Document ID: SEC-2012-0636-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Qualified Contingent Cross Orders
Posted Date: 2012-04-19T04:00Z

[Federal Register Volume 77, Number 76 (Thursday, April 19, 2012)]
[Notices]
[Pages 23521-23524]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-9404]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66800; File No. SR-Phlx-2012-47]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
Qualified Contingent Cross Orders

April 12, 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 April 2, 2012, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its Pricing Schedule to increase a 
rebate for Qualified Contingent Cross orders.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqtrader.com/micro.aspx?id=PHLXRulefilings, 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to increase a certain 
rebate applicable to both electronic QCC Orders (``eQCC'') \3\ and 
Floor QCC Orders \4\ (collectively ``QCC Orders''). The Exchange 
believes that offering an increased rebate for executing in excess of 
1,000,000 QCC Orders in a given month should create an additional 
incentive for market participants to execute a greater number of QCC 
Orders on the Exchange in Multiply Listed Securities.
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    \3\ A QCC Order is comprised of an order to buy or sell at least 
1000 contracts that is identified as being part of a qualified 
contingent trade, as that term is defined in Rule 1080(o)(3), 
coupled with a contra-side order to buy or sell an equal number of 
contracts. The QCC Order must be executed at a price at or between 
the National Best Bid and Offer and be rejected if a Customer order 
is resting on the Exchange book at the same price. A QCC Order shall 
only be submitted electronically from off the floor to the PHLX XL 
II System. See Rule 1080(o). See also Securities Exchange Act 
Release No. 64249 (April 7, 2011), 76 FR 20773 (April 13, 2011) (SR-
Phlx-2011-47) (a rule change to establish a QCC Order to facilitate 
the execution of stock/option Qualified Contingent Trades (``QCTs'') 
that satisfy the requirements of the trade through exemption in 
connection with Rule 611(d) of the Regulation NMS).
    \4\ A Floor QCC Order must: (i) Be for at least 1,000 contracts; 
(ii) meet the six requirements of Rule 1080(o)(3) which are modeled 
on the QCT Exemption; (iii) be executed at a price at or between the 
National Best Bid and Offer (``NBBO''); and (iv) be rejected if a 
Customer order is resting on the Exchange book at the same price. In 
order to satisfy the 1,000-contract requirement, a Floor QCC Order 
must be for 1,000 contracts and could not be, for example, two 500-
contract orders or two 500-contract legs. See Rule 1064(e). See also 
Securities Exchange Act Release No. 64688 (June 16, 2011), 76 FR 
36606 (June 22, 2011) (SR-Phlx-2011-56).
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    There are currently several categories of market participants: 
Customers, Market Makers,\5\ Directed Participants,\6\ Broker-Dealers, 
Firms and Professionals.\7\ The Exchange proposes to amend the current 
rebates applicable to both eQCC Orders and Floor QCC Orders for the 
above categories of market participants. The proposed amendment is 
applicable to both Sections I \8\ and II \9\ of the Pricing Schedule. 
Currently, the Exchange pays a rebate of $0.07 per contract on all 
qualifying executed QCC Orders up to 1,000,000 contracts in a month. In 
addition, if a member exceeds 1,000,000 contracts in a month of 
qualifying executed QCC Orders, the Exchange currently pays a rebate of 
$0.10 per contract on all qualifying executed QCC Orders, both eQCC and 
Floor QCC Orders, in a given month.\10\ The

[[Page 23522]]

Exchange does not offer a rebate on executed eQCC Orders or Floor QCC 
Orders where the transaction is either: (i) Customer-to-Customer; or 
(ii) a dividend,\11\ merger \12\ or short stock interest strategy \13\ 
and executions subject to the Reversal and Conversion Cap.\14\
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    \5\ A ``Market Maker'' includes Specialists (see Rule 1020) and 
Registered Options Traders (``ROTs'') (Rule 1014(b)(i) and (ii), 
which includes Streaming Quote Traders (``SQTs'') (see Rule 
1014(b)(ii)(A)) and Remote Streaming Quote Traders (``RSQTs'') (see 
Rule 1014(b)(ii)(B)). Directed Participants are also Market Makers.
    \6\ A Directed Participant is a Specialist, SQT, or RSQT that 
executes a customer order that is directed to them by an Order Flow 
Provider and is executed electronically on PHLX XL II.
    \7\ The Exchange defines a ``professional'' as 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) 
(hereinafter ``Professional'').
    \8\ Section I of the Pricing Schedule is entitled ``Rebates and 
Fees for Adding and Removing Liquidity in Select Symbols.'' The 
Section I fees and rebates are applicable to certain Select Symbols 
which are defined in that section.
    \9\ Section II of the Pricing Schedule is entitled ``Equity 
Options Fees.'' Section II includes options overlying equities, 
ETFs, ETNs, indexes and HOLDRS which are Multiply Listed.
    \10\ QCC Transaction Fees for a Market Maker, Professional, Firm 
and Broker-Dealer are $0.20 per contract. QCC Transaction Fees apply 
to QCC Orders, as defined in Exchange Rule 1080(o), and Floor QCC 
Orders, as defined in 1064(e).
    \11\ A dividend strategy is defined as transactions done to 
achieve a dividend arbitrage involving the purchase, sale and 
exercise of in-the-money options of the same class, executed the 
first business day prior to the date on which the underlying stock 
goes ex-dividend. See Section II of the Pricing Schedule.
    \12\ A merger strategy is defined as transactions done to 
achieve a merger arbitrage involving the purchase, sale and exercise 
of options of the same class and expiration date, executed the first 
business day prior to the date on which shareholders of record are 
required to elect their respective form of consideration, i.e., cash 
or stock. See Section II of the Pricing Schedule.
    \13\ A short stock interest strategy is defined as transactions 
done to achieve a short stock interest arbitrage involving the 
purchase, sale and exercise of in-the-money options of the same 
class. See Section II of the Pricing Schedule.
    \14\ Market Maker, Professional, Firm and Broker-Dealer equity 
options transaction fees are capped at $1,000 per day for reversal 
and conversion strategies executed on the same trading day in the 
same options class.
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    The Exchange proposes to increase the current rebate paid to a 
member that exceeds 1,000,000 contracts in a month of qualifying 
executed QCC Orders, both eQCC and Floor QCC Orders, from $0.10 per 
contract to $0.11 per contract to further incentivize members to 
execute a greater number of QCC Orders on the Exchange. For example, if 
a member executed 1,200,000 QCC Orders in April 2012, and those QCC 
Orders were eligible orders in that they did not include Customer-to-
Customer transactions or dividend, merger or short stock interest 
strategies or executions subject to the Reversal and Conversion Cap, 
that member would receive a rebate of $0.11 per contract on all 
1,200,000 orders for April 2012. Therefore, depending on the number of 
executed eligible QCC Orders, a member would receive either a $0.07 or 
$0.11 per contract rebate on all qualifying QCC Orders in a given 
month.
    With respect to a Floor QCC Order, the Exchange will continue to 
offer the rebate to the Floor Broker. The Exchange will continue to pay 
a rebate of $0.07 per contract on all qualifying executed QCC Orders up 
to 1,000,000 contracts in a month; the Exchange is not amending the 
$0.07 rebate. The current exceptions to qualifying QCC Orders will 
remain the same.\15\ Currently, QCC Transaction Fees apply to Sections 
I and II of the Pricing Schedule and are subject to the Monthly Firm 
Fee Cap \16\ and the Monthly Market Maker Cap.\17\ This will also 
remain the same.
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    \15\ The following transactions are not eligible for the $0.07 
per contract rebate: (i) Customer-to-Customer; or (ii) a dividend, 
merger or short stock interest strategy and executions subject to 
the Reversal and Conversion Cap (as defined in Section II).
    \16\ Firms are subject to a maximum fee of $75,000 (``Monthly 
Firm Fee Cap''). Firm equity option transaction fees and QCC 
Transaction Fees in the aggregate, for one billing month may not 
exceed the Monthly Firm Fee Cap per member organization when such 
members are trading in their own proprietary account. All dividend, 
merger, short stock interest and reversal and conversion strategy 
executions are excluded from the Monthly Firm Fee Cap. In addition, 
Market Makers that (i) are on the contra-side of an electronically-
delivered and executed Customer order; and (ii) have reached the 
Monthly Market Maker Cap will be assessed a $0.07 per contract fee, 
excluding PIXL Orders. For QCC Orders as defined in Exchange Rule 
1080(o), and Floor QCC Orders, as defined in 1064(e), a Service Fee 
of $0.07 per side will apply once a Market Maker has reached the 
Monthly Market Maker Cap. This $0.07 Service Fee will apply to every 
contract side of the QCC Order and Floor QCC Order after a Market 
Maker has reached the Monthly Market Maker Cap. The Service Fee will 
not be assessed to a Market Maker that does not reach the Monthly 
Market Maker Cap in a particular calendar month.
    \17\ Market Makers are currently subject to a Monthly Market 
Maker Cap of $550,000. The trading activity of separate Market Maker 
member organizations will be aggregated in calculating the Monthly 
Market Maker Cap if there is at least 75% common ownership between 
the member organizations. In addition, Market Makers that (i) are on 
the contra-side of an electronically-delivered and executed Customer 
order; and (ii) have reached the Monthly Market Maker Cap will be 
assessed a $0.07 per contract fee.
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2. Statutory Basis
    The Exchange believes that its proposal to amend its Pricing 
Schedule is consistent with Section 6(b) of the Act \18\ in general, 
and furthers the objectives of Section 6(b)(4) of the Act \19\ in 
particular, in that it is an equitable allocation of reasonable fees 
and other charges among Exchange members. The Exchange also believes 
that there is an equitable allocation of reasonable rebates among 
Exchange members.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that it is reasonable to incentivize members 
to transact both eQCC Orders and Floor QCC Orders in Multiply Listed 
securities \20\ by continuing to pay a tiered rebate of $0.07 per 
contract on all qualifying executed QCC Orders up to 1,000,000 
contracts in a month and to increase the rebate for members with 
qualifying executed QCC Orders exceeding 1,000,000 contracts in a month 
from $0.10 per contract to $0.11 per contract. The Exchange believes 
that increasing the rebate for qualifying QCC Orders exceeding 
1,000,000 contracts in a month from $0.10 to $0.11 per contract is 
reasonable because the Exchange would continue to pay a rebate on every 
executed contract QCC Order, as is the case today, while also 
incentivizing members to execute more than 1,000,000 qualifying 
executed QCC Orders to achieve a higher rebate on all contracts in a 
month. In other words, the proposal offers members an incentive to send 
a greater number of QCC Orders, while still paying a $0.07 rebate below 
1,000,000 contracts. The proposed increased rebate is within the range 
of rebates paid by other exchanges \21\ and balances the Exchange's 
desire to incentivize its members to send order flow to the Exchange 
while considering the costs attributable to offering such rebates. 
Further, all members have equal opportunity, depending on their chosen 
business model, to earn rebates for executing QCC Orders on the 
Exchange.
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    \20\ The rebate does not apply to Singly Listed Securities. For 
purposes of this filing, a Singly Listed Option means an option that 
is only listed on the Exchange and is not listed by any other 
national securities exchange or is otherwise defined as a Singly 
Listed Option in the Pricing Schedule. See Section III of the 
Exchange's Pricing Schedule entitled ''Singly Listed Options.''
    \21\ See NYSE Arca, Inc.'s (``NYSE Arca'') Fee Schedule. NYSE 
Arca pays a $0.10 per contract rebate for executed QCC orders 
entered by a Floor Broker. The Floor Broker Rebate for executed 
orders is $0.05 per contract side.
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    The Exchange believes that it is equitable and not unfairly 
discriminatory to increase the rebate for executed QCC Orders to $0.11 
per contract because all market participants will continue to be 
eligible for the $0.07 rebate on qualifying QCC Orders, as they are 
today, unless they are able to exceed 1,000,000 contracts of qualifying 
executed QCC Orders in a given month, then the member would be entitled 
to a higher rebate of $0.11 per contract on all qualifying executed QCC 
Orders. This benefit is intended to incentivize members to transact a 
greater number of qualifying QCC Orders in order to take advantage of 
the higher rebate. Additionally, the proposed rebate increase is within 
the range of tiered rebates offered by the International Securities 
Exchange, LLC (``ISE'').\22\

[[Page 23523]]

Also, all members are equally eligible to transact Multiply Listed 
securities.
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    \22\ See ISE's Schedule of Fees. ISE provides a rebate to 
members who reach a certain volume threshold in QCC orders and/or 
solicitation orders during a month. Once a member reaches the volume 
threshold, ISE pays a rebate to that member for all qualified 
contingent cross and solicitation traded contracts for that month. 
The rebate is paid to the member entering a qualifying order, i.e., 
a qualified contingent cross order and/or a solicitation order. The 
rebate applies to qualified contingent cross orders and solicitation 
orders in all symbols traded on the Exchange. Additionally, the 
threshold levels are based on the originating side. Specifically, 
the following rebates apply: for 0-199,999 originating contract 
sides ISE pays no rebate; for 200,000 to 999,999 originating 
contract sides ISE pays $0.05 per contract; for 1,000,000 to 
1,599,999 originating contract sides ISE pays $0.08 per contract; 
and for 1,600,000+ originating contract sides ISE pays $0.10 per 
contract.
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    The Exchange believes it continues to be reasonable to not offer a 
rebate for eQCC Orders and Floor QCC Orders for Customer-to-Customer 
executions because members executing Customer orders are not assessed a 
QCC Transaction Fee \23\ and therefore do not need to be incentivized 
to send QCC Orders to the Exchange. Likewise, the Exchange believes 
that it is reasonable to not offer a rebate for dividend, merger and 
short stock interest strategies and executions subject to the Reversal 
and Conversion Cap because the Exchange already provides a cap today on 
the transaction fees associated with these strategies and therefore 
does not believe an additional incentive is required.
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    \23\ Market Makers, Professionals, Firms and Broker-Dealers are 
assessed a QCC Transaction Fee of $0.20 per contract.
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    With respect to the Floor QCC Order, the Exchange will also 
continue to offer the rebate to the Floor Broker, including the 
proposed increase. The Floor Broker is in receipt of the Floor QCC 
Orders and enters those orders into the Floor Broker Management System 
(``FBMS'').\24\ The Exchange believes it is necessary from a 
competitive standpoint to offer this rebate to the executing Floor 
Broker on a Floor QCC Order. The Exchange expects that the rebate 
offered to executing Floor Brokers will allow them to continue to price 
their services at a level that will enable them to attract Floor QCC 
order flow from participants who would otherwise enter these orders 
electronically from off the floor to the PHLX XL II System \25\ or 
choose another exchange. To the extent that Floor Brokers are able to 
attract these Floor QCC Orders, they will gain important information 
that will allow them to solicit the parties to the Floor QCC Orders for 
participation in other trades, which will in turn benefit all other 
Exchange participants through the additional liquidity and price 
discovery that may occur as a result. The Exchange believes that it 
continues to be equitable and not unfairly discriminatory to pay the 
rebate for Floor QCC Orders to Floor Brokers because the rebate would 
uniformly apply to all Floor QCC Orders entered by a Floor Broker into 
FBMS for execution based on volume. The rebate is not unfairly 
discriminatory to firms that enter eQCC Orders directly into PHLX XL 
II, because the transaction fees and rebates are the same whether the 
order is entered electronically or through a Floor Broker. In addition, 
pursuant to Exchange Rule 1080(o)(3), only Floor Brokers may enter a 
Floor QCC Order from the floor of the Exchange; therefore, providing 
the rebate to Floor Brokers does not discriminate against eQCC orders 
entered into PHLX XL II. Any participant is able to engage a rebate-
receiving Floor Broker in a discussion surrounding the appropriate 
level of fees that they may be charged for entrusting the entry of the 
Floor QCC Order to the Floor Broker into FBMS for execution. The 
additional order flow attracted by this rebate should benefit all 
participants. The rebate is meant to assist Floor Brokers to recruit 
business on an agency basis. The Floor Broker may use all or part of 
the rebate to offset its fees.
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    \24\ See Exchange Rule 1063(e).
    \25\ In May 2009 the Exchange enhanced the system and adopted 
corresponding rules referring to the system as ``Phlx XL II.'' See 
Securities Exchange Act Release No. 59995 (May 28, 2009), 74 FR 
26750 (June 3, 2009) (SR-Phlx-2009-32).
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    The Exchange operates in a highly competitive market comprised of 
nine U.S. options exchanges in which sophisticated and knowledgeable 
market participants readily can, and do, send order flow to competing 
exchanges if they deem fee levels and rebate opportunities at a 
particular exchange to be excessive. The Exchange believes that the 
proposed rebates for eQCC Orders and Floor QCC Orders must be 
competitive with rebates offered at other options exchanges. The 
Exchange believes that this competitive marketplace impacts the rebates 
and fees present on the Exchange today and influences the proposals set 
forth above.

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.\26\ 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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    \26\ 15 U.S.C. 78s(b)(3)(A)(ii).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File No. SR-Phlx-2012-47 on the subject line.

Paper Comments

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

All submissions should refer to File No. SR-Phlx-2012-47. 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 such 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

[[Page 23524]]

information that you wish to make available publicly. All submissions 
should refer to File No. SR-Phlx-2012-47 and should be submitted on or 
before May 10, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-9404 Filed 4-18-12; 8:45 am]
BILLING CODE 8011-01-P