Document ID: SEC-2017-2043-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq PHLX LLC
Posted Date: 2017-12-14T05:00Z

[Federal Register Volume 82, Number 239 (Thursday, December 14, 2017)]
[Notices]
[Pages 58881-58884]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-26916]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82250; File No. SR-Phlx-2017-102]

Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Exclude Options 
Overlying NDX From Several Pricing Programs

December 8, 2017.
    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 December 1, 2017, Nasdaq PHLX LLC (``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 Pricing Schedule at 
Section II, ``Multiply Listed Options Fees,'' \3\ and Section IV, 
entitled ``Other Transaction Fees.'' Specifically, the Exchange 
proposes to exclude options overlying NDX \4\ from several pricing 
programs.
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    \3\ This includes options overlying equities, ETFs, ETNs and 
indexes which are Multiply Listed.
    \4\ NDX represents options on the Nasdaq 100 Index traded under 
the symbol NDX (``NDX'').
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    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaqphlx.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
    Phlx proposes to exclude options overlying NDX from the Monthly 
Market Maker Cap, the Market Access and Routing Subsidy or ``MARS,'' 
and Phlx's Price Improvement XL (``PIXL'') pricing. Each of the 
proposals are discussed in more detail below. The Exchange seeks to 
differentiate pricing for this exclusively-listed product from other 
multiply listed product pricing.

[[Page 58882]]

Monthly Market Maker Cap
    Today, Phlx Specialists \5\ and Market Makers \6\ are subject to a 
``Monthly Market Maker Cap'' of $500,000 for: (i) Electronic Option 
Transaction Charges, excluding surcharges; and (ii) Qualified 
Contingent Cross (``QCC'') Transaction Fees (as defined in Exchange 
Rule 1080(o) and Floor QCC Orders, as defined in 1064(e)).\7\ All 
dividend, merger, short stock interest, reversal and conversion, jelly 
roll and box spread strategy executions (as defined in Section II of 
the Pricing Schedule) will be excluded from the Monthly Market Maker 
Cap. Specialists or Market Makers that (i) are on the contra-side of an 
electronically-delivered and executed Customer order, excluding 
responses to a PIXL auction; and (ii) have reached the Monthly Market 
Maker Cap will be assessed fees as follows: $0.05 per contract Fee for 
Adding Liquidity in Penny Pilot Options, $0.18 per contract Fee for 
Removing Liquidity in Penny Pilot Options and $0.18 per contract in 
Non-Penny Pilot Options.
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    \5\ The term ``Specialist'' applies to transactions for the 
account of a Specialist (as defined in Exchange Rule 1020(a)). A 
Specialist is an Exchange member who is registered as an options 
specialist pursuant to Rule 1020(a). An options Specialist includes 
a Remote Specialist which is defined as an options specialist in one 
or more classes that does not have a physical presence on an 
Exchange floor and is approved by the Exchange pursuant to Rule 501. 
See Preface to Phlx's Pricing Schedule.
    \6\ The term ``Registered Options Trader'' or ``ROT'', 
``Streaming Quote Trader'' or ``SQT'' and ``Remote Streaming Quote 
Trader'' or ``RSQT'' applies to transactions for the accounts of 
ROTS, SQTs, and RSQTs. For purposes of the Pricing Schedule, the 
term ``Market Maker'' will be utilized to describe fees and rebates 
applicable to ROTs, SQTs and RSQTs. See Preface to Phlx's Pricing 
Schedule.
    \7\ The trading activity of separate Specialist and Market Maker 
member organizations is aggregated in calculating the Monthly Market 
Maker Cap if there is Common Ownership between the member 
organizations.
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    The Exchange proposes to amend the Monthly Market Maker Cap to 
exclude options overlying NDX from electronic Options Transaction 
Charges as subject to the Monthly Market Maker Cap. Transactions in NDX 
will not be subject to the the Monthly Market Maker Cap.
PIXL
    Today, the Exchange assess a $0.07 per contract PIXL Initiating 
Order Fee. However, if the member or member organization qualifies for 
the Tier 3, 4 or 5 Customer Rebate in Section B the member or member 
organization is assessed $0.05 per contract. If the member or member 
organization executes equal to or greater than 3.00% of National 
Customer Volume in Multiply-Listed equity and ETF Options Classes 
(excluding SPY Options) in a given month, the member or member 
organization is assessed no fee for Complex PIXL Orders. Any member or 
member organization under Common Ownership with another member or 
member organization that qualifies for a Customer Rebate Tier 4 or 5 in 
Section B, or executes equal to or greater than 3.00% of National 
Customer Volume in Multiply-Listed equity and ETF Options Classes 
(excluding SPY Options) in a given month receives one of the PIXL 
Initiating Order discounts as described above. Members or member 
organizations that qualify for Customer Rebate Tiers 2 through 6 or 
qualify for the Monthly Firm Fee Cap \8\ are eligible for a rebate of 
$0.12 per contract for all Complex PIXL Orders (excluding SPY Options) 
greater than 499 contracts, provided the member executes an average of 
2,500 contracts per day of SPY Complex PIXL Orders in a month.
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    \8\ Firms are subject to a maximum fee of $75,000 (``Monthly 
Firm Fee Cap''). Additional details on the Monthly Firm Fee Cap are 
at Section II of the Pricing Schedule.
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    Further, the Exchange has pricing noted for PIXL Order Executions 
in Section II Multiply Listed Options. When the PIXL Order is contra to 
the Initiating Order a Customer PIXL Order is assessed no fee and Non-
Customer PIXL Orders will be assessed $0.30 per contract. When a PIXL 
Order is contra to a PIXL Auction Responder, a Customer PIXL Order is 
assessed no fee, other Non-Customer PIXL Orders are assessed $0.30 per 
contract in Penny Pilot Options or $0.38 per contract in Non-Penny 
Pilot Options. A Responder that is a Specialist or a Market Maker is 
assessed $0.25 per contract in Penny Pilot Options or $0.40 per 
contract in Non-Penny Pilot Options. Other Non-Customer Responders are 
assessed $0.48 per contract in Penny Pilot Options or $0.70 per 
contract in Non-Penny Pilot Options when contra to a PIXL Order. A 
Responder that is a Customer is assessed $0.00 per contract in Penny 
Pilot Options and Non-Penny Pilot Options. Finally, when a PIXL Order 
is contra to a resting order or quote a Customer PIXL Order is assessed 
no fee, other Non-Customers are assessed $0.30 per contract and the 
resting order or quote is assessed the appropriate Options Transaction 
Charge in Section II. All other fees discussed in Section II, including 
Marketing Fees and surcharges, apply as appropriate.
    The Exchange proposes to exclude options overlying NDX from the 
PIXL Pricing in Section IV, Part A. NDX would be subject to Section II 
pricing, specifically the Options Transactions Charges in NDX as noted.
MARS
    Today, MARS, pays a subsidy to Phlx members that provide certain 
order routing functionalities to other Phlx members and/or use such 
functionalities themselves. Generally, under MARS, Phlx pays 
participating Phlx members to subsidize their costs of providing 
routing services to route orders to Phlx. To qualify for MARS, a Phlx 
member's order routing functionality would be required to meet certain 
criteria.\9\ With respect to Complex Orders, the Exchange would not 
require Complex Orders to enable the electronic routing of orders to 
all of the U.S. options exchanges or provide current consolidated 
market data from the U.S. options exchanges. Any Phlx member may apply 
for MARS, provided the requirements are met, including a robust and 
reliable System. The member is solely responsible for implementing and 
operating its System. The Exchange is not proposing to amend this 
eligibility standards.
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    \9\ Specifically, a Phlx member's routing system (hereinafter 
``System'') would be required to: (1) Enable the electronic routing 
of orders to all of the U.S. options exchanges, including Phlx; (2) 
provide current consolidated market data from the U.S. options 
exchanges; and (3) be capable of interfacing with Phlx's API to 
access current Phlx match engine functionality. Further, the 
member's System would also need to cause Phlx to be the one of the 
top five default destination exchanges for individually executed 
marketable orders if Phlx is at the national best bid or offer 
(``NBBO''), regardless of size or time, but allow any user to 
manually override Phlx as a default destination on an order-by-order 
basis. Notwithstanding the above, with respect to Complex Orders a 
Phlx member's routing system would not be required to enable the 
electronic routing of orders to all of the U.S. options exchanges or 
provide current consolidated market data from the U.S. options 
exchanges. Any Phlx member would be permitted to avail itself of 
this arrangement, provided that its order routing functionality 
incorporates the features described above and satisfies Phlx that it 
appears to be robust and reliable. The member remains solely 
responsible for implementing and operating its system.
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    Today, a MARS Payment would be made to Phlx members that have 
System Eligibility and have routed the requisite number of Eligible 
Contracts daily in a month, which were executed on Phlx. For the 
purpose of qualifying for the MARS Payment, Eligible Contracts include 
Firm,\10\ Broker-Dealer,\11\ Joint Back Office or ``JBO'' \12\ or

[[Page 58883]]

Professional \13\ equity option orders that are electronically 
delivered and executed. Eligible Contracts do not include floor-based 
orders, qualified contingent cross or ``QCC'' orders,\14\ price 
improvement or ``PIXL'' orders,\15\ Mini-Option orders \16\ or Singly-
Listed Options \17\ orders. The Eligible Contracts requirements are not 
being amended.
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    \10\ The term ``Firm'' or (``F'') applies to any transaction 
that is identified by a Participant for clearing in the Firm range 
at OCC.
    \11\ The term ``Broker-Dealer'' applies to any transaction which 
is not subject to any of the other transaction fees applicable 
within a particular category.
    \12\ The term ``Joint Back Office'' or ``JBO'' applies to any 
transaction that is identified by a member or member organization 
for clearing in the Firm range at OCC and is identified with an 
origin code as a JBO. A JBO will be priced the same as a Broker-
Dealer. A JBO participant is a member, member organization or non-
member organization that maintains a JBO arrangement with a clearing 
broker-dealer (``JBO Broker'') subject to the requirements of 
Regulation T Section 220.7 of the Federal Reserve System as further 
discussed at Exchange Rule 703.
    \13\ The term ``professional'' means 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). See Rule 
1000(b)(14).
    \14\ 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 NBBO 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 Exchange's match engine. 
See Rule 1080(o).
    \15\ PIXL is the Exchange's price improvement mechanism known as 
Price Improvement XL or (PIXLSM). See Rule 1080(n).
    \16\ Mini Options are further specified in Phlx Rule 1012, 
Commentary .13.
    \17\ Singly Listed Options are options overlying currencies, 
equities, ETFs, ETNs treasury securities and indexes not listed on 
another exchange.
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    Phlx members that have System Eligibility and have executed the 
requisite number of Eligible Contracts in a month are paid the 
following per contract rebates: \18\
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    \18\ The specified MARS Payment are paid on all executed 
Eligible Contracts which are routed to Phlx through a participating 
Phlx member's System and meet the requisite Eligible Contracts ADV. 
No payment are made with respect to orders that are routed to Phlx, 
but not executed.

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                                                                   Average daily           MARS payment
                              Tiers                                   volume     -------------------------------
                                                                     (``ADV'')        Non-SPY           SPY
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1...............................................................           1,000           $0.01           $0.01
2...............................................................          30,000            0.10            0.10
3...............................................................          40,000            0.12            0.12
4...............................................................          52,500            0.14            0.12
5...............................................................          65,000            0.18            0.12
6...............................................................          75,000            0.20            0.12
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    The Exchange proposes to exclude options overlying NDX from 
Eligible Contracts for purposes of qualifying for a MARS Payment. Only 
Eligible Contracts are paid rebates, therefore no MARS Payment would be 
paid on options overlying NDX.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\19\ in general, and furthers the objectives of 
Sections 6(b)(4) and 6(b)(5) of the Act,\20\ 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, and is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \19\ 15 U.S.C. 78f(b).
    \20\ 15 U.S.C. 78f(b)(4) and (5).
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    The Exchange believes that the proposed pricing changes to exclude 
options overlying NDX from the Monthly Market Maker Cap, MARS and PIXL 
pricing for NDX are reasonable, equitable and not unfairly 
discriminatory. NDX transitioned in 2017 to an exclusively-listed 
product. Similar to other proprietary products, the Exchange seeks to 
recoup the operational costs for listing proprietary products.\21\ 
Also, pricing by symbol is a common practice on many U.S. options 
exchanges as a means to incentivize order flow to be sent to an 
exchange for execution in particular products. Other options exchanges 
price by symbol.\22\ Further, the Exchange notes that with its 
products, market participants are offered an opportunity to either 
transact options overlying NDX or separately execute options overlying 
PowerShares QQQ Trust (``QQQ'').\23\ Offering products such as QQQ 
provides market participants with a variety of choices in selecting the 
product they desire to utilize to transact NDX.\24\ When exchanges are 
able to recoup costs associated with offering proprietary products, it 
incentivizes growth and competition for the innovation of additional 
products.
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    \21\ By way of example, in analyzing an obvious error, the 
Exchange would have additional data points available in establishing 
a theoretical price for a multiply listed option as compared to a 
proprietary product, which requires additional analysis and 
administrative time to comply with Exchange rules to resolve an 
obvious error.
    \22\ See pricing for Russell 2000 Index (``RUT'') on Cboe 
Exchange, Inc.'s Fees Schedule.
    \23\ QQQ is an exchange-traded fund based on the Nasdaq-100 
Index[supreg].
    \24\ By comparison, a market participant may trade options 
overlying RUT or separately the market participant has the choice of 
trading iShares Russell 2000 Index Fund (``IWM'') Exchange-Traded 
Fund Shares options, which are also multiply listed.
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Monthly Market Maker Cap
    The Exchange's proposal to exclude electronic Options Transaction 
Charges for options overlying NDX from the Monthly Market Maker Cap is 
reasonable because Market Makers will continue to be able to utilize 
the cap to reduce electronic Option Transaction Charges, excluding 
surcharges, QCC transaction fees and Floor QCC Orders, despite the 
exclusion of NDX transactions. The Exchange's proposal to exclude 
electronic Options Transaction Charges for options overlying NDX from 
the Monthly Market Maker Cap is equitable and not unfairly 
discriminatory because the Exchange will uniformly exclude electronic 
options overlying NDX from the Monthly Market Maker Cap.
PIXL
    The Exchange's proposal to exclude options overlying NDX from the 
PIXL Pricing in Section IV, Part A is reasonable because the Exchange 
believes that the PIXL pricing continues to be competitive despite the 
exclusion of NDX. The Exchange's proposal to exclude options overlying 
NDX from the PIXL Pricing in Section IV, Part A is equitable and not 
unfairly discriminatory because the Exchange will uniformly exclude 
options overlying NDX from PIXL pricing.
MARS
    The Exchange's proposal to exclude options overlying NDX from 
Eligible Contracts for purposes of qualifying for a MARS Payment is 
reasonable because the Exchange believes that despite the exclusion of 
NDX, MARS remains a competitive offering. The Exchange's proposal to 
exclude options overlying NDX from Eligible Contracts for purposes of 
qualifying for a MARS Payment is equitable and not unfairly 
discriminatory because the Exchange will uniformly exclude options 
overlying NDX from MARS.

[[Page 58884]]

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. In terms of inter-market 
competition, the Exchange notes that it operates in a highly 
competitive market in which market participants can readily favor 
competing venues if they deem fee levels at a particular venue to be 
excessive, or rebate opportunities available at other venues to be more 
favorable.
    The Exchange's proposal to exclude electronic Options Transaction 
Charges for options overlying NDX from the Monthly Market Maker Cap 
does not impose an undue burden on intra-market competition because the 
Exchange will uniformly exclude electronic options overlying NDX from 
the Monthly Market Maker Cap. The Exchange's proposal to exclude 
options overlying NDX from the PIXL Pricing in Section IV, Part A does 
not impose an undue burden on intra-market competition because the 
Exchange will uniformly exclude options overlying NDX from PIXL 
pricing. The Exchange's proposal to exclude options overlying NDX from 
Eligible Contracts for purposes of qualifying for a MARS Payment does 
not impose an undue burden on intra-market competition because the 
Exchange will uniformly exclude options overlying NDX from MARS.

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\
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    \25\ 15 U.S.C. 78s(b)(3)(A)(ii).
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    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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) 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.

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 [email protected]. Please include 
File Number SR-Phlx-2017-102 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-Phlx-2017-102. 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-Phlx-2017-102 and should be submitted on 
or before January 4, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-26916 Filed 12-13-17; 8:45 am]
 BILLING CODE 8011-01-P