[Federal Register Volume 81, Number 145 (Thursday, July 28, 2016)]
[Notices]
[Pages 49709-49712]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-17823]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78394; File No. SR-Phlx-2016-77]


Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Price 
Improvement XL Pricing

July 22, 2016.
    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 14, 2016, NASDAQ 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 to amend the Exchange's Pricing Schedule at 
section IV, part A, to amend Price Improvement XL (``PIXL'') 
Pricing.\3\
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    \3\ PIXLSM is the Exchange's price improvement 
mechanism known as Price Improvement XL or PIXL. A member may 
electronically submit for execution an order it represents as agent 
on behalf of a public customer, broker-dealer, or any other entity 
(``PIXL Order'') against principal interest or against any other 
order (except as provided in Rule 1080(n)(i)(F) it represents as 
agent (``Initiating Order''), provided it submits the PIXL order for 
electronic execution into the PIXL Auction pursuant to Rule 1080. 
See Exchange Rule 1080(n).
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    While changes to the Pricing Schedule pursuant to this proposal are 
effective upon filing, the Exchange has designated these changes to be 
operative on August 1, 2016.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqphlx.cchwallstreet.com/, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to amend PIXL Pricing in 
section IV, part A, to reduce the Penny Pilot Options Specialist \4\ or 
Market Maker \5\ Responder fee from $0.30 to

[[Page 49710]]

$0.25 per contract. The Exchange believes that this reduction will 
further align pricing, taking into consideration the Marketing Fee. 
Additional detail on this rule change is provided below.
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    \4\ The term ``Specialist'' shall apply to the account of a 
Specialist (as defined in Exchange Rule 1020(a)). A Specialist is an 
Exchange member who is registered as an options specialist pursuant 
to Rule 501(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.
    \5\ The term ``Market Maker'' will be utilized to describe fees 
and rebates applicable to Registered Options Traders (``ROTs''), 
Streaming Quote Traders (``SQTs''), Remote Streaming Quote Traders 
(``RSQTs''). An ROT is defined in Exchange Rule 1014(b) is a regular 
member or a foreign currency options participant of the Exchange 
located on the trading floor who has received permission from the 
Exchange to trade in options for his own account. A ROT includes 
SQTs and RSQTs as well as on and off-floor ROTS. An SQT is defined 
in Exchange Rule 1014(b)(ii)(A) as an ROT who has received 
permission from the Exchange to generate and submit option 
quotations electronically in options to which such SQT is assigned. 
An RSQT is defined in Exchange Rule in 1014(b)(ii)(B) as an ROT that 
is a member affiliated with an RSQTO with no physical trading floor 
presence who has received permission from the Exchange to generate 
and submit option quotations electronically in options to which such 
RSQT has been assigned. A Remote Streaming Quote Trader Organization 
or ``RSQTO,'' which may also be referred to as a Remote Market 
Making Organization (``RMO''), is a member organization in good 
standing that satisfies the RSQTO readiness requirements in Rule 
507(a). RSQTs may also be referred to as Remote Market Markers 
(``RMMs'').
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Amendment to Section IV, Part A--PIXL Pricing
    PIXL pricing is located in section IV, part A, of the Exchange's 
Pricing Schedule. A PIXL Auction Initiating Order is assessed $0.07 per 
contract. There are various incentives to lower the Initiating Order 
fee to $0.05 or $0.00.\6\ With respect to PIXL order executions in 
Multiply-Listed Options (including ETFs, ETNs, and indexes which are 
Multiply Listed), when the PIXL Order is contra to the Initiating Order 
a Customer PIXL Order will be assessed $0.00 per contract and Non-
Customer PIXL Orders will be assessed $0.30 per contract. When a PIXL 
Order is contra to a PIXL Auction Responder,\7\ a Customer PIXL Order 
will be assessed $0.00 per contract, other Non-Customer PIXL Orders 
will be assessed $0.30 per contract in Penny Pilot Options or $0.38 per 
contract in Non-Penny Pilot Options. A Responder that is a Specialist 
or a Market Maker will be assessed $0.30 per contract in Penny Pilot 
Options or $0.40 per contract in Non-Penny Pilot Options. Other Non-
Customer Responders will be assessed $0.48 per contract in Penny Pilot 
Options or $0.70 per contract in Non-Penny Pilot Options when contra to 
a PIXL Order. A Responder that is a Customer will be assessed $0.00 per 
contract in Penny Pilot Options and Non-Penny Pilot Options.\8\ All 
other fees discussed in Section II, including Marketing Fees \9\ and 
surcharges, will also apply as appropriate. Today, a Responder that is 
a Specialist or Market Maker would be assessed $0.30 per contract in 
Penny Pilot Options plus an additional $0.25 per contract Marketing Fee 
on that transaction for a total fee of $0.55 per contract.
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    \6\ If the member or member organization qualifies for the Tier 
4 or 5 Customer Rebate in Section B the member or member 
organization will be assessed $0.05 per contract. If the member or 
member organization executes equal to or greater than 3.00% of 
National Customer Volume in Multiply-Listed equity and ETF Options 
Classes (excluding SPY Options) in a given month, the member or 
member organization will be assessed $0.00 per contract for Complex 
PIXL Orders. Any member or member organization under Common 
Ownership with another member or member organization that qualifies 
for a Customer Rebate Tier 4 or 5 in Section B, or executes equal to 
or greater than 3.00% of National Customer Volume in Multiply-Listed 
equity and ETF Options Classes (excluding SPY Options) in a given 
month will receive one of the PIXL Initiating Order discounts as 
described above. The Initiating Order Fee for Professional, Firm, 
Broker-Dealer, Specialist and Market Maker orders that are contra to 
a Customer PIXL Order will be reduced to $0.00 if the Customer PIXL 
Order is greater than 399 contracts. See Chapter IV, Part A.
    \7\ A PIXL Auction Responder or a resting order or quote that 
was on the Phlx book prior to the auction are all Non-Initiating 
Order interest.
    \8\ When a PIXL Order is contra to a resting order or quote a 
Customer PIXL Order will be assessed $0.00 per contract, other Non-
Customer will be assessed $0.30 per contract and the resting order 
or quote will be assessed the appropriate Options Transaction Charge 
in Section II.
    \9\ The Exchange assesses a Marketing Fee of $0.25 per contract 
for options that are trading in the Penny Pilot Program and $0.70 
per contract for remaining equity options on trades resulting from 
either Directed or non-Directed Orders that are delivered 
electronically and executed on the Exchange, the above fees will be 
assessed on Specialists, Market Makers and Directed ROTs on those 
trades when the Specialist unit or Directed ROT elects to 
participate in the Marketing program. No Marketing Fees are assessed 
on trades not delivered electronically. No Marketing Fees are 
assessed in Professional Orders. See Section II of the Pricing 
Schedule. The term ``Directed Order'' means any order (other than a 
stop or stop-limit order as defined in Rule 1066) to buy or sell 
which has been directed to a particular specialist, RSQT, or SQT by 
an Order Flow Provider, as defined in Rule 1080(l).
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    The Exchange proposes to lower the Responder Fee for a Specialist 
or Market Maker from $0.30 to $0.25 per contract in Penny Pilot 
Options. The total Responder Fee for a Specialist or Market Maker in 
Penny Pilot Options would therefore be $0.25 per contract (Responder 
Fee) plus $0.25 per contract (Marketing Fee) for a total of $0.50 per 
contract. The Exchange believes that this fee reduction would better 
align Specialists and Market Makers responding in a PIXL auction with 
other responders, in Penny Pilot Options, who are not subject to the 
Marketing Fee.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with section 
6(b) of the Act,\10\ in general, and furthers the objectives of 
sections 6(b)(4) and 6(b)(5) of the Act,\11\ 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, and is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(4) and (5).
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    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, while adopting a series of steps to improve the current market 
model, the Commission highlighted the importance of market forces in 
determining prices and SRO revenues and, also, recognized that current 
regulation of the market system ``has been remarkably successful in 
promoting market competition in its broader forms that are most 
important to investors and listed companies.'' \12\
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    \12\ Securities Exchange Act Release No. 51808 (June 9, 2005), 
70 FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting 
Release'').
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    Likewise, in NetCoalition v. Securities and Exchange Commission 
\13\ (``NetCoalition'') 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.\14\ 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.'' \15\
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    \13\ NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010).
    \14\ See NetCoalition, at 534-535.
    \15\ Id. at 537.
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    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'. . . .'' \16\ Although the court and 
the SEC were discussing the cash equities markets, the Exchange 
believes that these views apply with equal force to the options 
markets.
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    \16\ Id. at 539 (quoting Securities Exchange Act Release No. 
59039 (December 2, 2008), 73 FR 74770, 74782-83 (December 9, 2008) 
(SR-NYSEArca-2006-21)).
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Amendment to Section IV, Part A--PIXL Pricing
    The Exchange's proposal to amend section IV, part A to lower the 
PIXL Responder Fee for a Specialist or Market Maker from $0.30 to $0.25 
per contract in Penny Pilot Options is reasonable because Specialists 
and Market Makers are subject to the Marketing Fee, whereas other types 
of market participants are not assessed the Marketing Fee. By lowering 
the PIXL Responder Fee for a Specialist or Market Maker from $0.30 to 
$0.25 per contract these market participants would be more closely 
aligned with other responders. The Exchange believes that Specialists 
and Market Makers will be

[[Page 49711]]

encouraged to respond to PIXL auctions with the lower fee. The proposed 
Non-Customer fees are lower than fees assessed to Non-Customers by 
other options exchanges.\17\
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    \17\ See NYSE MKT Inc. (``NYSE Amex'') Fees and Charges. 
Specifically, the RFR Response Penny Pilot Option Fee (Non-Customer) 
is $0.50 per contract for the CUBE auction. CUBE is NYSE Amex's 
electronic price improvement auction for options. This mechanism is 
similar to the PIXL auction. MIAX assesses a Responder to the Prime 
Auction a per contract Penny Pilot fee of $0.50 per contract to all 
market participants (including priority customer). PRIME is MIAX's 
electronic price improvement auction for options. This mechanism is 
similar to the PIXL auction.
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    The Exchange's proposal to amend section IV, part A to lower the 
PIXL Responder Fee for a Specialist or Market Maker from $0.30 to $0.25 
per contract in Penny Pilot Options is equitable and not unfairly 
discriminatory for the following reasons. The differential as between 
Specialists and Market Makers and other Non-Customers 
(Professionals,\18\ Firms \19\ and Broker-Dealers \20\) is not 
misaligned because Specialists and Market Makers pay a Marketing 
Fee.\21\ This proposal decreases the differential as between the 
Initiating Order Fee ($0.07 presuming no discount) and the Specialist 
or Market Maker contra party to the PIXL Order (proposed $0.25 per 
contract) for Penny Pilot Options. Specialists and Market Makers would 
receive lower prices because they have obligations to the market and 
regulatory requirements, which normally do not apply to other market 
participants in the continuous market, and as such the Exchange 
continues to believe Specialists and Market Makers should receive 
certain discounts in auctions.\22\ Additionally, the Marketing Fee is 
only paid by Specialists and Market Makers. Other Non-Customer 
Responders (Firms, Professionals and Broker-Dealers) are assessed $0.48 
per contract in Penny Pilot Options. All non-Customer market 
participants that do not engage in market making (Firms, Professionals 
and Broker-Dealers) are treated in a uniform manner. Customers will 
continue to be assessed no fee, as is the case today because Customer 
liquidity benefits all market participants by providing more trading 
opportunities, which attracts market makers. An increase in the 
activity of these market participants in turn facilitates tighter 
spreads, which may cause an additional corresponding increase in order 
flow from other market participants.
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    \18\ The term ``Professional'' applies to transactions for the 
accounts of Professionals, as defined in Exchange Rule 1000(b)(14) 
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).
    \19\ The term ``Firm'' applies to any transaction that is 
identified by a member or member organization for clearing in the 
Firm range at The Options Clearing Corporation.
    \20\ The term ``Broker-Dealer'' applies to any transaction which 
is not subject to any of the other transaction fees applicable 
within a particular category.
    \21\ See note 9 above.
    \22\ See Rule 1014 titled ``Obligations and Restrictions 
Applicable to Specialists and Registered Options Traders.''
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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.
    In this instance, the proposed changes to the charges assessed and 
credits available to member firms for execution of securities in 
securities of all three Tapes do not impose a burden on competition 
because the Exchange's execution services are completely voluntary and 
subject to extensive competition both from other exchanges and from 
off-exchange venues. The proposed PIXL Responder fees do not impose an 
undue burden on inter-market competition for the reasons described 
herein. In sum, if the changes proposed herein are unattractive to 
market participants, it is likely that the Exchange will lose market 
share as a result. Accordingly, the Exchange does not believe that the 
proposed changes will impair the ability of members or competing order 
execution venues to maintain their competitive standing in the 
financial markets.
    The Exchange's proposal to amend section IV, part A to lower the 
PIXL Responder Fee for a Specialist or Market Maker from $0.30 to $0.25 
per contract in Penny Pilot Options does not impose an undue burden on 
intra-market competition because the differential between the 
Initiating Order Fee and the Specialist or Market Maker contra party to 
the PIXL Order ($0.07 (presuming no discount) vs. $0.25 per contract 
for Penny Pilot Options is being decreased. The Marketing Fee is only 
paid by Specialists and Market Makers and not other market 
participants. Specialists and Market Makers would receive lower prices 
because have obligations to the market and regulatory requirements, 
which normally do not apply to other market participants in the 
continuous market, and as such the Exchange continues to believe 
Specialists and Market Makers should receive certain discounts in 
auctions.\23\ Other Non-Customer Responders (Firms, Professionals and 
Broker-Dealers) are assessed $0.48 per contract in Penny Pilot Options. 
All non-Customer market participants that do not engage in market 
making (Firms, Professionals and Broker-Dealers) are treated in a 
uniform manner. Customers will continue to be assessed no fee, as is 
the case today because liquidity benefits all market participants by 
providing more trading opportunities, which attracts market makers. An 
increase in the activity of these market participants in turn 
facilitates tighter spreads, which may cause an additional 
corresponding increase in order flow from other market participants.
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    \23\ Id.
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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.

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.\24\
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    \24\ 15 U.S.C. 78s(b)(3)(A)(ii).
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    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.

[[Page 49712]]

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-2016-77 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2016-77. 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-2016-77, and should be 
submitted on or before August 18, 2016.
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    \25\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
Brent J. Fields,
Secretary.
[FR Doc. 2016-17823 Filed 7-27-16; 8:45 am]
 BILLING CODE 8011-01-P