[Federal Register Volume 78, Number 223 (Tuesday, November 19, 2013)]
[Notices]
[Pages 69472-69483]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-27632]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70866; File No. SR-Phlx-2013-113]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Offer a
Customer Rebate
November 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 October 31, 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 Section B of the Exchange's Pricing
Schedule, entitled ``Customer Rebate Program'', to offer its market
participants an additional rebate.
While changes to the Pricing Schedule pursuant to this proposal are
effective upon filing, the Exchange has designated the proposed
amendment to be operative on November 1, 2013.
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 purpose of the proposed rule change is to amend the Customer
Rebate Program in Section B of the Pricing Schedule to increase
Customer rebates available to market participants that transact
Customer-denominated orders on Phlx. Specifically, Phlx proposes to
offer its members the opportunity to increase the Customer rebates
offered in Section B of the Pricing Schedule for transactions on Phlx
if the aggregate volumes of Customer orders transacted by a member
organization and its affiliates on Phlx, The NASDAQ Options Market LLC
(``NOM'') and/or NASDAQ OMX BX, Inc. (``BX Options'') (collectively
``NASDAQ OMX exchanges'') exceed a specified volume. The Exchange would
increase the applicable Phlx Customer rebate for which the member
organization qualified in the Customer Rebate Program by $0.02 per
contract, in any category, provided the member organization, together
with any affiliate under Common Ownership,\3\ transacts Customer volume
on Phlx, NOM and/or BX in multiply-listed options that is
electronically delivered and executed equal to or greater than 2.5% of
national customer volume in multiply-listed options during the month.
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\3\ Common ownership is defined in the Preface to the Pricing
Schedule as [sic] member organizations under 75% common ownership or
control.
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Today, the Exchange pays Customer Rebates based on a four-tier
structure comprised of percentage thresholds of Customer Orders in
multiply-listed options based on national volume. There are two
Categories, A and B, of transactions eligible for rebates. In 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 symbols.\4\ In Category
B, rebates are
[[Page 69473]]
paid to members executing electronically-delivered Customer Complex
Orders in Penny Pilot Options and Non-Penny Pilot Options in Section II
symbols.\5\ The Exchange bases a market participant's qualification for
a Customer Rebate Tier on the percentage of total national customer
volume in multiply-listed options that are transacted monthly on Phlx.
To determine the applicable rebate, the Exchange totals Customer volume
in Multiply Listed Options \6\ (including options overlying the SPDR
S&P 500 (``SPY'')) \7\ that are electronically-delivered and executed,
except volume associated with electronic Qualified Contingent Cross
(``QCC'') Orders. \8\ Today, the Customer Rebate Tiers \9\ are as
follows: \10\
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\4\ Rebates are paid on 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 will be
paid a rebate regardless of the contra-party to the transaction.
PIXL is the Exchange's price improvement mechanism known as Price
Improvement XL or (PIXL\SM\). See Rule 1080(n). 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).
\5\ Rebates are paid on PIXL Orders in Section II symbols that
execute against non-Initiating Order interest, except in the case of
Customer PIXL Complex Orders that are greater than 999 contracts.
All Customer PIXL Complex Orders that are greater than 999 contracts
will be paid a rebate regardless of the contra-party to the
transaction.
\6\ A Multiply Listed security means an option that is listed on
more than one exchange.
\7\ SPY is a Multiply Listed Option that is priced differently
on Phlx as compared to other Multiply Listed Option symbols. See
Section I of the Pricing Schedule.
\8\ 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).
\9\ The Exchange recently filed a rule change to amend the
percentage threshold requirements in Tiers 3 and 4 as of November 1,
2013. See SR-Phlx-2013-108 (not yet published).
\10\ Members and member organizations under Common Ownership may
aggregate their Customer volume for purposes of calculating the
Customer Rebate Tiers and receiving rebates.
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Percentage thresholds of national
customer volume in multiply-
Customer rebate tiers listed equity and ETF options Category A Category B
classes, excluding SPY options
(monthly)
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Tier 1....................................... 0.00%-0.75%...................... $0.00 $0.00
Tier 2....................................... Above 0.75%-1.60%................ 0.12 0.17
Tier 3....................................... Above 1.60%-2.50%................ 0.14 0.17
Tier 4....................................... Above 2.50%...................... 0.15 0.17
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The Exchange proposes to offer Phlx members the opportunity to earn
a higher rebate on Phlx by transacting a quantity of electronically
delivered and executed Multiply Listed Customer volume that is equal to
or greater than 2.5% percent of national customer volume in multiply-
listed options. The Exchange desires to incentivize its members to
achieve this type of volume by offering to aggregate Customer volume
transacted on Phlx with volume transacted on NOM and/or BX Options for
the sole purpose of measuring the volume criteria. Phlx would pay the
additional $0.02 per contract rebate, above and beyond other Customer
rebates, on all eligible orders \11\ transacted on Phlx by the
qualifying member organization.\12\ The Exchange believes that the
additional rebate would lower costs to transact business on Phlx and
increase the volume of Customer orders directed to and executed on
Phlx, to the benefit of all other market participants on Phlx.
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\11\ Orders that are eligible for Customer rebates are specified
in Section B of the Exchange's Pricing Schedule.
\12\ A member organization, together with its affiliate under
Common Ownership, that qualifies for any rebate tier in the Customer
Rebate Program in Section B of the Pricing Schedule, will have the
opportunity to increase the applicable Customer rebate by $0.02 per
contract on Phlx.
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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 \13\ in general,
and furthers the objectives of Section 6(b)(4) and (b)(5) of the Act
\14\ 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 Phlx operates or
controls, and is not designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\13\ 15 U.S.C. 78f(b).
\14\ 15 U.S.C. 78f(b)(4), (5).
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In analyzing the market for non-core market data, the Commission
developed a framework for analyzing whether market data fees are
equitable, fair and reasonable, and not unreasonably
discriminatory.\15\ NASDAQ [sic] believes that the analytical framework
adopted in the ArcaBook order with respect to non-core market data is
equally applicable to exchange transaction fees, which must also be
reasonable, equitably allocated, and not unfairly discriminatory in
order to be consistent with the Act. As the Commission found:
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\15\ Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74770 (December 9, 2008) (SR-NYSEArca-2006-21)
(``ArcaBook Order''), vacated on other grounds, NetCoalition v. SEC,
615 F.3d 525 (D.C. Cir. 2010) (``NetCoalition I'').
If competitive forces are operative, the self-interest of the
exchanges themselves will work powerfully to constrain unreasonable
or unfair behavior. . . . [W]hen an exchange is subject to
competitive forces in its distribution of non-core data, many market
participants would be unlikely to purchase the exchange's data
products if it sets fees that are inequitable, unfair, unreasonable,
or unreasonably discriminatory. As a result, competitive forces
generally will constrain an exchange in setting fees for non-core
data because it should recognize that its own profits will suffer if
it attempts to act unreasonably or unfairly. For example, an
exchange's attempt to impose unreasonably or unfairly discriminatory
fees on a certain category of customers would likely be counter-
productive for the exchange because, in a competitive environment,
such customers generally would be able to respond by using
alternatives to the exchange's data. The Commission therefore
believes that the existence of significant competition provides a
substantial basis for finding that the terms of an exchange's fee
proposal are equitable, reasonable, and not unreasonably or unfairly
discriminatory.\16\
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\16\ ArcaBook Order, 73 FR at 74781-74782.
[[Page 69474]]
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This reasoning applies with equal weight to transaction fees, since
members that believe fees at a particular venue to be unreasonable,
inequitable, or unfairly discriminatory are able to respond by using
the numerous competitive alternatives that exist. Moreover, although
the Court of Appeals for the District of Columbia Circuit vacated the
ArcaBook Order because it concluded that the record before it in that
case did not adequately support the Commission's determination that the
market for depth-of-book data was competitive, the Court's opinion
endorsed the Commission's view that the existence of competitive
markets may be used as the basis for concluding that a fee is
consistent with the requirements of the Act.
The petitioners believe that the SEC's market-based approach is
prohibited under the Exchange Act because the Congress intended
``fair and reasonable'' to be determined using a cost-based
approach. The SEC counters that, because it has statutorily-granted
flexibility in evaluating market data fees, its market-based
approach is fully consistent with the Exchange Act. We agree with
the SEC.\17\
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\17\ NetCoalition I, 615 F.3d at 534.
Thus, in analyzing the consistency of a fee change with the Act,
NASDAQ [sic] believes that it is justified in analyzing, first and
foremost, the competitive nature of the market in which the fee is
adopted.
The Exchange operates in a highly competitive market, comprised of
twelve exchanges, in which market participants can easily and readily
direct order flow to competing venues if they deem fee levels at a
particular venue to be excessive or rebates to be inadequate.\18\
Accordingly, in order to remain competitive in its efforts to attract
order flow, the Exchange must offer market participants an attractive
trading platform, responsive customer service, and effective management
tools, in addition to competitive fees and liquidity rebates. Price
competition is a central component of the competition for order flow.
As part of this competition, the NASDAQ OMX exchanges have modified
options trading fees monthly or even bi-monthly to attract new order
flow, retain existing order flow, and regain order flow lost to
competitors' price cuts. In 2012, PHLX, NOM and BX Options filed 72
execution fee changes. As one would expect in a competitive market, the
overall effect of these fee changes has been to lower options trading
costs, benefitting investors and promoting the goals of the Securities
Exchange Act of 1934. For example, based on publicly available data,
average revenue per contract has generally declined for major options
market operators as they compete for order flow. The following table
illustrates the results of that competition.
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\18\ ``No one disputes that competition for order flow is
`fierce.' . . . As the SEC explained, `[i]n the U.S. national market
system, buyers and sellers of securities, and the broker-dealers
that act as their order-routing agents, have a wide range of choices
of where to route orders for execution'; [and] `no exchange can
afford to take its market share percentages for granted' because `no
exchange possesses a monopoly, regulatory or otherwise, in the
execution of order flow from broker dealers'. . . .'' NetCoalition
I, 615 F.3d at 539 (quoting ArcaBook Order, 73 FR at 74782-74783).
Although the Court and the SEC were discussing the cash equities
markets, NASDAQ believes that, as discussed above, these views apply
with equal force to the options markets.
[GRAPHIC] [TIFF OMITTED] TN19NO13.000
Empirical evidence also demonstrates that no exchange has market
power sufficient to raise prices for competitively-traded options in an
unreasonable or unfairly discriminatory manner in violation of the
Exchange Act. In actuality, it is member firms that control the order
flow that options markets compete to attract. Only by attracting
members' orders can options exchanges display bids and offers that are
the sine qua non of trade executions. This ``second-order''
competition--where competition is driven by customers rather than
sellers of a product--is reflected both in the large number of pricing-
related rule changes and also in rapid shifts of market share among
multiple effective competitors seen on the chart of equity options
market share below.
[[Page 69475]]
[GRAPHIC] [TIFF OMITTED] TN19NO13.001
This level of competition is also readily apparent in the behavior
of market participants with respect to the Customer orders that are the
subject of this filing. The chart below shows fluctuations in the
volume of Customer orders routed to the NASDAQ OMX exchanges by their
top five member organizations since the beginning of 2013. As is
apparent from the chart, fluctuations in volume of more than 50% occur,
as member organizations respond to varying pricing incentives.
[[Page 69476]]
[GRAPHIC] [TIFF OMITTED] TN19NO13.002
The Commission has a statutory duty to promote competition,
including price competition. The Commission's traditional restraint in
regulating fees has fostered intense competition that benefits
investors and all market participants greatly. In mature markets where
competition is vibrant, pricing changes are often the most effective
way for markets to compete vigorously. Where participants view pricing
on one options market as unpalatable, they are free to move business to
another market or markets with favorable pricing, and in fact do so
with regularity, as demonstrated by the empirical data provided above.
Price competition works best where a variety of different models and
pricing schemes exist from which to choose and market participants are
highly knowledgeable about alternatives.
Diversity in the products and services offered by market
participants enhances competition and benefits consumers. To establish
policies that artificially enforce price uniformity would (i) eliminate
incentives for innovative market participants to invest in providing
desirable products, (ii) foster marketplace stagnation, and (iii) run
directly contrary to sound policy.\19\ When Congress charged the
Commission with supervising the development of a ``national market
system'' for securities, a premise of its action was that prices
ordinarily would be determined by market forces.\20\ Consistent with
this purpose, Congress and the Commission have repeatedly stated their
preference for competition, rather than regulatory intervention, to
determine prices, products, and services in the securities markets.\21\
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\19\ See, e.g., United States v. Microsoft Corp., 147 F.3d 935,
948 (D.C. Cir. 1998) (``Antitrust scholars have long recognized the
undesirability of having courts oversee product design, and any
dampening of technological innovation would be at cross purposes
with antitrust law.'').
\20\ See, e.g., H.R. Rep. No. 94-229, at 92 (1975) (Conf. Rep.)
(stating Congress's intent that the ``national market system evolve
through the interplay of competitive forces as unnecessary
regulatory restrictions are removed'').
\21\ See S. Rep. No. 94-75, 94th Cong., 1st Sess. 8 (1975)
(``The objective [in enacting the 1975 amendments to the Exchange
Act] would be to enhance competition and to allow economic forces,
interacting within a fair regulatory field, to arrive at appropriate
variations in practices and services.''); ArcaBook Order, 73 FR at
74781 (``The Exchange Act and its legislative history strongly
support the Commission's reliance on competition, whenever possible,
in meeting its regulatory responsibilities for overseeing the SROs
and the national market system. Indeed, competition among multiple
markets and market participants trading the same products is the
hallmark of the national market system.''); Securities Exchange Act
Release No. 51808 (June 9, 2005), 70 FR 37496, 37499 (June 29, 2005)
(File No. S7-10-04) (``Regulation NMS Adopting Release'') (observing
that national market system regulation ``has been remarkably
successful in promoting market competition in [the] forms that are
most important to investors and listed companies'').
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Against this background, which establishes that exchange
transaction fees should be presumed reasonable, equitable, and not
unfairly discriminatory, Phlx now turns to a particularized analysis of
the proposed rebate that is the subject of this filing. In doing so,
Phlx notes that the ArcaBook Order cited the possibility that even in a
competitive market, a fee might be subject to disapproval if ``there is
a substantial countervailing basis for determining that a proposal is
inconsistent with the Act.'' \22\ By way of example, the Commission
theorized that such a basis might exist in the case of an exchange
proposal that seeks to ``penalize market participants for trading in
markets other than the proposing exchange'' because it might constitute
``unreasonable and unfair discrimination.'' \23\ Although the issue was
not before it, the Commission also ventured that ``the Exchange Act
precludes anti-competitive tying of the liquidity pools of separately
registered national securities exchanges even if they are under common
control.'' \24\ As discussed in greater detail below, although the
proposal considers volume on NOM and BX Options in determining whether
a member organization is eligible for a rebate on Phlx, the proposal at
issue is not tying, because
[[Page 69477]]
the Phlx member organization is not required to use NOM or BX Options
at all in order to receive the rebate. Similarly, the proposal is not
anti-competitive, because Phlx lacks market power, and because the
proposal is a price incentive paid by Phlx to Phlx member organizations
with respect to orders executed on Phlx, just like any other exchange
price discount. Moreover, in discussing why anti-competitive tying
between two exchanges would present concerns, the Commission stated
that ``a proposed exchange rule must stand or fall based, among other
things, on the interests of customers, issuers, broker-dealers, and
other persons using the facilities of that exchange.'' \25\ In other
words, Phlx must explain why its proposal is in the best interests of
Phlx's members to enable the Commission to determine that a
countervailing basis does not exist for concluding that the proposal is
inconsistent with the Act in any respect. For the reasons discussed
below, Phlx believes that the proposal readily meets these standards.
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\22\ ArcaBook Order, 73 FR at 74782.
\23\ Id. See also Securities Exchange Act Release No. 65362
(September 20, 2011), 76 FR 59466 (September 26, 2011) (SR-NASDAQ-
2011-010) (decision pursuant to delegated authority to disapprove
proposal to discount market data fees for NASDAQ market
participants), petition for Commission review granted by Securities
Exchange Act Release No. 66667 (March 28, 2012), 77 FR 20079 (April
3, 2012).
\24\ ArcaBook Order, 73 FR at 74790 (emphasis added).
\25\ ArcaBook Order, 73 FR at 74793.
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The Proposal Is Consistent With the Requirement That Phlx Fees Must Be
Reasonable
The Exchange's proposal is reasonable because it provides an
opportunity for market participants to receive greater rebates and
therefore enables them to lower costs. In this respect, the proposal
should be considered, like any fee decrease or rebate increase,
presumptively consistent with the requirement that exchange fees must
be reasonable, since trading costs will be lower following
implementation of the proposal than before. Since existing fees are
themselves the product of the intense competition described above, it
is difficult to see how a fee decrease or rebate increase could in any
set of circumstances cause fees to become unreasonable. Moreover,
because the rebate is specific to Customer orders transacted on Phlx,
it benefits retail investors when member organizations choose to pass
on some portion of the rebate to their customers. Finally, Phlx notes
that the proposal does not restrict any existing rebates or increase
any other fees, and therefore will not place any market participants
that do not qualify for the rebate in a less favorable position than
under the existing Pricing Schedule. However, as discussed below, to
the extent that the proposal succeeds in its competitive goal of
attracting more Customer orders to the Exchange, it has the potential
to benefit all Phlx market participants.
The Proposal Is Consistent With the Requirement That Phlx's Fees
Provide for an Equitable Allocation of Fees
The Exchange's proposal is consistent with an equitable allocation
of fees because it benefits not only market participants receiving the
proposed rebate, but has the potential to benefit all other Phlx market
participants as well. Specifically, the proposal is intended to attract
a larger amount of Customer liquidity to the Exchange. Today, Phlx
offers members certain Customer rebates to encourage Phlx member
organizations to direct Customer order flow to the Exchange, and the
proposal will provide an additional incentive for Customer order flow.
Customer liquidity benefits all market participants by providing more
trading opportunities, which attract Specialists and Market Makers. An
increase in the activity of these market participants in turn
facilitates tighter spreads, which may cause an additional
corresponding increase in order flow from other market participants.
The proposed rebate is structured as a volume-based discount,
similar to the existing rebate tiers in Section B of the Pricing
Schedule. The Commission has previously accepted such volume tiers, and
they have been adopted by various options exchanges. Tiers are a well-
established method for drawing liquidity to an exchange by paying
higher rebates to those members that direct a greater amount of order
flow to the Exchange. Volume tiers in both the cash equity and options
markets provide reduced pricing to the heaviest liquidity providers and
liquidity takers. As with existing tiers, the higher the percentage of
a market participant's Customer orders on Phlx, the higher the rebate.
However, the aspect of the proposal under which a member organization's
eligibility is determined by volume on all of the NASDAQ OMX exchanges
broadens the potential availability of a higher rebate to market
participants that spread volume across multiple exchanges, rather than
requiring a concentration of activity on Phlx. Market participants with
Customer order flow often divide that order flow among Phlx, NOM and BX
Options, as well as other options exchanges; due to the different
market and pricing models available at various exchanges, dividing
order flow may allow them to improve execution quality and to minimize
costs. For example, a market participant that wants to transact
contracts in SPY under a pro rata allocation would necessarily send
order flow to Phlx, rather than NOM or BX Options, because Phlx offers
such a pro rata allocation.\26\ NOM and BX Options would allocate the
same SPY transaction using a price-time execution algorithm.\27\
Similarly, each exchange offers an array of services in order to
accommodate the wide array of demands that market participants
represent on behalf of investors. Finally, because different pricing
incentives are available on different exchanges, firms may divide order
flow in order to minimize trading costs. One exchange's technology and
one exchange's array of services may not be adequate to meet the needs
of all investors in all circumstances. A one-size-fits-all pricing
mechanism would not reflect the reality of those market participants
who represent a diverse set of investors' demands.
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\26\ See Phlx Rule 1080.
\27\ See NOM and BX Options Rules at Chapter VI, Section 7. BX
Options utilizes a price-time execution, as specified on BX Options'
system setting page located at: http://www.nasdaqomxtrader.com/Content/TechnicalSupport/BXOptions_SystemSettings.pdf.
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Therefore, recognizing Customer orders on other NASDAQ OMX
exchanges for purposes of determining volume is aimed at providing
market participants an incentive that does not make unreasonable
demands to send all order flow to Phlx, but rather permits those market
participants to seek different economics and execution models while
still receiving the benefit of an additional rebate for those Customer
orders that are transacted on Phlx. Thus, the rebate is an equitable
means of incentivizing a member with large quantities of Customer
orders to increase the amount of Customer order flow transacted on
Phlx, even though the current market structure requires it to fragment
Customer orders in its efforts to improve execution quality and reduce
execution costs across its total book of orders. Through the proposal,
the Exchange seeks to reduce distortionary incentives created by one-
size-fits-all pricing by including Customer volumes traded on NOM and
BX Options in determining eligibility for the Phlx rebate.
The Proposal Is Not Unfairly Discriminatory
The Exchange's proposal is not unfairly discriminatory. As
discussed above, the proposal broadens the availability of an enhanced
rebate because it does recognize that market participants with high
volumes of Customer orders may need to fragment their order flow among
options markets to improve execution quality and lower costs by taking
advantage of different market structures and pricing options.
[[Page 69478]]
Similar to current volume tiers on Phlx and volume tiers at other
options exchanges, the value of the incentive received for Customer
orders executed on Phlx increases as the volume of qualifying orders on
Phlx increases. Any Phlx market participant may qualify for the
Customer Rebate Program. Those Phlx members that are able to aggregate
their Customer volume and achieve high national customer volume on Phlx
already benefit by receiving rebates for that Customer volume when
transacted on Phlx. This proposal seeks to incentivize those members to
send more Customer volume to Phlx in order to receive an enhanced
rebate paid only with respect to orders on Phlx, while permitting them
to aggregate Customer volume across NASDAQ OMX exchanges for purposes
of determining eligibility for the rebate. Therefore, the proposal does
not discriminate among Phlx members that control high volumes of
Customer orders, but rather incentivizes them to execute as many
Customer orders as possible on Phlx in order to receive the benefit of
the rebate on those orders; moreover, the proposal does not require
them to fragment their Customer orders to achieve this goal, but
neither does it discriminate against them by denying eligibility for
the higher rebate if they do in fact direct order flow away from Phlx.
Thus, this proposal provides market participants the ability to achieve
lower costs without compromising their execution obligations.
Fundamentally, however, the proposed incentive rewards market
participants for directing a greater number of Customer orders to Phlx,
just as is the case with existing tier structures at Phlx and other
options markets.\28\
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\28\ See Phlx's Pricing Schedule, NOM at Chapter IV, Section 2,
NYSE Arca's Fee Schedule, NYSE MKT's Fee Schedule, Chicago Board
Options Exchange, Incorporated's (``CBOE'') Fees Schedule, MIAX's
Fee Schedule, BATS BZX's Fee Schedule, Gemini's Fee Schedule, C2's
Options Exchange, Incorporated (``C2'') Fee Schedule and ISE's Fee
Schedule.
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To the extent that they offer better pricing to higher volume
members, existing tier structures that exist at Phlx and other options
markets are inherently discriminatory, but this discrimination has been
widely accepted as not unfairly discriminatory because it incentivizes
greater usage of the market offering the pricing tier, thereby
benefitting the market's viability and providing liquidity benefits to
other market participants at that market.\29\ Specifically, options
exchanges have filed and continue to file rule filings with the
Commission proposing fees and rebates that create price
differentiations and segmentations; Phlx believes that such
differentiations exist in mature healthy competitive markets such as
the options market, because pricing is a key means by which exchange
participants compete with one another. Today, various options exchanges
segment pricing related to Multiply Listed Options as compared to
Singly Listed Options.\30\ Penny Pilot Options \31\ are also assessed
different fees and paid different rebates \32\ as compared to Non-Penny
Options.\33\ Options exchanges differentiate fees for options
transacted in open outcry \34\ as compared to electronic
transactions.\35\ A Phlx member transacting Customer orders on the
floor is not entitled to the Customer Rebate Program described herein
because that program applies only to electronic transactions.\36\
Indeed, the Exchange today differentiates various aspects of floor and
electronic pricing.\37\ Other types of differentials include Simple
versus Complex Orders; \38\ auction \39\ versus non-auction orders;
\40\ opening transactions \41\ versus regular hours trading; order
types; \42\ floor facilitation \43\ versus non-agency
[[Page 69479]]
transactions; directed \44\ versus non-directed orders; \45\ pricing by
market participant; \46\ Payment for Order Flow \47\ and fee caps.\48\
In addition, there are other examples of market segmentation evidenced
today in fees assessed by other SROs. Similarly, in the area of market
data various differentiations exist, such as displayed versus non-
displayed quotes/orders,\49\ professional and non-professional user
data \50\ and proprietary \51\ versus consolidated market data.
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\29\ Arguably, a uniform fee schedule in which all members pay
the same fee would also be discriminatory, because it would fail to
recognize reasoned bases for reflecting in the fees that members pay
their differing contributions to the quality of the market. It may
be helpful to understand ``unfair discrimination'' as discrimination
based on factors other than competition, such as pricing designed to
exclude or impair a class of participants.
\30\ Singly Listed Option means an option that is only listed on
the Exchange and is not listed by any other national securities
exchange.
\31\ The Penny Pilot was established in January 2007; and in
October 2009, it was expanded and extended through December 31,
2013. See Securities Exchange Act Release Nos. 55153 (January 23,
2007), 72 FR 4553 (January 31, 2007) (SR-Phlx-2006-74) (notice of
filing and approval order establishing Penny Pilot); 60873 (October
23, 2009), 74 FR 56675 (November 2, 2009) (SR-Phlx-2009-91) (notice
of filing and immediate effectiveness expanding and extending Penny
Pilot); 60966 (November 9, 2009), 74 FR 59331 (November 17, 2009)
(SR-Phlx-2009-94) (notice of filing and immediate effectiveness
adding seventy-five classes to Penny Pilot); 61454 (February 1,
2010), 75 FR 6233 (February 8, 2010) (SR-Phlx-2010-12) (notice of
filing and immediate effectiveness adding seventy-five classes to
Penny Pilot); 62028 (May 4, 2010), 75 FR 25890 (May 10, 2010) (SR-
Phlx-2010-65) (notice of filing and immediate effectiveness adding
seventy-five classes to Penny Pilot); 62616 (July 30, 2010), 75 FR
47664 (August 6, 2010) (SR-Phlx-2010-103) (notice of filing and
immediate effectiveness adding seventy-five classes to Penny Pilot);
63395 (November 30, 2010), 75 FR 76062 (December 7, 2010) (SR-Phlx-
2010-167) (notice of filing and immediate effectiveness extending
the Penny Pilot); 65976 (December 15, 2011), 76 FR 79247 (December
21, 2011) (SR-Phlx-2011-172) (notice of filing and immediate
effectiveness extending the Penny Pilot); 67326 (June 29, 2012), 77
FR 40126 (July 6, 2012) (SR-Phlx-2012-86) (notice of filing and
immediate effectiveness extending the Penny Pilot); 68534 (December
21, 2012), 77 FR 77174 (December 31, 2012) (notice of filing and
immediate effectiveness extending the Penny Pilot); and 69786 (June
18, 2013), 78 FR 37863 (June 24, 2013) (SR-Phlx-2013-64) (notice of
filing and immediate effectiveness extending the Penny Pilot). See
also Exchange Rule 1034.
\32\ See Phlx's Pricing Schedule, NOM Pricing at Chapter IV,
Section 2, ISE's Fee Schedule, CBOE's Fees Schedule, NYSE MKT's Fee
Schedule, BATS BZX's Fee Schedule, MIAX's Fee Schedule, Gemini's Fee
Schedule and NYSE Arca's Fee Schedule.
\33\ Non-Penny Pilot refers to options classes not in the Penny
Pilot.
\34\ The Exchange has Rules in place which govern the submission
of Orders in an open outcry market for execution. See Exchange Rules
110, 155, 1000, 1014, 1033, 1060, 1063, 1064, 1066, 1080 and Options
Floor Procedure Advices C-1, C-2, C-3, F-2 and F-14. See also NYSE
MKT and NYSE ARCA's Fee Schedule.
\35\ Electronically delivered orders do not include orders
delivered through the Floor Broker Management System.
\36\ See Section B of the Phlx Pricing Schedule.
\37\ See Section II of the Phlx Pricing Schedule, CBOE's Fee
Schedule, NYSE Arca's Fee Schedule and NYSE MKT's Fee Schedule.
\38\ 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). See also Section I of the Exchange's Pricing
Schedule. See also CBOE's Fees Schedule, ISE's Fee Schedule, NYSE
Arca's Fee Schedule, C2's Fee Schedule and NYSE MKT's Fee Schedule.
\39\ PIXL is the Exchange's price improvement mechanism known as
Price Improvement XL or (PIXLSM). See Rule 1080(n). 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). 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. See also CBOE's Fees Schedule and ISE's Fee
Schedule.
\40\ See Phlx's Pricing Schedule, CBOE's Fees Schedule, ISE's
Fee Schedule, NYSE Arca' Fees Schedule and BATS BZX's Fee Schedule.
\41\ See Exchange Rule 1017. See also Section II of the
Exchange's Pricing Schedule.
\42\ For example, a Qualified Contingent Cross (``QCC'') Order,
which is an order 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, has
different pricing compared to other types of order types. See
Section II of the Exchange's Pricing Schedule.
\43\ See Exchange Rule 1064. The Exchange offers certain fee
waivers for floor facilitation transactions at Section II of the
Exchange's Pricing Schedule. See also NYSE MKT's Fee Schedule.
\44\ 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).
\45\ See NYSE MKT's Fee Schedule and CBOE's Fees Schedule. Phlx
also previously differentiated pricing on the basis of whether the
order was directed.
\46\ All options exchanges distinguish pricing by market
participant.
\47\ 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 that are members or member
organizations that submit, as agent, Customer orders to the Exchange
through a member or member organization that 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 that paid into that pool of funds. There are no Payment
for Order Flow Fees on trades that are not delivered electronically.
See Phlx's Pricing Schedule and CBOE's Fees Schedule.
\48\ Today the Exchange has in place a fee cap for Specialists
and Market Makers (``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. Also, the Exchange caps Firms up to a maximum fee
of $75,000 (``Monthly Firm Fee Cap''). See Section II of the
Exchange's Pricing Schedule. See also NYSE Arca's Fee Schedule (Firm
and Broker-Dealer open outcry executions are capped).
\49\ See Nasdaq Rule 7018.
\50\ See Nasdaq Rule 7026.
\51\ See Nasdaq Rule 7039.
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In light of this wide-ranging degree of differentiation, the
Exchange submits that its proposal does not materially alter the degree
of differential pricing among Phlx market participants. Just as the
foregoing pricing differentials exist to encourage and reward market
participants for making order flow and other purchasing decisions that
benefit the Exchange, its market structure, and/or other market
participants, likewise the proposed rule change serves to incentivize
order routing decisions with respect to Customer orders that benefit
the Exchange and its participants. With this proposal, members are not
required to transact any volume on other options exchanges. In fact,
the more volume they transact on Phlx, the greater the reward, as only
qualifying Customer orders executed on Phlx are entitled to the rebate.
However, the proposal does not discriminate against members that choose
to direct orders to other options markets. By way of example, the
proposal is structured so that the maximum benefit occurs for market
participants who execute 2.5% or more of national customer volume and
are able to execute it all on Phlx. Such a participant would receive an
additional $0.02 per contract rebate for all its eligible volume
transacted on Phlx. If a market participant believes that it would
better meet its best execution obligation to a Customer by displaying
orders on a market with a different fee or market structure, such as
NOM, the participant can do so and will not receive the additional
$0.02 per contract rebate for any execution that results on NOM, but
would still be able to benefit from those NOM Customer orders by
receiving a rebate on Customer orders executed on Phlx which may
qualify for an enhanced rebate. Thus, the participant is not penalized
from an eligibility standpoint by its incidental usage of NOM or BX
Options.\52\
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\52\ Of course, volume on exchanges other than Phlx, NOM, and BX
Options would not qualify. The Exchange believes that it is not
unfairly discriminatory to recognize volume on its affiliates but
not other exchanges. Specifically, volume on NOM and BX Options
benefits Phlx by contributing to the overall financial well-being of
the exchange group of which Phlx is a part. It is reasonable,
equitable and not unfairly discriminatory to lower costs for market
participants transacting orders on Phlx by offering these market
participants the ability to qualify for lower pricing realized by
leveraging NASDAQ OMX's various options exchange offerings that are
available to market participants to provide greater flexibility to
market participants desiring to transact orders on NOM and BX
Options. Requiring Phlx to provide favorable pricing to member
organizations that meet the 2.5% volume requirement by directing
orders to, for example, CBOE would make as little sense as
stipulating that a member organization could meet existing Phlx
tiers by executing orders on CBOE. Phlx submits that the Act does
not require such an illogical result. Moreover, as discussed in more
detail below, the Phlx proposal does not tie the use of Phlx to NOM
or BX Options, because usage of those exchanges is not required, and
in any event, reduces the aggregate rebate paid by Phlx. Moreover,
because Phlx lacks market power, it cannot in any event use the
proposal to extend market power to its affiliates. Finally, Customer
orders which are executed on NOM and BX Options will continue to
benefit the market participants on those markets because that order
flow will provide liquidity to NOM and BX Options respectively and
participants on those markets may interact with that order flow.
---------------------------------------------------------------------------
If all of the participant's Customer volume was transacted solely
on NOM, then the market participant would not receive a Phlx rebate,
which is not surprising, since it is not bringing order flow to Phlx;
it would, however, still be eligible for any rebate that is offered on
NOM. Thus, a participant transacting volume on NOM is in no worse
position with the proposal. Today, a NOM Participant that transacted a
large amount of volume on NOM to benefit from the rebate structure
offered on that market would only receive rebates on Phlx for those
orders transacted on Phlx. With this proposal, the NOM Participant
still benefits from the current NOM pricing without change, but will
have the added benefit of possibly qualifying for a rebate on Phlx for
any orders that were transacted on Phlx. Because the benefit only
attributes to orders on Phlx, as is the case today, there is no change
in circumstance for the NOM Participant. In fact, the NOM Participant
that necessarily had Customer orders routed to Phlx because that market
was at the best price, with this proposal may receive an added benefit
on Phlx by qualifying for a rebate on that market because of the
Customer orders transacted on NOM. Moreover, as discussed above, the
Commission stated that ``a proposed exchange rule must stand or fall
based, among other things, on the interests of customers, issuers,
broker-dealers, and other persons using the facilities of that
exchange.'' \53\
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\53\ ArcaBook Order, 73 FR at 74793.
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In this instance, the proposal is unambiguously beneficial to Phlx
market participants, whether or not they receive the enhanced rebate.
With respect to two members transacting orders on Phlx, the proposal is
not materially different from current differentiations. Today, the
Exchange assesses different fees and pays different rebates to two Phlx
members that transact the same number of Customer orders on the
Exchange, if one Exchange member transacted those orders on the
Exchange floor and the other member transacted those orders
electronically. Only the electronic Customer orders would potentially
qualify for a Customer rebate pursuant to Section B of the Pricing
Schedule. Also, only certain types of orders in Categories A and B
qualify for the Customer Rebate today, so depending on the types of
electronic orders transacted by a Phlx member, one member may qualify
for a Customer rebate while another member with the same number of
Customer orders may not qualify for a rebate. Finally, two members on
Phlx may transact Customer orders today, but
[[Page 69480]]
depending on the number of qualifying Customer orders, one member may
qualify for Customer Rebate Tier 1 and the other member may qualify for
Customer Rebate Tier 2. In this scenario, Tier 1 does not pay a rebate
and Tier 2 of the Section B Customer Rebate Program does pay a rebate;
therefore one member would receive a rebate while another member would
not receive a rebate, due to differences in volume. In other words, the
proposed enhanced rebate does not create a pricing differential as
between two Phlx members that is different from differentials that
exist today. The proposal would differentiate market participants based
on the volume of qualifying Customer orders that are transacted on
Phlx, and that is already the case today with the existing Customer
rebate tiers as well as other pricing.
The Proposal is Similar to Other SRO Rules
The Commission already permits a particular trading venue to
consider volume executed away from that venue for fee calculation
purposes. For example, under NOM's pricing schedule, participants that
add (1) Customer and/or Professional liquidity of 25,000 or more
contracts per day in a month on NOM, (2) qualify for the Investor
Support Program set forth in Rule 7014 with respect to NASDAQ's cash
equity market, and (3) execute at least one order on NASDAQ's cash
equity market, qualify for a Tier 5 Customer and/or Professional rebate
on NOM.\54\ Thus, NOM's rebate permits a NOM Participant to qualify for
an options rebate based on its activity in both options and cash
equities markets. Another example of a fee imposed by exchanges that
considers volume on other exchanges is the options regulatory fee or
``ORF,'' which is assessed by many options exchanges.\55\ ORF is
assessed on all transactions by member firms of an options exchange
that are cleared in the customer range at The Options Clearing
Corporation (``OCC'').\56\ For example, if an OCC clearing member, ABC,
is a member of Phlx, ABC pays ORF on all executed and cleared customer
transactions regardless of where the trade executed. The ORF structure
is not dependent on a transaction on a particular SRO; rather, it is
based on transactions at other SROs.
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\54\ See NOM Rules at Chapter XV, Section 2.
\55\ Today ORF is assessed by PHLX, NOM, CBOE, ISE, NYSE Arca,
NYSE MKT, BOX Options Exchange LLC, MIAX, C2 and Gemini.
\56\ ORF is also assessed on transactions executed at an options
exchange by that options exchange.
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There are also examples where qualifying volume is quantified in a
different manner from the payment of a rebate. For example, Phlx
members may qualify for a Customer rebate by including SPY volume in
the calculation of qualifying orders for the purpose of calculating
Customer rebate tiers, but Phlx does not pay Customer rebates on SPY
volume as specified in the Customer Rebate Program.\57\ Volume other
than the volume on which the rebate is paid is considered for
eligibility.
---------------------------------------------------------------------------
\57\ See Section B of the Exchange's Pricing Schedule.
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Equally important, offering discounts between affiliated exchanges
is not novel. New York Stock Exchange LLC (``NYSE'') waives certain
annual fees for issuers that transfer the listing of their primary
class of common shares from NYSE Arca, Inc. (``NYSE Arca''), or NYSE
MKT LLC (``NYSE MKT''), to NYSE (``NYSE Listing Incentive'').\58\ The
Exchange assesses issuers an Initial Application Fee of $25,000 in
connection with applying to list an equity security except that, among
other things, the fee is waived if an issuer transfers a listing of any
class of equity security from another national securities exchange.\59\
In a similar manner, this proposed rule change is premised on the
principle that, in its efforts to provide greater competitive
incentives, Phlx should be permitted to consider activity on other
exchanges, given the need for member organizations to spread their
Customer order flow across multiple exchanges in an effort to improve
execution quality and reduce trading costs.
---------------------------------------------------------------------------
\58\ See NYSE Rules at Section 902.3.
\59\ Id.
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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. As described above in
considerable detail, the Exchange operates in a highly competitive
market; in order to remain competitive the Exchange must offer market
participants an attractive trading platform, customer service and
effective management tools in addition to competitive fees and
liquidity rebates to attract order flow to the market. It is the
competitive forces present among options exchanges that constrain the
Exchange's pricing by commanding pricing that is reasonable, equitable,
fair and not unreasonably discriminatory if the Exchange hopes to
attract order flow. The Exchange believes that its proposed pricing
will not harm competition but rather will benefit market participants
by lowering costs. Fundamentally, the proposal is a price reduction,
and therefore is consistent with achieving the benefits of the robust
competition that clearly exists in this market.
As discussed above, the ArcaBook Order stated that ``the Exchange
Act precludes anti-competitive tying . . . of separately registered
national securities exchanges even if they are under common control.''
\60\ However, the proposal neither constitutes tying, nor is it anti-
competitive in nature of effect. Tying is ``an agreement by a party to
sell one product [the tying product] but only on the condition that the
buyer also purchases a different (or tied) product, or at least agrees
that he will not purchase that product from any other supplier.'' \61\
Accordingly, a tying arrangement exists only where there is a
requirement that two separate products be purchased together.\62\ Thus,
for example, if a supplier offers two separate products together in a
bundle, there is no tying arrangement if the supplier also offers each
product for purchase separately. This is true even if the supplier
offers a discount for purchasing the bundle of products (which,
obviously, is a commonplace offering found in all sorts of
industries).\63\ ``[W]here the buyer is free to take either product by
itself[,] there is no tying problem even though the seller may also
offer the two items as a unit at a single price.'' \64\
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\60\ ArcaBook Order, 73 FR at 74790.
\61\ N. Pac. Ry. Co. v. United States, 356 U.S. 1, 5-6 (1958).
\62\ See, e.g., Paladin Assocs. v. Mont. Power Co., 328 F.3d
1145, 1159 (9th Cir. 2003) (``Essential to . . . a tying claim is
proof that the seller coerced a buyer to purchase the tied
product.'').
\63\ See, e.g., Warren Gen. Hosp. v. Amgen Inc., 2010 U.S. Dist.
LEXIS 56220, at *2-3, *21-22 (D.N.J. June 7, 2010) (a ``pricing and
rebate scheme'' that applies only when the buyer purchases both of
the defendants' products is not a tie because the buyer may purchase
either product by itself).
\64\ N. Pac. Ry. Co., 356 U.S. at 6 n.4; accord Jefferson Parish
Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 12 (1984).
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Even where there is a tying arrangement, such arrangements are not
always (or even usually) unlawful. As the Supreme Court has explained,
``[i]t is clear . . . that not every refusal to sell two products
separately can be said to restrain competition . . . . Buyers often
find package sales attractive; a seller's decision to offer such
packages can merely be an attempt to compete effectively.'' \65\
Indeed, the judicial
[[Page 69481]]
skepticism of tying arrangements that prevailed decades ago has given
way to a general recognition that tying arrangements are often
procompetitive and beneficial to consumers and competition, and that
they therefore are not anticompetitive in most circumstances. For
example, in 2006, a unanimous Supreme Court explained that ``[o]ver the
years, this Court's strong disapproval of tying arrangements has
substantially diminished.'' \66\ Accordingly, absent proof that a tying
arrangement creates foreclosure in the tied product market, the
antitrust laws do not condemn tying arrangements.\67\
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\65\ Jefferson Parish, 466 U.S. at 11-12.
\66\ Ill. Tool Works v. Indep. Ink, Inc., 547 U.S. 28, 35
(2006).
\67\ See, e.g., id.; Jefferson Parish, 466 U.S. at 13-14, 16.
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Because a tying arrangement can only run afoul of the antitrust
laws where the arrangement harms competition by creating foreclosure in
the tied product market, the Supreme Court has stated that ``in all
cases involving a tying arrangement, the plaintiff must prove that the
defendant has market power in the tying product.'' \68\ This
requirement makes good sense when considering the economic impact of a
tying arrangement. If a supplier lacking market power attempts to
condition the purchase of one product (the tying product) on the
purchase of a second, unwanted product (the tied product), the
supplier's customers will simply go elsewhere. There is no conceivable
harm to competition in this scenario--the misguided supplier will
simply lose business to its competitors. And, conversely, if customers
desire the bundled offering--such that they buy the bundled products
even when they are not forced to do so--that is a procompetitive
outcome that benefits consumers, which is not condemned by the
antitrust laws. It is only when the supplier has market power over the
tying product that it can force customers to take the unwanted product
and distort competition in the sale of the tied product, and it is
therefore only in those circumstances that tying arrangements can
violate the antitrust laws.\69\
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\68\ Ill. Tool, 547 U.S. at 46; see also Jefferson Parish, 466
U.S. at 13-14 (``we have condemned tying arrangements when the
seller has some special ability--usually called `market power'--to
force a purchaser to do something that he would not do in a
competitive market'').
\69\ See Jefferson Parish, 466 U.S. at 13-14.
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As discussed above, empirical evidence demonstrates that the
options market is a highly competitive market in which no exchange has
market power sufficient to raise prices for competitively-traded
options in an unreasonable or unfairly discriminatory manner in
violation of the Exchange Act. Moreover, this proposal is not tying in
any event, because (a) members may trade on any exchange, without
having to trade on another exchange (i.e., nothing is tied together),
and (b) Phlx members can qualify for the offered rebate without even
using another NASDAQ OMX exchange. The proposed rebate simply makes it
easier for members to reach the Phlx rebate levels if they trade on
another NASDAQ OMX exchange, but there is no requirement to do so.
Historically Phlx market participants have transacted greater than 2.5%
of Customer volume solely on Phlx. Thus, if the Commission accepts the
compelling logic of the antitrust precedents discussed above, it is
clear that the proposal could not be used in an anticompetitive manner
to force unwilling market participants to conduct transactions on NOM
or BX Options. Rather, as discussed extensively above, the proposal
incentivizes market participants to execute as many Customer orders on
Phlx as possible by reducing fees--an inherently pro-competitive
result--without penalizing them for incidental usage of the other
NASDAQ OMX exchanges. If the Commission nevertheless concludes that the
proposal is inconsistent with the Act because it constitutes anti-
competitive tying, Phlx believes that it must, as a minimum,
demonstrate why the proposal is anti-competitive in effect when similar
pricing incentives are viewed as pro-competitive under the antitrust
laws. Put another way, if the Commission concludes that a pricing
decrease adopted in a highly competitive market is per se
anticompetitive merely because of its cross-market aspect, it must
explain why this conclusion differs so dramatically from the analysis
in established Supreme Court precedents.
The NASDAQ OMX exchanges offer complementary models that members
and investors demand, and this proposal seeks to provide an opportunity
for market participants to benefit from those complementary services.
The Exchange competes for order flow by enhancing its technology and
the array of services offered on its market, as well as offering
rebates and assessing lower fees. Today, Phlx, NOM and BX Options offer
market participants an array of services including state-of-the-art
platforms. Phlx's trading platform executes orders utilizing a Customer
priority, pro-rata execution algorithm. Phlx accepts Complex Orders
\70\ and QCC Orders and offers auctions for both Simple and Complex
Orders.\71\ Phlx also has robust options listings on its market,
including index listing and various Singly Listed products. Today, Phlx
lists 3,660 options contracts as compared to NOM which lists 2,411
options contracts and BX Options which lists 1,145 options contracts.
NOM's trading platform executes orders utilizing a price time execution
algorithm. NOM does not accept Complex Orders or QCC Orders and does
not offer auctions. BX Options' trading platform executes orders
utilizing a price time execution algorithm. Similar to NOM, BX Options
does not accept Complex Orders or QCC Orders and does not offer
auctions. For example, a market participant that transacts a Complex
Order cannot do so on NOM or BX Options or certain other options
exchanges for that matter. Thus, the proposal will ensure that the
range of a member organization's business across these markets is
considered for eligibility purposes.
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\70\ 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).
\71\ 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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The Exchange also does not believe that the proposal imposes a
burden on competition with respect to Phlx members' status as members
of NOM and/or BX Options. If a market participant believes that it
would better meet its best execution obligation to a Customer by
displaying orders on a market with a different fee structure, such as
NOM, the participant can chose to take advantage of NOM's pricing
structure instead. The market participant would not receive the
additional $0.02 per contract rebate for any execution that results,
but would still be able to benefit from those orders, which would be
aggregated with qualifying Customer volume on Phlx and BX Options for
purposes of determining if the member qualified for a rebate on Phlx.
If all the volume was transacted solely on NOM, then that market
participant would still be eligible for any rebate that is offered on
[[Page 69482]]
NOM today. The Exchange does not believe that a participant transacting
volume on NOM is in any worse of a position with this proposal.
Further, NOM and BX Options members benefit from the pricing structures
available to them on those markets.\72\
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\72\ NOM offers Customers rebates. See Chapter XV, Section 2(1).
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The Exchange further believes that its proposal does not impact
established pricing differentials among NASDAQ OMX exchanges; rather,
it enhances equality among market participants transacting orders on
different NASDAQ OMX exchanges. The NOM Participant who is also a Phlx
member would be given an opportunity to earn a rebate on Phlx similar
to the current Phlx member. The same is true of a BX Options member who
is also a member on Phlx. If these market participants do not have a
membership on Phlx, then they transact no orders on Phlx today and
therefore would not be able to take advantage of the rebate because
these rebates would only apply to orders transacted on Phlx. The same
is true of any Phlx pricing proposal. The NOM or BX Options member that
does not choose to be a Phlx member is not able to take advantage of
any Phlx pricing, including this proposal, because it has not expended
the effort to become a Phlx member, but it is free to do so at any
time. Moreover, Phlx's proposal ``must stand or fall, based, among
other things, on the interests of . . . persons using the facilities of
[Phlx].\73\
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\73\ ArcaBook Order, 73 FR at 74793-74794.
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Fundamentally, this proposal offers market participants a price
decrease, the essence of competition. Price differentiation exists in
the options markets today, as noted in the various examples provided
above. These types of differentiation have not been seen as
anticompetitive. There is no evidence to support a conclusion that
competition would be harmed with the implementation of this proposal.
Competitors could replicate the rebate that is being offered by Phlx,
and to the extent that a competitor does not operate multiple
exchanges, the desired discount could be offered on the sole market to
achieve the same lower cost. Moreover, other options exchanges operate
multiple markets, with different functionality and pricing being
offered at the different markets, and there are no significant barriers
to entry of additional options exchanges. For example, the
International Stock Exchange LLC (``ISE'') recently launched a second
options exchange, Topaz Exchange, LLC (``Gemini''), the twelfth options
exchange today. New market entrants today offer incentivized pricing to
bring order flow to that market. Miami International Securities
Exchange LLC (``MIAX''), a recent options market entrant, waived
transaction fees that apply to marker makers from June 3, 2013 through
August 31, 2013.\74\ In its filing, MIAX stated that:
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\74\ See Securities Exchange Act Release No. 70069 (July 30,
2013), 78 FR 47457 (August 5, 2013) (SR-MIAX-2013-36).
[t]he fee waiver is designed to both enhance the Exchange's
competitiveness with other options exchanges and to strengthen its
market quality. The Exchange believes that the fee waiver increases
both intermarket and intramarket competition by incenting market
participants and market makers on other exchanges to register as
Market Makers on the Exchange. In addition, the Exchange believes
that waiving transaction fees for Market Makers registered on the
Exchange promotes tighter bid-ask spreads by Market Makers, and
increases the volume of transactions in order to allow the Exchange
to compete more effectively with other options exchanges for such
transactions. The Exchange notes that the Exchange's daily
percentage of the total market volume in MIAX listed options has
increased since the beginning of the fee waiver--indicating that the
fee waiver has enabled the Exchange to compete more effectively with
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other options exchanges for such transactions.\75\
\75\ Id.
Similarly, Phlx believes that its proposal promotes further
vigorous, healthy and appropriate competition, and will lead other
options exchanges to follow suit by offering higher rebates to attract
order flow. The interests of all investors are furthered by the
lowering of prices as a result of robust competition.
In sum, the Exchange believes that the proposed rule change will
promote competition through a price reduction that enhances Phlx's
competitiveness but to which other markets may respond in kind. The
Exchange believes that the proposed change would increase both
intermarket and intramarket competition by providing market
participants a different option to consider when they decide which
exchange provides the most attractive destination for directing order
flow. Moreover, the proposal to offer the rebate does not constitute a
tying arrangement under directly relevant judicial precedent. The
Exchange believes that the proposed rebate would enable market
participants to lower costs and incent them to provide additional
liquidity at the Exchange, thereby enhancing the quality of its markets
and increasing the volume of Customer contracts traded on Phlx. To the
extent that this purpose is achieved, all the Exchange's market
participants should benefit from the improved market liquidity.
Given the robust competition for volume among options markets, many
of which offer the same products, attracting order flow by offering
rebates is consistent with the pro-competitive goals of the Act. The
Exchange does not believe that the enhanced rebate could cause any
competitive harm to the options market or to market participants,
because no exchange has market power sufficient to raise prices for
competitively-traded options in an unreasonable or unfairly
discriminatory manner in violation of the Exchange Act.
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.\76\ 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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\76\ 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-2013-113 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission,
[[Page 69483]]
100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2013-113. 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-2013-113 and should be
submitted on or before December 10, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\77\
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\77\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-27632 Filed 11-18-13; 8:45 am]
BILLING CODE 8011-01-P