Document ID: SEC-2014-0904-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX, LLC
Posted Date: 2014-06-02T04:00Z

[Federal Register Volume 79, Number 105 (Monday, June 2, 2014)]
[Notices]
[Pages 31356-31359]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-12643]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72251; File No. SR-Phlx-2014-36]

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

May 27, 2014.
    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 May 15, 2014, 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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[[Page 31357]]

I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend Section V of the Pricing Schedule 
entitled ``Routing Fees.''
    While the changes proposed herein are effective upon filing, the 
Exchange has designated that the amendments be operative on June 2, 
2014.
    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 the Routing Fees in Section 
V of the Pricing Schedule in order to recoup costs incurred by the 
Exchange to route orders to away markets.
    Today, the Exchange assesses a Non-Customer a $0.95 per contract 
Routing Fee to any options exchange. The Customer \3\ Routing Fee for 
option orders routed to The NASDAQ Options Exchange LLC (``NOM'') is a 
$0.10 per contract Fixed Fee in addition to the actual transaction fee 
assessed. The Customer Routing Fee for option orders routed to NASDAQ 
OMX BX, Inc. (``BX Options'') is $0.10 per contract. The Customer 
Routing Fee for option orders routed to all other options exchanges \4\ 
(excluding NOM and BX Options) is a fixed fee of $0.20 per contract 
(``Fixed Fee'') in addition to the actual transaction fee assessed. If 
the away market pays a rebate, the Routing Fee is $0.10 per contract.
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    \3\ The term ``Customer'' applies to any transaction that is 
identified by a member or member organization for clearing in the 
Customer range at The Options Clearing Corporation (``OCC'') which 
is not for the account of broker or dealer or for the account of a 
``Professional'' (as that term is defined in Rule 1000(b)(14)).
    \4\ Including BATS Exchange, Inc. (``BATS''), BOX Options 
Exchange LLC (``BOX''), the Chicago Board Options Exchange, 
Incorporated (``CBOE''), C2 Options Exchange, Incorporated (``C2''), 
International Securities Exchange, LLC (``ISE''), the Miami 
International Securities Exchange, LLC (``MIAX''), NYSE Arca, Inc. 
(``NYSE Arca''), NYSE MKT LLC (``NYSE Amex'') and ISE Gemini, LLC 
(``Gemini'').
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    With respect to the fixed costs, the Exchange incurs a fee when it 
utilizes Nasdaq Execution Services LLC (``NES''),\5\ a member of the 
Exchange and the Exchange's exclusive order router.\6\ [sic] Each time 
NES routes an order to an away market, NES is charged a clearing fee 
\7\ 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 currently recoups clearing and transaction 
charges incurred by the Exchange as well as certain other costs 
incurred by the Exchange when routing to away markets, such as 
administrative and technical costs associated with operating NES, 
membership fees at away markets, Options Regulatory Fees (``ORFs''), 
staffing and technical costs associated with routing options. The 
Exchange assesses the actual away market fee 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.
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    \5\ The Exchange filed a proposed rule change to utilize Nasdaq 
Execution Services, LLC (``NES'') for outbound order routing. See 
Securities Exchange Act Release No. 71417 (January 28, 2014), 79 FR 
6253 (February 3, 2014) (SR-Phlx-2014-04).
    \7\ OCC assessed a $0.01 per contract side. The fee has recently 
been increased from $0.01 to $0.02 per contract side. See Securities 
Exchange Act Release No. 71769 (March 21, 2014), 79 FR 17214 (March 
21, 2014) (SR-OCC-2014-05).
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    The Exchange is proposing to increase Routing Fees to account for 
increased OCC fees and other increased costs associated with clearing, 
ORF and other operational costs. The Exchange proposes to increase 
Routing Fees for Non-Customer orders from $0.95 to $0.97 per contract. 
The Exchange also proposes to increase Customer Routing Fees as 
described herein. The Exchange proposes to increase Customer Routing 
Fees to NOM from a Fixed Fee of $0.10 to $0.12 per contract, in 
addition to the actual transaction fee assessed. The Exchange proposes 
to increase Customer Routing Fees to BX Options from $0.10 to $0.12 per 
contract. The Exchange also proposes to amend Routing Fees to all other 
exchanges (except NOM and BX Options) from $0.20 to $0.22 per contract, 
in addition to the actual transaction fee assessed, provided the away 
market does not pay a rebate. If the away market pays a rebate, the 
Routing Fee assessed would be $0.12 per contract, an increase from the 
current $0.10 per contract. The Exchange proposes these increases to 
recoup an additional portion of the costs incurred by the Exchange for 
routing these orders.
    The Exchange is proposing to increase Non-Customer and Customer 
Routing Fees by $0.02 per contract to cover the increased costs of 
offering its members the opportunity to route to other options 
exchanges. With the recent increase by OCC \8\ as well as increases in 
ORFs and Phlx's operational expenses, the Exchange sees to further 
recoup a portion of increased costs with the increase to its Routing 
Fees.
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    \8\ Id.
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    Today the Exchange does not assess the actual transaction fee 
assessed by BX Options, rather the Exchange only assesses the Fixed 
Fee, because the Exchange would continue to retain the rebate to offset 
the cost to route orders to BX Options. This is the not the case for 
all orders routed to BX Options because not all Customer orders receive 
a rebate.\9\ This will remain the same. Similarly, the Exchange is 
proposing to amend the Customer Routing Fee assessed when routing to 
all other options exchanges, if the away market pays a rebate, from a 
$0.10 to a $0.12 per contract Fixed Fee, in order to recoup an 
additional portion of the costs incurred by the Exchange for routing 
these orders. The Exchange does not assess the actual transaction fee 
assessed by the away market, rather the Exchange only assesses the 
Fixed Fee, because the Exchange would continue to retain the rebate to 
offset the cost to route orders to these away markets. This will remain 
the same. Finally, the Exchange is not amending the credit it offers to 
member organizations that qualify for a Tier 2, 3, 4 or 5 rebate in the 
Customer Rebate Program in Section B of the Pricing Schedule; and route 
away more than 5,000 Customer contracts per day in a given month to an 
away market.\10\
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    \9\ BX Options pays a Customer Rebate to Remove Liquidity as 
follows: Customers are paid $0.32 per contract in All Other Penny 
Pilot Options (excluding BAC, IWM, QQQ, SPY and VXX) and $0.70 per 
contract in Non-Penny Pilot Options. See BX Options Rules at Chapter 
XV, Section 2(1).
    \10\ Today, a member organization that: (1) Qualifies for a Tier 
2, 3, 4 or 5 rebate in the Customer Rebate Program in Section B of 
the Pricing Schedule; and (2) routes away more than 5,000 Customer 
contracts per day in a given month to an away market is entitled to 
receive a credit equal to the applicable Fixed Fee plus $0.05 per 
contract, unless the away market transaction fee is $0.00 or the 
away market pays a rebate, in which case the member organization is 
entitled to receive a credit equal to the applicable Fixed Fee.

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[[Page 31358]]

2. Statutory Basis
    The Exchange believes that its proposal to amend its Pricing 
Schedule is consistent with Section 6(b) of the Act \11\ in general, 
and furthers the objectives of Section 6(b)(4) and (b)(5) of the Act 
\12\ in particular, in that it provides for the equitable allocation of 
reasonable dues, fees and other charges among members and issuers and 
other persons using any facility or system which Phlx operates or 
controls, and is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(4), (5).
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    The Exchange believes that amending the Non-Customer and Customer 
Routing Fees by $0.02 per contracts is reasonable because the Exchange 
desires to recoup an additional portion of the cost it incurs when 
routing Non-Customer and Customer orders. Specifically, the Exchange's 
proposal to increase Non-Customer fees from $0.95 to $0.97 per contract 
is reasonable because the additional $0.02 per contract fee will recoup 
increased costs borne by Phlx.
    The Exchange believes that amending the Customer Routing Fees for 
orders routed to NOM from a Fixed Fee of $0.10 to $0.12 per contract is 
reasonable because the Exchange desires to recoup an additional portion 
of the cost it incurs when routing Customer orders to NOM. The Exchange 
will continue to also assess actual transaction fees assessed by NOM 
for Customer orders.
    The Exchange believes that amending the Customer Routing Fee for 
orders routed to BX Options from a Fixed Fee of $0.10 to $0.12 per 
contract is reasonable because the Exchange desires to recoup an 
additional portion of the cost it incurs when routing Customer orders 
to BX Options, similar to the amount of Fixed Fee it proposes to assess 
for orders routed to NOM. While the Exchange would continue to retain 
any rebate paid by BX Options, the Exchange does not assess the actual 
transaction fee that is charged by BX Options for Customer orders.
    The Exchange believes that continuing to assess lower Fixed Fees to 
route Customer orders to NOM and BX Options, as compared to other 
options exchanges, is reasonable as the Exchange is able to leverage 
certain infrastructure to offer those markets lower fees as explained 
further below.
    The Exchange believes that increasing the fee for routing to all 
other options exchanges (other than NOM and BX Options) from $0.20 to 
$0.22 per contact is reasonable because the increased fee would recoup 
costs associated with routing Customer orders, in addition to the 
actual transaction fee when no rebate is paid. Similarly, the Exchange 
believes that amending the Customer Routing Fee to other away markets, 
other than NOM and BX Options, in the instance the away market pays a 
rebate from $0.10 to $0.12 per contract is reasonable because the 
Exchange desires to recoup an additional portion of the cost it incurs 
when routing orders to these away markets. While the Exchange would 
continue to retain any rebate paid by these away markets, the Exchange 
does not assess the actual transaction fee that is charged by the away 
market for Customer orders. The Fixed Fee for Customer orders is an 
approximation of the costs the Exchange will be charged for routing 
orders to away markets. As a general matter, the Exchange believes that 
the proposed fees for Customer orders routed to markets which pay a 
rebate, such as BX Options and other away markets, would allow it to 
recoup and cover a portion of the costs of providing optional routing 
services for Customer orders because it better approximates the costs 
incurred by the Exchange for routing such orders. While each 
destination market's transaction charge varies and there is a cost 
incurred by the Exchange when routing orders to away markets, 
including, OCC clearing costs, administrative and technical costs 
associated with operating NES, membership fees at away markets, ORFs 
and technical costs associated with routing options, the Exchange 
believes that the proposed Routing Fees will enable it to recover the 
increased costs it incurs to route Customer orders to away markets.
    The Exchange believes that amending the Non-Customer Routing Fees 
from $0.95 to $0.97 per contract is equitable and not unfairly 
discriminatory because the Exchange would assess the same Non-Customer 
Routing Fee to all Non-Customer orders routed away. The Exchange 
believes that amending the Customer Routing Fee for orders routed to 
NOM from a Fixed Fee of $0.10 to $0.12 per contract, in addition to the 
actual transaction fee, is equitable and not unfairly discriminatory 
because the Exchange would assess the same Fixed Fee to all orders 
routed to NOM in addition to the transaction fee assessed by that 
market. With respect to BX Options, the Exchange believes that amending 
the Customer Routing Fee for orders routed to BX Options from a Fixed 
Fee of $0.10 to $0.12 per contract is equitable and not unfairly 
discriminatory because the Exchange would assess the same Fixed Fee to 
all Customer orders routed to BX Options. With respect routing Customer 
orders to all other away markets (except NOM and BX Options) the 
Exchange believes that amending the Customer Routing Fee from $0.20 to 
$0.22 per contract, in addition to the actual transaction fee assessed) 
is equitable and not unfairly discriminatory because the Exchange would 
assess the same fee to all Customer orders routed to away markets, 
provided the away market does not pay a rebate. The Exchange believes 
that increasing the Routing Fee to away markets (other than NOM and BX 
Options), when the away market pays a rebate, from $0.10 to $0.12 per 
contract is equitable and not unfairly discriminatory because all 
Customer orders routed to away markets (other than NOM and BX Options) 
would be assessed the same fee, provided the away market paid a rebate.
    The Exchange would uniformly assess a $0.12 per contract Fixed Fee 
to orders routed to NASDAQ OMX exchanges because the Exchange is 
passing along the saving realized by leveraging NASDAQ OMX's 
infrastructure and scale to market participants when those orders are 
routed to NOM or BX Options and is providing those savings to all 
market participants. Furthermore, 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.\13\ The Exchange believes that it is equitable and not unfairly 
discriminatory to assess a fixed cost of $0.12 per contract to route 
orders to NOM and BX Options 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 NOM and BX Options are lower as 
compared to other away markets because NES is utilized by all

[[Page 31359]]

three exchanges to route orders.\14\ NES and the three NASDAQ OMX 
options markets have a common data center and staff that are 
responsible for the day-to-day operations of NES. 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 lower than the costs to route to a non-NASDAQ OMX 
exchange. When routing orders to non-NASDAQ OMX exchanges, the Exchange 
incurs costly connectivity charges related to telecommunication lines, 
membership and access fees, and other related costs when routing 
orders. Market participants may submit orders to the Exchange as 
ineligible for routing or ``DNR'' to avoid Routing Fees.\15\ It is 
important to note that when orders are routed to an away market they 
are routed based on price first.\16\
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    \13\ 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).
    \14\ See Chapter VI, Section 11 of the BX Options and NOM Rules.
    \15\ See Rule 1066(h) (Certain Types of Orders Defined) and 
1080(b)(i)(A) (PHLX XL and PHLX XL II).
    \16\ 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.
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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 does not believe 
that the proposal creates a burden on intra-market competition because 
the Exchange is applying the same Routing Fee increase of $0.02 per 
contract to all market participants. The Exchange will continue to 
assess separate Customer Routing Fees. Customers will continue to 
receive the lowest fees as compared to Non-Customers when routing 
orders, as is the case today. Other options exchanges also assess lower 
Routing Fees for customer orders as compared to Non-Customer 
orders.\17\
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    \17\ BATS assesses lower customer routing fees as compared to 
non-customer routing fees per the away market. For example BATS 
assesses Phlx customer routing fees of $0.45 per contract and an ISE 
[sic] non-customer routing fee of $0.65 per contract. See BATS BZX 
Exchange Fee Schedule.
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    The Exchange's proposal would allow the Exchange to continue to 
recoup its costs when routing both Non-Customer and Customer orders. 
The Exchange continues to pass along savings realized by leveraging 
NASDAQ OMX's infrastructure and scale to market participants when 
Customer orders are routed to NOM and BX Options and is providing those 
savings to all market participants. Today, other options exchanges also 
assess fixed routing fees to recoup costs incurred by the exchange to 
route orders to away markets.\18\ Market participants may submit orders 
to the Exchange as ineligible for routing or ``DNR'' to avoid Routing 
Fees.\19\ It is important to note that when orders are routed to an 
away market they are routed based on price first.\20\
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    \18\ See CBOE's Fees Schedule and ISE's Fee Schedule.
    \19\ See note 15.
    \20\ See note 16.
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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.\21\ 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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    \21\ 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-2014-36 on the subject line.

Paper Comments

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

FAll submissions should refer to File Number SR-Phlx-2014-36. 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 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 information that you wish to make available publicly. All 
submissions should refer to File Number SR-Phlx-2014-36, and should be 
submitted on or before June 23, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-12643 Filed 5-30-14; 8:45 am]
BILLING CODE 8011-01-P