2017-11604. Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Openings in Options Rule

May 31, 2017.

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 May 22, 2017, NASDAQ PHLX LLC (“Phlx” or “Exchange”) filed with the Securities and Exchange Commission (“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 amend Rule 1017, Openings in Options, to conform this rule to recently filed Nasdaq ISE, LLC (“ISE”) Rule 701.

The text of the proposed rule change is available on the Exchange's Web site 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 is proposing to amend its rules relating to its opening process to conform the rule to a recently filed ISE rule change.^[3]

Conform Rule Text to ISE Rule

ISE recently filed to adopt Phlx's Opening Process.^[4] In adopting this rule, certain non-substantive modifications were made to the ISE rule text to further clarify the manner in which the Opening Process occurs. At this time, the Exchange proposes to amend Phlx Rule 1017 to conform certain rule text to ISE Rule 701.

With respect to the definitions at Rule 1017(a), ISE alphabetized the definitions. Phlx proposes to reorder the definitions to alphabetize them as well, so they are ordered in the same manner as ISE Rule 701, where applicable.^[5] Please note that the Phlx definitions remain the same referring to Phlx specific definitions and the applicable cross-references except for the changes noted hereafter. The definition of Quality Opening Market at proposed Rule 1017(a)(viii) is being expanded to conform to ISE's Rule. The Exchange proposes to add more information in this definition about what the calculation for Quality Opening Market is based on, namely the best bid and offer of Valid Width Quotes. Also, the Exchange notes that the differential between the best bid and offer are compared to reach this determination. The Exchange makes clear that the allowable differential, as determined by the Exchange, takes into account the type of security (for example, Penny Pilot versus non-Penny Pilot issue), volatility, option premium, and liquidity. The Exchange notes that the Quality Opening Market differential is intended to ensure the price at which the Exchange opens reflects current market conditions. This proposal does not change the calculation of Quality Opening Market, but provides more context to market participants to understand the manner in which the Exchange arrives at a Quality Opening Market for further clarity.

Rule 1017(b) proposes to amend text explaining what interest is included in the Opening Process. The rule today specifies what may be submitted, the elimination of redundant text simply makes clear what will not be included in the Opening Process. Quotes other than Valid Width Quotes will not be included in the Opening Process. The purpose of this change was to make the rule text simple and clear. The rule continues to make clear what interest will be included within the Opening Process. Phlx Rule 1017(b)(ii) is adding a reference to Rule 1014 for allocation purposes similar to ISE Rule 713.

Rule 1017(d)(i) proposes to amend the rule text to clarify that any of the options for opening with a Valid Width Quote in Rule 1017(d)(i)(A)-(C) may apply. The word “either” was not as clear that there were three choices for opening the market. In addition, the Exchange proposes to add the words “for the underlying currency” to describe that for U.S. dollar-settled foreign currency options it would be within two minutes of the market opening for the underlying currency. The reference should help readers understand which security is being discussed for the opening. Finally within this paragraph the Exchange is removing the capitalization from “Opening Price” because the opening price being referenced is the opening price for the undelying [sic] index, not the Opening Price as defined in Rule 1017.

Rule 1017(d)(ii) proposes to rearrange the rule text for clarity to make clear that for all options, for the Opening Process to commence the underlying security must be open on the primary market. The Exchange is not proposing to substantively amend the process. The proposed text changes make clear the purpose of the paragraph by explaining that the text explains a prerequisite for the Opening Process.

Rule 1017(d)(iv) proposes to add a “this” before Rule 1017 for emphasis. The Exchange proposes to segregate Rule 1017(d)(v) rule text to explain when an ABBO becomes crossed. Other minor changes are proposed to this section to simply clarify the rule text.

Rule 1017(f) proposes to amend the rule text to account for three conditions that must all exist to open with a PBBO. The change emphasizes the conditions, three of them, that must be met to open with a PBBO.

Rule 1017(h) proposes to amend the rule text to clarify that orders include Opening Sweeps. Opening Sweeps is already mentioned in the rule text, the placement of its mention is changed so that it is subcategorized in thinking about orders. The rule text also cross-references to Potential Opening Price to provide a roadmap within the rule.

Rule 1017(h)(C) proposes to add clarifying text to specify the Potential Opening Price is bounded by the better away market. The word “limited” was previously used and is being replaced by another word “bounded” to describe the same process. The “better” is added to clarify that it is the away market that is being considered.

Rule 1017(i) proposes to clarify the rule text with respect to the manner in which Opening with a Trade will occur. The proposed rule text simplifies the language in the rule. Rule 1017(i)(B)(2) proposes to insert the words “would cross” in place of “that crosses.” Also, additional language is proposed to be added to Rule 1017(i)(B)(2)(b) regarding the mid-point calculation. The current text simply notes that Exchange would open the option series for trading with an execution and use the best price which the Potential Opening Price crosses as a boundary price for the purposes of the mid-point calculation. The new text is more explicit, and makes clear that in order to calculate the midpoint, the Exchange will use the better of the Pre-Market BBO or ABBO as a boundary price, which is more specific than simply “best price.” Instead of stating the Exchange will open the option series for trading with an execution, the amendment adds “at the resulting Potential Opening Price,” which makes clear what price it would open with when opening with a trade. The current text does not explain what happens if the conditions described in Rule 1017(i)(B)(2) are not met. The proposed text once again provides a guidepost within the rule to make clear that if the conditions are not met, the text leads to paragraph (j) which describes the Opening Quote Range and thereafter, the Price Discovery Mechanism in paragraph (k).

Rule 1017(j) proposes to amend to clarify that the system will calculate an Opening Quote Range if the Exchange has not opened under any of the provisions from 1017(a)-(i). The word “sub” is proposed to be removed before the word “paragraph” in certain places throughout Rule 1017 because it is unnecessary.

Rule 1017(j)(3) proposes to amend the rule text to add more context to this paragraph. Currently, the rule text provides that if one or more away markets have disseminated opening quotes that are not crossed and there are Valid Width Quotes on the Exchange that cross each other or that cross away market quotes then the information in subparagraph (a) and (b) below would apply. The proposed new text uses the word “disseminating” for accuracy, because quotes are disseminated and instead of “opening quotes” the more precise “BBO” is utilized. A parenthetical is added to note that the Opening Process stops, because the market is crossed, and the series will not open if the ABBO becomes crossed as previously noted in Rule 1017(d)(v). This is another guidepost, in this case to emphasize again that the Exchange will not open with an ABBO that is crossed. The BBO cannot be crossed because it is indicative of uncertainty in the marketplace of where the option series should be valued. In this case, the Exchange will wait for the ABBO to become uncrossed before initiating the Opening Process to ensure that there is stability in the marketplace in order to assist the Exchange in determining the Opening Price. Rule 1017(j) indicates that the existence of all three conditions in Rule 1017(j)(1)-(3) warrant further price discovery to validate or perhaps update the Potential Opening Price and to attract additional interest to perhaps render an opening trade possible, because in the case of paragraph (2) specifically, the lack of an ABBO means there is no external check on the Exchange's market for that options series. If there are Valid Width Quotes on the Exchange that are executable against (which language replaces the word “cross” which the Exchange believes has the same meaning as “executable against”) each other or the ABBO (the ABBO is added for clarity in place of “that cross away market quotes”) then subparagraphs (a) and (b) apply to determine an Opening Quote Range for a particular options series. These additions are intended to provide additional detail to the rule that the Exchange believes will be helpful to the reader.

Furthermore, the words “away bid” and “away offer” are replacements for the concepts of quote bid/offer among quotes on away markets in Rules 1017(j)(3)(a) and (b). The Exchange does not believe there is any difference in those words, simply a more efficient word usage choice.

Rule 1017(j)(4) proposes to replace the word “opening quotes” with the more specific defined term “Valid Width Quotes.” The Exchange recognizes that opening quotes was intended to have the meaning that is intended in Valid Width Quotes and incorrectly did not utilize the definition in the initial filing. The term Valid Width Quote is what was intended when the Exchange utilized the more general term “opening quote.” The word cross is being replaced with “are executable against.” The Exchange used the term cross in the Phlx original filing and is now conforming these words to the approved words in the ISE rule change “are executable against” to signify that no difference was intended. The Exchange believes that this is an example of different word choice. The words “disseminating a BBO” are being added in this paragraph to more clearly express that each exchange disseminates a BBO. An exchange broadcasts its market's best bid or offer by disseminating it publically so that other exchanges are aware of what is the away market BBO. This more specific language simply provides more context to the sentence.

Rule 1017(j)(5) proposes to replace certain language in that rule text with more clarifying language. The new rule text replaces the words “through the” OQR with “wider than the” OQR. The words were intended to mean that the OQR must be exceeded. The word choice was amended to “wider than” in the ISE filing to make this point. The same language is being amended in this rule for consistency. Also, the Exchange notes in this paragraph that “If there is more than one Potential Opening Price possible where no contracts would be left unexecuted, any price used for the mid-point calculation (which is described in subparagraph (h) above) that is wider than the OQR will be restricted to the OQR price on that side of the market for the purposes of the mid-point calculation.” The calculation is now being more specifically defined as the “mid-point” calculation to be clear at this point in the rule the mid-point is the calculation being discussed.

Rule 1017(j)(6) is being amended to add clarifying language. Currently the paragraph states “[i]f there is more than one Potential Opening Price possible where no contracts would be left unexecuted and any price used for the mid-point calculation (which is described in subparagraph (h) above) an away market price when contracts will be routed, the system will use the away market price as the Potential Opening Price.” The Exchange proposes to instead remove the reference “and any price used for the mid-point calculation (which is described in subparagraph (h) above)” and instead simply state “pursuant to paragraph (h)(C)” which describes the Potential Opening Price. The Exchange believes that the replacement language avoids confusion to the reader because as proposed it would reference the specific language in the rule.

Rule 1017(j)(7) is being amended to add clarifying language. Currently the paragraph states, “If non-routable interest can be maximum executable against Exchange interest after routable interest has been determined by the system to satisfy the away market . . .” The purpose of this sentence was intended to convey that the Exchange will attempt to execute as much interest as possible at the opening. It was suggested in the ISE filing that another way to state this concept was “If the Exchange determines that non-routable interest can execute the maximum number of contracts against Exchange interest, after routable interest has been determined by the system to satisfy the away market . . .” The Exchange amended the language in the ISE filing to be clear. The Exchange proposes the same revision in the Phlx rule text. This is not a substantive change. The current sentence goes on to state, “then the Potential Opening Price is the price at which the maximum volume, excluding the volume which will be routed to an away market . . .” The ISE rule change removed the references to “volume” and instead replaced the concept of volume as follows, “then the Potential Opening Price is the price at which the maximum number of contacts can execute, excluding the interest which will be routed to an away market . . .” The Exchange notes that the new language is more specific because instead of volume in the first instance, the concept is expanded to the number of contracts executed and instead of volume in the second instance, the concept of interest is more accurate.

Rule 1017(k)(A) proposes to add language for clarity. The paragraph starts, “First, the system will broadcast an Imbalance Message.” It was noted in the ISE filing that adding “for the affected series” would be more specific, because the message concerns a certain series. The sentence then states, “(which includes the symbol, side of the imbalance (unmatched contracts), size of matched contracts, size of the imbalance, and price of the affected series which must be within the Pre-Market BBO) . . .” Instead of just stating price, the revision includes the more specific reference to the defined term “Potential Opening Price,” which is the actual price being discussed in the paragraph. Because “the affected series” was added to the beginning of the sentence, where it was relocated, it is no longer needed at this point in the sentence. Finally, a sentence is being added to the end of the paragraph to simply make clear in the rule text, as was explained in the 19b-4, that each Imbalance Message is subject to an Imbalance Timer.

Rule 1017(k)(B) proposes to replace certain language in that rule text with more clarifying language. The current rule text states, “If during or at the end of the Imbalance Timer, the Opening Price is at or within the OQR, the Imbalance Timer will execute at the Opening Price . . .” The ISE filing replaces the words “execute at” with more explicit language “open with a trade at” to convey that the trade is the manner in which the Phlx opens the market. This is not a substantive change, but different word usage. The current rule text continues later, “If no new interest comes in during the Imbalance Timer and the Opening Price is at or within OQR, the Exchange will open at the end of the Imbalance Timer.” The “Opening Price” is again being more specifically changed to the defined term “Potential Opening Price” here and the concept is again added to the end of the sentence to make clear that the Exchange will open with a trade at the end of the Imbalance Timer at the Potential Opening Price. The new language makes clear again that the trade is the manner in which the Phlx opens the market at the Potential Opening Price.

Rule 1017(k)(C)(1) proposes to replace the words “without trading” with “and would not trade” for clarity. This is simply a change in word choice and is not a substantive change.

Rule 1017(k)(C)(2) replaces the word “other” with “away” to describe a market other than Phlx. The word “simultaneously” is added to describe the order in which the trade will occur and the timer will end. The word “Potential Opening Price” was added to demonstrate the effect on this price more clearly as described herein in Rule 1017(k)(B). The Exchange also proposes to amend language that references “will trade” to instead more accurately states “will open with trades” to more precisely express that the system will open with the trade.

Rule 1017(k)(C)(3) proposes to add a clause at the beginning of the text “If no trade occurred pursuant to (2) above” as a roadmap to connect the rule. The words “without trading” are proposed to be replaced with “and would not trade” for clarity. Also, the word “series” is being added after the word “options” for more specificity.

Rule 1017(k)(C)(3)(i) proposes to add the words “better priced away” to the beginning of the sentence. Currently, the sentence reads, “If the total number of displayed contracts at better prices than the Exchange's Potential Opening Price on away markets (“better priced away contracts”) . . .” The ISE filings just noted “better priced away contracts” rather than the more in depth explanation of displayed at better prices than the Exchange's Potential Opening Price on away markets (“better priced away contracts”), for simplicity. The language is being relocated to modify the term contract at the beginning of the sentence rather than at the end of the sentence. Finally, the language in the last sentence of this paragraph is being amended to replace “routed to other away markets” to “routed to away markets.” This is simply a verbiage change to match the ISE rule.

Rule 1017(k)(C)(3)(ii) proposes to amend the rule text to add a clause “based on price/time priority of routable interest” for clarity as to the allocation method being utilized in this instance to route the orders. By adding the allocation method to the rule text, it makes it clear to market participants the order in which the Exchange will route orders. Further, the term “other” is proposed to be replaced by “away” to describe markets other than “Phlx”. References to “Phlx” and “at the Exchange Opening Price” is proposed to be removed as unnecessary and superfluous.

Rule 1017(k)(C)(3)(iii) proposes to amend the rule text to add a clause “based on price/time priority of routable interest” for clarity, as described in Rule 1017(k)(C)(3)(ii). Further, the term “other” is proposed to be replaced by “away” to describe markets other than “Phlx”.

Rule 1017(k)(C)(5) proposes to add a term “paragraph” to provide more context to the reference to “(4) above.” Also, the words “the series by executing” is proposed to be added to the rule text to refer to what is being opened, which is the open series and the manner in which that will happen is with an execution. The language is more explicit. The term “other” is proposed to be replaced by “away” to describe markets other than “Phlx”. A sentence is proposed to be added to the end of this rule text, “All other interest will be eligible for trading after opening” to provide context to the manner in which interest will be handled by the system.

Rule 1017(k)(D) proposes to remove the numbering as unnecessary and superfluous.

Rule 1017(k)(E) proposes to reword this rule text to add more clarity by adding the phrase, “During the opening of the option series, where there is an execution possible,” to give context to what follows, which is the manner in which the system will allocate order. The rule states the system will give priority to market orders first, in time priority. The words “in time priority” were removed as unnecessary because the Exchange references the specific allocation provision in Rule 1014(g)(vii). Quotes are added to the rule text because only limit orders were mentioned and quotes should have also been included to complete the interest that is available to trade.

Finally, Rule 1017(k)(F) proposes to reword the text to state, “Upon opening of an option series”, instead of “When the open series opens” to provide a more accurate representation of the timing of that process. Also, the Exchange proposes to insert the phrase “regardless of an execution” to explain that an opening can occur with or without a trade. This language matches the ISE language.

As noted, the Exchange believes that these proposed amendments add clarity to the rule text, but the proposed amendments do not substantively amend the manner in which the Opening Process occurs.

2. Statutory Basis

The Exchange believes that its proposal is consistent with Section 6(b) of the Act,^[6] in general, and furthers the objectives of Section 6(b)(5) of the Act,^[7] 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 conforming Phlx Rule 1017 to ISE Rule 701. The proposed language is non-substantive in nature and does not amend the manner in which Phlx's Opening Process occurs. Rather, the proposed language clarifies the existing language and provides more context to the manner in which the rule operates which amendments provide investors and the public interest with greater clarity as to the operation of the Opening Process.

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. Conforming Phlx's Rule to that of ISE is not a substantive amendment, the Phlx Opening Process will continue to operate in the same manner as today. The proposal does not change the intense competition that exists among the options markets for options business including on the opening. Nor does the Exchange believe that the proposal will impose any burden on intra-market competition; the Opening Process involves many types of participants and interest.

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

No written comments were either solicited or received.

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

Because the foregoing proposed rule change does not: (i) Significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A)(iii) of the Act ^[8] and subparagraph (f)(6) of Rule 19b-4 thereunder.^[9]

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: (i) Necessary or appropriate in the public interest; (ii) for the protection of investors; or (iii) 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 [e-mail]. Please include File Number SR-Phlx-2017-40 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-2017-40. 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-2017-40 and should be submitted on or before June 27, 2017.

For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.^[10]

Eduardo A. Aleman,

Assistant Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  17 CFR 240.19b-4.

3.  See Securities Exchange Act Release No. 80225 (March 13, 2017), 82 FR 14243 (March 17, 2017)(SR-ISE-2017-02).

4.  See note 3 above.

5.  Phlx market makers have different titles as compared to ISE market makers.

6.  15 U.S.C. 78f(b).

7.  15 U.S.C. 78f(b)(5).

8.  15 U.S.C. 78s(b)(3)(A)(iii).

9.  17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) requires a self-regulatory organization to give the Commission written notice of its intent to file 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.

10.  17 CFR 200.30-3(a)(12).