[Federal Register Volume 81, Number 57 (Thursday, March 24, 2016)]
[Notices]
[Pages 15761-15765]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-06604]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-77402; File No. SR-Phlx-2016-21]
Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend Rebates
and Fees for Adding and Removing Liquidity in SPY
DATE: March 18, 2016.
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 March 10, 2016, NASDAQ PHLX LLC (``Exchange'') filed with the
Securities and Exchange Commission (``SEC'' or ``Commission'') the
proposed rule change as described in Items I, II, and III, below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend the Phlx Pricing Schedule at Section
I, entitled ``Rebates and Fees for Adding and Removing Liquidity in
SPY,'' specifically related to PIXL \3\ executions in options overlying
SPY.\4\
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\3\ PIXL\SM\ is the Exchange's price improvement mechanism known
as Price Improvement XL or PIXL. 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 pursuant to Rule 1080. See Exchange
Rule 1080(n).
\4\ Options overlying Standard and Poor's Depositary Receipts/
SPDRs (``SPY'') are based on the SPDR exchange-traded fund, which is
designed to track the performance of the S&P 500 Index.
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The text of the proposed rule change is available on the Exchange's
Web site
[[Page 15762]]
at http://nasdaqomxphlx.cchwallstreet.com/, at the principal office of
the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend language in the Pricing Schedule at
Section I, entitled ``Rebates and Fees for Adding and Removing
Liquidity in SPY,'' related to PIXL executions in SPY.
Background
SR-Phlx-2013-61
Effective June 3, 2013, the Exchange filed a rule change \5\ to
adopt new pricing specific to options overlying Standard and Poor's
Depositary Receipts/SPDRs (``SPY'').\6\ The Exchange adopted ``Make/
Take'' pricing for SPY in both Simple and Complex Orders. The Exchange
adopted SPY PIXL Pricing at that time. The Exchange adopted the
following rule text concerning PIXL Orders:
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\5\ See Securities Exchange Act Release No. 69768 (June 14,
2013), 78 FR 37250 (June 20, 2013) (SR-Phlx-2013-61) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
Various Sections of the Exchange's Pricing Schedule).
\6\ SPY options are based on the SPDR exchange-traded fund
(``ETF''), which is designed to track the performance of the S&P 500
Index.
`When the PIXL Order is contra to other than the Initiating
Order, the PIXL Order will be assessed $0.00 per contract, unless
the order is a Customer, in which case the Customer will receive a
rebate of $0.38 per contract. All other contra parties to the PIXL
Order, other than the Initiating Order, will be assessed a Fee for
Removing Liquidity of $0.38 per contract or will receive the Rebate
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for Adding Liquidity.'
In that rule change, the Exchange noted that it was adopting PIXL
Pricing to ``. . . assess Initiating Orders in SPY options $0.05 per
contract for all market participants. In addition, when the PIXL Order
is contra to the Initiating Order, a Customer PIXL Order will be
assessed $0.00 per contact and all non-Customer market participants
will be assessed a $0.38 per contract fee when contra to the Initiating
Order. Also, when a PIXL Order is contra to other than the Initiating
Order, the PIXL Order will be assessed $0.00 per contract, unless the
order is a Customer, in which case the Customer will receive a rebate
of $0.38 per contract. All other contra parties to the PIXL Order,
other than the Initiating Order, will be assessed a reduced Fee for
Removing Liquidity of $0.38 per contract or will receive the Rebate to
Add Liquidity.'' The Exchange added a footnote in that filing, footnote
21, to further describe the phrase ``other than an Initiating Order,''
as, for example, a PIXL Auction Responder or a resting order or quote
that was on the Phlx book prior to the auction. In that proposal, the
Exchange reasoned, ``The Exchange believes it is reasonable that all
other contra parties to the PIXL Order, other than the Initiating
Order, will be equally assessed a reduced Fee for Removing Liquidity of
$0.38 per contract when removing or they will receive the Rebate for
Adding Liquidity if adding because the Exchange desires to equally
provide all market participants the same incentivizes to encourage them
to transact a greater number of SPY PIXL Orders.''
The Exchange also reasoned that ``[a]lso, the Exchange proposes to
uniformly assess all market participants a fee when a Customer rebate
would be paid to enable the Exchange to offer the rebate. The Exchange
believes that widening the differential as between the Initiating Order
Fee and the contra party to the PIXL Order ($0.05 vs. $0.38) as
compared to the cost to transact a PIXL Order today ($0.05 or $0.07 per
contract vs. $0.30) does not misalign the cost of these transactions
depending on the market participant because the Exchange would now not
assess a fee in the case that PIXL Order is contra to other than the
Initiating Order, which is not a Customer, and would pay the Customer a
rebate in the case where the contra party is a Customer.''
The Exchange assessed all contra-parties to the SPY PIXL Order,
other than the Initiating Order, a fee of $0.38 per contract as a
result of this rule change.
SR-Phlx-2015-25
On March 11, 2015, the Exchange filed a rule change to amend the
SPY PIXL pricing established by SR-Phlx-2013-61.\7\ In that filing, the
Exchange proposed to amend the following rule text, ``All other contra
parties to the PIXL Order, other than the Initiating Order, will be
assessed a Fee for Removing Liquidity of $0.38 per contract or will
receive the Rebate for Adding Liquidity'' \8\ to add the term ``Non-
Customer'' to the sentence and increase the Fee for Removing Liquidity
from $0.38 to $0.42 per contract. The term Non-Customer was being
introduced in this rule change into the Pricing Schedule.\9\ The
Exchange at that time stated in the purpose section to SR-Phlx-2015-25,
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\7\ See Securities Exchange Act Release No. 74531 (March 19,
2015), 80 FR 15850 (March 25, 2015) (SR-Phlx-2015-25) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change Relating
to the Pricing Schedule's Preface and Sections I, II and IV).
\8\ The quoted text is the original text which was amended by
SR-Phlx-2015-25.
\9\ The term ``Non-Customer'' applies to transactions for the
accounts of Specialists, Market Makers, Firms, Professionals,
Broker-Dealers and JBOs.
`The Exchange also proposes to amend PIXL fees in SPY in Section
I of the Pricing Schedule. Today, when a PIXL Order is contra to
other than the Initiating Order, the PIXL Order will be assessed
$0.00 per contract, unless the order is a Customer, in which case
the Customer will receive a rebate of $0.38 per contract. All other
contra parties to the PIXL Order, other than the Initiating Order,
will be assessed a Fee for Removing Liquidity of $0.38 per contract
or will receive the Rebate for Adding Liquidity. The Exchange is
proposing to increase the amount that all other contra parties to
the PIXL Order, other than the Initiating Order, will be assessed to
remove liquidity from $0.38 to $0.42 per contract. These contra
parties will continue to be entitled to receive the Rebate for
Adding Liquidity, as is the case today. Despite, the increase [the
Exchange] believes that its current SPY PIXL fees remain
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competitive.'
Footnote 13 in that rule change indicated that 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. Non-
Initiating Order interest could be a PIXL Auction Responder or a
resting order or quote that was on the Phlx book prior to the auction.
As a result of the amendments to SR-Phlx-2015-25, the Exchange's
current rule text does not address the amount a Customer would be
assessed if the
[[Page 15763]]
Customer was a contra-party responder to a SPY PIXL Order, other than
the Initiating Order. Today, no fee is assessed to the Customer contra
party to a SPY PIXL Order.
Proposal
The Exchange proposes to assess a Customer contra party to a PIXL
Order a Fee for Removing Liquidity of $0.42 per contract, similar to
all other contra parties to a SPY PIXL Order. The Exchange's proposal
would increase the Customer Fee for Removing Liquidity, when the
Customer is a contra party to the PIXL Order, other than the Initiating
Order, from $0.00 to $0.42 per contract.
The Exchange proposes to (i) add the word ``PIXL'' in the first
sentence to clarify the type of order being discussed; and (ii) remove
the reference to ``other Non-Customer'' in the second sentence, to
assess the $0.42 per contract Fee for Removing to Liquidity to all
participants, including a Customer and make the second sentence its own
paragraph. The proposed rule text would be as follows, ``When the PIXL
Order is contra to other than the Initiating Order, the PIXL Order will
be assessed $0.00 per contract, unless the PIXL Order is a Customer, in
which case the Customer will receive a rebate of $0.38 per contract.''
Separately, in another paragraph, the proposed rule text would be as
follows, ``All contra parties to the PIXL Order that are not the
Initiating Order will be assessed a Fee for Removing Liquidity of $0.42
per contract or will receive the Rebate for Adding Liquidity.'' The
Exchange is also adding some clarifying language in this sentence to
make clear that the contra parties are note [sic] the Initiating Order.
To further explain this amendment and the role of the contra party,
during a PIXL Auction, a paired order may be entered into the auction
consisting of a PIXL Order and an Initiating Order. If during the
auction, non-Initiating Order interest \10\ executes against the PIXL
Order, the Exchange would assess a Fee for Removing Liquidity of $0.42
per contract or will receive the Rebate for Adding Liquidity,
regardless of the capacity of the contra party. The contra party in
this example may be a Customer order.\11\
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\10\ Non-Initiating Order interest could be a PIXL Auction
Responder or a resting order or quote that was on the Phlx book
prior to the auction.
\11\ This contra party Customer order would be different than
the original Customer PIXL Order.
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The Exchange proposes to correct a typographical error in this
section to capitalize ``non-Customer'' to state ``Non-Customer'' to
properly refer to the defined term. The Exchange also proposes to
remove extraneous parentheticals from Section I in the Simple Order
Rebate for Adding Liquidity in the Specialist and Market Maker pricing.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \12\ in general, and furthers the objectives of
Sections 6(b)(4) and 6(b)(5) of the Act \13\ 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, and is not
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(4) and (5).
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The Commission and the courts have repeatedly expressed their
preference for competition over regulatory intervention in determining
prices, products, and services in the securities markets. In Regulation
NMS, for example, the Commission indicated that market forces should
generally determine the price of non-core market data because national
market system regulation ``has been remarkably successful in promoting
market competition in its broader forms that are most important to
investors and listed companies.'' \14\ Likewise, in NetCoalition v.
Securities and Exchange Commission \15\ (``NetCoalition'') the DC
Circuit upheld the Commission's use of a market-based approach in
evaluating the fairness of market data fees against a challenge
claiming that Congress mandated a cost-based approach.\16\ As the court
emphasized, the Commission ``intended in Regulation NMS that `market
forces, rather than regulatory requirements' play a role in determining
the market data . . . to be made available to investors and at what
cost.'' \17\
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\14\ Securities Exchange Act Release No. 51808 at 37499 (June 9,
2005) (``Regulation NMS Adopting Release'').
\15\ NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010).
\16\ See NetCoalition, at 534.
\17\ Id. at 537.
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Further, ``[n]o 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'. . . .'' \18\ Although the court and
the SEC were discussing the cash equities markets, the Exchange
believes that these views apply with equal force to the options
markets.
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\18\ Id. at 539 (quoting ArcaBook Order, 73 FR at 74782-74783).
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The Exchange's proposal to increase the amount that Customer contra
parties to a PIXL Order that were not the Initiating Order will be
assessed to remove liquidity from $0.00 to $0.42 per contract is
reasonable because despite the increase in the fee, the Exchange
believes this pricing will continue to incentivize market participants
to transact a greater number of SPY options. Customers will continue to
receive a rebate of $0.38 per contract when the PIXL Order is a
Customer order and is contra to other than the Initiating Order. The
Exchange's proposal to increase the Fee for Removing Liquidity for
Customer contra-parties to the PIXL Order in SPY that are not the
Initiating Order from $0.00 to $0.42 per contract remains lower than
the $0.43 per contract Simple Order Fee for Removing Liquidity that is
assessed for Simple Orders in SPY.\19\ Today, all other market
participants that are not the Initiating Order, other than a Customer,
who execute against the PIXL Order, are assessed a Fee for Removing
Liquidity of $0.42 per contract. The Exchange believes that it should
assess the Customer a fee similar to other market participants. The
Exchange notes that today, a Customer is assessed a $0.43 per contract
Simple Order Fee for Removing Liquidity in SPY. The proposed $0.42 per
contract Customer Fee for Removing Liquidity for Customer contra-
parties to the PIXL Order which are not the Initiating Order in SPY
would continue to be lower than the Simple Order Fee for Removing
Liquidity.
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\19\ See Section I of the Pricing Schedule. Customers are
assessed a $0.43 per contract Simple Order Fee for Removing
Liquidity in SPY while Non-Customers are assessed a $0.47 per
contract Simple Order Fee for Removing Liquidity in SPY.
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SPY options are currently the most actively traded options class
and therefore the Exchange believes that incentivizing Customers to
remove liquidity in SPY options by continuing to offer a lower rate as
compared to Simple Order Fees for Removing Liquidity in SPY will
benefit all market participants by providing incentives for price
improvement, such as this reduction in the Fee for Removing Liquidity.
Despite the increase, the Exchange believes the Fee for Removing
[[Page 15764]]
Liquidity will continue to encourage a greater number of market
participants to remove Customer liquidity in SPY on Phlx because the
proposed rate of $0.42 per contract is lower the $0.43 per contract
Simple Order Fee for Removing Liquidity that is assessed for Simple
Orders in SPY. Customer orders bring valuable liquidity to the market
which liquidity benefits other market participants.
The Exchange's proposal to increase the amount that Customer contra
parties to the PIXL Order that are not the Initiating Order will be
assessed to remove liquidity from $0.00 to $0.42 per contract is
equitable and not unfairly discriminatory because the Exchange will be
assessing the same Fees for Removing Liquidity for SPY PIXL options to
all market participants that are contra parties to the PIXL Order in
SPY, other than the Initiating Order. Customer liquidity benefits all
market participants by providing more trading opportunities, which
attracts Specialists and Market Makers. A higher percentage of SPY
Orders in PIXL leads to increased auctions and better opportunities for
price improvement.
The Exchange believes that it is reasonable, equitable and not
unfairly discriminatory to correct the typographical error to properly
refer to a defined term, remove extraneous parentheticals from Section
I and make other clarifying language. These rule changes are non-
substantive.
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. In terms of inter-market
competition, the Exchange notes that it operates in a highly
competitive market in which market participants can readily favor
competing venues if they deem fee levels at a particular venue to be
excessive, or rebate opportunities available at other venues to be more
favorable. In such an environment, the Exchange must continually adjust
its fees to remain competitive with other exchanges and with
alternative trading systems that have been exempted from compliance
with the statutory standards applicable to exchanges. Because
competitors are free to modify their own fees in response, and because
market participants may readily adjust their order routing practices,
the Exchange believes that the degree to which fee changes in this
market may impose any burden on competition is extremely limited.
The proposed increase to the amount that Customer contra parties to
the PIXL Order that are not the Initiating Order will be assessed to
remove liquidity does not impose a burden on inter-market competition,
because the Exchange is competing with other options markets which
offer price improvement mechanisms. A higher percentage of SPY Orders
in PIXL leads to increased auctions and better opportunities for price
improvement for all market participants. In sum, if the changes
proposed herein are unattractive to market participants, it is likely
that the Exchange will lose market share as a result. Accordingly, the
Exchange does not believe that the proposed changes will impair the
ability of members or competing order execution venues to maintain
their competitive standing in the financial markets.
The Exchange's proposal to amend the Fee for Removing Liquidity
applicable to Customers that are contra to a SPY PIXL Order, other than
the Initiating Order, does not impose any undue burden on intra-market
competition as all market participants will be assessed the same fee of
$0.42 per contract to remove liquidity as other contra party market
participants. Customer orders bring valuable liquidity to the market,
which liquidity benefits all market participants. This proposal also
corrects a discrepancy in the rule text which does not currently
address fees for Customer responders.
The Exchange's proposal to correct a typographical error to
properly refer to a defined term, remove extraneous parentheticals from
Section I and make other clarifying language does not impose any undue
burden on intra-market competition as these rule changes are non-
substantive.
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.\20\
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\20\ 15 U.S.C. 78s(b)(3)(A)(ii).
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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: (i)
Necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) 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.
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-2016-21 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2016-21. 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-2016-21 and
should
[[Page 15765]]
be submitted on or before April 14, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-06604 Filed 3-23-16; 8:45 am]
BILLING CODE 8011-01-P