Document ID: SEC-2016-0674-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ PHLX, LLC
Posted Date: 2016-04-19T04:00Z

[Federal Register Volume 81, Number 75 (Tuesday, April 19, 2016)]
[Notices]
[Pages 23023-23026]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-08948]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77613; File No. SR-Phlx-2016-45]

Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change to Proposed Rule 
Change To Modify Chapter VII Section B of the Exchange's Pricing 
Schedule

April 13, 2016.
    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 April 1, 2016, 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 modify Section B of the NASDAQ PHLX LLC 
Pricing Schedule (``Pricing Schedule'') in Chapter VII separately to 
identify streaming quote interface (``SQF'') Purge Ports and to set the 
fees applicable to SQF Purge Ports. The Exchange also is making 
technical, non-substantive modifications to the certain existing 
provisions in Chapter VII, Section B.
    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 the proposal is to modify Chapter VII, Section B of 
the Exchange's Pricing Schedule separately to identify SQF Purge Ports 
and to set the fees applicable to SQF Purge Ports. Active SQF Ports 
today allow purging, however the Exchange does not separately identify 
such ports or assess a fee for SQF Purge Ports.
    The SQF Port (known as ``Active SQF Port'') \3\ is an interface 
that enables Specialists,\4\ Streaming Quote Traders (``SQTs'') \5\ and 
Remote Streaming Quote Traders (``RSQTs'') \6\ (together known as 
``Market Makers'') to connect and send quotes into the Exchange's 
trading system and receive certain information.\7\ Market Makers rely 
on data available through Active SQF Ports to provide them the 
necessary information for risk control and risk management so that they 
can perform market making activities in a swift and meaningful way. 
Active SQF Ports allow Market Makers to access information such as 
execution reports, execution report messages, auction notifications, 
and administrative data through a single feed. Other data that is 
available includes: (1) Options Auction Notifications (e.g., opening 
imbalance, market exhaust, PIXL or other information); (2) Options 
Symbol Directory Messages; (3) System Event Messages (e.g., start of 
messages, start of system hours, start of quoting, start of opening); 
(4) Complex Order Strategy Auction Notifications (COLA); (5) Complex 
Order Strategy messages; (6) Option Trading Action Messages (e.g.,

[[Page 23024]]

trading halts, resumption of trading); and (7) Complex Strategy Trading 
Action Messages (e.g., trading halts, resumption of trading). In 
addition to Active SQF Ports being used to send quotes and to receive 
information needed for market making activities, Active SQF Ports now 
can be also used for purging quotes. Such Active SQF Ports enable 
Market Makers to seamlessly manage their ability to remove their quotes 
in a swift manner.
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    \3\ Current SQF Ports are known as ``Active SQF Ports'' in the 
Pricing Schedule to signify that such ports are fee liable when they 
receive inbound quotes at any time within that month ($1,250 per 
port per month up to a maximum of $42,000 per month).
    \4\ A Specialist is an Exchange member who is registered as an 
options specialist. See Phlx Rule 1020(a).
    \5\ An SQT is defined in Exchange Rule 1014(b)(ii)(A) as a 
Registered Options Trader (``ROT'') who has received permission from 
the Exchange to generate and submit option quotations electronically 
in options to which such SQT is assigned.
    \6\ An RSQT is defined in Exchange Rule in 1014(b)(ii)(B) as an 
ROT that is a member or member organization with no physical trading 
floor presence who has received permission from the Exchange to 
generate and submit option quotations electronically in options to 
which such RSQT has been assigned. An RSQT may only submit such 
quotations electronically from off the floor of the Exchange.
    \7\ See Securities Exchange Act Release No. 63034 (October 4, 
2010), 75 FR 62441 (October 8, 2010) (SR-Phlx-2010-124).
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    An Active Purge Port currently can be configured as a ``Purge-
only'' port utilized for the sole purpose of purging option interest 
from the Exchange's system and allowing entry of underlying-level 
purges for a specified range of options.\8\ Such dedicated ports reduce 
the amount of data flowing through Active SQF Ports. A purge of options 
quoted on the SQF interface is reported via a ``Purge Notification'' 
message that identifies who submitted the purge and the underlying 
symbols.\9\
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    \8\ If a Market Maker wants to re-enter an option contract after 
it was purged, the Market Maker is required to specify a re-entry 
indicator on the first quote following a purge.
    \9\ For additional information regarding SQF Purge Ports, as 
well as SQF generally, see http://www.nasdaqtrader.com/content/technicalsupport/specifications/TradingProducts/sqfnom2.0.pdf. This 
document applies to the Exchange, to the Nasdaq Options Market, and 
to the BX Options Market, all of which are options exchanges of 
Nasdaq, Inc.
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    The proposed SQF Purge Ports are, similar to the Active SQF Ports, 
designed to assist Market Makers in the management of, and risk control 
over, their quotes, particularly if the Market Makers are dealing with 
large numbers of options. For example, if a Market Maker detects market 
indications that may influence the direction or bias of his quotes the 
Market Maker may use the proposed SQF Purge Port(s) to reduce 
uncertainty and to manage risk by purging all quotes in a number of 
options seamlessly to avoid unintended executions, while continuing to 
evaluate the direction of the market.
    The Exchange proposes to amend Chapter VII, Section B of the 
Exchange's Pricing Schedule to distinguish SQF Purge Ports from Active 
SQF Ports and to add a new monthly SQF Purge Port fee. The Exchange is 
also making technical, non-substantive changes to Chapter VII, Section 
B to enhance clarity and readability. These changes are described in 
detail below.
Change 1--SQF Purge Port Fees
    The Exchange proposes new subsection 4 of Chapter VII, Section B to 
institute an SQF Purge Port Fee. The proposed fee will be $500 per port 
per month for each of the first five SQF Purge Ports, and will be $100 
per port per month for each port thereafter. The SQF Purge Port Fee 
will be applicable to all Market Makers who elect to use SQF Purge 
Ports on the Exchange. The structure of the proposed SQF Purge Port Fee 
is similar to that of the current CTI \10\ Port Fee, except that the 
SQF Purge Port Fee is lower for the first five ports.\11\ The following 
is an example of the proposed new SQF Purge Port Fee: A Participant 
that has three SQF Purge Ports would, on a monthly basis, be fee liable 
for $1,500 ($500 x 3). And a Participant that has seven SQF Purge Ports 
would, on a monthly basis, be fee liable for $2,700 ($500 x 5 and $100 
x 2).
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    \10\ CTI offers real-time clearing trade updates. A real-time 
clearing trade update is a message that is sent to a member after an 
execution has occurred and contains trade details. The message 
containing the trade details is also simultaneously sent to The 
Options Clearing Corporation.
    \11\ Whereas the proposed SQF Purge Port Fee is $500 per port, 
per month for each of the first five ports and $100 per port per 
month for each port thereafter, the CTI Port Fee is $650 per port, 
per month for the first five ports and $100 per port per month 
thereafter. See Phlx Pricing Schedule at Chapter VII, Section B.
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Change 2--Technical Modifications
    The Exchange is also taking the opportunity to enhance the clarity 
and readability of Chapter VII, Section B of the Pricing Schedule. 
First, the Exchange is numbering each port fee in a separate 
subsection. Second, the Exchange is moving text from a footnote to the 
body of the current Active SQF Port Fee provision. Third, the Exchange 
is adding missing words to clarify that the current CTI Port Fee is per 
month. Fourth, the Exchange is deleting extraneous trademark language 
from the Pricing Schedule. None of these changes modifies the 
application of any existing fee.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\12\ in general, and with 
Section 6(b)(4) and 6(b)(5) of the Act,\13\ in particular, in that it 
is designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, and to remove impediments to and perfect 
the mechanism of a free and open market and a national market system. 
The Exchange also believes that the proposed rule change provides for 
the equitable allocation of reasonable dues, fees and other charges 
among members and issuers and other persons using its facilities which 
the Exchange operates or controls, and is not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.
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    \12\ 15 U.S.C. 78f.
    \13\ 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, for example, the Commission indicated that market forces should 
generally determine pricing because national market system regulation 
``has been remarkably successful in promoting market competition in its 
broader forms that are most important to investors and listed 
companies.'' \14\ Likewise, in NetCoalition v. Securities and Exchange 
Commission \15\ (``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.\16\ 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.'' \17\
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    \14\ Securities Exchange Act Release No. 51808 at 37499 
(``Regulation NMS Adopting Release'' at Securities Exchange Release 
No. 34-51808 (June 29, 2005), 70 FR 37496 (File No. S7-10-04)).
    \15\ NetCoalition v. Securities and Exchange Commission, No. 09-
1042 (D.C. Cir. 2010).
    \16\ See id. at 534-535.
    \17\ See 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.' . . . .'' \18\ 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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    \18\ See id. at 539 (quoting Securities Exchange Release No. 
59039 (December 2, 2008), 73 FR 74770 (December 9, 2008) (SR-
NYSEArca-2006-21) at 73 FR at 74782-74783).
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    The Exchange believes that the proposed rule change would promote 
just and equitable principles of trade and remove impediments to and 
perfect the mechanism of a free and open market because offering Market 
Makers

[[Page 23025]]

designated SQF Purge Ports would enhance Market Makers' ability to 
manage quotes, quote traffic, and their quoting obligations,\19\ which 
would, in turn, improve their risk controls to the benefit of all 
market participants. The Exchange believes that the SQF Purge Ports 
would foster cooperation and coordination with persons engaged in 
facilitating transactions in securities because designating SQF Purge 
Ports for purges only, and making it clear in the Pricing Schedule that 
such ports are available,\20\ may encourage better use of such 
dedicated ports. This may, concurrent with the Active SQF Ports that 
carry quote and other information necessary for market making 
activities, enable more efficient, as well as fair and reasonable, use 
of Market Makers' resources. Because SQF Purge Ports, as the name 
suggests, are only available for purging and not for activities such as 
order or quote entry, the SQF Purge Ports are not designed to permit 
unfair discrimination but rather are designed to enable Market Makers 
to manage their quoting risk and meet their heightened quoting 
obligations that other market participants are not subject to, which, 
in turn, benefits all market participants.
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    \19\ See Rule 1014 titled ``Obligations and Restrictions 
Applicable to Specialists and Registered Options Traders.''
    \20\ As discussed, SQF Purge Ports will be fee liable on a 
monthly basis (and not only when such ports are active), which will 
help the Exchange to recoup the cost of these ports.
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    The Exchange believes that its proposal should facilitate the 
ability of the Exchange to recoup some costs associated with SQF Purge 
Ports as well as provide, maintain, and improve SQF Purge Ports. The 
Exchange believes the proposed change is reasonable, equitable and not 
unfairly discriminatory for the following reasons.
Change 1--SQF Purge Port Fees
    The Exchange believes that its proposal to institute a $500 per 
port per month fee for each of the first 5 SQF Purge Ports and $100 per 
port per month for each port thereafter is reasonable because it would 
allow the Exchange to recoup technology costs. The proposed SQF Purge 
Port Fee reflects the desire of the Exchange to recoup the costs of 
maintaining ports. The SQF Purge Port Fee is reasonable because it 
enables the Exchange to offset, in part, its costs associated with 
making such ports available, including costs based on software and 
hardware enhancements and resources dedicated to development, quality 
assurance, and support. The structure of the Exchange's SQF Purge Port 
Fee is similar to that of the current CTI Port Fee, except that the SQF 
Purge Port Fee is lower for the first five ports.\21\ In addition, the 
SQF Purge Port Fee is in line with costs for ports at other options 
exchanges.\22\ The SQF Purge Port Fee is also reasonable because it 
reflects a structure that is not novel in the options markets but 
rather, as a gradated fee, is similar to that of other options 
exchanges and competitive with what is offered by other exchanges.
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    \21\ Whereas the proposed SQF Purge Port Fee is $500 per port 
per month for each of the first five ports and $100 per port per 
month for each port thereafter, the Phlx CTI Port Fee is $650 per 
port per month for the first five ports and $100 per port per month 
thereafter. NOM and BX Options CTI Port Fees are simply $650 and 
$200, respectively. See NOM Chapter XV, Section 3(b) and BX Chapter 
XV, Section 3(b).
    \22\ See NOM Pricing Schedule (port fees $650 or $750 per port). 
See also C2 Options Exchange, Incorporated (``C2'') (generally 
assesses port fees $500 to $1,000 depending on connectivity levels); 
and NYSE AMEX Options (``AMEX'') fees (assesses a Quote Takedown 
Port of $450 per port per month in excess of the number of order/
quote entry ports utilized.)
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    Moreover, SQF Purge Ports allow Market Makers to better rely on 
data available through Active SQF Ports to provide them the necessary 
information for risk control and risk management so that they can 
perform market making activities in a swift and meaningful way. The 
Exchange believes that the progressive nature of the proposed new SQF 
Purge Port Fees for Market Makers is reasonable. While the proposed SQF 
Purge Port Fees will be assessed at $500 for the first five SQF Purge 
Ports, for more than five ports the fees will be assessed at only $100 
per SQF Purge Port per month.\23\ Market Makers on the Exchange are 
valuable market participants that provide liquidity in the marketplace 
and incur costs unlike other market participants because Market Makers 
add value through continuous quoting \24\ and the commitment of 
capital. Market Makers provide a critical liquidity function across 
thousands of individual option put and call series, a function no other 
market participants are obligated to perform.
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    \23\ Upon effectiveness of this proposal, a Market Maker that 
has three SQF Purge Ports would, on a monthly basis, be fee liable 
for $1,500 ($500 x 3). And a Participant that has seven SQF Purge 
Ports would, on a monthly basis, be fee liable for $2,700 ($500 x 5 
plus $100 x 2).
    \24\ See Rule 1014 titled ``Obligations and Restrictions 
Applicable to Specialists and Registered Options Traders.''
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    The Exchange believes that establishing the proposed SQF Purge Port 
Fee is equitable and not unfairly discriminatory in that it will apply 
uniformly to all similarly situated market participants. All Market 
Makers that use SQF Purge Ports will be assessed the SQF Purge Port Fee 
in the same way. Market Makers who do not wish to acquire a dedicated 
SQF Purge Port can continue to use their Active SQF Port for purging 
their quotes without requiring a new SQF Purge Port. Having the SQF 
Purge Port to purge gives Market Makers choices in their preferred 
technical configuration with the exchange.
Change 2--Technical Modifications
    The Exchange believes that the proposed technical modifications are 
fair and reasonable in that they do not impact the application of 
existing fees but simply enhance clarity and readability. Nor are the 
proposed technical modifications discriminatory in any respect.

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. Specifically, the Exchange does 
not believe that its proposal to make changes to Chapter VII, Section B 
to add new SQF Purge Port Fees will impose any undue burden on 
competition, as discussed below.
    The Exchange operates in a highly competitive market in which many 
sophisticated and knowledgeable market participants can and do send 
order flow to competing exchanges if they deem fee levels at a 
particular exchange to be excessive. Additionally, new competitors have 
entered the market and still others are reportedly entering the market 
shortly. These market forces ensure that the Exchange's fees remain 
competitive with the fee structures at other trading platforms. In that 
sense, the Exchange's proposal is actually pro-competitive because it 
enables the Exchange to propose offering dedicated purge ports, SQF 
Purge Ports, to the benefit of Market Makers.
    The Exchange does not believe that the proposed rule change will 
impose any undue 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. In such an environment, the Exchange must continually adjust 
its fees to remain competitive with other exchanges and

[[Page 23026]]

with alternative trading systems 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. Moreover, in terms of intra-market competition, the Exchange 
notes that the proposed assessment of an SQF Purge Port Fee will be 
applied uniformly to all Market Makers that use such ports but should 
have no undue burden on any particular group of users. The proposal is 
designed to ensure a fair and reasonable use of Exchange resources by 
allowing the Exchange to recoup for certain of its connectivity costs, 
while continuing to offer competitive rates to participants.
    Furthermore, in this instance the proposed SQF Purge Port Fee does 
not impose a burden on competition because the Exchange's execution and 
routing services are completely voluntary and subject to extensive 
competition both from other exchanges and from off-exchange venues. If 
the changes proposed herein are unattractive to market participants, it 
is likely that the Exchange will lose market share and revenue as 
participants choose to abandon ports. Accordingly, the Exchange does 
not believe that the proposed changes will impair the ability of 
members or competing order execution venues to maintain their 
competitive standing in the financial markets. Additionally, the 
changes proposed herein are pro-competitive to the extent that they 
continue to allow the Exchange to promote and maintain order 
executions.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \25\ and Rule 
19b-4(f)(6) thereunder.\26\ The Exchange believes the rule change 
qualifies for immediate effectiveness as a ``non-controversial'' rule 
change under Rule 19b-4(f)(6) of the Act.
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    \25\ 15 U.S.C. 78s(b)(3)(a)(iii).
    \26\ 17 CFR 240.19b-4(f)(6).
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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-2016-45 on the subject line.

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-2016-45. 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 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; 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-2016-45 and should be 
submitted on or before May 10, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-08948 Filed 4-18-16; 8:45 am]
 BILLING CODE 8011-01-P