Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt PHLX Options 9, Section 25 To Codify an Options Unbundling Rule

<NOTICE> SECURITIES AND EXCHANGE COMMISSION <DEPDOC>[Release No. 34-104427; File No. SR-PHLX-2025-72]</DEPDOC> <SUBJECT>Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt PHLX Options 9, Section 25 To Codify an Options Unbundling Rule</SUBJECT> <DATE>December 17, 2025.</DATE> Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), <SU>1</SU> <FTREF/> and Rule 19b-4 thereunder, <SU>2</SU> <FTREF/> notice is hereby given that on December 11, 2025, Nasdaq PHLX LLC (“PHLX” or “Exchange”) filed with the Securities and Exchange Commission (“SEC” or “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. <FTNT> <SU>1</SU>  15 U.S.C. 78s(b)(1). </FTNT> <FTNT> <SU>2</SU>  17 CFR 240.19b-4. </FTNT> <HD SOURCE="HD1">I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change</HD> The Exchange proposes to adopt PHLX Options 9, Section 25 to codify the Exchange's longstanding guidance that the unbundling of orders for any purpose other than best execution is considered conduct inconsistent with just and equitable principles of trade, and to remove extraneous and nonsensical rule text from PHLX Options 3, Section 7. The text of the proposed rule change is available on the Exchange's website at <E T="03">https://listingcenter.nasdaq.com/rulebook/phlx/rulefilings,</E> and at the principal office of the Exchange. <HD SOURCE="HD1">II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change</HD> 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. <HD SOURCE="HD2">A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change</HD> <HD SOURCE="HD3">1. Purpose</HD> The Exchange proposes to amend PHLX Options 9 by adding a new Section 25 to codify its longstanding guidance that it shall be considered conduct inconsistent with just and equitable principles of trade for any member, member organization, or person associated with or employed by a member or member organization (collectively, “member” or “members”) to split an order into multiple smaller orders for any purpose other than seeking the best execution of the entire order. Members of the Exchange are not allowed to engage in conduct inconsistent with just and equitable principles of trade. <SU>3</SU> <FTREF/> <FTNT> <SU>3</SU>   <E T="03">See</E> PHLX General 9, Section 1(c)(1) (“A member, member organization, or person associated with or employed by a member or member organization shall not engage in conduct inconsistent with just and equitable principles of trade.”). </FTNT> “Unbundling,” also known as “trade shredding,” is the practice of breaking up an order into multiple smaller orders for some purpose other than the best execution of the order. The practice of unbundling has in the past been used for purposes such as improperly maximizing commissions and fees charged to customers, distorting trade data, or circumventing rules pertaining to maximum order size. <SU>4</SU> <FTREF/> For example, the unbundling of a large order into several smaller orders could be done for the purpose of achieving the Lead Market Maker (LMM) allocation preference for orders of 5 contracts or fewer. <SU>5</SU> <FTREF/> Alternatively, unbundling an order into separate orders could be done for the purpose of gaining a higher allocation percentage in a price-improvement auction than the member submitting the orders into a price-improvement auction otherwise would have received. <SU>6</SU> <FTREF/> <FTNT> <SU>4</SU>   <E T="03">See, e.g.,</E> Securities Exchange Act Release No. 62667 (Aug. 9, 2010), 75 FR 50013 (Aug. 16, 2010) (File No. SR-NYSEAmex-2010-77) (Self-Regulatory Organizations; NYSE Amex, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending Rule 995NY). </FTNT> <FTNT> <SU>5</SU>   <E T="03">See</E> PHLX Options 3, Section 10(a)(1)(C). </FTNT> <FTNT> <SU>6</SU>   <E T="03">See</E> PHLX Options 3, Section 13(e) (Stating, in part, that “[i]t will also be deemed conduct inconsistent with just and equitable principles of trade and a violation of General 9, Section 1(c) to engage in a pattern of conduct where the Initiating Member breaks up a PIXL Order into separate orders for the purpose of gaining a higher allocation percentage than the Initiating Member would have otherwise received in accordance with the allocation procedures contained in subparagraph (b)(5) above.”). </FTNT> The Exchange believes that the unbundling of orders generally serves no purpose to the customer that entered the order and may cause unnecessary delays in the execution of that order. This belief has been reflected in the Exchange's longstanding regulatory guidance to its members. <SU>7</SU> <FTREF/> It is also reflected in PHLX General 9, Section 1(c)(3), concerning the unbundling of equity securities orders. <SU>8</SU> <FTREF/> <FTNT> <SU>7</SU>   <E T="03">See</E> Options Regulatory Alert #2025-34 (Aug. 29, 2025), <E T="03">available at https://www.nasdaqtrader.com/MicroNews.aspx?id=ORA2025-34;</E> Options Regulatory Alert #2016-6 (Feb. 17, 2016), <E T="03">available at https://www.nasdaqtrader.com/MicroNews.aspx?id=ORA2016-6;</E> and Options Regulatory Alert #2016-4 (Jan. 22, 2016), <E T="03">available at https://www.nasdaqtrader.com/MicroNews.aspx?id=ORA2016-4.</E> </FTNT> <FTNT> <SU>8</SU>  That rule states that “it is conduct inconsistent with just and equitable principles of trade for any member, member organization, or person associated with or employed by a member or member organization to engage in conduct that has the intent or effect of unbundling equity securities orders for execution for the primary purpose of maximizing a monetary or in-kind amount received by the member, member organization, or person associated with or employed by a member or member organization as a result of the execution of such equity securities orders. For purposes of this section, `monetary or in-kind amounts' shall be defined to include commissions, gratuities, payments for or rebate of fees resulting from the entry of such equity securities orders, or any similar payments of value to the member, member organization, or person associated with or employed by a member or member organization.” </FTNT> The impermissibility of unbundling is a well-established principle across the U.S. securities markets. Other options exchanges have anti-unbundling rules or rule interpretations that are similar to the rule being adopted by the Exchange. <SU>9</SU> <FTREF/> Additionally, other exchanges have also issued regulatory guidance to their members warning them against the practice of unbundling. <SU>10</SU> <FTREF/> Finally, the Financial Industry Regulatory Authority (“FINRA”) also has its own anti-unbundling rule, FINRA Rule 5290, which specifies, in part, that “[n]o member . . . shall engage in conduct that has the intent or effect of splitting any order into multiple smaller orders for execution or any execution into multiple smaller executions for transaction reporting for the primary purpose of maximizing a monetary or in-kind amount to be received by the member . . . as a result of the execution of such orders or the transaction reporting of such executions.” <FTNT> <SU>9</SU>   <E T="03">See, e.g.,</E> NYSE American Rule 995NY(d) (“It shall be considered conduct inconsistent with just and equitable principles of trade for an ATP Holder to split an order into multiple smaller orders for any purpose other than seeking the best execution of the entire order.”), NYSE Arca Rule 11.2(g) (“An ETP Holder may not split any order into multiple orders for any purpose other than seeking the best execution of the entire order.”), and MIAX Chapter III, Rule 301, Interpretation .03 (“It shall be considered conduct inconsistent with just and equitable principles of trade and a violation of Rule 301 for a Member to split an order into multiple smaller orders for any purpose other than seeking the best execution of the entire order.”). </FTNT> <FTNT> <SU>10</SU>   <E T="03">See, e.g.,</E> Cboe Regulatory Circular RG-15-011 (Sept. 23, 2015) (“Please note that unbundling of orders greater than 5 contracts into 1 to 5 lot increments for the purpose of achieving small order preference in favor of any [Designated Primary Market-Maker] or [Lead Market-Maker] may be a violation of CBOE Rule 4.1, Just and Equitable Principles of Trade”), <E T="03">available at https://cdn.cboe.com/resources/regulation/circulars/regulatory/RG15-130.pdf.</E> </FTNT> Additionally, the Exchange proposes to remove from PHLX Option 3, Section 7 the following sentence: “Orders may not be unbundled, nor may a firm solicit a customer to unbundle an order for this purpose.”  <SU>11</SU> <FTREF/> This sentence appears extraneous, as it does not seem to belong with the preceding sentence (“The Exchange may determine to make certain order types and time-in-force, respectively, on a class or System basis.”). The sentence is also nonsensical, as it is not at all clear what it refers to by “for this purpose.” The Exchange suspects that this rule text may be a vestigial remain of some older ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 17k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━