Document ID: SEC-2012-0552-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2012-04-09T04:00Z

[Federal Register Volume 77, Number 68 (Monday, April 9, 2012)]
[Notices]
[Pages 21137-21140]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-8427]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66721; File No. SR-Phlx-2012-34]

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

April 3, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that, on March 26, 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 Section III of the Exchange's 
Pricing Schedule entitled ``Singly Listed Options.'' The Exchange also 
proposes to amend Section II of the Pricing Schedule entitled, ``Equity 
Options Fees'' to clarify text concerning rebates.
    While changes to the Pricing Schedule pursuant to this proposal are 
effective upon filing, the Exchange has designated certain changes be 
operative on April 2, 2012, namely the amendments to the Alpha Index 
Options Fees and the proposed MSCI Index Options Fees. The Exchange 
proposes the clarifying amendment in Section II be immediately 
effective.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqtrader.com/micro.aspx?id=PHLXRulefilings, 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 Section III \3\ of the Exchange's 
Pricing Schedule to: (1) Amend the Alpha Index Options Fees; and (ii) 
create fees for MSCI Index Options. With respect to the Alpha Index 
Options Fees, the Exchange is lowering the Customer fee and increasing 
the Professional,\4\ Market Maker,\5\ Firm and Broker-Dealer fees with 
respect to this index. Despite the increases, the fees will continue to 
be lower than the Options Transaction Charges for other Singly Listed 
Options.

[[Page 21138]]

The Exchange proposes these amendments to support options overlying 
certain NASDAQ OMX Alpha IndexesTM (``Alpha Indexes'').\6\ 
The Exchange is also proposing to create fees for the MSCI Indexes \7\ 
and offer discounted pricing to encourage members and member 
organizations to trade options overlying MSCI Indexes.
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    \3\ Section III of the Pricing Schedule includes options 
overlying equities, ETFs, ETNs, indexes and HOLDRs which are not 
listed on another exchange.
    \4\ The Exchange defines a ``professional'' as 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) 
(hereinafter ``Professional'').
    \5\ The term ``Market Maker'' is utilized herein to describe 
fees and rebates applicable to Specialists, Registered Options 
Traders, Streaming Quote Traders and Remote Streaming Quote Traders.
    \6\ The Exchange initially received approval to list Alpha Index 
Options limited to specific Alpha Indexes the Target Component of 
which is a single stock. Specifically, Alpha Indexes based on the 
following Alpha Pairs: AAPL/SPY, AMZN/SPY, CSCO/SPY, F/SPY, GE/SPY, 
GOOG/SPY, HPQ/SPY, IBM/SPY, INTC/SPY, KO/SPY, MRK/SPY, MSFT/SPY, 
ORCL/SPY, PFE/SPY, RIMM/SPY, T/SPY, TGT/SPY, VZ/SPY and WMT/SPY. See 
Securities Exchange Act Release No. 63860 (February 7, 2011), 76 FR 
7888 (February 11, 2001) (SR-Phlx-2010-176). The Exchange expanded 
the number of Alpha Indexes on which options can be listed to 
include certain Alpha Indexes based on the following Alpha Pairs: 
DIA/SPY, EEM/SPY, EWJ/SPY, EWZ/SPY, FXI/SPY, GLD/SPY, IWM/SPY, QQQ/
SPY, SLV/SPY, TLT/SPY, XLE/SPY and XLF/SPY. In these Alpha Indexes, 
the Target Component as well as the Benchmark Component is an ETF 
share. The proposed Alpha Index Options will enable investors to 
trade the relative performance of the market sectors represented by 
the Target Components as compared with the overall market 
performance represented by the Benchmark Component SPY. See 
Securities Exchange Act Release No. 65149 (August 17, 2011), 76 FR 
52729 (August 23, 2011) (SR-Phlx-2011-89).
    \7\ The Exchange filed to list options on the MSCI EM Index. The 
MSCI EM Index is a free float-adjusted market capitalization index 
consisting of large and midcap component securities from countries 
classified by MSCI as ``emerging markets,'' and is designed to 
measure equity market performance of emerging markets. The index 
consists of component securities from the following 21 emerging 
market countries: Brazil, Chile, China, Colombia, Czech Republic, 
Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, 
Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, 
and Turkey. See Securities Exchange Act Release No. 66420 (February 
17, 2012), 77 FR 11177 (February 24, 2012) (SR-Phlx-2011-179) (an 
order granting approval of the proposal to list and trade options on 
the MSCI EM Index). The Exchange also proposed to list options on 
the MSCI EAFE Index. The MSCI EAFE Index is a free float-adjusted 
market capitalization index that is designed to measure the equity 
market performance of developed markets, excluding the U.S. and 
Canada. The MSCI EAFE Index consists of component securities from 
the following twenty-two (22) developed market countries: Australia, 
Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong 
Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, 
Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the 
United Kingdom. See SR-Phlx-2012-28.
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    Both the Alpha Indexes and MSCI Indexes trade on the Exchange as 
Singly Listed Options.\8\ The Exchange currently assesses the following 
fees on options overlying Alpha Indexes:
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    \8\ A Singly Listed Option means an option that is only listed 
on the Exchange and is not listed by any other national securities 
exchange.

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                                                                Customer         Professional       Market maker           Firm          Broker-Dealer
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Alpha Index Options......................................            $0.15+              $0.20              $0.00              $0.20              $0.20
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+ Customer executions with average daily volume of 1,000 Customer contracts or more in a calendar month will be assessed $0.10 per contract.

The Exchange is proposing to amend the Alpha Index Options Fees as 
noted below and assess the same fees for MSCI Index Options.

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                                                                Customer         Professional       Market maker           Firm          Broker-Dealer
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Alpha and MSCI Index Options.............................             $0.10              $0.25              $0.15              $0.25              $0.25
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    The Exchange proposes to eliminate the current incentive for 
Customer executions with average daily volume of 1,000 Customer 
contracts or more in a calendar month that are assessed $0.10 per 
contract. The Exchange is proposing to assess a $0.05 per contract 
surcharge on non-Customer executions in MSCI Index Options in order to 
recover a portion of the cost associated with licensing MSCI 
products.\9\ The Exchange intends that the aforementioned fee 
amendments become operative on April 2, 2012.
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    \9\ The Exchange has entered into a license agreement with MSCI 
Inc. (``MSCI'') to list certain products.
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    The Exchange also proposes to amend Section II of the Pricing 
Schedule to clarify that the current $0.07 per contract rebate that is 
applicable to Customer Orders that are electronically-delivered to a 
member that has an average daily volume of 50,000 contracts are 
Customer contracts. The Exchange is assessing rebates for Customer 
orders based on Customer volume. The Exchange proposes to clarify the 
text of the Pricing Schedule by adding the word ``Customer'' in the 
section of the sentence pertaining to the average daily volume. The 
Exchange proposes this amendment to be immediately effective.
2. Statutory Basis
    The Exchange believes that its proposal to amend its Pricing 
Schedule is consistent with Section 6(b) of the Act \10\ in general, 
and furthers the objectives of Section 6(b)(4) of the Act \11\ in 
particular, in that it is an equitable allocation of reasonable fees 
and other charges among Exchange members and other persons using its 
facilities.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(4).
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    The Exchange's proposal to amend the Alpha Index Options Fees and 
assess those same fees for MSCI Index Options is reasonable because the 
Exchange is seeking to recoup the operation and development costs 
associated with both the Alpha and MSCI Indexes.\12\ The Exchange would 
also be assessing lower fees for these options products, despite the 
increase to certain market participants in the Alpha Index Options 
Fees, as compared to other Singly Listed Options products to encourage 
members and member organizations to trade options on Alpha and MSCI 
Indexes. For example, Customers would be assessed $0.10 per contract to 
transact options on Alpha and MSCI Indexes as compared to $0.35 per 
contract for other Singly Listed Options products; Professionals, Firms 
and Broker-Dealers would be assessed $0.25 per contract as compared to 
$0.45 per contract for all other Singly Listed Options products; and 
Market Makers would be assessed $0.15 per contract as compared to the 
$0.35 per contract for all other Singly Listed Options products.
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    \12\ The Exchange continues to incur costs for maintaining the 
Alpha proprietary index including marketing expenses. The Exchange 
also has incurred and will continue to incur costs to list options 
on MSCI Indexes. In addition, the Exchange incurs certain additional 
costs related to Singly Listed options as compared to Multiply 
Listed options. For example, in analyzing an obvious error for a 
Singly Listed option, the Exchange does not have the additional data 
points available in establishing a theoretical price as is the case 
for a Multiply Listed option. For this reason, a Singly Listed 
option requires additional analysis and administrative time to 
comply with Exchange rules to resolve an obvious error.
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    The Exchange believes that its proposal to amend the Alpha Index 
Options Fees is equitable and not unfairly discriminatory because 
despite

[[Page 21139]]

the increase for all market participants, except Customers, the fees 
for Alpha Index Options would be lower than those for other Singly 
Listed Options products as detailed above. Specifically, the Customer 
fee for Alpha Index Options is being lowered from $0.15 per contract to 
$0.10 per contract to encourage market participants to transact a 
greater number of Customer orders in options overlying Alpha Indexes. 
The Exchange believes that it is equitable and not unfairly 
discriminatory to assess lower fees to Customers, because all market 
participants benefit from Customer order flow. The Professional, Firm 
and Broker-Dealer Alpha Index Options Fees would be increased by $0.05 
per contract (from $0.20 per contract to $0.25 per contract) and these 
fees would be uniformly assessed to these market participants and 
exclude Customers and Market Makers, which market participant fees are 
more specifically described herein. Currently, Market Makers \13\ are 
not assessed a fee for Alpha Index Options. The Exchange did not 
initially assess Market Makers a fee because the Exchange desired to 
encourage such Market Makers to transact Alpha Index Options. At this 
time, the Exchange still desires to encourage Market Makers to transact 
Alpha Index Options by assessing them a fee equal to that of a Customer 
($0.15 per contract) while still continuing to recognize the burdensome 
quoting obligations \14\ to the market which do not apply to Customers, 
Professionals, Firms and Broker-Dealers. The Exchange also believes the 
Market Maker fee amendment is equitable and not unfairly discriminatory 
because the amendment will more closely align the Market Maker fee with 
other market participant fees for Alpha Index Options.
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    \13\ The term ``Market Maker'' is utilized herein to describe 
fees and rebates applicable to Specialists, Registered Options 
Traders, Streaming Quote Traders and Remote Streaming Quote Traders.
    \14\ See Exchange Rule 1014 titled ``Obligations and 
Restrictions Applicable to Specialists and Registered Options 
Traders.''
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    The Exchange believes that the proposed MSCI Index Options fees are 
equitable and not unfairly discriminatory because the fees would be 
lower than those for other Singly Listed Options products as detailed 
above. In addition, the Exchange would be assessing a lower Customer 
fee ($0.10 per contract) because the Exchange, as noted above, seeks to 
encourage Customer order flow, which benefits all market participants. 
The Exchange would assess Market Makers a lower fee similar to a 
Customer ($0.15 per contract) because of the burdensome quoting 
obligations borne by these participants. The remaining market 
participants, Professionals, Firms and Broker-Dealers, would be 
uniformly assessed a $0.25 per contract fee to transact MSCI Index 
Options.
    The Exchange also believes that it is reasonable, equitable and not 
unfairly discriminatory to assess a surcharge of $0.05 per contract for 
non-Customer executions in MSCI Index Options. The Exchange incurs 
licensing fees associated with MSCI products and seeks to recoup those 
costs with the surcharge. The Exchange believes it is equitable and not 
unfairly discriminatory to assess this surcharge on all participants 
except Customers because the Exchange seeks to encourage Customer order 
flow and the liquidity such order flow brings to the marketplace, which 
in turn benefits all market participants.
    The Exchange has previously stated that it incurs higher costs for 
Singly Listed options as compared to Multiply Listed options.\15\ The 
Chicago Board Options Exchange, Incorporated (``CBOE'') noted in a 
comment letter dated June 21, 2010 that CBOE relies upon fees to recoup 
licensing costs incurred on options products that use third-party 
proprietary indexes as benchmarks (such as the S&P 500[supreg]), and to 
generate returns on its investments for its own popular proprietary 
products (such as The CBOE Volatility Index[supreg] (``VIX[supreg]'') 
Options).\16\ The Exchange agrees with CBOE's position and while the 
Exchange continues to assert that Singly Listed products incur higher 
costs and therefore market participants should be assessed higher fees 
as compared to Multiply Listed products, the Exchange is proposing to 
assess lower fees for the Alpha Indexes, and MSCI Indexes,\17\ as a 
means to promote these new index products.\18\ In addition, the 
Exchange believes that the proposed fees are reasonable, equitable and 
not unfairly discriminatory because the fees are consistent with price 
differentiation that exists today at all option exchanges. For example, 
CBOE assesses different rates for certain proprietary indexes as 
compared to other index products transacted at CBOE. VIX options and 
The S&P 500[supreg] Index options (``SPX\SM\'') are assessed different 
fees than other indexes.\19\ In addition, the concept of offering a 
volume discount to incentivize order flow is not novel.\20\
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    \15\ See Securities Exchange Release Act No. 64096 (March 18, 
2011), 76 FR 16646 (March 24, 2011) (SR-Phlx-2011-34).
    \16\ See CBOE's Comment Letter dated June 21, 2010 to the 
Proposed Amendments to Rule 610 of Regulation NMS, File No. S7-09-
10. CBOE further noted that options exchanges expend considerable 
resources on research and development related to new product 
offerings and options exchanges incur large licensing costs for many 
products.
    \17\ The proposed fees for the MSCI Index Options are lower than 
the options transaction charges for other Singly Listed options 
products even including the proposed $0.05 surcharge on non-Customer 
executions.
    \18\ The Alpha Indexes are still in an early phase of their life 
cycle and the MSCI EM Index is not yet listed. If the Exchange 
determines to increase the pricing for options overlying Alpha or 
MSCI Indexes at a later date, the Exchange would file a proposal 
with the Commission.
    \19\ See CBOE's Fees Schedule.
    \20\ See CBOE's Fees Schedule. CBOE has a sliding scale for its 
proprietary products whereby transaction fees are reduced when a 
Clearing Trading Permit Holder reaches certain volume thresholds in 
Multiply Listed options on CBOE in a month.
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    The Exchange believes that its proposal to add the term 
``Customer'' as a clarifying amendment to a sentence describing rebates 
in Section II is reasonable because the addition of the word 
``Customer'' will further clarify that the rebate, applicable to 
Customer orders, is based on members that have a certain amount of 
Customer volume. The Exchange believes that the proposal to amend this 
text is equitable and not unfairly discriminatory because it will help 
to clarify the Pricing Schedule and the Exchange's calculation of its 
fees.
    The Exchange operates in a highly competitive market, comprised of 
nine 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. Accordingly, the fees that are 
assessed by the Exchange must remain competitive with fees charged 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.

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.

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

[[Page 21140]]

19(b)(3)(A)(ii) of the Act.\21\ 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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    \21\ 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-2012-34 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-2012-34. 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 
a.m. and 3 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-2012-34 and should be 
submitted on or before April 30, 2012.
    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).

Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-8427 Filed 4-6-12; 8:45 am]
BILLING CODE 8011-01-P