Document ID: SEC-2016-1854-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ PHLX, LLC
Posted Date: 2016-10-17T04:00Z

[Federal Register Volume 81, Number 200 (Monday, October 17, 2016)]
[Notices]
[Pages 71556-71558]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-24980]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79080; File No. SR-Phlx-2016-100]

Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
of Proposed Rule Change To Amend the Pricing Schedule at Section IV, 
Part B titled ``Flex Transaction Fees''

October 11, 2016.
    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 October 3, 2016, NASDAQ PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I, II, 
and III, below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend the Pricing Schedule at Section IV, 
Part B titled ``Flex Transaction Fees'' to permit FLEX \3\ options to 
trade as strategies for purposes Section II Strategy Cap pricing.
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    \3\ FLEX options are flexible exchange-traded index, equity, or 
currency option contracts that provide investors the ability to 
customize basic option features including size, expiration date, 
exercise style, and certain exercise prices. FLEX options may have 
expiration dates within five years. See Rule 1079. FLEX currency 
option contracts traded on the Exchange are also known as FLEX WCO 
or FLEX FCO contracts.
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqphlx.cchwallstreet.com/, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Section IV, Part B, related to FLEX 
pricing, to permit Multiply Listed FLEX options to be eligible for the 
Section II Strategy Caps.\4\ The Section II Strategy Fee cap generally 
applies to all strategy executions executed in standard option 
contracts (as opposed to Mini Option contracts) on the same trading day 
in the same option class.\5\ Today, Multiply Listed FLEX options are 
excluded from Strategy Caps. The proposal is designed to compete with 
other markets that apply similar fee caps but that do not exclude 
Multiply Listed FLEX option transactions from Strategy Fee Caps.\6\ 
FLEX options are only executed on the Exchange's trading floor and are 
not executed electronically on the Exchange.
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    \4\ Section II includes pricing for Multiply Listed Options Fees 
which includes options overlying equities, ETFs, ETNs and indexes 
which are Multiply Listed.
    \5\ Dividend, merger and short stock interest strategies are the 
same trading day in the same options class when such members are 
trading in their own proprietary accounts.
    \6\ See NYSE AMEX OPTIONS Fee Schedule. See also Securities 
Exchange Act Release No. 71015 (December 6, 2013), 78 FR 75642 
(December 12, 2013).
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    Today, Customers are not assessed a fee for Multiply Listed FLEX 
options and Non-Customers are assessed a $0.25 per contract fee for 
Multiply Listed FLEX options. Further, the Monthly Firm Fee Cap, 
Monthly Market Maker Cap, and the Options Surcharge in BKX, MNX and NDX 
described in Section II apply to Multiply Listed FLEX options. No other 
fees described in Section II apply to Multiply Listed FLEX options. The 
FLEX transaction fees for a Firm are waived for members executing 
facilitation orders pursuant to Exchange Rule 1064 when such members 
are trading in their own proprietary account. In addition, FLEX 
transaction fees for a Broker-Dealer are waived for members executing 
facilitation orders pursuant to Exchange Rule 1064 when such members 
would otherwise incur this charge for trading in their own proprietary 
account contra to a Customer (``BD-Customer Facilitation''), if the 
member's BD-Customer Facilitation average daily volume (including both 
FLEX and non-FLEX transactions) exceeds 10,000 contracts per day in a 
given month. Finally, Multiply Listed FLEX options are not eligible for 
Section II strategy caps.
    The Exchange proposes to permit Multiply Listed FLEX options to be 
subject to strategy cap pricing.\7\ Currently, to qualify for a 
strategy cap,

[[Page 71557]]

the buy and sell side of a transaction must originate from the Exchange 
floor. The following are the strategy fee caps in Section II:
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    \7\ The Exchange noted in a prior rule change that there is no 
mechanism to mark FLEX Option transactions for strategy caps, and 
therefore excluded Multiply Listed FLEX options for strategy 
treatment. See Securities Exchange Act Release No. 69548 (May 9, 
2013), 78 FR 28681 (May 15, 2013) (SR-Phlx-2013-29). With this 
proposal the Exchange will implement a manual process to record the 
FLEX strategy with staff intervention thereby documenting the 
strategy for billing purposes.

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  Floor options transactions--multiply
             listed options                        Strategy                  Qualification              Cap
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Specialist, Market Maker, Professional,   Dividend, merger and short  Executed on the same                $1,500
 Firm, and Broker-Dealer.                  stock interest strategies.  trading day in the same
                                                                       options class when such
                                                                       members are trading in
                                                                       their own proprietary
                                                                       accounts.
                                          Reversal and conversion     Executed on the same                   700
                                           strategies.                 trading day in the same
                                                                       options class.
                                          Jelly rolls...............  Executed on the same                   700
                                                                       trading day in the same
                                                                       options class.
                                          Box spreads...............  Executed on the same                   700
                                                                       trading day in the same
                                                                       options class.
Per member organization.................  Dividend, merger, short     Combined executions in a            65,000
                                           stock interest, reversal    month when trading in own
                                           and conversion, jelly       proprietary accounts.
                                           roll, and box spread
                                           strategies (``Monthly
                                           Strategy Cap'').
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    The following types of strategies are eligible for the pricing in 
Section II: dividend strategy,\8\ merger strategy,\9\ short stock 
interest strategy,\10\ reversal and conversion strategies,\11\ jelly 
roll strategy \12\ and a box spread strategy.\13\ Reversal and 
conversion, jelly roll and box spread strategy executions are not 
included in the Monthly Strategy Cap for a Firm. Reversal and 
conversion, jelly roll and box spread strategy executions (as defined 
in this Section II) are included in the Monthly Firm Fee Cap. All 
dividend, merger, short stock interest, reversal and conversion, jelly 
roll and box spread strategy executions (as defined in Section II) are 
excluded from the Monthly Market Maker Cap.
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    \8\ A dividend strategy is defined as transactions done to 
achieve a dividend arbitrage involving the purchase, sale and 
exercise of in-the-money options of the same class, executed the 
first business day prior to the date on which the underlying stock 
goes ex-dividend.
    \9\ A merger strategy is defined as transactions done to achieve 
a merger arbitrage involving the purchase, sale and exercise of 
options of the same class and expiration date, executed the first 
business day prior to the date on which shareholders of record are 
required to elect their respective form of consideration, i.e., cash 
or stock.
    \10\ A short stock interest strategy is defined as transactions 
done to achieve a short stock interest arbitrage involving the 
purchase, sale and exercise of in-the-money options of the same 
class.
    \11\ Reversal and conversion strategies are transactions that 
employ calls and puts of the same strike price and the underlying 
stock. Reversals are established by combining a short stock position 
with a short put and a long call position that shares the same 
strike and expiration. Conversions employ long positions in the 
underlying stock that accompany long puts and short calls sharing 
the same strike and expiration.
    \12\ A jelly roll strategy is defined as transactions created by 
entering into two separate positions simultaneously. One position 
involves buying a put and selling a call with the same strike price 
and expiration. The second position involves selling a put and 
buying a call, with the same strike price, but with a different 
expiration from the first position.
    \13\ A box spread strategy is a strategy that synthesizes long 
and short stock positions to create a profit. Specifically, a long 
call and short put at one strike is combined with a short call and 
long put at a different strike to create synthetic long and 
synthetic short stock positions, respectively.
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    The Exchange is amending the rule text to include Strategy Caps in 
the list of Section II pricing which is applicable to Multiply Listed 
FLEX options. As a result, a Multiply Listed FLEX option transaction 
that is part of a strategy execution would be included in the Strategy 
Fee cap. The proposal is designed to encourage members and member 
organizations to engage in both additional Multiply Listed FLEX option 
transactions and strategy executions on the Exchange.
    The Exchange also proposes to correct a typographical error in 
Section IV to add a hyphen in the term BD-Customer.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\14\ in general, and furthers the objectives of 
Sections 6(b)(4) and 6(b)(5) of the Act,\15\ in particular, in that it 
provides for the equitable allocation of reasonable dues, fees and 
other charges among members and issuers and other persons using any 
facility, and is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(4) and (5).
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    The Commission and the courts have repeatedly expressed their 
preference for competition over regulatory intervention in determining 
prices, products, and services in the securities markets. In Regulation 
NMS, while adopting a series of steps to improve the current market 
model, the Commission highlighted the importance of market forces in 
determining prices and SRO revenues and, also, recognized that current 
regulation of the market system ``has been remarkably successful in 
promoting market competition in its broader forms that are most 
important to investors and listed companies.'' \16\
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    \16\ Securities Exchange Act Release No. 51808 (June 9, 2005), 
70 FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting 
Release'').
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    Likewise, in NetCoalition v. Securities and Exchange Commission 
\17\ (``NetCoalition'') the D.C. Circuit upheld the Commission's use of 
a market-based approach in evaluating the fairness of market data fees 
against a challenge claiming that Congress mandated a cost-based 
approach.\18\ As the court emphasized, the Commission ``intended in 
Regulation NMS that `market forces, rather than regulatory 
requirements' play a role in determining the market data . . . to be 
made available to investors and at what cost.'' \19\
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    \17\ NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010).
    \18\ See NetCoalition, at 534-535.
    \19\ Id. at 537.
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    Further, ``[n]o one disputes that competition for order flow is 
`fierce.' . . . As the SEC explained, `[i]n the U.S. national market 
system, buyers and sellers of securities, and the broker-dealers that 
act as their order-routing agents, have a wide range of choices of 
where to route orders for execution;' [and] `no exchange can afford to 
take its market share percentages for granted' because `no exchange 
possesses a monopoly, regulatory or otherwise, in the execution of 
order flow from broker dealers.' . . .'' \20\ Although the court and 
the SEC were discussing the cash equities markets, the Exchange 
believes that these views apply with equal force to the options 
markets.
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    \20\ Id. at 539 (quoting Securities Exchange Act Release No. 
59039 (December 2, 2008), 73 FR 74770, 74782-83 (December 9, 2008) 
(SR-NYSEArca-2006-21)).
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    The Exchange's proposal to permit Multiply-Listed FLEX options to 
be eligible for the Section II Strategy Caps is reasonable because 
including

[[Page 71558]]

Multiply-Listed FLEX option transactions in the Strategy Fee Cap may 
encourage members and member organizations to execute additional 
Multiply-Listed FLEX options and strategy executions on the Exchange. 
The proposed change would therefore result in greater amounts of 
liquidity on the Exchange, which should benefit the quality of the 
Exchange's market and investors, generally. This proposed change is 
further reasonable because the Exchange understands that other option 
markets similarly include Multiply Listed FLEX option transactions in 
certain fee caps applicable to strategy executions on such other 
markets.\21\
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    \21\ See note 6 above.
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    The Exchange believes that the proposed change is equitable and not 
unfairly discriminatory because all members and member organizations 
are eligible to transact Multiply Listed FLEX options and are eligible 
for the Strategy Fee Cap.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. In terms of inter-market 
competition, the Exchange notes that it operates in a highly 
competitive market in which market participants can readily favor 
competing venues if they deem fee levels at a particular venue to be 
excessive, or rebate opportunities available at other venues to be more 
favorable. In such an environment, the Exchange must continually adjust 
its fees to remain competitive with other exchanges and with 
alternative trading systems that have been exempted from compliance 
with the statutory standards applicable to exchanges. Because 
competitors are free to modify their own fees in response, and because 
market participants may readily adjust their order routing practices, 
the Exchange believes that the degree to which fee changes in this 
market may impose any burden on competition is extremely limited.
    The pricing proposed herein are intended to continue to incentivize 
market participants to execute additional Multiply Listed FLEX options 
and strategy executions on the Exchange and for this reason imposes no 
inter-market burden on competition. The proposal could increase 
competition on the Exchange by including Multiply Listed FLEX option 
transactions in the Strategy Fee Cap. This could result in members and 
member organizations engaging in both additional Multiply Listed FLEX 
option transactions and strategy executions in order to reach the fee 
cap levels. The proposed change could also increase competition between 
the Exchange and other option markets by making the Exchange a more 
desirable market with respect to pricing for Multiply Listed FLEX 
option transactions and strategy executions.
    If the changes proposed herein are unattractive to market 
participants, it is likely that the Exchange will lose market share as 
a result. Accordingly, the Exchange does not believe that the proposed 
changes will impair the ability of members or competing order execution 
venues to maintain their competitive standing in the financial markets.
    The Exchange's proposal to permit Multiply Listed FLEX options to 
be eligible for the Section II Strategy Caps does not impose an undue 
burden on intra-market competition because all members and member 
organizations are eligible to transact Multiply Listed FLEX options and 
are eligible for the Strategy Fee Cap.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2016-100 on the subject line.

Paper comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2016-100. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; 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-2016-100 and 
should be submitted on or before November 7, 2016.
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    \22\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-24980 Filed 10-14-16; 8:45 am]
 BILLING CODE 8011-01-P