[Federal Register Volume 86, Number 118 (Wednesday, June 23, 2021)]
[Notices]
[Pages 32989-32993]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-13105]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92200; File No. SR-Phlx-2021-36]


Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend the 
Exchange's Pricing Schedule at Options 7, Section 5

June 16, 2021.
    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 June 11, 2021, 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 Substance 
of the Proposed Rule Change

    The Exchange proposes to amend the Exchange's Pricing Schedule at 
Options 7, Section 5 to adopt an incentive program for Lead Market 
Makers (``LMMs'') and Market Makers in Nasdaq 100 Micro Index (``XND'') 
options.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/phlx/rules, 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

[[Page 32990]]

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 Exchange recently received approval to list index options on 
XND on a pilot basis, and subsequently began to list XND options on 
April 15, 2021.\3\ The Exchange now proposes to amend its Pricing 
Schedule to adopt a rebate program in order to incentivize LMMS and 
Market Makers to provide significant liquidity in XND options during 
the trading day, which, in turn, would provide greater trading 
opportunities, narrower bid-ask spreads, and enhanced price discovery 
for all market participants in XND.
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    \3\ See Securities Exchange Act Release No. 91524 (April 9, 
2021), 86 FR 19909 (April 15, 2021) (SR-Phlx-2021-07) (``Adopting 
Filing''). The Exchange also filed to adopt initial fees for XND 
options on April 15, 2021. See Securities Exchange Act Release No. 
91696 (April 28, 2021), 86 FR 24109 (May 5, 2021) (SR-Phlx-2021-24).
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    Today, LMMs and Market Makers are subject to certain intra-day 
electronic quoting obligations on the Exchange.\4\ As further described 
below, the Exchange proposes to amend the Exchange's Pricing Schedule 
to provide rebates to any LMM or Market Maker in XND that meet 
heightened quoting standards during the trading day, which will be 
specified in new Section 5.B of Options 7.\5\ As proposed, an LMM or 
Market Maker will be eligible to receive the following additional 
rebates in all XND series if they meet the following criteria: (i) 
$0.03 per contract if the LMM or Market Maker provides continuous 
electronic quotes during the trading day that meet or exceed the below 
heightened quoting standards for all XND series with an expiration of 
14 days or less, for the corresponding minimum time requirement on 
average in a given month based on daily performance; (ii) $0.01 per 
contract if the LMM or Market Maker provides continuous electronic 
quotes during the trading day that meet or exceed the below heightened 
quoting standards for all XND series with an expiration of 15 day to 60 
days, for the corresponding minimum time requirement on average in a 
given month based on daily performance; and (iii) $0.01 per contract if 
the LMM or Market Maker provides continuous electronic quotes during 
the trading day that meet or exceed the below heightened quoting 
standards for all XND series with an expiration of 61 days or greater, 
for the corresponding minimum time requirement on average in a given 
month based on daily performance. The foregoing rebates may be 
cumulative such that a qualifying LMM or Market Maker may receive a 
total rebate of $0.05 per contract for all XND series.
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    \4\ See Options 2, Sections 4(c), 5(a), and 5(c).
    \5\ In connection with this change, existing Sections 5.B and 
5.C of Options 7 will be renumbered to 5.C and 5.D, respectively.

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                                                                                                     Expiring
                                                         -----------------------------------------------------------------------------------------------
 Minimum time requirement (%)        Premium level                14 days or less               15 days to 60 days              61 days or greater
                                                         -----------------------------------------------------------------------------------------------
                                                               Width           Size            Width           Size            Width           Size
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90...........................  $0.00-$1.00..............           $0.05               5           $0.06               5           $0.10               5
90...........................  $1.01-$3.00..............            0.08               5            0.08               5            0.12               5
90...........................  $3.01-$5.00..............            0.10               5            0.10               5            0.15               5
90...........................  $5.01-$10.00.............            0.45               5            0.50               5            0.60               5
85...........................  $10.01-$25.00............            1.00               5            1.10               5            1.25               5
85...........................  Greater than $25.00......            2.50               5            3.00               5            3.50               5
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    In calculating whether an LMM or Market Maker met the heightened 
quoting standard each month, the Exchange will exclude from the 
calculation in that month the worst quoting day in XND for the LMM or 
Market Maker.
    As proposed, the above minimum time requirements will apply to each 
series on an individual basis such that an LMM or Market Maker must 
meet those requirements separately for each premium level (e.g., a 
Market Maker must quote a $0.95 premium XND option at least 90% of the 
time, separately quote a $2.00 premium XND option at least 90% of the 
time, etc. all the way down to the last premium level of greater than 
$25 in order to be eligible for a rebate).\6\ An LMM or Market Maker 
meeting all the minimum time requirements in all premium levels would 
thus be eligible to receive the applicable rebate (i.e., $0.03 in the 
14 days or less expiration bucket, $0.01 in the 15-60 days bucket, and/
or $0.01 in the 61 days or greater bucket) if it also meets the 
specified heightened quoting standards in the applicable expiration 
bucket, which rebate amount would then apply to all of the LMM's or 
Market Maker's XND contracts. In other words, an LMM or Market Maker 
can qualify for any one or combination of the foregoing rebates such 
that it may receive anywhere between $0.01 and up to a total of $0.05 
per contract, which would then be applied to all XND contracts.
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    \6\ As noted below, this is different from Cboe Exchange, Inc.'s 
(``Cboe'') LMM incentive program, which also requires LMMs to quote 
in a specified percentage of all series. See infra note 9.
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    The following examples further illustrate how the proposed rebate 
program will work:
Example 1
    A Market Maker is meeting the quote width requirement ($0.06) on a 
$0.95 premium XND option 20 days until expiration 93% of the time. The 
93% performance would count towards the 15-60 day expiration bucket 
that could gain the $0.01 per contract rebate. Six days later, as the 
XND option is now 14 days until expiration, the Market Maker tightens 
to quoting $0.05 wide 91% of the time. The 91% performance would count 
towards the 14 days or less expiration bucket that could gain the $0.03 
per contract rebate.
Example 2
    A Market Maker is meeting the quote width, size and minimum time 
requirements for all 14 days or less XND options up to a $25 premium 
level, but the Market Maker does not hit the 85% minimum time 
requirement for XND options with a premium greater than $25. As a 
result, the Market Maker would not be eligible to receive the $0.03 per 
contract rebate for the 14 days or less expiration bucket. However, it 
could still be eligible to receive the $0.01 per contract rebates in 
the other

[[Page 32991]]

two expiration buckets (15-60 days and 61 days or greater) if they meet 
all of the corresponding quote width, size and minimum time 
requirements for all premium levels for each bucket.
    LMMs and Market Makers in XND options are not obligated to satisfy 
the heightened quoting standards described in the table above. Rather, 
the LMM or Market Maker will only receive a rebate if they satisfy the 
abovementioned heightened quoting standard. If an LMM or Market Maker 
does not meet the heightened quoting standard, then it will simply not 
receive the rebate for that month. The Exchange notes, however, that 
with respect to quoting obligations, LMMs and Market Makers must still 
comply with the continuous quoting obligations and other obligations of 
LMMs and Market Makers described in the Exchange's Rules.\7\ The 
Exchange believes that the proposed rebates for the additional quoting 
standards described above will incentivize LMMs and Market Makers to 
provide significant liquidity in XND options.
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    \7\ See supra note 4.
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    As it relates to the proposed exception to the heightened quoting 
standards described above to exclude the LMM's or Market Maker's worst 
quoting day in XND in a given month, the Exchange seeks to adopt this 
exception to provide flexibility for LMMs and Market Makers, which in 
turn may further encourage those market participants to provide 
liquidity in XND options. For example, the Exchange notes that there 
may be certain circumstances, such as where the LMM or Market Maker has 
a system issue, that may impact their ability to meet the proposed 
heightened quoting standards for that day, which could result in the 
LMM or Market Maker no longer being able to satisfy the heightened 
quoting standard for the remainder of the month. The Exchange believes 
that the proposed change will further encourage LMMs and Market Makers 
to continue to quote aggressively in XND options throughout the entire 
month despite one poor performing day. For example, absent the proposed 
rule change, if an LMM or Market Maker has a poor performing day early 
in the month, the market participant may no longer have an incentive to 
continue to quote at the proposed heightened levels for the remainder 
of the month as it would know it would no longer be eligible to receive 
the proposed rebates for that month even if it continued to meet or 
exceed the prescribed quoting standards. Accordingly, the Exchange 
believes the proposed rule change would eliminate the potential 
disincentive that could occur if one poor performing day prevented an 
LMM or Market Maker from meeting the proposed heightened quoting 
standards.
    The Exchange notes that the proposed XND incentive program is 
substantially similar to incentive programs in place at Cboe that offer 
financial benefits for meeting heightened quoting standards, with 
certain structural differences.\8\ For instance, the proposed XND 
incentive program will pay the rebates to the qualifying LMM or Market 
Maker on a per contract basis, instead of as one monthly payment like 
Cboe's programs. Furthermore, the proposed rebates may be cumulative 
such that the qualifying LMM or Market Maker may receive up to $0.05 
per contract in all XND series, as discussed above. The proposed 
program will also be available to both LMMs and Market Makers in XND 
whereas Cboe's programs are generally limited to LMMs. In this respect, 
the Exchange seeks to expand the pool of Market Makers that may provide 
liquidity in XND, which is ultimately beneficial to the marketplace by 
facilitating tighter spreads and more trading opportunities, 
particularly in a newly listed and traded product on the Exchange 
during the trading day. In addition, while the Exchange will require 
LMMs and Market Makers to satisfy the proposed heightened quoting 
standards for a specified percentage of time for XND series, the 
Exchange will not require LMMs or Market Makers to meet the proposed 
heightened quoting requirements in a specified percentage of XND series 
like Cboe's programs.\9\ Otherwise, the proposed heightened quoting 
standards are similar to the detail and format (specific expiration 
categories and corresponding premiums, quote widths, and sizes) of the 
heightened quoting standards currently in place for Cboe's incentive 
programs.\10\
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    \8\ See, e.g., Cboe Fees Schedule, ``MRUT LMM Incentive 
Program,'' ``MSCI LMM Incentive Program,'' ``GTH VIX/VIXW LMM 
Incentive Program,'' ``GTH SPX/SPXW LMM Incentive Program,'' and 
``RTH SPESG LMM Incentive Program.''
    \9\ For example, Cboe's RTH SPESG LMM Incentive Program requires 
the LMM to meet the specified heightened quoting standards in at 
least 60% of the series 90% of the time in a given month.
    \10\ See supra note 8.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\11\ in general, and furthers the objectives of 
Sections 6(b)(4) and 6(b)(5) of the Act,\12\ 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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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(4) and (5).
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    The Exchange believes that the proposed XND incentive program is 
reasonable, equitable, and not unfairly discriminatory. The proposed 
heightened quoting standards and rebate amounts for meeting the 
heightened quoting standards in XND series are reasonably designed to 
incentivize an LMM or Market Maker to meet the quoting standards for 
XND during the trading day, thereby providing liquid and active 
markets, which facilitates tighter spreads, increased trading 
opportunities, and overall enhanced market quality to the benefit of 
all market participants, particularly in a newly listed and traded 
product like XND in order to encourage its growth on the Exchange. The 
Exchange believes that creating an incentive program in which LMMs and 
Market Makers must satisfy a heightened quoting standard to receive the 
rebates is a reasonable way to fortify market quality in XND, 
especially given XND's new market ecosystem where the Exchange expects 
lower trading liquidity and trading levels as compared to more 
established products that generally contain deeper pools of liquidity 
and are more active.
    The Exchange believes that the proposed rebates are set at 
appropriate levels that are reasonably designed to incentivize LMMs and 
Market Makers to provide liquid and active markets in XND options to 
encourage its growth on the Exchange. As stated in the Adopting Filing, 
the Exchange is seeking to attract a greater source of retail customer 
business by listing XND options.\13\ Accordingly, the Exchange is 
proposing to provide a higher rebate in XND series with expirations of 
14 days or less as compared to longer-term XND series (i.e., $0.03 per 
contract compared to $0.01 per contract) in order to incentivize 
significant liquidity in retail XND orders, which would typically be in 
XND series with shorter expirations and lower premiums. The Exchange 
also believes that allowing the proposed rebates to be cumulative such 
that qualifying LMMs and Market Makers could receive a total rebate of 
up to $0.05 per contract would encourage a more liquid and active 
market in all XND series, which will have a beneficial impact on market 
quality.
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    \13\ See supra note 3.
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    The Exchange believes that the proposed heightened quoting 
standards in XND options are reasonable in that

[[Page 32992]]

they are similar to the detail and format (specific expiration 
categories and corresponding premiums, quote widths, and sizes) of the 
heightened quoting standards currently in place for Cboe's incentive 
programs.\14\ For example, the proposed expiration categories are 
similar to those for Cboe's MRUT LMM incentive program except the 
Exchange will not have a separate expiration category for long term 
options (i.e., 271 days or greater). The Exchange notes that it does 
not currently list any long term XND options series. The Exchange 
believes that the proposed premiums and quote widths in the proposed 
heightened quoting standards for XND LMMs and Market Makers reasonably 
reflect what the Exchange believes will be typical market 
characteristics in XND options, given their reduced notional value 
based on the Nasdaq 100 Index, minimum increments, and target retail 
base, thus smaller, retail-sized orders. In addition, the Exchange 
believes that the proposed size requirement of five (5) contracts in 
the heightened quoting standards is a reasonable balance of the typical 
market characteristics of an XND order (i.e., smaller, retail-sized 
orders) and the desire for the Exchange to encourage significant 
liquidity in XND options. Furthermore, the Exchange believes that the 
proposed minimum time requirements are set at reasonable levels that 
would encourage LMMs and Market Makers to contribute to greater 
liquidity in a newly-listed product like XND.
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    \14\ See supra note 8.
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    The Exchange believes the proposed XND incentive program is 
equitable and not unfairly discriminatory as all LMMs and Market Makers 
may qualify for this program by meeting the heightened quoting 
standards described above. In addition, the Exchange believes that it 
is equitable and not unfairly discriminatory to only offer the proposed 
incentives to LMMs and Market Makers. LMMs and Market Makers add value 
through continuous quoting and are subject to additional requirements 
and obligations (such as continuous quoting obligations) that other 
market participants are not. Furthermore, by incentivizing LMMs and 
Market Makers to satisfy the heightened quoting standards in XND 
series, the proposed changes may increase liquidity and tighter 
spreads, which can lead to increased volume, thereby benefitting all 
market participants by providing a robust market, particularly in a 
newly listed and traded product like XND in order to encourage its 
growth on the Exchange.
    The Exchange believes that the proposed rule change to exclude the 
LMM's or Market Maker's worst quoting day each month is reasonable 
because it will encourage those market participants to continue to 
quote aggressively in XND options throughout the entire month despite 
an individual poor performing day. As discussed above, there may be 
days on which an LMM or Market Maker cannot quote aggressively (e.g., 
the market participant has a system issue) and in certain months, one 
poor performing day may prevent an LMM or Market Maker from meeting the 
heightened quoting standard required to receive the rebates under the 
proposed incentive program. Moreover, in such months where an LMM or 
Market Maker has a poor performing day, the LMM or Market Maker may be 
discouraged from quoting aggressively the remainder of the month if it 
knows it were no longer eligible to receive the rebates that month. 
This can be especially problematic if a poor performing day occurs 
early in the month. The Exchange notes that the proposed XND rebate 
program is to ensure there are sufficient incentives for an LMM or 
Market Maker to quote at heightened levels in this newly-listed 
product. Accordingly, the Exchange believes the proposed rule change 
will encourage LMMs and Market Makers to quote aggressively in a class 
throughout the entire month (and thereby ensure sufficient liquidity), 
notwithstanding a poor performing day. The Exchange also notes that its 
affiliated exchange, Nasdaq ISE, LLC (``ISE'') similarly omits a Market 
Maker's worst quoting day each month under its Market Maker Plus rebate 
program.\15\ Lastly, the Exchange believes the proposed exclusion is 
equitable and not unfairly discriminatory as it will apply equally to 
all LMMs and Market Makers.
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    \15\ See ISE Options 7, Section 3, footnote 5.
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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 intra-market competition, the Exchange does not believe 
that its proposal will place any category of market participant at a 
competitive disadvantage. The proposed XND incentive program is 
intended to encourage growth in a newly listed and traded product by 
providing rebates for LMMs and Market Makers that meet or exceed the 
proposed heighted quoting standards described above. As discussed 
above, the Exchange believes that its proposal will incentivize LMMS 
and Market Makers to provide significant liquidity in XND options 
during the trading day, which, in turn, would provide greater trading 
opportunities, narrower bid-ask spreads, and enhanced price discovery 
for all market participants in XND.
    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. The Exchange notes that there are 
other products today that are similarly based on the Nasdaq-100 Index. 
Specifically, market participants are offered an opportunity to 
transact in NDX, NDXP, or NQX, or separately execute options overlying 
QQQ, which offer various notional sizes.\16\ Offering these products 
provides market participants with a variety of choices in selecting the 
product they desire to utilize to transact in the Nasdaq-100 Index. 
Furthermore, the Exchange notes that there are other existing 
investment products that are similar to XND options in that they seek 
to allow investors to gain broad market exposure through reduced value 
options.\17\ 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.
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    \16\ See e.g., Options 7, Section 5.A for NDX and NDXP pricing. 
See also ISE Options 7, Section 5.B for NQX pricing. NQX is 
currently listed only on ISE.
    \17\ For instance, Cboe offers both MRUT and Mini-SPX (``XSP'') 
options, which are reduced-value options based on broad-based 
indexes (i.e., the Russell 2000 Index and S&P 500 Index). See Cboe 
Fees Schedule for MRUT and XSP pricing.
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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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \18\ and

[[Page 32993]]

subparagraph (f)(6) of Rule 19b-4 thereunder.\19\
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    \18\ 15 U.S.C. 78s(b)(3)(A).
    \19\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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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.

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-2021-36 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-2021-36. 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-Phlx-2021-36 and should be submitted on 
or before July 14, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-13105 Filed 6-22-21; 8:45 am]
BILLING CODE 8011-01-P