[Federal Register Volume 78, Number 154 (Friday, August 9, 2013)]
[Notices]
[Pages 48732-48734]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-19262]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70115; File No. SR-Phlx-2013-80]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing of Proposed Rule Changes to Its Excess Order Fee

August 5, 2013.
    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 July 26, 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.
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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 the 
Substance of the Proposed Rule Change

    The Exchange proposes changes to its Excess Order Fee under Section 
VIII of the Phlx Fee Schedule. Phlx proposes to implement the proposed 
rule change on August 1, 2013. The text of the proposed rule change is 
available on the Exchange's Web site at http://nasdaqomxphlx.cchwallstreet.com/nasdaqomxphlx/phlx, 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
    In 2012, Phlx introduced an Excess Order Fee, imposed on NASDAQ OMX 
PSX (``PSX'') market participant identifiers (``MPIDs'') that have 
characteristics indicative of inefficient order entry practices.\3\ As 
Phlx explained at the time, inefficient order entry practices may place 
excessive burdens on the systems of Phlx and its member organizations 
and may negatively impact the usefulness and life cycle cost of market 
data.\4\ Market participants that flood the market with orders that are 
rapidly cancelled or that are priced away from the inside market do 
little to support meaningful price discovery.
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    \3\ Securities Exchange Act Release Nos. 67004 (May 17, 2012), 
77 FR 30581 (May 23, 2012) (SR-Phlx-2012-64) (establishing fee); 
67271 (June 27, 2012), 77 FR 39537 (July 3, 2012) (SR-Phlx-2012-85) 
(modifying terms and conditions of fee).
    \4\ See generally Recommendations Regarding Regulatory Reponses 
to the Market Events of May 6, 2010, Joint CFTC-SEC Advisory 
Committee on Emerging Regulatory Issues, at 11 (February 18, 2011) 
(``The SEC and CFTC should also consider addressing the 
disproportionate impact that [high frequency trading] has on 
Exchange message traffic and market surveillance costs. . . . The 
Committee recognizes that there are valid reasons for algorithmic 
strategies to drive high cancellation rates, but we believe that 
this is an area that deserves further study. At a minimum, we 
believe that the participants of those strategies should properly 
absorb the externalized costs of their activity.'').
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    In general, the determination of whether to impose the fee on a 
particular MPID has been made by calculating the ratio between (i) 
entered orders, weighted by the distance of the order from the national 
best bid or offer (``NBBO''), and (ii) orders that execute in whole or 
in part. The fee has been imposed on MPIDs with an ``Order Entry 
Ratio'' of more than 100. The Order Entry Ratio is calculated, and the 
Excess Order Fee imposed, on a monthly basis. Phlx is now proposing to 
modify the fee, such that it will be calculated and assessed on the 
basis of all of a member organization's trading activity on PSX, rather 
than on an MPID basis. The purpose of this change is to ensure that 
member organizations do not act in a manner inconsistent with the 
intent of the fee by spreading inefficient order activity across 
multiple MPIDs in a manner that allows the MPIDs to avoid a charge that 
would not be avoided if all of the member organization's activity were 
aggregated. Thus, the change replaces the term ``MPID'' with the term 
``member organization'' throughout the text of Rule 7018(d). The rule, 
as amended, will operate as follows:
    For each member organization, the Order Entry Ratio will be the 
ratio of (i) the member organization's ``Weighted Order Total'' to (ii) 
the greater of one (1) or the number of displayed, non-marketable 
orders \5\ sent to PSX by the member organization during the month that 
execute in full or in part.\6\ The Weighted Order Total is the number 
of displayed, non-marketable orders sent to PSX by the member 
organization, as adjusted by a ``Weighting Factor.'' The applicable 
Weighting Factor is applied to each order based on its price in 
comparison to the NBBO at the time of order entry:
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    \5\ The fee focuses on displayed orders since they have the most 
significant impact on investor confusion and the quality of market 
data.
    \6\ Thus, in an extreme case where no orders entered by the 
member organization executed, this component of the ratio would be 
assumed to be 1, so as to avoid the impossibility of dividing by 
zero.

------------------------------------------------------------------------
                                                              Weighting
             Order's price versus NBBO at entry                 factor
------------------------------------------------------------------------
Less than 0.20% away.......................................           0x
0.20% to 0.99% away........................................           1x
1.00% to 1.99% away........................................           2x
2.00% or more away.........................................           3x
------------------------------------------------------------------------

    Thus, in calculating the Weighted Order Total, an order that was 
more than 2.0% away from the NBBO would be equivalent to three orders 
that were 0.50% away. Due to the applicable Weighting Factor of 0x, 
orders entered less than 0.20% away from the NBBO would not be included 
in the Weighted Order Total, but would be included in the ``executed'' 
orders component of the Order Entry Ratio if they execute in full or 
part.\7\ In addition, member

[[Page 48733]]

organizations with a daily average Weighted Order Total of less than 
100,000 during the month will not be subject to the Excess Order Fee. 
Finally, the fee is based on orders received by Phlx during regular 
market hours (generally, 9:30 a.m. to 4:00 p.m.),\8\ and will exclude 
orders received at other times, even if they execute during regular 
market hours.
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    \7\ An analogous fee of The NASDAQ Stock Market LLC (``NASDAQ'') 
includes an exclusion from both components of the ratio for orders 
sent by market makers in securities in which they are registered, 
through the MPID applicable to the registration. Although Phlx 
recently adopted rules to allow market maker registration on PSX, 
the extent of market making to date has been limited. Accordingly, 
Phlx has not deemed it necessary to adopt a comparable exclusion. In 
the event that market maker participation in PSX increases, Phlx 
will evaluate the advisability of adopting an exclusion.
    \8\ Regular market hours may be different in some circumstances, 
such as on the day after Thanksgiving, when regular market hours on 
all exchanges traditionally end at 1:00 p.m.
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    The following example illustrates the calculation of the Order 
Entry Ratio:
     A member organization enters 15,000,000 displayed, 
liquidity-providing orders:
     10,000,000 orders are entered at the NBBO. The Weighting 
Factor for these orders is 0x.
     5,000,000 orders are entered at a price that is 1.50% away 
from the NBBO. The Weighting Factor for these orders is 2x.
     Of the 15,000,000 orders included in the calculation, 
90,000 are executed.
     The Weighted Order Total is (10,000,000 x 0) + (5,000,000 
x 2) = 10,000,000. The Order Entry Ratio is 10,000,000/90,000 = 111.
    If a member organization has an Order Entry Ratio of more than 100, 
the amount of the Order Entry Fee will be calculated by determining the 
member organization's ``Excess Weighted Orders.'' Excess Weighted 
Orders are calculated by subtracting (i) the Weighted Order Total that 
would result in the member organization having an Order Entry Ratio of 
100 from (ii) the member organization's actual Weighted Order Total. In 
the example above, the Weighted Order Total that would result in an 
Order Entry Ratio of 100 is 9,000,000, since 9,000,000/90,000 = 100. 
Accordingly, the Excess Weighted Orders would be 10,000,000-9,000,000 = 
1,000,000.
    The Excess Order Fee charged to the member organization will then 
be determined by multiplying the ``Applicable Rate'' by the number of 
Excess Weighted Orders. The Applicable Rate is determined based on the 
member organization's Order Entry Ratio:

------------------------------------------------------------------------
                                                              Applicable
                     Order entry ratio                           rate
------------------------------------------------------------------------
101-1,000..................................................       $0.005
More than 1,000............................................        0.01
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    In the example above, the Applicable Rate would be $0.005, based on 
the member organization's Order Entry Ratio of 111. Accordingly, the 
monthly Excess Order Fee would be 1,000,000 x $0.005 = $5,000.
    Phlx continues to expect that the impact of the fee, as modified, 
will be narrow because the change will encourage potentially affected 
market participants to modify their order entry practices in order to 
avoid the fee, thereby improving the market for all participants. 
Accordingly, Phlx does not expect to earn significant revenues from the 
modified fee.
2. Statutory Basis
    Phlx believes that the proposed rule change is consistent with the 
provisions of Section 6 of the Act,\9\ in general, and with Sections 
6(b)(4) and 6(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.
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    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(4) and (5).
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    With respect to the Excess Order Fee, Phlx stated in its original 
filing to institute the fee that it is reasonable because it is 
designed to achieve improvements in the quality of displayed liquidity 
and market data that will benefit all market participants. In addition, 
although the level of the fee may theoretically be very high, the fee 
is reasonable because market participants may readily avoid the fee by 
making improvements in their order entry practices that reduce the 
number of orders they enter, bring the prices of their orders closer to 
the NBBO, and/or increase the percentage of their orders that execute. 
Similarly, the change proposed herein is reasonable because it will 
provide further incentive to member organizations to improve order 
entry practices by insuring that they cannot evade the fee by spreading 
activity across multiple MPIDs.
    For similar reasons, the fee is consistent with an equitable 
allocation of fees, because although the fee may apply to only a small 
number of market participants, the fee would be applied to them in 
order to encourage better order entry practices that will benefit all 
market participants. The change is also equitable because it will 
further encourage better order entry practices across a wider group of 
market participants. Finally, Phlx believes that the fee is not 
unfairly discriminatory. Although the fee may apply to only a small 
number of market participants, it will be imposed because of the 
negative externalities that such market participants impose on others 
through inefficient order entry practices. Accordingly, Phlx believes 
that it is fair to impose the fee on these market participants in order 
to incentivize them to modify their behavior and thereby benefit the 
market. The change is likewise not unfairly discriminatory because it 
will negatively affect member organizations only if they have been 
evading the incentives to improve order entry practices provided by the 
fee.

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

    Phlx does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.\11\ Phlx 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, Phlx 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, while 
also seeking to earn a reasonable profit from its trading and routing 
services. Because competitors are free to modify their own fees in 
response, and because market participants may readily adjust their 
order routing practices, Phlx believes that the degree to which fee 
changes in this market may impose any burden on competition is 
extremely limited. With respect to the change to the Excess Order Fee, 
Phlx believes that the change, like the original fee, will constrain 
market participants from pursuing certain inefficient and potentially 
abusive trading strategies. To the extent that this change may be 
construed as a burden on competition, Phlx believes that it is 
appropriate in order to allow Phlx to better achieve this purpose.
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    \11\ 15 U.S.C. 78f(b)(8).
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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.

[[Page 48734]]

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) of the Act \12\ and paragraph (f) of Rule 19b-4 
thereunder.\13\ 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.
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f).
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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-2013-80 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-2013-80. 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 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 offices 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-2013-80, and should be submitted on or before 
August 30, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-19262 Filed 8-8-13; 8:45 am]
BILLING CODE 8011-01-P