FR 2021-02710

Nasdaq PHLX LLC has proposed several changes to its rules concerning options trading. These modifications are intended to improve the clarity and consistency of the existing rules and are submitted to the Securities and Exchange Commission (SEC) for immediate implementation. The proposed changes span a variety of areas, including market maker responsibilities, order types, and the handling of specific order categories like All-or-None Orders. The rationale behind these updates is to align the written rules with the actual practices and functionalities of the trading system and to enhance transparency for market participants.

General Summary

The document outlines a series of amendments to the Nasdaq PHLX LLC's rules, which govern options trading on their exchange. They propose changes to definitions, update references within the rules, and adjust how certain orders are processed in the system. The ultimate goal is to ensure that the rules reflect the current practices and technological capabilities of the exchange. By doing so, the exchange aims to create a clearer, more transparent trading environment, helping market participants understand how their orders are managed and executed.

Issues and Concerns

There are several concerns that arise from the document:

• Complexity and Technicality: The document is densely packed with legal and technical jargon that might be difficult for those without a background in finance or law to fully comprehend. The frequent use of acronyms and references to specific sections without definitions further adds to the complexity.

• Understanding Feed Description: The document describes proprietary data feeds such as the PHLX Orders and PHLX Depth of Market feed in detail. However, someone unfamiliar with these aspects of market operations may find it challenging to grasp their significance and how they affect trading.

• Ambiguity in Transparency: While the document repeatedly uses the term "greater transparency," it lacks concrete examples or explanations of how this will be achieved or measured. More specific explanations would help readers understand the impact of these changes.

Impact on the Public

For the general public, this document signifies an effort by Nasdaq PHLX to improve its operations and align with technological advancements. While most investors may not need to understand the details, it is beneficial to know that the rules governing the exchanges where their investments are traded are designed to be clear and reflective of actual trading practices.

Impact on Stakeholders

• Market Participants: Traders and brokers directly involved with the Nasdaq PHLX exchange will likely benefit from a clearer and consistent rulebook that accurately describes the trading system's operations. This can lead to smoother transactions and fewer misunderstandings or disputes.

• Regulatory Bodies: The SEC, which oversees market regulations, would need to ensure these rules are in line with broader securities laws and maintain fair trading practices.

• Potential Investors: For potential investors, especially those wanting to enter options trading, a clear rulebook could mean an easier understanding of the trading environment, potentially influencing decision-making and increasing participation.

In summary, while the amendments may not immediately appear significant to the average investor, they exemplify ongoing efforts to maintain a transparent, efficient, and up-to-date trading environment that can adapt to the rapidly changing technology in financial markets. These changes are positioned to positively impact traders and market makers by providing clearer guidelines and thus enhancing overall confidence in the trading system. However, there is still a need for better communication of these complex changes to ensure broader understanding and acceptance.

The Federal Register document discusses proposed rule changes by Nasdaq PHLX LLC that, although primarily focused on regulatory modifications, contain several implicit financial references related to transactions and pricing adjustments within the exchange system.

In the document, there is reference to the bid and offer prices in the context of the exchange's operations. "$1.00 bid-1.00 offer" appears in a scenario described in Options 3, Section 6, where locked quotations are involved. This locked quotation scenario relates to the automatic execution of electronically submitted quotations per an allocation algorithm. The revision proposes removing the phrase about locked quotations, considering it outdated, which reflects a movement towards more accurate information dissemination rather than any financial spending or allocation.

Additionally, the document frequently refers to the replacement of "minimum price improvement increment" with a fixed "$0.01". The fixing of this increment indicates a standardization intended to enhance the clarity and consistency of pricing mechanisms within the exchange. Although not a financial allocation in the traditional sense, this standardization reflects a financial reference point that impacts the operations and transparency in pricing, potentially affecting trading practices and strategies of market participants.

The use of figures such as "no more than $.25", "no more than $.40", "no more than $.50", "no more than $.80", and "no more than $1" delineates acceptable bid-ask spread differentials under certain trading conditions. These figures are critical in maintaining market efficiency and transparency, important principles highlighted in the document.

Overall, while the document does not directly involve spending or appropriations, it discusses mechanisms that can significantly impact financial transactions on the Nasdaq exchange. By addressing issues of transparency and clarity in the trading process, these changes aim to maintain a fair and orderly market, which indirectly influences financial transactions by setting clearer and more standardized conditions under which trading and financial exchanges occur. The clarified price increment and trading rules ensure that investors have a better understanding of market operations, knowing how orders will be processed and executed, fostering trust and participation in the market.