Document ID: SEC-2012-1894-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2012-11-19T05:00Z

[Federal Register Volume 77, Number 223 (Monday, November 19, 2012)]
[Notices]
[Pages 69530-69534]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-28003]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68213; File No. SR-Phlx-2012-129]

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

November 13, 2012.
    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 31, 2012, 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 Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its Routing Fees to adopt new fees 
which recoup costs incurred by the Exchange when routing to various 
away markets. The Exchange also proposes to amend Section VII, Section 
D to memorialize a fee currently assessed to members in its Pricing 
Schedule.
    While changes to the Pricing Schedule pursuant to this proposal are 
effective upon filing, the Exchange has designated the proposed 
amendment to be operative on November 1, 2012.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nasdaqtrader.com/micro.aspx?id=PHLXfilings, 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

[[Page 69531]]

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 eliminate the current Routing Fees 
in Section V of the Pricing Schedule and adopt new Routing Fees which 
recoup costs that the Exchange incurs for routing and executing orders 
in equity options to various away markets.
    The Exchange's Pricing Schedule at Section V currently includes the 
following Routing Fees for routing Customer, Professional,\3\ Firm, 
Broker-Dealer, Market Maker \4\ and Specialist \5\ orders to away 
markets:
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    \3\ 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).
    \4\ A ``Market Maker'' includes Registered Options Traders 
(``ROTs'') (Rule 1014(b)(i) and (ii), which include Streaming Quote 
Traders (``SQTs'') (See Rule 1014(b)(ii)(A)) and Remote Streaming 
Quote Traders (``RSQTs'') (See Rule 1014(b)(ii)(B)).
    \5\ A Specialist is an Exchange member who is registered as an 
options specialist pursuant to Rule 1020(a).

----------------------------------------------------------------------------------------------------------------
                                                                                                  Firm/broker-
                                                                                                     dealer/
                         Exchange                               Customer        Professional       specialist/
                                                                                                  market maker
----------------------------------------------------------------------------------------------------------------
NYSE AMEX.................................................             $0.11             $0.31             $0.55
BATS Penny................................................              0.55              0.55              0.55
BATS non-Penny............................................              0.86              0.91              0.91
BOX.......................................................              0.11              0.11              0.55
BX Options................................................              0.11              0.54              0.54
CBOE......................................................              0.11              0.31              0.55
CBOE orders greater than 99 contracts in RUT, RMN, NDX,                 0.29              0.31              0.55
 MNX, ETFs, ETNs and HOLDRs...............................
C2........................................................              0.55              0.56              0.55
ISE.......................................................              0.11              0.29              0.55
ISE Select Symbols \13\...................................              0.31              0.39              0.55
NYSE ARCA (Penny Pilot)...................................              0.55              0.55              0.55
NYSE ARCA (Standard)......................................              0.11              0.11              0.55
NOM Penny Pilot Options...................................              0.54              0.54              0.55
NOM Non-Penny Pilot Options...............................              0.86              0.91              0.91
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\13\ These fees are applicable to orders routed to ISE that are subject to Rebates and Fees for Adding and
  Removing Liquidity in Select Symbols. See ISE's Schedule of Fees for the complete list of symbols that are
  subject to these fees.

    The Exchange proposes to adopt new Routing Fees when routing and 
executing orders in equity options to BATS Exchange, Inc. (``BATS''), 
BOX Options Exchange LLC (``BOX''), NASDAQ OMX BX, Inc. (``BX 
Options''), C2 Options Exchange, Incorporated (``C2''), Chicago Board 
Options Exchange, Incorporated (``CBOE''), International Securities 
Exchange, LLC (``ISE''), NASDAQ Options Market (``NOM''), NYSE Amex LLC 
(``NYSE Amex'') and NYSE Arca, Inc. (``NYSE Arca'').
    Today, the Exchange calculates Routing Fees by assessing certain 
Exchange costs related to routing orders to away markets plus the away 
market's transaction fee. The Exchange incurs a fee when it utilizes 
Nasdaq Options Services LLC (``NOS''), a member of the Exchange and the 
Exchange's exclusive order router.\6\ NOS is utilized by the Exchange's 
fully automated options trading system, PHLX XL[supreg],\7\ to route 
orders in options listed and open for trading on the PHLX XL system to 
destination markets. Each time NOS routes to away markets NOS incurs 
approximately $0.06 per contract in clearing-related cost 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 NOS, membership fees at away markets, and 
technical costs associated with routing options. Today, the Exchange's 
Routing Fees include a $0.06 clearing-related cost and another $0.05 
per contract fee associated with administrative and technical costs for 
operating NOS ($0.11 per contract in total) in addition to the away 
market's transaction fee. The Exchange does not assess actual 
transaction fees in all cases today, but rather has limited fees in 
certain circumstances. In those cases the Exchange does not recover all 
of its costs for routing to the away market. Each time an away market 
modifies its transaction fees the Exchange files a proposed rule change 
to amend its Routing Fees to reflect a Routing Fee which equates to the 
current away market's transaction fee plus an additional $0.11 per 
contract for costs incurred by the Exchange.\8\
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    \6\ In May 2009, the Exchange adopted Rule 1080(m)(iii)(A) to 
establish Nasdaq Options Services LLC (``NOS''), a member of the 
Exchange, as the Exchange's exclusive order router. See Securities 
Exchange Act Release No. 59995 (May 28, 2009), 74 FR 26750 (June 3, 
2009) (SR-Phlx-2009-32).
    \7\ This proposal refers to ``PHLX XL'' as the Exchange's 
automated options trading system. In May 2009 the Exchange enhanced 
the system and adopted corresponding rules referring to the system 
as ``Phlx XL II.'' See Securities Exchange Act Release No. 59995 
(May 28, 2009), 74 FR 26750 (June 3, 2009) (SR-Phlx-2009-32). The 
Exchange intends to submit a separate technical proposed rule change 
that would change all references to the system from ``Phlx XL II'' 
to ``PHLX XL'' for branding purposes.
    \8\ In some cases the Exchange filed a rule change which noted 
that the Exchange would not assess the actual transaction charge, 
but a lower amount where the transaction fees at an away market were 
higher than other markets. All Routing Fees are available on the 
Exchange's Pricing Schedule at Section V.
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    The Exchange proposes to amend its Routing Fees to specify in its 
rule text that the Exchange will assess the transaction fee that is 
being assessed by the away market plus a specified fixed fee which 
represents a cost incurred by the Exchange for routing an order to a 
destination market. The transaction fee

[[Page 69532]]

would be the actual charge assessed by the away exchange at the time 
that the order was entered into the Exchange's trading system. This 
transaction fee would be calculated on an order-by-order basis since 
different away markets charge different amounts.\9\ The Exchange would 
also assess a fixed fee that represents the cost to the Exchange for 
routing the order to the away market. In analyzing its costs, the 
Exchange took into account clearing costs,\10\ administrative and 
technical costs associated with operating NOS, membership fees at away 
markets and regulatory costs. With respect to BATS, BOX, C2, CBOE, ISE, 
NYSE Amex and NYSE Arca the Exchange proposes to assess a $0.10 per 
contract fee in addition to the away market's transaction fee.\11\ The 
Exchange currently assesses $0.11 per contract for costs incurred by 
the Exchange. This proposal would reduce those fixed costs to $0.10 per 
contract. While the clearing cost itself was lowered by OCC, the 
Exchange, in analyzing its actual costs, has determined to assess a 
$0.10 per contract fixed fee to represent the overall cost to the 
Exchange for technical, administrative, clearing, regulatory, 
compliance and other costs, which is in addition to the transaction fee 
assessed by the away market.\12\
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    \9\ This is similar to the methodology utilized by ISE in 
assessing Routing Fees. See ISE's Fee Schedule.
    \10\ The Options Clearing Corporation (``OCC'') recently amended 
its clearing fee from $0.03 per contract side to $0.01 per contract 
side. See Securities Exchange Act Release No. 68025 (October 10, 
2012), 77 FR 63398 (October 16, 2012) (SR-OCC-2012-18).
    \11\ The $0.10 per contract fixed fee would apply to all options 
exchanges other than BX Options and NOM, which are discussed 
separately in this proposal. The Exchange anticipates that if other 
options exchanges are approved by the Commission after the filing of 
this proposal, those exchanges would be assessed the $0.10 per 
contract fee applicable to ``all other options exchanges.''
    \12\ The Exchange will assess the actual transaction fees that 
are in place at the various away markets and will no longer limit 
those transaction fees as it does today in certain circumstances.
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    The Exchange also analyzed costs related to routing to BX Options 
and NOM and determined the costs are lower as compared to other away 
markets because NOS is utilized by all three exchanges to route 
orders.\13\ Because Phlx, BX Options and NOM all utilize NOS, the cost 
to the Exchange is less as compared to routing to other away markets. 
In addition the fixed costs are reduced because NOS is owned and 
operated by NASDAQ OMX and the three exchanges and NOS share common 
technology and related operational functions. The Exchange proposes to 
assess a $0.04 per contract fixed fee in addition to the away market's 
transaction fee to route to BX Options and NOM. This proposal would 
reduce the fixed fees assessed today on average to route to BX Options 
and NOM from $0.11 to $0.04 per contract.
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    \13\ See Chapter VI, Section 11 of the BX Options and NOM Rules.
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    For all Routing Fees, the transaction fee is based on the away 
market's transaction fee or rebate for particular market participants 
and in the case that there is no transaction fee or rebate assessed by 
the away market, the only fee assessed would be the $0.04 or $0.10 per 
contract fixed fee assessed by the Exchange to recoup its costs. As 
with all fees, the Exchange may adjust these Routing Fees in response 
to competitive conditions by filing a new proposed rule change.
    Finally, the Exchange notes in the proposed rule text in the 
Pricing Schedule that the fee assessed for routing shall be the actual 
transaction fee assessed or rebate paid by the away market. The 
Exchange is proposing to pay a market participant a rebate offered by 
an away market where there is such a rebate. Any rebate available would 
be netted against a fee assessed by the Exchange. For example, if a 
Customer order is routed to BOX, and BOX offers a customer rebate of 
$0.20 per contract, the Exchange would assess a $0.10 per contract 
fixed fee which would net against the rebate ($0.20 per contract in 
this example). The market participant for whom the customer contract 
was routed would receive a $0.10 per contract rebate. Today the market 
participant does not receive a rebate and only pays the current $0.11 
per contract Routing Fee.
    The Exchange is also proposing to memorialize a fee that is 
currently assessed on members and included in Exchange Rule 1092 titled 
``Obvious Error and Catastrophic Errors.'' Rule 1092(f)(ii) states that 
[a]n Options Exchange Official \14\ will determine whether a 
transaction(s) qualifies as a Catastrophic Error. If it is determined 
that a Catastrophic Error has occurred, the Options Exchange Official 
will adjust the execution price(s) of the transaction(s) according to 
Rule 1092. If it is determined that a Catastrophic Error has not 
occurred, the member requesting the determination will be subject to a 
charge of $5,000. The Exchange has memorialized its fees within the 
Pricing Schedule in order that all fees are readily located in one 
document. The Exchange is proposing to memorialize the Catastrophic Fee 
pursuant to Rule 1092 in Chapter VII, Part D of the Pricing Schedule 
for ease of reference.
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    \14\ An Option Exchange Official is an Exchange staff member or 
contract employee designated as such by the Chief Regulatory 
Officer.
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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) of the Act \16\ in 
particular, in that it is an equitable allocation of reasonable fees 
and other charges among Exchange members.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that the proposed Routing Fees are reasonable 
because they seek to recoup costs that are incurred by the Exchange 
when routing Customer, Professional, Firm, Broker-Dealer, Specialist 
and Market Maker orders to away markets on behalf of members. Each 
destination market's transaction charge varies and there is a cost 
incurred by the Exchange when routing orders to away markets. The costs 
to the Exchange include clearing costs, administrative and technical 
costs associated with operating NOS, membership fees at away markets, 
and technical costs associated with routing options. The Exchange 
believes that the proposed Routing Fees would enable the Exchange to 
recover the costs it incurs to route orders to away markets in addition 
to transaction fees assessed to market participants for the execution 
of Customer, Professional, Firm, Broker-Dealer, Specialist and Market 
Maker orders by the away market.
    In addition, the Exchange notes that while it currently assesses a 
fixed fee of $0.11 per contract for costs incurred by the Exchange, the 
proposal would reduce the fixed fee to $0.10 per contract for non-
NASDAQ OMX exchanges. The Exchange believes that the proposed fee is 
reasonable because while the per contract clearing fee itself was 
lowered by OCC (from $0.03 to $0.01 per contract side), the Exchange, 
in analyzing its actual costs, has determined to assess a $0.10 per 
contract fee to represent the overall cost to the Exchange for 
technical, administrative, clearing, regulatory, compliance and other 
costs, in addition to the transaction fee assessed by the away market. 
The clearing cost was only one component of the $0.11 per contract fee 
and other costs, which comprise the proposed $0.10 per contract fee, 
are not recouped today. Also, the Exchange will assess the actual 
transaction fees that are in place at the various away markets and will 
no longer limit those transaction fees as it does today in certain 
circumstances. The Exchange

[[Page 69533]]

believes that it is reasonable for it to recoup its actual costs 
associated with routing orders to away markets. Also, market 
participants whose orders routed to away markets would be entitled to 
receive rebates offered by away markets, which rebates would net 
against fees assessed by the Exchange for routing orders. The Exchange 
believes that the opportunity to collect a rebate, which is not the 
case today, will reduce Routing Fees.
    In addition, the Exchange believes that it is equitable and not 
unfairly discriminatory to assess a fixed cost of $0.10 per contract, 
which is mostly comprised of technology, infrastructure and away market 
non-transaction fee costs, to route orders to non-NASDAQ OMX away 
markets because the Exchange would be assessing an overall lower fixed 
fee. While today, the $0.11 per contract fee is mostly comprised of 
clearing costs, the proposed $0.10 per contract fixed fee is based on 
costs attributable to routing to non-NASDAQ OMX away markets, which 
costs are not assessed today. The proposed $0.10 per contract fixed fee 
would be assessed uniformly on all orders routed to non-NASDAQ OMX 
markets in addition to the actual away market transaction fee assessed 
by the destination market.
    The Exchange believes that it is equitable and not unfairly 
discriminatory to assess a fixed cost of $0.04 per contract to route 
orders to NASDAQ OMX away markets (BX Options and NOM) 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 BX 
Options and NOM are lower as compared to other away markets because NOS 
is utilized by all three exchanges to route orders.\17\ NOS and the 
three NASDAQ OMX options markets have a common data center and staff 
that are responsible for the day-to-day operations of NOS. 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 de minimis. When routing orders to non-NASDAQ 
OMX exchanges, the Exchange incurs costly connectivity charges related 
to telecommunication lines and other related costs when routing orders. 
The proposed fixed fee for routing orders to non-NASDAQ OMX exchanges 
is therefore increased as compared to the fees for routing orders to 
NASDAQ OMX exchanges (BX Options and NOM), $0.10 per contract versus 
$0.04 per contract, respectively. The proposed $0.04 per contract fixed 
fee would be assessed uniformly on all orders routed to NASDAQ OMX 
markets in addition to the actual away market transaction fee assessed 
by the destination market. The Exchange also believes that it is 
equitable and not unfairly discriminatory for market participants to 
receive rebates on orders routed to away markets that pay rebates. 
Today, the Exchange does not pay such rebates when routing orders. The 
Exchange would pay rebates offered by away markets uniformly to market 
participants when their orders are routed to a destination market that 
offers a rebate.
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    \17\ See Chapter VI, Section 11 of the BX Options and NOM Rules.
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    The Exchange believes it is reasonable, equitable and not unfairly 
discriminatory to pass along savings realized by leveraging NASDAQ 
OMX's infrastructure and scale to market participants when those orders 
are routed to BX Options and NOM.\18\ It is important to note with 
respect to routing to an away market that orders are routed to away 
markets based on price first. PHLX XL will route orders to away markets 
where the Exchange's disseminated bid or offer is inferior to the 
national best bid (best offer) (``NBBO'') price.\19\ Market 
participants may submit orders to the Exchange as ineligible for 
routing or ``DNR'' to avoid incurring the Routing Fees proposed 
herein.\20\
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    \18\ Today, the Exchange assesses a $0.11 per contract fixed fee 
for routing orders to BX Options and NOM. That fee is proposed to be 
reduced to a $0.04 per contract fixed fee, which would be in 
addition to the actual transaction fee assessed by the away market.
    \19\ See Rule 1080(m). The Phlx XL II system will 
contemporaneously route an order marked as an Intermarket Sweep 
Order (``ISO'') to each away market disseminating prices better than 
the Exchange's price, for the lesser of: (a) The disseminated size 
of such away markets, or (b) the order size and, if order size 
remains after such routing, trade at the Exchange's disseminated bid 
or offer up to its disseminated size. If contracts still remain 
unexecuted after routing, they are posted on the book. Once on the 
book, should the order subsequently be locked or crossed by another 
market center, the Phlx XL II system will not route the order to the 
locking or crossing market center, with some exceptions noted in 
Rule 1080(m).
    \20\ See Rule 1066(h) (Certain Types of Orders Defined) and 
1080(b)(i)(A) (PHLX XL and PHLX XL II).
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    The Exchange also believes its proposal to add the Catastrophic 
Error Fee to the Pricing Schedule is reasonable, equitable and not 
unfairly discriminatory because the Exchange has listed all fees it 
assesses and rebates paid to its members and member organizations 
within the Pricing Schedule. The Exchange believes that memorializing 
all fees and rebates within the Pricing Schedule provides an easy 
reference for members and member organizations. The Exchange is not 
establishing a new fee, but rather simply codifying the Catastrophic 
Error Fee, which is noted in Rule 1092, within the Pricing Schedule.

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. To the contrary, Phlx Routing 
Fees seek to recoup costs for Routing Orders to other exchanges on 
behalf of its members. Options Participants may choose to mark the 
order as ineligible for routing to avoid incurring these fees.\21\
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    \21\ Id.
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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\ 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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    \22\ 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

[[Page 69534]]

Number SR-Phlx-2012-129 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2012-129. 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-2012-129 and 
should be submitted on or before December 10, 2012.

    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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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-28003 Filed 11-16-12; 8:45 am]
BILLING CODE 8011-01-P