Document ID: SEC-2014-1223-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2014-07-22T04:00Z

[Federal Register Volume 79, Number 140 (Tuesday, July 22, 2014)]
[Notices]
[Pages 42578-42588]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-17156]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72633; File No. SR-Phlx-2013-113]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order 
Disapproving Proposed Rule Change To Offer a Rebate Based on Members' 
Aggregate Customer Volume in Multiply-Listed Options Transacted on 
NASDAQ OMX PHLX LLC or Its Affiliated Options Exchanges

July 16, 2014.

I. Introduction

    On October 31, 2013, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule

[[Page 42579]]

19b-4 thereunder,\2\ a proposed rule change to amend the Customer 
Rebate Program in Section B of the Exchange's Pricing Schedule to 
increase customer rebates available to certain market participants that 
transact electronically-delivered customer orders on Phlx (the 
``Proposal'') or its affiliated options exchanges. Phlx designated the 
proposed rule change as immediately effective upon filing with the 
Commission pursuant to Section 19(b)(3)(A) of the Act.\3\ The 
Commission published notice of filing of the proposed rule change in 
the Federal Register on November 19, 2013.\4\
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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\ See Securities Exchange Act Release No. 70866 (November 13, 
2013), 78 FR 69472 (``Notice'').
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    The Commission initially received two comment letters on the 
Proposal.\5\ On November 25, 2013, the Commission temporarily suspended 
and initiated proceedings to determine whether to approve or disapprove 
the proposed rule change.\6\ In response to the Order Instituting 
Proceedings, the Commission received four additional comment letters on 
the Proposal.\7\ On January 24, 2014, Phlx submitted a letter 
responding to the commenters and to the Order Instituting 
Proceedings.\8\
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    \5\ See letters to Elizabeth M. Murphy, Secretary, Commission 
from: Michael J. Simon, Secretary, International Securities 
Exchange, LLC (``ISE''), dated November 11, 2013 (``ISE Letter''); 
and William O'Brien, Chief Executive Officer, Direct Edge Holdings 
LLC, dated November 13, 2013 (``DirectEdge Letter'').
    \6\ See Securities Exchange Act Release No. 70940 (November 25, 
2013), 78 FR 71700 (November 29, 2013) (``Order Instituting 
Proceedings'').
    \7\ See letters to Elizabeth M. Murphy, Secretary, Commission 
from: Brian O'Neill, Vice President and Senior Counsel, Miami 
International Securities Exchange, LLC (``MIAX''), dated November 
27, 2013 (``MIAX Letter''); John C. Nagel, Managing Director and 
General Counsel, Citadel LLC, dated December 18, 2013 (``Citadel 
Letter''); Angelo Evangelou, Associate General Counsel, Chicago 
Board Options Exchange, Inc. (``CBOE''), dated December 20, 2013 
(``CBOE Letter''); and Michael J. Simon, Secretary, ISE, dated 
December 20, 2013 (``ISE Letter II'').
    \8\ See letter to Elizabeth M. Murphy, Secretary, Commission, 
from Joan C. Conley, Senior Vice President & Corporate Secretary, 
Phlx, dated January 24, 2014 (``Phlx Response Letter''). In the Phlx 
Response Letter, Phlx included an evaluation of the Proposal by 
economists Drs. Robert Willig and Gustavo Bamberger (``Willig and 
Bamberger Statement''). On January 24, 2014, Phlx also submitted a 
request to make an oral presentation in the proceeding. The 
Commission denied Phlx's request. See letter from Lynn M. Powalski, 
Deputy Secretary, Commission, to Eugene Scalia, Partner, Gibson, 
Dunn & Crutcher LLP, dated June 30, 2014.
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    On April 7, 2014, the Commission sought additional comment on the 
proposed rule change and extended the time period for Commission action 
to July 17, 2014.\9\ On April 18, 2014, Phlx submitted a letter 
responding to questions from the Commission staff.\10\ In response to 
the request for additional comment in the Extension Notice, the 
Commission received two additional comment letters on the Proposal.\11\ 
On May 9, 2014, Phlx submitted a letter responding to the request for 
additional comment in the Extension Notice.\12\ On May 20, 2014, Phlx 
submitted a letter responding to the Normann Letter.\13\ On May 30, 
2014, Phlx submitted a letter responding to ISE's May 20, 2014 comment 
letter.\14\ This order disapproves the proposed rule change.
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    \9\ See Securities Exchange Act Release No. 71891 (April 7, 
2014), 79 FR 20287 (April 11, 2014) (``Extension Notice''). In the 
Extension Notice, the Commission requested comment from market 
participants on the potential impact the Proposal would have on, 
among other things, fragmentation of the options market.
    \10\ See letter to Elizabeth M. Murphy, Secretary, Commission, 
from Jeffrey S. Davis, Vice President & Deputy General Counsel, 
Phlx, dated April 18, 2014 (``Phlx Response Letter II'').
    \11\ See letters to Elizabeth M. Murphy, Secretary, Commission, 
from Michael J. Simon, Secretary, ISE, dated May 20, 2014 (``ISE 
Letter III'') and Parker M. Normann, Ph.D., Partner, Edgeworth 
Economics LLC, dated May 8, 2014, on behalf of the CBOE, ISE, and 
MIAX (``Normann Letter'').
    \12\ See letter to Elizabeth M. Murphy, Secretary, Commission, 
from Jeffrey S. Davis, Vice President & Deputy General Counsel, 
Phlx, dated May 9, 2014 (``Phlx Response Letter III'').
    \13\ See letter to Elizabeth M. Murphy, Secretary, Commission, 
from Joan C. Conley, Senior Vice President & Corporate Secretary, 
Phlx, dated May 20, 2014 (``Phlx Response Letter IV''). In Phlx 
Response Letter IV, Phlx included a statement by economists Drs. 
Robert Willig and Gustavo Bamberger in response to the Normann 
Letter (``Willig and Bamberger Reply'').
    \14\ See letter to Elizabeth M. Murphy, Secretary, Commission, 
from Joan C. Conley, Senior Vice President & Corporate Secretary, 
Phlx, dated May 30, 2014 (``Phlx Response Letter V'').
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II. Summary of the Proposal

    Under the Phlx's existing Customer Rebate Program in its Pricing 
Schedule, the Exchange pays tiered rebates to members for executions of 
customer option orders on Phlx. The different tiers are based on a 
member organization's (and its affiliates under common ownership) \15\ 
total monthly volume in electronically-delivered customer orders 
executed on Phlx as a percentage of the total national customer volume 
in multiply-listed options that are transacted monthly on Phlx. These 
rebates apply separately to both the execution of simple orders and 
complex orders on Phlx.\16\
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    \15\ Phlx defines common ownership as a member or member 
organization under 75% common ownership or control. See Notice, 
supra note 4, at 69472 n.3.
    \16\ To determine the applicable rebate, the Exchange totals 
customer volume in multiply-listed options (including options 
overlying the SPDR S&P 500) that are electronically-delivered and 
executed, except volume associated with electronically Qualified 
Contingent Cross Orders. Pursuant to the Phlx Pricing Schedule, 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 which is not for the account of a 
broker or dealer or for the account of a ``Professional'' (as that 
term is defined in Rule 1000(b)(14)).
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    Phlx proposed amending its Customer Rebate Program in two ways. 
First, the Proposal would allow a Phlx member organization to aggregate 
its (and its affiliates under common ownership) customer volume in 
multiply-listed options that is electronically delivered and executed 
across Phlx and its two affiliated NASDAQ OMX exchanges, The NASDAQ 
Options Market LLC (``NOM''), and/or NASDAQ OMX BX, Inc. (``BX 
Options'') (collectively, the ``NASDAQ OMX exchanges''), for purposes 
of determining whether it meets the volume tiers on Phlx. Second, the 
Proposal would increase the customer rebates offered for these 
transactions executed on Phlx by $0.02 per contract,\17\ provided the 
member organization, together with any affiliate under common 
ownership, transacts customer volume on the NASDAQ OMX exchanges in 
multiply-listed options that is electronically delivered and executed 
equal to or greater than 2.5% of national customer volume in multiply-
listed options in a month.
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    \17\ Phlx would pay the additional $0.02 per contract rebate, 
above and beyond other existing customer rebates, on all eligible 
orders transacted on Phlx by the qualifying member organization.
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    The Exchange believes the additional rebate would lower costs to 
transact business on Phlx and increase the volume of customer orders 
directed to and executed on Phlx, to the benefit of all market 
participants on Phlx.\18\ According to Phlx, the aspect of the Proposal 
under which a member organization's eligibility for the volume tiers is 
determined by taking into account customer volume executed on all of 
the NASDAQ OMX exchanges broadens the potential availability of a 
higher rebate to market participants that spread volume across multiple 
exchanges, rather than requiring a concentration of activity on 
Phlx.\19\ Phlx also argues that the Proposal would benefit investors 
and the national market system by reducing costs, increasing the 
incentives for exchanges to compete for order flow, and encouraging 
market participants to direct more liquidity to the Exchange.\20\
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    \18\ See Notice, supra note 4, at 69473.
    \19\ See id. at 69477.
    \20\ See Phlx Response Letter, supra note 8, at 4.
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III. Summary of Comments

    As noted above, the Commission received thirteen comment letters on 
the proposed rule change,\21\ including five

[[Page 42580]]

supplemental submissions from Phlx responding to comment letters.\22\ 
The Commission received seven comment letters opposing the proposed 
rule change,\23\ and one comment letter supporting the proposed rule 
change.\24\ Comments on the Proposal generally addressed four areas, 
namely whether the Proposal: (1) Is an equitable allocation of 
reasonable fees; (2) is not designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers; (3) imposes a burden 
on competition not necessary or appropriate in furtherance of the 
purposes of the Act; and (4) impacts market structure and efficiency.
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    \21\ See supra notes 5, 7 and 11.
    \22\ See supra notes 8, 10, 12, 13 and 14.
    \23\ See ISE Letter; DirectEdge Letter; MIAX Letter; CBOE 
Letter; ISE Letter II; ISE Letter III; and Normann Letter, supra 
notes 5, 7 and 11.
    \24\ See Citadel Letter, supra note 7.
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A. Equitable Allocation of Reasonable Dues, Fees, and Other Charges 
Among Members and Issuers Using Its Facility

    Several commenters who do not support the Proposal argue that it is 
inconsistent with the statutory language of Section 6(b)(4) of the Act, 
which requires that the rules of a registered national securities 
exchange provide for ``the equitable allocation of reasonable dues, 
fees, and other charges among its members and issuers and other persons 
using its facilities'' (emphasis added).\25\ One commenter asserts that 
such dues, fees, and other charges are intended to be allocated only 
with respect to the volume on the facilities of the exchange imposing 
such charges, not the volume executed on another exchange.\26\ This 
commenter believes that imposing a fee or charge based on some activity 
other than use of the fee-imposing exchange's own facilities would be 
impossible to allocate in an ``equitable'' way and could never be 
``reasonable.'' \27\ Another commenter believes that the Act's focus on 
an equitable allocation of reasonable dues, fees, and other charges 
among its members using its facilities underscores the ArcaBook Order 
\28\ conclusion that the Commission must analyze an exchange's rules 
and fees on an exchange-by-exchange basis, and argues that imposing a 
cross-exchange fee, by its very nature, cannot be an equitable 
allocation of fees for the members of just one of the exchanges.\29\ 
This commenter believes that exchange fees tied to activity conducted 
on competing exchanges are impermissible regardless of whether they 
increase or lower the overall fees that joint exchange members may 
pay.\30\
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    \25\ See ISE Letter II, supra note 7, at 4; DirectEdge Letter, 
supra note 5, at 1; MIAX Letter, supra note 7, at 2; and CBOE 
Letter, supra note 7, at 2-3.
    \26\ See CBOE Letter, supra note 7, at 2.
    \27\ See id. at 3.
    \28\ See Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74770 (December 9, 2008) (SR-NYSEArca-2006-21) (Order 
Setting Aside Action by Delegated Authority and Approving Proposed 
Rule Change Relating to NYSE Arca Data), vacated and remanded sub 
nom by NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010) but on 
other grounds (the ``ArcaBook Order'').
    \29\ See ISE Letter II, supra note 7, at 4.
    \30\ See id. at 5. ISE states that the Commission has always 
required a self-regulatory organization (``SRO'') to justify its 
fees by reference solely to that SRO's operation and governing 
documents. See id. at 2.
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    The commenter that supports the Proposal believes that if an 
exchange is subject to significant competitive forces in setting the 
terms of its proposed fees, the exchange's fees are presumed to be 
equitable, fair, reasonable and not unfairly discriminatory.\31\ This 
commenter states that reduced fees and rebates based on volume, in 
general, have been accepted by the Commission and have not been 
considered inequitable, despite the rebate benefits applying to one 
member class over another.\32\ The commenter also asserts that, while 
the direct benefits flow to only some members, the rebate tiers will 
benefit all members and customer orders by providing greater liquidity 
on the exchange and spreading other fees across a larger number of 
transactions and members.\33\ Furthermore, this commenter states that 
the Commission has approved a proposal in which rebate volume tiers are 
calculated based on a market participant's aggregate activity on two 
markets operated by the same SRO.\34\ In this regard, the commenter 
believes that there is no distinction in differentiating between 
separately affiliated markets operated by the same SRO, on the one 
hand, and separate affiliated exchanges operated by affiliated SROs, on 
the other hand.\35\
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    \31\ See Citadel Letter, supra note 7, at 3.
    \32\ See id. at 4.
    \33\ See id. at 4.
    \34\ See id. at 7 (citing Securities Exchange Act Release No. 
50787 (December 2, 2004), 69 FR 71459 (December 9, 2004) (SR-NASD-
2004-170)) (approving a National Association of Securities Dealers, 
Inc. (``NASD'') proposed rule change, through its subsidiary The 
Nasdaq Stock Market (``Nasdaq''), to establish a price and rebate 
schedule for non-NASD members based on multiple volume-based usage 
tiers that takes into account the non-NASD member's combined volume 
activity on the Nasdaq Market Center and Nasdaq's BRUT facility). 
See also Phlx Response Letter IV, supra note 13, at 3. The 
Commission believes that the proposed rule change regarding the Brut 
ECN involved unique circumstances in which the Nasdaq Market Center 
and Brut were facilities of one SRO, a national securities 
association. See Securities Exchange Act Release No. 50311 
(September 3, 2004), 69 FR 54818 (September 10, 2004) (Order 
Granting Application for a Temporary Conditional Exemption Pursuant 
To Section 36(a) of the Exchange Act by the National Association of 
Securities Dealers, Inc. Relating to the Acquisition of an ECN By 
The NASDAQ Stock Market, Inc.). The Commission also notes that the 
proposed rule change was a temporary conditional exemption and, 
after Nasdaq's acquisition of the Brut ECN, the Nasdaq Market 
Center, the Brut ECN, and the Nasdaq INET system were fully 
integrated into a single pool of liquidity. See also Securities 
Exchange Act Release No. 54155 (July 14, 2006), 71 FR 41291 (July 
20, 2006) (SR-NASDAQ-2006-001) (order approving NASDAQ's proposed 
rule change to combine the operations of the existing Nasdaq Market 
Center with NASDAQ's Brut and INET facilities into one single 
integrated system).
    \35\ See id.
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    Phlx also responds to the commenters opposing the Proposal by 
arguing that the phrase ``persons using its facilities'' in Section 
6(b)(4) of the Act only refers to one category of market participant 
that is bound by an exchange's rules.\36\ Phlx asserts that the phrase 
does not describe the basis on which exchange fees may be determined, 
or restrict the right of an exchange to offer market participants a 
discount that is based in part on their trading activity on an 
affiliated exchange.\37\ Moreover, Phlx argues that the proposed rebate 
is consistent with Section 6(b)(4) of the Act because the proposed 
rebate is limited to market participants who transact business on Phlx 
and only applies to orders executed on Phlx.\38\ Phlx also states its 
view that the Proposal should be considered ``presumptively 
reasonable'' because it provides an opportunity for market participants 
to receive enhanced rebates and to lower the costs passed on to 
investors.\39\
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    \36\ See Phlx Response Letter, supra note 8, at 14.
    \37\ See id.
    \38\ See id.
    \39\ See id.
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B. Unfair Discrimination Between Customer, Issuers, Brokers, or Dealers

    Several commenters believe the Proposal is inconsistent with 
Section 6(b)(5) of the Act, which requires the rules of a national 
securities exchange to, among other things, not be ``designed to permit 
unfair discrimination between customers, issuers, brokers, or 
dealers.'' \40\ In particular, these commenters believe that the 
Proposal unfairly discriminates between Phlx members because it 
advantages Phlx members that are also members of NOM and/or BX Options, 
while disadvantaging Phlx members who are otherwise similarly situated, 
but who do not have such memberships.\41\ As a

[[Page 42581]]

result, several commenters believe that the Proposal could trigger 
relatively higher costs for the Phlx members who are not members on NOM 
and/or BX Options, but who otherwise have the same purchasing profile 
on Phlx as members who do hold such memberships.\42\
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    \40\ See ISE Letter II, supra note 7, at 2-3; MIAX Letter, supra 
note 7, at 2; and CBOE Letter, supra note 7, at 3.
    \41\ See ISE Letter II, supra note 7, at 2-3; ISE Letter III, 
supra note 11, at 2; MIAX Letter, supra note 7, at 2; CBOE Letter, 
supra note 7, at 3; and Normann Letter, supra note 11, at 5. One 
commenter states that maintaining multiple exchange memberships 
requires significant one-time and continuing costs, which include 
membership and regulatory fees, and connectivity and line charges. 
See ISE Letter III, supra note 11, at 2. This commenter states its 
view that requiring members to absorb these additional costs to 
qualify for the rebate is not reasonable and is discriminatory, as 
the requirement adds significant costs to the member, but benefits 
Phlx and its affiliates. See id.
    \42\ See CBOE Letter, supra note 7, at 3; and Normann Letter, 
supra note 11, at 5-6 (noting that a likely result of the Phlx 
proposal would be that ``two otherwise identical customers with 
identical volume on Phlx, using identical services, will pay 
different net fees due to differences in purchasing patterns at 
exchanges other than Phlx.''). See id. at 6. One commenter also 
believes that the Proposal does not comport with rebate practices 
that the Commission has allowed in the past as an acceptable means 
of seeking to attract additional order flow. See CBOE Letter, supra 
note 7, at 3. Specifically, this commenter states its view that the 
discriminatory nature of the proposed rebate could distort a 
brokers' best execution responsibilities and ``present a new threat 
to public confidence in brokerage services and market integrity'' 
contrary to the public interest and inconsistent with the protection 
of investors. Id. at 3-4.
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    The commenter that supports the Proposal argues that the Proposal 
is not unfairly discriminatory, noting that the Proposal does not 
require a Phlx member to become a member of NOM or BX Options to meet 
the rebate eligibility threshold.\43\ In addition, this commenter 
believes that most Phlx members with sufficient customer order flow to 
reach the eligibility threshold are already members of NOM and BX 
Options.\44\ The commenter further believes that becoming a member of 
Phlx affiliate exchanges is not an unreasonably discriminatory burden 
in exchange for the greater ability to meet the volume threshold under 
the Proposal.\45\
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    \43\ See Citadel Letter, supra note 7, at 5. The commenter notes 
that a Phlx member may meet the eligibility threshold by transacting 
sufficient volume on Phlx alone. See id.
    \44\ See id.
    \45\ See id. This commenter states that, for example, the 
Commission has approved fees as not unfairly discriminatory where 
the fee is tied to a service made available to all members on the 
same terms, even if only some voluntarily elect to use the service 
and pay the fee. See id.
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    In response to commenters opposing the Proposal, Phlx asserts that 
the Proposal is not unfairly discriminatory because the proposed rebate 
is available on equal terms to any market participant that may qualify 
for the rebate by executing the required volume on Phlx alone.\46\ Phlx 
argues that members have an incentive to transact volume on Phlx alone 
because only qualifying customer orders executed on Phlx are entitled 
to the proposed rebate.\47\ Phlx also argues that the Proposal cannot 
be unfairly discriminatory because it will extend the availability of 
an exchange rebate to more market participants.\48\ Additionally, Phlx 
asserts that there are no significant barriers for market participants 
to participate in the proposed rebate program because market 
participants can easily register as members of Phlx and its affiliated 
exchanges.\49\ Given these results, Phlx believes the Proposal would 
benefit not only market participants receiving the proposed rebate, but 
all other Phlx market participants as well.\50\
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    \46\ See Phlx Response Letter, supra note 8, at 5; and Phlx 
Response Letter V, supra note 14, at 2 and 6.
    \47\ See Phlx Response Letter, supra note 8, at 6; and Phlx 
Response Letter V, supra note 14, at 2. One commenter notes that 
there could be situations where customers earn rebates on Phlx due 
to purchases on NOM and/or BX Options because the Proposal 
aggregates volume from Phlx, NOM and BX Options. As a result, a 
customer may see its net pricing change from incremental purchases 
on NOM or BX Options and not on Phlx. See Normann Letter, supra note 
11, at 8-9.
    \48\ See Phlx Response Letter, supra note 8, at 4.
    \49\ See id. at 5; and Phlx Response Letter V, supra note 14, at 
2. Phlx asserts that most of its members are already members of its 
two affiliated NASDAQ OMX exchanges. See Phlx Response Letter V, 
supra note 14, at 2. Additionally, Phlx states that of the Phlx 
members that directed electronic customer orders to Phlx for 
execution in May 2014, 100% are members of NOM, and 88.6% are 
members of all of the NASDAQ OMX exchanges. See id.
    \50\ See id. at 4-5.
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    One commenter, MIAX, believes that the Proposal would cause 
``disparate treatment'' between two similarly positioned market 
participants on Phlx.\51\ MIAX offers the following example to 
demonstrate how it believes the Proposal would unfairly discriminate 
against similarly positioned market participants on Phlx: BD1 and BD2 
are both the same class of market participant and execute 2% of the 
national customer volume on Phlx.\52\ However, BD1 sends the balance of 
their customer order flow of 1% to MIAX while BD2 sends the balance of 
their customer order flow of 1% to NOM.\53\ MIAX believes that an 
equitable allocation of reasonable fees and dues that was not unfairly 
discriminatory would result in charging BD1 and BD2 the exact same fees 
for the identical trading activity on Phlx.\54\ In contrast, MIAX 
argues that the Proposal would result in BD1 and BD2 being charged 
different fees even though BD1 and BD2 are performing the same activity 
on Phlx.\55\
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    \51\ See MIAX Letter, supra note 7, at 2.
    \52\ See id.
    \53\ See id.
    \54\ See id. and see also Norman Letter, supra note 11, at 6.
    \55\ See MIAX Letter, supra note 7, at 2. In the MIAX example, 
under the Proposal, BD1 would be eligible for a $0.14 rebate, while 
BD2 would be eligible for a $0.17 rebate for executing the identical 
2% of the national customer volume on Phlx. See id.
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    Phlx does not directly respond to MIAX's example, but asserts that 
the MIAX example of price differentiation between two market 
participants who trade the same volume on Phlx does not mean that a 
rebate is unfairly discriminatory because ``all rebates predicated on 
volume or some other condition differentiate between customers who meet 
the condition and those who do not.'' \56\
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    \56\ Phlx Response Letter, supra note 8, at 5. For example, Phlx 
points to several pricing structures that the Commission has 
historically approved that result in differential pricing, 
including, among others, volume tiers and fee caps. See id. at 5-6. 
However, two commenters respond that the services and/or products 
cited by Phlx refer to product types or offerings only on a single 
exchange. See Normann Letter, supra note 11, at 5-6; and ISE Letter 
III, supra note 11, at 7-8. See also ISE Letter II, supra note 7, at 
5-6.
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    Two commenters also note that the ArcaBook Order \57\ provides 
precedent to disapprove the proposed rule change.\58\ One commenter 
argues that the Proposal is inconsistent with the Act because, 
according to the ArcaBook Order, ``the Exchange Act precludes anti-
competitive tying of the liquidity pools of separately registered 
securities exchanges even if they are under common control.'' \59\ 
Another commenter argues that Phlx misreads the ArcaBook Order to 
incorrectly stand for the proposition that ``as long as exchanges are 
subject to competitive forces, any fee is acceptable.'' \60\ This 
commenter states its view that, in the ArcaBook Order, the Commission 
determined that it must apply the Act's provision regarding rule and 
fee changes to individual exchanges, and not to exchanges as a 
group.\61\ The commenter asserts that ``[s]ince the Commission has held 
that the Act requires exchanges to compete at the individual level, 
Phlx unfairly discriminates by favoring members that route order flow 
to its affiliated exchanges rather than to other exchanges that also 
offer differing market and fee structures.'' \62\ As a

[[Page 42582]]

result, this commenter argues that, while Phlx can attempt to attract 
order flow by adjusting the market structure and fees on Phlx, Phlx 
cannot base its fees on factors related to other markets.\63\
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    \57\ See ArcaBook Order, supra note 28.
    \58\ See CBOE Letter, supra note 7, at 4-5; and ISE Letter III, 
supra note 11, at 4-7.
    \59\ CBOE Letter, supra note 7, at 5 (citing ArcaBook Order at 
74790).
    \60\ ISE Letter II, supra note 7, at 4. The commenter believes 
that the ArcaBook Order ``deals solely with the pricing of a 
monopoly or unique service . . . by one exchange of its own market 
data,'' which is distinguishable from the context of the proposed 
rebate. Id. at 5.
    \61\ See ISE Letter III, supra note 11, at 6.
    \62\ ISE Letter II, supra note 7, at 3. This commenter also 
asserts that the Proposal would create confusion for investors 
because Phlx's fee schedule would not fully encompass the costs of 
trading on Phlx, because the fees are dependent on trading on 
different exchanges. See id. at 4.
    \63\ See id. at 3.
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    Phlx disagrees with commenters who assert that the ArcaBook Order 
demonstrates that exchanges cannot cooperate with each other on 
fees.\64\ Phlx states that the ArcaBook Order ``presupposes that 
affiliated exchanges will at times act jointly and that they will not 
violate the requirements of the Exchange Act by doing so.'' \65\ Phlx 
argues that because market participants on Phlx will benefit from the 
proposed rebate by achieving lower costs and because more liquidity 
will be directed to the Exchange, nothing in the ArcaBook Order calls 
the proposed rebate into question.\66\ Furthermore, even if the 
Commission accepts the interpretation of the ArcaBook Order explained 
by commenters, Phlx believes that the Proposal meets all relevant 
requirements of the Act.\67\ Phlx states that the Act does not forbid 
Phlx from preferring its own affiliated exchanges over other competing 
exchanges.\68\ Phlx also believes that the Proposal does not unfairly 
discriminate against other exchanges that compete with Phlx and its 
affiliated exchanges for liquidity because single exchanges could match 
Phlx's proposed rebate or employ lower prices without establishing a 
new exchange to compete.\69\ Phlx also argues that the Commission has 
previously permitted ``materially similar pricing arrangements.'' \70\ 
However, several commenters argue that the fee precedents Phlx cites 
are distinguishable from the current Proposal because, among other 
things, those fees are not based on an affiliated group of 
exchanges.\71\
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    \64\ Phlx asserts that the ArcaBook Order ``at most stands for 
the proposition that an exchange cannot justify a harm imposed on a 
market participant on one exchange by referring to an offsetting 
benefit that the market participant will receive on another 
exchange.'' Phlx Response Letter, supra note 8, at 13.
    \65\ Id. at 12; and Phlx Response Letter V, supra note 14, at 4. 
One commenter argues that this statement is irrelevant because the 
primary issue is whether the proposed rebate violates the Act, not 
whether there are theoretical situations in which such actions would 
not violate the Act. See ISE Letter III, supra note 11, at 6 n.18.
    \66\ See Phlx Response Letter, supra note 8, at 13. In response, 
one commenter argues that Phlx is improperly attempting to condone 
its discrimination by citing commercial reasons for favoring its 
affiliates. See ISE Letter III, supra note 11, at 6. This commenter 
argues that while there may be valid commercial reasons for an 
exchange to want to favor its own affiliated exchanges, that does 
not mean that such proposals are consistent with the Act. See id.
    \67\ See Phlx Response Letter V, supra note 14, at 4. One 
commenter states that Phlx has failed to justify the discriminatory 
proposal on an individual exchange basis regarding the effects of 
proposed rebate. See ISE Letter III, supra note 11, at 6-7.
    \68\ See Phlx Response Letter V, supra note 14, at 5. Phlx 
states that Section 6(b)(5) of the Act ``prohibits an exchange from 
`unfair[ly] discriminat[ing] between customers, issuers, brokers, or 
dealers'--not other exchanges.'' Id.
    \69\ See Phlx Response Letter, supra note 8, at 7. Phlx also 
makes a similar argument in response to comments received on whether 
the Proposal would not impose any burden on competition not 
necessary or appropriate in furtherance of the Act. See infra 
Section III.C. Phlx also believes that there are no significant 
barriers to creating affiliated exchanges. See id. However, one 
commenter states that Phlx provides no support for this assertion. 
See ISE Letter III, supra note 11, at 3.
    \70\ Phlx Response Letter, supra note 8, at 15. See also Notice, 
supra note 4 at 69480.
    \71\ See CBOE Letter, supra note 7, at 3; ISE Letter II, supra 
note 7, at 5-6; and ISE Letter III, supra note 11, at 7-8. ISE 
Letter II lists the following exchange fee structures from the 
Notice: (1) The NASDAQ Stock Market LLC basing fees on combined 
equity and options volume; (2) the options regulatory fee (``ORF'') 
that some options exchanges charge; (3) listing exchanges providing 
discounts on listing fees for companies moving from one listed 
exchange to an affiliated listed exchange; and (4) exchanges 
treating specific products, such as options on the S&P 500 ETF, 
differently for volume and rebate purposes. See ISE Letter II, supra 
note 7, at 5-6. ISE explains that, of the four fees that Phlx cites 
in support of its proposed rebate, only the ORF is relevant as it 
relates to activity on multiple exchanges. ISE, however, believes 
that the ORF structure is distinguishable from the proposed rebate. 
Specifically, ISE states that ``the ORF structure is almost an exact 
opposite of the Phlx fee'' because the purpose of the ORF is ``to 
remove any incentive by members to avoid the fee by trading off that 
exchange,'' whereas the purpose of the proposed rebate is ``to 
encourage trading on the Phlx, the exchange collecting the fee.'' 
Id. at 6. Furthermore, ISE states that the ORF ``is not a fee based 
on an affiliated group of exchanges, it is not a variable fee based 
on the volume of transactions across exchanges, and most 
importantly, the choice of exchange or exchanges to which a broker-
dealer sends its order flow has absolutely no effect on the level of 
fee the broker-dealer pays.'' ISE Letter III, supra note 11, at 8.
---------------------------------------------------------------------------

    One commenter argues that Phlx has not provided any support that 
additional volume transacted at either NOM or BX Options generates 
efficiencies at Phlx that would justify, on efficiency grounds, the 
enhanced rebates.\72\ Additionally, the commenter states that it would 
expect Phlx to include ``substantive analysis of efficiencies generated 
for Phlx that would warrant passing these efficiencies down to Phlx 
customers.'' \73\ The absence of such analysis suggests to this 
commenter that the Proposal is ``motivated by a form of price 
discrimination based on preferences for purchasing volume on a 
particular exchange, and not on efficiency grounds.'' \74\ The 
commenter believes that the Proposal is likely a form of price 
discrimination which would result in otherwise identical Phlx customers 
paying different relative prices for substantially the same use of 
Phlx's facilities.\75\
---------------------------------------------------------------------------

    \72\ See Normann Letter, supra note 11, at 7. This commenter 
states that ``an economic justification for quantity discounting can 
be based on factors such as high fixed costs, scale economies or 
better scheduling of order flow.'' Id.
    \73\ Id.
    \74\ Id. at 8.
    \75\ See id. at 9. This commenter states its view that the 
effect of the Proposal likely would be to pay rebates to Phlx 
customers based on purchases made at other exchanges. See id.
---------------------------------------------------------------------------

    Phlx disagrees with the commenter's conclusion that the enhanced 
rebate is not an efficiency-based volume discount and believes that the 
commenter does not contend that the Proposal constitutes unfair 
discrimination under the Act.\76\ Phlx states that the commenter's 
efficiency discussion is based on the ``misguided assumption that 
differential pricing is only justified where it results in 
`efficiencies related to the customer or transaction.' '' \77\ However, 
Phlx states that the Proposal will allow Phlx to increase its trading 
volume and spread its substantial fixed and common costs over more 
trades, which will help Phlx cover its fixed and common costs to the 
benefit of market participants.\78\ Furthermore, Phlx states that the 
Commission has previously approved a number of similar forms of 
efficiency-based volume discounts that price discriminate, including 
cross-exchange pricing on equities exchanges,\79\ discounted fees for 
proprietary trading products linked to volume in multiply-listed 
products, fee caps and enterprise licenses that favor heavy users of a 
system over other users, and differentiated pricing for data fees.\80\
---------------------------------------------------------------------------

    \76\ See Phlx Response Letter IV, supra note 13, at 1. Phlx 
notes that the commenter ``does not offer an opinion that the 
[p]roposal will be harmful in any way.'' Id.
    \77\ Id.
    \78\ See id. at 2.
    \79\ See supra note 34.
    \80\ See Phlx Response Letter IV, supra note 13, at 3.
---------------------------------------------------------------------------

C. Burden on Competition Not Necessary or Appropriate

    Several commenters oppose the proposed rebate because they believe 
it is inconsistent with Section 6(b)(8) of the Act, which requires that 
the rules of a national securities exchange ``not impose any burden on 
competition not necessary or appropriate'' in furtherance of the 
Act.\81\ The commenters opposing the Proposal believe that an exchange 
with a single market structure and fee

[[Page 42583]]

schedule cannot fairly compete against a fee structure that leverages 
the execution volume and fees across affiliated options exchanges.\82\ 
One commenter asserts that the Proposal would establish a precedent 
that would allow existing affiliated exchange groups to leverage the 
execution volume across their multiple independent SROs to the 
detriment of options exchanges that do not have such affiliated options 
exchanges.\83\ Another commenter argues that exchange operators with 
multiple exchanges will be able to operate their exchanges with a 
single, integrated fee structure, cross-subsidizing various offerings 
in a way that exchanges with only one market will not be able to 
match.\84\
---------------------------------------------------------------------------

    \81\ See ISE Letter II, supra note 7, at 3; MIAX Letter, supra 
note 7, at 3; and CBOE Letter, supra note 7, at 4.
    \82\ See id. Two commenters argue that the Proposal is an undue 
burden on competition among market participants on Phlx because Phlx 
members that do not have the capacity to be members of multiple 
options exchanges will be unable to leverage additional customer 
trading volume on a Phlx affiliate exchange to lower their fees. See 
CBOE Letter, supra note 7, at 4; and MIAX Letter, supra note 7, at 
3.
    \83\ See MIAX Letter, supra note 7, at 3.
    \84\ See ISE Letter III, supra note 11, at 9.
---------------------------------------------------------------------------

    In response, Phlx states its belief that a single-exchange operator 
can compete by increasing its own volume-based rebate or offering its 
own differentiated products, even if those services do not precisely 
match those offered by Phlx or any other exchange.\85\ Phlx also 
asserts that CBOE, ISE, and NYSE each operate two options 
exchanges,\86\ and can adopt pricing mechanisms similar to the proposed 
rebate.\87\ Thus, Phlx argues that, even if one of the current single-
exchange operators were unable to match the proposed discount, Phlx 
would still face competition from five other exchange operators and 
eight other exchanges, including three exchange operators that 
themselves operate multiple exchanges.\88\ As a result, Phlx argues 
that the price competition from the Proposal would benefit consumers 
and would itself outweigh any purported harm to competing exchanges 
that could result from the proposed rebate.\89\
---------------------------------------------------------------------------

    \85\ See Phlx Response Letter II, supra note 10, at 9-10. Phlx 
asserts, for example, that CBOE offers larger rebates for trades for 
proprietary options contracts to members who meet certain volume 
thresholds for multiply-listed options contracts. See id. at 10. 
Phlx states that it cannot offer a similar pricing Proposal, since 
it does not execute trades for CBOE's proprietary contracts. See id.
    \86\ The Commission notes that CBOE, ISE, and NYSE do not 
themselves operate two exchanges, but are each part of separate 
affiliated groups of exchanges operating under common holding 
companies. The Commission assumes that Phlx is arguing that the 
parent holding companies could offer pricing mechanisms similar to 
the pricing mechanism in the Proposal.
    \87\ See Phlx Response Letter II, supra note 10, at 10.
    \88\ See Phlx Response Letter, supra note 8, at 10. Phlx states 
that seven exchanges have commenced operation since 2003, and all 
have been able to increase their market share due to the competitive 
nature of the options exchange marketplace. See Phlx Response Letter 
II, supra note 10, at 2. Phlx asserts that exchanges have proven 
viable even at a small scale. See id.
    \89\ See Phlx Response Letter, supra note 8, at 10-11.
---------------------------------------------------------------------------

    Phlx also argues that single market exchanges can compete with the 
Proposal by registering multiple exchanges and offering competing 
multi-exchange fees.\90\ However, one commenter argues that the overall 
cost of initiating operation of an exchange ``runs into the multiple 
millions of dollars.'' \91\ Furthermore, this commenter states that the 
cost and timing of such registrations impose ``unacceptable competitive 
impediments.''\92\
---------------------------------------------------------------------------

    \90\ See Notice, supra note 4, at 69482.
    \91\ ISE Letter II, supra note 7, at 3. This commenter also 
states that allowing an exchange to combine trading volume with 
competitors removes incentives for that exchange to broaden its 
offerings to attract more order flow, which leads to ``greater 
Balkanization of the exchange community.'' ISE Letter II, supra note 
7, at 4.
    \92\ ISE Letter III, supra note 11, at 11. In response, Phlx 
states the fact that ISE recently registered a new exchange 
demonstrates that the barriers to entry are not prohibitively high. 
See Phlx Response Letter V, supra note 14, at 4.
---------------------------------------------------------------------------

    The commenter that supports the Proposal believes that the Proposal 
would not place any undue burden on competition.\93\ This commenter 
reasons that the Proposal should be presumed to be pro-competitive 
because the proposed rebate lowers fees and forces competing exchanges 
to ``innovate to maintain customers and market share.'' \94\ The 
commenter notes that ``not all exchanges have affiliated exchanges 
through which they could structure a program similar to the 
[p]roposal.'' \95\ The commenter further states its belief that not 
having an affiliated exchange ``does not constitute an undue burden on 
competition, but rather a potential for its enhancement.'' \96\
---------------------------------------------------------------------------

    \93\ See Citadel Letter, supra note 7, at 5.
    \94\ Id. at 5.
    \95\ Id. at 6.
    \96\ Id. at 6.
---------------------------------------------------------------------------

    Phlx argues that the Proposal does not constitute anti-competitive 
tying because Phlx member organizations are not required to use NOM or 
BX Options to receive the enhanced rebate.\97\ One commenter argues 
that the antitrust ``tying'' arguments by Phlx are irrelevant to 
provide a basis for approval of the Proposal because tying would be 
dispositive in this context only if there was a combination in the 
pricing of a competitive product and a monopoly product, which is not 
present in the Proposal.\98\ In response, Phlx states that the 
Commission routinely cites and discusses antitrust cases in support of 
its orders approving proposed rule changes.\99\ For example, Phlx 
points to the ArcaBook Order, where the Commission cited to an economic 
analysis of monopolies and pricing.\100\
---------------------------------------------------------------------------

    \97\ See Notice, supra note 4, at 69476-77.
    \98\ See ISE Letter II, supra note 7, at 5. ISE notes that 
``[i]n basing fees on trading volume on multiple venues, Phlx argues 
that it will not be illegally tying services because there is no 
requirement that the `purchaser' buy any two products together.'' 
Id.
    \99\ See Phlx Response Letter V, supra note 14, at 2.
    \100\ See id. at 3.
---------------------------------------------------------------------------

    In its response, Phlx argues that the Proposal is simply a price 
cut and there is no evidence that low prices harm competition.\101\ 
Phlx asserts that the Proposal will benefit all Phlx market 
participants, including those who do not obtain the proposed rebates, 
through increased customer liquidity and tighter spreads.\102\ In 
addition, Phlx believes that market participants and investors will 
benefit under the Proposal because it is designed to attract Directed 
Orders (i.e., customer orders directed to particular market makers for 
execution).\103\ Phlx also states that members who choose to qualify 
for the enhanced rebates by maintaining volume on NOM or BX Options (as 
opposed to shifting their volume to Phlx, as would be required to 
qualify for a Phlx-only rebate) will have the flexibility to route 
their orders to NOM or BX Options without reducing the rebates that 
they accrue on Phlx.\104\ Additionally, Phlx explains that the Proposal 
offers several benefits beyond those available from a Phlx-only rebate, 
most notably, a significant price cut to members, additional volume, 
and increased flexibility for market

[[Page 42584]]

participants.\105\ Moreover, Phlx believes that employing bundled 
pricing in this manner can induce new trading and prompt members to 
shift volume from competing exchanges.\106\
---------------------------------------------------------------------------

    \101\ See Phlx Response Letter, supra note 8, at 7-8. Phlx 
anticipates that the Proposal will increase its trading volume, 
decrease the transaction fee revenue per contract, and improve its 
competitive position. See Phlx Response Letter II, supra note 10, at 
4.
    \102\ See id. at 5; Phlx Response Letter III, supra note 12, at 
1-2; Phlx Response Letter IV, supra note 13, at 2; and Phlx Response 
Letter V, supra note 14, at 4-5. One commenter asserts that firms 
that do not also trade on NOM or BX Options may lose order flow to 
larger firms that consolidate order flow to meet the rebate 
thresholds. See ISE Letter III, supra note 11, at 10. In response, 
Phlx states that this possibility exists today under any rebate 
program based on volume tiers. See Phlx Response Letter V, supra 
note 14, at 6.
    \103\ See Phlx Response Letter II, supra note 10, at 5. 
According to Phlx, under Phlx trading rules, a particular market 
maker (the ``Directed Participant'') can execute as much as 40% of 
the Directed Order. See id. In practice, however, Phlx states that 
Directed Participants only execute around 9% of Directed Orders on 
average. See id. Phlx states that the remainder of the order is 
executed by other market participants. See id.
    \104\ See id. at 6 and 9; and Phlx Response Letter IV, supra 
note 13, at 2.
    \105\ See Phlx Response Letter II, supra note 10, at 8; and Phlx 
Response Letter IV, supra note 13, at 2.
    \106\ See Phlx Response Letter II, supra note 10, at 6. Phlx has 
not made projections as to the amount of volume that might shift as 
a result of the Proposal or the effect that the Proposal would have 
on overall options industry volume. See id. at 7. However, Phlx 
expects that ``the [p]roposal could lead to an increase in total 
options exchange industry volume, but the belief is pricing alone 
will not have a material impact on industry volume.'' Id.
---------------------------------------------------------------------------

D. Impact on Options Market Structure

    In its response to the request for additional comment in the 
Extension Notice, Phlx states that it does not believe the Proposal 
will have a material effect on the structure of the options or equities 
markets or lead to a change in the total number of options 
exchanges.\107\ Phlx believes that its competitors can respond to the 
Proposal in several ways, including by offering better pricing on a 
single exchange, which would reduce the incentive for exchanges or new 
entities to create additional options exchanges.\108\ Phlx also 
believes that the decision to open a new exchange is influenced by 
other factors, primarily by whether ``opening a new exchange will allow 
them to offer a new market model that will provide a different value 
proposition to market participants than is available through their 
existing exchanges.'' \109\ Phlx notes that in the past five years, as 
the number of exchanges have increased, the revenue per contract of 
CBOE, NASDAQ and NYSE has decreased or remained relatively flat, which 
suggests that trading costs do not necessarily increase when additional 
markets open.\110\ Furthermore, Phlx believes that the enhanced rebate 
will not create a sufficient incentive to prompt existing exchanges or 
exchange groups to consolidate due to the significant transaction costs 
involved.\111\ Phlx argues that the decision whether to consolidate 
entities is driven by considerations other than those raised by the 
Proposal, including whether consolidation would help exchanges better 
serve the interest of market participants.\112\
---------------------------------------------------------------------------

    \107\ See Phlx Response Letter III, supra note 12, at 2, 4 and 
6. Thus, Phlx believes the Proposal should not generate any costs or 
benefits associated with a change in the number of exchanges. See 
id. at 7. Phlx also believes that the Proposal will not materially 
affect order interaction, liquidity, volatility, or execution. See 
id. at 6.
    \108\ See id. at 7. Phlx believes that its competitors can match 
the enhanced rebates by increasing the rebates on a single exchange 
or developing other strategies for offering differentiated pricing, 
products, or services that could appeal to market participants. See 
Phlx Response Letter III, supra note 12, at 4; and Phlx Response 
Letter V, supra note 14, at 3.
    \109\ Phlx Response Letter III, supra note 12, at 4-5. See also 
Phlx Response Letter V, supra note 14, at 4.
    \110\ See id. at 5.
    \111\ See id. at 7.
    \112\ See id.
---------------------------------------------------------------------------

    Moreover, Phlx believes that the Proposal should not be held to 
violate the Act merely because it creates an incentive for another 
market operator to open a new exchange.\113\ Phlx notes that the 
Commission has expressed concern in the past that a multiplicity of 
trading venues could lead to fragmentation if market participants are 
unable to interact with order flow on each exchange to ensure that they 
are obtaining the best available price.\114\ However, Phlx does not 
believe the Commission has ever expressed an opinion that the 
possibility of future order fragmentation is a sufficient reason to 
discourage the creation of new exchanges.\115\
---------------------------------------------------------------------------

    \113\ See id. at 2. Phlx cites to prior Commission rulemaking to 
argue that the ``Commission historically has praised the increase in 
securities exchanges in the United States as critical to enhancing 
competition for order flow and promoting consumer choice.'' Id.
    \114\ See id.
    \115\ See id.
---------------------------------------------------------------------------

    Finally, Phlx argues that the Commission's concern over the 
expansion of the number of exchanges presupposes that the Proposal will 
be successful and encourage other exchanges to respond by offering 
similar enhanced rebates to investors.\116\ Phlx believes that the 
Proposal should not be disapproved based on the presumption that 
investors will respond favorably to it and encourage other exchanges to 
offer additional market-based incentives.\117\ Phlx reiterates its view 
that because the Proposal enhances competition and offers a price cut 
to Phlx members, it is presumptively valid under the Act and ``[t]here 
would need to be significant countervailing evidence supporting any 
conclusion that the [p]roposal conflicts with the purposes underlying 
the Act.'' \118\ Phlx believes that no such evidence exists in the 
Proposal and the Commission therefore should ``permit market forces to 
determine both the optimal number of exchanges and the manner in which 
exchanges offer and respond to pro-competitive price discounts.'' \119\
---------------------------------------------------------------------------

    \116\ See id. at 3. Phlx anticipates that the Proposal will 
increase its trading volume, decrease transaction fee revenue per 
contract, and improve its competitive position. See Phlx Response 
Letter II, supra note 10, at 4. Furthermore, Phlx does not expect 
the Proposal to result in substantial total cost savings in the near 
term. See id. at 6. Phlx explains that most of its costs are fixed 
and are not affected by modest changes in volume. See id. While 
large increases in volume may require Phlx, NOM, or BX Options to 
incur significant expenses to increase capacity, Phlx does not 
expect the Proposal to result in volume increases sufficient to 
require such expenditures. See id.
    \117\ See Phlx Response Letter III, supra note 12, at 3. Phlx 
states that one firm would have qualified for the enhanced rebate at 
the time the Proposal was first implemented based on its pre-
existing trading volume. See Phlx Response Letter II, supra note 10, 
at 2-3. Phlx also states that during the month in which the Proposal 
was in effect prior to the Order Instituting Proceedings, there was 
a modest increase in Phlx's customer volume. See id. at 3. In 
addition to the one firm that qualified for the enhanced rebate 
based on its pre-existing trading volume, two firms qualified for 
the enhanced rebate by shifting volume to NOM from rival exchanges. 
See id.
    \118\ Phlx Response Letter III, supra note 12, at 3.
    \119\ Id.
---------------------------------------------------------------------------

    One commenter responded to the request for additional comment in 
the Extension Notice arguing that the Proposal will lead to an increase 
in the number of exchange registrations resulting in unnecessary market 
fragmentation.\120\ The commenter believes that the options market 
structure currently reflects an appropriate balance between competition 
and fragmentation.\121\ The commenter believes that if the Proposal is 
approved, single exchange operators will view exchange registration as 
a defensive measure against exchange operators with multiple markets, 
rather than register exchanges to offer value to the market.\122\ This 
commenter concludes that exchange operators will register multiple 
exchanges just to match competitive offerings, ``rather than providing 
any real benefit to the market,'' leading to increased fragmentation 
without any corresponding benefit.\123\
---------------------------------------------------------------------------

    \120\ See ISE Letter III, supra note 11, at 8-9.
    \121\ See id. at 8.
    \122\ See id. at 9. This commenter notes that such value could 
be new order types, a new fee structure, enhanced technology, or 
services complementary to the exchange operator's other offerings. 
See id.
    \123\ Id.
---------------------------------------------------------------------------

    Furthermore, two commenters raised concern about the potential 
impact of the Proposal on a market-wide basis. One commenter believes 
that the Proposal imposes obstacles to the development of a national 
market system for securities and that ignoring the precedent in the 
ArcaBook Order would require a major change to the underlying 
assumptions regarding a national market system, a change that could 
have significant unintended consequences.\124\ This commenter states

[[Page 42585]]

its view that the Proposal raises important questions about the 
foundation of the national market system and competition in the 
securities markets \125\ and suggests that if the Commission ever 
determines to make such a change, it should be addressed either through 
Commission rulemaking or Congressional action--not through an 
individual exchange's rule proposal.\126\ Similarly, another commenter 
believes that the Proposal raises significant legal and policy issues 
and suggests that--if a reconsideration of policy must be undertaken--
such reconsideration should be conducted on a market-wide basis and not 
in the context of a single proposed rule change.\127\
---------------------------------------------------------------------------

    \124\ See ISE Letter III, supra note 11, at 4. The commenter 
adds that each exchange competes for order flow through a variety of 
means, including execution quality, speed of execution, customer 
service, and fees. See id. Citing to the Act and the ArcaBook Order, 
this commenter explains its view that the national market system for 
options transactions has been built on the basis of competition 
between individual exchange markets, not groups of exchange markets. 
See id.
    \125\ See ISE Letter II, supra note 7, at 1-2.
    \126\ See ISE Letter III, supra note 11, at 4.
    \127\ See CBOE Letter, supra note 7, at 1 and 4.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    Under Section 19(b)(2)(C) of the Act, the Commission shall approve 
a proposed rule change of a self-regulatory organization if it finds 
that such proposed rule change is consistent with the requirements of 
the Act, and the rules and regulations thereunder that are applicable 
to such organization.\128\ The Commission shall disapprove a proposed 
rule change if it does not make such a finding.\129\ The Commission's 
Rules of Practice, under Rule 700(b)(3), state that the ``burden to 
demonstrate that a proposed rule change is consistent with the Exchange 
Act and the rules and regulations issued thereunder . . . is on the 
self-regulatory organization that proposed the rule change'' and that a 
``mere assertion that the proposed rule change is consistent with those 
requirements . . . is not sufficient.'' \130\
---------------------------------------------------------------------------

    \128\ See 15 U.S.C. 78s(b)(2)(C)(i).
    \129\ See 15 U.S.C. 78s(b)(2)(C)(ii); and see also 17 CFR 
201.700(b)(3).
    \130\ See 17 CFR 201.700(b)(3). ``The description of a proposed 
rule change, its purpose and operation, its effect, and a legal 
analysis of its consistency with applicable requirements must all be 
sufficiently detailed and specific to support an affirmative 
Commission finding. Any failure of a self-regulatory organization to 
provide the information elicited by Form 19b-4 may result in the 
Commission not having a sufficient basis to make an affirmative 
finding that a proposed rule change is consistent with the Exchange 
Act and the rules and regulations issued thereunder that are 
applicable to the self-regulatory organization.'' Id.
---------------------------------------------------------------------------

    After careful consideration, the Commission does not find that the 
proposed rule change is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange. In particular, the Commission does not find that 
the proposed rule change is consistent with: (1) Section 6(b)(4) of the 
Act, which requires that the rules of a national securities exchange 
``provide for the equitable allocation of reasonable dues, fees, and 
other charges among its members and issuers and other persons using its 
facilities;'' \131\ and (2) Section 6(b)(5) of the Act, which, among 
other things, requires that the rules of a national securities exchange 
not be ``designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers[.]'' \132\ Because either of these 
determinations under the Act independently necessitates disapproving 
the Proposal, the Commission does so.
---------------------------------------------------------------------------

    \131\ 15 U.S.C. 78f(b)(4).
    \132\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In the Order Instituting Proceedings, the Commission highlighted 
the statutory provisions referenced above, and noted that the 
Commission intended to further assess whether this additional customer 
rebate on Phlx, which is based on execution volume across the NASDAQ 
OMX exchanges, is consistent with the statutory requirements applicable 
to a national securities exchange under the Act.\133\ The Commission 
invited interested persons to submit written views with respect to 
these concerns. The Commission received eleven comment letters in 
response to the Order Instituting Proceedings, of which five were from 
Phlx.
---------------------------------------------------------------------------

    \133\ See Order Instituting Proceedings, supra note 6, at 71701-
02.
---------------------------------------------------------------------------

    To evaluate whether a fee, such as Phlx's proposed rebate, is 
consistent with the Act, the Commission applies a ``market-based 
approach.'' \134\ The Commission examines whether the exchange making 
the proposal is subject to significant competitive forces in setting 
the terms of its proposal, including the level of any fee.\135\ If the 
exchange is subject to significant competitive forces in setting the 
terms of a proposal, the Commission will approve the proposal unless it 
determines that there is a substantial countervailing basis to find 
that the proposal nevertheless fails to meet an applicable requirement 
of the Act or the rules thereunder.\136\ If the exchange is not subject 
to significant competitive forces in setting the terms of the proposal, 
the Commission will require the exchange to provide a substantial 
basis, other than competitive forces, to demonstrate that the terms of 
the proposal are equitable, fair, reasonable, and not unreasonably 
discriminatory.\137\ For reasons discussed below, although we base our 
analysis on the assumption that Phlx is subject to significant 
competitive forces in setting the terms of the Proposal, there is a 
substantial countervailing basis to find that those terms do not meet 
the Act's requirements that an exchange's rules be equitable, fair, 
reasonable, and not unreasonably discriminatory: namely, the Proposal 
could result in two similarly situated Phlx members being charged 
different fees for transacting the same amount and type of customer 
option volume on the Phlx exchange.
---------------------------------------------------------------------------

    \134\ See ArcaBook Order, supra note 28, at 74781-82. See also 
Securities Exchange Act Release No. 68202 (November 9, 2012), 77 FR 
68856, 68858-61 (November 16, 2012) (SR-Phlx-2012-27 and SR-Phlx-
2012-54) (``Phlx Fees Order'') (applying the market-based approach 
analysis in connection with a Phlx transaction fee proposal. The 
Commission found, pursuant to delegated authority, that the proposed 
rule changes were consistent with the requirements of the Act and 
rules and regulations thereunder applicable to a national securities 
exchange.). Notably, one commenter on this Proposal applied the 
Commission's market-based approach to analyzing the Proposal. See 
Citadel Letter, supra note 7, at 3.
    \135\ See ArcaBook Order, supra note 28, at 74781. See also Phlx 
Fees Order, supra note 134, at 68858.
    \136\ See ArcaBook Order, supra note 28, at 74781. See also Phlx 
Fees Order, supra note 134, at 68858.
    \137\ See ArcaBook Order, supra note 28, at 74781.
---------------------------------------------------------------------------

    As discussed more fully below and as explained in the ArcaBook 
Order, the Commission historically has reviewed whether a proposed 
exchange rule is consistent with the provisions of Section 6 of the Act 
on an exchange-by-exchange basis--that is, an exchange's proposed rule 
change is analyzed at the individual level of the registered securities 
exchange and not at the group level of exchanges.\138\ With respect to 
the first part of a market-based approach, the Commission previously 
has found and continues to believe that there is significant 
competition for order flow in the options market at the individual 
exchange level.\139\ This

[[Page 42586]]

Proposal adds complexity to the first part of a market-based approach 
analysis because it raises a question of whether we also should analyze 
competition at the group level of exchanges in addition to the 
individual exchange level.\140\ The Commission does not believe it is 
necessary to resolve that issue here because, even assuming that the 
Exchange were subject to significant competitive forces at the group 
level under the first part of a market-based approach, the Commission 
believes that, under the second part of the market-based analysis, 
there is a substantial countervailing basis to find that the terms of 
the proposed rebate fail to meet the requirements of the Act.
---------------------------------------------------------------------------

    \138\ See id. at 74793; and infra notes 143-145. Specifically, 
in the ArcaBook Order, the Commission stated:
    Section 6 of the Exchange Act . . . prohibits a national 
securities exchange from adopting rules that are designed to permit 
unfair discrimination among its customers or that would impose an 
unnecessary or inappropriate burden on competition. All of these 
requirements are applied at the level of the individual registered 
securities exchange, not at the group level of exchanges that are 
under common control. In particular, a proposed exchange rule must 
stand or fall based, among other things, on the interests of 
customers, issuers, broker-dealers, and other persons using the 
facility of that exchange.
    \139\ See Securities Exchange Act Release No. 61317 (January 8, 
2010), 75 FR 2915 (January 19, 2010) (SR-ISE-2009-103). The 
Commission found, pursuant to delegated authority, that the exchange 
was subject to significant competitive forces in setting the terms 
of its proposal, including fees, and noting that ``the Exchange has 
a compelling need to attract order flow to maintain its share of 
trading volume, imposing pressure on the Exchange to act reasonably 
in establishing fees for these data offerings.'' Id. at 2917. With 
respect to this Proposal, commenters and the Exchange have both 
provided representations and data regarding the existence of 
competition for order flow among options exchanges. See Notice, 
supra note 4, at 69474; Phlx Response Letter, supra note 8, at 10 
and 12; Phlx Response Letter II, supra note 10, at 2; Citadel 
Letter, supra note 7, at 3 (stating that ``it is clear that Phlx and 
all options exchanges are subject to significant competitive forces 
in setting their fees'' and ``the Commission recently found that 
there is significant competition for order flow in the options 
markets''); and ISE Letter II, supra note 7, at 3 (stating that 
``every exchange operates in a competitive environment, seeking to 
maximize the order flow on that exchange''). In particular, the 
Exchange has stated that the trading of options is a highly 
competitive environment and the ability to attract order flow is 
driven largely by price competition. See Notice, supra note 4, at 
69474; Phlx Response Letter, supra note 8, at 12; and Phlx Response 
Letter II, supra note 10, at 2. The Exchange also stated that member 
firms control the order flow that options markets compete to 
attract, and that exchange members, rather than the exchanges, drive 
competition. See Notice, supra note 4, at 69474.
    \140\ See Notice, supra note 4, at 69481-82.
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    Specifically, the Commission believes that providing a rebate for 
transactions on Phlx based on the aggregate amount of customer volume 
transacted across all three of the NASDAQ OMX exchanges would be 
inconsistent with Section 6(b)(4) of the Act \141\ because it would not 
provide for the equitable allocation of reasonable dues, fees, and 
other charges among Phlx members and issuers and other persons using 
Phlx facilities. The Commission also believes that the Proposal would 
be inconsistent with Section 6(b)(5) of the Act \142\ because it would 
permit unfair discrimination between customers, issuers, brokers, or 
dealers.
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    \141\ 15 U.S.C. 78f(b)(4).
    \142\ 15 U.S.C. 78f(b)(5).
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    As outlined above, the Proposal would allow market participants to 
aggregate volume across Phlx, NOM, and BX Options for purposes of 
determining whether they meet the volume tiers on Phlx. However, the 
Commission historically has reviewed whether a proposed exchange rule 
is consistent with the provisions of Section 6 of the Act on an 
exchange-by-exchange basis.\143\ As the Commission articulated in the 
ArcaBook Order, the regulatory structure of Section 6 ``limits the 
potential for related exchanges to act jointly[,]'' \144\ and reading 
the statute to require the application of (and assessment of compliance 
with) the requirements of Section 6 of the Act on an exchange-by-
exchange basis is consistent with that purpose. While the Commission 
recognizes that there are other plausible approaches to the 
interpretation of the Act, we do not believe a sufficiently compelling 
case has been made for the Commission to alter its historical position 
at this time.
---------------------------------------------------------------------------

    \143\ See ArcaBook Order, supra note 28, at 74793.
    \144\ Id.
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    Thus, as articulated by the Commission in the ArcaBook Order, the 
Commission has analyzed whether this proposed rule change is consistent 
with the Act at the level of the individual registered securities 
exchange--not the group level. In applying this principle, it is 
notable that the Proposal could result in the Exchange charging 
different fees to Phlx members that are similarly situated and transact 
the same amount and type (electronically delivered) of customer volume 
on the Phlx exchange. For example, a Phlx member who transacts 2.3% of 
national customer volume in multiply-listed options in a month on Phlx 
would not qualify for the additional rebate. However, another Phlx 
member who also transacts 2.3% of national customer volume in multiply-
listed options in a month on Phlx and who transacts an additional 0.5% 
of national customer volume in multiply-listed options in a month on 
NOM would qualify for the rebate. Further, given the second Phlx 
member's customer volume transacted on NOM, this second Phlx member 
need only transact 2.0% of national customer volume in multiply-listed 
options in that month on Phlx to qualify for the enhanced rebate.\145\
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    \145\ Several commenters also raised this concern and argued 
that it renders the Proposal inequitable. See, e.g., Normann Letter, 
supra note 11, at 6-9; and MIAX Letter, supra note 7, at 2. See also 
CBOE Letter, supra note 7, at 3 (noting that ``imposition of a fee 
or charge by an exchange based on some activity other than use of 
the fee-imposing exchange's own facilities necessarily would be 
impossible to allocate in an `equitable' way and could never be 
`reasonable.' ''); and ISE Letter II, supra note 7, at 2-3.
---------------------------------------------------------------------------

    Thus, under the Proposal, a Phlx member that transacts less 
national customer volume in multiply-listed options in a month on Phlx 
than other members would qualify for the additional proposed rebate 
while those other Phlx members with higher national customer volume 
percentages on Phlx--the exchange proposing the rebate--would not 
qualify. The Commission does not believe that the arguments put forth 
by Phlx provide a basis consistent with the Act as to why this 
disparity is equitable or not unfairly discriminatory when analyzing 
the treatment of Phlx members using the Phlx exchange.
    Phlx argues that the Proposal provides for the equitable 
allocations of fees because the proposed rebate is limited to market 
participants who transact business on Phlx and only applies to orders 
actually executed on the Phlx exchange.\146\ But this ignores the 
effect of the proposed rebate on those market participants. Because the 
Proposal is based in part on the activity of Phlx members outside the 
Phlx exchange, the Proposal could result in the Exchange charging 
different fees to members that are similarly situated and execute the 
same amount and type of customer orders on the Phlx exchange. Further, 
Phlx has not shown that, when analyzed at the level of the individual 
exchange, such differential treatment is equitable.
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    \146\ Phlx Response Letter, supra note 8, at 14; and Section 
III.A, supra. In addition, Phlx argues that the proposed rebate 
should be considered ``presumptively reasonable'' because it would 
reduce transaction costs of doing business on the Exchange, which 
the Exchange believes would ultimately reduce the costs passed on to 
investors. See Phlx Response Letter, supra note 8, at 14. See also 
Notice, supra note 4 at 69477. The Commission notes that it is not 
making a finding as to whether the proposed rebate is reasonable 
because the Commission finds that the Proposal is inconsistent with 
the Act on other grounds. See supra notes 138-143 and accompanying 
text.
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    Phlx believes that the resulting lower costs will incentivize 
market participants to increase the amount of customer orders sent to 
the Exchange, thereby enhancing the quality of its markets by narrowing 
quote spreads and further increasing customer volume to Phlx.\147\ The 
Commission does not believe that any of the potential benefits of the 
Proposal cure its inequitable effect because, when analyzing the 
activity of members on the Phlx exchange alone, the Proposal could 
result in two Phlx members that are similarly situated and transact the 
same amount and type of customer volume on Phlx being charged different 
fees.
---------------------------------------------------------------------------

    \147\ See Notice, supra note 4, at 69482.
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    Finally, Phlx argues that the proposed rebate is structured as a 
volume-based discount and is similar to the existing rebate tiers in 
Section B of the Pricing Schedule, which the Commission has previously 
accepted.\148\ But the

[[Page 42587]]

Commission believes that the Proposal is distinguishable from the 
volume-based tiers and discounts that currently exist on Phlx and other 
registered securities exchanges. Current volume based discounts are 
based on the volume transacted on the registered securities exchange 
charging the fee and not volume transacted on a separate registered 
securities exchange. Thus, under current volume-based discounts, two 
similarly situated members executing the same amount and type of 
transaction volume on a registered securities exchange should be 
charged the same transaction fee (or given the same transaction 
rebate).\149\
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    \148\ See Phlx Response Letter, supra note 8, at 15; and Notice, 
supra note 4 at 69480.
    \149\ See, e.g., the existing Phlx Pricing Schedule B, Customer 
Rebate Program. In the Notice, Phlx also discusses other examples of 
differences in fees and rebates for exchange services. See Notice, 
supra note 4, at 69477-80. The Proposal is similarly distinguishable 
from those examples because only under the Proposal could two 
similarly situated market participants who transact the same amount 
of the same type of volume on Phlx be charged differing levels of 
transaction fees by that exchange.
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    Given the principle articulated by the Commission in its ArcaBook 
Order, and based on the record, the Commission therefore does not 
believe that the proposed fee structure, which as commenters noted, 
would allow the Exchange to charge different fees to Phlx members that 
are similarly situated and transact the same amount and type of 
customer volume on Phlx, is consistent with Section 6(b)(4) of the Act 
which, requires that the rules of a registered national securities 
exchange ``provide for the equitable allocation of reasonable dues, 
fees, and other charges among its members and issuers and other persons 
using its facilities.''
    Phlx also argues that the Proposal is not unfairly discriminatory 
under Section 6(b)(5) of the Act, asserting that because any market 
participant could qualify for the proposed rebate by transacting the 
required amount of customer volume on Phlx alone and thus market 
participants are not required to become members of NASDAQ OMX exchanges 
to qualify for the proposed rebate.\150\ The Commission believes that 
this argument fails to address, when analyzing the activity of members 
on the Phlx exchange alone, the result of two Phlx members that are 
similarly situated and transact the same amount and type of customer 
volume on Phlx but could be charged different fees.\151\
---------------------------------------------------------------------------

    \150\ See Phlx Response Letter, supra note 8, at 4-7; and Phlx 
Response Letter V, supra note 14, at 2. See also supra Section 
III.B.
    \151\ See infra note 156.
---------------------------------------------------------------------------

    Phlx argues that market participants can easily register as members 
of Phlx and its affiliated exchanges at minimal cost, which will expand 
the pool of market participants who can receive the rebate.\152\ Phlx 
also argues that the Proposal would reduce fees and benefit market 
participants by way of reduced transaction costs.\153\ In addition, the 
Exchange argues that the Proposal would enhance efficient trading 
activity by allowing market participants to route customer orders to 
other NASDAQ OMX exchanges and count transactions as a result of those 
orders towards the proposed rebate on Phlx.\154\ The Exchange believes 
that this efficiency would improve execution quality while at the same 
time potentially lowering the cost for their customers.\155\ But the 
Commission does not believe that any of the potential benefits of the 
Proposal put forth by Phlx--such as to expand the rebate to more market 
participants resulting in lower costs to market participants without 
compromising their execution obligations, and improved market quality 
through increased liquidity to the Exchange \156\-- cures its unfair 
discriminatory effects on Phlx-only members, who could be charged a 
higher fee for the same volume on Phlx than Phlx members that have 
multiple NASDAQ OMX exchange memberships. Thus, the Commission does not 
believe that Phlx has provided a sufficient basis to support the 
assertion that the potential discrimination among Phlx members 
resulting from the Proposal would not be unfair. Consequently, the 
Commission does not believe that the proposed fee structure is 
consistent with Section 6(b)(5) of the Act which, among other things, 
requires that the rules of a registered national securities exchange be 
``not designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers[.]''
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    \152\ See Phlx Response Letter, supra note 8, at 4-5.
    \153\ See Notice, supra note 4, at 69473.
    \154\ See Phlx Response Letter II, supra note 10, at 6 and 9; 
and Phlx Response Letter IV, supra note 13, at 2.
    \155\ See Phlx Response Letter II, supra note 10, at 6 and 9; 
and Phlx Response Letter IV, supra note 13, at 2.
    \156\ The Proposal potentially could lead to order flow shifting 
away from the Phlx exchange to other options exchanges because a 
member could still qualify for the rebate by aggregating the amount 
of customer volume that it transacts across one or more of the 
exchanges in the NASDAQ OMX exchange group. According to the 
Exchange, during the month the proposed rebate was in effect on 
Phlx, customer volume on Phlx experienced a modest increase; 
however, two of the three firms that qualified for the proposed 
rebate did so by shifting customer volume from rival exchanges to 
NOM. See Phlx Response Letter II, supra note 10, at 3-4. Phlx data 
shows that Phlx Member A's customer volume on NOM increased from 
0.59% on October 1, 2013 to 1.67% on November 1, 2013 and Phlx 
Member C's customer volume on NOM increased from 0.58% on October 1, 
2013 to 1.44% on November 1, 2013. See id.
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    In analyzing this Proposal and in making its determination to 
disapprove the rule change, the Commission has considered whether the 
action will promote efficiency, competition, and capital 
formation.\157\ As part of this consideration, the Commission has 
considered comments regarding efficiency and competition, including 
literature cited in those comments, and how any effects on competition 
or efficiency could affect capital formation. For example, some 
commenters assert that the Proposal does not provide efficiency gains 
on Phlx,\158\ while Phlx contends that some market participants who 
transact customer orders on Phlx could experience efficiency gains from 
improved execution choices.\159\ Phlx contends the following effects 
may result from the Proposal: More efficient allocation of order flow 
between Phlx and its affiliated exchanges; \160\ more efficient use of 
the services associated with the substantial fixed, sunk costs shared 
among the three exchanges in the Nasdaq OMX group; \161\ more efficient 
price discrimination; \162\ increased trading volume on Phlx; \163\ 
and, in principle, a potential increase in total options exchange 
industry volume.\164\ The Commission notes that these efficiency gains, 
if realized, could potentially promote capital formation.
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    \157\ Whenever pursuant to the Act the Commission is engaged in 
rulemaking or the review of a rule of a self-regulatory 
organization, and is required to consider or determine whether an 
action is necessary or appropriate in the public interest, the 
Commission shall also consider, in addition to the protection of 
investors, whether the action will promote efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \158\ See ISE Letter III, supra note 11, at 8-9; Normann Letter, 
supra note 11, at 7.
    \159\ See Phlx Response Letter, supra note 8, at 4.
    \160\ See id.; and Willig and Bamberger Statement, supra note 8, 
at 19. See also Citadel Letter, supra note 7, at 2-3, 7.
    \161\ See Willig and Bamberger Reply, supra note 13, at 4.
    \162\ See Willig and Bamberger Statement, supra note 8, at 15-
20; Willig and Bamberger Reply, supra note 13, at 4.
    \163\ See Willig and Bamberger Statement, supra note 8, at 26; 
and Phlx Response Letter IV, supra note 13, at 2.
    \164\ See Phlx Response Letter II, supra note 10, at 7.
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    Additionally, commenters assert that the Proposal would lead to 
adverse effects on competition by placing burdens on competing 
exchanges \165\ that may face loss of business to Phlx and on competing 
market participants that are not entitled to the proposed

[[Page 42588]]

rebate.\166\ Phlx contends that the Proposal would have a beneficial 
effect on competition by providing competitors with incentives to match 
the proposed rebate--by developing their own pricing strategies or 
increasing the quality of their execution services, thereby creating a 
more efficient, less costly national market system.\167\ Phlx 
anticipates such enhanced competition, with or without the launch of 
new exchanges, while a commenter asserts that barriers to the creation 
of new exchanges could affect the competitive response and that the 
Proposal will lead to the inefficient proliferation of new 
exchanges.\168\
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    \165\ See ISE Letter III, supra note 11, at 3, MIAX Letter, 
supra note 7, at 3; and CBOE Letter, supra note 7, at 4.
    \166\ See CBOE Letter, supra note 7, at 4; MIAX Letter, supra 
note 7, at 3.
    \167\ See Phlx Response Letter, supra note 8, at 2.
    \168\ See ISE Letter III, supra note 11, at 3, 8-9.
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    The Commission has considered whether the action will promote 
efficiency, competition, and capital formation, but, as discussed 
above, the Commission does not find that the Proposal is consistent 
with Sections 6(b)(4) and 6(b)(5) of the Act.

V. Conclusion

    For the foregoing reasons, the Commission does not find that the 
proposed rule change is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities exchange, 
and, in particular, with Sections 6(b)(4) and 6(b)(5) of the Act.
    It Is Therefore Ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change (SR-Phlx-2013-113) be, and hereby is, 
disapproved.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\169\
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    \169\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-17156 Filed 7-21-14; 8:45 am]
BILLING CODE 8011-01-P