[Federal Register Volume 87, Number 39 (Monday, February 28, 2022)]
[Notices]
[Pages 11108-11111]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-04079]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94293; File No. SR-Phlx-2022-07]


Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Strategy 
Caps for Reversal and Conversion and Jelly Roll Strategies

February 22, 2022.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on February 9, 2022, 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\ 15 U.S.C. 78a.
    \3\ 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 Phlx's Pricing Schedule at Options 
7, Section 4, ``Multiply Listed Options Fees (Includes options 
overlying equities, ETFs, ETNs and indexes which are Multiply Listed) 
(Excludes SPY).''
    The Exchange originally filed the proposed pricing changes on 
February 1, 2022 (SR-PHLX-2022-06). On February 9, 2022, the Exchange 
withdrew that filing and submitted this filing.
    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 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 to amend its pricing within Options 7, Section 4, 
``Multiply Listed Options Fees (Includes options overlying equities, 
ETFs, ETNs and indexes which are Multiply Listed) (Excludes SPY).'' 
Specifically, Phlx proposes to amend the daily strategy

[[Page 11109]]

cap for reversal and conversion \4\ and jelly roll \5\ strategies.
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    \4\ Reversal and conversion strategies are transactions that 
employ calls and puts of the same strike price and the underlying 
stock. Reversals are established by combining a short stock position 
with a short put and a long call position that shares the same 
strike and expiration. Conversions employ long positions in the 
underlying stock that accompany long puts and short calls sharing 
the same strike and expiration. See Options 7, Section 4.
    \5\ A jelly roll strategy is defined as transactions created by 
entering into two separate positions simultaneously. One position 
involves buying a put and selling a call with the same strike price 
and expiration. The second position involves selling a put and 
buying a call, with the same strike price, but with a different 
expiration from the first position. See Options 7, Section 4.
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    Today, to qualify for a strategy cap, the buy and sell side of a 
transaction must originate either from the Exchange Trading Floor or as 
a Floor Qualified Contingent Cross Order.\6\ Currently, the Exchange 
offers the following strategy caps:
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    \6\ See Phlx's Pricing Schedule at Options 7, Section 4. A Floor 
Qualified Contingent Cross Order is comprised of an originating 
order to buy or sell at least 1,000 contracts that is identified as 
being part of a qualified contingent trade coupled with a contra-
side order or orders totaling an equal number of contracts. The term 
``qualified contingent trade'' shall have the same meaning set forth 
in Options 3, Section 12(a)(3). See Options 8, Section 30(e).

----------------------------------------------------------------------------------------------------------------
 Floor options transactions--multiply
            listed options                     Strategy              Qualification          Daily/monthly cap
----------------------------------------------------------------------------------------------------------------
Lead Market Maker, Market Maker,       dividend...............  executed on the same     $1,100 (daily).
 Professional, Firm and Broker-Dealer.                           trading day in the
                                                                 same class of options
                                                                 when such members are
                                                                 trading: (1) In their
                                                                 own proprietary
                                                                 accounts; or (2) on an
                                                                 agency basis. If
                                                                 transacted on an
                                                                 agency basis, the
                                                                 daily cap will apply
                                                                 per beneficial
                                                                 account..
Lead Market Maker, Market Maker,       reversal and             executed on the same     $1,000 (daily) if more
 Professional, Firm and Broker-Dealer.  conversion, merger,      trading day for all      than one class of
                                        short stock interest,    classes of options in    options, $700 (daily)
                                        jelly roll, and box      the aggregate when       if only in a single
                                        spread strategies.       such members are         class of options.
                                                                 trading (1) in their
                                                                 own proprietary
                                                                 accounts; or (2) on an
                                                                 agency basis. If
                                                                 transacted on an
                                                                 agency basis, the
                                                                 daily cap will apply
                                                                 per beneficial
                                                                 account..
Per member organization..............  dividend, merger, short  combined executions in   $65,000 (monthly).
                                        stock interest,          a month when trading
                                        reversal and             in its own proprietary
                                        conversion, jelly roll   accounts.
                                        and box spread
                                        strategies (``Monthly
                                        Strategy Cap'').
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    The Exchange offers strategy caps for various types of strategies, 
including dividend,\7\ merger,\8\ short stock interest,\9\ reversal and 
conversion, jelly roll, and box spread \10\ strategies. Of note, NDX, 
NDXP, and XND Options Transactions are excluded from strategy cap 
pricing.
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    \7\ A dividend strategy is defined as transactions done to 
achieve a dividend arbitrage involving the purchase, sale and 
exercise of in-the-money options of the same class, executed the 
first business day prior to the date on which the underlying stock 
goes ex-dividend. See Options 7, Section 4.
    \8\ A merger strategy is defined as transactions done to achieve 
a merger arbitrage involving the purchase, sale and exercise of 
options of the same class and expiration date, executed the first 
business day prior to the date on which shareholders of record are 
required to elect their respective form of consideration, i.e., cash 
or stock. See Options 7, Section 4.
    \9\ A short stock interest strategy is defined as transactions 
done to achieve a short stock interest arbitrage involving the 
purchase, sale and exercise of in-the-money options of the same 
class. See Options 7, Section 4.
    \10\ A box spread strategy is a strategy that synthesizes long 
and short stock positions to create a profit. Specifically, a long 
call and short put at one strike is combined with a short call and 
long put at a different strike to create synthetic long and 
synthetic short stock positions, respectively. See Options 7, 
Section 4.
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    Specifically, today, the Exchange offers a reversal and conversion, 
merger, short stock interest, jelly roll and box spread strategy cap, 
which is applicable to Lead Market Makers,\11\ Market Makers,\12\ 
Professionals,\13\ Firms \14\ and Broker-Dealers,\15\ of $1,000 (daily) 
if more than one class of options, and $700 (daily) if only in a single 
class of options.\16\ The aforementioned strategy cap applies to 
reversal and conversion, merger, short stock interest, jelly roll and 
box spread strategies executed on the same trading day for all classes 
of options in the aggregate when such members are trading (1) in their 
own proprietary accounts; or (2) on an agency basis.\17\
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    \11\ As provided in the Pricing Schedule within Options 7, 
Section 1(c), ``The term ``Lead Market Maker'' applies to 
transactions for the account of a Lead Market Maker (as defined in 
Options 2, Section 12(a)). A Lead Market Maker is an Exchange member 
who is registered as an options Lead Market Maker pursuant to 
Options 2, Section 12(a). An options Lead Market Maker includes a 
Remote Lead Market Maker which is defined as an options Lead Market 
Maker in one or more classes that does not have a physical presence 
on an Exchange floor and is approved by the Exchange pursuant to 
Options 2, Section 11.''
    \12\ As provided in the Pricing Schedule within Options 7, 
Section 1(c), ``The term ``Market Maker'' is defined in Options 1, 
Section 1(b)(28) as a member of the Exchange who is registered as an 
options Market Maker pursuant to Options 2, Section 12(a). A Market 
Maker includes SQTs and RSQTs as well as on and Floor Market 
Makers.''
    \13\ As provided in the Pricing Schedule within Options 7, 
Section 1(c), ``The term ``Professional'' applies to transactions 
for the accounts of Professionals, as defined in Options 1, Section 
1(b)(45) 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).''
    \14\ As provided in the Pricing Schedule within Options 7, 
Section 1(c), ``The term ``Firm'' applies to any transaction that is 
identified by a member or member organization for clearing in the 
Firm range at OCC.''
    \15\ As provided in the Pricing Schedule within Options 7, 
Section 1(c), ``The term ``Broker-Dealer'' applies to any 
transaction which is not subject to any of the other transaction 
fees applicable within a particular category.''
    \16\ For example, if a Lead Market Maker executed reversal and 
conversion strategies only in AAPL options, and otherwise met the 
qualifications for a reversal and conversion cap, the proposed $700 
daily cap would apply. If the Lead Market Maker executed reversal 
and conversion strategies in AAPL and SPY options, and otherwise met 
the qualifications for a reversal and conversion cap, the proposed 
$1,000 daily cap would apply.
    \17\ If transacted on an agency basis, the daily cap applies per 
beneficial account.
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    The Exchange is proposing to lower the daily strategy cap for Lead 
Market Makers, Market Makers, Professionals, Firms and Broker-Dealers 
who execute reversal and conversion and jelly roll strategies on the 
same trading day. The Exchange proposes to cap reversal and conversion 
and jelly roll strategies for all classes of options in the aggregate 
when such members are trading (1) in their own proprietary accounts; or 
(2) on an agency basis at $200 daily. As is the case today, if 
transacted on an agency

[[Page 11110]]

basis, the daily strategy cap would apply per beneficial account. The 
Exchange would not amend the current strategy caps for merger, short 
stock interest, and box spread strategies. The qualifications for the 
reversal and conversion and jelly roll strategy cap remains the same. 
Finally, the proposed daily strategy cap continues to apply to 
executions for all classes of options.
    The Exchange believes that its proposal will incentivize members to 
transact a greater number of reversal and conversion and jelly roll 
strategies because the strategy cap would be lowered from $1,000/$700 
daily (depending on the class of options) to $200 daily.
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, and is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 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.'' \20\
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    \20\ 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 
\21\ (``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.\22\ 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.'' \23\
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    \21\ NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010).
    \22\ See NetCoalition, at 534-535.
    \23\ 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' . . ..'' \24\ 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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    \24\ 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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    The Exchange's proposal to decrease the reversal and conversion and 
jelly roll strategy cap applicable to Lead Market Makers, Market 
Makers, Professionals, Firms and Broker-Dealers from $1,000/$700 daily 
(depending on the class of options) to $200 daily, with the same 
qualifications as today, is reasonable because it will incentivize Lead 
Market Makers, Market Makers, Professionals, Firms and Broker-Dealers 
to execute a greater number of reversal and conversion and jelly roll 
strategies for the opportunity to qualify for the lower daily strategy 
cap. Strategy fee caps defray brokerage costs associated with executing 
strategy transactions.
    Today, NYSE Arca, Inc. (``NYSE Arca'') and NYSE American LLC 
(``NYSE American'') cap certain strategy fees as low as $200.\25\ The 
Exchange believes that lowering the reversal and conversion and jelly 
roll strategy cap from $1,000/$700 daily (depending on the class of 
options) to $200 daily will allow the Exchange to more effectively 
compete with other options exchanges who offer lower strategy caps for 
these two particular strategies. The Exchange notes that reversal and 
conversion and jelly roll strategies are popular strategies that may be 
transacted by any Phlx member or member organization. To the extent 
that the proposed change attracts more reversal and conversion and 
jelly roll strategy executions to the Exchange, this increased (open 
outcry) order flow would continue to make the Exchange a more 
competitive venue for order execution. To the extent the proposed 
change continues to attract greater volume and liquidity, the Exchange 
believes the proposed change would improve the Exchange's overall 
competitiveness and strengthen its market quality for all market 
participants. In the backdrop of the competitive environment in which 
the Exchange operates, the proposed rule change is a reasonable attempt 
by the Exchange to effectively compete for strategy trades. Finally, 
the Exchange cannot predict with certainty whether any, or how many, 
Phlx members and member organizations would avail themselves of this 
proposed fee change. The Exchange believes that Phlx members and member 
organizations that execute reversal and conversion and jelly roll 
strategies on the Exchange can achieve the proposed daily cap of $200 
and that this proposal may encourage Phlx members and member 
organizations to execute reversal and conversion and jelly roll 
strategies on the Exchange.
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    \25\ NYSE Arca and NYSE American applies a strategy cap of $200 
on transactions fees for qualifying strategies traded on the same 
trading day for those ATP Holders that trade at least 25,000 monthly 
billable contract sides in qualifying Strategy Executions. The 
strategies include: (a) Reversals and conversions, (b) box spreads, 
(c) short stock interest spreads, (d) merger spreads, and (e) jelly 
rolls.
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    The Exchange's proposal to decrease the reversal and conversion and 
jelly roll strategy cap applicable to Lead Market Makers, Market 
Makers, Professionals, Firms and Broker-Dealers from $1,000/$700 daily 
(depending on the class of options) to $200 daily, with the same 
qualifications as today, is equitable and not unfairly discriminatory 
because all Lead Market Makers, Market Makers, Professionals, Firms and 
Broker-Dealers may qualify for the reversal and conversion and jelly 
roll strategy cap provided those strategies are executed on the same 
trading day for all classes of options in the aggregate when such 
members are trading either in their own proprietary accounts or on an 
agency basis. While Customers \26\ are not offered strategy caps, 
Customers are not assessed Options Transaction Charges within Options 
7, Section 4.
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    \26\ As provided in the Pricing Schedule within Options 7, 
Section 1(c), ``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 Options 1, Section 
1(b)(45)).''
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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

[[Page 11111]]

necessary or appropriate in furtherance of the purposes of the Act.
Inter-Market Competition
    The proposal does not impose an undue burden on inter-market 
competition. The Exchange believes its proposal remains competitive 
with other options markets and will offer market participants with 
another choice of where to transact options. 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 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.
    Moreover, the proposal is designed to encourage Phlx members and 
member organizations to execute reversal and conversion and jelly roll 
strategies on the Exchange as a primary execution venue. To the extent 
that the proposed change attracts more reversal and conversion and 
jelly roll strategies to the Exchange, this increased order flow would 
continue to make the Exchange a more competitive venue for order 
execution.
Intra-Market Competition
    The proposed amendments do not impose an undue burden on intra-
market competition.
    The Exchange's proposal to decrease the reversal and conversion and 
jelly roll strategy cap applicable to Lead Market Makers, Market 
Makers, Professionals, Firms and Broker-Dealers from $1,000/$700 daily 
(depending on the class of options) to $200 daily, with the same 
qualifications as today, does not impose an undue burden on competition 
because all Lead Market Makers, Market Makers, Professionals, Firms and 
Broker-Dealers may qualify for the reversal and conversion and jelly 
roll strategy cap provided those strategies are executed on the same 
trading day for all classes of options in the aggregate when such 
members are trading either in their own proprietary accounts or on an 
agency basis. While Customers are not offered strategy caps, Customers 
are not assessed Options Transaction Charges within Options 7, Section 
4.

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.\27\
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    \27\ 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.

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-2022-07 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-2022-07. 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-2022-07, and should be submitted on 
or before March 21, 2022.
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    \28\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2022-04079 Filed 2-25-22; 8:45 am]
BILLING CODE 8011-01-P