[Federal Register Volume 78, Number 160 (Monday, August 19, 2013)]
[Notices]
[Pages 50477-50480]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-20069]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70174; File No. SR-Phlx-2013-82]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Modify
Phlx Connectivity Options and Fees
August 13, 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 August 01, 2013, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II 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 modify Phlx connectivity options and fees.
The text of the proposed rule change is available at http://nasdaqomxphlx.cchwallstreet.com/, at the Exchange's principal office,
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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to modify the Phlx Fee Schedule, Section X(b)
regarding connectivity to Phlx. Specifically, the Exchange proposes to
establish connectivity and installation fees for a 10Gb Ultra low
latency fiber connection option, and provide a waiver of installation
fees for subscriptions through August 31, 2013.
The Exchange currently offers various bandwidth options for
connectivity to the Exchange, including a 40Gb fiber connection, a 10Gb
fiber connection, a 1Gb fiber connection, and a 1Gb copper
connection.\3\ In keeping with changes in technology, the Exchange now
proposes to provide a second 10Gb fiber connection offering, which uses
new ultra-low latency switches.\4\ A switch is a type of network
hardware that acts as the ``gatekeeper'' for all of a co-located
client's orders sent to the System \5\ at the Exchange's co-location
facility and orders them in sequence for entry into the System for
execution. Each of Phlx's current connection offerings uses different
switches between the offerings, but the switches are of uniform type
within each offering. As a consequence, all co-located client
subscribers to a particular connectivity option receive the same
latency in terms of the capabilities of their switches. The 10Gb Ultra
offering uses a new ultra-low latency switch, which provides faster
processing of orders sent to it in comparison to the current switch in
use for co-location connectivity. As a consequence, co-located clients
needing only 10Gb of bandwidth, but that seek faster processing of
those orders as they enter the Exchange's co-location facility now have
the option to subscribe to a faster and more efficient connection to
the Exchange.\6\
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\3\ Rule 7034(b).
\4\ The term ``Latency'' for these purposes is a measure of the
time it takes for an order to enter into a switch and then exit for
entry into the System.
\5\ As defined by Rule 4751(a).
\6\ The Exchange is not offering a low latency option for other
bandwidth connections at this time, but may do so in the future.
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The Exchange proposes a monthly subscription fee of $15,000 for a
10Gb Ultra connection, and a one-time installation fee of $1,500, which
is identical to the 40Gb fiber connectivity option. The Exchange
believes that the pricing is reflective of the value the option will
provide and the hardware and other infrastructure and maintenance costs
to the Exchange associated with offering technology that is at the
forefront of the industry. The growth in the size of consolidated and
proprietary data feeds has resulted in demand for faster processing of
message traffic, and ultra-low latency switches meet this demand by
decreasing the time individual orders are processed and market data is
transmitted by these new switches. The Exchange's proposal
[[Page 50478]]
provides the co-located client the option for faster switch processing,
which is highly valued among some market participants. The Exchange
notes that other markets have adopted low-latency connectivity options
for their clients. For example, the International Securities Exchange
LLC (``ISE'') offers a 10Gb low latency Ethernet connectivity option to
its clients, which provides a ``higher speed network to access [ISE's]
Optimise trading system.'' \7\
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\7\ See Securities Exchange Act Release No. 66525 (March 7,
2012), 77 FR 14847 (March 13, 2012) (SR-ISE-2012-09).
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The Exchange also proposes to provide a waiver of the installation
fees for client orders of 10Gb Ultra fiber connectivity to the Exchange
completed between the effectiveness of this proposal and August 31,
2013. The Exchange is providing the waiver to assist its co-located
clients in upgrading to lower latency connections to meet the growing
needs of co-located clients' business operations. The Exchange is
adding text to the rule that makes it clear that the connectivity
option also provides connection to the markets of The NASDAQ Stock
Market LLC (``NASDAQ'') and NASDAQ OMX BX, Inc. (``BX''). The Exchange
is deleting typographical errors in the title and text of the rule that
refer to connectivity to NASDAQ and replacing them with references to
Phlx, since it is a Phlx connectivity option. Last, the Exchange is
deleting text under the rule that refers to an installation fee waiver
time period for 10Gb and 40Gb fiber connections, which has since
expired.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\8\ in general, and with Section 6(b)(4) of the Act,\9\
in particular, in that it provides for the equitable allocation of
reasonable dues, fees and other charges among members and issuers and
other persons using any facility or system which the Exchange operates
or controls. The Exchange also believes the proposal furthers the
objectives of Section 6(b)(5) of the Act \10\ in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest and is not designed to permit unfair discrimination between
customer, issuers, brokers and dealers.
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\8\ 15 U.S.C. 78f(b).
\9\ 15 U.S.C. 78f(b)(4).
\10\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that its proposal is consistent with Section
6(b)(4) of the Act because the fees assessed for 10Gb Ultra fiber
connectivity fee allow the Exchange to cover the costs associated with
the purchase of new, state-of-the-art switches for this new offering.
Because the switches are best in breed, they are priced at a premium,
the cost of which the Exchange must bear. The Exchange is offering 10Gb
Ultra fiber connectivity at the same price as 40Gb fiber connectivity.
Both the proposed 10Gb Ultra fiber connectivity and 40Gb fiber
connectivity represent the best performance available to co-located
clients. 40Gb fiber connectivity provides the greatest bandwidth
available on the Exchange, which is important for co-located clients
that have high order flow and ingest large amounts of market data and
demand the greatest bandwidth possible to handle such message flow.
Some co-located clients, however, do not have bandwidth demands that
would require 40Gb fiber bandwidth but rather put a premium on reducing
latency. The 10Gb Ultra fiber connectivity it designed to meet this
demand. As a consequence, both 40Gb and 10Gb Ultra fiber connectivity
represent the best connectivity the Exchange offers in terms of
bandwidth and latency, respectively.
The Exchange believes that the proposed one-time installation fee
is consistent with Section 6(b)(4) of the Act because it is identical
to the installation fees assessed for 40Gb fiber connectivity under the
rule. The Exchange notes that it will incur the same costs associated
with setting up a subscriber with either 40Gb fiber or 10Gb Ultra fiber
connectivity. As a consequence, the Exchange believes that it is
reasonable to assess the same installation fee as 40Gb fiber. The
Exchange also believes that its proposal to waive temporarily the 10Gb
Ultra fiber connection installation fee is reasonable because it will
assist its co-located clients in upgrading to lower latency connections
to meet the growing needs of the co-located clients' business
operations at a time in the industry when speed continues to be a
driver of the U.S. securities markets. Moreover, the Exchange notes
that it has previously waived the installation fees for the 10Gb and
40Gb fiber connections for a limited time after these connectivity
options were first introduced.\11\
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\11\ See Securities Exchange Act Release No. 66429 (February 21,
2012), 77 FR 11611 (February 27, 2012) (SR-Phlx-2012-20).
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In addition to covering costs, the proposed fees will allow the
Exchange to recoup costs associated with providing the 10Gb Ultra fiber
connection and provide the Exchange a profit while providing clients
the possibility of reducing the number of their connections to the
Exchange. As discussed above, ISE offers different connectivity options
with respect to latency and NYSE Arca, Inc. offers what the Exchange
believes is a similar connectivity option, yet both options do not
provide the breadth of connectivity at the same latency as the
Exchange's proposed 10Gb Ultra fiber connectivity option.\12\ The
Exchange notes that the 10Gb Ultra fiber option provides connectivity
to seven of the NASDAQ OMX Group U.S. markets (specifically, the cash
equities and options markets operated by NASDAQ, BX, and Phlx, and the
NASDAQ OMX Futures Exchange), whereas the offerings of other exchanges
provide far fewer.\13\ Moreover, as new leading-edge technology, the
switches to be used for 10Gb Ultra fiber connectivity have lower
latency than the switches currently in use by other markets. For these
reasons, the Exchange believes the proposed fees for 10Gb Ultra fiber
connectivity to the Exchange are reasonable.
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\12\ NYSE Arca charges $10,000 per month for a 10Gb LCN
(Liquidity Center Network) Connection. See https://usequities.nyx.com/sites/usequities.nyx.com/files/nyse_arca_marketplace_fees_1.3.2012.pdf, page 13. Although similar, the
Exchange's 10Gb Ultra connection provides even lower latency
connectivity to a larger number of markets, which represents the
premium over the NYSE Arca 10Gb LCN connectivity option.
\13\ The ISE connectivity offering provides access to one market
and the NYSE Arca connectivity offering provides connectivity to the
four markets of NYSE Euronext.
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The Exchange also believes the proposed 10Gb Ultra fiber
installation and connectivity fees are equitably allocated in that all
co-located clients that voluntarily select this service option will be
charged the same amount to cover the hardware, installation, testing
and connection costs to maintain and manage the enhanced connection.
The proposed fees allow the Exchange to recoup costs associated with
providing the 10Gb Ultra fiber connection and provide the Exchange a
profit while providing clients with the most efficient connection to
the System in terms of latency. All co-located clients have the option
to select this voluntary co-location connectivity option; however, the
Exchange is not eliminating any existing connectivity options.
Accordingly, a co-located client may elect not to subscribe to the 10Gb
Ultra fiber connectivity option and
[[Page 50479]]
retain the option to which it is currently subscribed.
The Exchange also believes the proposal furthers the objectives of
Section 6(b)(5) of the Act \14\ in that it is designed to promote just
and equitable principles of trade, to remove impediments to and perfect
the mechanism of a free and open market and a national market system,
and, in general to protect investors and the public interest and is not
designed to permit unfair discrimination between customer, issuers,
brokers and dealers. The 10Gb Ultra fiber connectivity option assists
co-located clients in making their network connectivity more efficient
by reducing the time orders take to reach the System once sent from
their co-located server and also the time that market data takes to
reach their co-located server. Speed and efficiency are important
drivers of the U.S. securities markets and the Exchange is offering a
co-location connectivity solution that promotes these drivers by
providing state of the art technology that is available to all co-
located clients. The Exchange believes the enhanced 10Gb Ultra
connection will remove impediments to and perfect the mechanism of a
free and open market and a national market system because the Exchange
will provide state of the art switching technology to market
participants, which will improve the speed and efficiency of processing
orders arriving at the market from clients' co-located servers.
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\14\ 15 U.S.C. 78f(b)(5).
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The Exchange also believes that the reduction in latencies
attributed to the enhanced 10Gb Ultra connection option serves to
protect investors and the public interest. The reduction in latency
will provide investors with the most efficient means of processing
orders once they reach the Exchange. Higher bandwidth options like the
Exchange's current 10Gb and 40Gb fiber connectivity and the proposed
10Gb Ultra fiber option also remove the potential for data spikes and
data gapping issues that result from the transmission of the growing
size of the consolidated and proprietary market data feeds. Such data
spiking and data gapping issues have the potential for disrupting the
marketplace which could negatively impact investors as well as the
public interest.
The Exchange also believes the proposed installation and
subscription fees for the 10Gb Ultra fiber connectivity option are not
unfairly discriminatory because all clients have the option to
subscribe to co-locate with the Exchange and subscribe to the 10Gb
Ultra connection. There is no differentiation among co-located clients
with regard to the fees charged for these services. The Exchange
believes the proposal to waive the 10Gb Ultra fiber connection
installation fee is not unfairly discriminatory because the waiver of
fees is provided to all co-located clients that volunteer for this
particular service option during the prescribed timeframe, and there is
no differentiation among co-located clients with regard to the waiver
of fees for this option.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as amended.
Specifically, the Exchange believes that the changes will promote
competition by offering co-located clients an additional connectivity
option that will enhance their trading operations and ultimately bring
greater speed and efficiency to trading in the marketplace.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
by its terms does not become operative for 30 days after the date of
this filing, or such shorter time as the Commission may designate if
consistent with the protection of investors and the public interest,
the proposed rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \15\ and Rule 19b-4(f)(6) \16\ thereunder.
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\15\ 15 U.S.C. 78s(b)(3)(A).
\16\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to provide the Commission
with written notice of its intent to file the proposed rule change,
along with a brief description and text of the proposed rule change,
at least five business days prior to the date of filing of the
proposed rule change, or such shorter time as designated by the
Commission. The Exchange has met this requirement.
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A proposed rule change filed under Rule 19b-4(f)(6) normally does
not become operative for 30 days after the date of filing. However,
Rule 19b-4(f)(6)(iii) permits the Commission to designate a shorter
time if such action is consistent with the protection of investors and
the public interest. The Exchange has asked the Commission to waive the
30-day operative delay so that the proposal may become operative
immediately upon filing noting that it operates in a highly competitive
market in which colocation services are offered to facilitate trading
activities and that this new service provides clients with the option
to further enhance their trading immediately. The Commission believes
that waiving the 30-day operative delay is consistent with the
protection of investors and the public interest so that Phlx can
immediately offer the 10GB Ultra connectivity to those clients that
believe it can enhance the efficiency of their trading.\17\
Accordingly, the Commission hereby grants the Exchange's request and
designates the proposal operative upon filing.
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\17\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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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.
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-2013-82 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-2013-82. 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
[[Page 50480]]
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-2013-82 and should be
submitted on or before September 9, 2013.
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\18\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-20069 Filed 8-16-13; 8:45 am]
BILLING CODE 8011-01-P