Document ID: SEC-2010-0420-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX, Inc.
Posted Date: 2010-03-18T04:00Z

[Federal Register: March 18, 2010 (Volume 75, Number 52)]
[Notices]               
[Page 13189-13191]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18mr10-117]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61684; File No. SR-Phlx-2010-33]

 
Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change Relating 
to Fees and Rebates for Adding and Removing Liquidity

March 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 February 26, 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 substantially by the Exchange. Phlx has 
designated this proposal as one establishing or changing a member due, 
fee, or other charge imposed under Section 19(b)(3)(A)(ii) of the Act 
\3\ and Rule 19b-4(f)(2) thereunder,\4\ which renders the proposal 
effective upon filing with the Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
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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 by 
adopting per contract transaction fees for options overlying Standard 
and Poor's Depositary Receipts/SPDRs (``SPY''), \5\ the PowerShares QQQ 
Trust (``QQQQ'')[reg]; Ishares Russell 2000 (``IWM'') and Citigroup 
Inc. (``C''). The fees would apply to: (i) Transaction sides that 
remove liquidity from the Exchange's disseminated market, and (ii) Firm 
and broker-dealer quotes and orders that are included in the Exchange's 
disseminated market.
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    \5\ SPY options are based on the SPDR exchange-traded fund 
(``ETF''), which is designed to track the performance of the S&P 500 
Index.
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    Additionally, the Exchange proposes to offer a transaction rebate 
to certain liquidity providers, as described more fully below.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqtrader.com/micro.aspx?id=PHLXfilings, at the 
principal office of the Exchange, at the Commission's Public Reference 
Room, and on the Commission's Web site at http://www.sec.gov.

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 increase liquidity 
and to attract order flow in SPY, QQQQ, IWM and C options on the 
Exchange.
    Transaction Charges for Removing Liquidity:
    The Exchange proposes to assess a per-contract transaction charge 
in SPY, QQQQ, IWM and C options on five different categories of market 
participants that submit orders and/or quotes that remove, or ``take,'' 
liquidity from the Exchange. The per-contract transaction charge would 
depend on the category of market participant submitting an order or 
quote to the Exchange that removes liquidity.
    The proposed amendments to the Exchange's Fee Schedule would break

[[Page 13190]]

down market participants by the following five categories: (i) 
Specialists, Registered Options Traders (``ROTs''), Streaming Quote 
Traders (``SQTs'') \6\ and Remote Streaming Quote Traders (``RSQTs''); 
\7\ (ii) customers; \8\ (iii) specialists, ROTs [sic], SQTs and RSQTs 
that receive Directed Orders (``Directed Participants'' or ``Directed 
Specialists, RSQTs, or SQTs''; \9\) (iv) Firms; and (v) broker-dealers. 
For purposes of this fee, 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.
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    \6\ An SQT is an Exchange Registered Options Trader (``ROT'') 
who has received permission from the Exchange to generate and submit 
option quotations electronically through an electronic interface 
with AUTOM via an Exchange-approved proprietary electronic quoting 
device in eligible options to which such SQT is assigned. See 
Exchange Rule 1014(b)(ii)(A).
    \7\ An RSQT is an ROT that is a member or member organization 
with no physical trading floor presence who has received permission 
from the Exchange to generate and submit option quotations 
electronically through AUTOM in eligible options to which such RSQT 
has been assigned. An RSQT may only submit such quotations 
electronically from off the floor of the Exchange. See Exchange Rule 
1014(b)(ii)(B).
    \8\ This applies to all customer orders, directed and non-
directed.
    \9\ See Exchange Rule 1080(l), ``* * * The term `Directed 
Specialist, RSQT, or SQT' means a specialist, RSQT, or SQT that 
receives a Directed Order.'' A Directed Participant has a higher 
quoting requirement as compared with a specialist, SQT or RSQT who 
is not acting as a Directed Participant. See Exchange Rule 1014.
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    The per-contract transaction charges to be assessed on participants 
who submit proprietary quotes and/or orders that remove liquidity in 
SPY, QQQQ, IWM and C options from the Exchange in SPY, QQQQ, IWM and C 
options are, by category:

------------------------------------------------------------------------
                                                          Rebate  (per
                       Category                            contract)
------------------------------------------------------------------------
Specialist, ROT, SQT, RSQT...........................              $0.32
Customer.............................................               0.25
Directed Participants................................               0.30
Firms................................................               0.45
Broker-Dealers.......................................               0.45
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    Transaction Charges for Adding Liquidity:
    The Exchange proposes to assess a transaction charge of $0.35 per 
contract to Firms and $0.45 per contract to broker-dealers that add 
liquidity.
    Rebates:
    In order to promote and encourage liquidity in SPY, QQQQ, IWM and C 
options, the Exchange proposes to amend its fee schedule to include a 
per-contract rebate relating to transaction charges for orders or 
quotations that add liquidity in SPY, QQQQ, IWM and C options. The 
amount of the rebate would depend on the category of participant whose 
order or quote was executed as part of the Phlx Best Bid and Offer. 
Specifically, the per-contract rebates are, by category:

------------------------------------------------------------------------
                                                          Charge (per
                       Category                            contract)
------------------------------------------------------------------------
Specialist, ROT, SQT, RSQT...........................              $0.23
Customer.............................................               0.20
Directed Participants................................               0.25
Firms................................................                N/A
Broker-Dealers.......................................                N/A
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    Applicability of Other Fees:
     The Monthly Cap that is currently applicable to ROTs and 
specialists transacting equity options will not be applicable to the 
fees described herein.\10\
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    \10\ See Securities and Exchange Release No. 61529 (February 17, 
2010) (SR-Phlx-2010-17). [sic]
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     The Firm Related Equity Option Cap will not be applicable 
to the fees described herein.\11\
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    \11\ See SR-Phlx-2010-25.
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     The Exchange pays a per-contract Market Access Provider 
(``MAP'') Subsidy to any Exchange member organization that qualifies as 
an Eligible MAP.\12\ The MAP Subsidy will not apply to electronic 
transactions in SPY, QQQQ, IWM and C.\13\
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    \12\ An ``Eligible MAP'' is defined in the Exchange's Fee 
Schedule in the Market Access Provider Subsidy.
    \13\ See Securities Exchange Act Release No. 59537 (March 9, 
2009), 74 FR 11151 (March 16, 2009) (SR-Phlx-2009-19).
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     Payment for Order Flow fees \14\ will not be collected on 
transactions in SPY, QQQQ, IWM and C options.
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    \14\ See Securities Exchange Act Release No. 59841 (April 29, 
2009), 74 FR 21035 (May 6, 2009) (SR-Phlx-2009-38).
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     All electronic auctions will be free to Customers, 
Directed Participants, Specialists, ROTs, SQTs and RSQTs.\15\ 
Electronic auctions include, without limitation, the Complex Order Live 
Auction (``COLA''),\16\ and Quote and Market Exhaust auctions.\17\ 
Firms and broker-dealers will be assessed the appropriate charge for 
removing liquidity.
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    \15\ With respect to electronic auctions, it is systemically 
difficult to determine which participant(s) would qualify for a 
rebate, therefore the Exchange has determined not to apply the 
rebate to transactions resulting from electronic auctions.
    \16\ COLA is the automated Complex Order Live Auction process. A 
COLA may take place upon identification of the existence of a COLA-
eligible order either: (1) Following a COOP, or (2) during normal 
trading if the Phlx XL system receives a Complex Order that improves 
the cPBBO. See Exchange Rule 1080.
    \17\ Market Exhaust occurs when there are no Phlx XL II 
participant (specialist, SQT or RSQT) quotations in the Exchange's 
disseminated market for a particular series and an initiating order 
in the series is received. In such a circumstance, the Phlx XL II 
system, using Market Exhaust, will initiate a Market Exhaust auction 
for the initiating order. Under Market Exhaust, any order volume 
that is routed to away markets will be marked as an Intermarket 
Sweep Order or ``ISO.'' See Exchange Rule 1082.
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     The fees described herein will not apply to contracts 
executed during the Exchange's opening process.\18\ Firms and broker-
dealers will be assessed the appropriate charge for removing liquidity.
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    \18\ See Exchange Rule 1017.
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     The Exchange pays an Options Floor Broker Subsidy to 
member organizations with Exchange registered Floor Brokers for 
eligible contracts that are entered into the Exchange's Options Floor 
Broker Management System. The Options Floor Broker Subsidy will be 
applicable to the transactions described herein.\19\
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    \19\ See Securities Exchange Act Release No. 60578 (August 27, 
2009), 74 FR 45666 (September 3, 2009) (SR-Phlx-2009-72).
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     The Exchange assesses a Cancellation Fee of $2.10 per 
order on member organizations for each cancelled electronically 
delivered customer order in excess of the number of customer orders 
executed on the Exchange by that member organization in a given 
month.\20\ The Cancellation Fee will continue to apply.
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    \20\ See Securities Exchange Act Release No. 60188 (June 29, 
2009), 74 FR 32986 (July 9, 2009) (SR-Phlx-2009-48).
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     Regular Equity Option transaction fees will apply to 
Complex Orders that are electronically executed against a contra-side 
order with the same Complex Order Strategy.
     Single contra-side orders that are executed against the 
individual components of Complex Orders will be charged under the 
proposed Fee Schedule. The individual components of such a Complex 
Order will not be charged.
     SPY, QQQQ, IWM and C transactions executed via open outcry 
will be subject to the standard equity options fee schedule. However, 
if one side of the transaction is executed using the Options Floor 
Broker Management System \21\ and any other side of the trade

[[Page 13191]]

was the result of an electronically submitted order or a quote, then 
the fees proposed herein will apply to the FBMS contracts and contracts 
that are executed electronically on all sides of the transaction.
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    \21\ The Options Floor Broker Management System (``FBMS'') is a 
component of the Exchange's system designed to enable Floor Brokers 
and/or their employees to enter, route and report transactions 
stemming from options orders received on the Exchange. The FBMS also 
is designed to establish an electronic audit trail for options 
orders represented and executed by Floor Brokers on the Exchange, 
such that the audit trial provides an accurate, time-sequenced 
record of electronic and other orders, quotations and transactions 
on the Exchange, beginning with the receipt of an order by the 
Exchange, and further documenting the life of the order through the 
process of execution, partial execution, or cancellation of that 
order. AUTOM is the Exchange's electronic order delivery and 
reporting system, which provides for the automatic entry and routing 
of Exchange-listed equity options, index options and U.S. dollar-
settled foreign currency options orders to the Exchange trading 
floor. See Exchange Rule 1080, Commentary .06.
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2. Statutory Basis
    The Exchange believes that its proposal to amend its schedule of 
fees is consistent with Section 6(b) of the Act \22\ in general, and 
furthers the objectives of Section 6(b)(4) of the Act \23\ in 
particular, in that it is an equitable allocation of reasonable fees 
and other charges among Exchange members. The impact of the proposal 
upon the net fees paid by a particular market participant will depend 
on a number of variables, including its monthly volumes, the order 
types it uses, and the prices of its quotes and orders (i.e., its 
propensity to add or remove liquidity).
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    \22\ 15 U.S.C. 78f(b).
    \23\ 15 U.S.C. 78f(b)(4).
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    Specifically, the Exchange believes that its proposal is consistent 
with the current fee schedule and industry fee assessments of member 
firms that allow for different rates to be charged for different order 
types originated by dissimilarly classified market participants.\24\
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    \24\ NYSE Amex currently charges different rates to different 
market participants in assessing its firm facilitation fee. [sic] 
See Securities Exchange Act Release No. 60378 (July 23, 2009), 74 FR 
38245 (July 31, 2009) (SR-NYSEAmex-2009-38).
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    Order flow providers that control customer order flow and route 
customer orders to exchanges are responsible to obtain the best pricing 
available for their customers. An order flow provider has the ability 
to enter into arrangements whereby they may receive consideration for 
directing the customer order to a specific market maker (specialists, 
ROTs [sic], SQTs and/or RSQTs).
    The Exchange operates in a highly competitive market in which 
market participants can readily direct order flow to competing venues 
if they deem fee levels at a particular venue to be excessive. The 
Exchange believes that the fees it charges for options overlying SPY, 
QQQQ, IWM and C 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)(A)(ii) of the Act \25\ and paragraph (f)(2) of Rule 19b-4 \26\ 
thereunder. At any time within 60 days of the filing of the 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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    \25\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \26\ 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-2010-33 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-Phlx-2010-33. 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 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 publicly available. All 
submissions should refer to File Number SR-Phlx-2010-33 and should be 
submitted on or before April 8, 2010.

    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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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-5909 Filed 3-17-10; 8:45 am]
BILLING CODE 8011-01-P