Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing of Proposed Rule Change To Adopt a Limit Order Protection and a Market Order Protection
Federal Register, Volume 81 Issue 24 (Friday, February 5, 2016)
Federal Register Volume 81, Number 24 (Friday, February 5, 2016)
Notices
Pages 6314-6317
From the Federal Register Online via the Government Publishing Office www.gpo.gov
FR Doc No: 2016-02197
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SECURITIES AND EXCHANGE COMMISSION
Release No. 34-77007; File No. SR-Phlx-2016-12
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing of Proposed Rule Change To Adopt a Limit Order Protection and a Market Order Protection
February 1, 2016.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on January 21, 2016, NASDAQ OMX PHLX LLC (``Phlx'' or the ``Exchange'') filed with the Securities and Exchange Commission (the ``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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Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The Exchange proposes to amend NASDAQ OMX PSX Rule 3307, entitled ``Processing of Orders'' to adopt a Limit Order Protection or ``LOP'' and a Market Order Protection for members accessing PSX.
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.
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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.
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Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
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Purpose
The Exchange proposes to adopt two new mechanisms to protect against erroneous orders which are entered into PSX. Specifically, these features address risks to market participants of human error in entering Orders at unintended prices. LOP and the Market Order Protection would prevent certain Orders from executing or being placed on the Order Book at prices outside pre-set standard limits. The System would not accept such Orders, rather than executing them automatically.
Background
Today, the National Market System Plan to Address Extraordinary Market Volatility (the ``Plan'') \3\ provides a limit up-limit down (``LULD'') mechanism designed to prevent trades in NMS securities from occurring outside of specified price bands. The bands are set at a percentage level above and below the average transaction price of the security over the immediately preceding five-minute period, and are calculated on a continuous basis during regular trading hours.\4\ Rule 3100, entitled ``Limit Up-Limit Down Plan and Trading Halts on PSX,'' describes this process for PSX.
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\3\ See Securities Exchange Act Release No. 67091 (May 31, 2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (Order Approving, on a Pilot Basis, the National Market System Plan To Address Extraordinary Market Volatility). See also Rule 608 of Regulation NMS under the Act.
\4\ If the National Best Offer (``NBO'') equals the lower price band without crossing the NBB, or National Best Bid (``NBB'') equals the upper price band without crossing the NBO, then the stock will enter a limit state quotation period of 15 seconds during which no new reference prices or price bands will be calculated. A stock will exit the limit state when the entire size of all limit state quotations are executed or cancelled. If the limit state exists and trading continues to occur at the price band, or no trading occurs within the price band, for more than 15 seconds, then a five minute trading pause will be enacted.
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The Exchange proposes to adopt two new features, LOP for Limit Orders and Market Order Protection for Market Orders, which would cancel these Orders back to the member when the order exceeds certain defined logic. These two new features would be in addition to the LULD protections, which exist today.\5\ Each mechanism is explained further below.
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\5\ While LULD bands are in place from 9:30 to 4:00 p.m. E.T. each trading day, these new protections will be in place for each trading session.
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LOP
The Exchange proposes to adopt a new LOP feature on PSX to prevent certain Limit Orders at prices outside of pre-set standard limits (``LOP Limit Table'') from being accepted by the System. LOP shall apply to all Quotes and Orders,\6\ including any modified Orders.\7\ LOP would not apply to Market Orders. LOP would be operational each trading day, except during opening and closing crosses and trading halts.\8\ Since PSX Rules provide controls for the opening and closing processes within the Rulebook, the proposed protections are rendered ineffective for those processes.\9\ Members will be subject to certain parameters when submitting Orders into the Order Book.
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\6\ An Intermarket Sweep or ISO Order, which is an Order that is immediately executable within PSX against Orders against which they are marketable, is subject to LOP. See PSX Rule 3401(g).
\7\ If an Order is modified, LOP will review the order anew and, if LOP is triggered, such modification will not take effect and the original order will not be accepted.
\8\ LOP has the ability to suspend by symbol or system wide. The Exchange would notify market participants of any suspension that may be in place via an alert.
\9\ The PSX Rulebook provides specific rules for certain auction mechanisms, such as the opening and closing. The mechanisms contain their own protections with respect to the entry of Orders within those mechanisms. The addition of the proposed protections does not add value in the Exchange's analysis of those structures.
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The Exchange proposes to not accept incoming Limit Orders that exceed the LOP Reference Threshold. The LOP Limit Table contains upper limits and lower limits, for a particular security, across all trading sessions. For example, today, if the NBO is at $50 and a Limit Buy Order was entered into the System at $500, the Limit Buy Order would execute at $50 and then would continue to be executed at other applicable price levels within the Order Book until the Limit Buy Order was canceled or halted. The Exchange proposes LOP to avoid a series of improperly priced aggressive orders transacting in the Order Book.
With respect to Market Maker Peg Orders,\10\ the applicable limits shall be two times greater than the limits stated in the LOP Limit Table. A Market Maker Peg Order is a passive Order type which will not otherwise remove liquidity from the Order Book. This Order type was designed to assist Market Makers with meeting their quoting obligations which may require quoting at levels that are not standardized with LULD guidelines. Market Makers have a diverse business model as compared with other market participants. Widening the applicable limits for these market participants serves to promote market making. The Exchange believes that because Market Makers have other risk protections in place to prevent them from quoting outside of their financial means, the risk level for erroneous trades is not the same as with other market participants. Market Makers have more sophisticated infrastructures than other market participants and are able to manage their risk, particularly with quoting, utilizing other tools which may not be available to other market participants.
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\10\ A ``Market Maker Peg Order'' is an Order Type designed to allow a Market Maker to maintain a continuous two-sided quotation at a displayed price that is compliant with the quotation requirements for Market Makers set forth in Rule 3213(a)(2). The displayed price of the Market Maker Peg Order is set with reference to a ``Reference Price'' in order to keep the displayed price of the Market Maker Peg Order within a bounded price range. A Market Maker Peg Order may be entered through RASH or FIX. A Market Maker Peg Order must be entered with a limit price beyond which the Order may not be priced. The Reference Price for a Market Maker Peg Order to buy (sell) is the then-current National Best Bid (National Best Offer) or if no such National Best Bid or National Best Offer, the most recent reported last-sale eligible trade from the responsible single plan processor for that day, or if none, the previous closing price of the security as adjusted to reflect any corporate actions (e.g., dividends or stock splits) in the security. See PSX Rule 3301A.
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The Exchange will send an Equity Trader Alert in advance of implementation with the initial LOP Limit Table and, thereafter, to modify the LOP Limit Table. The initial LOP Limit Table utilizes the same limits as LULD to compare against the LOP Reference Threshold. The Exchange believes that utilizing the same tiers and bands will seek to provide additional market protection to PSX members that submit erroneous orders, prior to reaching LULD limits. The initial LOP table is below.
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Price band
Securities Time period percentage
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Tier 1 and Tier 2 NMS Market Hours, 5% (Tier 1) & 10%
Securities, Reference Price excluding Open/ (Tier 2).
>$3.00. Close (9:45 a.m.
to 3:35 p.m.).
Tier 1 and Tier 2 NMS Market Hours, 20%.
Securities, Reference Price excluding Open/
equal to $0.75 to and including Close (9:45 a.m.
$3.00. to 3:35 p.m.).
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Tier 1 & 2 NMS Securities, Market Hours, The lesser of
Reference Price Less than $0.75. excluding Open/ $0.15 or 75%.
Close (9:45 a.m.
to 3:35 p.m.).
Tier 1 and Tier 2 NMS During Market Open/ 10% & 20%. Note:
Securities, Reference Price Close: 8:00 a.m. Band % is doubled
>$3.00. to 9:45 a.m., during these
3:35 p.m. to 5:00 times.
p.m.
Tier 1 and Tier 2 NMS During Market Open/ 40%. Note: Band %
Securities, Reference Price Close: 8:00 a.m. is doubled during
equal to $0.75 to and including to 9:45 a.m., these times.
$3.00. 3:35 p.m. to 5:00
p.m. Same as
above.
Tier 1 and Tier 2 NMS During Market Open/ Lesser of $0.30 or
Securities, Reference Price Close: 8:00 a.m. 150% (upper band
less than $0.75. to 9:45 a.m., only). Note: Band
3:35 p.m. to 5:00 % is doubled
p.m. during these
times.
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LOP will cause Limit Orders to not be accepted if the price of the Limit Order is greater than the LOP Reference Threshold for a buy Limit Order. Limit Orders will also not be accepted if the price of the Limit Order is less than the LOP Reference Threshold for a sell Limit Order. The Exchange believes that doubling the band percentage for pre-open and post-close sessions is reasonable due to the volatility which may occur in the market during those trading sessions. The LULD Plan also doubles the percentages between 9:30 a.m. and 9:45 a.m. ET, and 3:35 p.m. and 4:00 p.m. ET. The Exchange's proposal aligns this protection with the LULD Plan.\11\
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\11\ The LULD Plan provides that between 9:30 a.m. and 9:45 a.m. ET, and 3:35 p.m. and 4:00 p.m. ET, or in the case of an early scheduled close, during the last 25 minutes of trading before the early scheduled close, the Price Bands shall be calculated by applying double the Percentage Parameters set forth in Appendix A. See Rule 608 of Regulation NMS under the Act.
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The LOP Reference Price shall be the current consolidated national Best Bid or Best Offer (consolidated NBBO), the Bid for sell orders and the Offer for buy orders. If there is no consolidated NBBO for a security, or if there is a one-sided market, the last regular way consolidated sale, adjusted for corporate actions, if any, will be the LOP Reference Price. If there is no last regular way consolidated sale on that trade date, then the prior day's adjusted close will be the LOP Reference Price.
The LOP Reference Threshold for buy orders will be the LOP Reference Price (offer) plus the applicable percentage specified in the LOP Limit Table. The LOP Reference Threshold for sell orders will be the LOP Reference Price (bid) minus the applicable percentage specified in the LOP Limit Table.
Market Order Protection
With respect to Market Orders, these Orders will not be accepted if the security is in an LULD Straddle State.\12\ If the offer is in a Straddle State then all buy Market Orders will not be accepted. If the bid is in a Straddle State than all sell market orders will not be accepted. The Exchange believes that this Market Order Protection feature will prevent Participants from executing Market Orders that stray widely from the LULD defined reference price.
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\12\ The LULD Plan defines a Straddle State as when the National Best Bid (Offer) is below (above) the Lower (Upper) Price Band and the NMS Stock is not in a Limit State. For example, assume the Lower Price Band for an NMS Stock is $9.50 and the Upper Price Band is $10.50, such NMS stock would be in a Straddle State if the National Best Bid were below $9.50, and therefore non-executable, and the National Best Offer were above $9.50 (including a National Best Offer that could be above $10.50). If an NMS Stock is in a Straddle State and trading in that stock deviates from normal trading characteristics, the Primary Listing Exchange may declare a Trading Pause for that NMS Stock. See Section VII(A)(2) of the Plan.
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The Exchange also notes that both LOP and Market Order Protection will be applicable to all protocols.\13\ Both the LOP and Market Order Protection features will be mandatory for all PSX members. The Exchange proposes to implement this rule within ninety (90) days of the implementation date. The Exchange will issue an Equities Trader Alert in advance to inform market participants of such implementation date.
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\13\ PSX maintains several communications protocols for members to use in entering Orders and sending other messages to PSX, such as: OUCH, RASH, FLITE and FIX.
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Statutory Basis
The Exchange believes that its proposal is consistent with Section 6(b) of the Act \14\ in general, and furthers the objectives of Section 6(b)(5) of the Act \15\ 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 mitigating risks to market participants of human error in entering Orders at clearly unintended prices. Also, the Market Order Protection feature would protect Market Orders from being executed in very wide markets when those prices are compared to the reference price. The Exchange believes that the proposals are appropriate and reasonable, because they offer protections to both Limit and Market Orders which should encourage price continuity and, in turn, protect investors and the public interest by reducing executions occurring at dislocated prices.
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\14\ 15 U.S.C. 78f(b).
\15\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed LOP and Market Order Protection features would assist with the maintenance of fair and orderly markets by mitigating the risks associated with errors resulting in executions at prices that are away from the Best Bid or Offer and potentially erroneous. Further the proposal protects investors from potentially receiving executions away from the prevailing prices at any given time.
The Exchange believes that the LOP Limit Table is appropriate because it is based on the current LULD bands. The Exchange believes that the proposed specified percentages are appropriate because LOP is designed to reduce the risk of, and to potentially prevent, the automatic execution of Orders at prices that may be considered clearly erroneous. The System will only execute Limit Orders priced within the LOP Limit Table or within the upper (lower) band of LULD, if the latter is more conservative.
The Exchange believes that the proposal to not accept System Orders that are Market Orders in a Straddle State will prevent Market Orders from being executed by market participants at erroneous prices which the Exchange believes would stray widely from the LULD defined reference price.
The Exchange believes LOP and Market Order Protection will remove impediments to and perfect the mechanisms of a free and open market because these features will operate in tandem with LULD.
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Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. The Exchange believes the LOP and Market
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Order Protection features will provide market participants with additional protection from anomalous executions, in addition to LULD protections. Thus, the Exchange does not believe the proposal creates any significant impact on competition. The Exchange believes that offering these protections to the PSX will not impose any undue burden on intra-market competition, rather, it would permit equities and options members to be protected in a similar manner from erroneous executions.
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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.
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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 self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule change should be disapproved.
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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-2016-12 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-2016-12. 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-2016-12 and should be submitted on or before February 26, 2016.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
FR Doc. 2016-02197 Filed 2-4-16; 8:45 am
BILLING CODE 8011-01-P
