FR 2021-00591

The Securities and Exchange Commission has published a notice about a proposed rule change by Nasdaq PHLX LLC regarding the modification of its trading operations. The focus of this proposal is to establish a "Virtual Trading Crowd" in cases where the physical trading floor cannot be utilized, as well as when the fallback "Back-Up Trading Floor" is not operational. The proposal is particularly relevant in the context of the COVID-19 pandemic, as it seeks to ensure the continuation of trading activities under similar conditions to the traditional open outcry method, albeit in a virtual environment.

General Summary

This document introduces a virtual mechanism for Nasdaq PHLX to maintain trading operations when physical locations are unavailable. It outlines the creation of a "Virtual Trading Crowd" to mimic the physical trading floor's activities. This virtual setup aims to bridge the gap left by the inoperability of the traditional trading floors due to unforeseen circumstances, such as a pandemic, by replicating the open outcry trading environment through an online communication platform.

Significant Issues and Concerns

The proposal is an extensive and complex document, which might pose understanding challenges for some stakeholders without a detailed analysis. The reliance on technical terms such as "Virtual Trading Crowd," "Back-Up Trading Floor," and "zones" could be confusing for the general public who are not familiar with trading industry jargon.

Security and compliance are significant concerns, especially about how unauthorized individuals are restricted from virtual trading spaces. While the proposal provides some details, specific measures and performance checks on the "Virtual Trading Crowd" to ensure it operates as intended were not thoroughly delineated.

Additionally, the document does not provide detailed expected costs or financial implications of implementing this virtual system, which raises concerns about potential inefficiencies or misuse of resources. Moreover, there may be a latent conflict of interest, as the proposal could inherently favor entities that have quicker adaptability or more resources to efficiently operate in a virtual environment.

Public Impacts

For the public and general economy, the document represents a shift towards greater flexibility in financial operations, allowing for continued market activity despite physical constraints. This could benefit individuals and entities reliant on steady market operations for financial wellness. However, the complexity and potential costs of implementing such a system might indirectly affect consumers through increased fees or taxes.

Stakeholder Impacts

Market Participants: This move can provide essential services during physical inaccessibility, thereby serving investors who engage in complex trading strategies that necessitate the open outcry method. Conversely, those less adept in technological adaptation might face challenges, potentially leading to competitive disadvantages.

Regulatory Bodies: The adaptation phase might necessitate tightening oversight and ensuring stringent security measures are applied appropriately within virtual trading environments.

General Public: As financial markets are integral to the broader economy, this continuity can support economic stability. However, stakeholders should be wary of financial pressures from institutions transitioning to or maintaining this digital infrastructure.

In conclusion, while the proposal aims to provide continuity in trading operations in the face of unforeseen challenges, thorough consideration of its implementation's complexities is critical to ensure fair participation and robust oversight.

The document outlines a proposed rule change by Nasdaq PHLX LLC to modify the operations of their trading environment in light of disruptions caused by COVID-19. Specifically, the change focuses on the creation of a Virtual Trading Crowd to replace physical trading environments in cases where the Trading Floor is inaccessible.

Financial References

The financial reference in the document is related to the FBMS, or Options Floor Based Management System, which is an order management system. FBMS serves as the electronic execution gateway on the Exchange's Options Floor. This system handles orders that are represented by Floor Brokers and includes equity, equity index, and U.S. dollar-settled foreign currency option orders. Although the document does not specify the cost associated with FBMS, it implies that transitioning functionalities to virtual settings may involve financial considerations.

Lack of Detailed Financial Impact

One of the issues highlighted in the document is the absence of detailed financial information regarding the implementation of this virtual trading solution. This is crucial since creating a virtual trading platform potentially involves considerable expenses related to technology infrastructure, training, and ongoing system maintenance. Without understanding these costs, there may be concerns about the possibility of inefficient or wasteful spending. Stakeholders might benefit from a comprehensive breakdown of the expected financial implications prior to fully endorsing the proposal.

Access and Anonymity Concerns

Another significant concern is related to the security of the Virtual Trading Crowd, especially concerning access control and anonymity. The system must ensure that only authorized individuals can participate, which may necessitate additional financial investment in secure technology solutions. Security breaches could lead to financial liabilities, making it vital for the Exchange to highlight the measures and associated costs already in place or required to maintain a highly secure trading environment.

Potential Conflict of Interest

The document suggests the possibility of a conflict of interest, where entities with greater resources could adapt more efficiently to the virtual trading environment. This could create disparities among participants, particularly smaller firms that might not have the financial capabilities to quickly adjust. It raises the question of whether there should be financial assistance or subsidies to help less-resourced members effectively transition to this new trading method, ensuring a level playing field.

Complex Legal and Financial References

The use of complicated legal references and citations is another notable aspect of the document. These elements may obscure stakeholders' understanding of the financial dynamics of the proposed changes. Clearly communicating how financial systems like FBMS interface with regulatory requirements could benefit various stakeholders, making the implications more transparent and accessible.

In summary, while the document introduces a potentially beneficial modification through the Virtual Trading Crowd, it lacks sufficient financial detail regarding implementation costs and does not fully address the potential cost-related challenges stakeholders might face. Providing this information would enhance stakeholder understanding and support for the initiative.