Document ID: SEC-2020-0561-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq PHLX, LLC
Posted Date: 2020-04-13T04:00Z

[Federal Register Volume 85, Number 71 (Monday, April 13, 2020)]
[Notices]
[Pages 20548-20551]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-07655]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88581; File No. SR-Phlx-2020-17]

Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Immediate Effectiveness of a Proposed Rule Change To Amend Phlx's 
Pricing Schedule at Options 7, Section 4

April 7, 2020.
    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 March 30, 2020, Nasdaq 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 Phlx's Pricing Schedule at Options 
7, Section 4, ``Multiply Listed Options Fees (Includes options 
overlying equities, ETFs, ETNs and indexes which are Multiply 
Listed).''
    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

[[Page 20549]]

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 amend its pricing within Options 7, Section 4, 
``Multiply Listed Options Fees (Includes options overlying equities, 
ETFs, ETNs and indexes which are Multiply Listed)'' to permit the 
strategy caps, which currently apply to the buy and sell side of a 
transaction that originate from the Exchange floor, to also apply to 
Floor Qualified Contingent Cross Orders.
    Phlx open outcry trading closed on March 17, 2020 due to measures 
taken by the Exchange to prevent the spread of the Coronavirus Disease 
(COVID-19).\3\ Phlx intends to permit Floor Brokers, on a temporary 
basis, to access and utilize, in a limited capacity, the Floor Based 
Management System (FBMS) from a remote location other than the Phlx 
Trading Floor. Phlx will permit, pursuant to Options 8, Section 32, to 
make all order types unavailable, with the exception of Section 32(e) 
Floor Qualified Contingent Cross Orders (``QCC''), for execution within 
FBMS.\4\ Today, Phlx applies the below strategy caps to the buy and 
sell side of a transaction, which must originate from the Exchange 
floor:
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    \3\ See Options Trader Alert #2020-7.
    \4\ Floor QCC transactions do not require exposure in open 
outcry. Additionally, Floor Brokers may also place orders on the 
limit order book electronically through the FBMS pursuant to Options 
8, Section 28(g).

----------------------------------------------------------------------------------------------------------------
  Floor options transactions--multiply
             listed options                        Strategy                  Qualification              Cap
----------------------------------------------------------------------------------------------------------------
Lead Market Maker, Market Maker,          dividend..................  executed on the same                $1,100
 Professional, Firm and Broker-Dealer.                                 trading day in the same
                                                                       options class when such
                                                                       members are trading: (1)
                                                                       In their own proprietary
                                                                       accounts; or (2) on an
                                                                       agency basis. If
                                                                       transacted on an agency
                                                                       basis, the daily cap will
                                                                       apply per beneficial
                                                                       account.
Lead Market Maker, Market Maker,          reversal and conversion,    executed on the same                $1,100
 Professional, Firm and Broker-Dealer.     merger, short stock         trading day for all
                                           interest, jelly roll, and   options classes in the
                                           box spread strategies.      aggregate when such
                                                                       members are trading (1)
                                                                       in their own proprietary
                                                                       accounts; or (2) on an
                                                                       agency basis. If
                                                                       transacted on an agency
                                                                       basis, the daily cap will
                                                                       apply per beneficial
                                                                       account.
Per member organization.................  dividend, merger, short     combined executions in a           $65,000
                                           stock interest, reversal    month when trading in its
                                           and conversion, jelly       own proprietary accounts.
                                           roll and box spread
                                           strategies (``Monthly
                                           Strategy Cap'').
----------------------------------------------------------------------------------------------------------------
 Reversal and conversion, jelly roll and box spread strategy executions will not be included in the
  Monthly Strategy Cap for a Firm. Reversal and conversion, jelly roll and box spread strategy executions (as
  defined in this Options 7, Section 4) are included in the Monthly Firm Fee Cap. All dividend, merger, short
  stock interest, reversal and conversion, jelly roll and box spread strategy executions (as defined in this
  Options 7, Section 4) will be excluded from the Monthly Market Maker Cap. NDX and NDXP Options Transactions
  will be excluded from Strategy Cap pricing.

    In light of the recent closure of open outcry, the Exchange 
proposes to apply the strategy caps within Options 7, Section 4 to 
qualifying strategies executed as Floor QCC Orders. The Exchange offers 
strategy caps for various types of strategies, including dividend,\5\ 
merger,\6\ short stock interest,\7\ reversal and conversion,\8\ jelly 
roll \9\ and box spread \10\ strategies. The Exchange proposes to amend 
the rule text within Options 7, Section 4 to provide, ``To qualify for 
a strategy cap, the buy and sell side of a transaction must originate 
either from the Exchange Trading Floor or as a Floor Qualified 
Contingent Cross Order.'' The Exchange is changing ``floor'' to 
``Trading Floor'' to be more specific. The Exchange believes that this 
proposal will allow members to avail themselves of the strategy caps 
within Options 7, Section 4 to the extent that they execute qualifying 
strategies as Floor QCC Orders, as open outcry is unavailable.
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    \5\ A dividend strategy is defined as transactions done to 
achieve a dividend arbitrage involving the purchase, sale and 
exercise of in-the-money options of the same class, executed the 
first business day prior to the date on which the underlying stock 
goes ex-dividend. See Options 7, Section 4.
    \6\ A merger strategy is defined as transactions done to achieve 
a merger arbitrage involving the purchase, sale and exercise of 
options of the same class and expiration date, executed the first 
business day prior to the date on which shareholders of record are 
required to elect their respective form of consideration, i.e., cash 
or stock. See Options 7, Section 4.
    \7\ A short stock interest strategy is defined as transactions 
done to achieve a short stock interest arbitrage involving the 
purchase, sale and exercise of in-the-money options of the same 
class. See Options 7, Section 4.
    \8\ Reversal and conversion strategies are transactions that 
employ calls and puts of the same strike price and the underlying 
stock. Reversals are established by combining a short stock position 
with a short put and a long call position that shares the same 
strike and expiration. Conversions employ long positions in the 
underlying stock that accompany long puts and short calls sharing 
the same strike and expiration. See Options 7, Section 4.
    \9\ A jelly roll strategy is defined as transactions created by 
entering into two separate positions simultaneously. One position 
involves buying a put and selling a call with the same strike price 
and expiration. The second position involves selling a put and 
buying a call, with the same strike price, but with a different 
expiration from the first position. See Options 7, Section 4.
    \10\ A box spread strategy is a strategy that synthesizes long 
and short stock positions to create a profit. Specifically, a long 
call and short put at one strike is combined with a short call and 
long put at a different strike to create synthetic long and 
synthetic short stock positions, respectively. See Options 7, 
Section 4.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\11\ in general, and furthers the

[[Page 20550]]

objectives of Sections 6(b)(4) and 6(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, 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) and (5).
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    The Commission and the courts have repeatedly expressed their 
preference for competition over regulatory intervention in determining 
prices, products, and services in the securities markets. In Regulation 
NMS, while adopting a series of steps to improve the current market 
model, the Commission highlighted the importance of market forces in 
determining prices and SRO revenues and, also, recognized that current 
regulation of the market system ``has been remarkably successful in 
promoting market competition in its broader forms that are most 
important to investors and listed companies.'' \13\
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    \13\ Securities Exchange Act Release No. 51808 (June 9, 2005), 
70 FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting 
Release'').
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    Likewise, in NetCoalition v. Securities and Exchange Commission 
\14\ (``NetCoalition'') the D.C. Circuit upheld the Commission's use of 
a market-based approach in evaluating the fairness of market data fees 
against a challenge claiming that Congress mandated a cost-based 
approach.\15\ As the court emphasized, the Commission ``intended in 
Regulation NMS that `market forces, rather than regulatory 
requirements' play a role in determining the market data . . . to be 
made available to investors and at what cost.'' \16\
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    \14\ NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010).
    \15\ See NetCoalition, at 534-535.
    \16\ Id. at 537.
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    Further, ``[n]o one disputes that competition for order flow is 
`fierce.' . . . As the SEC explained, `[i]n the U.S. national market 
system, buyers and sellers of securities, and the broker-dealers that 
act as their order-routing agents, have a wide range of choices of 
where to route orders for execution'; [and] `no exchange can afford to 
take its market share percentages for granted' because `no exchange 
possesses a monopoly, regulatory or otherwise, in the execution of 
order flow from broker dealers'. . . .'' \17\ Although the court and 
the SEC were discussing the cash equities markets, the Exchange 
believes that these views apply with equal force to the options 
markets.
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    \17\ Id. at 539 (quoting Securities Exchange Act Release No. 
59039 (December 2, 2008), 73 FR 74770, 74782-83 (December 9, 2008) 
(SR-NYSEArca-2006-21)).
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    The Exchange's proposal to permit qualifying strategies executed as 
Floor QCC Orders to qualify for a strategy cap is reasonable. Since 
Phlx's open outcry trading is currently unavailable, members are unable 
to qualify for strategy caps by transacting qualifying strategies that 
originate from the Trading Floor. Members are able to execute Floor QCC 
Orders through a remote connection to FBMS as Floor QCC Orders do not 
require exposure in open outcry. Floor QCC Orders are distinct from 
Qualified Contingent Cross orders submitted electronically.\18\ The 
Exchange continues to permit strategy caps to apply to Trading Floor 
members only with this proposal. The Exchange's proposal to amend 
Options 7, Section 4 to extend the criteria to qualify for a strategy 
cap to Floor QCC Orders that qualify as a strategy will allow members 
to benefit from the strategy caps within Options 7, Section 4.
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    \18\ See Options 3, Section 7(b)(8).
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    The Exchange's proposal to permit qualifying strategies executed as 
Floor QCC Orders to qualify for a strategy cap is equitable and not 
unreasonably discriminatory. Any member who transacts a qualifying 
strategy as a Floor QCC Order will be entitled to cap their strategies 
as provided for within Options 7, Section 4, provided the cap 
qualifications within Options 7, Section 4 are met.

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.
Inter-Market Competition
    The proposal does not impose an undue burden on inter-market 
competition. The Exchange believes its proposal remains competitive 
with other options markets and will offer market participants with 
another choice of where to transact options. 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. In such an environment, the Exchange 
must continually adjust its fees to remain competitive with other 
exchanges that have been exempted from compliance with the statutory 
standards applicable to exchanges. Because competitors are free to 
modify their own fees in response, and because market participants may 
readily adjust their order routing practices, the Exchange believes 
that the degree to which fee changes in this market may impose any 
burden on competition is extremely limited.
Intra-Market Competition
    The proposed amendments do not impose an undue burden on intra-
market competition.
    The Exchange's proposal to permit qualifying strategies executed as 
Floor QCC Orders to qualify for a strategy cap does not impose an undue 
burden on competition. Any member who transacts a qualifying strategy 
as a Floor QCC Order will be entitled to cap their strategies as 
provided for within Options 7, Section 4, provided the cap 
qualifications within Options 7, Section 4 are met.

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\
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    \19\ 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 rule-comments@sec.gov. Please include 
File Number SR-Phlx-2020-17 on the subject line.

[[Page 20551]]

Paper Comments

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

All submissions should refer to File Number SR-Phlx-2020-17. 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-2020-17 and should be submitted on 
or before May 4, 2020.

    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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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-07655 Filed 4-10-20; 8:45 am]
 BILLING CODE 8011-01-P