Document ID: SEC-2013-0156-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2013-01-25T05:00Z

[Federal Register Volume 78, Number 17 (Friday, January 25, 2013)]
[Notices]
[Pages 5530-5532]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-01492]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68698; File No. SR-Phlx-2013-04]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
Routing Fees

January 18, 2013.
    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 January 8, 2013, 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 Routing Fees at Section V of the 
Pricing Schedule. While changes to the Pricing Schedule pursuant to 
this proposal are effective upon filing, the Exchange has designated 
the proposed amendment to be operative on February 1, 2013. The text of 
the proposed rule change is available on the Exchange's Web site at 
http://nasdaqomxphlx.cchwallstreet.com/, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    The purpose of this filing is to amend Routing Fees in Section V of 
the Pricing Schedule in order to recoup costs that the Exchange incurs 
for routing and executing orders in equity options to various away 
markets.
    Today, the Exchange calculates Routing Fees by assessing certain 
Exchange costs related to routing orders to away markets plus the away 
market's transaction fee. The Exchange assesses a $0.04 per contract 
fixed Routing Fee when routing orders to the NASDAQ Options Market LLC 
(``NOM'') and NASDAQ OMX BX, Inc. (``BX Options) and a $0.10 per 
contract fixed Routing Fee to all other options exchanges in addition 
to the actual transaction fee or rebate paid by the away market.
    The fixed Routing Fee is based on costs that are incurred by the 
Exchange when routing to an away market in addition to the away 
market's transaction fee. For example, the Exchange incurs a fee when 
it utilizes Nasdaq Options Services LLC (``NOS''), a member of the 
Exchange and the Exchange's exclusive order router,\3\ to route orders 
in options listed and open for trading on the PHLX XL system to 
destination markets. Each time NOS routes to away markets NOS incurs a 
clearing-related cost \4\ and, in the case of certain exchanges, a 
transaction fee is also charged in certain symbols, which fees are 
passed through to the Exchange. The Exchange also incurs administrative 
and technical costs associated with operating NOS, membership fees at 
away markets, Options Regulatory Fees (``ORFs'') and technical costs 
associated with routing options.
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    \3\ In May 2009, the Exchange adopted Rule 1080(m)(iii)(A) to 
establish Nasdaq Options Services LLC (``NOS''), a member of the 
Exchange, as the Exchange's exclusive order router. See Securities 
Exchange Act Release No. 59995 (May 28, 2009), 74 FR 26750 (June 3, 
2009) (SR-Phlx-2009-32). NOS is utilized by the Exchange's fully 
automated options trading system, PHLX XL.[supreg] ``PHLX XL'' is 
the Exchange's automated options trading system.
    \4\ The Options Clearing Corporation (``OCC'') assesses a 
clearing fee of $0.01 per contract side. See Securities Exchange Act 
Release No. 68025 (October 10, 2012), 77 FR 63398 (October 16, 2012) 
(SR-OCC-2012-18).
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    The Exchange proposes to amend its Routing Fees to increase the 
current fixed Routing Fee to BX Options and NOM from $0.04 to $0.05 \5\ 
per contract and the fixed Routing Fee to all other options exchanges 
from $0.10 to $0.11 \6\ per contract to capture the increased costs 
that the Exchange incurs when routing to away markets in addition to 
the transaction fee that is being assessed by the away market. 
Specifically, several exchanges have increased ORFs or adopted ORFs and 
the Exchange proposes to increase its Routing Fees to recoup those 
increased fees.\7\
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    \5\ In a previous rule filing, the Exchange discussed the manner 
in which it analyzed costs related to routing to BX Options and NOM 
and determined the costs are lower as compared to other away markets 
because NOS is utilized by all three exchanges to route orders. In 
that filing the Exchange noted that because Phlx, BX Options and NOM 
all utilize NOS, the cost to the Exchange is less as compared to 
routing to other away markets. In addition the fixed costs are 
reduced because NOS is owned and operated by NASDAQ OMX and the 
three exchanges and NOS share common technology and related 
operational functions. See Securities Exchange Act Release No. 68213 
(November 13, 2012), 77 FR 69530 (November 19, 2012) (SR-Phlx-2012-
129).
    \6\ The $0.11 per contract fixed fee would apply to all options 
exchanges other than BX Options and NOM, which are discussed 
separately in this proposal. The Exchange anticipates that if other 
options exchanges are approved by the Commission after the filing of 
this proposal, those exchanges would be assessed the $0.11 per 
contract fee applicable to ``all other options exchanges.''
    \7\ The Chicago Board Options Exchange, Incorporated (``CBOE'') 
recently increased its ORF from $.0065 to $.0085 per contract. See 
Securities Exchange Act Release No. 68480 (December 19, 2012), 77 FR 
76119 (December 26, 2012) (SR-CBOE-2012-118). C2 Options Exchange, 
Incorporated (``C2'') recently increased its ORF from $.0015 to 
$.002 per contract. See Securities Exchange Act Release No. 68479 
(December 19, 2012), 77 FR 76131 (December 26, 2012) (SR-C2-2012-
040). NYSE MKT LLC (``NYSE Amex'') recently increased its ORF from 
$0.004 to $0.005 per contract. See Securities Exchange Act Release 
No. 68183 (November 8, 2012), 77 FR 68186 (November 15, 2012) (SR-
NYSEMKT-2012-54). NYSE Arca, Inc. (``NYSE Arca'') recently increased 
its ORF from $0.004 to $0.005 per contract. See Securities Exchange 
Act Release No. 68174 (November 7, 2012), 77 FR 67845 (November 14, 
2012) (SR-NYSEArca-2012-118). Miami International Securities 
Exchange, LLC (``MIAX'') recently adopted an ORF of $0.0040 per 
contract side. See SR-MIAX-2012-06 (not yet published).
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    Today, the transaction fee assessed by the Exchange is based on the 
away market's actual transaction fee or rebate for a particular market 
participant at the time that the order was entered into the Exchange's 
trading system. This transaction fee is calculated on an order-by-order 
basis, since different away markets charge different amounts.\8\ In the 
event that there is no transaction fee

[[Page 5531]]

or rebate assessed by the away market, the only fee assessed is the 
fixed Routing Fee. With respect to the rebate, the Exchange pays a 
market participant the rebate offered by an away market where there is 
such a rebate. Any rebate available is netted against a fee assessed by 
the Exchange.\9\ The Exchange is not proposing to amend its calculation 
of the away market's transaction fee as described herein.
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    \8\ This is similar to the methodology utilized by ISE in 
assessing Routing Fees. See ISE's Fee Schedule.
    \9\ For example, if a Customer order is routed to BOX, and BOX 
offers a customer rebate of $0.20 per contract, the Exchange would 
assess a $0.10 per contract fixed fee which would net against the 
rebate ($0.20 per contract in this example). The market participant 
for whom the Customer contract was routed would receive a $0.10 per 
contract rebate. Today the market participant does not receive a 
rebate and only pays the current $0.11 per contract Routing Fee.
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    As with all fees, the Exchange may adjust these Routing Fees in 
response to competitive conditions by filing a new proposed rule 
change.
2. Statutory Basis
    The Exchange believes that its proposal to amend its Pricing 
Schedule is consistent with Section 6(b) of the Act \10\ in general, 
and furthers the objectives of Section 6(b)(4) of the Act \11\ in 
particular, in that it is an equitable allocation of reasonable fees 
and other charges among Exchange members.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that the proposed Routing Fees are reasonable 
because they seek to recoup costs that are incurred by the Exchange 
when routing Customer, Professional, Firm, Broker-Dealer, Specialist 
and Market Maker orders to away markets on behalf of members. Each 
destination market's transaction charge varies and there is a cost 
incurred by the Exchange when routing orders to away markets. The costs 
to the Exchange include clearing costs, administrative and technical 
costs associated with operating NOS, membership fees at away markets, 
ORFs and technical costs associated with routing options. The Exchange 
believes that the proposed Routing Fees would enable the Exchange to 
recover the costs it incurs to route orders to away markets in addition 
to transaction fees assessed to market participants for the execution 
of Customer, Professional, Firm, Broker-Dealer, Specialist and Market 
Maker orders by the away market. Specifically, other options exchanges 
have increased ORFs that are assessed per transaction.\12\ The Exchange 
believes that it is reasonable to recoup these costs borne by the 
Exchange on each transaction.
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    \12\ CBOE recently increased its ORF from $.0065 to $.0085 per 
contract. See Securities Exchange Act Release No. 68480 (December 
19, 2012), 77 FR 76119 (December 26, 2012) (SR-CBOE-2012-118). C2 
recently increased its ORF from $.0015 to $.002 per contract. See 
Securities Exchange Act Release No. 68479 (December 19, 2012), 77 FR 
76131 (December 26, 2012) (SR-C2-2012-040). NYSE Amex recently 
increased its ORF from $0.004 to $0.005 per contract. See Securities 
Exchange Act Release No. 68183 (November 8, 2012), 77 FR 68186 
(November 15, 2012) (SR-NYSEMKT-2012-54). NYSE Arca recently 
increased its ORF from $0.004 to $0.005 per contract. See Securities 
Exchange Act Release No. 68174 (November 7, 2012), 77 FR 67845 
(November 14, 2012) (SR-NYSEArca-2012-118). MIAX recently adopted an 
ORF of $0.0040 per contract side. See SR-MIAX-2012-06 (not yet 
published).
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    Further, the Exchange believes that it is equitable and not 
unfairly discriminatory to increase the fixed Routing Fees from $0.04 
to $0.05 per contract and from $0.10 to $0.11 per contract, depending 
on the away market, because the Exchange would uniformly assess these 
fees depending on the away market. Further, the Exchange believes that 
it is equitable and not unfairly discriminatory to assess a fixed cost 
of $0.05 per contract to route orders to NASDAQ OMX away markets (BX 
Options and NOM) because the cost, in terms of actual cash outlays, to 
the Exchange to route to those markets is lower. For example, costs 
related to routing to BX Options and NOM are lower as compared to other 
away markets because NOS is utilized by all three exchanges to route 
orders.\13\ NOS and the three NASDAQ OMX options markets have a common 
data center and staff that are responsible for the day-to-day 
operations of NOS. Because the three exchanges are in a common data 
center, Routing Fees are reduced because costly expenses related to, 
for example, telecommunication lines to obtain connectivity are avoided 
when routing orders in this instance. The costs related to connectivity 
to route orders to other NASDAQ OMX exchanges are de minimis. When 
routing orders to non-NASDAQ OMX exchanges, the Exchange incurs costly 
connectivity charges related to telecommunication lines and other 
related costs when routing orders.
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    \13\ See Chapter VI, Section 11 of the BX Options and NOM Rules.
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    While the proposal increases the fixed fee for routing orders to 
all markets by $0.01 per contract, the Exchange is not proposing to 
amend the fee differential of $0.06 per contract that exists today when 
routing to a NASDAQ OMX exchange ($0.04 per contract) as compared to a 
non-NASDAQ OMX exchange ($0.10 per contract). The Exchange believes it 
is reasonable, equitable and not unfairly discriminatory to pass along 
savings realized by leveraging NASDAQ OMX's infrastructure and scale to 
market participants when those orders are routed to BX Options and 
NOM.\14\ It is important to note with respect to routing to an away 
market that orders are routed based on price first. PHLX XL will route 
orders to away markets where the Exchange's disseminated bid or offer 
is inferior to the national best bid (best offer) (``NBBO'') price.\15\ 
Market participants may submit orders to the Exchange as ineligible for 
routing or ``DNR'' to avoid incurring the Routing Fees proposed 
herein.\16\
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    \14\ Today, the Exchange assesses a $0.11 per contract fixed fee 
for routing orders to BX Options and NOM. That fee is proposed to be 
reduced to a $0.04 per contract fixed fee, which would be in 
addition to the actual transaction fee assessed by the away market.
    \15\ See Rule 1080(m). The Phlx XL II system will 
contemporaneously route an order marked as an Intermarket Sweep 
Order (``ISO'') to each away market disseminating prices better than 
the Exchange's price, for the lesser of: (a) The disseminated size 
of such away markets, or (b) the order size and, if order size 
remains after such routing, trade at the Exchange's disseminated bid 
or offer up to its disseminated size. If contracts still remain 
unexecuted after routing, they are posted on the book. Once on the 
book, should the order subsequently be locked or crossed by another 
market center, the Phlx XL II system will not route the order to the 
locking or crossing market center, with some exceptions noted in 
Rule 1080(m).
    \16\ See Rule 1066(h) (Certain Types of Orders Defined) and 
1080(b)(i)(A) (PHLX XL and PHLX XL II).
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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. The Exchange believes that the 
rule change would allow the Exchange to recoup its costs when routing 
orders designated as available for routing by the market participant. 
Members and member organizations may choose to mark the order as 
ineligible for routing to avoid incurring these fees.\17\ Today, other 
options exchanges also assess similar fees to recoup costs incurred by 
the Exchange to route orders to away markets. With respect to routing 
to BX Options and NOM at a lower cost as compared to other away 
markets, the Exchange does not believe that the proposed amendments to 
increase those fees, while maintaining the same fee differential, 
imposes a burden because all market participants would be assessed the 
same fees depending on the away market and the fee increase is the same 
for all market participants. Also, the Exchange is proposing to recoup 
costs incurred only when members request the Exchange route their 
orders

[[Page 5532]]

to an away market. The Exchange is passing along savings realized by 
leveraging NASDAQ OMX's infrastructure and scale to market participants 
when those orders are routed to BX Options and NOM and is providing 
those savings to all market participants. Finally, PHLX XL routes 
orders to away markets where the Exchange's disseminated bid or offer 
is inferior to the national best bid (best offer) (``NBBO'') price and 
based on price first.\18\
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    \17\ Id.
    \18\ See Rule 1080(m). The Phlx XL II system will 
contemporaneously route an order marked as an Intermarket Sweep 
Order (``ISO'') to each away market disseminating prices better than 
the Exchange's price, for the lesser of: (a) The disseminated size 
of such away markets, or (b) the order size and, if order size 
remains after such routing, trade at the Exchange's disseminated bid 
or offer up to its disseminated size. If contracts still remain 
unexecuted after routing, they are posted on the book. Once on the 
book, should the order subsequently be locked or crossed by another 
market center, the Phlx XL II system will not route the order to the 
locking or crossing market center, with some exceptions noted in 
Rule 1080(m).
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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.\19\ 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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    \19\ 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 Number SR-Phlx-2013-04 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-2013-04. 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-2013-04 and should be 
submitted on or before February 15, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-01492 Filed 1-24-13; 8:45 am]
BILLING CODE 8011-01-P