[Federal Register Volume 78, Number 15 (Wednesday, January 23, 2013)]
[Notices]
[Pages 4926-4936]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-01226]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68674; File No. SR- Phlx-2013-01]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change Relating to
Its Pricing Schedule
January 16, 2013.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on January 2, 2013, 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 to amend the Exchange's Pricing Schedule at Section A,
entitled ``Customer Rebate Program,'' Section I entitled ``Rebates and
Fees for Adding and Removing Liquidity in Select Symbols,'' \3\ Section
II entitled ``Multiply Listed Options Fees'' \4\ and at Section IV
entitled ``Other Transaction Fees.'' Specifically, the Exchange
proposes to amend the Customer Rebate Program, Select Symbols,\5\
Simple and Complex Order \6\ fees and rebates, the applicability of
Payment for Order Flow \7\ and PIXL \8\ Pricing.
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\3\ The rebates and fees in Section I apply to certain Select
Symbols which are listed in Section I of the Pricing Schedule.
\4\ The pricing in Section II includes options overlying
equities, ETFs, ETNs and indexes which are Multiply Listed.
\5\ The Select Symbols are listed in Section I of the Pricing
Schedule.
\6\ 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. Furthermore, a Complex Order can 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).
\7\ The Payment for Order Flow program started on July 1, 2005
as a pilot and after a series of orders extending the pilot became
effective on April 29, 2012. See Securities Exchange Act Release No.
52114 (July 22, 2005), 70 FR 44138 (August 1, 2005) (SR-Phlx-2005-
44); 57851 (May 22, 2008), 73 FR 31177 (May 20, 2008) (SR-Phlx-2008-
38); 55891 (June 11, 2007), 72 FR 333271 (June 15, 2007) (SR-Phlx-
2007-39); 53754 (May 3, 2006), 71 FR 27301 (May 10, 2006) (SR-Phlx-
2006-25); 53078 (January 9, 2006), 71 FR 2289 (January 13, 2006)
(SR-Phlx-2005-88); 52568 (October 6, 2005), 70 FR 60120 (October 14,
2005) (SR-Phlx-2005-58); and 59841 (April 29, 2009), 74 FR 21035
(May 6, 2009) (SR-Phlx-2009-38).
\8\ PIXL is the Exchange's price improvement mechanism known as
Price Improvement XL or (PIXL\SM\). See Rule 1080(n).
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The text of the proposed rule change is provided in Exhibit 5. The
text of the proposed rule change is also available on the Exchange's
Web site at http://nasdaqomxphlx.cchwallstreet.com/, at the principal
office of the Exchange, and at the Commission's Public Reference Room.
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
[[Page 4927]]
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 accomplish various
objectives. First, the Exchange proposes to amend the Customer Rebate
Program to incentivize market participants to increase the amount of
Customer order flow they transact on the Exchange. Towards this end,
the Exchange proposes the addition of Category D to the Customer Rebate
Program relating to Customer Simple Orders in Select Symbols. The
Exchange also proposes to offer certain credits when an order, which is
sent to the Exchange, is routed to an away market. Second, the Exchange
proposes to remove certain Select Symbols from Section I and instead
assess the fees and offer caps as specified in Section II of the
Pricing Schedule. The Exchange believes that the pricing in Section II,
coupled with the proposed enhancements to the Customer Rebate Program
may encourage an increase in Customer transactions in those symbols.
Third, the Exchange proposes to amend the Section I pricing in Simple
and Complex Orders and PIXL Pricing to also encourage additional
Customer order flow by not assessing fees to Customers. The Exchange
proposes to lower the Simple Order Fees for Removing Liquidity and
certain PIXL Pricing to encourage additional Simple Order transactions.
Fourth, the Exchange proposes to increase the Simple Order Fees for
Adding Liquidity, adopt Complex Order Fees for Adding Liquidity and
increase certain Complex Orders Fees for Removing Liquidity to permit
the Exchange to offer additional rebates in the Customer Rebate Program
in Section A. Fifth, the Exchange proposes to lower the Complex Order
Specialist and Market Fees for Removing Liquidity in Select Symbols, as
well as auctions and openings, and amend the applicability of Payment
for Order Flow Fee for Select Symbols and broadcast messages to
encourage greater Customer order interaction on the Exchange.
Customer Rebate Program
The Exchange is proposing to amend its Customer Rebate Program in
Section A of the Pricing Schedule. Currently, the Exchange has a four-
tiered Customer Rebate Program as follows:
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Rebate per contract categories
Average daily volume threshold -----------------------------------------------
Category A Category B Category C
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0 to 49,999 contracts in a month................................ $0.00 $0.00 $0.00
50,000 to 99,999 contracts in a month........................... 0.07 0.10 0.00
100,000 to 274,999 contracts in a month......................... 0.10 0.14 0.05
over 275,000 contracts in a month............................... 0.12 0.15 0.06
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(a) Changes to the Tiers and Rebate Rates
At this time, the Exchange proposes to reduce the Customer Rebate
Program to a three-tiered rebate structure. The Exchange proposes to
amend Tier 1 which is currently 0 to 49,999 contracts in a month to 0
to 99,999 contracts in a month. The Exchange is not proposing to amend
the rebate rates in Categories A, B or C for Tier 1. Those rebates will
remain at $0.00 per contract. Next, the Exchange is proposing to amend
Tier 2 which is currently 50,000 to 99,999 contracts in a month to
100,000 to 349,999 contracts in a month. The Exchange proposes to amend
the Tier 2 rate in Category A from $0.07 to $0.10 per contract. The
Exchange proposes to amend the Tier 2 rate in Category B from $0.10 to
$0.12 per contract. The Exchange proposes to amend the Tier 2 rate in
Category C from $0.00 to $0.13 per contract. The Exchange proposes to
eliminate Tier 3 which is currently 100,000 to 274,999 contracts in a
month.\9\ The Exchange proposes to amend current Tier 4 which awards
rebates over 275,000 contracts in a month and rename it Tier 3 and
award rebates over 350,000 contracts in a month. The Exchange proposes
to amend the new Tier 3 rate in Category A from $0.12 to $0.15 per
contract. The Exchange would not amend the Tier 3 rate in Category B.
The Exchange proposes to amend the Tier 3 rate in Category C from $0.06
to $0.15 per contract. The Exchange is not proposing to amend the types
of orders that qualify for Categories A, B or C.\10\
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\9\ Currently, Tier 3 pays the following rebates: A Category A
rebate of $0.10 per contract, a Category B rebate of $0.14 per
contract and a Category C rebate of $0.05 per contract.
\10\ The Exchange notes that it will evaluate the tiers monthly
and may file modifications to the tiers periodically depending on
market conditions.
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The Exchange also proposes to add another Category of orders
eligible for rebates entitled ``Category D.'' This new category would
pay rebates to members executing electronically-delivered Customer
Simple Orders in Select Symbols in Section I. Also, the rebate would be
paid on PIXL Orders in Section I symbols that execute against non-
Initiating Order interest.\11\ The Exchange proposes to pay the
following Category D rebates: no rebate for Tier 1, a $0.05 per
contract rebate for Tier 2 and a $0.07 per contract rebate for Tier 3.
The Exchange also proposes to add the words ``Tier 1,'' ``Tier 2,'' and
``Tier 3'' to the Pricing Schedule to further clarify the tiers. The
proposed Customer Rebate Program would be as follows:
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\11\ This application of the Category D rebate to PIXL Orders is
similar to the current application of the Category A rebate to PIXL
Orders.
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Rebate per contract categories
Average daily volume threshold ---------------------------------------------------------------
Category A Category B Category C Category D
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Tier 1: 0 to 99,999 contracts in a month........ $0.00 $0.00 $0.00 $0.00
[[Page 4928]]
Tier 2: 100,000 to 349,999 contracts in a month. 0.10 0.12 0.13 0.05
Tier 3: over 350,000 contracts in a month....... 0.15 0.15 0.15 0.07
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(b) Changes to Average Daily Volume Calculation
Currently, the Exchange calculates Average Daily Volume Threshold
by totaling Customer volume in Multiply Listed Options (including
Select Symbols) that are electronically-delivered and executed, except
volume associated with the following: (i) Electronically-delivered and
executed Customer Simple Orders in Select Symbols that remove
liquidity; and (ii) electronic Qualified Contingent Cross Orders (``QCC
Orders''),\12\ as defined in Exchange Rule 1080(o) (``Threshold
Volume''). Rebates are paid on Threshold Volume.
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\12\ A QCC Order is comprised of an order to buy or sell at
least 1000 contracts that is identified as being part of a qualified
contingent trade, as that term is defined in Rule 1080(o)(3),
coupled with a contra-side order to buy or sell an equal number of
contracts. The QCC Order must be executed at a price at or between
the National Best Bid and Offer (``NBBO'') and be rejected if a
Customer order is resting on the Exchange book at the same price. A
QCC Order shall only be submitted electronically from off the floor
to the PHLX XL II System. See Rule 1080(o). See also Securities
Exchange Act Release No. 64249 (April 7, 2011), 76 FR 20773 (April
13, 2011) (SR-Phlx-2011-47) (a rule change to establish a QCC Order
to facilitate the execution of stock/option Qualified Contingent
Trades (``QCTs'') that satisfy the requirements of the trade through
exemption in connection with Rule 611(d) of the Regulation NMS).
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The Exchange proposes to amend the Average Daily Volume Calculation
by eliminating Customer volume in Multiply-Listed Options that are
electronically-delivered and executed except for volume associated with
electronically-delivered and executed Simple Orders in Select Symbols
that remove liquidity. The Exchange is proposing to amend the Average
Daily Volume by eliminating the exclusion of the electronically-
delivered and executed Customer Simple Orders in Select Symbols that
remove liquidity. The QCC Orders would be the only exception when
calculating Customer volume in Multiply-Listed Options that are
electronically-delivered in the Average Daily Volume Threshold
calculation.\13\
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\13\ QCC Orders are excluded today.
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(c) Credit for Member Qualifying for Tier 2 and 3 Rebates
The Exchange proposes to reduce Routing Fees in Section V of the
Exchange's Pricing Schedule for member organizations that qualify for
Tier 2 or Tier 3 of the Customer Rebate Program. Specifically, the
Exchange proposes to credit member organizations that qualify for
either a Tier 2 or Tier 3 rebate with a credit of $0.04 per contract,
which credit would be applied to Routing Fees, as specified in Section
V of the Pricing Schedule, when a Customer order is routed to NASDAQ
OMX BX, Inc. (``BX Options'') or the NASDAQ Options Market LLC
(``NOM''). Member organizations that qualify for either a Tier 2 or
Tier 3 rebate would be entitled to receive a $0.10 per contract credit,
which credit would be applied to Routing Fees, specified in Section V
of the Pricing Schedule, when a Customer order is routed to an away
market other than BX Options or NOM.
The Exchange believes that the proposed amendments to the Customer
Rebate Program, including the credit proposed for Routing Fees, would
further incentivize members to transact Customer orders on the
Exchange. The Exchange believes the proposed amendments will attract
additional Customer order flow to the Exchange for the benefit of all
market participants.
Section I Amendments
(a) Select Symbols
The Exchange displays a list of Select Symbols in its Pricing
Schedule at Section I, which symbols are subject to the rebates and
fees in that section. The Exchange is proposing to delete the following
symbols from the list of Select Symbols in Section I of the Pricing
Schedule: Arena Pharmaceuticals, Inc. (``ARNA''), Alcoa, Inc. (``AA''),
Advanced Micro Devices, Inc. (``AMD''), Cisco Systems, Inc. (``CSCO''),
SPDR DOW Jones Industrial Average (``DIA''), iShares MSCI EAFE Index
Fund (``EFA''), iShares MSCI Brazil Index Fund (``EWZ''), Ford Motor
Co. (``F''), (Direxion Daily Financial Bull 3x Shares (``FAS''),
Direxion Daily Financial Bear 3X Shares (``FAZ''), iShares FTSE China
25 Index Fund (``FXI''), Market Vectors Gold Miners ETF (``GDX''),
General Electric Company (``GE''), Intel Corporation (``INTC''), Nokia
Corporation (``NOK''), Oracle Corporation (``ORCL''), Pfizer, Inc.
(``PFE''),Research in Motion Limited (``RIMM''), ProShares UltraShort
S&P 500 (``SDS''), Sirius XM Radio Inc. (``SIRI''), iShares Silver
Trust (``SLV''), ProShares UltraShort 20+ Year Treasury (``TBT''),
iShares Barclays 20 Year Treasury (``TLT''), Direxion Daily Small Cap
Bear 3X Shares (``TZA''), United States Natural Gas (``UNG''), United
States Oil (``USO''), Vale S.A. (``VALE''), iPath S&P 500 VIX ST
Futures ETN (``VXX''), Verizon Communications Inc. (``VZ''), SPDR
Select Sector Fund--Energy (``XLE''), SPDR Select Sector Fund (``XLI'')
and Yahoo! Inc. (``YHOO'') (collectively, ``Proposed Deleted
Symbols''). These Proposed Deleted Symbols would be subject to the
fees, fee caps and related discounts in Section II of the Pricing
Schedule entitled ``Multiply Listed Options Fees.'' The Exchange
believes that by assessing the Proposed Deleted Symbols the pricing in
Section II of the Pricing Schedule the Exchange will attract order flow
to the Exchange.
(b) Simple Orders
The Exchange proposes to amend the Simple Order rebates and fees in
Section I, Part A of the Pricing Schedule. Currently, the Exchange pays
the following Simple Order Rebates for Adding Liquidity: Customer $0.26
per contract, Specialist \14\ and Market Maker \15\ $0.23 per contract,
Firm and Broker-Dealer receive no rebate and Professional \16\ receives
a $0.23 per contract rebate. The Exchange proposes to not pay a
Customer or Professional rebate and decrease the Specialist and Market
Maker rebate from $0.23 to $0.20 per contract, however the Exchange
would only pay a Specialist or Market Maker Rebate for Adding Liquidity
in Simple Orders if the Specialist or Market Maker is contra to a
Specialist, Market Maker, Firm, Broker-Dealer or Professional. In other
words, the
[[Page 4929]]
Specialist or Market Maker would not receive a Simple Order Rebate for
Adding Liquidity if they are contra to a Customer and instead would be
assessed the Simple Order Fee for Adding Liquidity, which will be
discussed below. The Rebate for Adding Liquidity for Customer, Broker-
Dealer, Firm and Professional would be marked ``N/A'' as those market
participants would be assessed a Fee for Adding Liquidity to be
discussed below. In addition, the Exchange proposes to add a note to
the Pricing Schedule indicating the above exception to the payment of
the Specialist and Market Maker Rebate for Adding Liquidity in Simple
Orders.
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\14\ A ``Specialist'' is an Exchange member who is registered as
an options specialist pursuant to Rule 1020(a).
\15\ A ``Market Maker'' includes Registered Options Traders
(Rule 1014(b)(i) and (ii)), which includes Streaming Quote Traders
(see Rule 1014(b)(ii)(A)) and Remote Streaming Quote Traders (see
Rule 1014(b)(ii)(B)). Directed Participants are also market makers.
\16\ 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 Rule
1000(b)(14).
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Currently, the Exchange assesses the following Simple Order Fees
for Adding Liquidity: Customer, Specialist, Professional and Market
Maker pay no fee, a Firm and Broker-Dealer pay $0.05 per contract. The
Exchange proposes to amend the Simple Order Fees for Adding Liquidity
as follows: a Customer would continue to not be assessed however
instead of ``N/A'' the Exchange would reflect the fee as ``$0.00'' on
the Pricing Schedule. A Specialist and Market Maker would be assessed a
$0.10 per contract Simple Order Fee for Adding Liquidity, but only when
contra to a Customer order. If the Specialist or Market Maker is contra
to a Specialist, Market Maker, Firm, Broker-Dealer or Professional,
then the Specialist or Market Maker would be entitled to the Simple
Order Rebate for Adding Liquidity.
As explained above, Specialists and Market Makers receive a Rebate
for Adding Liquidity when contra to a Specialist, Market Maker, Firm,
Broker-Dealer and Professional. The Firm and Broker-Dealer Fees for
Adding Liquidity would be increased from $0.05 to $0.45 per contract. A
Professional would be assessed $0.45 per contract pursuant to this
proposal as compared to no fee.
Currently the Exchange assesses the following Simple Orders Fees
for Removing Liquidity: A Customer is assessed $0.43 per contract, a
Specialist, Market Maker, Firm, Broker-Dealer and Professional are
assessed $0.45 per contract. The Exchange proposes to decrease the
Customer Fee for Removing Liquidity from $0.43 to $0.00 per contract.
The Exchange also proposes to decrease the Specialist, Market Maker,
Firm, Broker-Dealer and Professional fees from $0.45 to $0.44 per
contract.
The Exchange believes that decreasing certain Simple Order fees
will incentivize market participants to send order flow to the
Exchange, particularly Customer order flow. In addition, the Exchange
believes that the increased fees would allow the Exchange to offer
additional Customer rebates as proposed in the Customer Rebate Program
to attract liquidity to the Exchange.
(c) Complex Orders
The Exchange proposes to amend the Complex Order rebates and fees
in Section I, Part B of the Pricing Schedule. The Exchange currently
pays the following Complex Order Rebates for Adding Liquidity: a
Customer is paid $0.32 per contract and Specialists, Market Makers,
Firms, Broker-Dealers and Professionals are paid $0.10 per contract.
The Exchange proposes to eliminate the Rebates for Adding Liquidity in
Complex Orders. Currently, Customers are paid a $0.06 Complex Order
Rebate for Removing Liquidity. No other market participant is paid a
Complex Order Rebate for Removing Liquidity. The Exchange proposes to
eliminate the Customer Complex Order Rebate for Removing Liquidity. The
Exchange's proposal would therefore pay no rebates in Section I, Part B
with respect to Complex Orders.
The Exchange proposes to adopt a Complex Order Fee for Adding
Liquidity of $0.10 per contract that will be applicable to Specialists,
Market Makers, Firms, Broker-Dealers and Professionals. Customers would
not be assessed a Complex Order Fee for Adding Liquidity.
The Exchange currently assesses the following Complex Order Fees
for Removing Liquidity: $0.39 per contract for Specialists, Market
Makers, Firms, Broker-Dealers and Professionals. Customers are not
assessed a Complex Order Fee for Removing Liquidity. The Exchange is
proposing to decrease the Specialist and Market Maker Complex Order
Fees for Removing Liquidity from $0.39 to $0.25 per contract. The
Exchange proposes to increase the Complex Order Fees for Removing
Liquidity for Firms, Broker-Dealers and Professionals from $0.39 to
$0.50 per contract. A Customer would continue to not be assessed a
Complex Order Fee for Removing Liquidity. The Exchange is proposing to
decrease certain fees to incentivize market participants to transact
Complex Orders on the Exchange and the Exchange is proposing to
increase certain fees in order that it may offer additional rebates in
the Customer Rebate Program as described herein.
(d) Complex Auctions, Non-Complex Auctions and the Opening Process
Today the Exchange pays market participants for Customer executions
that occur as part of a Complex electronic auction \17\ and the opening
process the Complex Order Rebate for Removing Liquidity. Customer
executions that occur as part of a non-Complex auction \18\ are paid
the Simple Order Rebate for Removing Liquidity, except when contra to
another Customer order. Today, the Exchange does not assess a Fee for
Removing Liquidity for transactions that occur either as part of a
Complex electronic auction or a non-Complex electronic auction.
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\17\ A Complex electronic auction includes, but is not limited
to, the Complex Order Live Auction (``COLA'').
\18\ A non-Complex electronic auction includes the Quote Exhaust
auction and, for purposes of these fees, the opening process.
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The Exchange proposes to no longer pay rebates for Customer
executions that occur as part of a Complex electronic auction, the
opening process or a Complex Order or a non-Complex auction. In
addition, the Exchange would not assess any fees for transactions that
occur as part of a Complex electronic auction, the opening process or a
non-Complex electronic auction, as is the case today for Customer
orders. The Exchange believes that assessing no fees and paying no
rebates for transactions executed during certain auctions and the
opening process would benefit market participants. While no rebates
would be paid, there would also be no fees assessed.
Currently, the Specialists and Market Makers pay the Simple Order
Fee for Removing Liquidity during the opening the process. The Exchange
proposes to assess Specialists and Market Makers the Simple Order Fee
for Adding Liquidity if contra to a Customer during the opening
process. Specialists and Market Makers will continue to pay the Simple
Order Fee for Removing Liquidity during the opening the process if
contra to a Specialist, Market Maker, Firm, Broker-Dealer or
Professional.
(e) Payment for Order Flow Fees
Currently, Payment for Order Flow \19\ Fees are not collected on
transactions in
[[Page 4930]]
Select Symbols.\20\ The Exchange is proposing to amend the Pricing
Schedule to collect Payment for Order Flow Fees on transactions in
Select Symbols, except when a Specialist or Market Maker is assessed
the Simple Order Fee for Removing Liquidity, in which case the Payment
for Order Flow fees would not apply. The Exchange believes that
assessing Payment for Order Flow Fees on Select Symbols, similar to
other Multiply Listed Symbols, except when a Specialist or Market Maker
is assessed the Simple Order Fee for Removing Liquidity would attract
additional Customer order flow to the Exchange.
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\19\ The Payment for Order Flow (``PFOF'') Program assesses fees
to Specialists and Market Makers resulting from Customer orders
(``PFOF Fees''). The PFOF fees are available to be disbursed by the
Exchange according to the instructions of the Specialist or Market
Maker to order flow providers who are members or member
organizations who submit, as agent, Customer orders to the Exchange
through a member or member organization who is acting as agent for
those customer orders. Any excess PFOF funds billed but not utilized
by the Specialist or Market Maker are carried forward unless the
Specialist or Market Maker elects to have those funds rebated on a
pro rata basis, reflected as a credit on the monthly invoices. At
the end of each calendar quarter, the Exchange calculates the amount
of excess funds from the previous quarter and subsequently rebates
excess funds on a pro-rata basis to the applicable Specialist or
Market Maker who paid into that pool of funds.
\20\ The Select Symbols are listed in Section I of the Pricing
Schedule.
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The Exchange also proposes to make a technical amendment in Section
II of the Pricing Schedule to amend the Pricing Schedule to change the
term ``Single contra-side'' in Part B of Section II of the Pricing
Schedule to ``Simple Order'' for consistency in use of its terms.
(f) Order Exposure Alert
The Exchange recently filed to amend Rule 1080(m) to provide for
the broadcast of certain orders that are on the Phlx Book.\21\ The
Exchange proposed to broadcast orders on the Phlx Book by issuing order
exposure alerts to all Phlx XL II \22\ participants and market
participants that subscribe to certain data feeds. The Exchange
proposes to specify in Section II of its Pricing Schedule that no
Payment for Order Flow Fees would be assessed on transactions which
execute against an order for which the Exchange broadcast an order
exposure alert in Penny Pilot Options, including Select Symbols. By
eliminating Payment for Order Flow Fees the Exchange desires to spur
Specialists and Market Makers to transact against orders that triggered
the broadcast message.
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\21\ See Securities Exchange Act Release No. 68517 (December 21,
2012), 77 FR 77134 (December 31, 2012) (SR-Phlx-2012-136).
\22\ This proposal refers to ``PHLX XL[supreg]'' as the
Exchange's automated options trading system. In May 2009 the
Exchange enhanced the system and adopted corresponding rules
referring to the system as ``Phlx XL II.'' See Securities Exchange
Act Release No. 59995 (May 28, 2009), 74 FR 26750 (June 3, 2009)
(SR-Phlx-2009-32). The Exchange intends to submit a separate
technical proposed rule change that would change all references to
the system from ``Phlx XL II'' to ``PHLX XL'' for branding purposes.
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Section IV Amendments
(a) PIXL
The Exchange proposes to amend Section IV of the Pricing Schedule
at Part A. Currently, the Exchange assesses an Initiating Order \23\ a
$0.07 per contract or $0.05 per contract fee if the Customer Rebate
Program Threshold Volume, defined in Section A, is greater than 275,000
contracts per day in a month. The Exchange is proposing to instead
assess an Initiating Order a $0.07 per contract or $0.05 per contract
fee if the Customer Rebate Program Threshold Volume defined in Section
A is greater than 100,000 contracts per day in a month.
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\23\ A member may electronically submit for execution an order
it represents as agent on behalf of a public customer, broker-
dealer, or any other entity (``PIXL Order'') against principal
interest or against any other order (except as provided in Rule
1080(n)(i)(E)) it represents as agent (``Initiating Order'')
provided it submits the PIXL order for electronic execution into the
PIXL Auction (``Auction'') pursuant to Rule 1080. See Exchange Rule
1080(n).
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In addition, the Exchange also proposes to permit Phlx members and
member organizations under common ownership to aggregate their Customer
Rebate Program Threshold Volume in order to determine if they qualify
for the $0.07 or $0.05 per contract Initiating Order fee. Common
ownership is defined as 75 percent common ownership or control.
Today, when a PIXL order in a Select Symbol \24\ is contra to a
PIXL Auction Responder, the Exchange will either pay a Rebate for
Adding Liquidity or assess a Fee for Adding Liquidity in Section I of
the Pricing Schedule. Today, a Responder is assessed $0.30 per
contract. The Exchange proposes to amend the PIXL pricing for order
executions in Select Symbols as follows: when a PIXL Order in a Select
Symbol is contra to a PIXL Auction Responder, the PIXL Order would be
assessed the Fee for Adding Liquidity in Section I and the Responder
would be assessed $0.30 per contract, unless the Responder is a
Customer, in which case the fee would be $0.00 per contract.
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\24\ Select Symbols are subject to the rebates and fees in
Section I of the Pricing Schedule.
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Additionally, today when a PIXL Order in a Select Symbol is contra
to a resting order or quote that was on the PHLX book prior to the
auction, the PIXL Order is assessed $0.30 per contract and the resting
order or quote is either paid the Rebate for Adding Liquidity or
assessed the Fee for Adding Liquidity in Section I. Today, if the
resting order or quote that was on the PHLX book was entered during the
Auction, the PIXL Order receives the Rebate for Adding Liquidity or is
assessed the Fee for Adding Liquidity in Section I and the resting
order or quote is assessed $0.30 per contract. The Exchange proposes to
amend the PIXL pricing for order executions in Select Symbols as
follows: when the PIXL Order is contra to a resting order or quote that
was on the PHLX book prior to the auction, the PIXL Order would be
assessed the Fee for Removing Liquidity not to exceed $0.30 per
contract and the resting order or quote would be assessed the Fee for
Adding Liquidity in Section I. Further, the Exchange proposes that if
the resting order or quote that was on the PHLX book was entered during
the Auction, the PIXL Order would be assessed the Fee for Adding
Liquidity in Section I and the resting order or quote would be assessed
the Fee for Removing Liquidity not to exceed $0.30 per contract.
The Exchange proposes to eliminate the payment of rebates, not
assess fees and lower the Threshold Volume to 100,000 contracts per day
in a month in order to incentivize market participants to transact PIXL
Orders.
2. Statutory Basis
The Exchange believes that its proposal to amend its Pricing
Schedule is consistent with Section 6(b) of the Act \25\ in general,
and furthers the objectives of Section 6(b)(4) of the Act \26\ 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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\25\ 15 U.S.C. 78f(b).
\26\ 15 U.S.C. 78f(b)(4).
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Customer Rebate Program
The Exchange's proposal to amend its Customer Rebate Program in
Section A of the Pricing Schedule is reasonable because the Exchange
believes that the amended Customer Rebate Program, including the
addition of Category D, would further incentivize market participants
to transact Customer order flow on the Exchange, which liquidity will
benefit all market participants. The Exchange believes that reducing
the Customer Rebate Program to a three-tiered rebate structure and
amending the tier volumes is reasonable because it should incentivize
market participants to increase the amount of Customer orders that are
transacted on the Exchange to obtain a rebate. The Exchange proposes
herein to amend the Average Daily Volume Threshold to only exclude QCC
Orders,\27\ which
[[Page 4931]]
should permit market participants to include additional orders in the
Average Daily Volume Threshold and obtain larger rebates on eligible
contracts. In addition, other exchanges employ similar incentive
programs.\28\
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\27\ Today, the Average Daily Volume Threshold is calculated by
totaling Customer volume in Multiply Listed Options (including
Select Symbols) that are electronically-delivered and executed,
except volume associated with: (i) Electronically-delivered and
executed Customer Simple Orders in Select Symbols that remove
liquidity; and (ii) electronic QCC Orders, as defined in Exchange
Rule 1080(o).
\28\ See the Chicago Board Options Exchange, Incorporated's
(``CBOE'') Fees Schedule. CBOE offers each Trading Permit Holder
(``TPH'') a credit for each public customer order transmitted by the
TPH which is executed electronically in all multiply-listed option
classes, excluding QCC trades and executions related to contracts
that are routed to one or more exchanges in connection with the
Options Order Protection and Locked/Crossed Market Plan, provided
the TPH meets certain volume thresholds in a month (Volume Incentive
Program).
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The Exchange believes that the proposal to amend the rebate tiers
is equitable and not unfairly discriminatory because while market
participants would need to transact a greater number of contracts to
achieve a Tier 2 or 3 rebate, the Exchange is also amending the Average
Daily Volume Threshold to allow market participants to receive a rebate
on a greater number of eligible contracts. The Exchange's proposal to
amend its rebates is equitable and not unfairly discriminatory for the
following reasons. With respect to Tier 1 which is currently 0 to
49,999 contracts in a month and would be 0 to 99,999 contracts in a
month pursuant to this proposal, the Exchange would continue to pay no
rebate. For those market participants executing from 1 to 49,999
contracts, this is the same as today. For those market participants
that currently transact 50,000 to 99,999 contracts, they would not be
eligible for a rebate under the proposal. The Exchange believes that
market participants would be incentivized to transact a greater number
of contracts in order to obtain a rebate in Tiers 2 or 3. With respect
to Tier 2 which is currently 50,000 to 99,999 contracts in a month, the
proposal would amend the contract volume to 100,000 to 349,999
contracts in a month which today is the volume necessary to obtain a
Tier 2 rebate or a Tier 3 rebate if the number of contracts is greater
than 275,000. A Category A \29\ rebate would remain the same as the
Exchange proposes to increase Tier 2 in Category A from $0.07 to $0.10
per contract. The Exchange would pay a lower rebate in Category B \30\
which would increase from $0.10 to $0.12 per contract. Today, a Tier 2,
Category B rebate receives a $0.14 per contract rebate up to 274,999
contracts. A market participant executing between 100,000 to 274,999
contracts today would receive a lower rebate ($0.12 per contract as
compared to $0.14 per contract). A Category C \31\ rebate would
increase for those market participants transacting between 100,000 to
274,999 contracts. Today, a market participant receives no rebate for
transacting up to 99,999 contracts in Category C. The Exchange is
proposing to pay $0.13 per contract in Category C to market
participants that execute between 100,000 and 349,999 contracts in a
month. The Exchange also proposes to increase the volume required for
current Tier 4 which awards rebates over 275,000 contracts in a month
to create a new Tier 3 to award rebates over 350,000 contracts in a
month. A market participant executing over 275,000 contracts today in
Category A would receive a $0.12 per contract rebate. As mentioned,
that rebate would decrease between 100,000 to 349,999 contracts to
$0.10 per contract, but would increase over 350,000 contracts to $0.15
per contract. A market participant executing over 275,000 contracts
today in Category B would receive $0.15 per contract. As mentioned,
that rebate would decrease between 100,000 to 349,999 contracts to
$0.12 per contract and would remain the same over 350,000 contracts. A
market participant executing over 275,000 contracts today in Category C
would receive a $0.06 rebate. As mentioned, that rebate would increase
between 100,000 to 349,999 contracts to $0.13 per contract and would
also increase over 350,000 contracts to $0.15 per contract. The
Exchange believes that while market participants in Categories A and B
would need to execute additional contracts to receive the same or
greater rebates, the Exchange believes that it continues to incentivize
those market participants to direct Customer orders to the Exchange.
With respect to Category C, the Exchange is providing greater
incentives to transact Customer Complex Orders in Select Symbols.
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\29\ A Category A rebate is paid to members executing
electronically-delivered Customer Simple Orders in Penny Pilot
Options and Customer Simple Orders in Non-Penny Pilot Options in
Section II. Rebates are paid on PIXL Orders in Section II symbols
that execute against non-Initiating Order interest.
\30\ A Category B rebate is paid to members executing
electronically-delivered Customer Complex Orders in Penny Pilot
Options and Non-Penny Pilot Options in Section II.
\31\ A Category C rebate is paid to members executing
electronically-delivered Customer Complex Orders in Select Symbols
in Section I.
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The Exchange believes that the addition of Category D is reasonable
because the Exchange is incentivizing market participants to transact
Customer Simple Orders in Select Symbols by offering a rebate. The
Exchange also believes that the Category D rebates are equitable and
not unfairly discriminatory because all market participants that direct
Customer Simple Orders in Select Symbols are eligible for the rebates.
The Exchange would pay a Category D rebate of $0.05 per contract to a
market participant that transacts between 100,000 and 349,999 contracts
in a month. Additionally, the Exchange would pay a Category D rebate of
$0.07 per contract to a market participant that transacts over 350,000
contracts in a month.\32\
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\32\ The Exchange would not pay a Category D rebate for contract
volume below 100,000 contracts.
---------------------------------------------------------------------------
The Exchange's amended rebate calculation is reasonable because the
Exchange proposes to include Customer volume in Multiply Listed Options
(including Select Symbols) that are electronically-delivered and
executed, except volume associated with QCC Orders as defined in
Exchange Rule 1080(o). Volume associated with electronically-delivered
Customer Simple Orders in Select Symbols that remove liquidity would be
included as part of this proposal. This volume is currently excluded.
The Exchange believes that the inclusion of the electronically-
delivered Customer Simple Orders in Select Symbols that remove
liquidity would allow market participants to obtain greater rebates. In
addition, the Exchange believes that the amended rebate calculation is
equitable and not unfairly discriminatory because the calculation would
apply uniformly to all market participants.
The Exchange's proposal to reduce Routing Fees \33\ in Section V of
the Exchange's Pricing Schedule for member organizations that qualify
for a Tier 2 or Tier 3 Customer Rebate in Section A of the Pricing
Schedule is reasonable because the Exchange proposes to provide an
additional incentive for transacting Customer orders on the Exchange.
The Exchange believes that providing a credit of $0.04 per contract
toward the Routing Fee specified in Section V of the Pricing Schedule
if a Customer order is routed to BX Options or NOM and a $0.10 per
contract credit toward the Routing Fee specified in Section V of the
Pricing
[[Page 4932]]
Schedule if the Customer order is routed to away market other than BX
Options or NOM would encourage market participants to transact their
Customer orders on the Exchange because they have the opportunity to
receive a Tier 2 or Tier 3 rebate and also reduce Routing Fees. The
Exchange believes that the proposal to reduce Routing Fees in Section V
of the Exchange's Pricing Schedule for members that qualify for a Tier
2 or Tier 3 Customer Rebate in Section A of the Pricing Schedule is
equitable and not unfairly discriminatory because any market
participant that transacts Customer orders may qualify for the credit.
Also, the Routing Fees specified in Section V of the Pricing Schedule
are lower for a Customer order routed to BX Options or NOM today and
higher for an away market other than BX Options or NOM.\34\
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\33\ Each destination market's transaction charge varies and
there is a cost incurred by the Exchange when routing orders to away
markets. The costs to the Exchange include clearing costs,
administrative and technical costs associated with operating NOS
that are assessed on the Exchange, membership fees at away markets,
and technical costs associated with routing options. The Routing
Fees enable the Exchange to recover the costs it incurs to route
orders to away markets in addition to transaction fees assessed to
market participants for the execution of orders by the away market.
\34\ The Exchange assesses a fixed fee of $0.10 per contract for
non-NASDAQ OMX exchanges and a $0.04 per contract fee for BX Options
and NOM. These fixed costs represent overall cost to the Exchange
for technical, administrative, clearing, regulatory, compliance and
other costs, which are in addition to the transaction fee assessed
by the away market. Also, market participants whose orders routed to
away markets are entitled to receive rebates offered by away
markets, which rebates would net against fees assessed by the
Exchange for routing orders. As explained in a previous rule change,
the actual cash outlays for the Exchange to route to BX Options and
NOM is lower as compared to routing to other non-NASDAQ OMX
exchanges. See Securities Exchange Act Release No. 68213 (November
13, 2012), 77 FR 69530 (November 19, 2012) (SR-Phlx-2012-129). The
Exchange noted in that rule change that the costs related to
connectivity to route orders to other NASDAQ OMX exchanges are de
minimis.
---------------------------------------------------------------------------
Section I Amendments
The Exchange believes that it is reasonable to remove the Proposed
Deleted Symbols from its list of Select Symbols to attract additional
order flow to the Exchange. The Exchange believes that applying the
pricing in Section II of the Pricing Schedule to the Proposed Deleted
Symbols, including the opportunity to receive payment for order flow,
will attract order flow to the Exchange.
The Exchange believes that it is equitable and not unfairly
discriminatory to amend its list of Select Symbols to remove the
Proposed Deleted Symbols because the list of Select Symbols would apply
uniformly to all categories of participants in the same manner. All
market participants who trade the Select Symbols would be subject to
the rebates and fees in Section I of the Pricing Schedule, which would
not include the Proposed Deleted Symbols. Also, all market participants
would be uniformly subject to the fees in Section II, which would
include the Proposed Deleted Symbols.
The Exchange's proposal to amend the Simple Order rebates and fees
in Section I, Part A of the Pricing Schedule is reasonable because the
Exchange is proposing to only pay rebates to Specialists and Market
Makers in limited circumstances and only when the Exchange is able to
fund that rebate with a Simple Order Fee for Removing Liquidity. In
other words, if a Specialist or Market Maker is contra to a Specialist,
Market Maker, Firm, Broker-Dealer or Professional, these market
participants pay Simple Order Fees for Removing Liquidity, which fund
the rebate to the Specialist or Market Maker. When a Specialist or
Market Maker is contra to a Customer, then the Specialist or Market
Maker would pay the Simple Order Fee for Adding Liquidity because the
Customer is assessed no Simple Order Fee for Removing Liquidity
pursuant to this proposal and instead receives the rebates defined in
Category D. The Exchange is reducing the Simple Order Fees for Removing
Liquidity because it is no longer paying certain Simple Order rebates
to Customers or Professionals. The Exchange believes that its proposal
to assess Simple Order Fees for Adding Liquidity is reasonable because
as explained herein, the Exchange is funding the rebates it offers to
Specialists and Market Makers with those Simple Order Fees for Adding
Liquidity.
The Exchange's proposal to amend the Simple Order rebates and fees
in Section I, Part A of the Pricing Schedule is equitable and not
unfairly discriminatory for the reasons which follow. With respect to
Customers, the Exchange would no longer assess a Customer the $0.43 per
contract Simple Order Fee for Removing Liquidity, the Exchange would
continue not to assess a Customer a Simple Order Fee for Adding
Liquidity, as is the case today. In light of eliminating these fees,
the Exchange proposes to no longer pay the $0.26 per contract Simple
Order Rebate for Adding Liquidity. Customer order flow is assessed no
fee because incentivizing members to continue to offer Customer trading
opportunities in Simple Orders benefits all market participants through
increased liquidity. The Exchange instead proposes to pay Customer
rebates for Simple Orders in Select Symbols as part of proposed
Category D to the Customer Rebate Program in Section A.\35\ Market
participants would continue to be incentivized to send Customer order
flow to the Exchange and would receive rebates as part of the Customer
Rebate Program and would also not pay fees.
---------------------------------------------------------------------------
\35\ The Exchange believes that market participants would
continue to be incentivized to send Customer order flow to the
Exchange because the Customer Rebate Program would pay rebates on
electronic orders, as is the case today for the rebates that are
being eliminated in Section I, Parts A and B. Transactions in the
Select Symbols originating on the Exchange floor are subject to
pricing in Section II and would not be subject to the rebates in the
Customer Rebate Program, as is the case today. The rebates in
Section I, Parts A and B are paid on electronic orders today. Also,
the Customer Rebate Program would pay rebates on both adding and
removing liquidity similar to the rebates that are being eliminated
in Section I, Parts A and B.
---------------------------------------------------------------------------
With respect to the Simple Order Rebate for Adding Liquidity, the
Exchange proposes to reduce the rebates for Specialists and Market
Makers from $0.23 to $0.20 per contract and not pay a Professional a
rebate \36\ because the Exchange proposes to offer market participants
greater rebates as part of the Customer Rebate Program in Section A.
The Exchange proposes to only pay Specialists and Market Makers a
Simple Order Rebate for Adding Liquidity, in limited circumstances,
because unlike other market participants, Specialists and Market Makers
have burdensome quoting obligations \37\ to the market. Specialists and
Market Makers would only be paid a Simple Order Rebate for Adding
Liquidity when the Specialist or Market Maker is contra to a
Specialist, Market Maker, Firm, Broker-Dealer and Professional. The
Exchange believes that its proposal to only pay a Specialist or Market
Maker a Simple Order Rebate for Adding Liquidity as long as the
Specialist or Market Maker is not contra to a Customer is equitable and
not unfairly discriminatory because the Exchange is only paying
Specialists and Market Makers a Simple Order Rebate to Add Liquidity
when it is able to fund that rebate with a Fee for Removing Liquidity.
In the case of a Customer, the Exchange proposes not to assess a
Customer a Simple Order Fee for Removing Liquidity and therefore in
that instance the Exchange would assess the Specialist or Market Maker
the Simple Order Fee for Adding Liquidity.
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\36\ Today, a Professional is paid a $0.23 per contract Simple
Order Rebate for Adding Liquidity.
\37\ See Rule 1014 titled ``Obligations and Restrictions
Applicable to Specialists and Registered Options Traders.''
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With respect to the Simple Order Fees for Adding Liquidity, the
Exchange currently only assesses Firms, Broker-Dealer and Professionals
a $0.05 per contract fee. The Exchange proposes to increase those fees
to $0.45 per contract for Firms, Broker-Dealer and Professionals to
permit the Exchange to continue to pay Customer rebates as proposed in
Section A of the Pricing Schedule. The Exchange would assess
[[Page 4933]]
these market participants the same fee because as explained herein the
proposed differentiation as between Customers, Specialists and Market
Makers and other market participants (Professionals, Firms and Broker-
Dealers) recognizes the differing contributions made to the liquidity
and trading environment on the Exchange by these market participants.
As noted previously, the Exchange is proposing not to assess Customers
Simple Order fees. The Exchange proposes to assess Specialists and
Market Makers a lower fee of $0.10 per contract to recognize the
obligations born by these market participants.
With respect to the Simple Order Fees for Removing Liquidity, the
Exchange proposes to decrease the fee from $0.45 to $0.44 per contract
for Specialists, Market Makers, Professionals, Firms and Broker-
Dealers. The Exchange proposes to continue to assess, uniformly, the
same fees for all market participants except Customers, as is the case
today. As noted previously, the Exchange is proposing not to assess
Customers Simple Order fees.\38\
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\38\ Today, the Exchange reduces its Fees for Removing
Liquidity, applicable to Specialists and Market Makers, by $0.05 per
contract when the Specialist or Market Maker transacts against a
Customer Order directed to that Specialist or Market Maker for
execution. This is not changing with this proposal.
---------------------------------------------------------------------------
The Exchange's proposal to make technical amendments to the Simple
Order Fees for Adding Liquidity to remove ``N/A'' and instead note the
fee as ``$0.00'' on the Pricing Schedule is reasonable, equitable and
not unfairly discriminatory because the Exchange proposes to indicate
that no fee is being assessed to clarify the Pricing Schedule.
As stated herein, the Exchange's proposal to amend Complex Order
rebates and fees in Section I, Part B of the Pricing Schedule are
reasonable because the Exchange is proposing to only pay rebates in
limited circumstances \39\ and only when the Exchange is able to fund
that rebate with a Complex Order Fee for Removing Liquidity as
described more fully above. The Exchange is proposing to decrease
certain fees to incentivize Specialists and Market Makers to add
Complex Order liquidity to the market and the Exchange is proposing to
increase certain fees for Firms, Broker-Dealers and Professionals in
order that it may offer additional rebates in the Customer Rebate
Program in Section A as described herein.
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\39\ The Exchange is only proposing to pay rebates to
Specialists and Market Makers when they are not contra to a Customer
order as described herein.
---------------------------------------------------------------------------
The Exchange's proposal to amend the Complex Order rebates and fees
in Section I, Part B of the Pricing Schedule are equitable and not
unfairly discriminatory for the reasons which follow. The Exchange is
proposing to eliminate the Complex Order Rebate for Adding Liquidity
and the Rebate for Removing Liquidity because the Exchange is amending
its Customer Rebate Program in Section A of the Pricing Schedule to
include an opportunity to obtain greater rebates. The Exchange is
proposing to adopt a Complex Order Fee for Adding Liquidity and assess
all market participants, except Customers a fee of $0.10 per contract.
The Exchange believes that uniformly assessing market participants,
other than Customers, a $0.10 per contract Complex Order Fee for Adding
Liquidity is equitable and not unfairly discriminatory. The Exchange
proposes to no longer assess Customers Complex Order fees. Today, the
Exchange does not assess a Customer Complex Order Fee for Removing
Liquidity and would likewise assess no Customer Complex Order Fee for
Adding Liquidity with this proposal. Customer order flow is assessed no
fee because incentivizing members to continue to offer Customer trading
opportunities in Complex Orders benefits all market participants
through increased liquidity.
With respect to the Complex Order Fees for Removing Liquidity, as
previously noted, the Exchange would continue to not assess a Customer
a Complex Order Fee for Removing Liquidity. Today, Specialists, Market
Makers, Firms, Broker-Dealers and Professionals all pay a $0.39 per
contract Complex Order Fee for Removing Liquidity. The Exchange
proposes to reduce the Specialist and Market Maker fee to $0.25 per
contract and increase the Firm, Broker-Dealer and Professional fees to
$0.50 per contract. The Exchange assesses Specialists and Market Maker
lower fees as compared to other market participants, other than
Customers, because Specialists and Market Makers have burdensome
quoting obligations \40\ to the market. In this case, the Exchange is
proposing to increase the fee differential in assessing the Complex
Order Fee for Removing Liquidity as between Specialist and Market
Makers and other non-Customer market participants from 0 to $0.25 per
contract ($0.25 vs. $0.50 per contract). The Exchange believes that
this fee differential is equitable and not unfairly discriminatory
because Specialists and Market Makers are valuable market participants
that provide liquidity in the marketplace and incur costs unlike other
market participants including, but not limited to, PFOF and other costs
associated with market making activities,\41\ which results in a higher
average cost per execution as compared to Firms, Broker-Dealers and
Professionals. The Exchange believes that the fees assessed to
Specialists and Market Makers in Complex Orders remain aligned with
fees assessed to Firms, Broker-Dealer and Professionals when other
costs are taken into account.
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\40\ See Rule 1014 titled ``Obligations and Restrictions
Applicable to Specialists and Registered Options Traders.''
\41\ Specialists and Market Makers pay for certain data feeds
including the SQF Port Fee. SQF Port Fees are listed in the
Exchange's Pricing Schedule at Section VII. SQF is an interface that
allows Specialists and Market Makers to connect and send quotes into
Phlx XL and assists them in responding to auctions and providing
liquidity to the market.
---------------------------------------------------------------------------
The Exchange's proposal to amend the Pricing Schedule to change
``Single contra-side'' in Part B of Section II of the Pricing Schedule
to ``Simple'' is reasonable, equitable and not unfairly discriminatory
because it would further clarify the Pricing Schedule.
The Exchange's proposal to amend Part C of Section I of the Pricing
Schedule to no longer pay rebates for Customer executions that occur as
part of a Complex electronic auction, the opening process or a non-
Complex auction is reasonable because the Exchange proposes to pay
Customer rebates as proposed in Section A of the Pricing Schedule.
Also, the Exchange has proposed a similar elimination of Customer
rebates in Section I, Parts A and B of the Pricing Schedule. In
addition, the Exchange's proposal to not assess any fees for
transactions that occur as part of a Complex electronic auction, the
opening process or a non-Complex electronic auction is reasonable
because those transactions would not be subject to rebates. Today, the
Exchange does not assess Customer fees on Complex electronic auctions,
the opening process or non-Complex electronic auctions. The Exchange
believes that it is reasonable to neither pay rebates nor assess fees
on these types of transactions and market participants would continue
to be incentivized to transact these types of orders on the Exchange.
The Exchange believes that its proposal to no longer pay rebates
for Customer executions that occur as part of a Complex electronic
auction, the opening process or a non-Complex auction and to no longer
assess fees for transactions that occur as part of a Complex electronic
auction, the opening process or a non-Complex electronic auction is
equitable and not unfairly
[[Page 4934]]
discriminatory because the Exchange proposes to not pay rebates or
assess fees during auctions and opening, as specified herein, uniformly
with respect to all market participants.
The Exchange's proposal to collect Payment for Order Flow Fees on
transactions in Select Symbols, except when a Specialist or Market
Maker is assessed the Simple Order Fee for Removing Liquidity, is
reasonable because it would attract additional Customer order flow to
the Exchange because of the benefit that order flow providers would
obtain from the Payment for Order Flow Program.\42\
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\42\ The PFOF Program assists Specialists and Market Maker
establish PFOF arrangements with an order flow provider in exchange
for that order flow provider directing some or all of its order flow
to that Specialist or Market Maker.
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The Exchange's proposal to assess Specialists and Market Makers the
Simple Order Fee for Adding Liquidity if contra to a Customer during
the opening process is reasonable because the Exchange desires to
incentivize Specialists and Market Makers to transact orders during the
opening process by lowering costs when the Specialist or Market Maker
trades against a Customer.
The Exchange's proposal to assess Specialists and Market Makers the
Simple Order Fee for Adding Liquidity if contra to a Customer during
the opening process is equitable and not unfairly discriminatory
because Specialists and Market Makers serve an important role on the
Exchange with regard to order interaction. The Exchange believes that
incentivizing Specialists and Market Makers to transact a greater
number of orders at the open by offering lower pricing would benefit
all market participants through increased order interaction.
The Exchange's proposal to collect Payment for Order Flow Fees on
transactions in Select Symbols, except when a Specialist or Market
Maker is assessed the Simple Order Fee for Removing Liquidity is
equitable and not unfairly discriminatory because the Exchange today
collects assesses Specialists and Market Makers Payment for Order Flow
Fees on all Multiply Listed Options except Select Symbols. The Exchange
believes that not assessing Specialists and Market Makers Payment for
Order Flow Fees when the Simple Order Fee for Removing Liquidity is
assessed is equitable and not unfairly discriminatory because the
Exchange does not desire to unfairly disadvantage Specialists and
Market Makers by assessing them a $0.44 per contract Simple Order Fee
for Removing Liquidity as well as a $0.25 per contract Payment for
Order Flow fee. The Exchange believes that in this instance the fee
would be much higher as compared to other market participants and does
not proposes to assess the fee.
The Exchange's proposal to not assess PFOF on transactions which
execute against an order for which the Exchange broadcast an order
exposure alert in Penny Pilot Options is reasonable the Exchange
believes that it would serve to incentivize Specialists and Market
Makers to remove liquidity from the Phlx Book. The Exchange believes
that the broadcast message, which alerts market participants to orders
placed on the Phlx book combined with the opportunity to not be
assessed PFOF in Penny Pilot Options would serve to incentivize
participants to remove liquidity. The Exchange believes that all market
participants would benefit from such an incentive which would lead to
greater order interaction and may further reduce fees related to
routing.
The Exchange's proposal to not assess PFOF on transactions which
execute against an order for which the Exchange broadcast an order
exposure alert in Penny Pilot Options is equitable and not unfairly
discriminatory because the Exchange would not assess any Specialist or
Market Maker such a PFOF fee regardless of whether or not that
Specialist or Market Maker was aware of the alert at the time of
execution.
Section IV Amendments
The Exchange's proposal to amend Section IV of the Pricing Schedule
at Part A to decrease the Threshold Volume from 275,000 to 100,000
contracts per day in a month is reasonable because the lower Threshold
Volume should allow a greater number of market participants to obtain
the requisite volume to be assessed the lower $0.05 per contract fee.
The Exchange's proposal to amend Section IV of the Pricing Schedule at
Part A to decrease the Threshold Volume from 275,000 to 100,000
contracts per day in a month is equitable and not unfairly
discriminatory because it would be uniformly assessed on all market
participants.
In addition, the Exchange's proposal to permit Phlx members and
member organizations under common ownership \43\ to aggregate their
Customer Rebate Program Threshold Volume in order to determine if they
qualify for the $0.07 or $0.05 per contract Initiating Order fee is
reasonable because the Exchange desires to provide all market
participants the ability to obtain the lower Initiating Order Fee. The
Exchange believes that its proposal to permit Phlx members and member
organizations under common ownership to aggregate their Customer Rebate
Program Threshold Volume for purposes of the Initiating Order fee is
equitable and not unfairly discriminatory because the Exchange would
permit all market participants the ability to aggregate for purposes of
the fee even if certain members and member organizations chose to
operate under separate entities. The Exchange currently permits such
aggregation in the calculation of the Monthly Market Maker Cap.\44\
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\43\ Common ownership is defined as 75 percent common ownership
or control.
\44\ See Section II of the Pricing Schedule. Specialists and
Market Makers are subject to a ``Monthly Market Maker Cap'' of
$550,000 for: (i) Equity option transaction fees; (ii) QCC
Transaction Fees (as defined in Exchange Rule 1080(o) and Floor QCC
Orders, as defined in 1064(e)); and (iii) fees related to an order
or quote that is contra to a PIXL Order or specifically responding
to a PIXL auction. The trading activity of separate Specialist and
Market Maker member organizations will be aggregated in calculating
the Monthly Market Maker Cap if there is at least 75% common
ownership between the member organizations.
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The Exchange's proposal to amend the PIXL pricing for order
executions in Select Symbols by assessing a PIXL Order the Fee for
Adding Liquidity in Section I and the Responder the $0.30 per contract
fee unless the Responder is a Customer, in which case no fee is
assessed, when a PIXL Order in a Select Symbol is contra to a PIXL
Auction Responder is reasonable because the Exchange is proposing to
only pay Rebates to Add Liquidity in Section I to Specialists and
Market Makers in certain circumstances \45\ and is not otherwise paying
rebates except as proposed in Section A of the Pricing Schedule as part
of the Customer Rebate Program. The Exchange does not desire to assess
Customers fees and therefore is amending the PIXL pricing to not assess
a fee if the Responder is contra to a Customer. The Exchange desires to
incentivize market participants to send Customer order flow by offering
the Customer Rebates in Section A and not assessing Customers fees in
Section I of the Pricing Schedule. Customer order flow benefits all
market participants by increased liquidity. In addition, the Exchange
believes that the proposed amendments to Section IV would align the
pricing with respect to Select Symbols to the amendments that are
proposed herein in Section I, Parts A and B. The Exchange also believes
that market participants would still be able to obtain rebates for PIXL
orders
[[Page 4935]]
because the Exchange proposes to pay rebates on PIXL Orders in Section
I symbols that execute against non-Initiating Order interest as part of
proposed Category D of the Customer Rebate Program.
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\45\ The Rebate for Adding Liquidity will be paid to a
Specialist or Market Maker only when the Specialist or Market Maker
is contra to a Specialist, Market Maker, Firm, Broker-Dealer or
Professional.
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The Exchange's proposal to amend the PIXL pricing for order
executions in Select Symbols by assessing the Fee for Removing
Liquidity not to exceed $0.30 per contract when the PIXL Order is
contra to a resting order or quote that was on the PHLX book prior to
the auction and assessing the resting order or quote the Fee for Adding
Liquidity in Section I is reasonable because the Exchange has amended
certain of its Fees for Removing Liquidity in Section I below $0.30 per
contract and desires to assess the lower fee where applicable to market
participants to further incentivize market participants to transact
PIXL orders in Select Symbols. The Exchange's elimination of the Rebate
to Add Liquidity with respect to PIXL Orders and the resting order or
quote is reasonable because the Exchange is proposing to only pay
Rebates to Add Liquidity in Section I to Specialists and Market Makers
in certain circumstances \46\ and is not otherwise paying rebates
except as proposed in Section A of the Pricing Schedule.\47\
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\46\ The Rebate for Adding Liquidity will be paid to a
Specialist or Market Maker only when the Specialist or Market Maker
is contra to a Specialist, Market Maker, Firm, Broker-Dealer or
Professional.
\47\ Market participants would still be able to obtain rebates
for PIXL orders because the Exchange proposes to pay rebates on PIXL
Orders in Section I symbols that execute against non-Initiating
Order interest as part of proposed Category D of the Customer Rebate
Program.
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The Exchange's proposal to amend the PIXL Pricing by eliminating
the Rebates to Add Liquidity in Select Symbols and assess the Fee for
Removing Liquidity not to exceed $0.30 per contract is equitable and
not unfairly discriminatory because the Exchange would uniformly apply
the pricing to all market participants transacting PIXL orders. The
Exchange's elimination of the Rebates for Adding Liquidity would impact
Specialists and Market Makers because they are the only market
participants entitled to rebates in certain circumstances in Section I.
The Exchange believes this is equitable and not unfairly discriminatory
because Specialists and Market Makers also benefit from being assessed
the lower Fee for Removing Liquidity in Complex Orders as proposed
herein, while other market participants are assessed $0.30 per
contract. The Exchange assessed this lower fee because these market
participants bear obligations not born by other market participants.
The Exchange also believes that assessing the Fee for Removing
Liquidity not to exceed $0.30 per contract specifically benefits
Customers because they would not be assessed a fee pursuant to this
proposal with respect to Simple Orders. Incentivizing Customer order
flow benefits all market participants through increased liquidity.
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. The Exchange operates in a
highly competitive market, comprised of eleven exchanges, in which
market participants can easily and readily direct order flow to
competing venues if they deem fee levels at a particular venue to be
excessive or rebates to be inadequate. Accordingly, the fees that are
assessed and the rebates paid by the Exchange described in the above
proposal are influenced by these robust market forces and therefore
must remain competitive with fees charged and rebates paid by other
venues and therefore must continue to be reasonable and equitably
allocated to those members that opt to direct orders to the Exchange
rather than competing venues.
The Exchange believes that the Customer Rebate Program will
encourage Customer order flow to be directed to the Exchange, which
will benefit all market participants. The Exchange believes that not
assessing Customers fees in Section I would also encourage market
participants to direct Customer orders to the Exchange. The Exchange
also believes that encouraging Specialists and Market Makers to remove
liquidity from the book by incentivizing them with lower fees would
benefit order interaction on the Exchange to the benefit of all market
participants and therefore does not create a burden on competition. To
the extent that the Exchange is increasing certain fees, those fees
would permit the Exchange to offer the proposed Customer Rebate Program
which benefits the market. Further, the fee increases impact all non-
Customer members in a similar fashion and are comparable to fees
assessed at other venues for transactions in similarly situated
options. With respect to the Complex Order Fee for Removing Liquidity,
the Exchange believes that the differential as between Specialists and
Market Makers as compared to Firms, Broker-Dealers and Professionals
must be considered in light of other fees which are applied to
Specialists and Makers and are not assessed on Firms, Broker-Dealers
and Professionals, such as the PFOF fee of $0.25 per contract. When
this additional fee and other fees paid by Specialists and Market
Makers are taken into consideration, the Exchange does not believe that
the proposed increase to the Complex Order Fee for Removing Liquidity
creates a burden on these market participants. Rather, the cost to
transact orders for non-Customers become more closely aligned when the
total costs is transacting a Complex Order is taken into account as
Specialists and Market Makers are contra to a Customer in most cases.
Additionally, a $0.25 per contract differential among non-Customers is
not uncommon when competing for order flow. The Exchange notes that its
floor fees for non-Customers in Multiply-Listed Options is $0.25 per
contract, except for Firms which are not assessed a fee when
facilitating a Customer order pursuant to Exchange Rule 1064. The
Exchange believes that other pricing amendments impact all market
participants alike as proposed. The Exchange believes that the proposed
rule change will continue to promote competition on the Exchange.
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.\48\ 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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\48\ 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.
[[Page 4936]]
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-2013-01 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-2013-01. This 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 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
10:00 a.m. and 3:00 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-2013-01 and
should be submitted on or before February 13, 2013.
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\49\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\49\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-01226 Filed 1-22-13; 8:45 am]
BILLING CODE 8011-01-P