Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Qualified Contingent Cross Orders, 2579-2581 [2012-818]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 77, Number 11 (Wednesday, January 18, 2012)]
[Notices]
[Pages 2579-2581]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-818]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66145; File No. SR-Phlx-2011-189]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
Qualified Contingent Cross Orders

January 11, 2012.
    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 December 30, 2011, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its Fee Schedule to create a tiered 
rebate for Qualified Contingent Cross orders (``QCC Orders'').
    While changes to the Fee Schedule pursuant to this proposal are 
effective upon filing, the Exchange has designated these changes to be 
operative on January 3, 2012.
    The text of the proposed rule change is available on the Exchange's 
Web site at https://nasdaqtrader.com/micro.aspx?id=PHLXfilings, at the 
principal office of the Exchange, on the Commission's Web site at 
https://www.sec.gov, 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 the rebate 
applicable to both electronic QCC Orders (``eQCC'') \3\ and Floor QCC 
Orders,\4\ in order to create a tiered rebate structure. The Exchange 
believes that offering tiered rebates for QCC Orders will create an 
additional incentive for market participants to execute QCC Orders on 
the Exchange in Multiply Listed Securities.\5\
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    \3\ A QCC Order is comprised of an order to buy or sell at least 
1,000 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 National Best Bid and Offer 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 PHLX XL 
II System. See Rule 1080(o). See also Securities Exchange Act 
Release No. 64249 (April 7, 2011), 76 FR 20773 (April 13, 2011) (SR-
Phlx-2011-47) (a rule change to establish a QCC Order to facilitate 
the execution of stock/option Qualified Contingent Trades (``QCTs'') 
that satisfy the requirements of the trade through exemption in 
connection with Rule 611(d) of the Regulation NMS).
    \4\ 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 
National Best Bid and Offer (``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).
    \5\ Multiply Listed Securities include those symbols which are 
subject to rebates and fees in Section I, Rebates and Fees For 
Adding and Removing Liquidity in Select Symbols, and Section II, 
Equity Options Fees.
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    There are currently several categories of market participants: 
Customers, Directed Participants,\6\ Specialists,\7\ Registered Options 
Traders,\8\ SQTs,\9\ RSQTs,\10\ Broker-Dealers, Firms and 
Professionals.\11\ The Exchange proposes to amend the current rebates 
applicable to both eQCC Orders and Floor QCC Orders, for the above 
categories of market participants, applicable to both Sections I \12\ 
and II \13\ of the Fee Schedule. Currently, the Exchange pays a rebate 
of $0.07 per contract for all executed eQCC Orders and Floor QCC 
Orders.\14\
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    \6\ A Directed Participant is a Specialist, SQT, or RSQT that 
executes a customer order that is directed to them by an Order Flow 
Provider and is executed electronically on PHLX XL II.
    \7\ A Specialist is an Exchange member who is registered as an 
options specialist pursuant to Rule 1020(a).
    \8\ A Registered Options Trader (``ROT'') includes a Streaming 
Quote Trader (``SQT''), a Remote Streaming Quote Trader (``RSQT'') 
and a Non-SQT ROT, which by definition is neither a SQT or a RSQT. A 
ROT is defined in Exchange Rule 1014(b) as 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. See Exchange Rule 1014 (b)(i) and 
(ii).
    \9\ 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.
    \10\ An RSQT is defined Exchange Rule in 1014(b)(ii)(B) as an 
ROT that is a member or member organization 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. An RSQT may only submit such 
quotations electronically from off the floor of the Exchange.
    \11\ The Exchange defines a ``professional'' as 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) 
(hereinafter ``Professional'').
    \12\ Section I of the Fee Schedule is entitled ``Rebates and 
Fees for Adding and Removing Liquidity in Select Symbols.'' The 
Section I fees and rebates are applicable to certain select symbols 
which are defined in that section.
    \13\ Section II of the Fee Schedule is entitled ``Equity Options 
Fees.'' Section II includes options overlying equities, ETFs, ETNs, 
indexes and HOLDRS which are Multiply Listed.
    \14\ QCC Transaction Fees for a Specialist, ROT, SQT, RSQT, 
Professional, Firm and Broker-Dealer are $0.20 per contract. QCC 
Transaction Fees apply to QCC Orders, as defined in Exchange Rule 
1080(o), and Floor QCC Orders, as defined in 1064(e).
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    The Exchange proposes to offer a tiered rebate structure for both 
eQCC Orders and Floor QCC Orders. The Exchange proposes to pay a rebate 
of $0.07 per contract on all qualifying executed QCC Orders up to 
1,000,000 contracts in a month. If a member exceeds 1,000,000 contracts 
in a month of qualifying executed QCC Orders, the Exchange would pay 
$0.10 per contract on all qualifying executed QCC Orders in a given 
month. In other words, the Exchange would either pay a $0.07 or $0.10 
rebate depending on the number of qualifying contracts for that month. 
With respect to a Floor QCC Order, the Exchange will continue to offer 
the rebate to the Floor Broker.
    The Exchange does not offer a rebate on executed eQCC Orders or 
Floor QCC Orders where the transaction is either: (i) Customer-to-
Customer; or (ii) a dividend,\15\ merger \16\ or short stock

[[Page 2580]]

interest strategy \17\ and executions subject to the Reversal and 
Conversion Cap.\18\ These exceptions will remain the same. Currently, 
QCC Transaction Fees apply to Sections I and II of the Fee Schedule and 
are subject to the Monthly Firm Fee Cap \19\ and the Monthly Market 
Maker Cap.\20\ This will also remain the same.
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    \15\ 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 Section II of the Fee Schedule.
    \16\ 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 Section II of the Fee Schedule.
    \17\ 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 Section II of the Fee Schedule.
    \18\ Specialists, ROTs, SQTs and RSQTs, Professionals, Firms and 
Broker-Dealers options transaction fees in Multiply Listed Options 
are capped at $500 per day for reversal and conversion strategies 
executed on the same trading day in the same options class.
    \19\ Firms are subject to a maximum fee of $75,000 (``Monthly 
Firm Fee Cap''). Firm equity option transaction fees 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, short stock interest and reversal and conversion strategy 
executions are excluded from the Monthly Firm Fee Cap. The Firm 
equity options transaction fees are waived for members executing 
facilitation orders pursuant to Exchange Rule 1064 when such members 
are trading in their own proprietary account. QCC Transaction Fees 
are included in the calculation of the Monthly Firm Fee Cap.
    \20\ ROTs and Specialists are currently subject to a Monthly 
Market Maker Cap of $550,000. The trading activity of separate ROTs 
and Specialist member organizations will be aggregated in 
calculating the Monthly Market Maker Cap if there is at least 75% 
common ownership between the member organizations. In addition, ROTs 
and Specialists that (i) are on the contra-side of an 
electronically-delivered and executed Customer complex order; and 
(ii) have reached the Monthly Market Maker Cap will be assessed a 
$0.05 per contract fee. See Securities Exchange Act Release No. 
64113 (March 23, 2011), 76 FR 17468 (March 29, 2011) (SR-Phlx-2011-
36).
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    The Exchange also proposes to add additional language to Section I, 
Part C to clarify which QCC Orders are qualifying orders. The proposed 
language that is added to Section I conforms the text related to the 
QCC rebate to Section II text. The proposed text is being added to 
clarify the exceptions to the rebate, which exceptions apply to both 
Sections I and II.
    While changes to the Fee Schedule pursuant to this proposal are 
effective upon filing, the Exchange has designated these changes to be 
operative on January 3, 2012.
2. Statutory Basis
    The Exchange believes that its proposal to amend its Fee Schedule 
is consistent with Section 6(b) of the Act \21\ in general, and 
furthers the objectives of Section 6(b)(4) of the Act \22\ in 
particular, in that it is an equitable allocation of reasonable fees 
and other charges among Exchange members. The Exchange also believes 
that there is an equitable allocation of reasonable rebates among 
Exchange members.
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    \21\ 15 U.S.C. 78f(b).
    \22\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that it is reasonable to incentivize members 
to transact both eQCC Orders and Floor QCC Orders in Multiply Listed 
securities \23\ by paying a tiered rebate of $0.07 per contract on all 
qualifying executed QCC Orders up to 1,000,000 contracts in a month or 
a rebate of $0.10 per contract for members with qualifying executed QCC 
Orders exceeding 1,000,000 contracts in a month. The Exchange believes 
that paying a tiered rebate will sufficiently incentivize its members 
to send both eQCC Orders and Floor QCC Orders to the Exchange. The 
Exchange believes that offering a tiered rebate, as compared to a flat 
rate, is reasonable because the Exchange is paying a rebate on every 
contract, similar to the flat rate, and the Exchange is also 
incentivizing members to execute an even greater number of qualifying 
executed QCC Orders to achieve a higher rebate on all contracts in that 
given month. In other words, the proposal offers members more incentive 
to send a greater number of QCC Orders, while still paying a $0.07 
rebate below 1,000,000 contracts. The proposed tiered rebate structure 
is within the range of rebates paid by other exchanges \24\ and 
balances the Exchange's desire to incentivize its members to send order 
flow to the Exchange while considering the costs attributable to 
offering such rebates.
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    \23\ The rebate does not apply to Singly Listed Securities. For 
purposes of this filing, a Singly Listed Option means an option that 
is only listed on the Exchange and is not listed by any other 
national securities exchange. See Section III of the Exchange's Fee 
Schedule entitled Singly Listed Options.
    \24\ See NYSE Arca, Inc.'s (``NYSE Arca'') Fee Schedule. NYSE 
Arca pays a $0.10 per contract rebate for executed QCC orders 
entered by a Floor Broker.
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    With respect to the Floor QCC Order, the Exchange will also 
continue to offer the rebate to the Floor Broker. The Floor Broker is 
in receipt of the Floor QCC Orders and enters those orders into FBMS. 
The Exchange believes it is necessary from a competitive standpoint to 
offer this rebate to the executing Floor Broker on a Floor QCC Order. 
The Exchange expects that the rebate offered to executing Floor Brokers 
will allow them to price their services at a level that will enable 
them to attract Floor QCC order flow from participants who would 
otherwise enter these orders electronically from off the floor to the 
PHLX XL II System. To the extent that Floor Brokers are able to attract 
these Floor QCC orders, they will gain important information that will 
allow them to solicit the parties to the Floor QCC orders for 
participation in other trades, which will in turn benefit all other 
Exchange participants through the additional liquidity and price 
discovery that may occur as a result.
    The Exchange believes it continues to be reasonable to not offer a 
rebate for eQCC Orders and Floor QCC Orders for Customer-to-Customer 
executions because members executing Customer orders are not assessed a 
QCC Transaction Fee \25\ and therefore do not need to be incentivized 
to send QCC Orders to the Exchange. Likewise, the Exchange believes 
that it is reasonable to not offer a rebate for dividend, merger and 
short stock interest strategies and executions subject to the Reversal 
and Conversion Cap because the Exchange already provides a cap today on 
the transaction fees associated with these strategies and therefore 
does not believe an additional incentive is required.
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    \25\ Specialists, ROTs, SQTs, RSQTs, Professionals, Firms and 
Broker-Dealers are assessed a QCC Transaction Fee of $0.20 per 
contract.
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    The Exchange believes that it is equitable and not unfairly 
discriminatory to pay a tiered rebate for executed QCC Orders because 
all market participants will continue to be eligible for the $0.07 
rebate, as they are today, unless they are able to exceed 1,000,000 
contracts of qualifying executed QCC Orders in a given month, then the 
member would be entitled to a higher rebate of $0.10 per contract on 
all qualifying executed QCC Orders. This benefit is intended to 
incentivize members to transact a greater number of contracts and 
qualifying QCC Orders in order to take advantage of the higher rebate. 
Additionally, the proposed rebate is within the range of tiered rebates 
offered by the International Securities Exchange, LLC (``ISE'').\26\

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Also, all members are equally eligible to transact Multiply Listed 
securities.
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    \26\ See ISE's Schedule of Fees. ISE provides a rebate to 
members who reach a certain volume threshold in QCC orders and/or 
solicitation orders during a month. Once a member reaches the volume 
threshold, ISE pays a rebate to that member for all qualified 
contingent cross and solicitation traded contracts for that month. 
The rebate is paid to the member entering a qualifying order, i.e., 
a qualified contingent cross order and/or a solicitation order. The 
rebate applies to qualified contingent cross orders and solicitation 
orders in all symbols traded on the Exchange. Additionally, the 
threshold levels are based on the originating side. Specifically, 
the following rebates apply: For 0-199,999 originating contract 
sides ISE pays no rebate; for 200,000 to 999,999 originating 
contract sides ISE pays $0.02 per contract; for 1,000,000 to 
1,699,999 originating contract sides ISE pays $0.03 per contract; 
for 1,700,000 to 1,999,999 ISE pays $0.04 per contract; and for 
2,000,000 or more originating contract sides ISE pays $0.05 per 
contract.
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    The Exchange believes that it continues to be equitable and not 
unfairly discriminatory to pay the rebate for Floor QCC Orders to Floor 
Brokers because it would uniformly apply to all Floor QCC Orders 
entered by a Floor Broker into FBMS for execution based on volume. The 
rebate is not unfairly discriminatory to firms that enter eQCC Orders 
directly into PHLX XL II, because the transaction fees and rebates are 
the same whether the order is entered electronically or through a Floor 
Broker. In addition, pursuant to Exchange Rule 1080(o)(3), only Floor 
Brokers may enter a Floor QCC Order from the floor of the Exchange; 
therefore, providing the rebate to Floor Brokers does not discriminate 
against eQCC orders entered into PHLX XL II. Any participant will be 
able to engage a rebate-receiving Floor Broker in a discussion 
surrounding the appropriate level of fees that they may be charged for 
entrusting the entry of the Floor QCC Order to the Floor Broker into 
FBMS for execution. The additional order flow attracted by this rebate 
should benefit all participants. The rebate is meant to assist Floor 
Brokers to recruit business on an agency basis. The Floor Broker may 
use all or part of the rebate to offset its fees.
    The Exchange believes it is equitable and not unfairly 
discriminatory to not offer a rebate for eQCC Orders and Floor QCC 
Orders for Customer-to-Customer executions and for dividend, merger and 
short stock interest strategies and executions subject to the Reversal 
and Conversion Cap because the Exchange would not offer a rebate for 
these two types of transactions for any QCC Order uniformly. Neither 
Customer-to-Customer executions nor dividend, merger and short stock 
interest strategies and executions subject to the Reversal and 
Conversion Cap will receive the rebate. Also, Customers are not 
assessed a QCC Transaction Fee.
    The Exchange believes that the technical amendments proposed herein 
are reasonable, equitable and not unfairly discriminatory because they 
would add clarity to the Fee Schedule and conform the Fee Schedule.
    The Exchange operates in a highly competitive market comprised of 
nine U.S. options exchanges in which sophisticated and knowledgeable 
market participants readily can, and do, send order flow to competing 
exchanges if they deem fee levels at a particular exchange to be 
excessive. The Exchange believes that the proposed rebates for eQCC 
Orders and Floor QCC Orders must be competitive with rebates offered at 
other options exchanges. The Exchange believes that this competitive 
marketplace impacts the rebates and fees present on the Exchange today 
and influences the proposals set forth above.

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.

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\ At any time within 60 days of the 
filing of the proposed rule change, the Commission summarily may 
temporarily suspend such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.
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    \27\ 15 U.S.C. 78s(b)(3)(A)(ii).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2011-189 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2011-189. 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 (https://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 
a.m. and 3 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-2011-189 and should be 
submitted on or before February 8, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-818 Filed 1-17-12; 8:45 am]
BILLING CODE 8011-01-P