Document ID: SEC-2009-0621-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX, Inc.
Posted Date: 2009-05-06T04:00Z

[Federal Register: May 6, 2009 (Volume 74, Number 86)]
[Notices]               
[Page 21035-21037]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06my09-148]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59841; File No. SR-Phlx-2009-38]

 
Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
Payment for Order Flow

April 29, 2009.
    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 23, 2009, NASDAQ OMX PHLX, Inc. (``Phlx'' or the ``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. Phlx 
filed the proposal pursuant to Section 19(b)(3)(A)\3\ of the Act and 
Rule 19b-4(f)(2)\4\ thereunder. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to make permanent its payment for order flow 
pilot program (``Pilot''), which is currently in effect until May 27, 
2009.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqomxphlx.cchwallstreet.com/NASDAQOMXPHLX/
Filings/, 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 parts 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 making permanent the Exchange's payment for order 
flow program (``Pilot'') is to remain competitive with other options 
exchanges that administer payment for order flow programs.\5\ The Pilot 
is

[[Page 21036]]

currently set to expire on May 27, 2009. The Exchange seeks to make the 
Pilot permanent because the Directed Order Flow Program is now 
permanent. The Directed Order Flow program was set to expire on May 27, 
2008, when the Exchange filed to make that program permanent.\6\ The 
Pilot was also set to expire on May 27, 2008, when the Exchange filed 
to extend the Pilot for an additional year.\7\ At this time, the 
Exchange proposes to make the Pilot permanent because of the permanent 
status of the Directed Order Flow Program. The Pilot has been in effect 
for several years.\8\
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    \5\ See e.g., Securities Exchange Act Release Nos. 57094 
(January 3, 2008), 73 FR 1653 (January 9, 2008) (SR-CBOE-2007-154); 
55895 (June 11, 2007), 72 FR 33549 (June 18, 2007) (SR-ISE-2007-38); 
55328 (February 21, 2007), 72 FR 9050 (February 28, 2007) (SR-Amex-
2007-16); and 53341 (February 21, 2006), 71 FR 10085 (February 28, 
2006) (SR-Amex-2006-15).
    \6\ See Securities Exchange Act Release No. 57844 (May 21, 
2008), 73 FR 30988 (May 29, 2008) (SR-Phlx-2008-39).
    \7\ See Securities Exchange Act Release No. 57851 (May 22, 
2008), 73 FR 31177 (May 20, 2008) (SR-Phlx-2008-38).
    \8\ The program took effect on July 1, 2005. See e.g., 
Securities Exchange Act Release Nos. 52114 (July 22, 2005), 70 FR 
44138 (August 1, 2005) (SR-Phlx-2005-44); 57851 (May 22, 2008), 73 
FR 31177 (May 20, 2008)(SR-Phlx-2008-38); 55891 (June 11, 2007), 72 
FR 333271 (June 15, 2007)(SR-Phlx-2007-39); 53754 (May 3, 2006), 71 
FR 27301 (May 10, 2006) (SR-Phlx-2006-25); 53078 (January 9, 2006), 
71 FR 2289 (January 13, 2006) (SR-Phlx-2005-88); and 52568 (October 
6, 2005), 70 FR 60120 (October 14, 2005) (SR-Phlx-2005-58).
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    Currently, the following payment for order flow fees are in effect 
at the Exchange: \9\ (1) Equity options (other than those equity 
options that trade as part of the Exchange's Penny Pilot Program); \10\ 
and options on: (i) The Russell 2000[supreg] Index \11\ traded under 
the symbol RUT; (ii) the one-tenth value Russell 2000[supreg] Index 
traded under the symbol RMN; (iii) the full value of the Nasdaq 100 
Index \12\ traded under the symbol NDX; (iv) and the one-tenth value of 
the Nasdaq 100 Index traded under the symbol MNX, are all assessed 
$0.70 per contract; and (2) equity options that trade as part of the 
Exchange's Penny Pilot Program are assessed $0.25 per contract. Trades 
resulting from either Directed or non-Directed Orders \13\ that are 
delivered electronically and executed on the Exchange are assessed a 
payment for order flow fee,\14\ while non-electronically-delivered 
orders (i.e. represented by a floor broker) are not assessed a payment 
for order flow fee.\15\ Additionally, payment for order flow fees are 
not assessed on transactions executed on the Exchange that correspond 
with an outbound Linkage Principal Acting as Agent (``P/A'') order.\16\
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    \9\ See e.g., Securities Exchange Act Release Nos. 53841 (May 
19, 2006), 71 FR 30461 (May 26, 2006) (SR-Phlx-2006-33); 54297 
(August 9, 2006), 71 FR 47280 (August 16, 2006) (SR-Phlx-2006-47); 
54485 (September 22, 2006), 71 FR 57017 (September 28, 2006) (SR-
Phlx-2006-56); 55290 (February 13, 2007), 72 FR 8051 (February 22, 
2007) (SR-Phlx-2007-05); 55473 (March 14, 2007), 72 FR 13338 (March 
21, 2007) (SR-Phlx-2007-12); 55891 (June 11, 2007), 72 FR 33271 
(June 15, 2007) (SR-Phlx-2007-39); 58049 (June 27, 2008); and 73 FR 
38286 (July 3, 2008) (SR-Phlx-2008-46).
    \10\ The current Penny Pilot Program, in effect through June 3, 
2009, permits certain options series to be quoted and traded in 
increments of $0.01. See Securities Exchange Act Release No. 59631 
(March 26, 2009), 74 FR 15022 (April 2, 2009) (SR-Phlx-2009-25).
    \11\ Russell 2000[supreg] is a trademark and service mark of the 
Frank Russell Company, used under license. Neither Frank Russell 
Company's publication of the Russell Indexes nor its licensing of 
its trademarks for use in connection with securities or other 
financial products derived from a Russell Index in any way suggests 
or implies a representation or opinion by Frank Russell Company as 
to the attractiveness of investment in any securities or other 
financial products based upon or derived from any Russell Index. 
Frank Russell Company is not the issuer of any such securities or 
other financial products and makes no express or implied warranties 
of merchantability or fitness for any particular purpose with 
respect to any Russell Index or any data included or reflected 
therein, nor as to results to be obtained by any person or any 
entity from the use of the Russell Index or any data included or 
reflected therein.
    \12\ NASDAQ(R), NASDAQ-100(R) and NASDAQ-100 Index(R) are 
registered trademarks of The NASDAQ OMX Group, Inc. (which with its 
affiliates are the ``Corporations'') and are licensed for use by 
NASDAQ OMX PHLX, Inc. in connection with the trading of options 
products based on the NASDAQ-100 Index(R). The options products have 
not been passed on by the Corporations as to their legality or 
suitability. The options products are not issued, endorsed, sold, or 
promoted by the Corporations. The Corporations make no warranties 
and bear no liability with respect to the options products.
    \13\ The term ``Directed Order'' means any customer order to buy 
or sell which has been directed to a particular specialist, Remote 
Streaming Quote Trader or Streaming Quote Trader by an Order Flow 
Provider. See Exchange Rule 1080(l).
    \14\ Specialists and Directed ROTs who participate in the 
Exchange's payment for order flow program are assessed a payment for 
order flow fee, in addition to ROTs. Therefore, the payment for 
order flow fee is assessed, in effect, on equity option transactions 
between a customer and an ROT, a customer and a Directed ROT, or a 
customer and a specialist.
    \15\ Electronically-delivered orders do not include orders 
delivered through the Floor Broker Management System pursuant to 
Exchange Rule 1063.
    \16\ See Securities Exchange Act Release No. 57313 (February 12, 
2008), 73 FR 9398 (February 20, 2008) (SR-Phlx-2008-10).
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    The Exchange's Directed Order Flow Program \17\ enables Exchange 
specialists, Streaming Quote Traders (``SQTs'') \18\ and Remote 
Streaming Quote Traders (``RSQTs'') \19\ assigned in option trading on 
Phlx XL \20\ to receive Directed Orders in accordance with the 
provisions of Exchange Rule 1080(1). When a Directed Order is received 
from a member or member organization (``Order Flow Provider'' or 
``OFP''), the specialist, SQT or RSQT to whom the order is directed 
(the ``Directed Participant'') would be assessed a payment for order 
flow fee if the Directed Order is from a Customer. Pursuant to Rule 
1080(l), OFPs must transmit Directed Orders to a particular specialist, 
SQT or RSQT through AUTOM.\21\ If the Exchange's disseminated best bid 
or offer is at the National Best Bid or Offer when the Directed Order 
is received, the Directed Order is automatically executed on Phlx XL 
and allocated to the orders and quotes represented in the Exchange's 
quotation. A Directed Specialist, SQT or RSQT will receive a 
participation allocation pursuant to Rule 1014(g)(viii) if the Directed 
Specialist, SQT or RSQT was quoting at the NBBO at the time that the 
Directed Order was received. Otherwise, the automatic execution will be 
allocated to those quotations and orders at the NBBO pursuant to Rule 
1014(g)(vii). When the Exchange is not quoting at the NBBO, the 
Directed Order will be manually handled by the specialist in accordance 
with the Exchange's rules. The Exchange's Directed Order Flow Pilot 
Program became permanent in 2008.\22\
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    \17\ See Securities Exchange Act Release Nos. 51759 (May 27, 
2005), 70 FR 32860 (June 6, 2005) (SR-Phlx-2004-91); 53870 (May 25, 
2006), 71 FR 31251 (June 1, 2006) (SR-Phlx-2006-27); 55803 (May 23, 
2007), 72 FR 30413 (May 31, 2007) (SR-Phlx-2007-37); and 57844 (May 
21, 2008), 73 FR 30988 (May 29, 2008) (SR-Phlx-2008-39).
    \18\ An SQT is an Exchange Registered Options Trader (``ROT'') 
who has received permission from the Exchange to generate and submit 
option quotations electronically through an electronic interface 
with AUTOM via an Exchange approved proprietary electronic quoting 
device in eligible options to which such SQT is assigned. See 
Exchange Rule 1014(b)(ii)(A).
    \19\ An RSQT is a participant in the Exchange's electronic 
trading system, Phlx XL who has received permission from the 
Exchange to trade in options for his own account, and to generate 
and submit option quotations electronically from off the floor of 
the Exchange through AUTOM in eligible options to which such RSQT 
has been assigned. See Exchange Rule 1014(b)(ii)(B).
    \20\ Phlx XL is the Exchange's electronic options trading 
platform.
    \21\ AUTOM is the Exchange's electronic order delivery, routing, 
execution and reporting system, which provides for the automatic 
entry and routing of equity option and index option orders to the 
Exchange trading floor. Orders delivered through AUTOM may be 
executed manually, or certain orders are eligible for AUTOM's 
automatic execution features, AUTO-X, Book Sweep and Book Match. 
Equity option and index option specialists are required by the 
Exchange to participate in AUTOM and its features and enhancements. 
Option orders entered by Exchange members into AUTOM are routed to 
the appropriate specialist unit on the Exchange trading floor. AUTOM 
is today more commonly referred to as Phlx XL. See Exchange Rule 
1080.
    \22\ See Securities Exchange Act Release No. 57844 (May 21, 
2008), 73 FR 30988 (May 29, 2008) (SR-Phlx-2009-39) (permanent 
approval of the Exchange's Directed Order Program).

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[[Page 21037]]

    In light of the Exchange's proposal to make the Pilot permanent, 
the Exchange also proposes to amend endnote 30 of the Exchange's fee 
schedule to remove the following language: ``[t]he payment for order 
flow fees will remain in effect as a pilot program that is scheduled to 
expire on May 27, 2009.'' The Exchange is not making any other changes 
to the Pilot at this time.
2. Statutory Basis
    The Exchange believes that its proposal to amend its schedule of 
fees is consistent with Section 6(b) of the Act,\23\ in general, and 
furthers the objectives of Section 6(b)(4) of the Act \24\ in 
particular, in that it is an equitable allocation of reasonable fees 
and other charges among Exchange members. In particular, the Exchange 
believes that continuing the payment for order flow program and making 
it permanent should allow the Exchange to remain competitive.
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    \23\ 15 U.S.C. 78f(b).
    \24\ 15 U.S.C. 78f(b)(4).
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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 that is 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 
19(b)(3)(A)(ii) of the Act \25\ and paragraph (f)(2) of Rule 19b-4 \26\ 
thereunder. At any time within 60 days of the filing of the proposed 
rule change, the Commission may summarily abrogate 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.
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    \25\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \26\ 17 CFR 240.19b-4(f)(2).
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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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2009-38 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-2009-38. This file 
number should be included on the subject line if e-mail 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 inspection and 
copying 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-2009-38 and should be 
submitted on or before May 27, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-10446 Filed 5-5-09; 8:45 am]

BILLING CODE 8010-01-P