[Federal Register Volume 78, Number 119 (Thursday, June 20, 2013)]
[Notices]
[Pages 37250-37259]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-14686]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69768; File No. SR-Phlx-2013-61]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
Various Sections of the Exchange's Pricing Schedule
June 14, 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 June 3, 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 proposes to amend the Exchange's Pricing Schedule to:
(i) Amend the Customer Rebate Program; (ii) adopt new pricing specific
to options overlying Standard and Poor's Depositary Receipts/SPDRs
(``SPY''); \3\ (iii) amend the Complex Order \4\ Fee for Removing
Liquidity applicable to Specialists and Market Makers in receipt of
certain directed orders; and (iv) amend PIXL \5\ Pricing.
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\3\ SPY options are based on the SPDR exchange-traded fund
(``ETF''), which is designed to track the performance of the S&P 500
Index.
\4\ 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).
\5\ 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 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 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 Exchange proposes to amend existing Section B, entitled
``Customer Rebate Program,'' Section I, entitled ``Rebates and Fees for
Adding and Removing Liquidity in Select Symbols,'' \6\ and Section IV,
A ``PIXL Pricing.'' The Exchange also proposes to adopt a new Section
C, entitled ``Rebates and Fees for Adding and Removing Liquidity in
SPY.'' Each proposed amendment is described in greater detail below.
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\6\ The Select Symbols are listed in Section I.
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Customer Rebate Program
Currently, the Exchange has in place a four tier structure Customer
Rebate Program at Section B of the Pricing Schedule which pays Customer
rebates on four Categories (A, B, C and D) of transactions. The four
tier structure pays rebates based on percentage thresholds of national
customer multiply-listed options volume by month based on the same four
Categories (A, B, C and D) of transactions. Specifically, the Exchange
bases a market participant's qualification for a certain Rebate Tier on
the percentage of total national customer volume in multiply-listed
options which are transacted monthly on Phlx as follows:
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Percentage
thresholds of
national
customer volume
Customer rebate tiers in multiply- Category A Category B Category C Category D
listed equity
and ETF options
classes
(monthly)
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Tier 1........................ 0.00%-0.75%..... $0.00 $0.00 $0.00 $0.00
Tier 2........................ Above 0.75%- 0.11 0.12 0.13 0.08
1.60%.
Tier 3........................ Above 1.60%- 0.13 0.13 0.14 0.08
2.60%.
Tier 4........................ Above 2.60%..... 0.15 0.15 0.15 0.09
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Today, the Exchange totals Customer volume in Multiply Listed
Options (including Select Symbols) that are electronically-delivered
and executed, except volume associated with electronic QCC Orders, as
defined in Exchange Rule 1080(o).\7\ Members and member organizations
under common ownership \8\ may aggregate their Customer volume for
purposes of calculating the Customer Rebate Tiers and receiving
rebates.
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\7\ The Exchange calculates volume and pay rebates based on a
member organization's Phlx house account numbers.
\8\ Common ownership means 75% common ownership or control.
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Category A rebates are 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 Customer PIXL Orders in Section II symbols that execute against
non-Initiating Order interest, except in the case of Customer PIXL
Orders that are greater than 999 contracts. All Customer PIXL Orders
that are greater than 999 contracts are paid a rebate regardless of
[[Page 37251]]
the contra party to the transaction. Category B rebates are paid to
members executing electronically-delivered Customer Complex Orders in
Penny Pilot Options and Non-Penny Pilot Options in Section II. Category
C rebates are paid to members executing electronically-delivered
Customer Complex Orders in Select Symbols in Section I. Category D
rebates are paid to members executing electronically-delivered Customer
Simple Orders in Select Symbols in Section I. Rebates are paid on PIXL
Orders in Section I symbols that execute against non-Initiating Order
interest.
The Exchange is proposing to amend the rebates paid to market
participants with this proposal. The Exchange proposes to continue to
pay Categories A, B, C and D no rebate with proposed Tier 1 which is
between 0.00% to 0.75% of national customer volume in multiply-listed
options classes. Currently, the Exchange pays the following Tier 2
rebates for a percentage of national customer volume in multiply-listed
options classes above 0.75% to 1.60%: Category A: $0.11, Category B:
$0.12, Category C: $0.13 and Category D: $0.08. The Exchange is
proposing to increase the Tier 2 Category A rebate from $0.11 to $0.12
per contract, the Category B rebate from $0.12 to $0.17 per contract
and the Category C rebate from $0.13 to $0.17 per contract. The
Category D rebate for Tier 2 would remain at $0.08 per contract.
Currently, the Exchange pays the following Tier 3 rebates for a
percentage of national customer volume in multiply-listed options
classes above 1.60% to 2.60%: Category A: $0.13, Category B: $0.13,
Category C: $0.14 and Category D: $0.08. The Exchange is proposing to
increase the Tier 3 Category A rebate from $0.13 to $0.14 per contract,
the Category B rebate from $0.13 to $0.17 per contract and the Category
C rebate from $0.14 to $0.17 per contract. The Category D rebate for
Tier 3 would remain at $0.08 per contract. Currently, the Exchange pays
the following Tier 4 rebates for a percentage of national customer
volume in multiply-listed options classes above 2.60%: Category A:
$0.15, Category B: $0.15, Category C: $0.15 and Category D: $0.09. The
Exchange is proposing to increase the Tier 4 Category B rebate from
$0.15 to $0.17 per contract and the Category C rebate from $0.15 to
$0.17 per contract. The Tier 4 Category A rebate would remain at $0.15
per contract and the Tier 4 Category D rebate would remain at $0.09 per
contract.
As is the case today, the Exchange is proposing to continue to
permit the electronically-delivered and executed volume associated with
options on SPY to be included in the calculation of Multiply Listed
Options, however SPY options will no longer be paid the Customer
rebates in Section A because SPY options will no longer be part of
Section I, as proposed below. Today SPY is defined as a Select Symbol
in Section I of the Pricing Schedule. The Exchange is proposing below
to remove SPY from the definition of Select Symbol and adopt new
pricing which applies to SPY. In calculating electronically-delivered
and executed Customer volume in Multiply Listed Options, the numerator
of the equation will remain unchanged and will continue to include all
electronically-delivered and executed Customer volume in Multiply
Listed Options. The Exchange is proposing to amend the denominator of
that equation by excluding volume associated with SPY from the
computation of national customer volume in multiply-listed equity and
ETF options volume. The Exchange believes it is appropriate to make
this modification to afford members the opportunity to achieve new
Customer Rebate Program tiers or maintain their current level of
Customer Rebate Program tiers in light of the proposed changes below.
The Exchange notes that options on SPY account for approximately 15% of
the equity and ETF options volume in the industry. The proposed pricing
in new Section C, described below, would contain rebates applicable to
SPY options. Therefore, the Exchange would not pay rebates on SPY
options as part of the Customer Rebate Program.
The Exchange believes that increasing the amount of rebates that
will be paid to market participants that qualify for certain Categories
of rebates in Tiers 2, 3 and 4 will encourage market participants to
send increased Customer order flow to the Exchange to the benefit of
all market participants. The Exchange also believes that continuing to
include options on SPY transactions in the calculation for qualifying
tiers will continue to encourage Customer order flow in SPY.
Section C-SPY
The Exchange proposes to not apply Section I pricing to options on
SPY and instead adopt new pricing in a new Section C entitled ``Rebates
and Fees for Adding and Removing Liquidity in SPY'' for options on SPY.
The Exchange also proposes to remove the symbol ``SPY'' from the list
of Select Symbols in Section I of the Pricing Schedule.
The Exchange proposes to adopt ``Make/Take'' pricing for SPY in
both Simple and Complex Orders. The Exchange proposes to adopt the
following pricing for options on SPY in Simple Orders in a new Part A
to Section C:
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Customer Specialist Market maker Firm Broker-dealer Professional
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Rebate for Adding Liquidity............................. $0.00 $0.20 $0.20 $0.00 $0.00 $0.00
Fee for Removing Liquidity.............................. 0.44 0.44 0.44 0.44 0.44 0.44
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Today, Specialists \9\ and Market Makers \10\ transacting Simple
Orders in Select Symbols are paid a $0.20 per contract Rebate for
Adding Liquidity only when the Specialist or Market Maker is contra to
a Specialist, Market Maker, Firm, Broker-Dealer or Professional.\11\ If
the Specialist or Market Maker is contra to a Customer order, the
Specialist or Market Maker is assessed the Simple Order Fee for Adding
Liquidity. The Exchange assesses Specialists and Market Makers a $0.10
per contract Fee for Adding Liquidity for Simple Orders in Select
Symbols and Firms, Professionals and Broker-Dealers pay a $0.45 per
contract Fee for Adding Liquidity for Simple Orders in Select Symbols.
Customers are not assessed a Simple Order Fee for Adding or Removing
Liquidity in Select Symbols. Specialists, Market Makers, Firms, Broker-
Dealers and Professionals are assessed a $0.45 per contract Fee for
Removing Liquidity in Select Symbols.
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\9\ A ``Specialist'' is an Exchange member who is registered as
an options specialist pursuant to Rule 1020(a).
\10\ 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.
\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 Rule
1000(b)(14).
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The Exchange proposes to adopt a ``Make/Take'' pricing model with
[[Page 37252]]
respect to SPY options wherein the Exchange would pay a rebate to
liquidity providers and assess a fee on liquidity takers. The Exchange
therefore proposes to adopt certain Rebates for Adding Liquidity for
Specialists and Market Makers of $0.20 per contract and assess a $0.44
per contract Fee for Removing Liquidity on all market participants with
respect to Simple Order SPY options. Customers, Firms, Broker-Dealers
and Professionals would not be assessed a fee for adding liquidity in
SPY Simple Orders. Unlike the pricing for Simple Order Select Symbols,
the Exchange would pay a rebate to Specialists and Market Makers for
each transaction in SPY, regardless of the contra party. Therefore,
Firms, Broker-Dealers and Professionals would be assessed a lower fee
because the Simple Order Fees for Removing Liquidity in SPY are
decreased from $0.45 to $0.44 per contract. Customers would now pay
$0.44 per contract when removing liquidity as compared to no fee today,
but would remain free with respect to adding liquidity. Specialists and
Market Makers would pay lower fees as compared to today.
The Exchange proposes to adopt the following pricing for options on
SPY in Complex Orders in a new Part B to Section C:
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Customer Specialist Market maker Firm Broker-dealer Professional
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Fee for Adding Liquidity................................ $0.00 $0.10 $0.10 $0.10 $0.10 $0.10
Fee for Removing Liquidity.............................. 0.00 0.40 0.40 0.50 0.50 0.50
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Today, all market participants, other than a Customer are assessed
a Complex Order Fee for Adding Liquidity in Select Symbols of $0.10 per
contract. A Customer is not assessed a Complex Order Fee for Adding or
Removing Liquidity in Select Symbols. Today, a Specialist and Market
Maker are assessed a $0.25 per contract Complex Order Fee for Removing
Liquidity and a Firm, Broker-Dealer and Professional are assessed $0.50
per contract Complex Order Fee for Removing Liquidity in Select
Symbols. The Exchange proposes to adopt pricing for SPY options and
continue to not assess a Customer either a Fee for Adding or Removing
Liquidity in Complex Orders in SPY options. All market participants,
other than a Customer, would be assessed a $0.10 per contract Complex
Order Fee for Adding Liquidity in SPY options, as is the case today in
Select Symbols. The Exchange proposes to adopt Complex Order Fees for
Removing Liquidity for SPY options as follows: A Specialist and Market
Maker would be assessed $0.40 per contract Complex Order Fee for
Removing Liquidity and a Firm, Broker-Dealer and Professional would be
assessed $0.50 per contract. The Exchange would pay a Customer rebate
of $0.38 per electronically-delivered and executed contract in Complex
Orders in SPY options. The Exchange would therefore increase the
Complex Order Fees for Removing Liquidity in SPY options for
Specialists and Market Makers.
Similar to Section I pricing, the order that is received by the
trading system first in time shall be considered an order adding
liquidity and an order that trades against that order shall be
considered an order removing liquidity, except with respect to orders
that trigger an order exposure alert.
The Exchange also proposes to decrease Complex Order Fees for
Removing Liquidity applicable to Specialists and Market Makers by $0.02
per contract when the Specialist or Market Maker transacts against a
Customer Order directed to that Specialist or Market Maker for
execution. Today, the Exchange decreases the Complex Order Fees for
Removing Liquidity applicable to Specialists and Market Makers by $0.05
per contract pursuant to a Pilot Program.\12\ As described in greater
detail below, the Exchange proposes to reduce the Complex Order Fees
for Removing Liquidity applicable to Specialists and Market Makers from
$0.02 to $0.05 per contract for Select Symbols and SPY. In addition,
the Exchange proposes to pay Customers a rebate of $0.38 per contract
for SPY transactions in Complex Orders. The Exchange believes that the
proposed pricing will encourage market participants to direct orders in
SPY options to the Exchange.
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\12\ See Securities Exchange Act Release No. 68202 (November 9,
2012), 77 FR 68856 (November 16, 2012) (SR-Phlx-2012-27 and SR-Phlx-
2012-54).
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The Exchange also states in the Pricing Schedule, similar to
Section I pricing, that Simple Orders that are executed against the
individual components of Complex Orders will be assessed the fees and
rebates in Part A (Simple Orders) and the individual components of such
a Complex Order will be assessed the fees in Part B (Complex Orders).
The Exchange proposes to assess no fees and pay no rebates on
transactions which execute against an order for which the Exchange
broadcast an order exposure alert in SPY. Rule 1080(m) provides for the
broadcast of certain orders that are on the Phlx Book.\13\ The Exchange
broadcasts orders on the Phlx Book by issuing order exposure alerts to
all Phlx market participants that subscribe to certain data feeds. The
Exchange believes that by not assessing fees (or paying a rebate) when
removing orders from the order book in SPY where an order exposure
alert was issued, will incentivize market participants to remove
liquidity from the Phlx Book.
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\13\ See Rule 1080(m) and see also Securities Exchange Act
Release No. 68517 (December 21, 2012), 77 FR 77134 (December 31,
2012) (SR-Phlx-2012-136).
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As explained above, SPY Customer volume will be included in the
calculation of Customer volume in Multiply Listed Options that are
electronically-delivered and executed for purposes of the Customer
Rebate Program in Section A, however the rebates defined in Section A
will not apply to electronic executions in SPY.
Today, the Monthly Market Maker Cap \14\ is not applicable to
electronic transactions in the Select Symbols, except Qualified
Contingent Cross (``QCC'') Transaction Fees.\15\ The
[[Page 37253]]
Exchange proposes to apply the Monthly Market Maker Cap to SPY
transactions as it is applied today.
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\14\ Specialists and Market Makers are subject to a ``Monthly
Market Maker Cap'' of $550,000 for: (i) Electronic and floor Option
Transaction Charges; (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 is aggregated in calculating the Monthly Market Maker
Cap if there is Common Ownership between the member organizations.
All dividend, merger, short stock interest and reversal and
conversion strategy executions (as defined in this Section II) are
excluded from the Monthly Market Maker Cap.
\15\ 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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Today, the Monthly Firm Fee Cap \16\ applies to floor transactions
in Select Symbols and QCC Orders (electronic and floor transactions).
The Exchange proposes to apply the Monthly Firm Fee Cap to SPY
transactions as it is applied today.
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\16\ Firms are subject to a maximum fee of $75,000 (``Monthly
Firm Fee Cap''). Firm Floor Option Transaction Charges and QCC
Transaction Fees, as defined in this section above, in the
aggregate, for one billing month may not exceed the Monthly Firm Fee
Cap per member organization when such members are trading in their
own proprietary account. All dividend, merger, and short stock
interest strategy executions (as defined in this Section II) are
excluded from the Monthly Firm Fee Cap. Reversal and conversion
strategy executions (as defined in this Section II) are included in
the Monthly Firm Fee Cap. QCC Transaction Fees are included in the
calculation of the Monthly Firm Fee Cap.
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Today, Payment for Order Flow Fees \17\ are collected on
transactions in the Select Symbols, except when a Specialist or Market
Maker is also assessed the Simple Order Fee for Removing Liquidity, in
which case the Payment for Order Flow fees will not apply. The Exchange
proposes to not collect PFOF on transactions in SPY options.
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\17\ 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.
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Today, the Cancellation Fee for each cancelled electronically
delivered Professional AON order applies to Select Symbols. The
Cancellation Fee does not apply for each cancelled electronically
delivered Customer order in Select Symbols. The Exchange proposes to
apply the Cancellation Fee to SPY transactions as it is applied today.
Today, transactions in Select Symbols originating on the Exchange
floor are subject to the Multiply Listed Options Fees in Section II.
However, if one side of the transaction originates on the Exchange
floor and any other side of the trade was the result of an
electronically submitted order or a quote, then these fees will apply
to the transactions which originated on the Exchange floor and
contracts that are executed electronically on all sides of the
transaction. The Exchange proposes to treat transactions originating on
the Exchange floor in SPY as they are applied today.
Today, non-Complex electronic auctions include the Quote Exhaust
auction and, for purposes of fees, the opening process. A Complex
electronic auction includes, but is not limited to, the Complex Order
Live Auction (``COLA'').\18\ Customer executions that occur as part of
a Complex electronic auction are assessed $0.00 per contract. However,
the Exchange would pay the applicable proposed Customer rebate of $0.38
per contract for Customer executions in a Complex electronic auction in
SPY.
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\18\ COLA is the automated Complex Order Live Auction process. A
COLA may take place upon identification of the existence of a COLA-
eligible order either: (1) Following a COOP, or (2) during normal
trading if the Phlx XL system receives a Complex Order that improves
the cPBBO. See Exchange Rule 1080.
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Today, Customer executions that occur as part of a non-Complex
electronic auction are assessed $0.00 per contract. Professional, Firm,
Broker-Dealer, Specialist and Market Maker executions that occur as
part of a Complex electronic auction are assessed the Fees for Removing
Liquidity in Section I, Part B. Professional, Firm, Broker-Dealer,
Specialist and Market Maker executions that occur as part of a non-
Complex electronic auction are assessed the Fees for Adding Liquidity
in Section I, Part B. The Exchange proposes to treat transactions in
auctions in the same manner for SPY options and assess the fees in
Section C, Part B.
Today, QCC Transaction fees and rebates, defined in Section II, are
applicable to Section I. This will also be the case for SPY in that the
QCC Transaction fees and rebates will be applicable to Section C.
With respect to PIXL Pricing, today an Initiating Order is assessed
$0.07 per contract or $0.05 per contract if Customer Rebate Program
Threshold Volume defined in Section B of the Pricing Schedule is
greater than 100,000 contracts per day in a month.\19\ The Exchange
reduces the Initiating Order \20\ Fee for Firms that are contra to
Customer PIXL Orders to $0.00 per contract if the Customer PIXL Order
is greater than 999 contracts. Today, with respect to Select Symbols:
(i) When the PIXL Order is contra to the Initiating Order a Customer
PIXL Order is assessed $0.00 per contract and all non-Customer market
participant PIXL Orders are assessed $0.30 per contract when contra to
the Initiating Order; (ii) when a PIXL Order is contra to a PIXL
Auction Responder, the PIXL Order is assessed the Fee for Adding
Liquidity in Section I and the Responder is assessed $0.30 per
contract, unless the Responder is a Customer, in which case the fee
will be $0.00 per contract; and (iii) 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 is assessed the Fee for Removing Liquidity not
to exceed $0.30 per contract and the resting order or quote is assessed
the Fee for Adding Liquidity in Section I. If the resting order or
quote that was on the Phlx Book was entered during the Auction, the
PIXL Order is assessed the Fee for Adding Liquidity in Section I and
the resting order or quote is assessed the Fee for Removing Liquidity
not to exceed $0.30 per contract.
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\19\ See Section IV, A Pricing.
\20\ 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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The Exchange proposes to adopt PIXL Pricing in new Section C to
assess Initiating Orders in SPY options $0.05 per contract for all
market participants. In addition, when the PIXL Order is contra to the
Initiating Order, a Customer PIXL Order will be assessed $0.00 per
contact and all non-Customer market participants will be assessed a
$0.38 per contract fee when contra to the Initiating Order. Also, when
a PIXL Order is contra to other than the Initiating Order,\21\ the PIXL
Order will be assessed $0.00 per contract, unless the order is a
Customer, in which case the Customer will receive a rebate of $0.38 per
contract. All other contra parties to the PIXL Order, other than the
Initiating Order, will be assessed a reduced Fee for Removing Liquidity
of $0.38 per contract or will receive the Rebate to Add Liquidity.
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\21\ For example, a PIXL Auction Responder or a resting order or
quote that was on the Phlx book prior to the auction.
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The Exchange believes that the proposed pricing for SPY options
will encourage market participants to send an even greater amount of
SPY orders to the Exchange to take advantage of the new pricing for SPY
and lower costs in certain circumstances.
Finally, the Exchange proposes to amend the Preface to the Pricing
[[Page 37254]]
Schedule to include new Section C in the Preface.
Section I Complex Orders
On November 9, 2012, the Commission approved SR-Phlx-2012-27 and
SR-Phlx-2012-54, as modified by Amendment No. 1, on a one-year pilot
basis, with such fees being operative on December 3, 2012 (``Approval
Order'').\22\ The Approval Order reinstated the fees that were proposed
by the Exchange in SR-Phlx-2012-27.\23\ Specifically, the Approval
Order permits a $0.05 fee differential as between Specialists and
Market Makers that receive directed \24\ Complex Orders and those that
do not receive directed Complex Orders. Today, the Exchange decreases
the Complex Order Fee for Removing Liquidity applicable to Specialists
and Market Makers of $0.25 per contract 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. The pilot was
approved for one year and expires on December 2, 2013. As part of the
pilot program, the Exchange provides certain pilot reports.\25\ The
Exchange proposes to reduce the fee differential from $0.05 to $0.02
per contract and proposes to terminate the current pilot program that
is in effect. The Exchange believes that it will continue to
incentivize Specialists and Market Makers to remove liquidity on the
Exchange with the lower fee differential.
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\22\ See Securities Exchange Act Release No. 68202 (November 9,
2012), 77 FR 68856 (November 16, 2012) (SR-Phlx-2012-27 and SR-Phlx-
2012-54).
\23\ Specifically, SR-Phlx-2012-27 proposed to: (1) Increase the
Customer Complex Order Rebate for Adding Liquidity from $0.30 to
$0.32 per contract; (2) create a new Complex Order Rebate for
Removing Liquidity and specifically pay a Customer a $0.06 Complex
Order Rebate for Removing Liquidity; and (3) increase the Complex
Order Fees for Removing Liquidity for Firms, Broker-Dealers and
Professionals from $0.35 per contract to $0.38 per contract. These
filings were initially suspended and later approved on a pilot
basis. See Securities Exchange Act Release Nos. 66551 (March 9,
2012), 77 FR 15400 (March 15, 2012) (SR-Phlx-2012-27) and 66883
(April 30, 2012), 77 FR 26591 (May 4, 2012) (SR-Phlx-2012-54). By
order dated April 30, 2012, the Commission suspended SR-Phlx-2012-27
and SR-Phlx-2012-54. See Securities Exchange Release No. 66884
(April 30, 2012), 77 FR 26595 (May 4, 2012) (SR-Phlx-2012-27 and SR-
Phlx-2012-54).
\24\ An order that is ``directed'' is one that is directed by an
Order Flow Provider to a specific Market Maker or Specialist when
that order is entered electronically into PHLX XL II. The term
``Order Flow Provider'' means any member or member organization that
submits, as agent, orders to the Exchange. See Rule 1080(l)(i)(B).
\25\ See note 22.
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Section IV PIXL Amendments
The Exchange proposes to amend PIXL pricing at Section IV, Part A
of the Pricing Schedule. As noted above, today the Exchange assesses an
Initiating Order a $0.07 per contract or $0.05 per contract fee if the
Customer Rebate Program Threshold Volume, defined in Section B, is
greater than 100,000 contracts per day in a month.\26\ If the
Initiating Order fee is for a Firm that is contra to a Customer PIXL
Order, the Initiating Order Fee is reduced to $0.00 if a Customer PIXL
Order is greater than 999 contracts. The Exchange proposes to expand
the reduction of the Initiating Order Fee to a Professional, Broker-
Dealer, Specialist and Market Maker, as well as a Firm. Customers are
not assessed an Initiating Order Fee. The Exchange believes that this
amendment will encourage all market participants to transact a greater
number of PIXL Orders.
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\26\ Any member or member organization under Common Ownership
with another member or member organization that qualifies for a
Customer Rebate Tier discount in Section B receives the PIXL
Initiating Order discount as described above.
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2. Statutory Basis
The Exchange believes that its proposal to amend its Pricing
Schedule is consistent with Section 6(b) of the Act \27\ in general,
and furthers the objectives of Section 6(b)(4) of the Act \28\ in
particular, in that it provides for an equitable allocation of
reasonable fees and other charges among Exchange members and other
persons using its facilities.
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\27\ 15 U.S.C. 78f(b).
\28\ 15 U.S.C. 78f(b)(4).
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Customer Rebate Program
The Exchange's proposal to increase certain Customer rebates in
Tiers 2, 3 and 4 is reasonable because the increased rebates will
encourage market participants to send increased Customer order flow to
the Exchange to the benefit of all market participants. The Exchange's
proposal to increase certain Customer rebates in Tiers 2, 3 and 4 is
equitable and not unfairly discriminatory because the Exchange would
pay the Customer rebates uniformly with respect to market participants
transacting qualifying orders. Any market participant that transacts
qualifying orders is eligible for a Customer rebate.
The Exchange's proposal to not pay Customer rebates on SPY options,
but continue to include SPY options in the calculation of Multiply
Listed Options that qualify for Customer rebates in Section A of the
Pricing Schedule is reasonable because market participants would
continue to benefit from SPY option volume in terms of qualifying for
Customer Rebate Tiers. Also, the Exchange will offer a Customer rebate
of $0.38 per contract for Complex Order transactions in SPY options.
The Exchange's proposal to not pay Customer Rebate Program rebates in
Section B for transactions in SPY options, but continue to include SPY
options in the calculation of Multiply Listed Options that qualify for
Customer rebates in Section B of the Pricing Schedule is equitable and
not unfairly discriminatory because the Exchange would apply the
calculation of Customer rebates and would pay rebates on qualifying
orders in a uniform manner. Further, the Exchange's proposal to remove
SPY options volume from the industry calculation is reasonable because
it allows members and member organizations to have the flexibility in
routing decisions with respects to SPY while maintaining their current
level rebate tiers. The Exchange's proposal to remove SPY options
volume from the industry calculation is equitable and not unfairly
discriminatory because the Exchange [sic] would no longer apply
uniformly to all market participants.
The Exchange's proposal to adopt new pricing for SPY is reasonable,
equitable, and not unfairly discriminatory because pricing by symbol is
a common practice on many U.S. options exchanges as a means to
incentivize order flow to be sent to an exchange for execution in the
most actively traded options classes. SPY options are currently the
most actively traded equity or ETF option class.\29\ Other options
exchanges price by symbol.\30\
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\29\ For May 2013, SPY Options accounted for approximately 15%
of the overall equity and ETF options volume. By comparison, the
second most actively traded equity or ETF option are AAPL Options,
which account for approximately 4% of the overall equity and ETF
options volume.
\30\ See the Chicago Board Options Exchange Incorporated's Fees
Schedule and the International Securities Exchange LLC.
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The Exchange's proposed new Simple and Complex Order pricing, which
adopts ``Make/Take'' pricing, in SPY options is reasonable because the
Exchange desires to incentivize market participants to transact a
greater number of SPY options. The Exchange is offering pricing
specific to SPY because, as previously mentioned, SPY options are
currently the most actively traded options class and therefore the
Exchange believes that incentivizing Specialists and Market Makers to
add increased liquidity in SPY options and encouraging market
participants to send Customer order flow to the Exchange by offering
Complex Order Customer rebates and PIXL incentives will benefit
[[Page 37255]]
all market participants through increased liquidity, tighter markets
and order interaction. The Exchange believes it is reasonable to assess
lower fees to transact SPY options in Simple Orders to Specialists,
Market Makers, Firms, Broker-Dealers and Professionals because the
Exchange seeks to incentivize these market participants to transact a
greater number of Simple Order SPY options. The Exchange would assess
higher fees to Customers in the form of a Simple Order Fee for Removing
Liquidity in SPY options. Assessing Customers Fees for Removing
Liquidity, similar to other market participants, is reasonable in a
``Make/Take'' pricing model because the model seeks to reward liquidity
providers by assessing takers. Other options exchanges similarly assess
Customers fees to remove liquidity.\31\ The Exchange also believes that
it is reasonable to increase the Specialist and Market Maker Complex
Order Fees for Removing Liquidity in SPY options because Specialists
and Market Makers would continue to be assessed lower fees as compared
to Firms, Broker-Dealers and Professionals \32\ and by increasing this
fee, the Exchange is able to pay the proposed $0.38 per contract
Customer rebate in Complex Orders in SPY options.
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\31\ See The NASDAQ Options Market LLC's (``NOM'') Rules at
Chapter XV, Section 2. NOM assesses Customers a $0.45 per contract
Fee for Removing Liquidity in Penny Pilot Options and a $0.82 Fee
for Removing Liquidity in Non-Penny Pilot Options.
\32\ Customers are not assessed a Complex Order Fee for Removing
Liquidity in SPY options.
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The Exchange's proposed Simple Order pricing is equitable and not
unfairly discriminatory for the reasons below. Today, Specialists and
Market Makers transacting Simple Orders in Select Symbols are paid a
$0.20 per contract Rebate for Adding Liquidity only when the Specialist
or Market Maker is contra to a Specialist, Market Maker, Firm, Broker-
Dealer or Professional and they also pay a $0.10 per contract Fee for
Adding Liquidity and a $0.45 per contract Fee for Removing Liquidity in
Select Symbols. The Exchange is proposing to continue to pay
Specialists and Market Makers a Rebate for Adding Liquidity in Simple
Orders in SPY options, but without limitation as to contra-party. The
Exchange would not assess a Fee for Adding Liquidity and would assess a
$0.01 per contract lower Fee for Removing Liquidity ($0.44 vs. $0.45
per contract) for Simple Orders in SPY options.
The Exchange believes that by providing Specialists and Market
Makers a greater opportunity to earn a rebate and assessing lower Fees
for Removing Liquidity and no Fees for Adding Liquidity will
incentivize Specialists and Market Makers to interact with a greater
number of Simple Orders in SPY options on the Exchange. Similar to
Section I pricing, the Exchange is only paying a rebate to Specialists
and Market Makers and not pay a similar rebate to other market
participants because Specialists and Market Makers have obligations to
the market and regulatory requirements,\33\ which normally do not apply
to other market participants. They have obligations to make continuous
markets, engage in a course of dealings reasonably calculated to
contribute to the maintenance of a fair and orderly market, and not
make bids or offers or enter into transactions that are inconsistent
with a course of dealings. The proposed differentiation as between
Specialists and Market Makers and other market participants recognizes
the differing contributions made to the liquidity and trading
environment on the Exchange by these market participants. With respect
to Firms, Broker-Dealers and Professionals, today the Exchange pays no
Rebate for Adding Liquidity in Select Symbols to these market
participants and uniformly assesses a $0.45 per contract Fee for Adding
and Removing Liquidity for Simple Orders in Select Symbols. The
Exchange is proposing to continue to not pay a Simple Order Rebate for
Adding Liquidity to Firms, Broker-Dealers and Professionals in SPY
options and also to not assess a Fee for Adding Liquidity for Simple
Orders in SPY options. The Exchange proposes to lower the Fee for
Removing Liquidity for Simple Orders in SPY options for Firms, Broker-
Dealers and Professionals from $0.45 to $0.44 per contract. The
Exchange would continue to uniformly assess the Fees for Removing
Liquidity to all market participants for Simple Orders in SPY options.
Customers would be assessed higher fees for Simple Orders in SPY
options in terms of removing liquidity but would continue to be free
with respect to adding liquidity. Today, Customers do not receive a
Rebate for Adding Liquidity for Simple Orders in Select Symbols nor do
they pay a Fee for Adding Liquidity in Simple Orders for Select
Symbols. This will continue to be the case for Simple Orders in SPY
options. Today, Customers do not pay a Simple Order Fee for Removing
Liquidity in Select Symbols. With this proposal the Exchange would
assess a $0.44 per contract Simple Order Fee for Removing Liquidity in
SPY options similar to all other market participants. The Exchange
believes that it is equitable and not unreasonably discriminatory to
assess the same Simple Order Fee for Removing Liquidity in SPY options
to all market participants.
---------------------------------------------------------------------------
\33\ See Rule 1014 titled ``Obligations and Restrictions
Applicable to Specialists and Registered Options Traders.''
---------------------------------------------------------------------------
The Exchange's proposed Complex Order pricing is equitable and not
unfairly discriminatory for the reasons below. Today, Customers are not
assessed a Complex Order Fee for Adding or Removing Liquidity in Select
Symbols. In a classic pricing model, the Exchange has traditionally not
assessed fees to Customers because Customer order flow brings unique
benefits to the market. Other market participants benefit from the
liquidity that Customer order flow brings to the Exchange. All market
participants, except Customers, today pay a $0.10 per contract Complex
Order Fee for Adding Liquidity in Select Symbols. The Exchange proposes
to continue to assess all market participants, other than Customers, a
$0.10 per contract Complex Order Fee for Adding Liquidity in SPY
Options. Today, Specialists and Market Makers pay a $0.25 per contract
Complex Order Fee for Removing Liquidity in Select Symbols and Firms,
Broker-Dealers and Professionals pay a $0.50 per contract Complex Order
Fee for Removing Liquidity in Select Symbols. The Exchange proposes to
increase the Complex Order Fee for Removing Liquidity in SPY options
for Specialists and Market Makers from $0.25 to $0.40 per contract.
Firms, Broker-Dealers and Professionals would continue to be assessed
$0.50 per contract Complex Order Fee for Removing Liquidity in SPY
options because the Exchange is seeking to narrow the differential as
between Specialists and Market Makers and Firms, Broker-Dealers and
Professionals. Today, Specialists and Market Maker pay a Complex Order
Fee for Removing Liquidity in Select Symbols of $0.25 per contract
whereas Firms, Broker-Dealers and Professionals pay $0.50 per contract.
That $0.25 per contract differential as between these market
participants when removing liquidity in Complex Orders would be
narrowed to $0.10 per contract by increasing the Specialist and Market
Maker Complex Order Fee for Removing Liquidity from $0.25 to $0.40 per
contract. The Exchange believes it is equitable and not unfairly
discriminatory to continue to assess lower fees in SPY options to
Specialists
[[Page 37256]]
and Market Makers as compared to Firms, Broker-Dealers and
Professionals because as explained herein, Specialists and Market
Makers have obligations to the market and regulatory requirements,\34\
which normally do not apply to other market participants.
---------------------------------------------------------------------------
\34\ See Rule 1014 titled ``Obligations and Restrictions
Applicable to Specialists and Registered Options Traders.''
---------------------------------------------------------------------------
As discussed more fully below, the Exchange believes that reducing
the current fee differential for SPY options in new Section C, as well
as Select Symbols, from $0.05 to $0.02 per contact is reasonable
because the Exchange believes that reducing Specialist and Market Maker
Fees for Removing Liquidity in Complex Orders when such orders are
directed to these [sic] seeks to incentivize market participants to
direct and transact a greater number of Customer Complex Orders at the
Exchange. Creating these incentives and attracting Customer Complex
Orders to the Exchange, in turn, benefits all market participants
through increased liquidity at the Exchange. A higher percentage of
Customer Complex Orders leads to increased Complex Order auctions and
better opportunities for price improvement.
The Exchange believes that reducing the current fee differential
for SPY options in new Section C, as well as Select Symbols, from $0.05
to $0.02 per contact is equitable and not unfairly discriminatory
because Specialists and Market Makers have burdensome quoting
obligations \35\ to the market which do not apply to Firms,
Professionals and Broker-Dealers. Also, Specialists and Market Makers
that receive directed orders have higher quoting obligations \36\
compared to other Specialists and Market Makers and therefore are
assessed a lower fee when they transact with a Customer order that was
directed to them for execution as compared to Specialists and Market
Makers. In addition, the Exchange believes that reducing the discount
for directed orders will narrow the fee differential as between
Specialists and Market Makers that receive directed orders and those
that do not receive directed orders.
---------------------------------------------------------------------------
\35\ See Rule 1014 titled ``Obligations and Restrictions
Applicable to Specialists and Registered Options Traders.''
\36\ Id.
---------------------------------------------------------------------------
The Exchange believes that it is reasonable, equitable and not
unreasonably discriminatory \37\ to pay a Customer Complex Order rebate
of $0.38 per contract in SPY options because such a rebate would
attract increased Customer Complex Order flow to the Exchange which
liquidity benefits all market participants. Customer order flow
benefits market participants and provides the opportunity for increased
order interaction on the Exchange.
---------------------------------------------------------------------------
\37\ The Commission notes that Section 6(b) of Act the prohibits
unfair discrimination. 15 U.S.C. 78f(b).
---------------------------------------------------------------------------
The Exchange believes that it is reasonable, equitable and not
unfairly discriminatory to specify within new Section C (SPY) pricing
that similar to Section I (Select Symbol) pricing, the order that is
received by the trading system first in time shall be considered an
order adding liquidity and an order that trades against that order
shall be considered an order removing liquidity, except with respect to
orders that trigger an order exposure alert and that Simple Orders that
are executed against the individual components of Complex Orders will
be assessed the fees and rebates in Part A, however, the individual
components of such a Complex Order will be assessed the fees in Part B.
The Exchange believes that this text will clarify the application of
the pricing in Section C, similar to Section I. The Exchange is not
proposing to amend this language, but rather represent that the same
method by which the Exchange determines whether an order adds or
removes liquidity and what pricing applies, Simple or Complex, applies
in new Section C.
The Exchange's proposal to assess no fees and pay no rebates on
transactions which execute against an order for which the Exchange
broadcast an order exposure alert in SPY is reasonable because by not
imposing any pricing when market participants respond to broadcasts
orders and remove orders from the Phlx Book will incentivize market
participants to respond to additional broadcast orders. The Exchange's
proposal to assess no fees and pay no rebates on transactions which
execute against an order for which the Exchange broadcast an order
exposure alert in SPY options is equitable and not unfairly
discriminatory because the Exchange proposes to not assess fees or pay
rebates uniformly for all market participants.
The Exchange's proposal to not apply the Monthly Market Maker Cap
to electronic transactions in the Select Symbols, except QCC
Transaction Fees is reasonable, equitable and not unfairly
discriminatory because this is the same manner in which the Monthly
Market Maker Cap applies to Section I pricing.
The Exchange's proposal to apply the Monthly Firm Fee Cap to floor
transactions in Select Symbols and QCC Orders (electronic and floor
transactions) is reasonable, equitable and not unfairly discriminatory
because this is the same manner in which the Monthly Firm Fee Cap
applies to Section I pricing.
The Exchange's proposal to not collect PFOF on transactions in SPY
options is reasonable because the Exchange seeks to encourage market
participants to transact a greater number of SPY option orders. The
Exchange's proposal to not collect PFOF on transactions in SPY options
is equitable and not unfairly discriminatory because the Exchange would
not assess PFOF on any market participant transacting SPY.
The Exchange's proposal to apply the Cancellation Fee for each
cancelled electronically delivered Professional AON order in SPY
options as it applies today to Select Symbols is reasonable, equitable
and not unfairly discriminatory as the Exchange is not proposing to
treat SPY options differently from Select Symbols with respect to the
Cancellation Fee.
The Exchange's proposal to subject transactions in SPY options
originating on the Exchange floor to the Multiply Listed Options Fees
in Section II, unless one side of the transaction originates on the
Exchange floor and any other side of the trade was the result of an
electronically submitted order or a quote, then applicable fees in Part
C will apply to the transactions which originated on the Exchange floor
and contracts that are executed electronically on all sides of the
transaction is reasonable, equitable and not unfairly discriminatory
because the Exchange proposes to not amend the manner in which SPY
options are treated today as Select Symbols.
The Exchange's proposal to treat Customer executions which occur as
part of a non-Complex electronic auction and a Complex electronic
auction in the same manner for SPY options as exists today for Select
Symbols is reasonable, equitable and not unfairly discriminatory
because the Exchange is not proposing to amend these fees. In addition,
the Exchange would pay the applicable proposed Customer Complex Order
rebate of $0.38 per contract for Customer executions in an auction
which should benefit market participants as described herein.
The Exchange believes that paying Customers a $0.38 per contract
rebate when Complex Order transactions in SPY options are transacted is
reasonable because it encourages Customer order flow in SPY options,
which order flow benefits all market participants. The
[[Page 37257]]
Exchange believes that paying Customers a $0.38 per contract rebate
when Complex Order transactions in SPY options are transacted is
equitable and not unfairly discriminatory because Customer order flow
bring unique benefits to the market which benefits all market
participants. The Exchange today offers Customer rebates in Section B
and would now instead pay this rebate for SPY options in Complex
Orders.
The Exchange's proposal to treat QCC Transaction fees and rebates
for SPY options in the same manner as exists today for Select Symbols
is reasonable, equitable and not unfairly discriminatory because the
Exchange is not proposing to amend these fees or rebates.
The Exchange's proposal to amend PIXL pricing for SPY options is
reasonable because the Exchange is seeking to incentivize market
participants to transact a greater number of SPY options in PIXL by
lower the Initiating Order Fee to $0.05 per contract for all market
participants for all PIXL transactions. The Exchange's proposal to
increase the fee that will be assessed to non-Customer market
participants that are contra to an Initiating Order for SPY options
from $0.30 to $0.38 per contract is reasonable because the Exchange is
offering to pay a Customer rebate of $0.38 per contract when the PIXL
Order is contra to an order other than an Initiating Order \38\ in
order to incentivize market participants to transact a greater number
of Customer SPY options in PIXL. The fee increase would provide the
Exchange the opportunity to offer the $0.38 Customer rebate. The
Exchange also believes that it is reasonable to assess a PIXL Order
that is contra to other than the Initiating Order $0.00 per contract,
unless the order is a Customer order, in which case the Exchange would
pay a Customer rebate of $0.38 per contract to remove liquidity because
the Exchange desires to incentivize its market participants to transact
a greater number of SPY PIXL orders. The Exchange believes it is
reasonable that all other contra parties to the PIXL Order, other than
the Initiating Order, will be equally assessed a reduced Fee for
Removing Liquidity of $0.38 per contract when removing or they will
receive the Rebate for Adding Liquidity if adding because the Exchange
desires to equally provide all market participants the same
incentivizes to encourage them to transact a greater number of SPY PIXL
Orders.
---------------------------------------------------------------------------
\38\ See note 20.
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The Exchange's proposal to amend PIXL pricing for SPY options is
equitable and not unfairly discriminatory because the Exchange proposes
to assess all market participants transacting SPY options in PIXL a
$0.05 per contract for Initiating Orders in SPY options. The Exchange's
proposal to increase the fee for non-Customer market participants that
are contra to a PIXL Order from $0.30 to $0.38 per contract is
equitable and not unfairly discriminatory because the Exchange is
seeking to incentivize Customer orders in PIXL. As explained herein,
Customer order flow benefits all market participants through increased
liquidity and therefore increasing the fee that will be assessed to
non-Customer market participants benefits all market participants
because of the increased liquidity that such order flow will bring to
the market. With respect to PIXL Orders that are contra to other than
the Initiating Order, the Exchange will not assess a Customer PIXL
Order a fee unless the order is contra a Customer order and then the
fee will be increased because of the rebate that is being assessed. The
Exchange believes that it is equitable and not unfairly discriminatory
to lower fees for all market participants that are contra to other than
an Initiating Order because the treatment is the same for all
participants; the fee amendment applies uniformly to all non-Customer
market participants. Also, the Exchange proposes to uniformly assess
all market participants a fee when a Customer rebate would be paid to
enable the Exchange to offer the rebate. The Exchange believes that
widening the differential as between the Initiating Order Fee and the
contra party to the PIXL Order ($0.05 vs. $0.38) as compared to the
cost to transact a PIXL Order today ($0.05 or $0.07 per contract vs.
$0.30) does not misalign the cost of these transactions depending on
the market participant because the Exchange would now not assess a fee
in the case that PIXL Order is contra to other than the Initiating
Order, which is not a Customer, and would pay the Customer a rebate in
the case where the contra party is a Customer. Further, the Exchange
notes that Specialist and Market Makers today pay a combined fee of
$0.55 \39\ to respond to a PIXL auction when the PIXL Order is a
Customer order, whereas Broker-Dealers or Professionals responding to
PIXL auctions pay only $0.30 per contract. Under the proposal, all non-
Customer market participants would be treated in a uniform manner when
responding to PIXL auctions. In order to remain competitive, the
Exchange must implement fees and rebates that are competitive with
pricing at other options exchanges that offer a similar auction
opportunity. While the proposed fees would increase the differential
between a non-Customer market participants that initiated the PIXL
auction and a non-Customer market participants responding to the PIXL
auction, the Exchange believes the fee differential is important in
that it affords the Exchange the opportunity to pay Customers a rebate
in order to provide the required incentives for market participants to
continue to utilize PIXL for SPY options executions where the
participant seeks price improvement.
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\39\ The combined fee of $0.55 per contract is calculated by
adding the transaction fee of $0.30 per contract in Section I and
the PFOF of $0.25 per contract.
---------------------------------------------------------------------------
Section I Complex Orders
Customer Complex Orders are becoming an increasingly important
segment of options trading. The Exchange believes that reducing the
current fee differential for Select Symbols in Section I and SPY
options in new Section C from $0.05 to $0.02 per contact is reasonable
because the Exchange believes that reducing Specialist and Market Maker
Fees for Removing Liquidity in Complex Orders when such orders are
directed to these seeks to incentivize market participants to direct
and transact a greater number of Customer Complex Orders at the
Exchange. Creating these incentives and attracting Customer Complex
Orders to the Exchange, in turn, benefits all market participants
through increased liquidity at the Exchange. A higher percentage of
Customer Complex Orders leads to increased Complex Order auctions and
better opportunities for price improvement.
The Exchange believes that reducing the current fee differential
for Select Symbols and SPY options from $0.05 to $0.02 per contact is
equitable and not unfairly discriminatory because Specialists and
Market Makers have burdensome quoting obligations \40\ to the market
which do not apply to Firms, Professionals and Broker-Dealers. Also,
Specialists and Market Makers that receive directed orders have higher
quoting obligations \41\ compared to other Specialists and Market
Makers and therefore are assessed a lower fee when they transact with a
Customer order that
[[Page 37258]]
was directed to them for execution as compared to Specialists and
Market Makers. In addition, the Exchange believes that reducing the
discount for directed orders will narrow the fee differential as
between Specialists and Market Makers that receive directed orders and
those that do not receive directed orders.
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\40\ See Rule 1014 titled ``Obligations and Restrictions
Applicable to Specialists and Registered Options Traders.''
\41\ Id.
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The Exchange's proposal to remove SPY from the list of Select
Symbols in Section I is reasonable because the new pricing in Section C
of the Pricing Schedule would now apply to SPY options. The Exchange's
proposal to remove SPY from the list of Select Symbols in Section I is
equitable and not unfairly discriminatory because the new pricing in
Section C would apply uniformly to all market participants for SPY
options just as the pricing in Section I would apply uniformly to all
symbols noted in that section.
Section IV--PIXL Amendments
The Exchange's proposal to amend PIXL pricing at Section IV, Part A
of the Pricing Schedule is reasonable because the Exchange is
attempting to attract PIXL order flow by incentivizing members. The
Exchange believes that this amendment will encourage market
participants to transact a greater number of larger sized orders in
PIXL. Today, the Exchange offers Firms the opportunity to reduce the
PIXL Initiating Order Fee which is currently $0.07 or $0.05 per
contract if a Firm that is a contra to a Customer PIXL Order transacts
an order which exceeds 999 contracts. The Exchange now desires to
incentivize all market participants that are assessed an Initiating
Order Fee to transact large PIXL Orders (greater than 999 contracts) by
expanding the reduction of the Initiating Order Fee to a Professional,
Broker-Dealer, Specialist and Market Maker. The Exchange would offer
all market participants, other than Customers who are not assessed an
Initiating Order Fee, an incentive to transact large sized orders in
PIXL.
The Exchange's proposal to amend PIXL pricing at Section IV, Part A
of the Pricing Schedule is equitable and not unfairly discriminatory
because the Exchange would uniformly provide all market participants
that are assessed the Initiating Order Fee an opportunity to reduce the
Initiating Order Fee to $0.00 per contract provided the requisite
number of orders is transacted.
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 believes that its
proposal to amend the Customer Rebate Program to increase certain
rebates offered by the Exchange does not impose an undue burden on
competition because all market participants may participate in the
Customer Rebate Program. The Exchange's proposal to not pay rebates on
SPY options in the Customer Rebate Program because the Exchange is
proposing to offer rebates on SPY options as part of new Part C also
does not impose an undue burden on competition because the Exchange is
offering to pay Customer rebates on SPY options as part of a new
pricing schedule to encourage market participants to transact a greater
number of SPY options.
The Exchange believes that the proposed pricing for SPY options,
which provides greater incentives to transact both SPY Simple and
Complex Orders creates additional opportunity for all market
participants to decrease cost and bring additional liquidity to the
market by offering the Exchange an ability to provide rebates to
Customers, Specialists and Market Makers. 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. The Exchange believes
that not assessing fees or paying rebates when a market participant
executes against an order for which the Exchange broadcast an order
exposure alert in SPY options creates competition among market
participants to remove liquidity from the Phlx Book. This competition
does not create an undue burden on competition but rather offers all
market participants the opportunity to receive the benefit of the
pricing when transacting SPY options. The Exchange's proposal to not
collect PFOF on SPY transactions likewise promotes competition in SPY
by reducing costs to all market participants that pay PFOF.
The Exchange's proposal to reduce the PIXL Initiating Order fee for
all market participants transacting SPY options promotes competition in
this highly liquid option. The Exchange's proposal to increase the
differential as between the Initiating Order Fee and the PIXL Order in
SPY options is offset by the rebate that is offered to the Customer
transacting SPY which in turn brings liquidity to the PIXL auction. The
Exchange is proposing to not assess the PIXL Order that is contra to
other than the Initiating Order in SPY options a fee except when contra
to a Customer order because that is the only case where a rebate is
paid to a Customer in PIXL. There is also the opportunity for
Specialists and Market Makers to receive a Rebate To Add Liquidity when
transacting SPY options. The Exchange does not believe the proposal
creates an undue burden on competition, the increased fees when
transacting PIXL Orders in SPY Options allow for the Exchange to pay
Customer rebates which in turn brings necessary liquidity to the PIXL
auction and promotes competition. Further, in 2013, Specialists and
Market Makers represented 99.8% of responders to SPY PIXL auctions.
Specialists and Market Makers were the contra party to a Customer order
97.7% of the time. Therefore, under the current pricing structure, the
effective rate for Specialists and Market Makers responding to SPY PIXL
orders was $0.5443, which means the effective differential today is
$0.4943. The proposed SPY PIXL pricing actually reduces the effective
differential among Broker-Dealers, which the Exchange believes enhances
competition among Broker-Dealers, enriches the price discovery process
and creates further price improvement opportunities for Customers.
With respect to reducing the Complex Order Fees for Removing
Liquidity in Select Symbols and SPY options for orders directed to
Specialists and Market Makers, it is important to note that Specialists
and 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 order flow provider in order to be assessed the reduced Complex
Order Fee for Removing Liquidity. The Exchange is proposing to decrease
the fee differential as between Specialists and Market Makers that
receive directed orders and those that do not receive directed orders
in Select Symbols and SPY. The Exchange believes that decreasing this
fee differential does not create an undue burden on competition.
Today, PIXL pricing is proposed to incentivize Firms to bring
Initiating Orders to a PIXL auction by offering an incentive to reduce
the Initiating Order Fee. By expanding the opportunity to all market
participants that pay an Initiating Order Fee to reduce those fees, the
Exchange encourages competition among market participants to price
improve the order.
The Exchange operates in a highly competitive market, comprised of
eleven exchanges, in which market
[[Page 37259]]
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.
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.\42\ 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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\42\ 15 U.S.C. 78s(b)(3)(A)(ii).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-Phlx-2013-61 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-2013-61. 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-2013-61 and
should be submitted on or before July 11, 2013.
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\43\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\43\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-14686 Filed 6-19-13; 8:45 am]
BILLING CODE 8011-01-P