Document ID: SEC-2010-0729-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX, Inc.
Posted Date: 2010-05-17T04:00Z

[Federal Register: May 17, 2010 (Volume 75, Number 94)]
[Notices]
[Page 27611-27613]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17my10-108]

[[Page 27611]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62069; File No. SR-Phlx-2010-66]

Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change Relating to
Equity Option Fees

May 10, 2010.
    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 30, 2010, NASDAQ OMX PHLX, Inc. (``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 the Exchange's Fee Schedule
applicable to equity options fees by: (i) Adopting an options
transaction charge and options surcharge for non-electronically
delivered orders for options transactions by Registered Options Traders
(on-floor) and Specialists; (ii) amending the current options
transaction charge for Registered Options Traders (on-floor) and
Specialists and applying that charge and the options surcharge to
electronically delivered orders; and (iii) creating an options
transaction charge for option orders in the penny pilot program
(``Penny Pilot'') \3\ that are electronically delivered. The Exchange
also proposes making a technical clarification. The text of the
proposed rule change is available on Phlx's Web site at http://
www.nasdaqtrader.com, on the Commission's Web site at http://
www.sec.gov, and at the Commission's Public Reference Room.
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    \3\ The Penny Pilot was established in January 2007; and in
October 2009, it was expanded and extended through December 31,
2010. See Securities Exchange Act Release Nos. 55153 (January 23,
2007), 72 FR 4553 (January 31, 2007) (SR-Phlx-2006-74) (approval
order establishing Penny Pilot); 60873 (October 23, 2009), 74 FR
56675 (November 2, 2009) (SR-Phlx-2009-91) (expanding and extending
Penny Pilot); 60966 (November 9, 2009), 74 FR 59331 (November 17,
2009) (SR-Phlx-2009-94) (adding seventy-five classes to Penny
Pilot); and 61454 (February 1, 2010), 75 FR 6233 (February 8, 2010)
(SR-Phlx-2010-12) (adding seventy-five options classes to the Penny
Pilot). See also Exchange Rule 1034.
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II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements
concerning the purpose of, and basis for, the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant aspects of such
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to amend Category II of
the Fee Schedule, Equity Option Fees, to create separate fees for
electronically delivered versus non-electronically delivered orders of
Registered Options Traders (on-floor) and Specialists. A transaction
resulting from an order that was electronically delivered \4\ utilizes
Phlx XL II.\5\ A transaction resulting from an order that is non-
electronically-delivered is represented on the trading floor by a floor
broker.\6\ All orders will be either electronically or non-
electronically delivered.
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    \4\ Electronically delivered orders do not include orders
delivered through the Floor Broker Management System.
    \5\ See Exchange Rules 1014 and 1080.
    \6\ See Exchange Rule 1063.
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    The Exchange currently categorizes its broker-dealer fees by
electronically and non-electronically delivered orders.\7\ The Exchange
proposes to create these new fee categories for Registered Options
Traders and Specialists orders. The Exchange is creating these new fee
categories in further recognition of the distinction between the floor
order entry model and the electronic model and also in response to
competition along the same lines.
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    \7\ Specifically, broker-dealers are assessed an options
transaction charge of $.45 per contract fee [sic] for electronically
delivered orders and an options transaction charge of $.25 per
contract for non-electronically delivered orders.
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Electronically Delivered
    The Exchange is proposing to adopt fees for electronically
delivered orders. The Exchange proposes to amend its current equity
options fees to Registered Options Traders (on-floor) and Specialists
by titling those fees as ``Electronically Delivered.''
    The Exchange currently assesses two types of equity options
transaction charges on Registered Options Traders (on-floor) and
Specialists: (i) A $.22 per contract options transaction charge; and
(ii) a $.15 per contract options surcharge for executions in options on
the Russell 2000[supreg] Index (the ``Full Value Russell Index'' or
``RUT''), options on the one-tenth value Russell 2000[supreg] Index \8\
(the ``Reduced Value Russell Index'' or ``RMN''), options on the Nasdaq
100 Index \9\ traded under the symbol NDX (``NDX'') and options on the
one-tenth value of the Nasdaq 100 Index traded under the symbol MNX
(``MNX''). The Exchange proposes increasing its current $.22 per
contract options transaction charge to $.23 per contract and amending
the title of this fee to ``Options Transaction Charge (non-Penny
Pilot)'' to indicate this fee would be applicable to Registered Options
Traders (on-floor) and Specialists for a transaction resulting from an
order that was electronically delivered and not in the Penny Pilot. In
addition, the Exchange proposes to adopt a $.22 transaction charge for
Penny Pilot options classes for transactions resulting from an order
that was electronically delivered. The Exchange does not propose to
amend the options surcharge for RUT, RMN, MNX or NDX for electronically
delivered orders.
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    \8\ Russell 2000[supreg] is a trademark and service mark of the
Frank Russell Company, used under license. Neither Frank Russell
Company's publication of the Russell Indexes nor its licensing of
its trademarks for use in connection with securities or other
financial products derived from a Russell Index in any way suggests
or implies a representation or opinion by Frank Russell Company as
to the attractiveness of investment in any securities or other
financial products based upon or derived from any Russell Index.
Frank Russell Company is not the issuer of any such securities or
other financial products and makes no express or implied warranties
of merchantability or fitness for any particular purpose with
respect to any Russell Index or any data included or reflected
therein, nor as to results to be obtained by any person or any
entity from the use of the Russell Index or any data included or
reflected therein.
    \9\ NASDAQ(R), NASDAQ-100(R) and NASDAQ-100 Index(R) are
registered trademarks of The NASDAQ OMX Group, Inc. (which with its
affiliates are the ``Corporations'') and are licensed for use by
Phlx in connection with the trading of options products based on the
NASDAQ-100 Index(R). The options products have not been passed on by
the Corporations as to their legality or suitability. The options
products are not issued, endorsed, sold, or promoted by the
Corporations. The Corporations make no warranties and bear no
liability with respect to the options products.
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Non-Electronically Delivered
    The Exchange is proposing to adopt fees for non-electronically
delivered orders. The Exchange proposes to adopt a transaction charge
for Registered

[[Page 27612]]

Options Traders (on-floor) and Specialists (in Category II, Equity
Option Fees) applicable to non-electronically delivered orders and
titling those fees ``Non-Electronically Delivered.'' The Exchange
proposes to assess a $.25 per contract transaction charge on Registered
Options Traders (on-floor) and Specialists for transactions resulting
from an order that was non-electronically delivered. The Exchange also
proposes to continue to assess Registered Options Traders (on-floor)
and Specialists an options surcharge in RUT, RMN, MNX and NDX of .15
per contract for orders that are non-electronically delivered.
    Currently, the equity options transaction charge applicable to
Registered Options Traders (on-floor) and Specialists is subject to a
$650,000 monthly Cap (``Monthly Cap''). The options transaction charges
for electronically delivered Penny and non-Penny Pilot options classes
applicable to Registered Options Traders (on-floor) and Specialists are
proposed to be subject to the Monthly Cap. The non-electronically
delivered options transaction charge will also be subject to the
Monthly Cap.
    Finally, the Exchange proposes to amend the Professional equity
options fee by adding the words ``per contract'' after the $.20 fee.
These words were inadvertently omitted from a previous filing.\10\
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    \10\ See Securities Exchange Act Release No. 61905 (April 14,
2010), 75 FR 20871 (April 21, 2010) (SR-Phlx-2010-55).
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    While changes to the Exchange's Fee Schedule pursuant to this
proposal are effective upon filing, the Exchange has designated this
proposal to be operative for trades settling on or after May 3, 2010.
2. Statutory Basis
    The Exchange believes that its proposal to amend its Fee Schedule
is consistent with Section 6(b) of the Act \11\ in general, and
furthers the objectives of Section 6(b)(4) of the Act \12\ in
particular, in that it is an equitable allocation of reasonable fees
and other charges among Exchange members.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that its proposal to categorize orders as
electronically and non-electronically delivered is consistent with the
statute. First, it is consistent with our long-standing Fee Schedule
which has been amended from time to time. The Exchange has categorized
its broker-dealer transaction charges in a similar manner since
2006.\13\ The Exchange has two different methods of handling orders.
The non-electronic model is one that is represented on the trading
floor by a floor broker. An electronic order is an entirely different
model. Those orders are entered by members who are connected to the
Phlx XL II system. These members are assessed different rates because
the Exchange operates two different models, a floor-based model and an
electronic model, which both utilize different processes. The Exchange
believes that it is appropriate to charge each model differently.
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    \13\ See Securities Exchange Act Release No. 54423 (September
11, 2006), 71 FR 54701 (September 18, 2006) (SR-Phlx-2006-54)
(originally AUTOM-delivered and non-AUTOM-delivered, the Exchange
amended its electronic/non-electronic distinction for broker-dealer
to create a single fee of $.25 for non-AUTOM-delivered orders (now
known as Non-Electronically-Delivered) and a $.45 transaction fee
for AUTOM-delivered orders (now known as Electronically Delivered
orders). AUTOM was the Exchange's electronic delivery, routing,
execution and reporting system which provided [sic]
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    Second, NYSE Arca, Inc. (``NYSE Arca'') and The Chicago Board of
Options Exchange, Inc. (``CBOE'') also distinguish between
electronically and non-electronically delivered orders. Specifically,
NYSE Arca categorizes its transaction fees as either electronic or
manual for its broker-dealer, customer and firm order types.\14\ NYSE
Arca assesses broker-dealers, customers and firm proprietary
transactions a different rate for manual and electronic orders. CBOE
assesses broker-dealers who enter manual orders a different rate as
compared to broker-dealers who enter electronic orders.\15\ CBOE
assesses electronically executed broker-dealer orders a transaction
charge of $.45 and manually executed broker-dealer orders a transaction
charge of $.25.
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    \14\ See NYSE Arca's Fee Schedule. See also Securities Exchange
Act Release Nos. 60379 (July 23, 2009), 74 FR 38244 (July 31, 2009)
(SR-NYSEARca-2009-62); 61894 (April 13, 2010), 75 FR 20413 (April
19, 2010) (SR-NYSEArca-2010-24).
    \15\ See CBOE's Fees Schedule. See also Securities Exchange Act
Release No. 55677 (April 27, 2007), 72 FR 26430 (May 9, 2007) (SR-
Phlx-2007-32).
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    The Exchange believes that assessing different transaction fees for
electronic and non-electronic orders is reasonable because the method
of handling differs and because the fees are consistent with other fees
assessed by the Exchange. The Exchange also believes that these fees
are equitably allocated because the fees are uniformly applied to all
similarly situated ROTs and Specialists. While the Exchange is
assessing different fees for orders that are electronically delivered
and non-electronically delivered, for ROTs and Specialists, these
charges are subject to the Monthly Cap \16\ which is the same for both
methods of delivery. As previously cited, other exchanges distinguish
between delivery methods for certain market participants and charge
different fees depending on the method of delivery. This type of
distinction is not novel and has long existed within the industry.
While the Exchange may be the first to make this distinction with
respect to ROTs and Specialists, other exchanges have distinguished
between delivery methods as to certain market participants and not
others and charged different rates depending on the delivery method.
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    \16\ The Monthly Cap is currently $650,000.
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    In addition, the Exchange believes that assessing Registered
Options Traders (on-floor) and Specialists a $.22 per contract
transaction charge for options that are trading in the Penny Pilot and
increasing the current $.22 per contract options transaction charge to
$.23 per contract for non-Penny Pilot options orders that are
electronically delivered is consistent with other fees in the Fee
Schedule. The Exchange currently makes a similar distinction in its
Payment for Order Flow Fees \17\ and also in its Routing Fees.\18\
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    \17\ See Securities Exchange Act Release Act No. 59841 (April
29, 2009), 74 FR 21035 (May 6, 2009) (SR-Phlx-2009-38).
    \18\ See Securities Exchange Act Release Act No. 61664 (March 5,
2010), 75 FR 11957 (March 12, 2010) (SR-Phlx-2010-32).
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    Other exchanges also make a similar distinction in pricing equity
options. Both NYSE Arca and CBOE distinguish between Penny and Non-
Penny Pilot fees and assess different rates for Penny and Non-Penny
Pilot options depending on whether the orders were electronically or
non-electronically delivered. NYSE Arca distinguishes pricing in Penny
Pilot options from its pricing for Standard Executions (Standard
Executions include all executions in non-Penny Pilot issues and all
manual executions in Penny) \19\ Pilot issues.\20\ Likewise CBOE
assesses a Marketing Fee that differentiates Penny Pilot Classes from
non-Penny Pilot Classes.\21\
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    \19\ See NYSE Arca's Fee Schedule.
    \20\ See NYSE Arca's Fee Schedule. See also Securities Exchange
Act Release Nos. 60379 (July 23, 2009), 74 FR 38244 (July 31, 2009)
(SR-NYSEArca-2009-62); 61894 (April 13, 2010), 75 FR 20413 (April
19, 2010) (SR-NYSEArca-2010-24).
    \21\ See CBOE's Fees Schedule. See also Securities Exchange Act
Release No. 57094 (January 3, 2008), 73 FR 1653 (January 9, 2008)
(SR-CBOE-2007-154).
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    The Exchange believes that assessing options transaction charges
for Penny Pilot and Non-Penny Pilot options with different rates is
consistent with fees assessed in the options industry. The proposed
rule change is equitable and

[[Page 27613]]

reasonable because it applies uniformly to all similarly situated ROTs
and Specialists. Additionally the different rates that are assessed for
electronically delivered Penny and Non-Penny Pilot transactions and
non-electronically delivered Penny and Non-Penny Pilot transactions are
equitable because the rates are uniformly applied to similarly situated
users. The fees are reasonable because they are within the range of
fees assessed by the Exchange.
    The degree of difference between the rates charged for different
order types is the result of competitive forces in the marketplace and
reflects certain competitive differences amongst market participants.
The Exchange believes that the fees it charges for equity options
remain competitive with fees charged by other venues and therefore
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) of the Act \22\ and Rule 19b-4(f)(2) \23\ thereunder. At any
time within 60 days of the filing of such proposed rule change, the
Commission may summarily abrogate 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.
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    \22\ 15 U.S.C. 78s(b)(3).
    \23\ 17 CFR 240.19b-4(f)(2).
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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 e-mail to rule-comments@sec.gov. Please include
File Number SR-Phlx-2010-66 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 Number SR-Phlx-2010-66. This file
number should be included on the subject line if e-mail 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 will also 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 No. SR-Phlx-2010-66 and should be
submitted on or before June 7, 2010.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-11649 Filed 5-14-10; 8:45 am]
BILLING CODE 8010-01-P