Document ID: SEC-2013-1950-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2013-11-18T05:00Z

[Federal Register Volume 78, Number 222 (Monday, November 18, 2013)]
[Notices]
[Pages 69164-69167]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-27475]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70850; File No. SR-Phlx-2013-109]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Regarding 
Box Spread Strategies

November 12, 2013.
    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 October 30, 2013, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I, II, 
and III, below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to adopt a strategy fee cap applicable to box 
spreads.
    While the changes proposed herein are effective upon filing, the 
Exchange has designated that the amendments be operative on November 1, 
2013.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqomxphlx.cchwallstreet.com/, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this filing is to amend the strategy fee caps which 
are currently located in Section II, entitled ``Multiply Listed 
Options.'' \3\ Today, the Exchange caps fees on certain dividend, 
merger, short stock interest, reversal and conversion and jelly roll 
strategy floor option transactions. The Exchange is proposing to also 
cap fees on box spread strategy transactions.
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    \3\ This includes options overlying equities, ETFs, ETNs and 
indexes which are Multiply Listed.
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    A box spread strategy 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. The Exchange proposes to include this definition in 
Section II of the Pricing Schedule in the section entitled ``Strategies 
Defined.''
    The Exchange proposes to offer a strategy cap for box spreads. 
Today, Specialist,\4\ Market Maker,\5\ Professional,\6\ Firm \7\ and 
Broker-Dealer \8\

[[Page 69165]]

floor option transaction charges in Multiply Listed Options are capped 
at $1,250 for dividend, merger and short stock interest strategies 
executed on the same trading day in the same options class when such 
members are trading in their own proprietary accounts, and option 
transaction charges in Multiply Listed Options are capped at $700 for 
reversal and conversion and jelly roll strategies executed on the same 
trading day in the same options class. Floor option transaction charges 
in Multiply Listed Options for dividend, merger, short stock interest, 
reversal and conversion and jelly roll strategies combined are further 
capped at $35,000 per member organization, per month when such members 
are trading in their own proprietary accounts (``Monthly Strategy 
Cap''). Reversal and conversion and jelly roll strategy executions are 
not included in the Monthly Strategy Cap for a Firm. Further, to 
qualify for a strategy fee cap, the buy and sell side of a transaction 
must originate from the Exchange floor.
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    \4\ A ``Specialist'' is an Exchange member who is registered as 
an options specialist pursuant to Rule 1020(a).
    \5\ 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.
    \6\ 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).
    \7\ The term ``Firm'' applies to any transaction that is 
identified by a member or member organization for clearing in the 
Firm range at OCC.
    \8\ The term ``Broker-Dealer'' applies to any transaction which 
is not subject to any of the other transaction fees applicable 
within a particular category.
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    The Exchange proposes to cap Specialist, Market Maker, 
Professional, Firm and Broker-Dealer floor option transaction charges 
in Multiply Listed Options at $700 for box spread strategies executed 
on the same trading day in the same options class. Further, the 
Exchange will include box spreads in the Monthly Strategy Cap so that 
floor option transaction charges in Multiply Listed Options for 
dividend, merger, short stock interest, reversal and conversion, jelly 
roll and box spread strategies combined will continue to be capped at 
$35,000 per member organization, per month when such members are 
trading in their own proprietary accounts for purposes of the Monthly 
Strategy Cap, except for a Firm. Similar to reversal and conversion and 
jelly roll strategy executions, box spreads will not be included in the 
Monthly Strategy Cap for a Firm. The Exchange proposes to note for 
purposes of clarity in the Pricing Schedule that, as is the case today 
for reversal and conversion and jell roll strategy executions, box 
spreads are included in the Monthly Firm Fee Cap.\9\ The Exchange 
proposes to amend the text of the Pricing Schedule describing the 
applicability of the Monthly Market Maker Cap \10\ and the Monthly Firm 
Fee Cap to clarify how box spread strategies will be included or 
excluded from these caps as defined herein. For purposes of clarity, 
the Exchange proposes to note in the Pricing Schedule that all strategy 
executions are excluded from the Monthly Market Maker Cap.
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    \9\ 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.
    \10\ 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.
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    In order to receive the applicable strategy caps today, members are 
required to designate on the trade ticket whether the trade involves a 
dividend, merger, short stock interest, reversal and conversion or 
jelly roll strategy by entering the proper code on the trading ticket 
\11\ and into the system, or directly into the Floor Broker Management 
System \12\ (``FBMS'').\13\ In the alternative, members may request 
Exchange staff on the trading floor to input the code into the 
system.\14\ The Exchange will require members to enter a ``Z3'' on the 
trading ticket in order to receive the strategy cap for a box spread 
strategy. The Exchange will note the required designation in a 
memorandum to floor members when it announces the availability of the 
strategy cap for box spread strategies.
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    \11\ The Exchange has designated ``Z1'' for dividend strategies, 
``Z2'' for short stock interest and merger strategies, ``Z3'' for 
box spread strategies and ``Z4'' for reversal and conversion and 
jelly roll strategies.
    \12\ FBMS is designed to enable Floor Brokers and/or their 
employees to enter, route and report transactions stemming from 
options orders received on the Exchange. FBMS also is designed to 
establish an electronic audit trail for options orders represented 
and executed by Floor Brokers on the Exchange, such that the audit 
trail provides an accurate, time-sequenced record of electronic and 
other orders, quotations and transactions on the Exchange, beginning 
with the receipt of an order by the Exchange, and further 
documenting the life of the order through the process of execution, 
partial execution, or cancellation of that order. See Exchange Rule 
1080, Commentary .06.
    \13\ See Securities Exchange Act Release No. 65228 (August 30, 
2011), 76 FR 55453 (September 7, 2011) (SR-Phlx-2012-73) (notice of 
filing and immediate effectiveness of proposed rule change relating 
to reversal and conversion strategies).
    \14\ The system refers to PHLX XL[supreg], the Exchange's 
automated trading system. The Exchange believes that providing 
members the ability to request Exchange staff to mark a Strategy 
Trade on the day the strategy is executed would provide members with 
a means to ensure the Strategy Trade is properly marked for purposes 
of pricing in the event that a floor broker inadvertently forgot to 
mark a trade. Therefore, the Exchange requires that members 
executing Strategy Trades either: (1) enter a code on the trading 
ticket and into the system; (2) enter a code directly into FBMS; or 
(3) request that the information be input into the system by 
Exchange staff on the trading floor, on the day the order was 
executed, to take advantage of certain pricing caps for which they 
may qualify.
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2. Statutory Basis
    The Exchange believes that its proposal to amend its Pricing 
Schedule is consistent with Section 6(b) of the Act \15\ in general, 
and furthers the objectives of Section 6(b)(4) and (b)(5) of the Act 
\16\ in particular, in that it provides for the equitable allocation of 
reasonable dues, fees and other charges among members and issuers and 
other persons using any facility or system which Phlx operates or 
controls, and is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(4), (5).
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    The Exchange believes that adopting a strategy cap for box spreads 
is reasonable because it should encourage members and member 
organizations to transact a greater number of box spread strategies on 
the Exchange's trading floor in order that they may benefit from the 
fee cap. The Exchange also believes that it is reasonable to permit box 
spread strategy executions to count toward the Monthly Strategy Cap 
when members are trading in their own proprietary account to receive 
the benefit of the combined executions, which will include the ability 
to achieve the Monthly Strategy Cap by transacting box spreads as well 
as dividend, merger, short stock interest, reversal and conversion and 
jelly roll strategies. In addition, other options exchanges offer fee 
caps for box spreads, namely NYSE Arca, Inc. (``NYSE Arca'') \17\ and 
NYSE MKT LLC (``NYSE MKT''),\18\ for strategies.
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    \17\ NYSE Arca offers a $750 cap on transaction fees for 
Strategy Executions involving (a) reversals and conversions, (b) box 
spreads, (c) short stock interest spreads, (d) merger spreads, and 
(e) jelly rolls. The cap applies to each Strategy Execution executed 
in standard option contracts on the same trading day in the same 
option class. See NYSE Arca General Options and Trading Permit (OTP) 
Fees.
    \18\ NYSE MKT offers a $750 cap on transaction fees for Strategy 
Executions involving (a) reversals and conversions, (b) box spreads, 
(c) short stock interest spreads, (d) merger spreads, and (e) jelly 
rolls. The cap applies to all Strategy Executions executed in 
standard option contracts on the same trading day in the same option 
class. See NYSE Amex Options Fee Schedule.
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    The Exchange believes that adopting a strategy cap for box spreads 
is

[[Page 69166]]

equitable and not unfairly discriminatory because all market 
participants that are assessed transaction fees will have an 
opportunity to cap floor option transaction charges in Multiply Listed 
Options with respect to box spreads. In addition, the Exchange believes 
that it is equitable and not unfairly discriminatory to continue to 
require that all fee cap strategies, including box spreads, which 
combine executions for purposes of the Monthly Strategy Cap, must be 
traded in a member's own proprietary account. The Exchange is not 
amending the calculation of the Monthly Strategy Cap which will 
continue to impose the same requirements on members for all strategies 
to qualify for the Monthly Strategy Caps.
    The Exchange's proposal to exclude Firm floor options transaction 
charges related to reversal and conversion strategies, jelly rolls, and 
now box spreads, from the Monthly Strategy Cap is reasonable because 
these fees would be capped as part of the Monthly Firm Fee Cap, which 
applies only to Firms. The Exchange believes that the exclusion of Firm 
floor options transaction charges related to reversal and conversion 
strategies, jelly rolls and now box spreads from the Monthly Strategy 
Cap is equitable and not unfairly discriminatory because Firms, unlike 
other market participants, have the ability to cap transaction fees up 
to $75,000 per month with the Monthly Firm Fee Cap. The Exchange would 
include floor option transaction charges related to box spread 
strategies in the Monthly Strategy Cap for Professionals, and Broker 
Dealers, when such members are trading in their own proprietary 
accounts, because these market participants are not subject to the 
Monthly Firm Fee Cap or other similar cap. While Specialists and Market 
Makers are subject to a Monthly Market Maker Cap on both electronic and 
floor options transaction charges, box spreads would be excluded from 
the Monthly Market Maker Cap, as all other strategy transactions are 
excluded from this cap.\19\ For the reasons described above, the 
Exchange believes including box spread strategies in the Monthly Firm 
Fee Cap is reasonable, equitable and not unfairly discriminatory 
because the cap provides an incentive for Firms to transact floor 
transactions on the Exchange, which brings increased liquidity and 
order flow to the floor for the benefit of all market participants.\20\
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    \19\ The reversal and conversion strategy and jelly roll 
executions are excluded from the Monthly Market Maker Cap. See 
Section II of the Pricing Schedule.
    \20\ Firms are eligible to cap floor options transactions 
charges and QCC Transaction Fees as part of the Monthly Firm Fee 
Cap. QCC Transaction Fees apply to QCC Orders as defined in Exchange 
Rule 1080(o) and Floor QCC Orders as defined in 1064(e). See Section 
II of the Pricing Schedule.
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    The Exchange believes that its proposal to apply box spread fee 
caps to orders originating from the Exchange floor is reasonable 
because members pay floor brokers to execute trades on the Exchange 
floor. The Exchange believes that offering fee caps to members 
executing floor transactions defrays brokerage costs associated with 
executing strategy transactions and continues to incentivize members to 
utilize the floor for certain executions.\21\ The Exchange believes 
that its proposal to apply box spread strategy fee caps to orders 
originating from the Exchange floor is equitable and not unfairly 
discriminatory because today all other strategy fee caps are only 
applicable for floor transactions. The Exchange believes that a 
requirement that both the buy and sell sides of the order originate 
from the floor to qualify for the fee cap constitutes equal treatment 
of members.
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    \21\ The Exchange's proposal would only apply the fee cap to 
options transaction charges where buy and sell sides originate from 
the Exchange floor. See proposed rule text in Section II of the 
Pricing Schedule.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The [sic] 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 because the proposed changes 
apply uniformly to all members that incur transaction charges for box 
spreads.\22\ Further, other options exchanges today offer fee caps \23\ 
on box spread strategies; therefore, the Exchange believes the proposal 
is consistent with robust competition and does not provide any 
unnecessary burden on competition. Further, floor members pay floor 
brokers to execute trades on the Exchange floor. The Exchange believes 
that offering fee caps on box spreads to members executing floor 
transactions and not electronic executions does not create an 
unnecessary burden on competition because the fee cap defrays brokerage 
costs associated with executing box spread strategy transactions, 
similar to other strategies today. Also, requiring that both the buy 
and sell sides of the order originate from the floor to qualify for the 
fee cap constitutes equal treatment of members.
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    \22\ Customers are not assessed options transaction charges in 
Section II of the Pricing Schedule.
    \23\ Supra notes 17 and 18.
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    The Exchange operates in a highly competitive market, comprised of 
twelve options 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 fee caps that are proposed by the Exchange, as 
described in the proposal, are influenced by these robust market forces 
and therefore must remain competitive with fees caps at 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.\24\ 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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    \24\ 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-2013-109 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary,

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Securities and Exchange Commission, 100 F Street NE., Washington, DC 
20549-1090.

All submissions should refer to File Number SR-Phlx-2013-109. 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 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 offices 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-2013-109, and should be submitted on or before 
December 9, 2013.
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    \25\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-27475 Filed 11-15-13; 8:45 am]
BILLING CODE 8011-01-P