[Federal Register Volume 80, Number 224 (Friday, November 20, 2015)]
[Notices]
[Pages 72768-72773]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-29602]
[[Page 72768]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-76446; File No. SR-Phlx-2015-89]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change to a Market
Access and Routing Subsidy or ``MARS''
November 16, 2015.
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 2, 2015, 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 the Exchange's Pricing Schedule at
Section IV, entitled ``Other Transaction Fees'' to create a subsidy
program, the Market Access and Routing Subsidy or ``MARS,'' for Phlx
members that provide certain order routing functionalities \3\ to other
Phlx members and/or use such functionalities themselves.
---------------------------------------------------------------------------
\3\ The order routing functionalities permit a Phlx member to
provide access and connectivity to other members as well utilize
such access for themselves. The Exchange notes that under this
arrangement it will be possible for one Phlx member to be eligible
for payments under MARS, while another Phlx member might potentially
be liable for transaction charges associated with the execution of
the order, because those orders were delivered to the Exchange
through a Phlx member's connection to the Exchange and that member
qualified for the MARS Payment. Consider the following example: both
members A and B are Phlx members but A does not utilize its own
connections to route orders to the Exchange, and instead utilizes
B's connections. Under this program, B will be eligible for the MARS
Payment while A is liable for any transaction charges resulting from
the execution of orders that originate from A, arrive at the
Exchange via B's connectivity, and subsequently execute and clear at
The Options Clearing Corporation or ``OCC,'' where A is the valid
executing clearing member or give-up on the transaction. Similarly,
where B utilizes its own connections to execute transactions, B will
be eligible for the MARS Payment, but would also be liable for any
transaction resulting from the execution of orders that originate
from B, arrive at the Exchange via B's connectivity, and
subsequently execute and clear at OCC, where B is the valid
executing clearing member or give-up on the transaction.
---------------------------------------------------------------------------
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
Phlx proposes a new subsidy program, MARS, which would pay a
subsidy to Phlx members that provide certain order routing
functionalities to other Phlx members and/or use such functionalities
themselves. Generally, under MARS, Phlx proposes to make payments to
participating Phlx members to subsidize their costs of providing
routing services to route orders to Phlx. The Exchange believes that
MARS will attract higher volumes of electronic equity and ETF options
volume to the Exchange from non-Phlx market participants as well as
Phlx members.
MARS System Eligibility
To qualify for MARS, a Phlx member's order routing functionality
would be required to meet certain criteria. Specifically the member's
routing system (hereinafter ``System'') would be required to: (1)
Enable the electronic routing of orders to all of the U.S. options
exchanges, including Phlx; (2) provide current consolidated market data
from the U.S. options exchanges; and (3) be capable of interfacing with
Phlx's API to access current Phlx match engine functionality. The
member's System would also need to cause Phlx to be one of the top
three default destination exchanges for individually executed
marketable orders if Phlx is at the national best bid or offer
(``NBBO''), regardless of size or time, but allow any user to manually
override Phlx as the default destination on an order-by-order basis.
Specifically, with respect to Complex Orders,\4\ the Exchange would not
require Complex Orders to enable the electronic routing of orders to
all of the U.S. options exchanges or provide current consolidated
market data from the U.S. options exchanges. The Exchange notes that
these requirements would not make sense for Complex Orders as some
options exchanges do not offer Complex Order execution systems.
---------------------------------------------------------------------------
\4\ A Complex Order is any order involving the simultaneous
purchase and/or sale of two or more different options series in the
same underlying security, priced at a net debit or credit based on
the relative prices of the individual components, for the same
account, for the purpose of executing a particular investment
strategy. Furthermore, a Complex Order can also be a stock-option
order, which is an order to buy or sell a stated number of units of
an underlying stock or exchange-traded fund (``ETF'') coupled with
the purchase or sale of options contract(s). See Exchange Rule 1080,
Commentary .08(a)(i).
---------------------------------------------------------------------------
The Exchange would require Phlx members desiring to participate in
MARS \5\ to complete a form, in a manner prescribed by the Exchange,
and reaffirm their information on a quarterly basis to the Exchange.
Any Phlx member would be permitted to apply for MARS, provided the
above-referenced requirements are met, including a robust and reliable
System. The member would be solely responsible for implementing and
operating its System.
---------------------------------------------------------------------------
\5\ For example, a Phlx member that desires to qualify for MARS
in November must complete the form and submit it to the Exchange no
later than the last business day of November. Such form will require
the Phlx member to identify the Phlx member seeking the MARS Payment
and must list, among other things, the connections utilized by the
Phlx member to provide Exchange access to other Phlx members and/or
itself. MARS Payments would be made one month in arrears (i.e., a
MARS Payment earned for activity in November would be paid to the
qualifying Phlx member in December), as is the case with all other
transactional payments and assessments made by the Exchange.
---------------------------------------------------------------------------
MARS Eligible Contracts
A MARS Payment would be made to Phlx members that have System
Eligibility and have routed at least 30,000 Eligible Contracts daily in
a month, which were executed on Phlx. For the purpose of qualifying for
the MARS Payment, Eligible Contracts may include Firm,\6\ Broker-
Dealer,\7\ Joint
[[Page 72769]]
Back Office or ``JBO'' \8\ or Professional \9\ equity option orders
that are electronically delivered and executed. Eligible Contracts do
not include floor-based orders, qualified contingent cross or ``QCC''
orders,\10\ price improvement or ``PIXL'' orders,\11\ Mini-Option
orders \12\ or Singly-Listed Options \13\ orders.
---------------------------------------------------------------------------
\6\ The term ``Firm'' or (``F'') applies to any transaction that
is identified by a Participant for clearing in the Firm range at
OCC.
\7\ The term ``Broker-Dealer'' applies to any transaction which
is not subject to any of the other transaction fees applicable
within a particular category.
\8\ The term ``Joint Back Office'' or ``JBO'' applies to any
transaction that is identified by a member or member organization
for clearing in the Firm range at OCC and is identified with an
origin code as a JBO. A JBO will be priced the same as a Broker-
Dealer. A JBO participant is a member, member organization or non-
member organization that maintains a JBO arrangement with a clearing
broker-dealer (``JBO Broker'') subject to the requirements of
Regulation T Section 220.7 of the Federal Reserve System as further
discussed at Exchange Rule 703.
\9\ The term ``professional'' means 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). See Rule
1000(b)(14).
\10\ A QCC Order is comprised of an order to buy or sell at
least 1000 contracts that is identified as being part of a qualified
contingent trade, as that term is defined in Rule 1080(o)(3),
coupled with a contra-side order to buy or sell an equal number of
contracts. The QCC Order must be executed at a price at or between
the NBBO and be rejected if a Customer order is resting on the
Exchange book at the same price. A QCC Order shall only be submitted
electronically from off the floor to the Exchange's match engine.
See Rule 1080(o).
\11\ PIXL is the Exchange's price improvement mechanism known as
Price Improvement XL or (PIXL\SM\). See Rule 1080(n).
\12\ Mini Options are further specified in Phlx Rule 1012,
Commentary .13.
\13\ Singly Listed Options are options overlying currencies,
equities, ETFs, ETNs treasury securities and indexes not listed on
another exchange.
---------------------------------------------------------------------------
Phlx members using an order routing functionality provided by
another member or its own functionality will continue to be required to
comply with best execution obligations.\14\ Specifically, just as with
any Customer \15\ order and any other routing functionality, a Phlx
member will continue to have an obligation to consider the availability
of price improvement at various markets and whether routing a Customer
order through a functionality that incorporates the features described
above would allow for access to such opportunities if readily
available. Moreover, a Phlx member would need to conduct best execution
evaluations on a regular basis, at a minimum quarterly, that include
its use of any router incorporating the features described above.
---------------------------------------------------------------------------
\14\ See Phlx Rule 764.
\15\ 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 a broker or dealer or for the account of a
``Professional'' (as that term is defined in Rule 1000(b)(14)).
---------------------------------------------------------------------------
MARS Payment
Phlx members that have System Eligibility and have executed the
Eligible Contracts in a month may receive the MARS Payment of $0.10 per
contract. The MARS Payment will be paid only on executed Firm orders
routed to Phlx through a participating member's System. No payment will
be made with respect to orders that are routed to Phlx, but not
executed. The Exchange believes that the MARS Payment will subsidize
the costs of Phlx members in providing the routing services.
Further, a Phlx member would not be entitled to receive any other
revenue \16\ for the use of its System specifically with respect to
orders routed to Phlx, with the exception of Payment for Order
Flow.\17\
---------------------------------------------------------------------------
\16\ This requirement would not prevent the member from charging
fees (for example, a flat monthly fee) for the general use of its
System. Nor would it prevent the member from charging fees or
commissions in accordance with its general practices with respect to
transactions effected through its System.
\17\ The Payment for Order Flow (``PFOF'') Program assesses fees
to Specialists and Market Makers resulting from Customer orders.
These PFOF Fees are available to be disbursed by the Exchange
according to the instructions of the Specialist or Marker Maker to
order flow providers who are members or member organizations who
submit, as agent, customer orders to the Exchange through a member
or member organization who is acting as agent for those customer
orders.
---------------------------------------------------------------------------
The Exchange proposes to add the MARS to new Section IV, Part E of
the Pricing Schedule, entitled ``Market Access and Routing Subsidy
(``MARS'').'' Additionally, the Exchange proposes to amend the Table of
Content to include the new section.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \18\ in general, and furthers the objectives of
Sections 6(b)(4) and 6(b)(5) of the Act \19\ 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.
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78f(b).
\19\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------
The Commission and the courts have repeatedly expressed their
preference for competition over regulatory intervention in determining
prices, products, and services in the securities markets. In Regulation
NMS, for example, the Commission indicated that market forces should
generally determine the price of non-core market data because national
market system regulation ``has been remarkably successful in promoting
market competition in its broader forms that are most important to
investors and listed companies.'' \20\ Likewise, in NetCoalition v.
NYSE Arca, Inc., 615 F.3d 525 (D.C. Cir. 2010), the D.C. Circuit upheld
the Commission's use of a market-based approach in evaluating the
fairness of market data fees against a challenge claiming that Congress
mandated a cost-based approach.\21\ As the court emphasized, the
Commission ``intended in Regulation NMS that `market forces, rather
than regulatory requirements' play a role in determining the market
data . . . to be made available to investors and at what cost.'' \22\
---------------------------------------------------------------------------
\20\ Exchange Act Release No. 34-51808 (June 9, 2005)
(``Regulation NMS Adopting Release'').
\21\ See NetCoalition, 615 F.3d at 534.
\22\ Id. at 537.
---------------------------------------------------------------------------
Further, ``[n]o one disputes that competition for order flow is
`fierce.' . . . As the SEC explained, `[i]n the U.S. national market
system, buyers and sellers of securities, and the broker-dealers that
act as their order-routing agents, have a wide range of choices of
where to route orders for execution'; [and] `no exchange can afford to
take its market share percentages for granted' because `no exchange
possesses a monopoly, regulatory or otherwise, in the execution of
order flow from broker dealers' . . ..'' \23\ Although the Court and
the SEC were discussing the cash equities markets, the Exchange
believes that, as discussed above, these views apply with equal force
to the options markets.
---------------------------------------------------------------------------
\23\ NetCoalition I, 615 F.3d at 539 (quoting ArcaBook Order, 73
FR at 74782-74783).
---------------------------------------------------------------------------
The Exchange believes that MARS is reasonable because it is
designed to attract higher volumes of electronic equity and ETF options
volume to the Exchange, which will benefit all Phlx market participants
by offering greater price discovery, increased transparency, and an
increased opportunity to trade on the Exchange. Moreover, the Exchange
believes that the proposed subsidy offered by MARS is both equitable
and not unfairly discriminatory because any qualifying Phlx member that
offers market access and connectivity to the Exchange and/or utilizes
such functionality themselves may earn the MARS Payment for all
Eligible Contracts.
MARS System Eligibility
The Exchange believes that requiring Phlx members to maintain their
Systems according to the various requirements set forth by the Exchange
in order to
[[Page 72770]]
qualify for MARS is reasonable because the Exchange seeks to encourage
market participants to send higher volumes of orders to Phlx, which
will contribute to the Exchange's depth of book as well as to the top
of book liquidity. The Exchange also believes that the proposed MARS is
reasonable because it is designed to enhance the competitiveness of the
Exchange, particularly with respect to those exchanges that offer their
own front-end order entry system or one they subsidize in some
manner.\24\ The Exchange believes that requiring members to maintain
their Systems according to the various requirements set forth by the
Exchange in order to qualify for MARS is equitable and not unfairly
discriminatory because these requirements will uniformly apply to all
market participants desiring to qualify for MARS.
---------------------------------------------------------------------------
\24\ See, e.g., supra note 10; Securities Exchange Act Release
No. 34-54121 (July 10, 2006), 71 FR 40566 (July 17, 2006) (SR-ISE-
2006-31) (describing PrecISE, which is a front-end, order entry
application for trading options utilized by International Securities
Exchange LLC).
---------------------------------------------------------------------------
With respect to Complex Orders,\25\ the Exchange believes that not
requiring Phlx members to enable the electronic routing of orders to
all of the U.S. options exchanges or provide current consolidated
market data from the U.S. options exchanges, provided the transaction
was effected as a portion of a Complex Order, is reasonable because
this requirement would not make sense for Complex Orders as some
options exchanges do not offer Complex Order execution systems. Also,
Phlx members will be encouraged to provide Complex Order routing
functionalities. The Exchange believes that limiting these requirements
for Complex Orders, while still paying a subsidy on these types of
orders, is equitable and not unfairly discriminatory because Phlx
members transacting Complex Orders have devoted resources to provide
the order routing functionalities. All Phlx members that qualify for
the subsidy will have the ability to count Complex Orders toward their
Eligible Contracts and be subject to similar requirements.
---------------------------------------------------------------------------
\25\ A Complex Order is any order involving the simultaneous
purchase and/or sale of two or more different options series in the
same underlying security, priced at a net debit or credit based on
the relative prices of the individual components, for the same
account, for the purpose of executing a particular investment
strategy. Furthermore, a Complex Order can also be a stock-option
order, which is an order to buy or sell a stated number of units of
an underlying stock or exchange-traded fund (``ETF'') coupled with
the purchase or sale of options contract(s). See Exchange Rule 1080,
Commentary .08(a)(i).
---------------------------------------------------------------------------
The Exchange also notes that the Chicago Board of Options Exchange,
Inc. (``CBOE'') currently offers a similar Order Routing Subsidy
(``ORS'') and Complex Order Routing Subsidy (``CORS'') which, similar
to the current proposal, allows CBOE members to enter into subsidy
arrangements with CBOE Trading Permit Holders (``TPHs'') that provide
certain order routing functionalities to other CBOE TPHs and/or use
such functionalities themselves.\26\ Also, NYSE MKT LLC (``NYSE MKT'')
had a Market Access and Connectivity Subsidy (``MAC'') which allowed
NYSE MKT members to enter into subsidy arrangements with ATP Holders
that provided certain order routing functionalities to other ATP
Holders and/or use such functionalities themselves. The NYSE MKT
program was discontinued.\27\ Finally, in 2007, Phlx offered a Market
Access Provider Subsidy or ``MAPs'' as a per contract fee payable by
the Exchange to Eligible Market Access Providers for Eligible Contracts
submitted by MAPs for execution on the Exchange. The subsidy was
applicable to any Exchange member organization that qualified as a MAP
and elected to participate for that calendar month.\28\
---------------------------------------------------------------------------
\26\ See note 43. CBOE's programs permit both CBOE members and
CBOE non-members to be eligible for a rebate. CBOE members are
eligible to receive exchange transaction fees on transactions that
earn a non-CBOE member a subsidy payment.
\27\ See note 44. See also Securities Exchange Act Release No.
75609 (August 11, 2015), 80 FR 48132 (August 5, 2015) (SR-NYSEMKT-
2015-059).
\28\ See Securities Exchange Act Release No. 56274 (August 16,
2007), 72 FR 48720 (August 24, 2007) (SR-Phlx-2007-54). This program
is no longer being offered.
---------------------------------------------------------------------------
MARS Eligible Contracts
The Exchange believes that excluding the volumes attributable to
QCC Orders, PIXL and Mini Options is reasonable, equitable, and not
unfairly discriminatory for the reasons below. QCC Order volume is
already counted toward a separate rebate that the Exchange pays on both
electronic and floor QCC transactions.\29\ If the Exchange were to
count QCC Orders volumes towards the volume tiers for MARS, the
Exchange may have to raise fees for all other participants. The
Exchange does not believe such a result would be reasonable or
equitable. PIXL Orders are also subject to separate pricing and certain
discounts.\30\ Mini Options are also subject to separate pricing.\31\
The Exchange does not desire to pay an additional subsidy on top of the
already discounted rates for PIXL and Mini Options. Because all Phlx
members seeking to qualify for MARS would be treated equally with
respect to excluding QCC, PIXL and Mini Options volume, the proposal to
exclude these volumes from the MARS Payment is not inequitable or
unfairly discriminatory. With respect to excluding Singly Listed
options, these orders are not subject to a default destination
exchange, and therefore should not be taken into account in calculating
Eligible Contracts. The exclusion of these types of orders from MARS is
equitable and not unfairly discriminatory because the Exchange will
uniformly exclude these orders from the Eligible Contracts for all
qualifying Phlx members.
---------------------------------------------------------------------------
\29\ See notes 10 and 39.
\30\ See Phlx's Pricing Schedule at Section IV, Part A. The
Exchange offers discounted fees provided certain criteria are met.
\31\ See Section A of the Phlx Pricing Schedule.
---------------------------------------------------------------------------
With respect to floor orders, the Exchange's exclusion of such
orders from Eligible Contracts is reasonable because the floor model
does not lend itself to this type of incentive which requires the
maintenance of a front-end system to route orders. The Exchange has two
different methods of handling orders. The non-electronic model is one
that is represented on the trading floor by a floor broker. An
electronic order is an entirely different model. Those orders are
entered by members who are connected to the Phlx's match engine. These
members are assessed different rates because the Exchange operates two
different models, a floor-based model and an electronic model, which
both utilize different processes. The Exchange believes that it is
appropriate to assess fees and incentivize through rebates and
subsidies differently for each model. With respect to floor orders, the
Exchange's exclusion of such order from MARS is equitable and not
unfairly discriminatory because the Exchange will not permit any floor
orders to count toward Eligible Contracts for any market participant
for MARS.
The Exchange further notes that while MARS is only being offered to
qualifying Phlx members for electronically-executed Firm, Broker-
Dealer, JBO or Professional equity option orders and not, for example,
on the electronic volumes of Phlx Customer, Specialist \32\ or Market
Maker \33\ the Exchange believes this is reasonable, equitable and not
unfairly
[[Page 72771]]
discriminatory for the reasons below. With respect to Customer orders,
the Exchange notes that Customer orders have the ability to earn
rebates today.\34\ Additionally, Customers are not assessed transaction
fees.\35\ The Exchange believes that the availability of these rebates
for Customer volumes as well as no transaction fees does not warrant
paying an additional subsidy on Customer volumes in MARS. With respect
to Specialists and Market Makers, the Exchange offers Specialists and
Market Makers certain rebates in SPY,\36\ assesses them lower
transaction fees as compared to other market participants \37\ and
offers them the ability cap their transaction fees.\38\ The Exchange
believes that the SPY rebates, coupled with the lower transaction fees
and Monthly Market Maker Cap, already provide ample incentive for
attracting Specialist and Market Maker volumes to the Exchange and that
no further subsidy is warranted at this time.
---------------------------------------------------------------------------
\32\ A Specialist is an Exchange member who is registered as an
options specialist pursuant to Rule 1020(a). An options Specialist
includes a Remote Specialist which is defined as an options
specialist in one or more classes that does not have a physical
presence on an Exchange floor and is approved by the Exchange
pursuant to Rule 501.
\33\ 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)). Directed Participants are also market makers.
\34\ See Section B of the Phlx Pricing Schedule.
\35\ See Section II of the Phlx Pricing Schedule.
\36\ See Section I of SPY Pricing in Phlx Pricing Schedule.
\37\ See Section II of the Phlx Pricing Schedule.
\38\ Specialists and Market Makers are subject to a ``Monthly
Market Maker Cap'' of $550,000 for: (i) Electronic and floor Option
Transaction Charges; (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. The trading
activity of separate Specialist and Market Maker member
organizations is aggregated in calculating the Monthly Market Maker
Cap if there is Common Ownership between the member organizations.
All dividend, merger, short stock interest, reversal and conversion,
jelly roll and box spread strategy executions (as defined in Section
II) are excluded from the Monthly Market Maker Cap.
---------------------------------------------------------------------------
The proposed MAC Subsidy is designed to attract higher margin
business to the Exchange, business which at present has no opportunity
to transact at rates anywhere close to the rate assessed to Customers,
Specialists or Market Makers. To offer the proposed subsidy on
Customer, Specialist or Market Maker electronic volume would require
funding from some other source, such as raising fees for other
participants. As a result, the Exchange believes it is appropriate to
offer MARS to only Firms, Broker-Dealers and JBO participants that are
charged higher per contract transaction fees than other market
participants. The Exchange notes that it is commonplace within the
options industry for exchanges to charge different rates and/or offer
different rebates depending upon the capacity in which a participant is
trading. For these reasons, the Exchange believes that the proposed
change to offer MARS Payment to qualifying Phlx members on certain
electronic volumes is reasonable, equitable and not unfairly
discriminatory for the reasons mentioned herein.
Finally, the Exchange believes that 30,000 Eligible Contracts is a
reasonable level of contracts, because the Exchange is only counting
volume from Firms, Broker-Dealers, JBOs and Professionals which are
electronically delivered and executed. The Exchange believes that this
number reflects an appropriate level of commitment from Phlx members to
earn the MARS Payment. The Exchange believes that 30,000 Eligible
Contracts is equitable and not unfairly discriminatory because this
level will be uniformly applied to all qualifying Phlx members.
MARS Payment
The Exchange believes that it is reasonable, equitable and not
unfairly discriminatory to pay the proposed MARS Payment to Phlx
members that have System Eligibility and have executed the Eligible
Contracts, even when a different Phlx member may be liable for
transaction charges resulting from the execution of the orders upon
which the subsidy might be paid. The Exchange notes that this sort of
arrangement already exists on the Exchange with respect to QCC rebates
for floor QCC transactions. Today, this arrangement results in a
situation where the floor broker is earning a rebate and one or more
different Phlx members are potentially liable for the Exchange
transaction charges applicable to QCC Orders. With the QCC rebates
applicable to transactions executed on the trading floor, the Exchange
does not offer a front-end for order entry; unlike some of the
competing exchanges, the Exchange believes it is necessary from a
competitive standpoint to offer this rebate to the executing floor
broker on a QCC Order. Also, all qualifying Phlx members would be
uniformly paid the subsidy on all qualifying volume that was routed by
them to the Exchange and executed.
The Exchange believes the $0.10 per contract rate that is being
offered to be paid as a subsidy is reasonable and will allow Phlx
members to price their services at a level that will enable them to
attract order flow from participants who would otherwise utilize an
existing front-end order entry mechanism offered by the Exchange's
competitors instead of incurring the cost in time and money to develop
their own internal systems to be able to deliver orders directly to the
Exchange's trading systems.\39\ The Exchange believes that offering a
flat rate is reasonable because all qualifying Phlx members would
receive the same $0.10 per contract subsidy, provided they met the
qualifications for MARS.
---------------------------------------------------------------------------
\39\ A Floor QCC Order must: (i) Be for at least 1,000
contracts, (ii) meet the six requirements of Rule 1080(o)(3) which
are modeled on the QCT Exemption, (iii) be executed at a price at or
between the NBBO; and (iv) be rejected if a Customer order is
resting on the Exchange book at the same price. In order to satisfy
the 1,000-contract requirement, a Floor QCC Order must be for 1,000
contracts and could not be, for example, two 500-contract orders or
two 500-contract legs. See Rule 1064(e). See also Securities
Exchange Act Release No. 64688 (June 16, 2011), 76 FR 36606 (June
22, 2011) (SR-Phlx-2011-56).
---------------------------------------------------------------------------
The Exchange believes that paying the MARS payments to a Phlx
member, solely on executed Firm orders submitted by the qualifying Phlx
member, is reasonable because, as noted herein Customers, Specialists
and Market Makers are offered other pricing incentives such as rebates,
no fees or lower fees and the Monthly Market Maker Cap. With respect to
Professionals, JBOs and Broker-Dealers the Exchange believes it is
reasonable to differentiate these market participants and Firms for the
reasons which follow. Firms already benefit from certain pricing
advantages that Professionals, JBOs and Broker-Dealers do not also
enjoy, such as the Firm Monthly Fee Cap.\40\ The Exchange desires to
incentivize Phlx members to transact Firm, JBO, Broker-Dealer and
Professional orders on the Exchange to qualify for MARS and receive the
subsidy for Firm orders. The Exchange believes that this proposal may
incentivize Phlx members that receive reduced rates at other options
exchanges to select Phlx as a venue to send Firm, JBO, Broker-Dealer
and Professional orders by offering competitive pricing to these market
participants in the form of a subsidy, even though the financial
benefit will only be made with respect to Firm orders. Such
competitive, differentiated pricing exists today on other options
exchanges. Further, the Exchange believes there is nothing
impermissible about the MARS Payment
[[Page 72772]]
being made solely on Firm orders. This practice is consistent with
longstanding differentials between Firms, other Broker-Dealers and
Professionals. The options exchanges have differentiated between:
retail customers and professional customers; broker/dealers clearing in
the ``Firm'' range at OCC and broker/dealers registered as market
makers and away market makers; early-adopting market makers; and many
others. The Commission has also permitted price differentiation based
on whether an order is processed manually versus electronically. The
proposal is consistent with previously established pricing proposals
accepted by the Commission.
---------------------------------------------------------------------------
\40\ Firms are subject to a maximum fee of $75,000 (``Monthly
Firm Fee Cap''). Firm Floor Option Transaction Charges and QCC
Transaction Fees, in the aggregate, for one billing month may not
exceed the Monthly Firm Fee Cap per member organization when such
members are trading in their own proprietary account. All dividend,
merger, and short stock interest strategy executions (as defined in
Section II of the Pricing Schedule) are excluded from the Monthly
Firm Fee Cap. Reversal and conversion, jelly roll and box spread
strategy executions (as defined in Section II) are included in the
Monthly Firm Fee Cap. QCC Transaction Fees are included in the
calculation of the Monthly Firm Fee Cap. See Section II of the
Pricing Schedule.
---------------------------------------------------------------------------
The Exchange believes that paying the MARS payments to a Phlx
member, solely on executed Firm orders submitted by the qualifying Phlx
member, is equitable and not unfairly discriminatory for the same
reasons that the Firm Monthly Fee Cap which applies to Firms and not to
Professionals and Broker-Dealers is equitable and not unfairly
discriminatory. The MARS Payment, like the Monthly Firm Fee Cap,
provides an incentive for Firms to transact order flow on the Exchange,
which order flow brings increased liquidity to the Exchange for the
benefit of all Exchange participants. To the extent the purpose of the
proposed MARS is achieved, all the Exchange's market participants,
including Professionals and Broker-Dealers, should benefit from the
improved market liquidity.
The Exchange believes that preventing members from receiving any
other revenue for the use of its routing system, specifically with
respect to orders routed to Phlx, with the exception of Payment for
Order Flow or ``PFOF'' is reasonable because members could still charge
fees for the general use of its order routing system as well as
charging fees or commissions in accordance with its general practices
with respect to transactions effected through its system. PFOF also
remains eligible under MARS. The Exchange believes that preventing
members from receiving any other revenue for the use of its routing
system, specifically with respect to orders routed to Phlx, with the
exception of PFOF is equitable and not unfairly discriminatory because
the Exchange would uniformly apply its MARS requirements to all
qualifying Phlx members.
Finally, the Exchange believes that adding a new Part E to Section
IV and amending the Table of Content is reasonable, equitable and not
unfairly discriminatory as it will make finding MARS in the Pricing
Schedule easier for all participants.
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. In terms of inter-market
competition, the Exchange 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, the Exchange 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. Because
competitors are free to modify their own fees in response, and because
market participants may readily adjust their order routing practices,
the Exchange believes that the degree to which fee changes in this
market may impose any burden on competition is extremely limited.
MARS System Eligibility
The Exchange believes that requiring members to maintain their
order routing systems according to the various requirements set forth
by the Exchange in order to qualify for MARS does not create an undue
burden on intra-market competition because the proposed requirements
will uniformly apply to all market participants desiring to qualify for
MARS.
With respect to Complex Orders, the Exchange believes that not
requiring the Phlx members to enable the electronic routing of orders
to all of the U.S. options exchanges and not requiring Phlx members to
provide current consolidated market data from the U.S. options
exchanges, in connection with Complex Orders, does not create an undue
burden on intra-market competition because all Phlx members that
qualify for the subsidy will have the ability to count Complex Orders
toward their Eligible Contracts and be subject to similar requirements.
The Exchange also notes that CBOE currently offers ORS and CORS which,
similar to the current proposal, allow CBOE members to enter into
subsidy arrangements with TPHs that provide certain order routing
functionalities to other CBOE TPHs and/or use such functionalities
themselves.\41\
---------------------------------------------------------------------------
\41\ See note 43. CBOE's programs permit both CBOE members and
CBOE non-members to be eligible for a rebate. CBOE members are
eligible to receive exchange transaction fees on transactions that
earn a non-CBOE member a subsidy payment.
---------------------------------------------------------------------------
MARS Eligible Contracts
The Exchange believes that excluding floor, QCC, PIXL, Mini Options
and Single Listed Orders does not create an undue burden on intra-
market competition because these types of orders will uniformly be
excluded from the volume calculation for all qualifying Phlx members
for MARS.
The Exchange believes that excluding Customer, Market Makers and
Specialists orders from the types of orders that would be eligible for
MARS does not create an undue burden on intra-market competition
because Customers are not assessed transaction fees and are eligible
for rebates. With respect to Specialists and Market Makers, the
Exchange offers as Specialists and Market Makers certain rebates in
SPY, assesses them lower transaction fees as compared to other market
participants and offers them the ability cap their transaction fees.
Finally, the Exchange believes that the 30,000 Eligible Contracts
requirement does not create an undue burden on intra-market competition
because this level will be uniformly applied to all qualifying Phlx
members.
MARS Payment
The Exchange believes that paying the proposed MARS Payment to
qualifying Phlx members that have System eligibility and have executed
the Eligible Contracts does not create an undue burden on intra-market
competition, even when a different Phlx member, other than the Phlx
member receiving the subsidy, may be liable for transaction charges,
because this sort of arrangement already exists on the Exchange and
would be uniformly applied to all qualifying Phlx members.
The Exchange believes that paying the proposed MARS Payment to
qualifying Phlx members that have System eligibility and have executed
the Eligible Contracts in a month, solely on executed Firm orders, does
not create an undue burden on intra-market competition because the
Exchange is counting all Firm, JBO, Broker-Dealer and Professional
volume toward the Eligible Contracts. Customers, Specialists and Market
Makers are offered other pricing incentives such as rebates, no fees or
lower fees and the Monthly Market Maker Cap. The increased order flow
will bring
[[Page 72773]]
increased liquidity to 50the Exchange for the benefit of all Exchange
participants. To the extent the purpose of the proposed MARS is
achieved, all the Exchange's market participants, including
Professionals and Broker-Dealers, should benefit from the improved
market liquidity.
The Exchange believes that preventing members from receiving any
other revenue for the use of its routing system, specifically with
respect to orders routed to Phlx, with the exception of PFOF, does not
create undue burden on intra-market competition because the Exchange
would continue to uniformly apply its MARS requirements to all Phlx
members.
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.\42\
---------------------------------------------------------------------------
\42\ 15 U.S.C. 78s(b)(3)(A)(ii).
---------------------------------------------------------------------------
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: (i)
Necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) 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.
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-2015-89 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-2015-89. 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-2015-89, and should be
submitted on or before December 11, 2015.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\43\
---------------------------------------------------------------------------
\43\ 17 CFR 200.30-3(a)(31).
---------------------------------------------------------------------------
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-29602 Filed 11-19-15; 8:45 am]
BILLING CODE 8011-01-P