[Federal Register Volume 77, Number 242 (Monday, December 17, 2012)]
[Notices]
[Pages 74715-74718]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-30323]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68406; File No. SR-Phlx-2012-138]


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

December 11, 2012.
    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 3, 2012, 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 amend the fee caps applicable to certain 
strategies on Multiply Listed Options in Section II, entitled ``Equity 
Options Fees.'' \3\ The Exchange also proposes to apply the fee caps to 
transactions on certain reversal \4\ and conversion \5\ strategies.
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    \3\ Section II Equity Options fees include options overlying 
equities, ETFs, ETNs and indexes which are Multiply Listed.
    \4\ 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.
    \5\ Conversions are established by combining a long position in 
the underlying stock with a long put and a short call position that 
share the same strike and expiration.
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nasdaqtrader.com/micro.aspx?id=PHLXfilings, 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

[[Page 74716]]

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 amend the fee caps 
relating to dividend,\6\ merger \7\ and short stock interest \8\ 
strategies in Section II of the Pricing Schedule.\9\ The Exchange also 
proposes to apply the fee caps to reversal and conversion strategies in 
Section II of the Pricing Schedule and modify the application of 
reversal and conversion strategies in other parts of the Pricing 
Schedule. The Exchange believes the amendments would continue to 
incentivize market participants to trade on the Exchange by capping 
floor option transaction charges related to various strategies.
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    \6\ 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.
    \7\ 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.
    \8\ 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.
    \9\ While the fee caps are noted in Section II of the Pricing 
Schedule, the caps apply to all Multiply Listed Options in Sections 
I and II.
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    Today, Specialist,\10\ Market Maker,\11\ Professional,\12\ Firm and 
Broker-Dealer floor 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. In addition, floor 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 when such members are trading 
in their own proprietary account.
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    \10\ A ``Specialist'' is an Exchange member who is registered as 
an options specialist pursuant to Rule 1020(a).
    \11\ A ``Market Maker'' includes Registered Options Traders 
(Rule 1014(b)(i) and (ii)), which includes Streaming Quote Traders 
(see Rule 1014(b)(ii)(A)) and Remote Streaming Quote Traders (see 
Rule 1014(b)(ii)(B)).
    \12\ The term ``Professional'' is a 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). See Rule 1000(b)(14).
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    The Exchange proposes to increase the cap for dividend, merger and 
short stock interest strategies from $1,000 to $1,250 provided the 
strategy is executed on the same trading day in the same options class 
when such members are trading in their own proprietary account. 
Further, the Exchange proposes to adopt a cap for floor options 
transaction charges for reversal and conversion strategies of $750, 
provided the reversal and conversion strategy is executed on the same 
trading day in the same options class when such members are trading in 
their own proprietary account, similar to dividend, merger and short 
stock interest strategies. The Exchange also proposes to increase the 
cap for floor equity options transaction charges for dividend, merger 
and short stock interest strategies combined from the greater of 
$10,000 per member or $25,000 per member organization per month to 
simply $35,000 per member organization per month provided that such 
members are trading in their own proprietary account.\13\ The Exchange 
proposes to apply this cap of $35,000 per member organization per month 
to reversal and conversion strategies as well and term the cap as the 
``Monthly Strategy Cap.''\14\
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    \13\ The requirement that such members trade in their own 
proprietary account would not be amended by this proposal.
    \14\ Reversal and conversion strategies executed on the floor 
will be assessed the floor options transaction charge of $0.25 per 
contract. Floor QCC Orders are defined in 1064(e). See Section II of 
the Pricing Schedule.
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    The Exchange proposes to define reversal and conversion strategies 
within Section II of the Pricing Schedule as follows: ``Reversals and 
conversions 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.''
    Further, the Exchange proposes to include Firm reversal and 
conversion transactions in the Monthly Firm Fee Cap \15\ and note this 
in Section II of the Pricing Schedule. Because of the inclusion of the 
Firm reversal and conversion transactions in the Monthly Firm Fee Cap, 
the Exchange also proposes to exclude Firm reversal and conversion 
transactions from the Monthly Strategy Cap. The reversal and conversion 
strategy cap of $750 would apply to Firms, as proposed herein, as it 
applies to other market participants. The Exchange also proposes to 
note this exception to the Monthly Strategy Cap in Section II of the 
Pricing Schedule.
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    \15\ Firms are subject to a maximum fee of $75,000 (``Monthly 
Firm Fee Cap''). Firm floor option transaction charges and QCC 
Transaction Fees, as defined in this section above, in the 
aggregate, for one billing month will not exceed the Monthly Firm 
Fee Cap per member organization when such members are trading in 
their own proprietary account.
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    The Exchange proposes to exclude reversal and conversion strategy 
transactions from the $0.07 per side Service Fee which is applicable 
once a Specialist and Market Maker has reached the Monthly Market Maker 
Cap.\16\ The Exchange proposes to note in Section II of the Pricing 
Schedule that the $0.07 per side Service Fee ``* * *will apply to every 
contract side of the QCC Order and Floor QCC Order after a Specialist 
or Market Maker has reached the Monthly Market Maker Cap, except for 
reversal and conversion strategies executed via QCC.'' Similarly, the 
Exchange proposes to exclude reversal and conversion strategy 
transactions from the $0.01 per side Service Fee which is applicable 
once a Firm has reached the Monthly Firm Fee Cap.\17\ The Exchange 
proposes to note in Section II of the Pricing Schedule that the $0.01 
per side Service Fee ``* * *will apply once a Firm has reached the 
Monthly Firm Fee Cap, except for reversal and conversion strategies 
executed via QCC.''
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    \16\ Specialists and Market Makers are subject to a ``Monthly 
Market Maker Cap'' of $550,000 for: (i) Equity option transaction 
fees; (ii) QCC Transaction Fees (as defined in Exchange Rule 1080(o) 
and Floor QCC Orders, as defined in 1064(e)); and (iii) fees related 
to an order or quote that is contra to a PIXL Order or specifically 
responding to a PIXL auction. For QCC Orders as defined in Exchange 
Rule 1080(o), and Floor QCC Orders, as defined in 1064(e), a Service 
Fee of $0.07 per side will apply once a Specialist and Market Maker 
has reached the Monthly Market Maker Cap.
    \17\ Firms are subject to a maximum fee of $75,000 (``Monthly 
Firm Fee Cap''). Firm floor option transaction charges and QCC 
Transaction Fees, as defined in this section above, in the 
aggregate, for one billing month will not exceed the Monthly Firm 
Fee Cap per member organization when such members are trading in 
their own proprietary account. For QCC Orders as defined in Exchange 
Rule 1080(o), and Floor QCC Orders, as defined in 1064(e), a Service 
Fee of $0.01 per side will apply once a Firm has reached the Monthly 
Firm Fee Cap.
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    For purposes of clarity, the Exchange proposes to add the word 
``floor'' when describing the fee caps to indicate that the cap is only 
applicable to transactions which originated from the Exchange floor. 
This is not a change to the Pricing Schedule but rather a 
clarification. In addition, the Exchange proposes to amend the 
applicability of the fees caps by further specifying that in order to 
qualify for a fee cap, the buy

[[Page 74717]]

and sell side of a transaction must originate on the Exchange floor. 
Today, the Exchange does not restrict the buy and sell sides to floor 
transactions. This proposal would require that the cap apply to floor 
options transactions charges if both the buy and sell sides originated 
on the Exchange floor to receive the benefit of the fee cap. The 
Exchange is proposing to add this language to Section II of the Pricing 
Schedule.
    For purposes of clarity, the Exchange also proposes to make a 
technical correction to Section II of the Pricing Schedule to remove a 
reference the term ``Reversal and Conversion Cap'' and replace it with 
``reversal and conversion strategy.'' The Exchange also proposes to 
substitute the word ``or'' instead of ``and'' to further clarify text 
related to the Monthly Market Maker Cap. The Exchange previously 
eliminated a former Reversal and Conversion Cap and inadvertently did 
not also eliminate a reference to this defined terminology from a prior 
rule filing. The Exchange proposes to remove the defined term at this 
time and utilize the term ``reversal and conversion strategy.'' The 
Exchange also proposes to make a technical amendment to substitute the 
term ``equity options transaction fees'' with ``options transaction 
charges'' so that the terminology is consistent throughout Section II 
of the Pricing Schedule. Finally, the Exchange proposes to add the term 
``Multiply Listed Options'' in Section II for clarity to indicate the 
strategies apply to all Multiply Listed Options.
2. Statutory Basis
    The Exchange believes that its proposal to amend its Pricing 
Schedule is consistent with Section 6(b) of the Act \18\ in general, 
and furthers the objectives of Section 6(b)(4) of the Act \19\ 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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    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(4).
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    The Exchange's proposal to increase the fee cap on floor option 
transaction charges for dividend, merger and short stock interest 
strategies from $1,000 to $1,250 per month, provided the strategy is 
executed on the same trading day in the same options class when such 
members are trading in their own proprietary account, is reasonable 
because the Exchange seeks to incentivize members to transact a greater 
number of strategies on the Exchange to benefit from the fee cap. Also, 
this proposal is similar in nature to caps on other exchanges, namely 
NYSE Arca, Inc. (``NYSE Arca''),\20\ NYSE Amex, Inc. (``NYSE Amex'') 
\21\ and the Chicago Board Options Exchange, Incorporated (``CBOE'') 
\22\ for strategies. The Exchange also believes that the increased fee 
cap is equitable and not unfairly discriminatory because the Exchange 
is offering all members, except for Customers,\23\ the same opportunity 
to cap their floor option transaction charges in Multiply Listed 
Options.
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    \20\ See NYSE Arca General Options and Trading Permit (OTP) 
Fees. 
    \21\ See NYSE Amex Options Fee Schedule.
    \22\ See CBOE's Fees Schedule.
    \23\ Customers are not assessed options transaction charges in 
Section II of the Pricing Schedule.
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    The Exchange believes that its proposal to adopt a $750 per month 
fee cap on floor options transaction charges for reversal and 
conversion strategies, provided the reversal and conversion strategy is 
executed on the same trading day in the same options class when such 
members are trading in their own proprietary accounts, is reasonable 
because the Exchange seeks to incentivize members to transact a greater 
number of strategies on the Exchange to benefit from the fee cap. Also, 
this proposal is similar to reversal and conversion fee caps on other 
exchanges, namely NYSE Arca,\24\ NYSE Amex \25\ and CBOE.\26\ The 
Exchange also believes that the adoption of the fee cap is equitable 
and not unfairly discriminatory because the Exchange would offer all 
members, except for Customers,\27\ the same opportunity to cap floor 
option transaction charges in Multiply Listed Options.
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    \24\ See NYSE Arca General Options and Trading Permit (OTP) 
Fees. 
    \25\ See NYSE Amex Options Fee Schedule.
    \26\ See CBOE's Fees Schedule.
    \27\ Customers are not assessed options transaction charges in 
Section II of the Pricing Schedule.
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    The Exchange believes its proposal to amend and increase fee caps 
for floor options transaction charges for dividend, merger and short 
stock interest strategies and adopt the cap for reversal and conversion 
strategies of $35,000 per member organization per month, provided that 
such members are trading in their own proprietary accounts, is 
reasonable because the Exchange seeks to incentivize members to 
transact a greater number of strategies on the Exchange to benefit from 
the fee cap. The Exchange also believes its proposal to increase the 
Monthly Strategy Cap is equitable and not unfairly discriminatory 
because the Exchange would offer all members, except for Customers,\28\ 
the opportunity to cap their floor equity options transaction fees for 
dividend, merger and short stock interest strategies. With respect to 
reversal and conversion strategies, the Exchange believes that its 
proposal to increase the Monthly Strategy Cap is equitable and not 
unfairly discriminatory because the Exchange would offer all members, 
except for Customers and Firms,\29\ the opportunity to cap their floor 
equity options transaction charges for dividend, merger and short stock 
interest strategies.
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    \28\ Customers are not assessed options transaction charges in 
Section II of the Pricing Schedule.
    \29\ Firms transaction fees are capped at $75,000 per month as 
noted in Section II of the Pricing Schedule.
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    The Exchange's proposal to exclude Firm floor options transaction 
charges related to reversal and conversion strategies from the Monthly 
Strategy Cap is reasonable because these fees would be capped as part 
of the Monthly Firm Fee Cap, which applies only to Firms. The Exchange 
believes that the exclusion of Firm floor options transaction charges 
related to reversal and conversion strategies from the Monthly Strategy 
Cap is equitable and not unfairly discriminatory because Firms, unlike 
other market participants, have the ability to cap transaction fees up 
to $75,000 per month. The Exchange would include floor option 
transaction charges related to reversal and conversion strategies in 
the Monthly Strategy Cap for Professionals, and Broker Dealers because 
these market participants are not subject to the Monthly Firm Fee Cap 
or other similar Cap. While Specialists and Market Makers are subject 
to a Monthly Market Maker Cap on both electronic and floor options 
transaction charges, reversal and conversion transactions are excluded 
from the Monthly Market Maker Cap.\30\ For the reasons described above, 
the Exchange believes including reversal and conversion strategies in 
the Monthly Firm Fee Cap is reasonable, equitable and not unfairly 
discriminatory because the cap provides an incentive for Firms to 
transact floor transactions on the Exchange, which brings increased 
liquidity and order flow to the floor for the benefit of all market 
participants.\31\
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    \30\ The reversal and conversion strategy executions are 
excluded from the Monthly Market Maker Cap. See Section II of the 
Pricing Schedule.
    \31\ Firms are eligible to cap floor options transactions 
charges and QCC Transaction Fees as part of the Monthly Firm Fee 
Cap. QCC Transaction Fees apply to QCC Orders as defined in Exchange 
Rule 1080(o) and Floor QCC Orders as defined in 1064(e). See Section 
II of the Pricing Schedule.
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    The Exchange believes that its proposal to amend the applicability 
of the fee caps to orders originating from the Exchange floor is 
reasonable because

[[Page 74718]]

members pay floor brokers to execute trades on the Exchange floor. The 
Exchange believes that offering fee caps to members executing floor 
transactions would defray brokerage costs associated with executing 
strategy transactions and continue to incentivize members to utilize 
the floor for certain executions.\32\ The Exchange believes that its 
proposal to amend the applicability of the fee caps to orders 
originating from the Exchange floor is equitable and not unfairly 
discriminatory because today, the fee caps are only applicable for 
floor transactions. The Exchange believes that a requirement that both 
the buy and sell sides of the order originate from the floor to qualify 
for the fee cap would constitute equal treatment of members.
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    \32\ The Exchange's proposal would only apply the fee cap to 
options transaction charges where buy and sell sides originate from 
the Exchange floor. See proposed rule text in Section II of the 
Pricing Schedule.
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    The Exchange believes that excluding the reversal and conversion 
strategy transactions from both the $0.07 per side Service Fee 
applicable to the Monthly Market Maker Cap and the $0.01 per side 
Service Fee applicable to the Monthly Firm Fee Cap is reasonable 
because the Exchange is not offering members a QCC rebate for floor 
transactions executed via QCC.\33\ The Exchange specifically excludes 
dividend, merger, short stock interest or reversal or conversion 
strategy executions from the QCC rebate and therefore does not desire 
to assess the Service Fees for these types of transactions.\34\ The 
Exchange believes that excluding the reversal and conversion strategy 
transactions from both the $0.07 per side Service Fee applicable to the 
Monthly Market Maker Cap and the $0.01 per side Service Fee applicable 
to the Monthly Firm Fee Cap is equitable and not unfairly 
discriminatory because the Exchange would not assess the Service Fees 
described herein on any member executing reversal and conversion 
strategies on QCC.
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    \33\ QCC Transaction Fees for a Specialist, Market Maker, 
Professional, Firm and Broker-Dealer are $0.20 per contract. QCC 
Transaction Fees apply to QCC Orders, as defined in Exchange Rule 
1080(o), and Floor QCC Orders, as defined in 1064(e). A rebate, as 
specified in Section II of the Pricing Schedule is paid pursuant to 
the QCC Rebate Schedule on all qualifying executed QCC Orders, as 
defined in Exchange Rule 1080(o) and Floor QCC Orders, as defined in 
1064(e), except where the transaction is either: (i) Customer-to-
Customer; or (ii) a dividend, merger or short stock interest 
strategy or reversal or conversion strategy executions (as defined 
in Section II). The proposed rule text relating to reversal and 
conversion strategies is included in this explanation.
    \34\ Dividend, merger and short stock interest strategies do not 
qualify as QCC Transactions pursuant to Rule 1080(o)(3) because of 
the necessity of the stock component.
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    The Exchange believes that removing an outdated reference and 
making clarifying changes to the Pricing Schedule, such as adding the 
reference to floor and amending ``equity options transaction fees'' to 
``options transaction charges,'' adding the term ``Multiply Listed 
Options'' to the discussion of strategies and substituting the word 
``and'' with ``or'' in the Monthly Market Maker Cap are reasonable, 
equitable and not unfairly discriminatory amendments because these 
technical amendments would clarify the Pricing Schedule and make it 
terms consistent throughout.

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. To the contrary, the proposed 
fees would continue to encourage members to transact strategies on the 
exchange because the proposed fee caps are competitive with fee caps at 
other options exchanges.

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.\35\ 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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    \35\ 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 [email protected]. Please include 
File Number SR-Phlx-2012-138 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-2012-138. 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-2012-138 and should be 
submitted on or before January 7, 2013.
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    \36\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-30323 Filed 12-14-12; 8:45 am]
BILLING CODE 8011-01-P