, “An RSQT may only submit quotations electronically from off the floor of the Exchange. An RSQT may not simultaneously quote both as RSQT and Remote Lead Market Maker in a particular security. If an RSQT is a Remote Lead Market Maker in a particular security, the Remote Lead Market Maker must make a market as a Remote Lead Market Maker and may not make a market as an RSQT in that particular security.” Because an RSQT cannot also be a Lead Market Maker, the Exchange proposes to delete “an RSQT” as part of its amendment to Options 2, Section 5(c).
Today, the Exchange calculates whether a member organization that is assigned in an options series as both a Lead Market Maker and a Market Maker has met its quoting obligations as Lead Market Maker and Market Maker, respectively, by aggregating all quotes submitted through the Specialized Quote Feed interface from the member organization, regardless of whether the quote was submitted by the member organization in its capacity as Lead Market Maker or Market Maker.
“Specialized Quote Feed” or “SQF” is an interface that allows Lead Market Makers, SQTs and RSQTs to connect, send, and receive messages related to quotes, Immediate-or-Cancel Orders, and auction responses into and from the Exchange. Features include the following: (1) Options symbol directory messages (e.g., underlying and complex instruments); (2) system event messages (e.g., start of trading hours messages and start of opening); (3) trading action messages (e.g., halts and resumes); (4) execution messages; (5) quote messages; (6) Immediate-or-Cancel Order messages; (7) risk protection triggers and purge notifications; (8) opening imbalance messages; (9) auction notifications; and (10) auction responses. The SQF Purge Interface only receives and notifies of purge requests from the Lead Market Maker, SQT or RSQT. Lead Market Makers, SQTs and RSQTs may only enter interest into SQF in their assigned options series. See Options 3, Section 7(a)(i)(B).
The Exchange proposes to amend its calculation to only consider quotes submitted through the Specialized Quote Feed interface utilizing badges and options series assigned to a Lead Market Maker when calculating whether a member organization acting as a Lead Market Maker has satisfied the requirements to provide two-sided quotations in 90% of the cumulative number of seconds, or such higher percentage as Phlx may announce for which that member organization's assigned options series are open for trading. Similarly, the Exchange proposes to only consider quotes submitted through the Specialized Quote Feed interface utilizing badges and option series assigned to a Market Maker when calculating whether a member organization acting as a Market Maker has satisfied the requirements to provide two-sided quotations in 60% of the cumulative number of seconds, or such higher percentage as Phlx may announce for which that member organization's assigned options series are open for trading. With this proposed change, a member organization that is a Market Maker (SQT) in an options series where the member organization is also assigned as the Lead Market Maker in an options series will be held to both the Lead Market Maker and Market Maker (SQT) obligations, pursuant to Options 2, Section 5(c), separately, in that option series. The Exchange will consider whether a member organization, acting as both Lead Market Maker and Market Maker in an assigned options series, has complied with each requirement by only considering quotes in the respective badges.
The term “badge” means an account number, which may contain letters and/or numbers, assigned to Lead Market Makers and Market Makers. A Lead Market Maker or Market Maker account may be associated with multiple badges. See Options 1, Section 1(b)(6).
Phlx currently utilizes a badge without an associated options series to designate a Lead Market Maker assigned in an options series and a badge with an associated options series to designate a Market Maker assigned in an option series.
The Exchange notes that Floor Market Makers and Floor Lead Market Makers are not required to quote electronically in any designated percentage of series pursuant to Options 8, Section 27(a). Options 8, Section 27(f) provides for certain trading requirements applicable to Floor Market Makers.
The term “Floor Market Maker” is a Market Maker who is neither an SQT or an RSQT. A Floor Market Maker may provide a quote in open outcry. See Options 8, Section 2(a)(8).
The term “Floor Lead Market Maker” is a member who is registered as an options Lead Market Maker pursuant to Options 2, Section 12(a) and has a physical presence on the Exchange's trading floor. See Options 8, Section 2(a)(7).
By way of example,
Current Quoting obligation methodology:
Lead Market Maker firm ABC is assigned five badges: 123A, 123B, 123C, 123D and 123.
Badge 123 is designated the Lead Market Maker badge and badge 123A-D are designated as Market Maker badges.
Today, all quoting activity from all 5 badges is aggregated in determining if Firm 123 [sic] complied with the requirement to provide two-sided quotations in 90% of the cumulative number of seconds for which that member organization's assigned options series are open for trading. The higher of the two obligations is required today.
Proposed Quoting obligation methodology:
Lead Market Maker firm ABC is assigned five badges: 123A, 123B, 123C, 123D and 123.
Badge 123 is designated the Lead Market Maker badge and badge 123A-D are designated as Market Maker badges.
As proposed only quoting activity from badge 123 (and excluding badges 123 A-D) would be counted toward the requirement to provide two-sided quotations in 90% of the cumulative number of seconds for which that member organization's assigned options series are open for trading.
All other badges (123 A-D), excluding badge 123, would be counted toward the requirement to provide two-sided quotations in 60% of the cumulative number of seconds for which that member organization's assigned options series are open for trading.
A member organization may have only one Lead Market Maker badge per option series.
The below example explains how the Exchange aggregates quotes from Lead Market Makers, in their assigned options series, to determine compliance with quoting requirements, which will not be changing pursuant to this proposal. The same calculation applies to quotes from Market Makers in their assigned options series.
Under the proposal, and as is the case today, by way of example, assume Lead Market Maker Firm ABC assigned in five symbols across 2 different badges:
Badge 123 is assigned in symbols QQQ and SPY.
Badge 124 is assigned in symbols IBM, GM, and MSFT.
Quotes submitted through the Specialized Quote Feed interface from the Firm ABC's Lead Market Maker badges from all 5 symbols will be counted in determining compliance with Firm ABC's requirement to provide two-sided quotations in 90% of the cumulative number of seconds for which Firm ABC's assigned options series are open for trading.
If Firm ABC Lead Market Maker badge 123 quotes symbol QQQ at 95% and SPY at 90% and Firm ABC Lead Market Maker badge 124 quotes IBM at 85%, GM at 95%, and MSFT at 90% then Firm ABC will have met requirement to provide two-sided quotations in 90% of the cumulative number of seconds for which Firm ABC's assigned options series are open for trading because the percentage across the 5 symbols is 91%.
Implementation
The Exchange proposes to implement this rule change on August 2, 2021. The Exchange has issued an Options Regulatory Alert notifying members and member organizations of this change.
See Options Regulatory Alert 2021-36.
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 requiring Lead Market Makers and Market Makers to separately meet quoting requirements as both a Lead Market Maker and Market Maker, respectively, when the member organization is assigned in both roles in an options series.
15 U.S.C. 78f(b)(5).
The Exchange's proposal to separately calculate Market Maker and Lead Market Maker quoting obligations where the member organization is assigned as both Lead Market Maker and Market Maker in an options series is consistent with the Act. Specifically, the Exchange's proposal would only consider quotes submitted through the Specialized Quote Feed interface utilizing badges and options series assigned to a Lead Market Maker when calculating whether a member organization acting as a Lead Market Maker has satisfied the requirements to provide two-sided quotations in 90% of the cumulative number of seconds, or such higher percentage as Phlx may announce for which that member organization's assigned options series are open for trading. Similarly, the Exchange's proposal would only consider quotes submitted through the Specialized Quote Feed interface utilizing badges and option series assigned to a Market Maker when calculating whether a member organization acting as a Market Maker has satisfied the requirements to provide two-sided quotations in 60% of the cumulative number of seconds, or such higher percentage as Phlx may announce for which that member organization's assigned options series are open for trading.
The proposed change for calculating the Lead Market Maker requirement separate from the Market Maker requirement, where a member organization is assigned in both roles in an options series, would ensure that the member organization quotes the requisite number of seconds in an assigned options series, when acting as both Lead Market Maker and Market Maker. This would ensure that a member organization adds the requisite amount of liquidity in that assigned options series in exchange for certain benefits offered by the Exchange to the member organization, such as enhanced Lead Market Maker allocation and favorable pricing, in addition to the member organization fulfilling other market making obligations specified in Options 2, Section 5(a).
See Options 3, Section 10(a)(1)(B).
See Options 7, Pricing Schedule.
In registering as an electronic Market Maker, a member organization commits to various obligations. Transactions of an electronic Market Maker in its market making capacity must constitute a course of dealings reasonably calculated to contribute to the maintenance of a fair and orderly market, and those member organizations should not make bids or offers or enter into transactions that are inconsistent with such course of dealings. Electronic Market Makers should not effect purchases or sales except in a reasonable and orderly manner. Ordinarily during trading hours, an electronic Market Maker must: (1) Maintain a two-sided market in those options in which the electronic Market Maker is registered to trade, in a manner that enhances the depth, liquidity and competitiveness of the market. (2) Engage, to a reasonable degree under the existing circumstances, in dealings for its own account when there exists, or it is reasonably anticipated that there will exist, a lack of price continuity, a temporary disparity between the supply of (or demand for) a particular option contract, or a temporary distortion of price relationships between option contracts of the same class. (3) Compete with other electronic Market Makers in all options in all capacities in which the electronic Market Maker is registered to trade. (4) Make markets that will be honored for the number of contracts entered into the System in all options in which the electronic Market Maker is registered to trade. (5) Update quotations in response to changed market conditions in all options in which the electronic Market Maker is registered to trade. (6) Maintain active markets in all options in which the electronic Market Maker is registered. (7) Honor all orders attributed to the electronic Market Maker that the System routes to away markets pursuant to Options 5, Section 4.
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. Rather, the proposal would ensure that member organizations that are assigned in an options series as both the Lead Market Maker and Market Maker, respectively, are meeting the same quoting obligations as other member organizations who are assigned solely as either the Lead Market Maker or Market Maker in an option series. Also, this proposal would ensure that a member organization quotes the requisite number of seconds in an assigned options series, when acting as both Lead Market Maker and Market Maker, respectively, thereby adding the requisite amount of liquidity in exchange for certain benefits provided by the Exchange such as enhanced Lead Market Maker allocation and favorable pricing, in addition to fulfilling its other market making obligations specified in Options 2, Section 5(a).
See Options 3, Section 10(a)(1)(B).
See Options 7, Pricing Schedule.
See note 25 above.
C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Because the proposed rule change does not: (i) Significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-4(f)(6) thereunder.
17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) requires the Exchange to give the Commission written notice of its intent to file the proposed rule change, along with a brief description and text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. The Exchange has satisfied this requirement.
A proposed rule change filed under Rule 19b-4(f)(6) normally does not become operative for 30 days after the date of filing. However, pursuant to Rule 19b-4(f)(6)(iii), the Commission may designate a shorter time if such action is consistent with the protection of investors and the public interest. The Exchange has asked the Commission to waive the 30-day operative delay so that the proposal may become operative upon filing. Waiving the operative delay will allow the Exchange to amend, without delay, its rules regarding Market Maker quoting obligations to ensure that member organizations assigned in an options series as both the Lead Market Maker and Market Maker would have the same quoting obligations as member organizations who are assigned solely as either Lead Market Maker or Market Maker in an option series. The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest and hereby designates the proposed rule change to be operative upon filing.
17 CFR 240.19b-4(f)(6)(iii).
For purposes only of waiving the 30-day operative delay, the Commission has also considered the proposed rule's impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f).
At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.
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-2021-38 on the subject line.
Paper Comments
- Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2021-38. 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 20549-1090, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-Phlx-2021-38 and should be submitted on or before August 9, 2021.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.34
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-15195 Filed 7-16-21; 8:45 am]
BILLING CODE 8011-01-P