[Federal Register Volume 77, Number 51 (Thursday, March 15, 2012)]
[Notices]
[Pages 15400-15405]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-6229]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66551; File No. SR-Phlx-2012-27]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
Complex Order Fees and Rebates for Adding and Removing Liquidity in 
Select Symbols

March 9, 2012.
    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 1, 2012, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``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 I of the Exchange's Fee 
Schedule titled ``Rebates and Fees for Adding and Removing Liquidity in 
Select Symbols,'' by amending the transaction fees and rebates for 
Complex Orders and proposing a new rebate.
    The Exchange has designated these changes to be operative on March 
1, 2012.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqtrader.com/micro.aspx?id=PHLXfilings, 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 proposed rule change will increase certain Complex Order \3\ 
rebates, create a new rebate and also increase certain fees. The 
proposed changes will enable the Exchange to continue to reward market 
participants that add liquidity to the Exchange and allow the Exchange 
to compete more effectively respecting Complex Orders. The Complex 
Order fees and rebates being amended appear in Section I of the 
Exchange's Fee Schedule, entitled ``Rebates and Fees for Adding and 
Removing Liquidity in Select Symbols.'' \4\
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    \3\ 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).
    \4\ The Select Symbols are listed in Section I of the Fee 
Schedule.
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    The Exchange proposes to: (1) Amend the Customer Rebate for Adding 
Liquidity, (2) create a new Rebate for Removing Liquidity, (3) amend 
the Fee for Removing Liquidity for all participants that are assessed 
such a fee, and (4) create a volume tier for certain

[[Page 15401]]

market participants that transact significant volumes of Complex Orders 
on the Exchange. Currently, the Exchange's Complex Order fees and 
rebates are as follows:

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                                                                             Directed
                                                             Customer       participant    Market maker        Firm        Broker-dealer   Professional
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Rebate for Adding Liquidity.............................           $0.30           $0.00           $0.00           $0.00           $0.00           $0.00
Fee for Adding Liquidity................................            0.00            0.10            0.10            0.20            0.20            0.20
Fee for Removing Liquidity..............................            0.00            0.30            0.32            0.35            0.35            0.35
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    First, the Exchange is amending the Customer Complex Order Rebate 
for Adding Liquidity. Specifically, the Exchange proposes to increase 
the Customer Complex Order Rebate to Add Liquidity from $0.30 per 
contract to $0.32 per contract to further incentivize market 
participants to route Customer Complex Orders to the Exchange.
    Second, the Exchange proposes to create a new Customer Complex 
Order rebate to attract additional Customer Complex Orders to the 
Exchange. The new rebate, entitled ``Rebate for Removing Liquidity,'' 
will pay a rebate of $0.06 per contract for each contract of liquidity 
removed by an order designated as a Customer Complex Order. The 
Exchange currently pays no rebate and assesses no fee for removing 
Customer Complex Order liquidity. The Exchange will pay no rebate for 
other market participants removing Complex Order liquidity. This is 
similar to the existing Complex Order Rebate for Adding Liquidity where 
the Exchange offers a rebate only with respect to Customer Complex 
Orders. The Exchange believes that increasing the Customer Complex 
Order Rebate for Adding Liquidity and creating a new Customer Rebate 
for Removing Liquidity will incentivize market participants to transact 
Customer Complex Orders on the Exchange.
    Third, the Exchange proposes to increase the Complex Order Fees for 
Removing Liquidity for the Directed Participant,\5\ Market Maker,\6\ 
Firm, Broker-Dealer and Professional\7\ categories. The fee for 
Directed Participant transactions would increase from $0.30 to $0.32 
per contract; the fee for Market Makers would increase from $0.32 to 
$0.37 per contract; the fee for Firms would increase from $0.35 to 
$0.38 per contract; the fee for Broker-Dealers would increase from 
$0.35 to $0.38 per contract; and the fee for Professionals would 
increase from $0.35 to $0.38 per contract. As a result, the new Complex 
Order Fees for Removing Liquidity would be as follows:
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    \5\ The term ``Directed Participant'' applies to transactions 
for the account of a Specialist, Streaming Quote Trader (``SQT'') or 
Remote Streaming Quote Trader (``RSQT'') resulting from a Customer 
order that is (1) directed to it by an order flow provider, and (2) 
executed by it electronically on Phlx XL II.
    \6\ A ``Market Maker'' includes Specialists (see Rule 1020) and 
Registered Options Traders (``ROTs'') (Rule 1014(b)(i) and (ii), 
which includes SQTs (see Rule 1014(b)(ii)(A)) and RSQTs (see Rule 
1014(b)(ii)(B)).
    \7\ The term ``professional'' means any person or entity that 
(i) is not a broker or dealer in securities, and (ii) places more 
than 390 orders in listed options per day on average during a 
calendar month for its own beneficial account(s). See Rule 
1000(b)(14).

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                                                                         Directed
                                                        Customer       participant      Market maker         Firm        Broker-dealer     Professional
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Fee for removing liquidity........................           $0.00            $0.32            $0.37            $0.38            $0.38            $0.38
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    Finally, the Exchange will provide a new volume incentive to Market 
Makers. The Exchange has four categories of market makers: 
Specialists,\8\ ROTs,\9\ SQTs \10\and RSQTs.\11\ The Exchange proposes 
to offer a volume incentive to Market Makers that execute more than 
25,000 contracts per day in a month of Complex Orders, either adding or 
removing liquidity, in Select Symbols. Market Makers that meet the 
aforementioned volume criteria will receive a $0.01 per contract 
reduction of both the Directed Participant and Market Maker Complex 
Order Fees for Removing Liquidity, as applicable, on all of their 
transactions for the month. For example, assume Market Maker ABCD 
executes 30,000 contracts per day of Complex Orders, including 5,000 
contracts of Complex Orders that would be assessed the Directed 
Participant fee and 5,000 contracts per day of Complex Orders that 
would be assessed the Market Maker fee. In that case, Market Maker 
ABCD's Directed Participant Complex Orders transactions in the month 
would be assessed a Directed Participant Fee for Removing Liquidity of 
$0.31 per contract instead of the new $0.32 per contract, and Market 
Maker ACBD's Market Maker Complex Orders would be assessed a Market 
Maker Fee of $0.36 per contract instead of the new $0.37 per contract. 
For the purposes of the $0.01 reduction in the aforementioned fees, the 
Exchange also proposes to aggregate the trading activity of Market 
Makers where there is at least 75% common ownership between member 
organizations.
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    \8\ A Specialist is an Exchange member who is registered as an 
options specialist pursuant to Rule 1020(a).
    \9\ A ROT includes a SQT, a RSQT and a Non-SQT ROT, which by 
definition is neither a SQT or a RSQT. A Registered Option Trader is 
defined in Rule 1014(b) as a regular member of the Exchange located 
on the trading floor who has received permission from the Exchange 
to trade in options for his own account. See Rule 1014 (b)(i) and 
(ii).
    \10\ An SQT is defined in 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.
    \11\ An RSQT is defined in Rule in 1014(b)(ii)(B) as an ROT that 
is a member or member organization 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. An RSQT may only submit such quotations 
electronically from off the floor of the Exchange.
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    The Exchange is not proposing any amendments to Parts A or C of 
Section I of the Fee Schedule.
2. Statutory Basis
    The Exchange believes that its proposal to amend its Fee Schedule 
is consistent with Section 6(b) of the Act \12\ in general, and 
furthers the objectives of Section 6(b)(4) of the Act \13\ in 
particular, in that it is an equitable allocation of reasonable fees 
and other charges among Exchange members and

[[Page 15402]]

other persons using its facilities. The Exchange also believes that it 
is an equitable allocation of reasonable rebates among Exchange members 
and other persons using its facilities.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(4).
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Customer Rebates
    Customer Complex Orders are becoming an increasingly important 
segment of options trading. The Exchange believes that it is reasonable 
to increase the current Customer Complex Order Rebate for Adding 
Liquidity to $0.32 per contract and create a new Customer Complex Order 
Rebate for Removing Liquidity of $0.06 per contract, because the 
Exchange seeks to incentivize market participants to direct and 
transact a greater number of Customer Complex Orders at the Exchange. 
Creating these incentives and attracting Customer Complex Orders to the 
Exchange, in turn, benefits all market participants through increased 
liquidity at the Exchange. A higher percentage of Customer Complex 
Orders leads to increased Complex Order auctions and better 
opportunities for price improvement.
    The Exchange also believes it is reasonable, equitable and not 
unfairly discriminatory to only offer rebates to Customers and not 
other market participants. Customer Complex Order flow brings unique 
benefits to the marketplace in terms of liquidity and order 
interaction. It is an important Exchange function to provide an 
opportunity to all market participants to trade against Customer 
Complex Orders. The Exchange believes that it is equitable and not 
unfairly discriminatory to increase the current Customer Complex Order 
Rebate for Adding Liquidity to $0.32 per contract and create a new 
Customer Complex Order Rebate for Removing Liquidity of $0.06 per 
contract, because the Exchange will uniformly pay these rebates to all 
Customer orders from any member organization.
Fee for Removing Liquidity
    The Exchange believes that it is reasonable to increase the Complex 
Order Fees for Removing Liquidity for Directed Participants, Market 
Makers, Firms, Broker-Dealers and Professionals so that the Exchange 
can offer increased rebates to Customers. As previously noted, the 
Exchange is proposing to increase the Customer Complex Order Rebate for 
Adding Liquidity and offer a new Customer Complex Order Rebate for 
Removing Liquidity.
    The Exchange believes that it is equitable and not unfairly 
discriminatory to increase the Complex Order Fees for Removing 
Liquidity for Directed Participants, Market Makers, Firms, Broker-
Dealers and Professionals because, the Exchange is increasing these 
fees for all market participants, except Customers who are not assessed 
a fee, to position itself to offer greater Customer Complex Order 
rebates. The Exchange is consistently assessing lower Complex Order 
Fees for Removing Liquidity to Directed Participants and Market Makers 
as compared to Firms, Broker-Dealers and Professionals, because of the 
requisite quoting obligations applicable to Market Makers. Market 
Makers \14\ have burdensome quoting obligations to the market which do 
not apply to Firms, Professionals and Broker-Dealers. Also, Market 
Makers that receive Directed Orders \15\ have higher quoting 
obligations compared to other Market Makers and therefore are assessed 
a lower fee when they transact with a Customer order that was directed 
to them for execution as compared to Market Makers. Firms, Broker-
Dealers and Professionals are being assessed the same $0.38 per 
contract fees. Customers are not assessed a Fee for Removing Liquidity, 
as is the case on competing exchanges.\16\
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    \14\ See Rule 1014 titled ``Obligations and Restrictions 
Applicable to Specialists and Registered Options Traders.''
    \15\ See Rule 1014 titled ``Obligations and Restrictions 
Applicable to Specialists and Registered Options Traders.''
    \16\ See the Chicago Board Options Exchange Incorporated's 
(``CBOE'') Fees Schedule.
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    With respect to the proposed Complex Order Fees for Removing 
Liquidity for Directed Participant transactions as compared to Market 
Maker transactions, the Exchange provides a deeper analysis below and 
its basis for proposing a $0.32 per contract Complex Order Directed 
Participant Fee for Removing Liquidity and a $0.37 per contract Complex 
Order Market Maker Fee for Removing Liquidity. In summary, the 
Exchange's Fees for Removing Liquidity, for both Single contra-side and 
Complex Order transactions, for the Directed Participant categories are 
two cents lower than the Fees for Removing Liquidity for the Market 
Maker categories.\17\ As explained above, Market Makers that receive 
Directed Orders have higher quoting obligations as compared to other 
Market Makers and therefore are assessed a lower fee. The fee 
differentials today reflect the additional obligation of a Market Maker 
that accepts directed orders when compared to a Market Maker that does 
not accept directed orders for both Single contra-side and Complex 
Order transactions. The Exchange is now proposing to increase the 
differential between the Directed Participant and Market Maker 
transaction fees from $0.02 per contract to $0.05 per contract for 
Complex Order transactions to also reflect the increased costs that are 
incurred by such Market Makers that enter into order flow arrangements 
at a cost and without the benefit of a guaranteed allocation. Market 
Makers that accept Directed Orders transacting Single contra-side 
orders today are entitled to a guaranteed allocation which is why the 
Exchange is distinguishing between these types of orders in assessing 
fees between the Market Maker and Directed Participant categories. The 
Exchange will discuss below its rationale for why the proposal is 
reasonable, equitable and not unfairly discriminatory. The Exchange 
believes that in order to attract Customer Complex Orders in an 
intensely competitive environment it must continue to adjust its fees 
and rebates, which benefits all market participants for the good of 
investors.
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    \17\ Today, the Exchange assesses Directed Participants a fee of 
$0.36 per contract and Market Makers a fee of $0.38 per contract for 
Single contra-side transactions and the Exchange assesses Directed 
Participants a fee of $0.30 per contract and Market Makers a fee of 
$0.32 per contract for Complex Order transactions.
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The Directed Participants and Market Makers Categories
    Specialists, ROTs, SQTs and RSQTs are Market Makers. Such Market 
Makers may also be categorized as Directed Participants when such 
Market Makers execute against a Customer order directed to that Market 
Maker for execution by an Order Flow Provider (``OFP'').\18\ For 
example, Market Maker A is assessed the Directed Participant category 
fee for trading against a Customer order directed to it for execution 
by an OFP. Market Maker A is not assessed the Directed Participant 
category fee for executing a Customer order directed to different 
Market Maker, but rather is assessed the Market Maker category fee.\19\ 
It is important to note that a Market Maker, at the time of the trade, 
is unaware of the identity of the contra-party to the trade. In other 
words, it is only sometime after the trade occurs that the Market Maker 
learns whether the Market Maker or Directed Participant fees will be 
assessed on a particular transaction.\20\
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    \18\ The term ``Order Flow Provider'' (``OFP'') means any member 
or member organization that submits, as agent, orders to the 
Exchange. See Rule 1080(l)(i)(B).
    \19\ Neither a Market Maker nor a Directed Participant is 
entitled to a rebate for transacting a Customer Complex Order today.
    \20\ This distinction holds true today for Market Makers and 
Directed Participants executing either Single contra-side 
transactions (Part A of Section I of the Fee Schedule) or Complex 
Orders (Part B of Section of the Fee Schedule). When a Single 
contra-side transaction is executed against the individual 
components of a Complex Order, the Single contra-side part of the 
order will be subject to the fees in Part A of the Fee Schedule and 
the individual components will be subject to the fees in Part B.

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[[Page 15403]]

    The proposed amendments to the Fees for Removing Liquidity apply 
only to Complex Orders.\21\ Market Makers receive no allocation 
guarantee when a Customer Complex Order is directed to them by an OFP 
and the order is executed.\22\ Also, only Customer Complex Order flow 
which is directed to a Market Maker by an OFP and is executed by that 
particular Market Maker is eligible for the Directed Participant fees 
for Complex Orders.\23\ When a Market Maker executes against a Customer 
Complex Order the Market Maker may do so by responding to an 
auction,\24\ executing against an order on the Complex Order Book 
(``CBOOK''), or sweeping a resting Customer Complex Order.\25\ The 
Customer Complex Order may also be executed against existing quote and 
or limit orders on the limit order book for the individual components 
of the Complex Order.\26\ In each of these cases, the order will trade 
based on the best price or prices available pursuant to Exchange 
Rules.\27\ Therefore, in order to enjoy the benefits of trading against 
a directed Complex Customer order by receiving a lower transaction fee 
(the Directed Participant Complex Order Fee for Removing Liquidity), 
the transaction must: (i) Occur at the best price; and (ii) be 
directed, by an OFP, to the particular Market Maker that executed the 
order.
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    \21\ The Exchange is not proposing to amend the fees in Section 
I, Part A applicable to Single contra-side transactions.
    \22\ Complex Orders can be distinguished from Single contra-side 
transactions with respect to allocation guarantees applicable to 
Directed Specialists, Directed ROTs, Directed SQTs and Directed 
RSQTs pursuant to Rule 1014(g)(viii). Directed Specialists, Directed 
ROTs, Directed SQTs and Directed RSQTs are guaranteed a 40% 
allocation with respect to Single contra-side transactions eligible 
as a Directed Order.
    \23\ All other types of directed non-Customer order flow is not 
eligible for Directed Participant pricing.
    \24\ The Complex Order Live Auction (``COLA'') is the auction 
for eligible Complex Orders. See Rule 1080, Commentary .08.
    \25\ A COLA Sweep is when a Phlx XL participant bids and/or 
offers on either or both sides of the market during the COLA Timer 
(a timing mechanism which is a counting period not to exceed 5 
seconds) by submitting one or more bids or offers that improve the 
cPPBO (the best net debit or credit price for a Complex Order 
Strategy based on the PBBO for individual components of such Complex 
Order Strategy). See Rule 1080, Commentary .08.
    \26\ In this scenario the Customer order is ``legged'' against 
interest present in the disseminated market.
    \27\ See Rule 1080.
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    Currently, on the Exchange, an average of 14.5% of Customer Complex 
directed orders trade with the Market Maker to which they are 
directed.\28\ All market participants may compete equally for Customer 
Complex Order executions, even if that Customer Complex Order is 
directed to a specific Market Maker. All Market Makers have the ability 
to incentivize an OFP to direct or preference an order if they desire 
to enter into, for example, a payment for order flow arrangement with 
an OFP. A Market Maker that pays for such Customer Complex Order flow 
cannot control whether it executes an order directed to it, because 
that Market Maker must compete equally against other market 
participants and as previously stated must be at the best price. While 
all market participants enjoy the benefits of the liquidity that such 
order flow brings to the market, not all market participants incur the 
additional expense of paying an OFP for such order flow. The Exchange 
believes that this additional expense should be considered in assessing 
fees to Market Makers that attract directed order flow to the Exchange 
for the benefit of all market participants.
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    \28\ This statistic is based on Customer Complex Order data from 
September 2011 to January 2012 and ranges from (7.2% to 17.94%). 
During this period, Customer Complex Orders received by the Exchange 
were directed on average at least 95% of the time.
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    A Market Maker that executes a Customer Complex Order on a non-
directed basis pays a fee of $0.32 per contract today (Market Maker 
Complex Order Fee for Removing Liquidity). A Market Maker that executes 
a Customer Complex Order on a directed basis pays a fee of $0.30 per 
contract today (Directed Participant Complex Order Fee for Removing 
Liquidity) plus the additional cost associated with the order flow. The 
Exchange believes that the Customer Complex Order rebates may partially 
compensate Market Makers for payments they owe to the OFP for the 
Customer order flow.
    The Exchange believes it is reasonable, equitable and not unfairly 
discriminatory to raise the Market Maker Complex Order Fee for Removing 
Liquidity from $0.32 to $0.37 per contract and raise the Directed 
Participant Complex Order Fee for Removing Liquidity from $0.30 to 
$0.32 per contract. Generally, a Market Maker will be assessed the 
Market Maker Fee for Removing Liquidity in Complex Orders when the 
Market Maker is not executing a Customer order intended for that Market 
Maker. Moreover, in a given month the effective Complex Order Fee for 
Removing Liquidity for a Market Maker that also has executions subject 
to the Directed Participant rate is approximately $0.02 below the 
Market Maker Complex Order Fee for Removing Liquidity.\29\
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    \29\ For example if a Market Maker, that is the intended 
recipient of a Customer Complex Order, only executes the Customer 
Complex Order 14.5% of the time (paying the Directed Participant 
Complex Order fee of $0.32 per contract), then that Market Maker is 
paying the proposed Market Maker Complex Order fee of $0.37 per 
contract the other 85.5% of the time. The effective Complex Order 
Fee for Removing Liquidity for that Market Maker is $0.3613 in a 
given month, less than $0.01 below the rate paid by a Market Maker 
that never receives a Customer Complex Order directed to it for 
execution. Approximately 80% of Market Makers executing Customer 
Complex Orders receive an order directed to it for execution.
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    The Exchange bases its belief that the proposed fees are 
reasonable, in part, on an analysis of the level of price improvement 
currently received by Customer Complex Orders trading in an auction 
process. Based on an analysis of the week of October 10, 2011, Customer 
Complex Orders received price improvement 29% of the time and the 
average level of price improvement was $0.059 per option or $5.90 per 
contract for options receiving price improvement. Market Makers compete 
in offering price improvement in auctions. The significant difference 
in magnitude between the proposed $0.03 per contract increased fee 
differential (between Market Makers and Directed Participants) and the 
extent of price improvement supports the Exchange's belief that the 
proposed fee is reasonable and will have a negligible impact on 
Directed and non-Directed Market Makers.
New Volume Discount
    The Exchange is further incentivizing Market Makers by providing an 
opportunity to lower the Market Maker and Directed Participant Complex 
Order Fees for Removing Liquidity, as applicable, when a Market Maker 
executes more than 25,000 Complex Order contracts (either adding or 
removing liquidity) per day in a month. The Exchange proposes to 
reduce, by $0.01 per contract, the Market Maker and Directed 
Participant Complex Order Fees for Removing Liquidity, as applicable on 
all of their transactions for the month (``Added Incentive''). The 
Exchange believes that the Added Incentive will encourage all Market 
Makers to transact additional order flow at the Exchange because of the 
fee reduction. All Market Maker Complex Order contracts will be counted 
toward the 25,000 contracts per day in a month. The Exchange also 
believes that this Added Incentive to Market Makers that pay for 
directed orders will encourage those Market Makers to continue to pay 
for such orders and provide liquidity to

[[Page 15404]]

the market even without a guaranteed allocation in Complex Orders, 
because the Added Incentive would benefit Market Makers whether 
directed or not, but, in the instance the Market Maker is assessed a 
Directed Participant fee, the benefit is greater. The Exchange believes 
that its proposal to allow Market Makers to aggregate trading activity 
where there is at least 75% common ownership between member 
organizations is reasonable, because this would allow member 
organizations to also obtain the Added Incentive by combining 
transaction fees where the common ownership is met. The Exchange 
currently permits such aggregation in the calculation of the Monthly 
Market Maker Cap.\30\ The Exchange believes that permitting member 
organizations with at least 75% common ownership to aggregate fees to 
obtain the Added Incentive is equitable and not unfairly discriminatory 
because the ability to aggregate would apply uniformly to all member 
organizations that are at least 75% commonly owned, but chose to 
operate under separate entities.
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    \30\ See Section II of the Exchange's Fee Schedule.
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    The Exchange desires to continue to encourage Market Makers to 
enter into order flow arrangements by assessing a lower Directed 
Participant Fee for Removing Liquidity, as compared to the Market Maker 
Fee for Removing Liquidity. The Exchange believes that offering a 
Directed Participant fee that is a lower Fee for Removing Liquidity 
than the Market Maker Fee to Remove Liquidity offsets costs incurred by 
these Market Markers that pay for order flow and assume the risk of 
possibly being assessed the same Fee for Removing Liquidity as a Market 
Maker who did not enter into similar arrangements. Today, options 
exchanges aggressively compete for Complex order flow. In January 2012, 
based on data from the Options Price Reporting Authority (``OPRA''), 
the average daily equity options complex order transactions on the 
various option exchanges totaled 117,539. The combined total for the 
last six months of 2011 was 593,286. With respect to market share, the 
six options exchanges handling complex orders had market share in 
complex orders ranging from 2.4% to 40.1% in January 2012.
    The benefit that a Market Maker brings to the Exchange when it pays 
for order flow is not an insignificant one and this benefit should not 
go unrewarded. Market Makers who pay for order flow must still compete 
for that order flow with other Exchange participants in order to reap 
benefits. This competition provides the Exchange greater execution 
quality, which also benefits all participants.
    The Exchange believes that the proposed Market Maker and Directed 
Participant Complex Order Fees for Removing Liquidity and the Added 
Incentive are reasonable, equitable and not unfairly discriminatory 
because: (i) Market Makers are not entitled to guaranteed allocations 
for directed Complex Orders; \31\ (ii) all Market Makers have an equal 
opportunity to incentivize an OFP to direct an order to it for 
execution on the Exchange; (iii) only Customer orders that are directed 
by an OFP and executed by the intended Market Maker receive the Complex 
Order Directed Participant fee; \32\ (iv) the proposed Directed 
Participant and Market Maker Complex Order fees are less than the fees 
assessed to Firms, Professionals and Broker-Dealers because of 
obligations carried by those Market Makers which do not burden other 
participants; (v) Market Makers are unaware of the identity of the 
contra-party at the time of the trade and are also required to execute 
at the best price, pursuant to Exchange Rules, against an order 
intended for them by an OFP in order to be assessed the Directed 
Participant Complex Order Fee for Removing Liquidity (the only benefit) 
which does not happen more than 80% of the time; (vi) order flow 
arrangements benefit all market participants equally through added 
liquidity; and (vii) the Added Incentive will further encourage Market 
Makers to respond more aggressively in the COLA, with respect to 
Customer orders, and sweep resting orders in CBOOK thereby improving 
execution quality of Customer Complex Orders.
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    \31\ Unlike Complex Orders, Single contra-side orders are 
governed by Rule 1014. Specifically, Directed Orders that are 
executed electronically shall be automatically allocated as follows: 
(A) First, to customer limit orders resting on the limit order book 
at the execution price; (B) Thereafter, contracts remaining in the 
Directed Order, if any, shall be allocated automatically as follows: 
(1) The Directed Specialist (where applicable), shall be allocated a 
number of contracts that is the greater of: (a) the proportion of 
the aggregate size at the NBBO associated with such Directed 
Specialist's quote, SQT and RSQT quotes, and non-SQT ROT limit 
orders entered on the book at the disseminated price represented by 
the size of the Directed Specialist's quote; (b) the Enhanced 
Specialist Participation as described in Rule 1014(g)(ii); or (c) 
40% of the remaining contracts. See Rule 1014(g)(viii). Thereafter, 
SQTs and RSQTs quoting at the disseminated price, and non-SQT ROTs 
that have placed limit orders on the limit order book via electronic 
interface at the Exchange's disseminated price shall be allocated 
contracts according to a formula specified in Rule 1014(g)(viii). If 
any contracts remain to be allocated after the specialist, SQTs, 
RSQTs and non-SQT ROTs with limit orders on the limit order book 
have received their respective allocations, off-floor broker-dealers 
(as defined in Rule 1080(b)(i)(C)) that have placed limit orders on 
the limit order book which represent the Exchange's disseminated 
price shall be entitled to receive a number of contracts that is the 
proportion of the aggregate size associated with off-floor broker-
dealer limit orders on the limit order book at the disseminated 
price represented by the size of the limit order they have placed on 
the limit order book.
    \32\ Other markets discount their directed fee for other classes 
of market participants in addition to customers. For example, NYSE 
Amex assesses a an [sic] options market maker that is non directed a 
fee of $0.17 per contract and am [sic] options market maker that is 
directed a fee of $0.15 per contract. See NYSE Amex's Fee Schedule. 
Phlx only assesses the Directed Participant Fee for Removing 
Liquidity with respect to Customer orders.
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    The Exchange operates in a highly competitive market, comprised of 
nine 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 offered to be insufficient. 
Accordingly, the fees that are assessed by the Exchange and the rebates 
it pays for options overlying the various Select Symbols in Complex 
Orders must remain competitive with fees and rebates charged/paid by 
other venues and therefore must continue to be reasonable and equitably 
allocated to those members that opt to direct orders to the Exchange 
rather than competing venues.

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.

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\ 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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    \33\ 15 U.S.C. 78s(b)(3)(A)(ii).

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[[Page 15405]]

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

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#c9bbbca5ace4aaa6a4a4aca7bdba89baacaae7aea6bf"><span class="__cf_email__" data-cfemail="9defe8f1f8b0fef2f0f0f8f3e9eeddeef8feb3faf2eb">[email protected]</span></a>. Please include 
File Number SR-Phlx-2012-27 on the subject line.

Paper Comments

    <bullet> Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2012-27. 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 
a.m. and 3 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-2012-27 and should be 
submitted on or before April 5, 2012.

    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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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-6229 Filed 3-14-12; 8:45 am]
BILLING CODE 8011-01-P


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