Nasdaq PHLX LLC, a self-regulatory organization under the Securities Exchange Act of 1934, filed a proposed rule change on November 19, 2025, to amend its Legging Order functionality. Published in the Federal Register on December 5, 2025, the filing seeks to refine how Legging Orders are generated for complex options orders, specifically addressing scenarios where multiple orders compete at the same price. This change, designated as SR-Phlx-2025-61, became effective immediately upon filing, with the Securities and Exchange Commission waiving the 30-day operative delay to coincide with a related technology migration. The amendment underscores ongoing efforts to align PHLX's complex order system with its allocation priorities, potentially enhancing market efficiency and investor protection by ensuring higher-priority orders, such as those from customers, receive appropriate precedence.
Background on Legging Orders and Recent Rule Changes
Legging Orders represent a mechanism in options trading where a single-leg order is automatically generated from a resting complex order to interact with the regular order book. PHLX introduced this functionality earlier in 2025 through filing SR-Phlx-2025-17, which harmonized its complex order rules with those of affiliated exchanges Nasdaq ISE, LLC and Nasdaq MRX, LLC. As detailed in that filing, published in the Federal Register on April 21, 2025 (90 FR 16731), PHLX adopted Legging Order rules at Options 3, Section 7(k), mirroring ISE and MRX provisions. These rules allow a Legging Order to be created for one or both legs of a complex order if it matches or improves the best bid or offer on the single-leg book and achieves the net price against the opposite leg.
However, PHLX's allocation methodology differs from its affiliates. While ISE and MRX execute complex orders at the same price in time priority, PHLX employs a pro-rata allocation based on size with customer priority, as outlined in Options 3, Section 14(d)(2). This distinction necessitates adjustments to ensure Legging Orders respect customer precedence. The current proposal addresses a specific inconsistency in the rule text adopted from ISE and MRX, where generation criteria did not fully account for PHLX's priority model.
Purpose and Details of the Proposed Amendment
The core of the proposal amends Options 3, Section 7(k)(2)(iv), which previously stated that a Legging Order would not be generated if another Legging Order already existed in the same series on the same side at the same price. The revised language specifies that generation is barred if the existing Legging Order stems from a complex order with higher priority, such as a customer order. This change ensures consistency with related provisions in Options 3, Section 7(k)(1) and (4)(vii), which allow for the removal and replacement of lower-priority Legging Orders when a higher-priority complex order arrives at the same price.
As explained in the filing, 'if a Legging Order is created from a Complex Order with a lower priority (i.e., Non-Customer Order) at the same price and, thereafter, a Complex Order with a higher priority arrives (i.e., Customer), the prior lower priority Legging Order would be removed and replaced with the Legging Order for the Complex Order with a higher priority.' This process aligns with PHLX's allocation rules, promoting just and equitable trade principles by prioritizing customer interests without disrupting overall market functionality.
The amendment is set to implement concurrently with the broader complex order migration from SR-Phlx-2025-17, ensuring seamless integration into PHLX's trading system.
Statutory Basis and Regulatory Justification
PHLX asserts that the proposal complies with Section 6(b) of the Securities Exchange Act, particularly subsection (5), which requires rules to promote just and equitable principles of trade and protect investors. By clarifying Legging Order generation to reflect customer priority, the change removes potential ambiguity in system behavior, as noted in the filing: 'The proposed amendment to Options 3, Section 7(k)(2)(iv) accounts for Phlx's allocation methodology and removes any ambiguity in the rule as to the System's process of generating Legging Orders.'
This aligns with precedents in options market regulation, such as the SEC's approval of similar priority mechanisms in other exchanges. For instance, customer priority overlays are common in U.S. options markets to foster retail participation, as seen in rules governing exchanges like Cboe Exchange, Inc. PHLX argues the change imposes no undue burden on competition, applying uniformly to all participants and potentially encouraging other exchanges to adopt comparable features.
No comments were received on the proposal, and the SEC's waiver of the operative delay reflects its view that the change supports investor protection without novel regulatory concerns.
Implications for Market Participants and Competition
From a short-term perspective, the amendment could immediately affect how complex orders are executed on PHLX, particularly in scenarios with competing customer and non-customer interest at identical prices. Traders, including market makers and institutional investors, may need to adjust strategies to account for enhanced customer precedence in Legging Order generation, potentially leading to more predictable order handling.
Longer-term, this refinement supports broader goals of market integrity and efficiency. By aligning rules with allocation priorities, PHLX may reduce execution risks and enhance liquidity in complex orders. Different stakeholders offer varied views: proponents, including retail advocates, see it as bolstering investor protection, while some professional traders might argue it could marginally disadvantage non-customer orders in tight pricing environments. Regulators, however, emphasize the balance, noting that such priorities are standard to encourage public participation without stifling competition.
The proposal's inter-market implications are minimal, as PHLX states it does not burden competition and invites other exchanges to consider similar rules. Intra-market, the uniform application ensures fairness across participant types.
Forward-Looking Considerations
Key takeaways from this development include the precise alignment of Legging Order rules with PHLX's customer-focused allocation model, potentially setting a template for future rule harmonizations across Nasdaq-affiliated exchanges. Ongoing debates may center on the balance between customer priority and overall market efficiency, with possible future challenges arising if trading volumes in complex orders increase, testing system robustness. Next steps could involve monitoring implementation outcomes and potential SEC reviews of related filings, while stakeholders watch for any adjustments in response to market feedback.
