Document ID: SEC-2014-2021-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2014-12-02T05:00Z

[Federal Register Volume 79, Number 231 (Tuesday, December 2, 2014)]
[Notices]
[Pages 71485-71488]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-28319]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73687; File No. SR-Phlx-2014-73]

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

November 25, 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 November 12, 2014, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I, II, 
and III, below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.

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[[Page 71486]]

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

    The Exchange proposes to amend Section VI of the Exchange's Fee 
Schedule pertaining to the Active SQF Port Fee.
    While the changes proposed herein are effective upon filing, the 
Exchange has designated that the amendments be operative on December 1, 
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 Exchange proposes to amend the Active SQF Port Fee in Section 
VII of the Exchange's Fee Schedule, titled ``Access Service, 
Cancellation, Membership, Regulatory and Other Member Fees,'' [sic] in 
order that the Exchange may provide an equal opportunity to Specialists 
and Market Makers to access the Specialized Quote Feed (``SQF'') data 
at a lower cost. SQF is an interface that enables specialists, 
Streaming Quote Traders (``SQTs'') \3\ and Remote Streaming Quote 
Traders (``RSQTs'') \4\ to connect and send quotes into Phlx XL.\5\ 
Active SQF ports are ports that receive inbound quotes at any time 
within that month.\6\
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    \3\ An SQT is defined in Exchange Rule 1014(b)(ii)(A) as a 
Registered Options Trader (``ROT'') who has received permission from 
the Exchange to generate and submit option quotations electronically 
in options to which such SQT is assigned.
    \4\ An RSQT is defined in Exchange Rule in 1014(b)(ii)(B) as an 
ROT that is a member or member organization with no physical trading 
floor presence who has received permission from the Exchange to 
generate and submit option quotations electronically in options to 
which such RSQT has been assigned. An RSQT may only submit such 
quotations electronically from off the floor of the Exchange.
    \5\ See Securities Exchange Act Release No. 63034 (October 4, 
2010), 75 FR 62441 (October 8, 2010) (SR-Phlx-2010-124).
    \6\ The current Active SQF Ports allows member organizations to 
access, information such as execution reports, execution report 
messages, auction notifications, and administrative data through a 
single feed. Other data that is available includes: (1) Options 
Auction Notifications (e.g., opening imbalance, market exhaust, PIXL 
or other information); (2) Options Symbol Directory Messages; (3) 
System Event Messages (e.g., start of messages, start of system 
hours, start of quoting, start of opening); (4) Complex Order 
Strategy Auction Notifications (COLA); (5) Complex Order Strategy 
messages; (6) Option Trading Action Messages (e.g., trading halts, 
resumption of trading); and (7) Complex Strategy Trading Action 
Message (e.g., trading halts, resumption of trading).
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    The Exchange is currently undergoing a technology refresh on the 
Phlx trading system. State-of-the-art hardware and software 
architecture will be deployed in order to achieve a more efficient and 
more robust infrastructure to support the growing needs of market 
participants. Today, the Exchange offers Active SQF Ports in sets of 
four to accommodate the connections necessary to[sic] the match 
engine.\7\ The refresh will require at least one port to connect to the 
match engine as compared to a set of four ports. The functionality will 
not change as a result of the refresh. The Exchange anticipates that 
Specialists and Market Makers will benefit from the efficiency of the 
service that will be available to them as a result of the refresh. 
While Specialists and Market Makers will be required to make network 
and other technical changes in order to connect to the Phlx system via 
SQF, the Exchange believes that members costs will decline overall as a 
result of the more efficient connectivity offered by the refresh. The 
increased efficiency in connectivity will not require the same 
infrastructure on the part of members to connect to the Exchange. 
Members will not need to have the same level of connectivity after the 
conversion to the new ports and overall this will reduce cost.
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    \7\ These four connections each contain various alpha ranges and 
therefore four ports are required to access all options.
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    The Exchange intends to provide Specialists and Market Makers with 
new SQF ports for connectivity and functionality testing so that 
Specialists and Market Makers may migrate from the old to the new 
Active SQF Ports over a reasonable period of time.\8\ For purposes of 
this filing the current ports will be referred to as ``current ports'' 
and the ports available after the refresh will be referred to as ``new 
ports.'' Current ports will be eliminated after the refresh is complete 
and only new ports will be utilized thereafter.
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    \8\ The Exchange will migrate on a symbol by symbol basis 
thereby requiring the use of both new and old Active SQF Ports for a 
period of time. The Commission notes that the exchange has 
represented that the rollout will take place over an 8 week period. 
See Email from Angela Dunn, Associate General Counsel, Phlx, to 
Tyler Raimo, Senior Special Counsel, Commission, dated November 21, 
2014.
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    Today, the Exchange assesses member organizations an Active SQF 
Port Fee based on the number of active ports. For 0-4 ports, the member 
organization is assessed $350, for 5-18 ports the member organization 
is assessed $1,350 and for 19 or more ports the member organization is 
assessed $2,500. Active SQF Port Fees are capped at $41,000 per month.
    The Exchange proposes to assess Specialists and Market Makers, who 
are currently assessed the Active SQF Port Fee because they have ports 
today, a fee for their current ports which reflects the average of fees 
assessed to them for the months of August, September and October 2014 
(``Fixed Fee''). The Active SQF Fixed Fee will be assessed on a monthly 
basis to these Specialists and Market Makers, for their current ports, 
from December 1, 2014 through March 31, 2015.\9\ Any new ports utilized 
by Specialists or Market Makers, that are being assessed the Fixed Fee, 
will not be subject to any additional fees through March 31, 2015 
beyond the Fixed Fee. The Exchange proposes to not assess Specialists 
or Market Makers for new ports assigned in connection with XL refresh 
during the time period from December 1, 2014 through March 31, 2015.
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    \9\ The Exchange intends to notify each Phlx member firm 
impacted by this proposal in writing, either via email or letter, of 
the amount of their Fixed Fee.
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    All Specialists and Market Makers would be subject to the following 
Active SQF Port Fees as of April 1, 2015:

------------------------------------------------------------------------
                                                            Monthly fee
                Number of active SQF port                    per port
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1.......................................................          $2,500
2-6.....................................................           4,000
7 and over..............................................          15,000
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    A Specialist or Market Maker who was not subject to Fixed Fees 
prior to December 1, 2014, because that Specialist or Marker Maker did 
not have Active SQF Ports, will be assessed the above Active SQF Port 
Fees as of December 1, 2014.\10\
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    \10\ The Exchange does not anticipate any existing or 
prospective members seeking to become Specialists or Market Makers 
to utilize the current system for less than two months given the 
cost of technology and development resources required to connect to 
an exchange.

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[[Page 71487]]

    Finally, the Exchange proposes to increase the Active SQF fee cap 
from $41,000 to $42,000 a month as of April 1, 2015.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\11\ in general, and with 
Section 6(b)(4) and 6(b)(5) of the Act,\12\ 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 the Exchange operates or controls, and is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers. The concept of a fixed fee is not novel. A fixed 
monthly fee was previously adopted in connection with a specialist unit 
fee on Phlx.\13\
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    \11\ 15 U.S.C. 78f.
    \12\ 15 U.S.C. 78f(b)(4) and (5).
    \13\ See Securities Exchange Act Release No. 48459 (September 8, 
2003), 68 FR 54034 (September 15, 2003) (SR-Phlx-2003-61). This 
proposal offered specialists the ability to pay a fixed monthly fee 
which was computed by taking the equity options and index options 
volume in May and June 2003 and multiplying that volume, for the 
specific specialist, by the specialist transaction fee in effect for 
equity and index options and adding the total of the charges for 
that period. In order to qualify for the option of paying a fixed 
fee, the specialist unit must have been trading an equity or index 
option book on the Phlx trading floor in their capacity as a 
specialist unit with Phlx equity option or index option transactions 
in at least one equity option or index option book, for at least one 
year from September 1, 2002.
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    The Exchange believes it is reasonable to allow Specialists and 
Market Makers to utilize new ports at no cost for a period of time to 
transition their current SQF ports to the new ports that will be 
offered as a result of the technology refresh. In order to ease the 
transition from the current ports to new ports, Specialists and Market 
Makers would be given an extended period to test functionality and 
connectivity and resolve any issues that may arise during the testing 
phase with the new ports. Therefore, pursuant to this proposal, new 
ports will be offered at no cost to those Specialists and Market Makers 
that currently pay Active SQF Fees through March 31, 2015 beyond the 
Fixed Fee. Also, Specialists and Market Maker will be able to continue 
to utilize their existing SQF ports in the interim to continue to 
conduct their business at a fixed cost. The Exchange believes that this 
will allow Specialists and Market Makers to have flexibility when 
testing the new ports as they will not be limited in number by cost.
    The Exchange believes it is equitable and not unfairly 
discriminatory to allow Specialists and Market Makers to utilize new 
ports at no cost because the Exchange is permitting all current 
Specialists and Market Makers, who will be paying the Active SQF Port 
Fixed Fee, the opportunity to utilize the new ports at no costs.
    The Exchange believes that averaging the months of August, 
September and October 2014 for the Fixed Active SQF Port Fee that will 
be assessed from December 1, 2014 to March 31, 2015 is reasonable 
because the Exchange desires to offer Specialists and Market Makers who 
currently have ports some certainty with respect to their costs through 
the transition. The Exchange believes that utilizing the months August, 
September and October 2014 to determine the Fixed Fee is reasonable 
because it should reflect an accurate representation of the number of 
ports typically utilized by that particular Specialist and Market Maker 
for Active SQF Ports. The three month window reflects the typical 
pattern of usage for the Specialist or Market Maker. Also, these 
Specialists and Market Makers would not be assessed any fees to utilize 
as many new ports as they require to test in the new system.
    The Exchange believes that averaging the months of August, 
September and October 2014 for the Fixed Active SQF Port Fee that will 
be assessed from December 1, 2014 to March 31, 2015 is equitable and 
not unfairly discriminatory because the Exchange will assess all 
current users of Active SQF Ports a Fixed Fee based on the same 
criteria.
    The Exchange believes that it is reasonable to assess the increased 
port fees as of April 1, 2015 of $2,500 for 1 port, $4,000 for 2-6 
ports and $15,000 for 7 or more ports. The technology refresh will 
increase the efficiency with which members can connect to the Phlx 
system. As a result of the refresh, members would not be required to 
utilize the same number of ports as they do today to connect to the 
Phlx system and therefore this should reduce the number of ports 
required and lower costs.\14\ The refresh will require at least one 
port to connect to the match engine as compared to a set of four ports. 
The functionality will not change as a result of the refresh. The 
Exchange anticipates that Specialists and Market Makers will benefit 
from the efficiency of the service that will be available to them as a 
result of the refresh. While Specialists and Market Makers will be 
required to make network and other technical changes in order to 
connect to the Phlx system via SQF, the Exchange believes that members 
costs will decline overall as a result of the more efficient 
connectivity offered by the refresh. The increased efficiency in 
connectivity will not require the same infrastructure on the part of 
members to connect to the Exchange. Members will not need to have the 
same level of connectivity after the conversion to the new ports and 
overall this will reduce cost.
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    \14\ The member organization may have some technological reasons 
for desiring the same number of ports based on their own technical 
infrastructure but not because of Phlx's system structure.
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    The Exchange believes it is equitable and not unfairly 
discriminatory to increase the port fees as of April 1, 2015 because 
all Specialists and Market Makers would be subject to the same fees.
    The Exchange believes that assessing new Specialists and Market 
Makers the new Active SQF Port fees as of December 1, 2014 if they 
currently have no Active SQF Ports is reasonable because these 
Specialists and Market Makers would not be required to maintain two 
sets of ports during the transition.\15\ Existing Specialists and 
Market Makers will be required to maintain old as well as new ports 
during portions of the migration. These Specialists and Market Makers 
would be able to commence utilizing the new ports for testing. As 
previously explained, the technology refresh will increase the 
efficiency with which members can connect to the Phlx system. As a 
result of the refresh, members would not be required to utilize the 
same number of ports as they do today to connect to the Phlx system and 
therefore this should reduce the number of ports required and lower 
costs.
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    \15\ Currently all Specialists and Market Makers are utilizing 
the current ports. If during the end of October 2014 or November 
2014 a new Specialist or Market Maker desired ports they could still 
obtain the current ports. After December 1, 2014, only the new ports 
would be offered to a new Specialist or Market Maker.
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    The Exchange believes that assessing Specialists and Market Makers 
the new Active SQF Port fees if they currently have no Active SQF Ports 
is equitable and not unfairly discriminatory because these Specialists 
and Market Makers would not be paying an Active SQF Fee for the current 
ports. All Specialists and Market Makers would be paying a fee to 
utilize Active SQF Port Fees.
    The Exchange believes that increasing the Active Port Fee cap from 
$41,000 to $42,000 as of April 1, 2015 is reasonable because the 
Exchange is increasing the pricing on new ports. The increase in the 
cost of the ports aligns with the increased fee cap.

[[Page 71488]]

    The Exchange believes that increasing the Active Port Fee cap from 
$41,000 to $42,000 as of April 1, 2015 is equitable and not unfairly 
discriminatory because the Exchange will apply the fee cap to all 
Specialists and Market Makers uniformly at that time.

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

    The Exchange does not believe that the proposed rule change will 
impose an undue burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange believes that 
offering Specialists and Market Makers the opportunity to utilize 
certain Active SQF ports, during this transition with XL, at no cost 
will ensure the transition is done smoothly. Specialists and Market 
Makers will continue to be assessed the Active SQF Port Fees for 
current ports at a Fixed Fee that is representative of their typical 
usage. The Exchange would allow these market participants to utilize 
new ports at no cost without limit.
    Finally, increasing the Active SQF Fee cap from $41,000 to $42,000 
as of April 1, 2015 will not impose an undue burden on competition 
because the cap would be applied uniformly to all market participants.
    The Exchange operates in a highly competitive market, comprised of 
twelve options exchanges, in which market participants can easily and 
readily direct order flow to competing venues if they deem fee levels 
at a particular venue to be excessive or rebates to be inadequate. 
Accordingly, the fees that are assessed and the rebates paid by the 
Exchange described in the above proposal are influenced by these robust 
market forces and therefore must remain competitive with fees charged 
and rebates paid by other venues and therefore must continue to be 
reasonable and equitably allocated to those members that opt to direct 
orders to the Exchange rather than competing venues.

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.
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    \16\ 15 U.S.C. 78s(b)(3)(A)(ii).
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IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2014-73 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-2014-73. 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 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-2014-73, and should be 
submitted on or before December 23, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-28319 Filed 12-1-14; 8:45 am]
BILLING CODE 8011-01-P