Document ID: SEC-2016-0654-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ PHLX, LLC
Posted Date: 2016-04-15T04:00Z

[Federal Register Volume 81, Number 73 (Friday, April 15, 2016)]
[Notices]
[Pages 22324-22328]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-08642]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77577; File No. SR-Phlx-2016-42]

Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Qualified 
Contingent Cross Rebates and Certain Floor Options Transaction Charges

April 11, 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 March 28, 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 amend the Exchange's Pricing Schedule at 
Section II, entitled ``Multiply Listed Options Fees.'' Specifically, 
the Exchange is proposing to amend the Qualified Contingent Cross 
(``QCC'') rebates and certain floor Options Transaction Charges.
    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

[[Page 22325]]

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 proposed rule change is to amend the Exchange's 
Pricing Schedule at Section II, entitled ``Multiply Listed Options 
Fees.'' Specifically, the Exchange is proposing to amend QCC rebates 
and certain floor Options Transaction Charges. Each change will be 
described below in more detail.
Section II--QCC Rebates
    Today, the Exchange assesses a QCC Transaction Fee of $0.20 per 
contract to a Specialist,\3\ Market Maker,\4\ Professional,\5\ Firm \6\ 
and Broker-Dealer.\7\ The Exchange also pays rebates on QCC Orders 
based on the following five tier rebate schedule:
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    \3\ A ``Specialist'' is an Exchange member who is registered as 
an options specialist pursuant to Rule 1020(a).
    \4\ The term ``Market Maker'' includes Registered Options 
Traders (``ROT''). See Exchange Rule 1014 (b)(i) and (ii). A ROT 
includes a Streaming Quote Trader or ``SQT,'' a Remote Streaming 
Quote Trader or ``RSQT'' and a Non-SQT, which by definition is 
neither a SQT nor a RSQT. A ROT is defined in Exchange Rule 1014(b) 
as a regular member [sic] of the Exchange located on the trading 
floor who has received permission from the Exchange to trade in 
options for his own account. An SQT is a ROT who has received 
permission from the Exchange to generate and submit option 
quotations electronically in options to which such SQT is assigned. 
An SQT may only submit such quotations while such SQT is physically 
present on the floor of the Exchange. An SQT may only trade in a 
market making capacity in classes of options in which the SQT is 
assigned. See Rule 1014(b)(11)(A) [sic]. An RSQT is an ROT that is a 
member affiliated with and [sic] Remote Streaming Quote 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. A 
qualified RSQT may function as a Remote Specialist upon Exchange 
approval. See Rule 1014(ii)(B) [sic].
    \5\ 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).
    \6\ The term ``Firm'' applies to any transaction that is 
identified by a member or member organization for clearing in the 
Firm range at The Options Clearing Corporation.
    \7\ The term ``Broker-Dealer'' applies to any transaction which 
is not subject to any of the other transaction fees applicable 
within a particular category.

                           QCC Rebate Schedule
------------------------------------------------------------------------
                                                            Rebate per
              Tier                      Threshold            contract
------------------------------------------------------------------------
Tier 1.........................  0 to 299,999 contracts            $0.00
                                  in a month.
Tier 2.........................  300,000 to 499,999                 0.07
                                  contracts in a month.
Tier 3.........................  500,000 to 699,999                 0.08
                                  contracts in a month.
Tier 4.........................  700,000 to 999,999                 0.09
                                  contracts in a month.
Tier 5.........................  Over 1,000,000                     0.11
                                  contracts in a month.
------------------------------------------------------------------------

    Rebates are paid for all qualifying executed QCC Orders, as defined 
in Rule 1080(o) \8\ and Floor QCC Orders, as defined in Rule 
1064(e),\9\ except where the transaction is either: (i) Customer-to-
Customer; or (ii) a dividend, merger, short stock interest or reversal 
or conversion strategy execution.\10\ The maximum QCC Rebate to be paid 
in a given month will not exceed $450,000.\11\
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    \8\ A QCC Order is comprised of an order to buy or sell at least 
1000 contracts [sic] 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 Regulation NMS).
    \9\ A Floor QCC Order must: (i) Be for at least 1,000 contracts 
[sic]; (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 
[sic], 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).
    \10\ See Section II of the Pricing Schedule.
    \11\ Id.
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    The Exchange proposes to amend the QCC rebate schedule to add a new 
tier to create a six tier rebate schedule and amend the existing tiers. 
The proposed QCC rebate schedule would be as follows:

                           QCC Rebate Schedule
------------------------------------------------------------------------
                                                            Rebate per
              Tier                      Threshold            contract
------------------------------------------------------------------------
Tier 1.........................  0 to 99,999 contracts             $0.00
                                  in a month.
Tier 2.........................  100,000 to 299,999                 0.05
                                  contracts in a month.
Tier 3.........................  300,000 to 499,999                 0.07
                                  contracts in a month.
Tier 4.........................  500,000 to 699,999                 0.08
                                  contracts in a month.
Tier 5.........................  700,000 to 999,999                 0.09
                                  contracts in a month.
Tier 6.........................  Over 1,000,000                     0.11
                                  contracts in a month.
------------------------------------------------------------------------

    Tier 1 does not currently pay a QCC rebate between 0 and 299,999 
contracts in a month. The Exchange will continue to pay no rebate for 
Tier 1, however the Exchange proposes to lower the volume threshold to 
between 0 and 99,999 contracts in month. The Exchange proposes a new 
Tier 2 QCC rebate which would pay a QCC rebate of $0.05

[[Page 22326]]

per contract for volume between 100,000 and 299,999 contracts in a 
month. The remainder of the QCC rebate tiers would be renumbered. 
Current Tier 2 would be renumbered as Tier 3 and would continue to pay 
a rebate of $0.07 per contract for volume between 300,000 and 499,999 
contracts in a month. Current Tier 3 would be renumbered to Tier 4 and 
would continue to pay a QCC rebate of $0.08 per contract for volume 
between 500,000 and 699,999. Current Tier 4 would be renumbered as Tier 
5 and would continue to pay a $0.09 per contract rebate for volume 
between 700,000 and 999,999 contracts in a month. Finally, current Tier 
5 would be renumbered as Tier 6 and would continue to pay a QCC rebate 
of $0.11 per contract for volume over 1,000,000 contracts in a month.
    The Exchange believes that its proposed amendments to the QCC 
rebates will provide an opportunity for additional members to receive 
the rebate. The Exchange's proposal permits volume over 99,999 to 
receive a rebate.
Section II--Multiply Listed Options Fees
    The Exchange proposes to amend the current Floor Options 
Transaction Charges in Section II of the Exchange's Pricing Schedule in 
both Penny Pilot and non-Penny Pilot Options from $0.30 to $0.35 per 
contract for Specialists and Market Makers. The Exchange believes that 
these fees remain competitive with fees currently assessed today on 
Phlx.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\12\ in general, and furthers the objectives of 
Sections 6(b)(4) and 6(b)(5) of the Act,\13\ 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 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(b).
    \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, while adopting a series of steps to improve the current market 
model, the Commission highlighted the importance of market forces in 
determining prices and SRO revenues and, also, recognized that current 
regulation of the market system ``has been remarkably successful in 
promoting market competition in its broader forms that are most 
important to investors and listed companies.'' \14\
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    \14\ Securities Exchange Act Release No. 51808 at 37499 (June 9, 
2005) [sic] (``Regulation NMS Adopting Release'').
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    Likewise, in NetCoalition v. Securities and Exchange Commission 
(``NetCoalition'') \15\ 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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    \15\ NetCoalition v. SEC, 615 F.3d 525 (D.C. Circuit 2010).
    \16\ See NetCoalition, at 534.
    \17\ 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\ Id. at 539 (quoting ArcaBook Order, 73 FR at 74782-74783 
[sic]).
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Section II--QCC Rebates
    The Exchange believes that it is reasonable to add a new QCC rebate 
tier and amend the current rebate tiers to lower the Tier 1 volume 
threshold and start paying a rebate of $0.05 per contract for volume 
between 100,000 to 299,999 contracts per month. The Exchange believes 
that paying a QCC rebate starting at 100,000 contracts per month will 
attract additional QCC volume on the Exchange. While the other rebate 
tiers are not being amended and simply renumbered (current Tiers 2-6), 
the Exchange believes these rebate tiers will continue to attract QCC 
volume on the Exchange.
    The Exchange believes that adding a new QCC rebate tier and 
amending the current rebate tiers to lower the Tier 1 volume threshold 
and start paying a rebate of $0.05 per contract for volume between 
100,000 to 299,999 contracts per month is equitable and not unfairly 
discriminatory because all market participants are eligible to transact 
QCC Orders and receive the rebates.
Section II--Multiply Listed Options Fees
    The Exchange's proposal to amend its Floor Options Transaction 
Charges to increase Penny and non-Penny Pilot Options Transaction 
Charges for Specialists and Market Makers is reasonable because the 
proposed fees are within the range of other fees in Section II of the 
Pricing Schedule.\19\ Also, Specialists and Market Makers pay a 
Marketing Fee \20\ on electronic orders but do not pay a Marketing Fee 
when transacting non-electronic orders, which is why the floor 
transaction charges are higher as compared to electronic options 
transaction charges for Specialists and Market Makers.
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    \19\ Section II Options Transaction Charges for Penny Pilot and 
non-Penny Pilot Options range from $0.22 to $0.75 per contract for 
Non-Customers.
    \20\ The Marketing Fee is assessed on Specialists and Market 
Makers when they elect to participate in the Marketing program. The 
fees are assessed on electronically-delivered Customer orders. The 
fees are available to be disbursed by the Exchange according to the 
instructions of the Specialist or Market Maker to order flow 
providers who are members or member organizations who submit, as 
agent, Customer orders to the Exchange through a member or member 
organization who is acting as agent for those customer orders. Any 
excess funds billed but not utilized by the Specialist or Market 
Maker are carried forward unless the Specialist or Market Maker 
elects to have those funds rebated on a pro rata basis, reflected as 
a credit on the monthly invoices. At the end of each calendar 
quarter, the Exchange calculates the amount of excess funds from the 
previous quarter and subsequently rebates excess funds on a pro-rata 
basis to the applicable Specialist or Market Maker who paid into 
that pool of funds. See Section II of the Pricing Schedule.
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    The Exchange's proposal to amend its Floor Options Transaction 
Charges to increase Penny Options and non-Penny Pilot Options 
Transaction Charges for Specialists and Market Makers is equitable and 
not unfairly discriminatory because Specialists and Market Makers have 
a time and place advantage on the trading floor with respect to orders, 
unlike other market participants. A Professional, Broker-Dealer, or a 
Firm would necessarily require a floor broker to represent their 
trading interest on the trading floor as compared to a Specialist or 
Market Maker that could directly transact such orders on the trading 
floor. Further, the Exchange believes that to attract orders from a 
Professional, Broker-Dealer or a Firm, via a floor broker, the rates 
must be competitive with rates at other trading floors.
    Therefore, the Exchange would continue to assess a Professional,

[[Page 22327]]

Broker-Dealer and a Firm a Floor Options Transaction Charge for Penny 
Pilot Options and Non-Penny Pilot Options of $0.25 per contract. 
Customers are not assessed an Options Transaction Charge because 
Customer order flow is unique. Customer liquidity benefits all market 
participants by providing more trading opportunities, which attracts 
Specialists and Market Makers. An increase in the activity of these 
market participants in turn facilitates tighter spreads, which may 
cause an additional corresponding increase in order flow from other 
market participants.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. In terms of inter-market 
competition, the Exchange notes that it operates in a highly 
competitive market in which market participants can readily favor 
competing venues if they deem fee levels at a particular venue to be 
excessive, or rebate opportunities available at other venues to be more 
favorable. In such an environment, the Exchange must continually adjust 
its fees to remain competitive with other exchanges and 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.
    In this instance, the proposed changes to the charges assessed and 
credits available to member firms for execution of securities in 
securities of all three Tapes do not impose a burden on competition 
because the Exchange's execution services are completely voluntary and 
subject to extensive competition both from other exchanges and from 
off-exchange venues.
    The Exchange believes that its proposed amendments to the QCC 
rebate tiers and increase to the Specialist and Market Maker floor 
options transaction charges do not impose an undue burden on inter-
market competition because the QCC rebates and Specialist and Market 
Maker fees remain competitive with rebates and fees offered on other 
options markets.\21\ In sum, if the changes proposed herein are 
unattractive to market participants, it is likely that the Exchange 
will lose market share as a result. 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.
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    \21\ The International Securities Exchange LLC (``ISE'') pays 
QCC rebates ranging from $0.00 to $0.011 per contract. See ISE's 
Schedule of Fees. Also, the Chicago Board Options Exchange, 
Incorporated (``CBOE'') assess market-makers, DPMs and LLMs manual 
fees based on a sliding scale which range from $0.03 to $0.23 per 
contract depending on certain volume thresholds. See CBOE's Fees 
Schedule.
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    The Exchange believes that adding a new QCC rebate tier and 
amending the current rebate tiers to lower the Tier 1 volume threshold 
and start paying a rebate of $0.05 per contract for volume between 
100,000 to 299,999 contracts per month does not impose an undue burden 
on intra-market competition because all market participants are 
eligible to transact QCC Orders and receive a rebate.
    The Exchange's proposal to amend its Floor Options Transaction 
Charges to increase Penny Options and non-Penny Pilot Options 
Transaction Charges for Specialists and Market Makers does not impose 
an undue burden on intra-market competition because Specialists and 
Market Makers have a time and place advantage on the trading floor with 
respect to orders, unlike other market participants. Unlike other 
market participants, a Specialist or Market Maker may directly transact 
orders on the trading floor. Further, unlike Specialist or Market Maker 
electronic orders, which are subject to a Marketing Fee, Specialist or 
Market Maker floor orders are not subject to a Marketing Fee.

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.\22\
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    \22\ 15 U.S.C. 78s(b)(3)(A)(ii).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2016-42 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-2016-42.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-2016-42 and should be 
submitted on or before May 6, 2016.

[[Page 22328]]

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-08642 Filed 4-14-16; 8:45 am]
 BILLING CODE 8011-01-P