[Federal Register Volume 76, Number 173 (Wednesday, September 7, 2011)]
[Notices]
[Pages 55453-55455]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-22725]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65228; File No. SR-Phlx-2011-119]


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

August 30, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\, and Rule 19b-4 \2\ thereunder, notice is hereby given 
that, on August 18, 2011, 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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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to establish a fee cap on equity options 
transactions on certain reversals and conversion strategies. The text 
of the proposed rule change is available on the Exchange's Web site at 
http://nasdaqtrader.com/micro.aspx?id=PHLXRulefilings, at the principal 
office of the Exchange, at the Commission's Public Reference Room, and 
on the Commission's Web site at www.sec.gov.

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 the proposed rule change is to incentivize market 
participants by capping option transaction fees related to reversal and 
conversion strategies to encourage trading on the Exchange. 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 are established by combining a long position in the 
underlying security with a long put and a short call position that 
shares the same strike and expiration.
    The Exchange proposes to cap Specialist,\3\ Registered Option 
Trader (``ROT''),\4\ SQT,\5\ RSQT,\6\ Professional,\7\ Broker-Dealer 
and Firm option transaction fees in Multiply Listed Options \8\ at $500 
per day for reversal and conversion strategies which are executed on 
the same trading day in the same options class (``Reversal and 
Conversion Cap''). The Reversal and Conversion Cap will only apply to 
executions occurring on either of the two days preceding the standard 
options expiration date, which is typically the third Thursday and 
Friday of every

[[Page 55454]]

month.\9\ The Exchange proposes to add language to Section II of the 
Exchange's Fee Schedule entitled, Equity Options Fees, to describe the 
Reversal and Conversion Cap and define reversals and conversions.
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    \3\ A Specialist is an Exchange member who is registered as an 
options specialist pursuant to Rule 1020(a).
    \4\ A Registered Options Trader (``ROT'') includes a SQT, a RSQT 
and a Non-SQT ROT, which by definition is neither a SQT or a RSQT. A 
ROT is defined in Exchange Rule 1014(b) as a regular member or a 
foreign currency options participant of the Exchange located on the 
trading floor who has received permission from the Exchange to trade 
in options for his own account. See Exchange Rule 1014 (b)(i) and 
(ii).
    \5\ An SQT is defined in Exchange Rule 1014(b)(ii)(A) as an ROT 
who has received permission from the Exchange to generate and submit 
option quotations electronically in options to which such SQT is 
assigned.
    \6\ An RSQT is defined 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.
    \7\ The Exchange defines a ``professional'' as any person or 
entity that (i) is not a broker or dealer in securities, and (ii) 
places more than 390 orders in listed options per day on average 
during a calendar month for its own beneficial account(s) 
(hereinafter ``Professional'').
    \8\ For purposes of this filing, a Multiply Listed security 
means an option that is listed on more than one exchange.
    \9\ When the standard expiration date is also an Exchange 
holiday, the trading dates will be brought forward by one day.
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    For example, the standard options expiration date for September 
2011 is September 17, 2011. Therefore, on the two preceding days, 
Thursday, September 15, 2011, and Friday, September 16, 2011, 
Specialists, ROTs, SQTs, RSQTs, Professionals, Broker-Dealers and Firms 
are eligible for the Reversal and Conversion Cap.
    In order to capture the necessary information electronically, the 
Exchange requires members to designate on the trade ticket whether the 
trade involves a dividend, merger, short stock interest or reversal and 
conversion strategy. Specifically, members would be required to enter 
the proper code, ``Z4'', on the trading ticket and into the system, or 
directly into the Floor Broker Management System (``FBMS'').\10\
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    \10\ FBMS is designed to enable Floor Brokers and/or their 
employees to enter, route and report transactions stemming from 
options orders received on the Exchange. FBMS also is designed to 
establish an electronic audit trail for options orders represented 
and executed by Floor Brokers on the Exchange, such that the audit 
trail provides an accurate, time-sequenced record of electronic and 
other orders, quotations and transactions on the Exchange, beginning 
with the receipt of an order by the Exchange, and further 
documenting the life of the order through the process of execution, 
partial execution, or cancellation of that order. See Exchange Rule 
1080, Commentary .06.
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    The Exchange also proposes to make an amendment to Section VII of 
the Fee Schedule entitled, ``Options Floor Broker Subsidy.'' The 
Exchange currently excludes dividend, merger and short stock interest 
strategies from the eligible contract computations in computing the 
monthly eligible contracts for the Options Floor Broker Subsidy 
(``Subsidy'').\11\ The Exchange proposes to also exclude those 
executions subject to the Reversal and Conversion Cap from the Subsidy. 
The Exchange proposes to amend Section VII to add language to indicate 
that executions subject to the Reversal and Conversion Cap will not be 
included in the eligible contract computations.
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    \11\ The Exchange currently pays an Options Floor Broker Subsidy 
(``Subsidy'') to member organizations with Exchange registered floor 
brokers that enter eligible contracts into the Exchange's FBMS. The 
Subsidy is paid based on the contract volume on Customer-to-non-
Customer as well as non-Customer-to-non-Customer transactions for 
that month. Only the volume from orders entered by floor brokers 
into FBMS and subsequently executed on the Exchange qualifies.
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    The Exchange also proposes to amend the applicability of the 
dividend,\12\ merger \13\ and short stock interest \14\ strategies in 
Section II of the Exchange's Fee Schedule. Currently, Specialist, ROT, 
SQT and RSQT, Firm and Broker-Dealer equity option transaction charges 
are capped at $1,000 for dividend, merger and short stock interest 
strategies executed on the same trading day in the same options class 
when such members are trading in their own proprietary accounts.\15\ 
The Exchange proposes to add Professionals to the list of market 
participants that may cap their options transaction charges for 
dividend, merger and short stock interest strategies.
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    \12\ 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.
    \13\ 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.
    \14\ 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.
    \15\ Equity option transaction charges for dividend, merger and 
short stock interest strategies combined are further capped at the 
greater of $10,000 per member or $25,000 per member organization per 
month when such members are trading in their own proprietary 
accounts.
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2. Statutory Basis
    The Exchange believes that its proposal to amend its Fee Schedule 
is consistent with Section 6(b) of the Act \16\ in general, and 
furthers the objectives of Section 6(b)(4) of the Act \17\ in 
particular, in that it is an equitable allocation of reasonable fees 
and other charges among Exchange members and other persons using its 
facilities.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that the proposed Reversal and Conversion Cap 
is reasonable because the Exchange is proposing to offer all members an 
opportunity to reduce option transaction fees in Multiply Listed 
options for reversals and conversions. Customers are not subject to the 
Reversal and Conversion Cap because they do not pay option transaction 
charges for reversal and conversion strategies. The Exchange also 
believes that this proposal is equitable and not unfairly 
discriminatory because the Exchange is offering all members, except for 
Customers, the same opportunity to cap their option transaction fees in 
Multiply Listed Options for two days every month. Also, this proposal 
is similar in nature to caps on other exchanges, namely NYSE Arca, Inc. 
(``NYSEArca''),\18\ NYSE Amex, Inc. (``NYSE Amex'') \19\ and the 
Chicago Board Options Exchange, Incorporated(``CBOE'') \20\ for 
reversals and conversions.
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    \18\ See NYSE Arca's Fee Schedule.
    \19\ See NYSE Amex's Fee Schedule.
    \20\ See CBOE's Fees Schedule.
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    The Exchange also believes that its proposal to allow Professionals 
to cap option transaction charges for dividend, merger and short stock 
interest strategies executed on the same trading day in the same 
options class when such members are trading in their own proprietary 
accounts is reasonable because all other market participants, other 
than Customers, are able to cap these fees. In addition, the Exchange 
believes that adding Professionals to the list of market participants 
that may cap dividend, merger and short stock interest strategies, is 
equitable and not unfairly discriminatory because the Exchange is 
offering all members, except for Customers, the opportunity to cap 
their transaction fees for dividend, merger and short stock interest 
strategies. Customers do not pay option transaction charges for 
dividend, merger or short stock interest strategies.
    The Exchange believes that amending Section VII to indicate that 
executions subject to the Reversal and Conversion Cap will not be 
included in the eligible contract computations of the Subsidy is 
reasonable since the Exchange currently excludes other strategies that 
are the subject of a cap. The recipients of the cap on strategies 
already receive a benefit by capping their options transaction charges 
and therefore the Exchange believes it is reasonable to exclude those 
strategies from the Subsidy. Additionally, the Exchange believes that 
excluding those executions that are subject to the Reversal and 
Conversion Cap from the Subsidy computation is equitable and not 
unfairly discriminatory because the exclusion will be applied evenly 
for all member organizations with Exchange registered floor brokers.

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.

[[Page 55455]]

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.\21\ 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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    \21\ 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 e-mail to [email protected]. Please include 
File Number SR-Phlx-2011-119 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-2011-119. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for 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 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-Phlx-2011-119 and should be 
submitted on or before September 28, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-22725 Filed 9-6-11; 8:45 am]
BILLING CODE 8011-01-P