I. Introduction

On August 3, 2017, NASDAQ PHLX LLC (“Phlx” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) ^[1] of the Securities Exchange Act of 1934 (“Act”),^[2] and Rule 19b-4 thereunder,^[3] a proposed rule change regarding quarterly trading requirements applicable to Registered Options Traders (“ROTs”). The proposed rule change was published for comment in the Federal Register on August 22, 2017.^[4] The Commission received no comments on the proposal. This order approves the proposed rule change.

II. Description of the Proposal

The Exchange proposes two amendments to a quarterly trading requirement applicable to certain ROTs. ROTs can be either Streaming Quote Traders ^[5] (“SQTs”), Remote SQTs ^[6] (“RSQTs”) or non-SQT ROTs.^[7] Currently, Phlx Rule 1014, Commentary .01 requires SQTs and non-SQT ROTs, but not RSQTs, to trade 1,000 contracts and 300 transactions on the Exchange each quarter (excluding transactions executed in the trading crowd where the contra-side is an ROT). The Exchange proposes to: (1) Apply the quarterly trading requirement only to non-SQT ROTs (and no longer to SQTs); and (2) add a new alternative standard to meet this requirement. Specifically, the Exchange proposes to amend Phlx Rule 1014, Commentary .01 to require only a non-SQT ROT to trade either (a) 1,000 contracts and 300 transactions (the “1000/300 Alternative,” which is the current requirement) or (b) 10,000 contracts and 100 transactions (the “New Alternative”), on the Exchange each quarter.^[8] The Exchange notes that, similar to the current 1000/300 Alternative, the New Alternative is a pure trading requirement, not limited, like other trading requirements, to assigned options ^[9] and in person trading.^[10] Accordingly, the Exchange proposes that the New Alternative requirement can be fulfilled with trades and contracts that are not in assigned options and not executed in person, although the existing trading requirements respecting “in assigned” options and “in person” trading must still be met.^[11] In addition, the Exchange proposes that limit orders can continue to be counted toward either minimum trading requirement.^[12]

III. Discussion and Commission Findings

After careful review, the Commission finds that the proposed rule change is consistent with the requirements of Section 6 of the Act ^[13] and the rules and regulations thereunder applicable to the Exchange.^[14] Specifically, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act,^[15] which requires, among other things, that the rules of an exchange be designed to prevent fraudulent and manipulative acts and practices, 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, and not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers.

The Commission believes that the Exchange's proposal to apply the quarterly trading requirement only to non-SQT ROTs is consistent with the Act. The Exchange has noted that SQTs are subject to continuous quoting requirements when trading electronically in their assigned series.^[16] In contrast, the Exchange represents that non-SQT ROTs are not similarly subject to continuous quoting obligations as they do not electronically stream quotes into the Exchange and may only quote verbally in response to Floor Brokers representing orders in the trading crowd or submit limit orders electronically.^[17] Accordingly, the Exchange believes that, because SQTs are already subject to continuous quoting obligations, it is appropriate to exclude them from the quarterly trading requirement and to impose obligations in a manner consistent with their business model.^[18] The Commission therefore believes that this aspect of the proposal is reasonably designed to preserve the market making function performed by ROTs and to ensure that ROTs continue to provide adequate liquidity to the Exchange, while applying standards that reflect the differing operating models of SQTs and non-SQT ROTs. Accordingly, the Commission believes that the Exchange's proposal to amend Phlx Rule 1014, Commentary .01 to apply the quarterly trading requirement only to non-SQT ROTs is consistent with Section 6(b)(5) of the Act in that it is reasonably designed to help promote just and equitable principles of trade, and to protect investors and the public interest, and is not designed to permit unfair discrimination.

The Commission also believes that the Exchange's proposed amendment to create the New Alternative quarterly trading requirement is consistent with the Act. The Exchange represents that in recent years it has observed lower trading volumes on its floor, as well as increased use of mechanisms such as the Qualified Contingent Cross (“QCC”) mechanism for larger orders, in which non-SQT ROTs may not submit responses.^[19] The Exchange notes that it has also become difficult for non-SQT ROTs to meet the 1000/300 Alternative because non-SQT ROTs do not stream quotes electronically, but instead quote verbally in response to Floor Brokers representing orders in the trading ( printed page 47586) crowd, where they cannot control the size or frequency of trading interest.^[20] The Exchange asserts that the New Alternative serves as a reasonable standard by which to assess the level of liquidity provided by non-SQT ROTs, albeit with a focus on an additional liquidity metric of fewer trades that are larger in size.^[21] The Exchange states that, since 100 transactions is only 33% of the current requirement, it proposes to increase the total number of executed contracts requirement in the New Alternative by 900 percent to 10,000 contracts, so as not to dilute the overall trading requirement.^[22] The Commission therefore believes that the Exchange's proposal should continue to encourage active market making and thereby promote the provision of liquidity to the market. The Commission also notes that non-SQT ROTs continue to have the option of complying with the current requirement ( i.e., the 1000/300 Alternative) if they so choose. Accordingly, the Commission believes that the Exchange's proposed amendments to create the New Alternative standard to satisfy the quarterly trading requirement is reasonably designed to preserve the market making function performed by non-SQT ROTs and thereby serves to maintain a fair and orderly market and should remove impediments to and perfect the mechanism of a free and open market and a national market system and help protect investors and the public interest, consistent with Section 6(b)(5) of the Act.

IV. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the Act ^[23] that the proposed rule change (SR-Phlx-2017-67), be, and hereby is, approved.