Document ID: SEC-2014-0065-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX, LLC
Posted Date: 2014-01-14T05:00Z

[Federal Register Volume 79, Number 9 (Tuesday, January 14, 2014)]
[Notices]
[Pages 2498-2501]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-00466]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71258; File No. SR-Phlx-2013-125]

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

January 8, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 31, 2013, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend Section V of the Pricing Schedule 
entitled ``Routing Fees.''
    While the changes proposed herein are effective upon filing, the 
Exchange has designated that the amendments be operative on January 2, 
2014.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqomxphlx.cchwallstreet.com/, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    The purpose of this filing is to amend the Routing Fees in Section 
V of the Pricing Schedule in order to continue to incentivize members 
to direct Customer orders to the Exchange.
    Today, the Exchange assesses a Non-Customer a $0.95 per contract 
Routing Fee to any options exchange. The Customer \3\ Routing Fee for 
option orders routed to The NASDAQ Options Exchange LLC (``NOM'') is a 
$0.05 per contract Fixed Fee in addition to the actual transaction fee 
assessed. The Customer Routing Fee for option orders routed to NASDAQ 
OMX BX, Inc. (``BX Options'') is $0.00. The Customer Routing Fee for 
option orders routed to all other options exchanges \4\ (excluding NOM 
and BX Options) is a fixed fee of $0.20 per contract (``Fixed Fee'') in 
addition to the actual transaction fee assessed. If the away market 
pays a

[[Page 2499]]

rebate, the Routing Fee is $0.00 per contract. For all Routing Fees, 
the transaction fee will continue to be based on the away market's 
actual transaction fee or rebate for particular market participants 
and, in the case that there is no transaction fee or rebate assessed by 
the away market, the Fixed Fee.
---------------------------------------------------------------------------

    \3\ 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 (``OCC'') which 
is not for the account of broker or dealer or for the account of a 
``Professional'' (as that term is defined in Rule 1000(b)(14)).
    \4\ Including BATS Exchange, Inc. (``BATS''), BOX Options 
Exchange LLC (``BOX''), the Chicago Board Options Exchange, 
Incorporated (``CBOE''), C2 Options Exchange, Incorporated (``C2''), 
International Securities Exchange, LLC (``ISE''), the Miami 
International Securities Exchange, LLC (``MIAX''), NYSE Arca, Inc. 
(``NYSE Arca''), NYSE MKT LLC (``NYSE Amex'') and Topaz Exchange, 
LLC (``Gemini'').
---------------------------------------------------------------------------

    With respect to the fixed costs, the Exchange incurs a fee when it 
utilizes Nasdaq Options Services LLC (``NOS''), a member of the 
Exchange and the Exchange's exclusive order router.\5\ Each time NOS 
routes an order to an away market, NOS is charged a clearing fee \6\ 
and, in the case of certain exchanges, a transaction fee is also 
charged in certain symbols, which fees are passed through to the 
Exchange. The Exchange currently recoups clearing and transaction 
charges incurred by the Exchange as well as certain other costs 
incurred by the Exchange when routing to away markets, such as 
administrative and technical costs associated with operating NOS, 
membership fees at away markets, Options Regulatory Fees (``ORFs'') and 
technical costs associated with routing options. The Exchange assesses 
the actual away market fee at the time that the order was entered into 
the Exchange's trading system. This transaction fee would be calculated 
on an order-by-order basis since different away markets charge 
different amounts.
---------------------------------------------------------------------------

    \5\ In May 2009, the Exchange adopted Rule 1080(m)(iii)(A) to 
establish NOS, a member of the Exchange, as the Exchange's exclusive 
order router. See Securities Exchange Act Release No. 59995 (May 28, 
2009), 74 FR 26750 (June 3, 2009) (SR-Phlx-2009-32). NOS is utilized 
by the Exchange's fully automated options trading system, PHLX 
XL[supreg].
    \6\ The Options Clearing Corporation (``OCC'') assesses $0.01 
per contract side.
---------------------------------------------------------------------------

    Today, a member organization qualifying for a Tier 2, 3 or 4 rebate 
in the Customer Rebate Program in Section B of the Pricing Schedule is 
entitled to receive a credit equal to the applicable Fixed Fee plus 
$0.05 per contract, unless the away market transaction fee is $0.00 or 
the away market pays a rebate, in which case the member organization is 
entitled to receive a credit equal to the applicable Fixed Fee. The 
Exchange proposes to amend the Routing Fees to state that a member 
organization that qualifies (1) for a Tier 2, 3, 4 or 5 rebate in the 
Customer Rebate Program in Section B of the Pricing Schedule; and (2) 
routes away more than 5,000 Customer contracts per day in a given month 
to an away market is entitled to receive a credit equal to the 
applicable Fixed Fee plus $0.05 per contract, unless the away market 
transaction fee is $0.00 or the away market pays a rebate, in which 
case the member organization is entitled to receive a credit equal to 
the applicable Fixed Fee.
    The Exchange recently added a new tier to the Customer Rebate 
Program.\7\ The Exchange desires to offer the credit to member 
organizations that qualify for a Tier 2, 3, 4 or 5 rebate in the 
Customer Rebate Program going forward. The Exchange added a second 
requirement which requires the member organization to route away more 
than 5,000 Customer contracts per day in a given month to receive the 
credit because the Exchange believes that the 5,000 threshold will 
reward member organizations that route a certain amount of Customer 
orders to the Exchange by providing them a credit in the event that 
those contracts are not executed at Phlx.\8\ The 5,000 threshold 
represents what the Exchange believes is a reasonable amount of 
Customer contracts to warrant the receipt of the credit toward fees. As 
a result of this added criteria, some member organizations that are 
currently receiving a credit may no longer receive a credit if they do 
not route away more than 5,000 Customer contracts per day in a given 
month. These member organizations would continue to qualify for a 
Customer rebate if they transacted the requisite amount of Customer 
orders on the Exchange as specified in the Customer Rebate Program. The 
credit only applies to orders routed away from the Exchange and would 
now only be offered to member organizations that qualify for a Tier 2, 
3, 4 or 5 rebate in the Customer Rebate Program and have more than 
5,000 Customer contracts routed to an away market per day in a given 
month.
---------------------------------------------------------------------------

    \7\ See SR-Phlx-2013-130 (not yet published).
    \8\ Certain Customer contracts which are executed on Phlx are 
entitled to the Customer Rebate Program rebates in Section B of the 
Pricing Schedule. Customer rebates are paid on Customer Rebate Tiers 
in Section B of the Pricing Schedule according to categories (A or 
B). The Customer Rebate Tiers are calculated by totaling Customer 
volume in Multiply Listed Options (including SPY) that are 
electronically-delivered and executed, except volume associated with 
electronic QCC Orders, as defined in Exchange Rule 1080(o) in a 
month.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that its proposal to amend its Pricing 
Schedule is consistent with Section 6(b) of the Act \9\ in general, and 
furthers the objectives of Section 6(b)(4) and (b)(5) of the Act \10\ 
in particular, in that it provides for the equitable allocation of 
reasonable dues, fees and other charges among members and issuers and 
other persons using any facility or system which Phlx operates or 
controls, and is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(4), (5).
---------------------------------------------------------------------------

    The Exchange believes that the addition of the criteria that a 
member organization must route more than 5,000 Customer contracts per 
day in a given month to an away market, in addition to qualifying for 
Tiers 2, 3, 4 and now 5, is reasonable because the Exchange is 
intending to provide a credit to member organizations that qualify for 
a Customer rebate and route away a certain amount of volume. The 
addition of Tier 5 reflects a recent amendment to the Customer Rebate 
Program. Today, all member organizations that qualify for a Customer 
rebate tier which pays a rebate are eligible for the credit. The 
requirement that a member organization qualify for a Tier 2, 3, 4 or 5 
Customer rebate should incentivize member organizations to continue to 
send Customer orders to Phlx by offering the credit in the event a 
certain amount of those orders are not filled on the Exchange and 
routed to an away market. By offering member organizations a credit 
toward the cost of routing to an away market with the additional volume 
requirements attached, the Exchange is seeking to encourage market 
participants to transact a greater number of Customer orders on Phlx 
which liquidity benefits all market participants. Customer liquidity 
benefits all market participants by providing more trading 
opportunities, which attracts Specialists and Market Makers. An 
increase in the activity of these market participants in turn 
facilitates tighter spreads, which may cause an additional 
corresponding increase in order flow from other market participants. In 
addition, the credit toward Customer Routing Fees is in addition to the 
Customer rebate received for the qualifying Customer Rebate Tier.
    The Exchange is now adding a new criteria, that all member 
organizations that qualify for a Customer rebate tier which pays a 
rebate are eligible for a credit provided the member organization also 
routes away more than 5,000 Customer contracts per day in a given month 
to an away market. The 5,000 Customer contracts represents a 
significant amount of volume to warrant a credit to reduce fees for 
member organizations that were unable to execute their Customer orders 
on the Exchange. It is important to note that when orders are routed to 
an away market they are routed based on price first.\11\ Further, 
market participants may

[[Page 2500]]

submit orders to the Exchange as ineligible for routing or ``DNR'' to 
avoid Routing Fees.\12\ The Exchange believes it is reasonable to apply 
the credit only when a member organization has routed away a certain 
number of Customer orders, in this case 5,000 Customer orders per day, 
particularly since the member may choose not to have their orders 
routed. Despite the fact that the additional criteria may prevent some 
member organizations that receive the credit today from receiving it in 
the future, the Exchange believes that this added incentive is 
reasonable because it would impact those members that are routing away 
a certain amount of Customer orders and incurring higher Routing Fees. 
Member organizations will continue to direct their Customer orders to 
Phlx in order to obtain the applicable Customer rebate offered to 
qualifying orders through the Customer Rebate Program. Only in the 
instance that those orders are not filled, and the member organization 
has not indicated that the orders should be returned, will those orders 
be routed to an away market. At the time the order is entered, the 
member organization submitting the order does not know if the order 
will be filled on Phlx or routed away. The Exchange believes that it is 
reasonable to credit member organizations that qualify for a Tier 2, 3, 
4 or 5 Customer rebate and that have more than 5,000 Customer contracts 
per day in a given month routed to an away market, because the credit 
will compensate those members for Routing Fees which are incurred when 
routing that quantity of Customer orders to an away market.
---------------------------------------------------------------------------

    \11\ PHLX XL will route orders to away markets where the 
Exchange's disseminated bid or offer is inferior to the national 
best bid (best offer) (``NBBO'') price. See Rule 1080(m). The PHLX 
XL II system will contemporaneously route an order marked as an 
Intermarket Sweep Order (``ISO'') to each away market disseminating 
prices better than the Exchange's price, for the lesser of: (a) The 
disseminated size of such away markets, or (b) the order size and, 
if order size remains after such routing, trade at the Exchange's 
disseminated bid or offer up to its disseminated size. If contracts 
still remain unexecuted after routing, they are posted on the book. 
Once on the book, should the order subsequently be locked or crossed 
by another market center, the PHLX XL II system will not route the 
order to the locking or crossing market center, with some exceptions 
noted in Rule 1080(m).
    \12\ See Rule 1066(h) (Certain Types of Orders Defined) and 
1080(b)(i)(A) (PHLX XL and PHLX XL II).
---------------------------------------------------------------------------

    The Exchange believes that the addition of Tier 5 to the first 
qualifying criteria is equitable and not unfairly discriminatory 
because the Exchange intends to continue to offer the credit to member 
organizations that are sending a certain amount of Customer volume to 
the Exchange which qualifies for a Customer rebate. Any market 
participant that transacts Customer orders may qualify for a Customer 
rebate provided they transact a qualifying number of Customer 
contracts. Further, the Exchange believes that the addition of the 
second criteria that a member organization must route more than 5,000 
Customer contracts per day in a given month to an away market is 
equitable and not unfairly discriminatory because the Exchange will 
apply the second criteria (more than 5,000 Customer contracts per day 
routed to an away market) to all market participants in a uniform 
manner.

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. The Customer Rebate Program in 
Section B of the Pricing Schedule seeks to encourage Customer order 
flow to be directed to the Exchange, which order flow benefits all 
market participants. All market participants are eligible to qualify 
for a Customer Rebate. Further, the Exchange will continue to offer the 
credit to all member organizations that qualify for certain Customer 
rebates (Tiers 2, 3, 4 or 5) and route away a certain amount of volume. 
The Exchange believes that offering member organizations that qualify 
for a Tier 2, 3, 4 or 5 Customer rebate, and that route more than 5,000 
Customer contracts per day in a month to an away market, a credit does 
not impose an undue burden on competition, but rather promotes 
competition on the Exchange and encourages members to direct Customer 
orders to Phlx.
    The Exchange does not believes that the added criteria that member 
organizations that route more than 5,000 Customer contracts to an away 
market receive the credit will impose a burden on competition because 
member organizations will continue to direct their Customer orders to 
Phlx in order to obtain the applicable Customer rebate offered to 
qualifying orders through the Customer Rebate Program. If those 
Customer orders are not filled and the member organization has not 
indicated that the orders should be returned, the Customer orders will 
be routed to an away market and may be applicable for the credit. The 
member organization that submits those Customer orders to the Exchange 
is unaware at that time the order is submitted if the order will be 
filled on Phlx or routed. For this reason, the Exchange does not 
believe that the added criteria will impose an undue burden on 
competition.
    Market participants may submit orders to the Exchange as ineligible 
for routing or ``DNR'' to avoid Routing Fees.\13\ It is important to 
note that when orders are routed to an away market they are routed 
based on price first.\14\ Today, other options exchanges also assess 
similar fees to recoup costs incurred when routing orders to away 
markets.\15\
---------------------------------------------------------------------------

    \13\ See note 12.
    \14\ See note 11.
    \15\ See Chicago Board of Options Exchange, Incorporated's Fee 
Schedule. See NYSE Amex's Fee Schedule.
---------------------------------------------------------------------------

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act.\16\ At any time within 60 days of the 
filing of the proposed rule change, the Commission summarily may 
temporarily suspend such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78s(b)(3)(A)(ii).
---------------------------------------------------------------------------

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-2013-125 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-Phlx-2013-125. This file

[[Page 2501]]

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 such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-Phlx-2013-125, and should be 
submitted on or before February 4, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
Kevin M. O'Neill,
Deputy Secretary.
---------------------------------------------------------------------------

    \17\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

[FR Doc. 2014-00466 Filed 1-13-14; 8:45 am]
BILLING CODE 8011-01-P