Document ID: SEC-2020-0783-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq PHLX, LLC
Posted Date: 2020-05-18T04:00Z

[Federal Register Volume 85, Number 96 (Monday, May 18, 2020)]
[Notices]
[Pages 29770-29773]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-10517]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88858; File No. SR-Phlx-2020-26]

Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Immediate Effectiveness of a Proposed Rule Change To Amend Phlx's 
Pricing Schedule at Options 7, Section 4

May 12, 2020.
    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 30, 2020, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``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 Phlx's Pricing Schedule at Options 
7, Section 4, ``Multiply Listed Options Fees (Includes options 
overlying equities, ETFs, ETNs and indexes which are Multiply 
Listed).'' The Exchange also proposes to correct a technical amendment 
within Options 7, Section 1.
    While the changes proposed herein are effective upon filing, the 
Exchange has designated the amendments become operative on May 1, 2020.
    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaqphlx.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
    Phlx proposes to amend its pricing within Options 7, Section 4, 
``Multiply Listed Options Fees (Includes options overlying equities, 
ETFs, ETNs and indexes which are Multiply Listed)'' to: (1) Decrease an 
existing strategy cap for certain strategies; and (2) establish a new 
daily cap for certain strategies in a single class of options.\3\ The 
Exchange also proposes to correct a technical amendment within Options 
7, Section 1.
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    \3\ The term ``class of options'' means all option contracts of 
the same type of option covering the same underlying stock or 
Exchange-Traded Fund Share (in the case of options on a stock or 
Exchange-Traded Fund Share) or the same underlying foreign currency 
(in the case of options on a foreign currency). See Options 1, 
Section 1(b)(9). The Exchange proposes to replace the terms 
``options class'' and ``options classes'' in the current rule text, 
within Options 7, Section 4, with the terms ``class of options'' and 
``classes of options'', respectively, to conform to the defined 
term.
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    Today, to qualify for a strategy cap, the buy and sell side of a 
transaction must originate either from the Exchange Trading Floor or as 
a Floor Qualified Contingent Cross Order.\4\
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    \4\ See Phlx's Pricing Schedule at Options 7, Section 4.
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    Currently, the Exchange offers the following strategy caps:

----------------------------------------------------------------------------------------------------------------
Floor options  transactions-- multiply
            listed options                       Strategy                  Qualification                Cap
----------------------------------------------------------------------------------------------------------------
Lead Market Maker, Market Maker,        dividend.................  executed on the same trading           $1,100
 Professional, Firm and Broker-Dealer.                              day in the same options
                                                                    class when such members are
                                                                    trading: (1) In their own
                                                                    proprietary accounts; or (2)
                                                                    on an agency basis. If
                                                                    transacted on an agency
                                                                    basis, the daily cap will
                                                                    apply per beneficial account.
Lead Market Maker, Market Maker,        reversal and conversion,   executed on the same trading            1,100
 Professional, Firm and Broker-Dealer.   merger, short stock        day for all options classes
                                         interest, jelly roll,      in the aggregate when such
                                         and box spread             members are trading (1) in
                                         strategies.                their own proprietary
                                                                    accounts; or (2) on an
                                                                    agency basis. If transacted
                                                                    on an agency basis, the
                                                                    daily cap will apply per
                                                                    beneficial account.
Per member organization...............  dividend, merger, short    combined executions in a               65,000
                                         stock interest, reversal   month when trading in its
                                         and conversion, jelly      own proprietary accounts.
                                         roll and box spread
                                         strategies (``Monthly
                                         Strategy Cap'').
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     Reversal and conversion, jelly roll and box spread 
strategy executions will not be included in the Monthly Strategy Cap 
for a Firm. Reversal and conversion, jelly roll and box spread strategy 
executions (as defined in this Options 7,

[[Page 29771]]

Section 4) are included in the Monthly Firm Fee Cap. All dividend, 
merger, short stock interest, reversal and conversion, jelly roll and 
box spread strategy executions (as defined in this Options 7, Section 
4) will be excluded from the Monthly Market Maker Cap. NDX and NDXP 
Options Transactions will be excluded from Strategy Cap pricing.
    The Exchange offers strategy caps for various types of strategies, 
including dividend,\5\ merger,\6\ short stock interest,\7\ reversal and 
conversion,\8\ jelly roll \9\ and box spread \10\ strategies.
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    \5\ A dividend strategy is defined as transactions done to 
achieve a dividend arbitrage involving the purchase, sale and 
exercise of in-the-money options of the same class, executed the 
first business day prior to the date on which the underlying stock 
goes ex-dividend. See Options 7, Section 4.
    \6\ A merger strategy is defined as transactions done to achieve 
a merger arbitrage involving the purchase, sale and exercise of 
options of the same class and expiration date, executed the first 
business day prior to the date on which shareholders of record are 
required to elect their respective form of consideration, i.e., cash 
or stock. See Options 7, Section 4.
    \7\ A short stock interest strategy is defined as transactions 
done to achieve a short stock interest arbitrage involving the 
purchase, sale and exercise of in-the-money options of the same 
class. See Options 7, Section 4.
    \8\ Reversal and conversion strategies are transactions that 
employ calls and puts of the same strike price and the underlying 
stock. Reversals are established by combining a short stock position 
with a short put and a long call position that shares the same 
strike and expiration. Conversions employ long positions in the 
underlying stock that accompany long puts and short calls sharing 
the same strike and expiration. See Options 7, Section 4.
    \9\ A jelly roll strategy is defined as transactions created by 
entering into two separate positions simultaneously. One position 
involves buying a put and selling a call with the same strike price 
and expiration. The second position involves selling a put and 
buying a call, with the same strike price, but with a different 
expiration from the first position. See Options 7, Section 4.
    \10\ A box spread strategy is a strategy that synthesizes long 
and short stock positions to create a profit. Specifically, a long 
call and short put at one strike is combined with a short call and 
long put at a different strike to create synthetic long and 
synthetic short stock positions, respectively. See Options 7, 
Section 4.
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    The Exchange proposes to add the phrase ``(daily)'' next to the 
daily caps and ``(monthly)'' next to the monthly cap in the Cap column 
for clarity. The Exchange also proposes to rename the ``Cap'' column as 
``Daily/Monthly Cap.''
    The Exchange proposes to amend the strategy cap applicable to Lead 
Market Makers,\11\ Market Makers,\12\ Professionals,\13\ Firms \14\ and 
Broker-Dealers \15\ with respect to reversal and conversion, merger, 
short stock interest, jelly roll and box spread strategies from $1,100 
to $1,000. The Exchange believes that its proposal will incentivize 
members to transact a greater number of reversal and conversion, 
merger, short stock interest, jelly roll and box spread strategies 
because the cap for these strategies is being lowered from $1,100 to 
$1,000. As proposed, the Exchange notes that this daily cap applies to 
strategies that were executed on the same trading day for all classes 
of options in the aggregate when such members are trading (1) in their 
own proprietary accounts; or (2) on an agency basis. If transacted on 
an agency basis, the daily cap will apply per beneficial account. The 
Exchange also proposes to state within the rule text, after the amended 
$1,000 cap and the term ``(daily),'' ``if more than one class of 
options.'' The daily cap applies to executions for all classes of 
options. The Exchange proposes to add this rule text because it is 
proposing a new daily cap applicable to executions in a single class of 
options.
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    \11\ The term ``Lead Market Maker'' applies to transactions for 
the account of a Lead Market Maker (as defined in Options 2, Section 
12(a)). A Lead Market Maker is an Exchange member who is registered 
as an options Lead Market Maker pursuant to Rule Options 2, Section 
12(a). An options Lead Market Maker includes a Remote Lead Market 
Maker which is defined as an options Lead Market Maker in one or 
more classes that does not have a physical presence on an Exchange 
floor and is approved by the Exchange pursuant to Options 2, Section 
11. See Options 7, Section 1.
    \12\ The term ``Market Maker'' is defined in Options 1, Section 
1(b)(28) as a member of the Exchange who is registered as an options 
Market Maker pursuant to Options 2, Section 12(a). A Market Maker 
includes SQTs and RSQTs as well as on and Floor Market Makers. See 
Options 7, Section 1.
    \13\ The term ``Professional'' applies to transactions for the 
accounts of Professionals, as defined in Exchange Rule 1000(b)(43) 
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 Options 7, Section 1.
    \14\ 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. See Options 7, 
Section 1.
    \15\ The term ``Broker-Dealer'' applies to any transaction which 
is not subject to any of the other transaction fees applicable 
within a particular category. See Options 7, Section 1.
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    The Exchange proposes to establish a new daily cap of $700 for 
reversal and conversion, merger, short stock interest, jelly roll and 
box spread strategies in a single class of options. Lead Market Makers, 
Market Makers, Professionals, Firms and Broker-Dealers who execute 
reversal and conversion, merger, short stock interest, jelly roll and 
box spread strategies on the same trading day in a single class of 
options will be subject to the daily strategy cap of $700. The Exchange 
qualifications, as proposed, executed on the same trading day for all 
classes of options in the aggregate when such members are trading (1) 
in their own proprietary accounts; or (2) on an agency basis still 
apply.\16\ For example, if a Lead Market Maker executed reversal and 
conversion strategies only in AAPL options, and otherwise met the 
qualifications for a reversal and conversion cap, the proposed $700 
daily cap would apply. If the Lead Market Maker executed reversal and 
conversion strategies in AAPL and SPY options, and otherwise met the 
qualifications for a reversal and conversion cap, the proposed $1,000 
daily cap would apply. The Exchange believes that offering a daily cap, 
when executions are only in a single class of options, will incentivize 
members to transact a greater number of reversal and conversion, 
merger, short stock interest, jelly roll and box spread strategies.
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    \16\ If transacted on an agency basis, the daily cap will apply 
per beneficial account.
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    The Exchange proposes to amend a cross-reference within the 
description of the term ``Customer'' within Options 7, Section 1. 
Specifically, the Exchange proposes to amend the cross-reference to the 
term ``Professional,'' within that description of Customer, from Rule 
1000(b)(43) to Options 1, Section 1(b)(45).
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\17\ in general, and furthers the objectives of 
Sections 6(b)(4) and 6(b)(5) of the Act,\18\ 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, and is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 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

[[Page 29772]]

broader forms that are most important to investors and listed 
companies.'' \19\
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    \19\ Securities Exchange Act Release No. 51808 (June 9, 2005), 
70 FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting 
Release'').
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    Likewise, in NetCoalition v. Securities and Exchange Commission 
\20\ (``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.\21\ 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.'' \22\
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    \20\ NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010).
    \21\ See NetCoalition, at 534-535.
    \22\ 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'. . . .'' \23\ 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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    \23\ Id. at 539 (quoting Securities Exchange Act Release No. 
59039 (December 2, 2008), 73 FR 74770, 74782-83 (December 9, 2008) 
(SR-NYSEArca-2006-21)).
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    The Exchange's proposal to decrease the strategy cap applicable to 
Lead Market Makers, Market Makers, Professionals, Firms and Broker-
Dealers with respect to reversal and conversion, merger, short stock 
interest, jelly roll and box spread strategies from $1,100 to $1,000 is 
reasonable because it will incentivize Lead Market Makers, Market 
Makers, Professionals, Firms and Broker-Dealers to transact a greater 
number of reversal and conversion, merger, short stock interest, jelly 
roll and box spread strategies with the lower cap.
    The Exchange's proposal to decrease the strategy cap applicable to 
Lead Market Makers, Market Makers, Professionals, Firms and Broker-
Dealers with respect to reversal and conversion, merger, short stock 
interest, jelly roll and box spread strategies from $1,100 to $1,000 is 
equitable and not unfairly discriminatory because all Lead Market 
Makers, Market Makers, Professionals, Firms and Broker-Dealers may 
qualify for the reversal and conversion, merger, short stock interest, 
jelly roll and box spread strategy cap provided they transact the 
requisite amount of reversal and conversion, merger, short stock 
interest, jelly roll and box spread strategies, wherein the buy and 
sell side of a transaction originated either from the Exchange Trading 
Floor or as a Floor Qualified Contingent Cross Order. The Exchange 
notes that while Customers \24\ are not offered the strategy caps, 
Customers are not assessed the Options Transaction Charges within 
Options 7, Section 4.
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    \24\ The term ``Customer'' applies to any transaction that is 
identified by a member or member organization for clearing in the 
Customer range at The Options Clearing Corporation (``OCC'') which 
is not for the account of a broker or dealer or for the account of a 
``Professional'' (as that term is defined in Options 1, Section 
1(b)(45)). See proposed Options 7, Section 1.
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    The Exchange's proposal to establish a new daily cap of $700 for 
reversal and conversion, merger, short stock interest, jelly roll and 
box spread strategies in a single class of options, with the same 
qualifications as today, is reasonable. The proposed daily cap will 
incentivize Lead Market Makers, Market Makers, Professionals, Firms and 
Broker-Dealers to execute a greater number of reversal and conversion, 
merger, short stock interest, jelly roll and box spread strategies for 
the opportunity to qualify for the new daily cap.
    The Exchange's proposal to establish a new daily cap of $700 for 
reversal and conversion, merger, short stock interest, jelly roll and 
box spread strategies in a single class of options, with the same 
qualifications as today, is equitable and not unfairly discriminatory 
because all Lead Market Makers, Market Makers, Professionals, Firms and 
Broker-Dealers may qualify for the reversal and conversion, merger, 
short stock interest, jelly roll and box spread daily strategy cap 
provided they transact the requisite amount of reversal and conversion, 
merger, short stock interest, jelly roll and box spread strategies, 
wherein the buy and sell side of a transaction originated either from 
the Exchange Trading Floor or as a Floor Qualified Contingent Cross 
Order in a single class of options. The Exchange notes that while 
Customers are not offered the strategy caps, Customers are not assessed 
the Options Transaction Charges within Options 7, Section 4.
    The Exchange's proposal to amend a cross-reference within the 
description of the term ``Customer'' within Options 7, Section 1 from 
Rule 1000(b)(43) to Options 1, Section 1(b)(45) is a non-substantive 
amendment.

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.
Inter-Market Competition
    The proposal does not impose an undue burden on inter-market 
competition. The Exchange believes its proposal remains competitive 
with other options markets and will offer market participants with 
another choice of where to transact options. 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 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.
Intra-Market Competition
    The proposed amendments do not impose an undue burden on intra-
market competition.
    The Exchange's proposal to decrease the strategy cap applicable to 
Lead Market Makers, Market Makers, Professionals, Firms and Broker-
Dealers with respect to reversal and conversion, merger, short stock 
interest, jelly roll and box spread strategies from $1,100 to $1,000 
does not impose an undue burden on competition because all Lead Market 
Makers, Market Makers, Professionals, Firms and Broker-Dealers may 
qualify for the reversal and conversion, merger, short stock interest, 
jelly roll and box spread strategy cap provided they transact the 
requisite amount of reversal and conversion, merger, short stock 
interest, jelly roll and box spread strategies, wherein the buy and 
sell side of a transaction originated either from the Exchange Trading 
Floor or as a Floor Qualified Contingent Cross Order. The Exchange 
notes that while Customers are not offered the strategy caps, Customers 
are

[[Page 29773]]

not assessed the Options Transaction Charges within Options 7, Section 
4.
    The Exchange's proposal to establish a new daily cap of $700 for 
reversal and conversion, merger, short stock interest, jelly roll and 
box spread strategies in a single class of options, with the same 
qualifications as today, does not impose an undue burden on competition 
because all Lead Market Makers, Market Makers, Professionals, Firms and 
Broker-Dealers may qualify for the reversal and conversion, merger, 
short stock interest, jelly roll and box spread daily strategy cap 
provided they transact the requisite amount of reversal and conversion, 
merger, short stock interest, jelly roll and box spread strategies, 
wherein the buy and sell side of a transaction originated either from 
the Exchange Trading Floor or as a Floor Qualified Contingent Cross 
Order in a single class of options. The Exchange notes that while 
Customers are not offered the strategy caps, Customers are not assessed 
the Options Transaction Charges within Options 7, Section 4.
    The Exchange's proposal to amend a cross-reference within the 
description of the term ``Customer'' within Options 7, Section 1 from 
Rule 1000(b)(43) to Options 1, Section 1(b)(45) is a non-substantive 
amendment.

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.\25\
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    \25\ 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-2020-26 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-2020-26. 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-Phlx-2020-26 and should be submitted on 
or before June 8, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-10517 Filed 5-15-20; 8:45 am]
 BILLING CODE 8011-01-P