Document ID: SEC-2014-1898-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2014-11-13T05:00Z

[Federal Register Volume 79, Number 219 (Thursday, November 13, 2014)]
[Notices]
[Pages 67504-67507]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-26840]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73548; File No. SR-Phlx-2014-68]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
Routing Fees

November 6, 2014.
    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, 2014, 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to modify Section V entitled ``Routing Fees'' 
of the NASDAQ OMX Phlx LLC Pricing Schedule (``Pricing Schedule''). 
Specifically, the Exchange proposes to modify Section V entitled 
``Routing Fees'' of the Phlx Pricing Schedule (``Pricing Schedule''). 
Specifically, the Exchange proposes to amend its Routing Fees, and to 
allow aggregation of Customer \3\ volume for calculating discount 
thresholds and receiving discounted routing fees.
---------------------------------------------------------------------------

    \3\ The term ``Customer'' applies to any transaction that is 
identified by a Participant 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)). Section V of Pricing 
Schedule.
---------------------------------------------------------------------------

    While the changes proposed herein are effective upon filing, the 
Exchange has designated that the amendments be operative on November 3, 
2014.
    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 Routing Fees in Section 
V of the Pricing Schedule in order to recoup costs incurred by the 
Exchange to route orders to away markets, and to allow members and 
member organizations to aggregate their Customer volume for calculating 
discount thresholds and receiving discounted routing fees.
    Today, the Exchange assesses a Non-Customer a $0.97 per contract 
Routing Fee to any options exchange for routing an order. The Customer 
Routing Fee for option orders routed to The NASDAQ Options Market, LLC 
(``NOM'') is a $0.12 per contract Fixed Fee (``Fixed Fee'') in addition 
to the actual transaction fee assessed. The Customer Routing Fee for 
option orders routed to NASDAQ OMX BX, Inc. (``BX Options'') is $0.12 
per contract. The Customer Routing Fee for option orders routed to all 
other options exchanges \4\ (excluding NOM and BX Options) is a fixed 
fee of $0.22 per contract in addition to the actual transaction fee 
assessed. If the away market pays a rebate, the Routing Fee is $0.12 
per contract.
---------------------------------------------------------------------------

    \4\ This includes BATS Exchange, Inc. (``BATS''), BOX Options 
Exchange LLC (``BOX''), the Chicago Board Options Exchange, 
Incorporated (``CBOE''), C2 Options Exchange, Incorporated (``C2''), 
International Securities Exchange, LLC (``ISE''), the Miami 
International Securities Exchange, LLC (``MIAX''), NYSE Arca, Inc. 
(``NYSE Arca''), NYSE MKT LLC (``NYSE Amex'') and ISE Gemini, LLC 
(``Gemini'').
---------------------------------------------------------------------------

    With respect to the fixed costs, the Exchange incurs a fee when it 
utilizes

[[Page 67505]]

NASDAQ Execution Services LLC (``NES''), a member of the Exchange and 
the Exchange's affiliated broker-dealer exclusive order router.\5\ Each 
time NES routes an order to an away market, NES is charged a clearing 
fee \6\ and, in the case of certain exchanges, a transaction fee is 
also charged in certain symbols, which fees are passed through to the 
Exchange. The Exchange currently recoups clearing and transaction 
charges incurred by the Exchange as well as certain other costs 
incurred by the Exchange when routing to away markets, such as 
administrative and technical costs associated with operating NES, 
membership fees at away markets, Options Regulatory Fees (``ORFs''), 
staffing and technical costs associated with routing options. The 
Exchange assesses the actual away market fee at the time that the order 
was entered into the Exchange's trading system. This transaction fee is 
calculated on an order-by-order basis since different away markets 
charge different amounts.
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release No. 71416 (January 28, 
2014), 79 FR 6244 (February 3, 2014) (SR-Phlx-2014-05) (notice of 
filing and immediate effectiveness regarding utilization of NES for 
outbound order routing from Phlx).
    \6\ The Options Clearing Corporation (``OCC'') assesses $0.01 
per contract side.
---------------------------------------------------------------------------

    The Exchange is proposing to increase its Non-Customer Routing Fees 
from $0.97 to $0.99 per contract to any options exchange. The Exchange 
is proposing to increase its Customer Routing Fixed Fees to NOM from 
$0.12 to $0.13 per contract, in addition to the actual transaction fee 
assessed to recoup an additional portion of the costs incurred by the 
Exchange for routing these orders. The Exchange is proposing to 
increase its Customer Routing Fixed Fees to BX Options from $0.12 to 
$0.13 per contract. The Exchange is proposing to increase its Customer 
Routing Fixed Fees to all other options exchanges (excluding NOM and BX 
Options) from $0.22 to $0.23 per contract, in addition to actual 
transaction fees assessed. The Exchange would also increase the 
Customer Routing Fee to all other options exchanges if the away market 
pays a rebate from a fee of $0.12 to $0.13 per contract, because the 
Exchange would continue to retain the rebate to offset the cost to 
route orders to offset the cost to route orders to these away markets. 
The Exchange desires to recoup additional costs at this time.
    Today, a member organization that: (1) Qualifies for a Tier 2, 3, 4 
or 5 rebate in the Customer Rebate Program in Section B of the Pricing 
Schedule; and (2) routes away more than 5,000 Customer contracts per 
day in a given month to an away market (together the ``Customer Rebate 
requirements'') \7\ is entitled to receive a credit equal to the 
applicable Fixed Fee plus $0.05 per contract, unless the away market 
transaction fee is $0.00 or the away market pays a rebate, in which 
case the member organization is entitled to receive a credit equal to 
the applicable Fixed Fee. Customer rebates are paid on Customer Rebate 
Tiers in Section B of the Pricing Schedule according to applicable 
categories (A or B). The Customer Rebate Tiers are calculated by 
totaling Customer volume in Multiply Listed Options (including SPY) 
that are electronically-delivered and executed, except volume 
associated with electronic Qualified Contingent Cross (``QCC'') Orders, 
as defined in Rule 1080(o), in a month.
---------------------------------------------------------------------------

    \7\ When the Exchange recently added the 5,000 Customer 
contracts criterion, it did so to provide a credit to member 
organizations that qualify for a Customer rebate and route away a 
certain amount of volume. See Securities Exchange Act Release No. 
71258 (January 8, 2014), 79 FR 2948 (January 14, 2014) (SR-Phlx-
2013-125) (notice of filing and immediate effectiveness).
---------------------------------------------------------------------------

    The Exchange is proposing to add language to Section V stating that 
members and member organizations under Common Ownership \8\ may 
aggregate their Customer volume routed away for purposes of calculating 
discount thresholds \9\ and receiving discounted routing fees. The 
Customer Rebate requirements regarding Tier and volume remain in place. 
However, with the added language if members and member organizations 
are under Common Ownership they will be able to aggregate their 
Customer volume for the purpose of calculating discount thresholds and 
receiving discounted routing fees.
---------------------------------------------------------------------------

    \8\ The term ``Common Ownership'' shall mean members or member 
organizations under 75% common ownership or control. Section V of 
Pricing Schedule.
    \9\ A member or member organization may, for example, route away 
more than 5,000 Customer contracts per day in a given month to an 
away market.
---------------------------------------------------------------------------

    The proposal allows the Exchange to continue attracting liquidity 
to Phlx while recouping costs incurred by the Exchange to route orders 
to away markets.
2. Statutory Basis
    The Exchange believes that its proposal to amend the Pricing 
Schedule is consistent with Section 6(b) of the Act \10\ in general, 
and furthers the objectives of Section 6(b)(4) and (b)(5) of the Act 
\11\ 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.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(4), (5).
---------------------------------------------------------------------------

    The Exchange believes that amending the Non-Customer Routing Fee 
for orders routed to any options exchange from a fee of $0.97 to $0.99 
per contract, is reasonable because the Exchange desires to recoup an 
additional portion of the cost it incurs when routing Non-Customer 
orders. The Exchange is proposing to increase the Fixed Fee to recoup 
additional costs that are incurred by the Exchange in connection with 
routing these orders on behalf of its members.
    The Exchange believes that amending the Customer Routing Fee for 
orders routed to NOM from a Fixed Fee of $0.12 to $0.13 per contract, 
in addition to the actual transaction fee, is reasonable because the 
Exchange desires to recoup an additional portion of the cost it incurs 
when routing Customer orders to NOM. Today, the Exchange assesses 
orders routed to NOM a lower Fixed Fee for routing Customer orders as 
compared to the Fixed Fee assessed to other options exchanges. The 
Exchange is proposing to increase the Fixed Fee to recoup additional 
costs that are incurred by the Exchange in connection with routing 
these orders on behalf of its members.
    The Exchange believes that amending the Customer Routing Fee for 
orders routed to BX Options from a Fixed Fee of $0.12 to $0.13 per 
contract is reasonable because the Exchange desires to recoup an 
additional portion of the cost it incurs when routing Customer orders 
to BX Options, similar to the amount of Fixed Fee it proposes to assess 
for orders routed to NOM. The Exchange is proposing to assess a Fixed 
Fee to recoup additional costs that are incurred by the Exchange in 
connection with routing these orders on behalf of its members. While 
the Exchange would continue to retain any rebate paid by BX 
Options,\12\ the Exchange does not assess the actual transaction fee 
that is charged by BX Options for Customer orders.
---------------------------------------------------------------------------

    \12\ BX Options pays a Customer Rebate to Remove Liquidity as 
follows: Customers are paid $0.35 per contract in All Other Penny 
Pilot Options (excluding BAC, IWM, QQQ, SPY and VXX) and $0.70 per 
contract in Non-Penny Pilot Options. See BX Options Rules at Chapter 
XV, Section 2(1).
---------------------------------------------------------------------------

    The Exchange believes that continuing to assess lower Fixed Fees to 
route Customer orders to NOM and BX Options, as compared to other 
options exchanges, is reasonable as the Exchange is able to leverage 
certain infrastructure to offer those markets

[[Page 67506]]

lower fees as explained further below. Similarly, the Exchange believes 
that amending the Customer Routing Fee to other away markets, other 
than NOM and BX Options, in the instance the away market does not pay a 
rebate from a Fixed Fee of $0.22 to $0.23 per contract is reasonable 
because the Exchange desires to recoup an additional portion of the 
cost it incurs when routing orders to these away markets. While the 
Exchange would continue to retain any rebate paid by these [sic] away 
markets, the Exchange does not assess the actual transaction fee that 
is charged by the away market for Customer orders. The Fixed Fee for 
Customer orders is an approximation of the costs the Exchange will be 
charged for routing orders to away markets. As a general matter, the 
Exchange believes that the proposed fees for Customer orders routed to 
markets which pay a rebate, such as BX Options and other away markets, 
would allow it to recoup and cover a portion of the costs of providing 
optional routing services for Customer orders because it better 
approximates the costs incurred by the Exchange for routing such 
orders. While each destination market's transaction charge varies and 
there is a cost incurred by the Exchange when routing orders to away 
markets, including, OCC clearing costs, administrative and technical 
costs associated with operating NES, membership fees at away markets, 
ORFs and technical costs associated with routing options, the Exchange 
believes that the proposed Routing Fees will enable it to recover the 
costs it incurs to route Customer orders to away markets.
    Moreover, the Exchange believes that amending the Customer Routing 
Fee to other away markets, other than NOM and BX Options, if the away 
market pays a rebate, from $0.12 to $0.13 per contract is reasonable 
because the Exchange desires to recoup an additional portion of the 
cost it incurs when routing Customer orders to away markets, similar to 
the amount of Fixed Fee it proposes to assess for orders routed to NOM 
and BX Options. The Exchange is proposing to assess a Fixed Fee to 
recoup additional costs that are incurred by the Exchange in connection 
with routing these orders on behalf of its members. While the Exchange 
would continue to retain any rebate paid by away markets, the Exchange 
does not assess the actual transaction fee that is charged by away 
markets for Customer orders.
    The Exchange believes that amending the Non-Customer Routing Fee 
for orders routed to any options exchange from a fee of $0.97 to $0.99 
per contract, is equitable and not unfairly discriminatory because the 
Exchange would assess the same $0.99 per contract fee to all market 
participants utilizing routing for Non-Customer orders.
    The Exchange believes that amending the Customer Routing Fee for 
orders routed to NOM from a Fixed Fee of $0.12 to $0.13 per contract, 
in addition to the actual transaction fee, is equitable and not 
unfairly discriminatory because the Exchange would assess the same 
Fixed Fee to all orders routed to NOM in addition to the transaction 
fee assessed by that market.
    The Exchange believes that increasing the Customer Routing Fee for 
orders routed to BX Options from a Fixed Fee from $0.12 to $0.13 per 
contract is equitable and not unfairly discriminatory because the 
Exchange would uniformly increase the Fixed Fee, similar to NOM, for 
all orders routed to BX Options and would continue to uniformly not 
assess the actual transaction fee, as is the case today.
    The Exchange would uniformly assess a $0.13 per contract Fixed Fee 
to orders routed to NASDAQ OMX exchanges because the Exchange is 
passing along the saving realized by leveraging NASDAQ OMX's 
infrastructure and scale to market participants when those orders are 
routed to NOM or BX Options and is providing those saving to all market 
participants. Furthermore, it is important to note that when orders are 
routed to an away market they are routed based on price first.\13\ The 
Exchange believes that it is equitable and not unfairly discriminatory 
to assess a fixed cost of $0.13 per contract to route orders to NOM and 
BX Options because the cost, in terms of actual cash outlays, to the 
Exchange to route to those markets is lower. For example, costs related 
to routing to NOM and BX Options are lower as compared to other away 
markets because NES is utilized by all three exchanges to route 
orders.\14\ NES and the three NASDAQ OMX options markets have a common 
data center and staff that are responsible for the day-to-day 
operations of NES. Because the three exchanges are in a common data 
center, Routing Fees are reduced because costly expenses related to, 
for example, telecommunication lines to obtain connectivity are avoided 
when routing orders in this instance. The costs related to connectivity 
to route orders to other NASDAQ OMX exchanges are lower than the costs 
to route to a non-NASDAQ OMX exchange. When routing orders to non-
NASDAQ OMX exchanges, the Exchange incurs costly connectivity charges 
related to telecommunication lines, membership and access fees, and 
other related costs when routing orders.
---------------------------------------------------------------------------

    \13\ See Rule 1080(m).
    \14\ See Phlx Rule 1080(m)(iii)(A). See also Chapter VI, Section 
11 of BX Options Rules and NOM Rules.
---------------------------------------------------------------------------

    The Exchange believes that amending the Customer Routing Fee to 
other away markets, other than NOM and BX Options, in the instance the 
away market does not pay a rebate from a Fixed Fee of $0.22 to $0.23 
per contract is equitable and not unfairly discriminatory because the 
Exchange would assess the same Fixed Fee to all orders routed to away 
markets other than NOM and BX Options in addition to the transaction 
fee. The Exchange's proposal to increase the Customer Routing Fee to 
all other options exchanges that pay a rebate, other than NOM and BX 
Options, from $0.12 to $0.13 per contract is equitable and not unfairly 
discriminatory because the Exchange would assess the same Fixed Fee 
that is proposed when routing Customer orders to a NASDAQ OMX exchange. 
All market participants that route an order to an away market, other 
than NOM or BX Options, would be assessed a uniform fee of $0.13 per 
contract if the away market (non-NASDAQ OMX exchange) pays a rebate. 
These proposals would apply uniformly to all market participants when 
routing to an away market that pays a rebate, other than NOM and BX 
Options.
    In addition, market participants may submit orders to the Exchange 
as ineligible for routing or ``DNR'' to avoid Routing Fees.\15\ Also, 
orders are routed to an away market based on price first.\16\
---------------------------------------------------------------------------

    \15\ See Rule 1080(m)(iv).
    \16\ See Rule 1080(m). See also Chapter VI, Section 11 of the BX 
Options Rules and NOM Rules.
---------------------------------------------------------------------------

    Finally, the Exchange believes that the added aggregation language 
regarding members and member organizations under Common Ownership is 
reasonable because the Exchange desires to attract liquidity. The added 
language is equitable and not unfairly discriminatory because it would 
apply to all members and member organizations uniformly. The Customer 
Rebate requirements regarding Tier and volume remain in place. However, 
all members and member organizations that are under Common Ownership 
will have the ability to aggregate their Customer volume for the 
purpose of calculating discount thresholds and receiving discounted 
routing fees. The Exchange will apply the aggregation language to all 
members and member organizations in a uniform manner.

[[Page 67507]]

    The proposal allows the Exchange to continue attracting liquidity 
to Phlx while recouping costs incurred by the Exchange to route orders 
to away markets.

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 does not believe 
that the proposal creates a burden on intra-market competition because 
the Exchange is applying the same Routing Fees to all market 
participants in the same manner dependent on the routing venue, with 
the exception of Customers. The Exchange will continue to assess 
separate Customer Routing Fees. Customers will continue to receive the 
lowest fees as compared to non-Customers when routing orders, as is the 
case today. Other options exchanges also assess lower Routing Fees for 
customer orders as compared to non-customer orders.\17\
---------------------------------------------------------------------------

    \17\ BATS assesses lower customer routing fees as compared to 
non-customer routing fees per the away market. For example BATS 
assesses ISE customer routing fees of $0.52 per contract and an ISE 
non-customer routing fee of $ 0.65 per contract. See BATS BZX 
Exchange Fee Schedule.
---------------------------------------------------------------------------

    The Exchange's proposal would allow the Exchange to continue to 
recoup its costs when routing Customer orders to NOM or BX Options as 
well as away markets that pay a rebate when such orders are designated 
as available for routing by the market participant. The Exchange 
continues to pass along savings realized by leveraging NASDAQ OMX's 
infrastructure and scale to market participants when Customer orders 
are routed to NOM and BX Options and is providing those savings to all 
market participants. Today, other options exchanges also assess fixed 
routing fees to recoup costs incurred by the exchange to route orders 
to away markets.\18\ Market participants may submit orders to the 
Exchange as ineligible for routing or ``DNR'' to avoid Routing Fees. It 
is important to note that when orders are routed to an away market they 
are routed based on price first. Today, other options exchanges also 
assess similar fees to recoup costs incurred when routing orders to 
away markets.
---------------------------------------------------------------------------

    \18\ See CBOE's Fees Schedule and ISE's Fee Schedule.
---------------------------------------------------------------------------

    The Exchange is seeking to encourage market participants to 
transact a greater number of Customer orders on Phlx, which liquidity 
benefits all market participants. Customer liquidity benefits all 
market participants by providing more trading opportunities, which 
attracts specialists and other 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. In addition, the credit toward 
Customer Routing Fees is in addition to the Customer rebate received 
for the qualifying Customer Rebate Tier.

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

    Pursuant to Section 19(b)(3)(A)(ii) of the Act,\19\ the Exchange 
has designated this proposal as establishing or changing a due, fee, or 
other charge imposed by the self-regulatory organization on any person, 
whether or not the person is a member of the self-regulatory 
organization, which renders the proposed rule change effective upon 
filing.
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78s(b)(3)(A)(ii).
---------------------------------------------------------------------------

    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.

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-2014-68 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-Phlx-2014-68. 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-2014-68 and should be 
submitted on or before December 4, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
---------------------------------------------------------------------------

    \20\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-26840 Filed 11-12-14; 8:45 am]
BILLING CODE 8011-01-P