[Federal Register Volume 81, Number 144 (Wednesday, July 27, 2016)]
[Notices]
[Pages 49293-49299]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-17668]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78382; File No. SR-Phlx-2016-62]
Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change Related to
Affiliated Entities
July 21, 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 July 15, 2016, NASDAQ PHLX LLC (``Phlx'' or ``Exchange'') filed with
the Securities and Exchange Commission (``SEC'' or ``Commission'') the
proposed rule change as described in Items I, II, and III, below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend the Preface, Section B and Section
II of the Exchange's Pricing Schedule to permit certain affiliated
market participants to aggregate volume and qualify for various pricing
incentives in the Pricing Schedule.
The text of the proposed rule change is available on the Exchange's
Web site at http://nasdaqphlx.cchwallstreet.com/ 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 permit certain
affiliated market participants to aggregate volume and qualify for
various pricing incentives in the Pricing Schedule. Specifically, the
Exchange proposes to amend the Pricing Schedule at Section B, Customer
\3\ Rebates and at Section II, Multiply-Listed Options Fees,\4\ to
offer
[[Page 49294]]
Affiliated Entities certain rebate and fee incentives.
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\3\ The term ``Customer'' applies to any transaction that is
identified by a member or member organization for clearing in the
Customer range at The Options Clearing Corporation which is not for
the account of a broker or dealer or for the account of a
``Professional'' (as that term is defined in Rule 1000(b)(14)).
\4\ These fees include options overlying equities, ETFs, ETNs
and indexes which are Multiply Listed.
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Affiliated Entity
The Exchange proposes to add three definitions to the Preface of
the Pricing Schedule. The Exchange proposes to define the terms
``Appointed MM,'' ``Appointed OFP,'' and ``Affiliated Entity.'' The
Exchange proposes to define the term ``Appointed MM'' as a Phlx Market
Maker \5\ or Specialist \6\ who has been appointed by an Order Flow
Provider (``OFP'') for purposes of qualifying as an Affiliated Entity.
An OFP is a member or member organization that submits orders, as agent
or principal, to the Exchange.\7\ The Exchange proposes to define the
term ``Appointed OFP'' as an OFP who has been appointed by a Phlx
Market Maker or Specialist for purposes of qualifying as an Affiliated
Entity. The Exchange proposes to define the term ``Affiliated Entity''
as a relationship between an Appointed MM and an Appointed OFP for
purposes of qualifying for certain pricing as specified in the Pricing
Schedule. In order to become an Affiliated Entity, Market Makers or
Specialists, and OFPs will be required to send an email to the Exchange
to appoint their counterpart, at least 3 business days prior to the
last day of the month to qualify for the next month.\8\ For example,
with this proposal, market participants may submit emails to the
Exchange to become Affiliated Entities eligible to qualify for
discounted pricing starting August 1, 2016, provided the emails are
sent at least 3 business days prior to the first business day of August
2016. The Exchange will acknowledge receipt of the emails and specify
the date the Affiliated Entity would be eligible to qualify for
applicable pricing, as specified in the Pricing Schedule. Each
Affiliated Entity relationship will commence on the 1st of a month and
may not be terminated prior to the end of any month. An Affiliated
Entity relationship will terminate after a one (1) year period, unless
either party terminates earlier in writing by sending an email to the
Exchange at least 3 business days prior to the last day of the month to
terminate for the next month. Affiliated Entity relationships must be
renewed annually. For example, if the start date of the Affiliated
Entity relationship is August 1, 2016, the counterparties may determine
to commence a new relationship as of August 1, 2017 by sending two new
emails by July 27, 2017 (3 business days prior to the end of the
month). Members and member organizations under Common Ownership \9\ may
not qualify as a counterparty comprising an Affiliated Entity. Each
member or member organization may qualify for only one (1) Affiliated
Entity relationship at any given time.
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\5\ The term ``Market Maker'' will be utilized to describe fees
and rebates applicable to Registered Options Traders (``ROTs''),
Streaming Quote Traders (``SQTs''), Remote Streaming Quote Traders
(``RSQTs''). An ROT is defined in Exchange Rule 1014(b) is a regular
member or a foreign currency options participant of the Exchange
located on the trading floor who has received permission from the
Exchange to trade in options for his own account. A ROT includes
SQTs and RSQTs as well as on and off-floor ROTS. An SQT is defined
in Exchange Rule 1014(b)(ii)(A) as an ROT who has received
permission from the Exchange to generate and submit option
quotations electronically in options to which such SQT is assigned.
An RSQT is defined in Exchange Rule in 1014(b)(ii)(B) as an ROT that
is a member affiliated with an RSQTO with no physical trading floor
presence who has received permission from the Exchange to generate
and submit option quotations electronically in options to which such
RSQT has been assigned. A Remote Streaming Quote Trader Organization
or ``RSQTO,'' which may also be referred to as a Remote Market
Making Organization (``RMO''), is a member organization in good
standing that satisfies the RSQTO readiness requirements in Rule
507(a). RSQTs may also be referred to as Remote Market Markers
(``RMMs'').
\6\ The term ``Specialist'' shall apply to the account of a
Specialist (as defined in Exchange Rule 1020(a)). A Specialist is an
Exchange member who is registered as an options specialist pursuant
to Rule 501(a). An options Specialist includes a Remote Specialist
which is defined as an options specialist in one or more classes
that does not have a physical presence on an Exchange floor and is
approved by the Exchange pursuant to Rule 501.
\7\ Specialist and Market Makers submitting quotes to the
Exchange shall not be considered Appointed OFPs for the purpose of
becoming an Affiliated Entity.
\8\ The Exchange shall issue an Options Trader Alert specifying
the email address and details required to apply to become an
Affiliated Entity.
\9\ The term ``Common Ownership'' shall mean members or member
organizations under 75% common ownership or control. Phlx members or
member organizations that are under 75% common ownership or control
shall be considered under Common Ownership for purposes of pricing.
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As proposed, an Affiliated Entity shall be eligible to aggregate
their volume for purposes of qualifying for certain pricing specified
in the Pricing Schedule, as described below.
Section B--Customer Rebates
The Exchange proposes to amend Section B, entitled ``Customer
Rebate Program'' to permit Affiliated Entities to aggregate their
Customer volume for purposes of calculating Customer Rebate Tiers and
receiving rebates. Currently, the Exchange has a Customer Rebate
Program consisting of the following five tiers that pay Customer
rebates on three Categories, A, B and C, of transactions:
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Percentage thresholds of
national customer volume in
multiply-listed equity and
Customer rebate tiers ETF Options classes, Category A Category B Category C
excluding SPY Options
(monthly)
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Tier 1............................. 0.00%-0.60%................ $0.00 $0.00 $0.00
Tier 2............................. Above 0.60%-1.10%.......... $0.10 $0.10 $0.17
Tier 3............................. Above 1.10%-1.60%.......... $0.15 $0.12 $0.17
Tier 4............................. Above 1.60%-2.50%.......... $0.20 $0.16 $0.22
Tier 5............................. Above 2.50%................ $0.21 $0.17 $0.22
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A Phlx member qualifies for a certain rebate tier based on the
percentage of total national customer volume in multiply-listed options
that it transacts monthly on Phlx. The Exchange calculates Customer
volume in Multiply Listed Options by totaling electronically-delivered
and executed volume, excluding volume associated with electronic
Qualified Contingent Cross (``QCC'') Orders, as defined in Exchange
Rule 1080(o).\10\ The Exchange proposes to incentivize certain members
and member organizations, who are not under Common Ownership, to enter
into an Affiliated Entity relationship for the purpose of aggregating
Customer volume to qualify for Section B Customer Rebates. By
aggregating volume, the counterparties comprising the Affiliated Entity
are offered an opportunity to qualify for higher rebates, thereby
lowering costs and encouraging members to send more order flow.
Customer liquidity benefits all market participants by providing
[[Page 49295]]
more order flow to the marketplace and more trading opportunities.
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\10\ In calculating electronically-delivered and executed
Customer volume in Multiply Listed Options, the numerator of the
equation includes all electronically-delivered and executed Customer
volume in Multiply Listed Options. The denominator of that equation
includes national customer volume in multiply-listed equity and ETF
options volume, excluding SPY. See Section B of the Pricing
Schedule.
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Affiliated Entities may aggregate Customer volume as between the
Appointed MM and Appointed OFP to qualify for any of the five tiers of
Customer Rebates that pay Category, A, B or C rebates on transactions.
An Appointed OFP would be eligible to receive the additional $0.02 per
contract Category A and B rebate and the additional $0.03 per contract
Category C rebate, paid in addition to the applicable Tier 2 and 3
rebate, currently available to a Specialist or Market Maker or its
member or member organization affiliate under Common Ownership,
provided the Appointed MM has reached the Monthly Market Maker Cap, as
defined in Section II.
The Exchange proposes to amend the language in Section B to clarify
the applicability of the $0.02 per contract rebate in addition to
Categories A and B and the $0.03 per contract rebate in addition to
Category C, applicable to Tiers 2 and 3. The Exchange proposes to
relocate certain language and add language to amend the sentence as
follows: ``The Exchange will pay a $0.02 per contract Category A and B
rebate and a $0.03 per contract Category C rebate in addition to the
applicable Tier 2 and 3 rebate, provided the Specialist, Market Maker
or Appointed MM has reached the Monthly Market Maker Cap as defined in
Section II, to: (1) A Specialist or Market Maker who is not under
Common Ownership or is not a party of an Affiliated Entity; or (2) an
OFP member or member organization affiliate under Common Ownership; or
(3) an Appointed OFP of an Affiliated Entity.''
The Exchange's proposal would incentivize certain members and
member organizations, which are not under Common Ownership, to enter
into an Affiliated Entity relationship for the purpose of aggregating
Customer volume to qualify the Appointed OFP for Customer Rebates in
Section B of the Pricing Schedule. Phlx members and member
organizations that are under 75% common ownership or control will be
considered under Common Ownership and therefore by definition are not
eligible to enter an Affiliated Entity relationship.
Section II--Options Transaction Charge
The Exchange proposes to amend Section II of the Pricing Schedule
to offer members and member organizations that are Appointed OFPs of
Affiliated Entities transacting non-Customer orders an opportunity to
reduce non-Penny Pilot electronic Options Transaction Charges. Today,
the Exchange assesses a Professional,\11\ Broker-Dealer \12\ and Firm
\13\ a non-Penny Pilot electronic Options Transaction Charge of $0.75
per contract and a Specialist and Market Maker a $0.25 per contract
non-Penny Pilot electronic Options Transaction Charge. The Exchange
proposes to provide an Appointed OFP of an Affiliated Entity with an
opportunity to lower the Professional, Broker-Dealer and Firm non-Penny
Pilot electronic Options Transaction Charge from $0.75 to $0.60 per
contract provided the Affiliated Entity qualifies for Customer Rebate
Tiers 4 \14\ or 5 \15\ in Section B of the Pricing Schedule. The
Exchange proposes to provide an Appointed MM of an Affiliated Entity
with an opportunity to lower the Specialist and Market Maker non-Penny
Pilot electronic Options Transaction Charge from $0.25 to $0.23 per
contract provided the Affiliated Entity qualifies for Customer Rebate
Tiers 4 or 5 in Section B of the Pricing Schedule.\16\
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\11\ The term ``Professional'' means any person or entity that
(i) is not a broker or dealer in securities, and (ii) places more
than 390 orders in listed options per day on average during a
calendar month for its own beneficial account(s). See Rule
1000(b)(14).
\12\ The term ``Broker-Dealer'' applies to any transaction which
is not subject to any of the other transaction fees applicable
within a particular category.
\13\ The term ``Firm'' applies to any transaction that is
identified by a member or member organization for clearing in the
Firm range at The Options Clearing Corporation.
\14\ The Tier 4 Customer Rebate in Section B of the Pricing
Schedule requires Customer volume above 1.60% to 2.50% of National
Customer Volume in Multiply Listed Equity and ETF Options, excluding
SPY. This rebate tier pays a Category A $0.20 rebate, a Category B
$0.16 rebate and a Category C $0.22 rebate.
\15\ The Tier 5 Customer Rebate in Section B of the Pricing
Schedule requires Customer volume above 2.50% of National Customer
Volume in Multiply Listed Equity and ETF Options, excluding SPY.
This rebate tier pays a Category A $0.21 rebate, a Category B $0.17
rebate and a Category C $0.22 rebate.
\16\ Today, any member or member organization under Common
Ownership with another member or member organization that qualifies
for Customer Rebate Tiers 4 or 5 in Section B of the Pricing
Schedule is assessed either a $0.23 or $0.60 per contract non-Penny
Pilot electronic Options Transaction Charge.
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The Exchange's proposal would incentivize certain members and
member organizations, who are not under Common Ownership, to enter into
an Affiliated Entity relationship for the purpose of aggregating
Customer volume to qualify for reduced non-Penny Pilot Options
Transaction Charges.
2. Statutory Basis
The Exchange believes that its proposal to amend its Pricing
Schedule is consistent with Section 6(b) of the Act,\17\ in general,
and furthers the objectives of Section 6(b)(4) and (b)(5) of the
Act,\18\ 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 its facilities, and is not designed to
permit unfair discrimination between customers, issuers, brokers, or
dealers.
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\17\ 15 U.S.C. 78f(b).
\18\ 15 U.S.C. 78f(b)(4), (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, while adopting a series of steps to improve the current market
model, the Commission highlighted the importance of market forces in
determining prices and SRO revenues and, also, recognized that current
regulation of the market system ``has been remarkably successful in
promoting market competition in its broader forms that are most
important to investors and listed companies.'' \19\
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\19\ Securities Exchange Act Release No. 51808 (June 29, 2005),
70 FR 37496 at 37499 (File No. S7-10-04) (``Regulation NMS Adopting
Release'').
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Likewise, in NetCoalition v. Securities and Exchange Commission
\20\ (``NetCoalition'') the D.C. 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.\21\ 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.'' \22\
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\20\ NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010).
\21\ See id. at 534-535.
\22\ See 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' . . . .'' \23\ Although the court and
the SEC were discussing the cash equities markets, the Exchange
believes
[[Page 49296]]
that these views apply with equal force to the options markets.
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\23\ See id. at 539 (quoting Securities Exchange Act Commission
at Release No. 59039 (December 2, 2008), 73 FR 74770 at 74782-74783
(December 9, 2008) (SR-NYSEArca-2006-21)).
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The Exchange's proposal to amend the Preface of the Pricing
Schedule to add the definitions of ``Appointed MM,'' ``Appointed OFP''
and ``Affiliated Entity'' is reasonable because the Exchange is
proposing to identify the applicable market participants that may
qualify to aggregate volume as an Affiliated Entity. Further the
Exchange seeks to make clear the manner in which members and member
organizations may participate on the Exchange as Affiliated Entities by
setting timeframes for communicating agreements among market
participants and terms of early termination. The Exchange also clearly
states that no member or member organization under Common Ownership may
become a counterparty to an Affiliated Entity. Any Phlx member or
member organization who meets the definition of Common Ownership shall
not be eligible to become an Affiliated Entity. The Exchange believes
that these terms are reasonable because they would allow members or
member organizations to elect to become a counterparty to an Affiliated
Entity, provided they are not under Common Ownership.
The Exchange's proposal to amend the Preface of the Pricing
Schedule to add the definitions of ``Appointed MM,'' ``Appointed OFP''
and ``Affiliated Entity'' is equitable and not unfairly discriminatory
because all member or members that are not under Common Ownership by
definition may choose to enter into an Affiliated Entity relationship.
Section B Customer Rebates
The Exchange's proposal to permit Affiliated Entities to aggregate
Customer volume for purposes of qualifying Appointed OFPs for Section B
Customer Rebates is reasonable because it will attract additional
Customer order flow to the Exchange. Customer liquidity benefits all
market participants by providing more trading opportunities, which
attracts Market Makers and Specialists. 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. Appointed OFPs directing order flow to the
Exchange may be eligible to qualify for a Customer Rebate or a higher
Customer Rebate tier, with this proposal, as a result of aggregating
volume with an Appointed MM and thereby qualifying for higher Customer
Rebates. Permitting members and member organizations to affiliate for
purposes of qualifying for Section B Customer Rebates may also
encourage the counterparties that comprise the Affiliated Entities to
incentivize each other to attract and seek to execute more Customer
volume on Phlx. In turn, market participants would benefit from the
increased liquidity with which to interact and potentially tighter
spreads on orders. Overall, incentivizing market participants with
increased opportunities to earn higher Customer rebates may increase
the quality of the liquidity available on Phlx.
The Exchange's proposal to permit Affiliated Entities to aggregate
Customer volume for purposes of qualifying Appointed OFPs for Section B
Customer rebates is equitable and not unfairly discriminatory because
all Phlx members and member organizations, other than those that meet
the definition of Common Ownership, may elect to become an Affiliated
Entity as either an Appointed MM or an Appointed OFP.\24\ Also, each
member or member organization may participate in only one Affiliated
Entity relationship at a given time, which imposes a measure of
exclusivity among market participants, allowing each party to rely on
the other's executed Customer volume on Phlx to receive a corresponding
benefit in terms of a higher rebate. Any market participant that by
definition is not under Common Ownership may elect to become a
counterparty of an Affiliated Entity.
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\24\ Both members must elect each other to become an Affiliated
Entity for one year. Participation is effected by an agreement of
both parties that have provided proper notification to the Exchange.
A party may elect to terminate the agreement at any time prior to
one year.
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The Exchange's proposal to exclude members and member organizations
that are under Common Ownership from qualifying as an Affiliated Entity
is reasonable because members and member organizations under Common
Ownership may aggregate volume today for purposes of Section B Customer
Rebates.\25\ The Exchange's proposal to exclude members and member
organizations that by definition are under Common Ownership from
qualifying as an Affiliated Entity is equitable and not unfairly
discriminatory because the Exchange will apply all qualifications in a
uniform manner when approving Affiliated Entities. Excluding members
and member organizations that by definition are under Common Ownership
from also qualifying as an Affiliated Entity is equitable and not
unfairly discriminatory because they are able to aggregate volume today
and qualify for Customer Rebates in Section B.
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\25\ See Section B of the Pricing Schedule.
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Section II--Options Transaction Charges
The Exchange's proposal to amend note 3 of Section II of the
Pricing Schedule to offer members and member organizations that are
Affiliated Entities an opportunity to reduce non-Customer non-Penny
Pilot electronic Options Transaction Charges is reasonable because the
Exchange believes it will encourage these market participants to
transact a greater amount of Customer volume on Phlx. The Exchange's
proposal to permit Appointed OFPs of Affiliated Entities to qualify for
the reduced non-Penny Pilot electronic Options Transaction Charges by
qualifying for Customer Rebate Tiers 4 or 5 in Section B of the Pricing
Schedule will attract additional Customer order flow to the Exchange.
Customer liquidity benefits all market participants by providing more
trading opportunities, which attracts Market Makers and Specialists. An
increase in the activity of these market participants in turn
facilitates tighter spreads, which may cause a corresponding increase
in order flow from other market participants. Appointed OFPs directing
order flow to the Exchange may be eligible to qualify for these
Customer rebate tiers as a result of aggregating volume with another
appointed member and benefit from reduced non-Penny Pilot electronic
Options Transaction Charges. Permitting members and member
organizations to affiliate for purposes of qualifying for Section B
Customer rebates may also encourage the counterparties of an Affiliated
Entity to incentivize each other to attract and seek to execute more
Customer volume on Phlx. The Affiliated Entity relationship would
permit the Appointed OFP to benefit from reduced non-Penny Pilot
electronic Options Transaction Charges. In turn, market participants
would benefit from the increased liquidity with which to interact and
potentially tighter spreads on orders. The Exchange believes that
lowering these fees for electronic non-Penny Pilot Options Transaction
Charges, as compared to Penny Pilot Options Transaction Charges, is
reasonable because today, Penny Pilot Options are the most traded and
more liquid than Non-Penny Pilot Options. Electronic Penny Pilot
Options Transaction Charges are lower for Professionals, Broker-Dealers
and Firms because of the demand in the marketplace. The Exchange is
offering Appointed OFPs the opportunity to reduce the higher electronic
non-Penny Pilot Options Transaction Charges for
[[Page 49297]]
Professionals, Broker-Dealers and Firms with this incentive, provided
they qualify for the reduced non-Penny Pilot electronic Options
Transaction Charges by qualifying for Customer Rebate Tiers 4 or 5 in
Section B of the Pricing Schedule.
The Exchange's proposal to amend note 3 of Section II of the
Pricing Schedule to offer members and member organizations that are
Affiliated Entities an opportunity to reduce non-Customer non-Penny
Pilot electronic Options Transaction Charges is equitable and not
unfairly discriminatory because the Exchange will assess Appointed OFPs
a reduced Professional, Broker-Dealer and Firm electronic Options
Transaction Charge in Non-Penny Pilot Options. The Exchange does not
assess Customers an electronic Options Transaction Charge in Non-Penny
Pilot Options because Customer order flow enhances liquidity on the
Exchange for the benefit of all market participants. Customer liquidity
benefits all market participants by providing more trading
opportunities, which attracts 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.
Specialists and Market Makers are assessed lower electronic Options
Transaction Charges in Non-Penny Pilot Options as compared to
Professionals, Broker-Dealers and Firms because they have obligations
to the market and regulatory requirements, which normally do not apply
to other market participants.\26\ They have obligations to make
continuous markets, engage in a course of dealings reasonably
calculated to contribute to the maintenance of a fair and orderly
market, and not make bids or offers or enter into transactions that are
inconsistent with a course of dealings. The proposed differentiation as
between Customers, Specialists and Market Makers and other market
participants recognizes the differing contributions made to the
liquidity and trading environment on the Exchange by these market
participants. The Exchange believes that offering Appointed OFPs an
opportunity to lower fees for electronic non-Penny Pilot Options
Transaction Charges as compared to Penny Pilot Options Transaction
Charges is equitable and not unfairly discriminatory because the
Exchange seeks to offer lower fees to those market participants paying
the highest electronic non-Penny Pilot Options Transaction Charges.
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\26\ See Rule 1014 titled ``Obligations and Restrictions
Applicable to Specialists and Registered Options Traders.''
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The Exchange's proposal to amend note 4 of Section II of the
Pricing Schedule to offer Appointed MMs of an Affiliated Entity an
opportunity to reduce the Specialist and Marker Maker electronic non-
Penny Pilot electronic Options Transaction Charges is reasonable
because today the Exchange offers all market participants, excluding
Customers who are not assessed a non-Penny Pilot electronic Options
Transaction Charges, a means to reduce electronic Options Transaction
Charges by qualifying for a Customer Rebate in Section B of the Pricing
Schedule. Even with the reduced rate for Professionals, Broker-Dealers
and Firms of $0.60 per contract, Specialists and Market Makers will
continue to be assessed the lowest electronic Options Transaction
Charge in Non-Penny Pilot Options because they have obligations to the
market and regulatory requirements, which normally do not apply to
other market participants.\27\ The Exchange believes that offering
Appointed MMs an opportunity to benefit from lower fees for electronic
non-Penny Pilot Options Transaction Charges is reasonable because the
reduced electronic non-Penny Pilot will be consistent with the current
lower reduced Penny Pilot Options Transaction charges ($0.25 vs. $0.22
per contract).
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\27\ Id.
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The Exchange's proposal to amend note 4 of Section II of the
Pricing Schedule to offer Appointed MMs of an Affiliated Entity an
opportunity to reduce the Specialist and Marker Maker electronic non-
Penny Pilot electronic Options Transaction Charges is equitable and not
unfairly discriminatory because the Exchange seeks to incentivize
Specialists and Market Makers to increase their activity on Phlx and in
turn facilitate tighter spreads, which may cause an additional
corresponding increase in order flow from other market participants.
Specialists and Market Makers have obligations to the market and
regulatory requirements, which normally do not apply to other market
participants.\28\ They have obligations to make continuous markets,
engage in a course of dealings reasonably calculated to contribute to
the maintenance of a fair and orderly market, and not make bids or
offers or enter into transactions that are inconsistent with a course
of dealings. The Exchange believes that offering Appointed MMs the
opportunity to receive this additional benefit will continue to benefit
the marketplace as described herein. The Exchange believes that
lowering electronic non-Penny Pilot Options Transaction Charges as
compared to electronic Penny Pilot Options Transaction Charges is
equitable and not unfairly discriminatory because the Exchange is
offering market participants the opportunity to reduce the higher
electronic non-Penny Pilot Options Transaction Charges for Specialists
and Market Makers with this incentive and permitting Appointed MMs to
also receive this discount, provided they qualify.
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\28\ 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. Specifically, the Exchange does
not believe that permitting counterparties to an Affiliated Entity to
aggregate volume to qualify for certain rebates and reduced fees will
impose any undue burden on competition, as discussed below.
The Exchange operates in a highly competitive market in which many
sophisticated and knowledgeable market participants can readily and do
send order flow to competing exchanges if they deem fee levels or
rebate incentives at a particular exchange to be excessive or
inadequate. Additionally, new competitors have entered the market and
still others are reportedly entering the market shortly. These market
forces ensure that the Exchange's fees and rebates remain competitive
with the fee structures at other trading platforms.
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
[[Page 49298]]
changes in this market may impose any burden on competition is
extremely limited.
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.
In terms of inter-market competition, the Exchange notes that other
options markets have similar incentives in place to attract volume to
their markets.\29\
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\29\ See NYSE MKT LLC's (``NYSE Amex'') pricing at NYSE Amex
Options Fee Schedule). NYSE Amex permits aggregation of volume to
qualify for the Amex Customer Engagement or ACE Program. See Bats
BZX Exchange, Inc.'s (``BZX'') fee schedule. BZX permits aggregation
of volume to qualify for tiered pricing. See the Chicago Board
Options Exchange Incorporated (``CBOE'') Fees Schedule. CBOE permits
aggregation of volume to qualify for credits available under an
Affiliated Volume Plan or ``AVP.''
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The Exchange's proposal to amend the Preface of the Pricing
Schedule to add the definitions of ``Appointed MM,'' ``Appointed OFP''
and ``Affiliated Entity'' does not impose an undue burden on
competition because these definitions apply to all members and member
organizations uniformly.
Section B Customer Rebates
In terms of intra-market competition, the Exchange does not believe
that its proposal to permit counterparties of an Affiliated Entity to
aggregate Customer volume for purposes of qualifying for Section B
Customer Rebates imposes an undue burden on intra-market competition
because all Phlx members and member organizations, other than those
under Common Ownership, may become an Affiliated Entity as either an
Appointed MM or an Appointed OFP. Also, each Phlx member or member
organization may participate in only one Affiliated Entity relationship
at a given time, which imposes a measure of exclusivity among market
participants, allowing each party to rely on the other's executed
Customer volume on Phlx to receive a corresponding benefit in terms of
a higher rebate. The Exchange will apply all qualifications in a
uniform manner to all market participants that elect to become
counterparties of an Affiliated Entity. Any market participant that is
by definition a member or member organization under Common Ownership
may not become a counterparty of an Affiliated Entity.
Market Makers and Specialists are valuable market participants that
provide liquidity in the marketplace and incur costs that other market
participants do not incur. Market Makers and Specialists are subject to
burdensome quoting obligations \30\ to the market that do not apply to
other market participants. Incentivizing these market participants to
execute Customer volume on Phlx may result in tighter spreads. 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.
Appointed OFPs directing order flow to the Exchange may be eligible to
qualify for a Customer Rebate or a higher Customer Rebate tier, with
this proposal, as a result of aggregating volume with an Appointed MM
and thereby qualifying for higher Customer Rebates. Permitting members
and member organizations to affiliate for purposes of qualifying for
Section B Customer Rebates may also encourage the counterparties that
comprise the Affiliated Entities to incentivize each other to attract
and seek to execute more Customer volume on Phlx.
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\30\ See note 26 above.
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The Exchange's proposal to exclude members and member organizations
that are under Common Ownership from becoming an Affiliated Entity does
not impose and [sic] undue burden on intra-market competition because
member and member organizations under Common Ownership may aggregate
volume today for purposes of qualifying for Customer Rebates.
Section II--Options Transaction Charges
The Exchange's proposal to amend note 3 of Section II of the
Pricing Schedule to offer Appointed OFPs of Affiliated Entities an
opportunity to reduce non-Customer non-Penny Pilot electronic Options
Transaction Charges does not impose an undue burden on intra-market
competition because the Exchange will assess Appointed OFPs a reduced
Professional, Broker-Dealer and Firm electronic Options Transaction
Charge in Non-Penny Pilot Options. The Exchange does not assess
Customers an electronic Options Transaction Charge in Non-Penny Pilot
Options because Customer order flow enhances liquidity on the Exchange
for the benefit of all market participants. Customer liquidity benefits
all market participants by providing more trading opportunities, which
attracts 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. Specialists and Market Makers are assessed lower
electronic Options Transaction Charges in Non-Penny Pilot Options as
compared to Professionals, Broker-Dealers and Firms because they have
obligations to the market and regulatory requirements, which normally
do not apply to other market participants.\31\ They have obligations to
make continuous markets, engage in a course of dealings reasonably
calculated to contribute to the maintenance of a fair and orderly
market, and not make bids or offers or enter into transactions that are
inconsistent with a course of dealings. The proposed differentiation as
between Customers, Specialists and Market Makers and other market
participants recognizes the differing contributions made to the
liquidity and trading environment on the Exchange by these market
participants. The Exchange will apply all qualifications for the
reduced rate in a uniform manner. The Exchange believes that lowering
these fees for electronic non-Penny Pilot Options Transaction Charges
as compared to electronic Penny Pilot Options Transaction Charges does
not impose an undue burden on intra-market competition because the
Exchange seeks to offer lower fees to those market participants paying
the highest electronic non-Penny Pilot Options Transaction Charges.
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\31\ See note 26 above.
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The Exchange's proposal to amend note 4 of Section II of the
Pricing Schedule to offer Appointed MMs of Affiliated Entities an
opportunity to reduce non-Customer electronic non-Penny Pilot
electronic Options Transaction Charges does not impose an undue burden
on intra-market competition because the Exchange seeks to incentivize
Specialists and Market Makers to increase their activity on Phlx and in
turn facilitate tighter spreads, which may cause an additional
corresponding increase in order flow from other market participants.
Specialists and Market have obligations to the market and regulatory
requirements, which normally do not apply to other market
participants.\32\ They have obligations to make continuous markets,
engage in a course of dealings reasonably calculated to contribute to
the maintenance of a fair and orderly market, and not make bids or
offers or enter into transactions that are inconsistent with a course
of dealings. The Exchange believes that permitting Affiliated [sic] MMs
to receive this additional benefit will continue to benefit the market
place as
[[Page 49299]]
described herein. The Exchange believes that lowering these fees for
electronic non-Penny Pilot Options Transaction Charges as compared to
Penny Pilot Options Transaction Charges does not impose an undue burden
on intra-market competition because the electronic non-Penny Pilot
Options Transaction Charges is higher ($0.25 vs. $0.22 per contract).
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\32\ See note 26 above.
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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.\33\
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\33\ 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-2016-62 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-2016-62. 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-2016-62 and should be
submitted on or before August 17, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\34\
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\34\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-17668 Filed 7-26-16; 8:45 am]
BILLING CODE 8011-01-P