[Federal Register Volume 76, Number 173 (Wednesday, September 7, 2011)]
[Notices]
[Pages 55453-55455]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-22725]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-65228; File No. SR-Phlx-2011-119]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change Relating to
Reversal and Conversion Strategies
August 30, 2011.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\, and Rule 19b-4 \2\ thereunder, notice is hereby given
that, on August 18, 2011, NASDAQ OMX 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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to establish a fee cap on equity options
transactions on certain reversals and conversion strategies. The text
of the proposed rule change is available on the Exchange's Web site at
http://nasdaqtrader.com/micro.aspx?id=PHLXRulefilings, at the principal
office of the Exchange, at the Commission's Public Reference Room, and
on the Commission's Web site at www.sec.gov.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
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.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to incentivize market
participants by capping option transaction fees related to reversal and
conversion strategies to encourage trading on the Exchange. Reversals
are established by combining a short stock position with a short put
and a long call position that shares the same strike and expiration.
Conversions are established by combining a long position in the
underlying security with a long put and a short call position that
shares the same strike and expiration.
The Exchange proposes to cap Specialist,\3\ Registered Option
Trader (``ROT''),\4\ SQT,\5\ RSQT,\6\ Professional,\7\ Broker-Dealer
and Firm option transaction fees in Multiply Listed Options \8\ at $500
per day for reversal and conversion strategies which are executed on
the same trading day in the same options class (``Reversal and
Conversion Cap''). The Reversal and Conversion Cap will only apply to
executions occurring on either of the two days preceding the standard
options expiration date, which is typically the third Thursday and
Friday of every
[[Page 55454]]
month.\9\ The Exchange proposes to add language to Section II of the
Exchange's Fee Schedule entitled, Equity Options Fees, to describe the
Reversal and Conversion Cap and define reversals and conversions.
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\3\ A Specialist is an Exchange member who is registered as an
options specialist pursuant to Rule 1020(a).
\4\ A Registered Options Trader (``ROT'') includes a SQT, a RSQT
and a Non-SQT ROT, which by definition is neither a SQT or a RSQT. A
ROT is defined in Exchange Rule 1014(b) as a regular member or a
foreign currency options participant of the Exchange located on the
trading floor who has received permission from the Exchange to trade
in options for his own account. See Exchange Rule 1014 (b)(i) and
(ii).
\5\ An SQT is defined in Exchange Rule 1014(b)(ii)(A) as an ROT
who has received permission from the Exchange to generate and submit
option quotations electronically in options to which such SQT is
assigned.
\6\ An RSQT is defined Exchange Rule in 1014(b)(ii)(B) as an ROT
that is a member or member organization with no physical trading
floor presence who has received permission from the Exchange to
generate and submit option quotations electronically in options to
which such RSQT has been assigned. An RSQT may only submit such
quotations electronically from off the floor of the Exchange.
\7\ The Exchange defines a ``professional'' as any person or
entity that (i) is not a broker or dealer in securities, and (ii)
places more than 390 orders in listed options per day on average
during a calendar month for its own beneficial account(s)
(hereinafter ``Professional'').
\8\ For purposes of this filing, a Multiply Listed security
means an option that is listed on more than one exchange.
\9\ When the standard expiration date is also an Exchange
holiday, the trading dates will be brought forward by one day.
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For example, the standard options expiration date for September
2011 is September 17, 2011. Therefore, on the two preceding days,
Thursday, September 15, 2011, and Friday, September 16, 2011,
Specialists, ROTs, SQTs, RSQTs, Professionals, Broker-Dealers and Firms
are eligible for the Reversal and Conversion Cap.
In order to capture the necessary information electronically, the
Exchange requires members to designate on the trade ticket whether the
trade involves a dividend, merger, short stock interest or reversal and
conversion strategy. Specifically, members would be required to enter
the proper code, ``Z4'', on the trading ticket and into the system, or
directly into the Floor Broker Management System (``FBMS'').\10\
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\10\ FBMS is designed to enable Floor Brokers and/or their
employees to enter, route and report transactions stemming from
options orders received on the Exchange. FBMS also is designed to
establish an electronic audit trail for options orders represented
and executed by Floor Brokers on the Exchange, such that the audit
trail provides an accurate, time-sequenced record of electronic and
other orders, quotations and transactions on the Exchange, beginning
with the receipt of an order by the Exchange, and further
documenting the life of the order through the process of execution,
partial execution, or cancellation of that order. See Exchange Rule
1080, Commentary .06.
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The Exchange also proposes to make an amendment to Section VII of
the Fee Schedule entitled, ``Options Floor Broker Subsidy.'' The
Exchange currently excludes dividend, merger and short stock interest
strategies from the eligible contract computations in computing the
monthly eligible contracts for the Options Floor Broker Subsidy
(``Subsidy'').\11\ The Exchange proposes to also exclude those
executions subject to the Reversal and Conversion Cap from the Subsidy.
The Exchange proposes to amend Section VII to add language to indicate
that executions subject to the Reversal and Conversion Cap will not be
included in the eligible contract computations.
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\11\ The Exchange currently pays an Options Floor Broker Subsidy
(``Subsidy'') to member organizations with Exchange registered floor
brokers that enter eligible contracts into the Exchange's FBMS. The
Subsidy is paid based on the contract volume on Customer-to-non-
Customer as well as non-Customer-to-non-Customer transactions for
that month. Only the volume from orders entered by floor brokers
into FBMS and subsequently executed on the Exchange qualifies.
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The Exchange also proposes to amend the applicability of the
dividend,\12\ merger \13\ and short stock interest \14\ strategies in
Section II of the Exchange's Fee Schedule. Currently, Specialist, ROT,
SQT and RSQT, Firm and Broker-Dealer equity option transaction charges
are capped at $1,000 for dividend, merger and short stock interest
strategies executed on the same trading day in the same options class
when such members are trading in their own proprietary accounts.\15\
The Exchange proposes to add Professionals to the list of market
participants that may cap their options transaction charges for
dividend, merger and short stock interest strategies.
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\12\ A dividend strategy is defined as transactions done to
achieve a dividend arbitrage involving the purchase, sale and
exercise of in-the-money options of the same class, executed the
first business day prior to the date on which the underlying stock
goes ex-dividend.
\13\ A merger strategy is defined as transactions done to
achieve a merger arbitrage involving the purchase, sale and exercise
of options of the same class and expiration date, executed the first
business day prior to the date on which shareholders of record are
required to elect their respective form of consideration, i.e., cash
or stock.
\14\ A short stock interest strategy is defined as transactions
done to achieve a short stock interest arbitrage involving the
purchase, sale and exercise of in-the-money options of the same
class.
\15\ Equity option transaction charges for dividend, merger and
short stock interest strategies combined are further capped at the
greater of $10,000 per member or $25,000 per member organization per
month when such members are trading in their own proprietary
accounts.
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2. Statutory Basis
The Exchange believes that its proposal to amend its Fee Schedule
is consistent with Section 6(b) of the Act \16\ in general, and
furthers the objectives of Section 6(b)(4) of the Act \17\ in
particular, in that it is an equitable allocation of reasonable fees
and other charges among Exchange members and other persons using its
facilities.
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\16\ 15 U.S.C. 78f(b).
\17\ 15 U.S.C. 78f(b)(4).
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The Exchange believes that the proposed Reversal and Conversion Cap
is reasonable because the Exchange is proposing to offer all members an
opportunity to reduce option transaction fees in Multiply Listed
options for reversals and conversions. Customers are not subject to the
Reversal and Conversion Cap because they do not pay option transaction
charges for reversal and conversion strategies. The Exchange also
believes that this proposal is equitable and not unfairly
discriminatory because the Exchange is offering all members, except for
Customers, the same opportunity to cap their option transaction fees in
Multiply Listed Options for two days every month. Also, this proposal
is similar in nature to caps on other exchanges, namely NYSE Arca, Inc.
(``NYSEArca''),\18\ NYSE Amex, Inc. (``NYSE Amex'') \19\ and the
Chicago Board Options Exchange, Incorporated(``CBOE'') \20\ for
reversals and conversions.
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\18\ See NYSE Arca's Fee Schedule.
\19\ See NYSE Amex's Fee Schedule.
\20\ See CBOE's Fees Schedule.
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The Exchange also believes that its proposal to allow Professionals
to cap option transaction charges for dividend, merger and short stock
interest strategies executed on the same trading day in the same
options class when such members are trading in their own proprietary
accounts is reasonable because all other market participants, other
than Customers, are able to cap these fees. In addition, the Exchange
believes that adding Professionals to the list of market participants
that may cap dividend, merger and short stock interest strategies, is
equitable and not unfairly discriminatory because the Exchange is
offering all members, except for Customers, the opportunity to cap
their transaction fees for dividend, merger and short stock interest
strategies. Customers do not pay option transaction charges for
dividend, merger or short stock interest strategies.
The Exchange believes that amending Section VII to indicate that
executions subject to the Reversal and Conversion Cap will not be
included in the eligible contract computations of the Subsidy is
reasonable since the Exchange currently excludes other strategies that
are the subject of a cap. The recipients of the cap on strategies
already receive a benefit by capping their options transaction charges
and therefore the Exchange believes it is reasonable to exclude those
strategies from the Subsidy. Additionally, the Exchange believes that
excluding those executions that are subject to the Reversal and
Conversion Cap from the Subsidy computation is equitable and not
unfairly discriminatory because the exclusion will be applied evenly
for all member organizations with Exchange registered floor brokers.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
[[Page 55455]]
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act.\21\ At any time within 60 days of the
filing of the proposed rule change, the Commission summarily may
temporarily suspend such rule change if it appears to the Commission
that such action is necessary or appropriate in the public interest,
for the protection of investors, or otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission shall institute proceedings to determine whether the
proposed rule should be approved or disapproved.
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\21\ 15 U.S.C. 78s(b)(3)(A)(ii).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File Number SR-Phlx-2011-119 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2011-119. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-Phlx-2011-119 and should be
submitted on or before September 28, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-22725 Filed 9-6-11; 8:45 am]
BILLING CODE 8011-01-P