Document ID: SEC-2013-0904-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2013-05-15T04:00Z

[Federal Register Volume 78, Number 94 (Wednesday, May 15, 2013)]
[Notices]
[Pages 28681-28686]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-11520]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69548; File No. SR-Phlx-2013-49]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend 
Various Sections of the Exchange's Pricing Schedule

May 9, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on May 1, 2013, NASDAQ OMX 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 with 
respect to the Customer \3\ Rebate Program in Section B, certain 
pricing in Section II entitled ``Multiply Listed Options Fees,'' \4\ 
including Qualified Contingent Cross (``QCC'') Rebates,\5\ and Section 
IV, entitled ``Other Transaction Fees,'' PIXL \6\ Pricing and FLEX 
Options \7\ pricing. The Exchange also proposes to eliminate references 
to RUT and clarify the treatment of certain strategies.
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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\ The pricing in Section II includes options overlying 
equities, ETFs, ETNs and indexes which are Multiply Listed.
    \5\ 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 National Best Bid and Offer 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 PHLX XL 
II System. See Rule 1080(o). See also Securities Exchange Act 
Release No. 64249 (April 7, 2011), 76 FR 20773 (April 13, 2011) (SR-
Phlx-2011-47) (a rule change to establish a QCC Order to facilitate 
the execution of stock/option Qualified Contingent Trades (``QCTs'') 
that satisfy the requirements of the trade through exemption in 
connection with Rule 611(d) of the Regulation NMS). A Floor QCC 
Order must: (i) Be for at least 1,000 contracts, (ii) meet the six 
requirements of Rule 1080(o)(3) which are modeled on the QCT 
Exemption, (iii) be executed at a price at or between the National 
Best Bid and Offer (``NBBO''); and (iv) be rejected if a Customer 
order is resting on the Exchange book at the same price. In order to 
satisfy the 1,000-contract requirement, a Floor QCC Order must be 
for 1,000 contracts and could not be, for example, two 500-contract 
orders or two 500-contract legs. See Rule 1064(e). See also 
Securities Exchange Act Release No. 64688 (June 16, 2011), 76 FR 
36606 (June 22, 2011) (SR-Phlx-2011-56).
    \6\ PIXL is the Exchange's price improvement mechanism known as 
Price Improvement XL or (PIXL\SM\). See Rule 1080(n).
    \7\ The term ``FLEX option'' means a FLEX option contract that 
is traded subject to this Rule. Although FLEX options are generally 
subject to the rules in this section, to the extent that the 
provisions of this Rule are inconsistent with other applicable 
Exchange rules, this Rule takes precedence with respect to FLEX 
options. See Exchange Rule 1079.
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    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.

[[Page 28682]]

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 amend Category A of 
the Customer Rebate Program to offer increased rebate opportunities for 
PIXL Orders greater than 999 contracts in Section II symbols. The 
Exchange proposes to amend Section II to increase the maximum QCC 
rebate that will be paid by the Exchange, adopt a new fee and rebate 
for certain floor transactions, clarify the treatment of strategies and 
eliminate RUT from the Pricing Schedule. Finally, the Exchange proposes 
to amend its PIXL Pricing and relocate and adopt new FLEX Multiply 
Listed Options pricing.
    Customer Rebate Program
    Currently, the Exchange has in place a four tier structure Customer 
Rebate Program at Section B of the Pricing Schedule which pays Customer 
rebates on four Categories (A, B, C and D) of transactions. The four 
tier structure pays rebates based on percentage thresholds of national 
customer multiply-listed options volume by month based on the same four 
Categories (A, B, C and D) of transactions. Specifically, the Exchange 
bases a market participant's qualification for a certain Rebate Tier on 
the percentage of total national customer volume in multiply-listed 
options which are transacted monthly on Phlx as follows:

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                                                 Percentage thresholds of
                                                national customer volume in
            Customer rebate tiers               multiply-listed  equity and       Category A         Category B         Category C         Category D
                                                   ETF  options classes
                                                         (Monthly)
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Tier 1......................................  0.00%-0.75%...................              $0.00              $0.00              $0.00              $0.00
Tier 2......................................  Above 0.75%-1.60%.............               0.11               0.12               0.13               0.08
Tier 3......................................  Above 1.60%-2.60%.............               0.13               0.13               0.14               0.08
Tier 4......................................  Above 2.60%...................               0.15               0.15               0.15               0.09
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    Today, the Exchange totals Customer volume in Multiply Listed 
Options (including Select Symbols) that are electronically-delivered 
and executed, except volume associated with electronic QCC Orders, as 
defined in Exchange Rule 1080(o) in the same manner.\8\ Members and 
member organizations under common ownership \9\ may aggregate their 
Customer volume for purposes of calculating the Customer Rebate Tiers 
and receiving rebates. Category A rebates are paid to members executing 
electronically-delivered Customer Simple Orders in Penny Pilot Options 
and Customer Simple Orders in Non-Penny Pilot Options in Section II. 
Rebates are paid on PIXL Orders in Section II symbols that execute 
against non-Initiating Order interest. Category B rebates are paid to 
members executing electronically-delivered Customer Complex Orders in 
Penny Pilot Options and Non-Penny Pilot Options in Section II. Category 
C rebates are paid to members executing electronically-delivered 
Customer Complex Orders in Select Symbols in Section I. Category D 
rebates are paid to members executing electronically-delivered Customer 
Simple Orders in Select Symbols in Section I. Rebates are paid on PIXL 
Orders in Section I symbols that execute against non-Initiating Order 
interest.
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    \8\ For clarity, the Exchange will calculate volume and pay 
rebates based on a member organization's Phlx house account numbers.
    \9\ Common ownership means 75% common ownership or control.
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    The Exchange proposes to amend Category A of the Customer Rebate 
Program to instead pay on PIXL Orders in Section II symbols that 
execute against non-Initiating Order interest, except in the case of a 
PIXL Order that is greater than 999 contracts. All PIXL Orders that are 
greater than 999 contracts will be paid a rebate regardless of the 
contra party to the transaction. The Exchange is not proposing any 
additional amendments to the Customer Rebate Program.
Section II Amendments
    The Exchange proposes to remove references to FLEX Option pricing 
in Section II of the Pricing Schedule. The Exchange will adopt new FLEX 
Option pricing in Section IV of the Pricing Schedule, which will be 
described in additional detail below.
    The Exchange proposes to adopt new pricing for Specialists \10\ and 
Market Makers \11\ that are contra to a Customer Penny Pilot Options on 
Exchange Traded-Fund (``ETFs'') \12\ on the Exchange's floor of $0.25 
per contract in addition to the Floor Options Transaction Charges in 
Section II of the Pricing Schedule.\13\ Additionally, the contra 
Customer order to the Specialist and Market Maker transaction will be 
entitled to a rebate of $0.25 per contract. The Exchange believes that 
this new pricing will encourage trading in Penny Pilot Options on ETFs 
on the Exchange's trading floor.
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    \10\ A Specialist is an Exchange member who is registered as an 
options specialist pursuant to Rule 1020(a).
    \11\ A Market Maker includes Registered Options Traders (Rule 
1014(b)(i) and (ii)), which includes Streaming Quote Traders (see 
Rule 1014(b)(ii)(A)) and Remote Streaming Quote Traders (see Rule 
1014(b)(ii)(B)). Directed Participants are also market makers.
    \12\ An ETF is an open-ended registered investment company under 
the Investment Company Act of 1940 that has received certain 
exemptive relief from the Commission to allow secondary market 
trading in the ETF shares. ETFs are generally index-based products, 
in that each ETF holds a portfolio of securities that is intended to 
provide investment results that, before fees and expenses, generally 
correspond to the price and yield performance of the underlying 
benchmark index.
    \13\ Specialists and Market Makers are assessed a Floor Options 
Transaction Charge of $0.25 per contract. See Section II of the 
Pricing Schedule.
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    Finally, the Exchange is removing references the reference to 
options on the Russell 2000[supreg] Index (the ``Full Value Russell 
Index'' or ``RUT'') in Section II of the Pricing Schedule as the 
Exchange delisted RUT as of April 24, 2013.
Section IV Amendments
PIXL
    The Exchange proposes to amend PIXL pricing at Section IV, Part A 
of the Pricing Schedule. Currently, the Exchange assesses an Initiating 
Order \14\ a $0.07 per contract or $0.05 per contract fee if the 
Customer Rebate Program Threshold Volume, defined in Section B, is 
greater than 100,000

[[Page 28683]]

contracts per day in a month. \15\ The Exchange proposes to amend the 
PIXL pricing to state that an Initiating Order fee for a Firm that is 
contra to a Customer PIXL Order will be reduced to $0.00 if a Customer 
PIXL Order is greater than 999 contracts. The Exchange believes that 
this amendment will encourage Firms to transact a greater number of 
PIXL Orders.
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    \14\ A member may electronically submit for execution an order 
it represents as agent on behalf of a public customer, broker-
dealer, or any other entity (``PIXL Order'') against principal 
interest or against any other order (except as provided in Rule 
1080(n)(i)(E)) it represents as agent (``Initiating Order'') 
provided it submits the PIXL order for electronic execution into the 
PIXL Auction (``Auction'') pursuant to Rule 1080. See Exchange Rule 
1080(n).
    \15\ Any member or member organization under Common Ownership 
with another member or member organization that qualifies for a 
Customer Rebate Tier discount in Section B receives the PIXL 
Initiating Order discount as described above.
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FLEX
    The Exchange also proposes to add a new Part B to Section IV 
entitled ``FLEX Transaction Fees.'' As mentioned herein, FLEX Options 
pricing is currently located in Section II of the Pricing Schedule. 
Today, the Exchange assesses Customers no fee for transacting FLEX 
Options. All other market participants, Professionals,\16\ Specialists, 
Market Makers, Broker-Dealers \17\ and Firms,\18\ are assessed $0.10 
per contract when transacting FLEX Options.\19\ Further, today the Firm 
Floor Options Transaction Charges are waived for members executing 
facilitation orders pursuant to Exchange Rule 1064 when such members 
are trading in their own proprietary account (including FLEX and 
Cabinet Options Transaction Charges).\20\
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    \16\ 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).
    \17\ The term ``Broker-Dealer'' applies to any transaction which 
is not subject to any of the other transaction fees applicable 
within a particular category.
    \18\ The term ``Firm'' applies to any transaction that is 
identified by a member or member organization for clearing in the 
Firm range at OCC.
    \19\ FLEX Option fees today are not in addition to Options 
Transaction Charges.
    \20\ The Firm Floor Options Transaction Charges is waived for 
the buy side of a transaction if the same member or its affiliates 
under Common Ownership represents both sides of a Firm transaction 
when such members are trading in their own proprietary account.
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    The Exchange proposes to adopt new FLEX Multiply Listed Options 
pricing in Section IV, Part B of the Pricing Schedule for Multiply 
Listed Options. FLEX Transaction Customer Fees for Multiply Listed 
Orders on the Exchange's trading floor \21\ will continue to be 
assessed no fee for transacting FLEX Options. All other market 
participants, Professionals, Specialists, Market Makers, Broker-Dealers 
and Firms, will now be assessed an increased fee of $0.15 per contract 
when transacting FLEX Options.\22\ The Exchange will continue to apply 
the Monthly Firm Fee Cap,\23\ Monthly Market Maker Cap,\24\ and the 
Options Surcharge in PHLX/KBW Bank Index (``BKX''), options on the one-
tenth value of the Nasdaq 100 Index traded under the symbol MNX 
(``MNX'') and options on the Nasdaq 100 Index traded under the symbol 
NDX (``NDX'') described in Section II \25\ will apply to this Section 
IV, B. No other fees described in Section II will apply to this Section 
IV, B. The Exchange will continue to waive FLEX transaction fees for a 
Firm executing facilitation orders pursuant to Exchange Rule 1064 when 
such members are trading in their own proprietary account. The pricing 
in Section III, entitled ``Singly Listed Options'' will continue to 
apply to FLEX Singly Listed Options, as is the case today.\26\ The 
Exchange assesses Options Transaction Charges for Singly Listed Options 
as follows: A Customer is assessed $0.35 per contract, a Specialist and 
Market Maker is assessed $0.40 per contract and a Professional, Firm 
and Broker-Dealer are assessed $0.60 per contract.
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    \21\ FLEX options are only executed on the Exchange's trading 
floor and are not executed electronically on the Exchange.
    \22\ FLEX Option fees today are not in addition to Options 
Transaction Charges.
    \23\ Firms are subject to a maximum fee of $75,000 (``Monthly 
Firm Fee Cap''). Firm Floor Option Transaction Charges and QCC 
Transaction Fees, as defined in this section above, in the 
aggregate, for one billing month may not exceed the Monthly Firm Fee 
Cap per member organization when such members are trading in their 
own proprietary account. All dividend, merger, and short stock 
interest strategy executions (as defined in this Section II) are 
excluded from the Monthly Firm Fee Cap. Reversal and conversion 
strategy executions (as defined in this Section II) are included in 
the Monthly Firm Fee Cap. QCC Transaction Fees are included in the 
calculation of the Monthly Firm Fee Cap.
    \24\ Specialists and Market Makers are subject to a ``Monthly 
Market Maker Cap'' of $550,000 for: (i) Electronic and floor Option 
Transaction Charges; (ii) QCC Transaction Fees (as defined in 
Exchange Rule 1080(o) and Floor QCC Orders, as defined in 1064(e)); 
and (iii) fees related to an order or quote that is contra to a PIXL 
Order or specifically responding to a PIXL auction. 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. 
All dividend, merger, short stock interest and reversal and 
conversion strategy executions (as defined in this Section II) are 
excluded from the Monthly Market Maker Cap.
    \25\ Today, the Exchange pays an Options Surcharge in BKX of 
$0.10 per contract for all market participants except Customers. 
Also, the Exchange pays an Options Surcharge in RUT, MNX and NDX of 
$0.15 per contract for all market participants, except Customers. As 
noted herein, RUT is delisted.
    \26\ Section III pricing includes options overlying currencies, 
equities, ETFs, ETNs treasury securities and indexes not listed on 
another exchange.
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    The Exchange also proposes to clarify that FLEX Options are not 
eligible for strategy treatment. Today, the Exchange caps certain 
dividend,\27\ merger,\28\ short stock interest \29\ and reversal and 
conversion \30\ floor option transactions. FLEX Options are not 
eligible for strategy treatment today. There is no mechanism today to 
mark FLEX Option transactions for strategy caps, therefore today FLEX 
Options are not eligible for strategy treatment. The Exchange proposes 
to clarify in the new FLEX Pricing in Section IV, Part B that FLEX 
Options will not be eligible for strategy treatment.
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    \27\ 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.
    \28\ 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.
    \29\ 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.
    \30\ 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.
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    The Exchange proposes to rename Section IV, Part B, ``Cancellation 
Fees,'' as Part C and also proposes to rename Section IV, Part C, 
``Options Regulatory Fee,'' as Part D.
2. Statutory Basis
    The Exchange believes that its proposal to amend its Pricing 
Schedule is consistent with Section 6(b) of the Act \31\ in general, 
and furthers the objectives of Section 6(b)(4) of the Act \32\ in 
particular, in that it provides for an equitable allocation of 
reasonable fees and other charges among Exchange members and other 
persons using its facilities.
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    \31\ 15 U.S.C. 78f(b).
    \32\ 15 U.S.C. 78f(b)(4).
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Customer Rebate Program
    The Exchange's proposal to amend Category A of the Customer Rebate 
Program to pay rebates on PIXL Orders in Section II symbols for orders 
that are greater than 999 contracts, regardless of the contra party, is 
reasonable because the Exchange seeks to incentivize market 
participants by offering additional opportunities to earn Customer 
rebates on PIXL Orders.
    The Exchange's proposal to amend Category A of the Customer Rebate 
Program to pay rebates on PIXL Orders

[[Page 28684]]

in Section II symbols for orders that are greater than 999 contracts, 
regardless of the contra party,\33\ is equitable and not unfairly 
discriminatory because the Exchange will pay Customer rebates to any 
market participant that transacts a PIXL Order greater than 999 
contracts regardless of the contra party in Section II symbols. This 
proposal would pay a rebate for a Customer PIXL Order in a Section II 
symbol for orders greater than 999 contracts regardless of whether the 
Customer PIXL Order is contra to an Initiating Order or a non-
Initiating Order. The Exchange will apply the Category A rebate 
uniformly with respect to market participants transacting qualifying 
orders.
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    \33\ Today, a PIXL Order that is contra to a non-Initiating 
Order interest is entitled to the Customer rebate in Section B of 
the Pricing Schedule.
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Section II Amendments
    The Exchange's proposal to adopt new pricing for Specialists and 
Market Makers that are contra to a Customer Penny Pilot Options on ETFs 
transacted on the Exchange's floor of $0.25 per contract in addition to 
the Options Transaction Charges \34\ in Section II of the Pricing 
Schedule is reasonable because the Exchange seeks to encourage more 
orders in Penny Pilot Options on ETFs to be delivered and executed on 
the Exchange's trading floor and therefore provides an opportunity for 
floor participants to interact with that order. Additionally, the 
proposed fees are in line with pricing at other options exchanges.\35\ 
The Exchange also proposes to assess this fee in order that it may 
offer a rebate to the Customer on the contra-side of a Specialist and 
Market Maker floor transaction in a Penny Pilot Option on an ETF. The 
Exchange believes that paying a rebate of $0.25 per contract to 
Customers on the contra-side of a Specialist and Market Maker Penny 
Pilot Options on an ETF order will encourage market participants to 
send Customer Penny Pilot Options on ETFs to the Exchange's floor for 
execution to qualify for the rebate when they are contra to a 
Specialist or Market Maker order.
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    \34\ Specialists and Market Makers are assessed an Options 
Transaction Charge of $0.25 per contract for transacting floor 
trading ETFs in Penny Pilot Options. See Section II of the Pricing 
Schedule. The Exchange does not assess Payment for Order Flow fees 
for floor transactions. See Section II of the Pricing Schedule.
    \35\ See the Chicago Board Options Exchange Incorporated 
(``CBOE'') Fees Schedule. CBOE assesses CBOE Market Makers 
transaction fees for floor trading of ETFs in Penny Pilot Options of 
$0.25 -$0.03 per contracts, depending on the number of contracts 
executed per month (Liquidity Provider Scale) in addition to a $0.25 
per contract payment for order flow fee.
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    The Exchange's proposal to adopt new pricing for Specialists and 
Market Makers that are contra to a Customer Penny Pilot Options on ETFs 
transacted on the Exchange's trading floor of $0.25 per contract in 
addition to the Options Transaction Charges \36\ in Section II of the 
Pricing Schedule is equitable and not unfairly discriminatory. Today, 
Customers do not pay transaction fees for Multiply Listed Penny and 
Non-Penny Pilot Options, so Specialists and Market Makers will continue 
to be assessed higher transaction fees. Also, unlike Professionals and 
Broker-Dealers, the Exchange provides other pricing benefits to 
Specialists and Market Makers such as a Monthly Market Maker Cap. Also, 
when comparing Specialists and Market Makers to Firms and other market 
participants it is important to note that Specialists and Market Makers 
are assessed Payment for Order Flow fees (``PFOF'') when transacting 
Customer electronic orders, but not floor transactions. Specialists and 
Market Makers are assessed a higher fee in order to incentivize order 
flow, similar to the manner in which the PFOF \37\ incentivizes order 
flow for electronic transactions. Specialists and Market Makers 
interact with that Customer order flow and benefit from it unlike other 
market participants.
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    \36\ Specialists and Market Makers are assessed an Options 
Transaction Charge of $0.25 per contract for transacting Floor ETFs 
in Penny Pilot Options. See Section II of the Pricing Schedule. The 
Exchange does not assess Payment for Order Flow fees for floor 
transactions. See Section II of the Pricing Schedule.
    \37\ The Exchange assesses a $0.25 per contract PFOF for options 
that are trading in the Penny Pilot Program and a $0.70 per contract 
fee for remaining equity options in addition to other transaction 
fees in Sections I and II of the Pricing Schedule with respect to 
Customer orders. No payment for order flow fees will be assessed on 
trades that are not delivered electronically. See Section II of the 
Pricing Schedule.
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    The Exchange's proposal to pay a $0.25 per contract rebate to a 
Customer that is contra to a Specialist or Market Maker order in a 
Penny Pilot Options on an ETF transacted on the Exchange's trading 
floor is equitable and not unfairly discriminatory because Customer 
order flow is unique and such order flow attracts liquidity to the 
market to the benefit of all market participants. The Exchange will 
uniformly pay all Customers the $0.25 per contract rebate if the order 
is contra to a Specialist or Market Maker order in Penny Pilot Options 
on ETFs transacted on the Exchange's trading floor.
    The Exchange's proposal to remove references to RUT in Section II 
of the Pricing Schedule is reasonable, equitable and not unfairly 
discriminatory because the Exchange delisted RUT as of April 24, 2013 
and RUT is no longer traded on Phlx. The pricing is unnecessary.
Section IV Amendments
PIXL
    The Exchange's proposal to amend PIXL pricing at Section IV, Part A 
of the Pricing Schedule to reduce the Initiating Order fee to $0.00 for 
a Firm that is contra to a Customer PIXL Order that is greater than 999 
contracts is reasonable for the reasons stated below. The Exchange is 
attempting to attract PIXL order flow by incentivizing members. The 
Exchange believes that this amendment will encourage market 
participants to transact a greater number of larger sized orders in 
PIXL. Today, the Exchange incentivizes market participants to transact 
PIXL Orders by offering competitive pricing including Customer rebates 
in Section B of the Pricing Schedule. The Exchange is instead offering 
to reduce the PIXL Initiating Order Fee which is currently $0.07 or 
$0.05 per contract if Customer Rebate Program Threshold Volume defined 
in Section B is greater than 100,000 contracts per day in a month to 
$0.00 for a Firm that is a contra to a Customer PIXL Order which 
exceeds 999 contracts. The Exchange desires to incentivize Firms to 
offer Customer PIXL Orders with respect to large orders (greater than 
999 contracts) price improvement opportunities via PIXL because Firms 
typically execute such large institutional orders as compared to other 
market participants. The proposed PIXL Initiation Order Firm Fee 
reduction to $0.00 per contract, when contra to a Customer PIXL Order, 
is similar to the manner in which the Exchange assesses transaction 
fees for Firm Floor Facilitation orders. Today, the Exchange waives 
Firm Floor Options Transaction Charges \38\ for members executing 
facilitation orders pursuant to Exchange Rule 1064 \39\ when such 
members are trading in their own proprietary account. The Exchange 
waives Firm Facilitation Fees because such fees serve to encourage 
Firms to facilitate Customer order flow. Likewise, the Exchange seeks 
to similarly assess Firm fees for PIXL orders, which are electronic 
orders, as compared to floor

[[Page 28685]]

orders, by encouraging Firms to initiate PIXL Orders within the PIXL 
auction mechanism in an effort to lower execution charges by 
transacting with a Customer PIXL Order. When a Firm enters an 
Initiating Order, similar to Firm Facilitation orders on the Exchange 
floor, market participants are afforded an opportunity to respond to 
the order which should in turn generate additional responders to a PIXL 
auction. All market participants are eligible to respond to an 
Initiating PIXL Orders. Therefore, offering Firms an opportunity to 
deliver orders into the PIXL auction, for purposes of price 
improvement, benefits all market participants by incentivizing order 
interaction in PIXL. Also, the Exchange's proposal is similar to 
pricing at CBOE,\40\ except the Exchange is offering to reduce the 
Initiating Order Fee to $0.00 for a Firm only when the Initiating Order 
is contra to a Customer PIXL Order that is greater than 999 contracts, 
otherwise there is a fee.
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    \38\ The Exchange assesses Firm Floor Options Transaction 
Charges in Penny and Non-Penny Pilot Options of $0.25 per contract.
    \39\ Exchange Rule 1064, entitled ``Crossing, Facilitation and 
Solicited Orders,'' provides at Rule 1064(b) that except as provided 
in paragraph 1064(e), a Floor Broker holding an options order for a 
public customer and a contra-side order may cross such orders in 
accordance with Rule 1064(a) or may execute such orders as a 
facilitation cross as specified in Rule 1064(b)(i)-(iii).
    \40\ For facilitation orders on CBOE, other than SPX, SPXpm, 
SRO, VIX or other volatility indexes, OEX or XEO, no Clearing 
Trading Permit Holder Proprietary transaction fees are assessed to a 
Firm. CBOE defines facilitation orders as any paired order in which 
a Clearing Trading Permit Holder (F) origin code is contra to any 
other origin code, provided the same executing broker and clearing 
firm are on both sides of the order) executed in AIM, open outcry, 
or as a QCC or FLEX transaction. See CBOE's Fees Schedule.
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    The Exchange's proposal to amend PIXL pricing at Section IV, Part A 
of the Pricing Schedule to reduce the Initiating Order fee to $0.00 for 
a Firm that is contra to a Customer PIXL Order that is greater than 999 
contracts is equitable and not unfairly discriminatory for the reasons 
which follow. With respect to the increased differential as between 
Firms and other market participants, except Customers, who will 
continue to pay either the $0.07 or the $0.05 per contract Initiating 
Order Fee,\41\ the Exchange believes that, as mentioned above, Firms 
typically execute such large institutional orders as compared to other 
market participants. Customers do not pay a fee when contra to an 
Initiating Order.\42\ It is only in a limited circumstance where the 
Firm would pay no fee because the Firm Initiating Orders must be contra 
to a Customer PIXL Order that is greater than 999 contracts, otherwise 
there is a fee. Further, by assessing no fees, Firms should be 
incentivized to execute more orders on the Exchange. To the extent that 
this purpose is achieved, all of the Exchange's market participants 
should benefit from the improved market liquidity. Likewise, the 
proposal would increase the differential as between other market 
participants, except Customers, that would pay the $0.30 per contract 
PIXL Order fee when they are contra to an Initiating Order \43\ and the 
Firm that would not pay a fee, but only in the limited circumstance 
that the Firm is contra to a Customer PIXL Order and that order is 
greater than 999 contracts. Customers do not pay a fee when contra to 
an Initiating Order.\44\ Similar to Firm Facilitation on the Exchange's 
trading floor, such fees serve to encourage Firms to facilitate 
Customer order flow. As noted herein, Exchange seeks to encourage Firms 
to initiate PIXL auctions within the PIXL auction mechanism in an 
effort to lower execution charges by transacting with a Customer PIXL 
Order. When a Firm enters an Initiating Order market participants are 
afforded an opportunity to respond to the order which should in turn 
generate additional responders to a PIXL auction. All market 
participants are eligible to respond to an Initiating PIXL Orders. 
Therefore, offering Firms an opportunity to deliver orders into the 
PIXL auction, for purposes of price improvement, benefits all market 
participants by incentivizing order interaction in PIXL. Today, the 
differential for Firm floor facilitation is $0.25 per contract.\45\ 
While this differential is wider, it is not applicable on all 
transactions but only in the limited circumstance that the Firm is 
contra to a Customer PIXL Order and that order is greater than 999 
contracts. As explained herein, Firms typically execute such large 
institutional orders as compared to other market participants.
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    \41\ The Initiating Order Fee is $0.07 per contract or $0.05 per 
contract depending on whether the Customer Rebate Program Threshold 
Volume defined in Section B is greater than 100,000 contracts per 
day in a month.
    \42\ See Section IV, Part A of the Pricing Schedule.
    \43\ Section IV, Part A of the Pricing Schedule provides when 
the PIXL Order is contra to the Initiating Order a Customer PIXL 
Order will be assessed $0.00 and all non-Customer market participant 
PIXL Orders will be assessed $0.30 per contract when contra to the 
Initiating Order for PIXL Order executions in Section I, Select 
Symbols, as well as in Section II, Multiply Listed Options.
    \44\ See Section IV, Part A of the Pricing Schedule.
    \45\ All market participants, except Customers, are assessed a 
Penny Pilot Option and Non-Penny Pilot Option Transaction Charge of 
$0.25 per contract for floor transactions. See Section II of the 
Pricing Schedule.
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    For these reasons, the Exchange believes the proposal is equitable 
and not unfairly discriminatory.
FLEX Pricing
    The Exchange's proposal to add a new Part B to Section IV entitled 
``FLEX Transaction Fees'' and to amend the FLEX pricing is reasonable 
for the reasons which follow. With respect to Multiply Listed Options 
the Exchange is proposing to increase the FLEX Options pricing for 
Professionals, Specialists, Market Makers, Broker-Dealers and Firms 
from $0.10 to $0.15 per contract, which should not discourage market 
participants from transacting FLEX Options.\46\ The Exchange has not 
recently amended these fees. The FLEX Options are transacted on the 
Exchange's trading floor and the process is not automated. Exchange 
staff is involved in the process of processing requests for FLEX Orders 
and costs associated with the Exchange's trading floor have risen over 
the years. The Exchange believes that the increase will assist the 
Exchange in offsetting costs while keeping such costs competitive with 
other markets. The Exchange believes that its proposal to amend the 
Multiply Listed Options FLEX pricing is equitable and not unfairly 
discriminatory because the Exchange is assessing the same fees for 
Multiply Listed Options on all market participants, except Customers. 
Customers traditionally are not assessed transaction fees because 
Customer orders bring valuable liquidity to the market. The Exchange 
believes that the cost to transact FLEX Options remains competitive 
with costs at other options Exchanges.\47\
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    \46\ FLEX Transaction Customer Fees for Multiply Listed Orders 
on the Exchange's trading floor will continue to be assessed fee for 
transacting FLEX Options
    \47\ See CBOE's Fees Schedule.
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    The Exchange is not otherwise proposing to amend its treatment of 
FLEX pricing. As is the case today, the Monthly Firm Fee Cap, the 
Monthly Market Maker Cap and the Options Surcharges in BKX, MNX and NDX 
will continue to apply. Also, the Exchange is not amending the FLEX 
pricing for Singly Listed Options, which will continue to be assessed 
the pricing in Section III of the Pricing Schedule. The Exchange will 
also continue to waive FLEX transaction fees for a Firm when such 
members are trading in their own proprietary accounts pursuant to 
Exchange Rule 1064, as is the case today. The Exchange's proposal to 
clarify that FLEX Options are not eligible for strategy treatment is 
reasonable, equitable and not unfairly discriminatory because today 
market participants may not mark a FLEX Option as eligible for a 
strategy transaction. The Exchange believes that adding a clarifying 
sentence to specifically state that FLEX Options will not qualify for 
strategy treatment will clarify the Pricing Schedule to the benefit of 
all market participants.

[[Page 28686]]

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 its 
proposal to amend Category A of the Customer Rebate Program does not 
impose an undue burden on competition because the Exchange is offering 
to pay Customer rebates on PIXL Orders greater than 999 contracts 
regardless of the contra party for all market participants. The 
Exchange believes that assessing additional fees to Specialists and 
Market Makers does not create an undue burden on competition because 
the Exchange is proposing to offer Customers a rebate which should 
attract Customer order flow to the benefit of Specialists, Market 
Makers and other market participants that interact with such order 
flow. Today, the Exchange assesses Specialists and Market Makers PFOF 
for electronic transaction to similarly attract order flow to the 
Exchange when the Specialist and Market Maker are contra to a Customer 
order.
    The PIXL pricing is proposed to incentivize Firms to bring 
Initiating Orders to a PIXL auction. The Exchange does not believe that 
the proposed PIXL pricing creates an undue burden on competition, but 
rather encourages competition among market participants to price 
improve the order. Other market participants may respond to a PIXL 
Initiating Order. The Exchange does not believe that the differentials 
created as between Firms and other market participants, in terms of the 
cost of participating in a PIXL transaction, while greater, creates an 
undue burden on competition because the Firm Initiating Order Fee will 
only be reduced in limited circumstances and most likely by a Firm. By 
reducing the Initiating Order Fee for a Firm in these limited 
circumstances, the Exchange is incentivizing Firms to execute more 
orders on the Exchange. To the extent that this purpose is achieved, 
all of the Exchange's market participants should benefit from the 
improved market liquidity.
    The FLEX pricing in Multiply Listed Options is the same pricing for 
all market participants except Customers, who are not assessed FLEX 
Options transaction fees in Multiply Listed Options because Customer 
order brings liquidity to the market which benefits all market 
participants. The Exchange does not believe that the FLEX pricing 
creates an undue burden on competition.
    The Exchange operates in a highly competitive market, comprised of 
eleven exchanges, in which market participants can easily and readily 
direct order flow to competing venues if they deem fee levels at a 
particular venue to be excessive or rebates to be inadequate. 
Accordingly, the fees that are assessed and the rebates paid by the 
Exchange described in the above proposal are influenced by these robust 
market forces and therefore must remain competitive with fees charged 
and rebates paid by other venues and therefore must continue to be 
reasonable and equitably allocated to those members that opt to direct 
orders to the Exchange rather than competing venues.

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.\48\ 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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    \48\ 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-2013-49 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-2013-49. 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-2013-49 and should be 
submitted on or before June 5, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\49\
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    \49\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-11520 Filed 5-14-13; 8:45 am]
BILLING CODE 8011-01-P