[Federal Register Volume 77, Number 87 (Friday, May 4, 2012)]
[Notices]
[Pages 26595-26598]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-10755]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66884; File Nos. SR-Phlx-2012-27; SR-Phlx-2012-54]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Suspension of
and Order Instituting Proceedings To Determine Whether To Approve or
Disapprove Proposed Rule Changes Relating to Complex Order Fees and
Rebates for Adding and Removing Liquidity in Select Symbols
April 30, 2012.
I. Introduction
On March 1, 2012 and April 23, 2012, NASDAQ OMX PHLX LLC (``Phlx''
or ``Exchange'') filed with the Securities and Exchange Commission (the
``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Exchange Act'' or ``Act'') \1\ and Rule 19b-4
thereunder,\2\ two proposed rule changes relating to the transaction
fees for certain Complex Order transactions.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b 4.
\3\ A Complex Order is any order involving the simultaneous
purchase and/or sale of two or more different options series in the
same underlying security, priced at a net debit or credit based on
the relative prices of the individual components, for the same
account, for the purpose of executing a particular investment
strategy. A Complex Order may also be a stock-option order, which is
an order to buy or sell a stated number of units of an underlying
stock or exchange-traded fund (``ETF'') coupled with the purchase or
sale of options contract(s). See Exchange Rule 1080, Commentary
.08(a)(i).
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In SR-Phlx-2012-27 (filed on March 1, 2012), Phlx proposed to amend
the Exchange's Fee Schedule to increase the transaction fees and
rebates for certain Complex Order transactions and create a new rebate
for certain Complex Orders. The proposed rule change was immediately
effective upon filing with the Commission pursuant to Section
19(b)(3)(A) of the Act.\4\ Notice of filing of the proposed rule change
was published in the Federal Register on March 15, 2012.\5\
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\4\ 15 U.S.C. 78s(b)(3)(A).
\5\ See Securities Exchange Act Release No. 66551 (March 9,
2012) 77 FR 15400 (``Notice'').
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In SR-Phlx-2012-54 (filed on April 23, 2012), Phlx proposed to
replace a portion of SR-Phlx-2012-27 to provide additional information
concerning the Directed Participant and Market Maker fees for removing
liquidity in Complex orders (``Second Proposal,'' and, together with
SR-Phlx-2012-27, the ``Phlx Proposals'').\6\ The proposed rule change
was immediately effective upon filing with the Commission pursuant to
Section 19(b)(3)(A) of the Act.\7\
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\6\ See Securities Exchange Act Release No. 66883 (April 30,
2012) (SR-Phlx-2012-54) (notice of filing of the proposed rule
change).
\7\ 15 U.S.C. 78s(b)(3)(A).
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To date, the Commission has not received any comment letters on the
Exchange's proposed rule changes.
Under Section 19(b)(3)(C) of the Act, the Commission is: (1) Hereby
temporarily suspending the Phlx Proposals; and (2) instituting
proceedings to determine whether to approve or disapprove the Phlx
Proposals.
II. Summary of the Proposed Rule Changes
SR-Phlx-2012-27
The Exchange's proposal amended Complex Order fees and rebates for
adding and removing liquidity in its Select Symbols.\8\ Specifically,
Phlx's proposal: (1) Increased the Customer Rebate for Adding Liquidity
from $0.30 per contract to $0.32 per contract; (2) created a new Rebate
for Removing Liquidity of $0.06 per contract for each contract of
liquidity removed by an order designated as a Customer Complex Order;
(3) amended the Fee for Removing Liquidity for all participants who are
assessed such a fee; and (4) created a volume incentive for certain
market participants that transact significant volumes of Complex Orders
on the Exchange.
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\8\ The Select Symbols are listed in Section I of the Phlx Fee
Schedule.
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Phlx's proposal to amend the Fee for Removing Liquidity increased
the Complex Order Fees for Removing Liquidity for the Directed
Participant,\9\ Market Maker,\10\ Firm, Broker-Dealer, and Professional
\11\ categories of market participants. The fee for Directed
Participant transactions increased from $0.30 to $0.32 per contract;
the fee for Market Makers increased from $0.32 to $0.37 per contract;
and the fee for Firms, Broker-Dealers, or Professionals
[[Page 26596]]
increased from $0.35 to $0.38 per contract.
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\9\ The term ``Directed Participant'' applies to transactions
for the account of a Specialist, Streaming Quote Trader (``SQT'') or
Remote Streaming Quote Trader (``RSQT'') resulting from a Customer
order that is (1) directed to it by an order flow provider, and (2)
executed by it electronically on Phlx XL II. See Phlx Fee Schedule
at 3.
\10\ A ``Market Maker'' includes Specialists (see Exchange Rule
1020) and Registered Options Traders (``ROTs'') (see Exchange Rule
1014(b)(i) and (ii), which includes SQTs (see Exchange Rule
1014(b)(ii)(A)) and RSQTs (see Exchange Rule 1014(b)(ii)(B)).
\11\ The term ``professional'' means 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). See Exchange Rule
1000(b)(14).
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The proposal also provided a new volume incentive to Market Makers.
The Exchange has four categories of market makers--Specialists,\12\
ROTs,\13\ SQTs \14\ and RSQTs \15\--that would all be eligible to
receive the volume incentive. If the Market Maker executes more than
25,000 contracts of Complex Orders each day in a given month, all of
that Market Maker's transactions in Complex Orders that remove
liquidity, both as a Directed Participant and as a Market Maker, shall
be reduced by $0.01 per contract for that month.
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\12\ A Specialist is an Exchange member who is registered as an
options specialist pursuant to Exchange Rule 1020(a).
\13\ A ROT includes a SQT, a RSQT and a Non-SQT ROT, which by
definition is neither a SQT nor a RSQT. A Registered Option Trader
is defined in Rule 1014(b) as a regular member 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).
\14\ 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.
\15\ An RSQT is defined in Exchange Rule 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.
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SR-Phlx-2012-54
The Exchange's proposal replaced a portion of SR-Phlx-2012-27 to
provide additional information concerning the current Complex Order
Directed Participant and Market Maker Fees for Removing Liquidity in
Select Symbols. The Exchange did not propose to amend any of the fees
for the Complex Order Directed Participant and Market Maker Fees for
Removing Liquidity in Select Symbols, but rather included additional
justification for the differential between the fees paid by Directed
Participants and Market Makers.
III. Suspension of the Phlx Proposals
Pursuant to Section 19(b)(3)(C) of the Act,\16\ at any time within
60 days of the date of filing of a proposed rule change pursuant to
Section 19(b)(1) of the Act,\17\ the Commission summarily may
temporarily suspend the change in the rules of a self-regulatory
organization 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.
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\16\ 15 U.S.C. 78s(b)(3)(C).
\17\ 15 U.S.C. 78s(b)(1).
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The Commission believes it is appropriate to further evaluate the
potential effect of the proposed rule changes on competition among
different types of market participants and on market quality,
particularly with respect to the fee differential between Directed
Participants and Market Makers, and the basis for such differential put
forth by the Exchange. Under the proposed rule changes, the Exchange
increased the differential between the fee charged to Directed
Participants and Market Makers from $0.02 to $0.05. As a result, if a
Market Maker that is a Directed Participant executes against a Customer
order directed to that Market Maker for execution by an Order Flow
Provider (``OFP''),\18\ it will be charged $0.05 less per contract than
another Market Maker to whom the order is not directed would have been
charged for executing against that same order.
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\18\ The term ``Order Flow Provider'' (``OFP'') means any member
or member organization that submits, as agent, orders to the
Exchange. See Exchange Rule 1080(l)(i)(B).
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In the Notice for SR-Phlx-2012-27, the Exchange stated that the
changes to the Complex Order taker fees in the Select Symbols for
Market Makers and Directed Participants are reasonable, equitable, and
not unfairly discriminatory.\19\ The Exchange did not specifically
analyze the impact, if any, of the changes to the Complex Order taker
fees on competition.\20\ The Exchange argued that the proposed fee
change is reasonable, equitable, and not unfairly discriminatory
because:
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\19\ See Notice, supra note 5, at 15403.
\20\ See Section 6(b)(8) of the Act, which requires that the
rules of a national securities exchange ``not impose any burden on
competition not necessary or appropriate in furtherance of the
purposes of [the Exchange Act].''
(i) Market Makers are not entitled to guaranteed allocations for
directed Complex Orders; (ii) all Market Makers have an equal
opportunity to incentivize an OFP to direct an order to it for
execution on the Exchange; (iii) only Customer orders that are
directed by an OFP and executed by the intended Market Maker receive
the Complex Order Directed Participant fee; (iv) the proposed
Directed Participant and Market Maker Complex Order fees are less
than the fees assessed to Firms, Professionals and Broker-Dealers
because of obligations carried by those Market Makers which do not
burden other participants; (v) Market Makers are unaware of the
identity of the contra-party at the time of the trade and are also
required to execute at the best price, pursuant to Exchange Rules,
against an order intended for them by an OFP in order to be assessed
the Directed Participant Complex Order Fee for Removing Liquidity
(the only benefit) which does not happen more than 80% of the time;
(vi) order flow arrangements benefit all market participants equally
through added liquidity * * * \21\
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\21\ See id. at 15404.
In support of this argument, the Exchange noted that ``an average
of 14.5% of Customer Complex Orders trade with the Market Maker to
which they are directed.'' \22\ It also provided an analysis for the
week of October 10, 2011 of the level of price improvement received by
Customer Complex Order trading in an auction process on the Exchange.
Phlx noted that, based on its analysis, ``Customer Complex Orders
received price improvement 29% of the time and the average level of
price improvement was $0.059 per option or $5.90 per contract for
options receiving price improvement.'' \23\ The Exchange stated that
difference between the proposed fee differential and the price
improvement levels ``supports the Exchange's belief that the proposed
fee is reasonable and will have a negligible impact on Directed and
non-Directed Market Makers,'' \24\ given that the fee differential
between Directed Participants and Market Makers rose by $0.03 per
contract, while the average level of price improvement, for options
receiving price improvement, is $5.90 per contract.
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\22\ See id. at 15403.
\23\ See id.
\24\ Id.
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The Exchange also noted the justification for the existing $0.02
differential between Directed Participants and Market Makers is that
Market Makers that receive Directed Orders have higher quoting
obligations than Market Makers who do not.\25\
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\25\ See id. at 15402.
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The Exchange further stated that increasing this differential is
intended ``to also reflect the increased costs that are incurred by
such Market Makers that enter into order flow arrangements at a cost
and without the benefit of a guaranteed allocation.'' \26\ Phlx stated
that it wants to encourage Market Makers to enter into order flow
arrangements and that ``[t]he benefit that a Market Maker brings to the
Exchange when it pays for order flow is not an insignificant one and
this benefit should not go unrewarded.'' \27\ The competition for order
flow, according to the Exchange, provides better execution quality on
the Exchange, which benefits all participants.\28\
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\26\ See id.
\27\ See id. at 15404.
\28\ See id.
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In the Second Proposal, Phlx replaced a portion of SR-Phlx-2012-27
to provide additional justification for the
[[Page 26597]]
differential between the Complex Order Directed Participant and Market
Maker Fees for Removing Liquidity in Select Symbols (as modified by SR-
Phlx-2012-27). The Exchange argued that the $0.05 per contract
differential is reasonable, equitable and not unfairly discriminatory
because: (i) It is consistent with the fee structures at other options
exchanges; (ii) Market Makers do not receive guaranteed allocations for
directed Complex Orders; (iii) the only executions that receive the
reduced Complex Order Directed Participant fee are Market Maker
executions against Customer orders that are directed by an OFP to the
executing Market Maker; (iv) Market Makers do not know the identity of
the contra-party at the time of a trade and must execute at the best
price; (v) Market Makers compete to offer price improvement in
auctions; and (vi) the fees for removing liquidity in Complex Orders
allow the Exchange to offer increased Customer rebates, which attracts
additional Customer order flow to the Exchange and benefits all market
participants.
The Exchange also provided data for the time period from September
1, 2011 through April 19, 2012, showing the percentage of Customer
Complex directed orders that traded with the Market Maker to which the
order was directed, as follows:
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October November December January February April 1-19,
September 2011 2011 2011 2011 2012 2012 March 2012 2012
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17.02%....................................................... 16.16% 17.94% 14.01% 6.19% 11.47% 14.19% 17.13%
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The Exchange maintained that ``in a given month the effective
Complex Order Fee for Removing Liquidity for a Market Maker that also
has executions subject to the Directed Participant rate is
approximately $0.02 below the Market Maker Complex Order Fee for
Removing Liquidity.'' The Exchange also updated the price improvement
statistics described above to note that the average level of price
improvement during the week of April 9, 2012 was $5.60 per contract for
options receiving price improvement.
The Commission intends to further assess whether the resulting fee
disparity between Directed Participants and Market Makers ($0.05 per
contract) is consistent with the statutory requirements applicable to a
national securities exchange under the Act, as described below. In
particular, the Commission will assess whether the Phlx Proposals
satisfy the standards under the Exchange Act and the rules thereunder
requiring, among other things, that an exchange's rules: provide for
the equitable allocation of reasonable fees among members, issuers, and
other persons using its facilities; not be designed to permit unfair
discrimination between customers, issuers, brokers, or dealers; and do
not impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act.
Therefore, the Commission finds that it is appropriate in the
public interest, for the protection of investors, and otherwise in
furtherance of the purposes of the Act, to temporarily suspend the
proposed rule changes.
IV. Proceedings To Determine Whether To Approve or Disapprove the Phlx
Proposals
The Commission is instituting proceedings pursuant to Sections
19(b)(3)(C) \29\ and 19(b)(2) of the Act \30\ to determine whether the
Exchange's proposed rule changes should be approved or disapproved.
Pursuant to Section 19(b)(2)(B) of the Act,\31\ the Commission is
providing notice of the grounds for disapproval under consideration. As
discussed above, under the proposal, a Market Maker that is a Directed
Participant pays a lower fee than a Market Maker that is not a Directed
Participant when executing against a Complex Order in a Select Symbol
that was directed to the Directed Participant. The Exchange Act and the
rules thereunder require that an exchange's rules: Provide for the
equitable allocation of reasonable fees among members, issuers, and
other persons using its facilities; not be designed to permit unfair
discrimination between customers, issuers, brokers, or dealers; and do
not impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act. The Commission intends
to further assess whether the Phlx Proposals are consistent with these
Exchange Act standards.
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\29\ 15 U.S.C. 78s(b)(3)(C). Once the Commission temporarily
suspends a proposed rule change, Section 19(b)(3)(C) of the Act
requires that the Commission institute proceedings under Section
19(b)(2)(B) to determine whether a proposed rule change should be
approved or disapproved.
\30\ 15 U.S.C. 78s(b)(2).
\31\ 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of the Act also
provides that proceedings to determine whether to disapprove a
proposed rule change must be concluded within 180 days of the date
of publication of notice of the filing of the proposed rule change.
Id. The time for conclusion of the proceedings may be extended for
up to 60 days if the Commission finds good cause for such extension
and publishes its reasons for so finding. Id.
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The Commission believes it is appropriate and in the public
interest to institute disapproval proceedings at this time in view of
the significant legal and policy issues raised by the Phlx
Proposals.\32\ Institution of disapproval proceedings does not
indicate, however, that the Commission has reached any conclusions with
respect to the issues involved. The sections of the Act and the rules
thereunder that are applicable to the proposed rule changes include:
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\32\ See also Securities Exchange Act Release No. 61547
(February 19, 2010) 75 FR 8762 (February 25, 2010) (Order of Summary
Abrogration, in which the Commission abrogated several Phlx fee
filings, including a fee that would have instituted a $0.16
differential between certain classes of market makers depending on
whether they had orders directed to them).
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Section 6(b)(4) of the Act, which requires that the rules
of a national securities exchange ``provide for the equitable
allocation of reasonable dues, fees, and other charges among its
members and issuers and other persons using its facilities;'' \33\
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\33\ 15 U.S.C. 78f(b)(4).
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Section 6(b)(5) of the Act, which requires, among other
things, that the rules of a national securities exchange not be
``designed to permit unfair discrimination between customers, issuers,
brokers, or dealers;'' \34\ and
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\34\ 15 U.S.C. 78f(b)(5).
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Section 6(b)(8) of the Act, which requires that the rules
of a national securities exchange ``not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of [the Exchange Act].'' \35\
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\35\ 15 U.S.C. 78f(b)(8).
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V. Commission's Solicitation of Comments
The Commission requests written views, data, and arguments with
respect to the concerns identified above as well as any other relevant
concerns. Such comments should be submitted by May 25, 2012. Rebuttal
comments should be submitted by June 8, 2012. Although there do not
appear to be any issues relevant to approval or disapproval which would
be facilitated by an oral presentation of views, data, and
[[Page 26598]]
arguments, the Commission will consider, pursuant to Rule 19b-4, any
request for an opportunity to make an oral presentation.\36\
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\36\ 15 U.S.C. 78s(b)(2). Section 19(b)(2) of the Act grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Acts Amendments of 1975, Report of the
Senate Committee on Banking, Housing and Urban Affairs to Accompany
S. 249, S. Rep. No. 75, 94th Cong., 1st Sess. 30 (1975).
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The Commission asks that commenters address the sufficiency and
merit of the Exchange's statements in support of the proposals, in
addition to any other comments they may wish to submit about the
proposed rule changes. The Commission is focusing its request for
comment on the fee for removing liquidity assessed on Directed
Participants as compared to the fee for removing liquidity assessed on
Market Makers, not the other fee changes that were included in Phlx-
2012-27. In particular, the Commission seeks comment on the following:
As noted above, Section 6(b)(5) of the Act requires, among
other things, that the rules of a national securities exchange not be
``designed to permit unfair discrimination between customers, issuers,
brokers or dealers.'' The Commission seeks comment on whether
discrimination on the basis of whether a market maker has an off-
exchange arrangement to pay an OFP to direct its orders to that market
maker is a ``fair'' basis for discrimination among its members with
respect to the fees charged by the exchange. Do commenters' views
change depending on whether the payment for order flow is pursuant to
exchange rules or an off-exchange payment for order flow arrangement?;
The Commission seeks comment on whether the filing for SR-
Phlx-2012-27 or for SR-Phlx-2012-54 was sufficient under Section 19(b)
of the Act in addressing issues regarding the basis for discrimination
between Market Makers and Directed Participants in Complex Order
transaction fees, and whether the basis for such discrimination is
fair, and why or why not;
As noted above, Section 6(b)(4) requires that the rules of
a national securities exchange ``provide for the equitable allocation
of reasonable dues, fees, and other charges among its members and
issuers and other persons using its facilities.'' The Commission seeks
comment on whether the filing for SR-Phlx-2012-27 or for SR-Phlx-2012-
54 was sufficient under Section 19(b) of the Act in addressing issues
regarding the reasonableness of the proposed fees (and thus the
proposed fee differential), and whether the amount of the proposed fees
(and thus the amount of the proposed fee differential), are reasonable,
and why or why not. Does a flat $0.05 fee differential appropriately
reflect potential differences that may exist in payment for order flow
arrangements between market makers and OFPs?;
Section 6(b)(8) of the Act requires that the rules of a
national securities exchange ``not impose any burden on competition not
necessary or appropriate in furtherance of the purposes of [the
Exchange Act]. The Commission seeks comment on whether the filing for
SR-Phlx-2012-27 or for SR-Phlx-2012-54 was sufficient under Section
19(b) of the Act in addressing issues regarding the effects of the
proposed fee change on competition, and what, if any, impact the
proposed fee change has or will have on competition, especially as
between Directed Participants and Market Makers; and
Whether the proposed fee changes will affect the quality
of execution of Customer Complex Orders or broader market quality; and
if so, how and what type of impact will they have.
Interested persons are invited to submit written data, views, and
arguments concerning the proposed rule changes, including whether the
proposed rule changes are 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 email to [email protected]. Please include
File Number SR-Phlx-2012-27 and/or SR-Phlx-2012-54 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-2012-27 and/or SR-
Phlx-2012-54. The file number should be included on the subject line if
email 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 changes that
are filed with the Commission, and all written communications relating
to the proposed rule changes 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 10:00 a.m. and 3:00 p.m. Copies of such 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
publicly available. All submissions should refer to File Number SR-
Phlx-2012-27 and SR-Phlx-2012-54 and should be submitted on or before
May 25, 2012. Rebuttal comments should be submitted by June 8, 2012.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(3)(C) of the
Act,\37\ that File Nos. SR-Phlx-2012-27 and SR-Phlx-2012-54, be and
hereby are, temporarily suspended. In addition, the Commission is
instituting proceedings to determine whether the proposed rule changes
should be approved or disapproved.
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\37\ 15 U.S.C. 78s(b)(3)(C).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\38\
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\38\ 17 CFR 200.30-3(a)(57) and (58).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-10755 Filed 5-3-12; 8:45 am]
BILLING CODE 8011-01-P