Document ID: SEC-2014-0062-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX, LLC
Posted Date: 2014-01-14T05:00Z

[Federal Register Volume 79, Number 9 (Tuesday, January 14, 2014)]
[Notices]
[Pages 2489-2493]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-00465]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71257; File No. SR-Phlx-2014-03]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
the Customer Rebate Program

January 8, 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 January 3, 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.
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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 the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend the Customer Rebate Program in 
Section B of the Pricing Schedule.
    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 Exchange proposes to amend certain Customer Rebate tier 
percentage thresholds and add a new tier to the

[[Page 2490]]

``Customer Rebate Program,'' in Section B of the Pricing Schedule to 
provide members a greater opportunity to receive Customer rebates.
    Currently, the Exchange has a Customer Rebate Program consisting of 
four tiers which pays Customer rebates on two Categories, A \3\ and 
B,\4\ of transactions.\5\ A Phlx member qualifies for a certain rebate 
tier based on the percentage of total national customer volume in 
multiply-listed options which it transacts monthly on Phlx. The 
Exchange calculates Customer volume in Multiply Listed Options by 
totaling electronically-delivered and executed volume, except volume 
associated with electronic Qualified Contingent Cross (``QCC'') 
Orders,\6\ as defined in Exchange Rule 1080(o).\7\ The Exchange pays 
the following rebates: \8\
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    \3\ Category A rebates are paid to members executing 
electronically-delivered Customer Simple Orders in Penny Pilot 
Options and Customer Simple Orders in Non-Penny Pilot Options in 
Section II symbols. Rebates are paid on Customer PIXL Orders in 
Section II symbols that execute against non-Initiating Order 
interest. In the instance where member organizations qualify for 
Tier 3 or higher in the Customer Rebate Program, Customer PIXL 
Orders that execute against a PIXL Initiating Order are paid a 
rebate of $0.14 per contract.
    \4\ Category B rebates are paid to members executing 
electronically-delivered Customer Complex Orders in Penny Pilot 
Options and Non-Penny Pilot Options in Section II. Rebates are paid 
on Customer PIXL Complex Orders in Section II symbols that execute 
against non-Initiating Order interest. In the instance where member 
organizations qualify for Tier 3 or higher in the Customer Rebate 
Program, Customer Complex PIXL Orders that execute against a Complex 
PIXL Initiating Order will be paid a rebate of $0.17 per contract.
    \5\ See Section B of the Pricing Schedule.
    \6\ A QCC Order is comprised of an order to buy or sell at least 
1000 contracts 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 the Regulation NMS).
    \7\ Members and member organizations under common ownership may 
aggregate their Customer volume for purposes of calculating the 
Customer Rebate Tiers and receiving rebates. Common ownership means 
members or member organizations under 75% common ownership or 
control.
    \8\ SPY is included in the calculation of Customer volume in 
Multiply Listed Options that are electronically-delivered and 
executed for purposes of the Customer Rebate Program, however, the 
rebates do not apply to electronic executions in SPY.

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                                                    Percentage thresholds of
                                                   national customer volume in
             Customer rebate tiers               multiply-listed equity and ETF     Category A      Category B
                                                 options classes, excluding SPY
                                                        options (monthly)
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Tier 1........................................  0.00%-0.75%.....................           $0.00           $0.00
Tier 2........................................  Above 0.75%-1.60%...............           *0.12           *0.17
Tier 3........................................  Above 1.60%-2.50%...............            0.16            0.19
Tier 4........................................  Above 2.50%.....................            0.17            0.19
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* The Exchange will pay a $0.02 per contract rebate in addition to the applicable Tier 2 rebate to a Specialist
  or Market Maker or its affiliate under Common Ownership provided the Specialist or Market Maker has reached
  the Monthly Market Maker Cap, as defined in Section II.

    The Exchange proposes to amend Tier 1 of the Customer Rebate 
Program to lower the percentage threshold from 0.00%-0.75% to 0.00%-
0.45%. The Exchange believes that lowering the percentage threshold in 
Tier 1 will continue to encourage market participants to direct a 
greater number of Customer orders to the Exchange to qualify for the 
rebate.
    The Exchange proposes to adopt a new Tier 2 Customer rebate with a 
percentage threshold of above 0.45%-1.00% and offer a Category A rebate 
of $0.11 per contract and a Category B rebate of $0.17 per contract. 
The Exchange believes that this new tier will continue to encourage 
market participants to direct a greater number of Customer orders to 
the Exchange to qualify for the rebate.
    The Exchange proposes to amend the current Tier 2 rebate by 
renaming it ``Tier 3'' and amending the percentage threshold from above 
0.75%-1.60% to above 1.00%-1.60%. The Exchange is increasing this 
rebate tier to account for the new Tier 2 rebate.
    The Exchange proposes to rename current Tier 3 as Tier 4 and 
current Tier 4 as Tier 5 to account for the new rebate tier that is 
being proposed.
    The Exchange proposes to amend rule text related to a current 
rebate which was recently added in November 2013.\9\ In that filing the 
Exchange amended the Pricing Schedule at Section B to offer a 
Specialist or Market Maker, or its affiliate under Common 
Ownership,\10\ provided the Specialist or Market Maker has reached the 
Monthly Market Maker Cap \11\ as defined in Section II, an additional 
$0.02 per contract rebate in addition to the applicable Tier 2 rebate 
if they qualified for the Tier 2 rebate (``$0.02 Rebate''). The 
Exchange is proposing to amend the rule text to continue to refer to 
the current Tier 2 rebate which the Exchange is proposing to rename 
Tier 3. The rule text will be amended to also reflect the change to 
Tier 3 with respect to the ``$0.02 Rebate.'' Further, the Exchange 
proposes to clarify the rule text by noting that the reference to 
``affiliate'' with respect to the ``$0.02 Rebate is to a member or 
member organization affiliate. This relates back to the definition of 
Common Ownership which means members or member organizations under 75% 
common ownership or control.\12\ The Exchange is proposing to add the 
words ``member or member organization'' before ``affiliate'' to make 
clear that the affiliate must be a member or member organization of 
Phlx.
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    \9\ See Securities Exchange Act Release No. 70969 (December 3, 
2013), 78 FR 73907 (December 9, 2013) (SR-Phlx-2013-114).
    \10\ The term ``Common Ownership'' means members or member 
organizations under 75% common ownership or control.
    \11\ Specialists and Market Makers are subject to a ``Monthly 
Market Maker Cap'' of $550,000 for: (i) Electronic and floor Option 
Transaction Charges; (ii) QCC Transaction Fees (as defined in 
Exchange Rule 1080(o) and Floor QCC Orders, as defined in 1064(e)); 
and (iii) fees related to an order or quote that is contra to a PIXL 
Order or specifically responding to a PIXL auction. The trading 
activity of separate Specialist and Market Maker member 
organizations is aggregated in calculating the Monthly Market Maker 
Cap if there is Common Ownership between the member organizations. 
All dividend, merger, short stock interest, reversal and conversion, 
jelly roll and box spread strategy executions (as defined in this 
Section II) are excluded from the Monthly Market Maker Cap. In 
addition, Specialists or Market Makers that (i) are on the contra-
side of an electronically-delivered and executed Customer order; and 
(ii) have reached the Monthly Market Maker Cap are assessed a $0.17 
per contract fee.
    \12\ See the Preface of the Exchange's Pricing Schedule which 
includes the definition of Common Ownership.
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    The Exchange also proposes to amend Category A of Section B of the 
Pricing Schedule to amend the following sentence: [i]n the instance 
where member organizations qualify for Tier 3 or higher in the Customer 
Rebate Program, Customer PIXL Orders that execute against a PIXL 
Initiating Order are paid a rebate of $0.14 per contract.

[[Page 2491]]

The Exchange proposes to pay the $0.14 per contract rebate in the 
instance where member organizations qualify for Tier 4 or higher in the 
Customer Rebate Program. Similarly, the Exchange proposes to amend 
Category B of Section B of the Pricing Schedule to amend the following 
sentence: [i]n the instance where member organizations qualify for Tier 
3 or higher in the Customer Rebate Program, Customer Complex PIXL 
Orders that execute against a Complex PIXL Initiating Order will be 
paid a rebate of $0.17 per contract. The Exchange proposes to pay the 
$0.17 per contract rebate in the instance where member organizations 
qualify for Tier 4 or higher in the Customer Rebate Program. The 
Exchange added a new Tier 2 rebate to the Customer Rebate Program and 
is proposing to apply the higher rebates to the newly renamed Tier 4 
rebate at this time to incentivize market participants to add a greater 
amount of Customer volume.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\13\ in general, and with 
Section 6(b)(4) and 6(b)(5) of the Act,\14\ 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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    \13\ 15 U.S.C. 78f.
    \14\ 15 U.S.C. 78f(b)(4) and (5).
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    The Exchange's proposal to lower the Tier 1 percentage threshold 
from 0.00% -0.75% to 0.00%-0.45% is reasonable because the Exchange is 
proposing to adopt a Tier 2 rebate for volume between 0.45%-1.00%. 
Members that currently qualify for a non-paying Tier 1 rebate by 
transacting greater than 0.75% of national customer volume in multiply 
listed equity and ETF options (excluding SPY) may qualify for the newly 
added Tier 2 rebate, which pays a Category A rebate of $0.11 per 
contract and a Category B rebate of $0.17 per contract, by transacting 
greater than 0.45% of national customer volume in multiply listed 
equity and ETF options (excluding SPY). The Exchange believes that the 
new Tier 2 will offer members an opportunity to earn a Customer rebate 
because the volume threshold is lower with new Tier 2 than with current 
Tier 1.
    The Exchange's proposal to lower the Tier 1 percentage threshold 
from 0.00% -0.75% to 0.00%-0.45% is equitable and not unfairly 
discriminatory because it will be applied to all market participants in 
a uniform matter. Any market participant is eligible to receive the 
rebate provided they transact a qualifying amount of electronic 
Customer volume.
    The Exchange's proposal to adopt a Tier 2 rebate of above 0.45%-
1.00% is reasonable because, as stated above, members that today do not 
earn a Customer Rebate in current Tier 1 may be able to qualify for the 
new Tier 2 rebate. Some members that currently qualify for the current 
Tier 2 (0.75%-1.60%) rebate would receive a lower Category A rebate as 
the new Tier 2 rebate pays a Category A rebate of $0.11 per contract 
and the current Tier 2 Category A rebate is $0.12 per contract. The 
Category B rebate is $0.17 per contract in both the current and 
proposed Tier 2. However, the volume requirement for the new Tier 2 
rebate (0.45%-1.00%) is lower than the current Tier 2 rebate (0.75%-
1.60%). The Exchange believes that despite the lower Category A rebate, 
the new Tier 2 will continue to encourage members to transact Customer 
orders on Phlx. Certain members that currently qualify for the current 
Tier 2 rebate will need to transact above 1.00% of national customer 
volume in multiply listed equity and ETF options (excluding SPY) to 
continue to receive the higher Category A rebate of $0.12 per contract. 
In addition Specialists and Market Makers that currently qualify for 
the $0.02 Rebate will need to transact the increased volume of at least 
1.00% of national customer volume in multiply listed equity and ETF 
options (excluding SPY) to qualify for the $0.02 Rebate. The Exchange 
believes that members will be encouraged to transact a greater number 
of Customer contracts to receive higher rebates, despite the reduced 
Category A rebate with the new Tier 2.
    The Exchange's proposal to adopt a new Tier 2 rebate of above 
0.45%-1.00% is equitable and not unfairly discriminatory because it 
will be applied to all market participants in a uniform matter. Any 
market participant is eligible to receive the rebate provided they 
transact a qualifying amount of electronic Customer volume.
    The Exchange's proposal to increase the current Tier 3 rebate from 
above 0.75%-1.60% to above 1.00%-1.60% is reasonable because it should 
incentivize members to direct a greater number of Customer orders to 
the Exchange to qualify for the newly named Tier 3 rebate. As explained 
above, certain members that currently qualify for the current Tier 2 
rebate will need to transact above 1.00% of national customer volume in 
multiply listed equity and ETF options (excluding SPY) to continue to 
receive the higher Category A rebate of $0.12 per contract.\15\ The 
Exchange believes that members will be encouraged to transact a greater 
number of Customer contracts to receive the higher Category A rebate in 
newly named Tier 3. In addition Specialists and Market Makers that 
currently qualify for the $0.02 Rebate will need to transact the 
increased volume of at least 1.00% of national customer volume in 
multiply listed equity and ETF options (excluding SPY) to qualify for 
the $0.02 Rebate. This should also incentivize Specialists and Market 
Makers to transact a greater number of Customer orders on the Exchange. 
Phlx offers members certain Customer rebates to encourage Phlx member 
organizations to direct Customer order flow to the Exchange, and the 
$0.02 Rebate provides an additional incentive for Customer order flow. 
Customer liquidity benefits all market participants by providing more 
trading opportunities, which attract 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.
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    \15\ The Category B rebate is $0.17 per contract with new Tier 2 
and newly named Tier 3.
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    The Exchange's proposal to increase the current Tier 3 rebate from 
above 0.75%-1.60% to above 1.00%-1.60% is equitable and not unfairly 
discriminatory because it will be applied to all market participants in 
a uniform matter. All members are eligible to receive the rebate 
provided they submit a qualifying number of electronic Customer volume.
    The Exchange's proposal to renumber the Customer Rebate Tiers to 
accommodate the new Tier 2 is reasonable, equitable and not unfairly 
discriminatory to clarify the Pricing Schedule.
    The Exchange's proposal to add the words ``member or member 
organization'' before ``affiliate'' is reasonable, equitable and not 
unfairly discriminatory because the addition of these words further 
clarifies the intent of the $0.02 Rebate to apply to affiliates that 
are members or member organizations of the Exchange. The proposed 
amendment is not substantive as this is the manner in which the Common 
Ownership is applied today.
    The Exchange's proposal to replace Tier 3 with Tier 4 in order to 
receive the

[[Page 2492]]

higher Category A rebate of $0.14 per contract or the higher Category B 
rebate of $0.17 per contract in the instance where member organizations 
qualify for Tier 3 or higher in the Customer Rebate Program, Customer 
PIXL Orders that execute against a PIXL Initiating Order or member 
organizations qualify for Tier 3 or higher in the Customer Rebate 
Program, Customer Complex PIXL Orders that execute against a Complex 
PIXL Initiating Order, respectively, is reasonable to encourage market 
participants to add a greater amount of Customer volume on Phlx. The 
Exchange believes that members will be encouraged to transact a greater 
amount of Customer volume to obtain the higher rebates.
    The Exchange believes that replacing Tier 3 with Tier 4 in order to 
receive the higher Category A rebate of $0.14 per contract or the 
higher Category B rebate of $0.17 is equitable and not unfairly 
discriminatory because the Exchange will pay rebates to all market 
participants in a uniform manner provided they meet the requirements to 
obtain the higher rebate.

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

    The Exchange does not believe that the proposed rule change will 
impose an undue burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange believes that the 
Customer Rebate Program will continue to encourage Customer order flow 
to be directed to the Exchange. By incentivizing members to route 
Customer orders, the Exchange desires to attract liquidity to the 
Exchange, which in turn benefits all market participants. Customer 
liquidity benefits all market participants by providing more trading 
opportunities, which attract 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. All market participants 
are eligible to qualify for a Customer Rebate.
    The Exchange believes the proposed amendments would allow market 
participants to qualify for the new Tier 2 rebate and possibly higher 
rebates if they direct a qualifying number of Customer orders to the 
Exchange. The Exchange believes this pricing amendment does not impose 
a burden on competition but rather that the proposed rule change will 
continue to promote competition on the Exchange. A market participant 
requires less Customer volume with this proposal to earn a Customer 
rebate. The current Tier 2 rebate requires above 0.75% of national 
customer volume in multiply listed equity and ETF options (excluding 
SPY) while the new Tier 2 rebate requires above 0.45% of national 
customer volume in multiply listed equity and ETF options (excluding 
SPY). While some participants will be required to transact a greater 
number of Customer orders to continue to earn the newly named Tier 3 
Category A rebate, the Exchange believes that members will be 
encouraged to transact a greater number of Customer contracts to 
receive the higher rebate, which will promote competition.
    In addition Specialists and Market Makers that currently qualify 
for the $0.02 Rebate will need to transact the increased volume of at 
least 1.00% of national customer volume in multiply listed equity and 
ETF options (excluding SPY) to qualify for the $0.02 Rebate. This 
proposal should incentivize Specialists and Market Makers to transact a 
greater number of Customer orders on the Exchange to achieve the $0.02 
Rebate and therefore would not create an undue burden on competition, 
but would instead encourage competition.
    The Exchange believes that replacing Tier 3 with Tier 4 in order to 
receive the higher Category A rebate of $0.14 per contract or the 
higher Category B rebate of $0.17 does not impose an undue burden on 
competition because the Exchange will pay the higher rebate to all 
market participants that qualify for the rebate and the rebate is 
intended to promote competition by encouraging market participants to 
transact a greater number of Customer orders.
    The remainder of the proposed amendments are clarifying and would 
not impose an undue burden on competition.
    The Exchange operates in a highly competitive market, comprised of 
twelve options exchanges, in which market participants can easily and 
readily direct order flow to competing venues if they deem fee levels 
at a particular venue to be excessive or rebates to be inadequate. 
Accordingly, the fees that are assessed and the rebates paid by the 
Exchange described in the above proposal are influenced by these robust 
market forces and therefore must remain competitive with fees charged 
and rebates paid by other venues and therefore must continue to be 
reasonable and equitably allocated to those members that opt to direct 
orders to the Exchange rather than competing venues.

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.\16\ 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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    \16\ 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 Number SR-Phlx-2014-03 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-2014-03. 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

[[Page 2493]]

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 
such 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-2014-03, and should be submitted on or before 
February 4, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-00465 Filed 1-13-14; 8:45 am]
BILLING CODE 8011-01-P