Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Complex Order Fees for Removing Liquidity in Select Symbols, 26591-26595 [2012-10754]
Download as PDF
<![CDATA[
26591
Federal Register / Vol. 77, No. 87 / Friday, May 4, 2012 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.17
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–10753 Filed 5–3–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–66883; File No. SR–Phlx–
2012–54]
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change Relating to
Complex Order Fees for Removing
Liquidity in Select Symbols
April 30, 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 April 23,
2012, NASDAQ OMX PHLX LLC
(‘‘Phlx’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘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.
Section I of the Exchange’s Pricing
Schedule titled ‘‘Rebates and Fees for
Adding and Removing Liquidity in
Select Symbols,’’ with this filing which
provides additional information
concerning the current Complex Order
Directed Participant and Market Maker
Fees for Removing Liquidity in Select
Symbols. Those fees became effective on
March 1, 2012 pursuant to SR–Phlx–
2012–27, and they will remain in effect,
unchanged by this filing.
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, 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.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to replace a
portion of a previously filed rule
change. Specifically, PHLX is replacing
SR–Phlx–2012–27,3 which amended
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
This rule change seeks to replace a
portion of SR–Phlx–2012–27 to provide
Customer
Fee for Removing Liquidity ......................................................................
The Exchange is not amending any of
these prices in this proposal. Rather,
this proposal is intended to justify
further the differential between the fees
paid by different participants that trade
Complex Orders. Specifically, the filing
addresses the Directed Participant
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 66551
(March 9, 2012), 77 FR 15400 (March 15, 2012) (SR–
Phlx–2012–27). This rule proposal amended the
Customer Complex Order Rebate to Add Liquidity,
adopted a new category of Complex Order ‘‘Rebate
to Remove Liquidity,’’ amended various Complex
Order Fees for Removing Liquidity and created a
volume tier for certain market participants that
2 17
erowe on DSK2VPTVN1PROD with NOTICES
additional information concerning the
Directed Participant and Market Maker
Fees for Removing Liquidity in Complex
Orders.4 The Exchange filed SR–Phlx–
2012–27 in order to attract additional
Customer Complex Orders from
competing exchanges because increased
order flow benefits all market
participants and investors that trade on
the Exchange. This filing maintains the
fees adopted in SR–Phlx–2012–27
related to Directed Participants and
Market Makers because the evidence
(set forth below) demonstrates that
while those fees have been in effect,
since March 1, 2012 to the present, the
Exchange has experienced increased
Customer order flow. The Exchange
continues to believe such Customer
order flow will encourage Market
Makers to compete more aggressively to
trade against that order flow.
Specifically, the Exchange amended
certain fees in Section I of the
Exchange’s Pricing Schedule, entitled
‘‘Rebates and Fees for Adding and
Removing Liquidity in Select
Symbols.’’ 5 The Directed Participant
Complex Order Fee for Removing
Liquidity was increased from $0.30 per
contract to $0.32 per contract and the
Market Maker Complex Order Fee for
Removing Liquidity was increased from
$0.32 per contract to $0.37 per contract.
Today, the Complex Order Fees for
Removing Liquidity are as follows:
VerDate Mar<15>2010
15:20 May 03, 2012
Jkt 226001
$0.00
Directed
participant
$0.32
Market
maker
Firm
$0.37
$0.38
Brokerdealer
$0.38
Professional
$0.38
2. Statutory Basis
Complex Order Fee for Removing
Liquidity, which was increased from
$0.30 per contract to $0.32 per contract,
and the Market Maker Complex Order
Fee for Removing Liquidity, which was
increased from $0.32 per contract to
$0.37 per contract.
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act 6 in general, and furthers the
objectives of Section 6(b)(4) of the Act 7
in particular, in that it is an equitable
transact significant volumes of Complex Orders.
These fees became effective on March 1, 2012. The
Exchange does not intend to amend any pricing
changes that became effective in SR–Phlx–2012–27.
4 A Complex Order is any order involving the
simultaneous purchase and/or sale of two or more
different options series in the same underlying
security, priced at a net debit or credit based on the
relative prices of the individual components, for the
same account, for the purpose of executing a
particular investment strategy. Furthermore, a
Complex Order can also be a stock-option order,
which is an order to buy or sell a stated number
of units of an underlying stock or exchange-traded
fund (‘‘ETF’’) coupled with the purchase or sale of
options contract(s). See Exchange Rule 1080,
Commentary .08(a)(i).
5 The Select Symbols are listed in Section I of the
Pricing Schedule.
6 15 U.S.C. 78f(b).
7 15 U.S.C. 78f(b)(4).
PO 00000
Frm 00105
Fmt 4703
Sfmt 4703
E:\FR\FM\04MYN1.SGM
04MYN1
26592
Federal Register / Vol. 77, No. 87 / Friday, May 4, 2012 / Notices
allocation of reasonable fees and other
charges among Exchange members and
other persons using its facilities.
SR–Phlx–2012–27 amended the
Complex Order Fees for Removing
Liquidity in Select Symbols to assess a
$0.32 per contract Complex Order
Directed Participant Fee for Removing
Liquidity and a $0.37 per contract
Complex Order Market Maker Fee for
Removing Liquidity. The Exchange
argued in SR–Phlx–2012–27 that it is
reasonable, equitable and not unfairly
discriminatory to increase the Market
Maker Complex Order Fee for Removing
Liquidity from $0.32 to $0.37 per
contract and increase the Directed
Participant Complex Order Fee for
Removing Liquidity from $0.30 to $0.32
per contract. The Exchange intends in
this filing to justify further the
differential by indicating that the
differential is reasonable, equitable and
not unfairly discriminatory because (i)
the current fee structure is consistent
with fee structures at other options
exchanges, and reflects a degree of price
differentiation that is comparable to or
lower than the degree that exists
elsewhere; 8 (ii) Market Makers are not
entitled to guaranteed allocations for
directed Complex Orders; 9 (ii) [sic] only
erowe on DSK2VPTVN1PROD with NOTICES
8 The
Exchange believes that its fee differentiation
as between Directed Participants and Market
Makers is comparable to a fee differentiation at The
International Securities Exchange LLC (‘‘ISE’’)
which assesses a complex order take fee in Select
Symbols of $0.32 per contract for preferenced
market makers, $0.34 per contract for nonpreferenced market makers, firm proprietary and
customer professionals and $0.38 per contract for
the non-ISE market maker (FARMM). See ISE’s Fee
Schedule. The Exchange believes that its fee
differentiation as between Directed Participants and
Market Makers is lower than a similar fee
differentiation in place at NYSE Amex, LLC
(‘‘Amex’’) which assesses $0.13 per contract for
Specialists and eSpecialists complex orders, $0.20
per contract for an NYSE Amex Options Market
Maker-Non Directed and $0.18 per contract for a
NYSE Amex Options Market Maker-Directed.
9 Unlike Complex Orders, Single contra-side
orders are governed by Rule 1014. Specifically,
Directed Orders that are executed electronically
shall be automatically allocated as follows: (A)
First, to customer limit orders resting on the limit
order book at the execution price; (B) Thereafter,
contracts remaining in the Directed Order, if any,
shall be allocated automatically as follows: (1) [sic]
The Directed Specialist (where applicable), shall be
allocated a number of contracts that is the greater
of: (a) the proportion of the aggregate size at the
NBBO associated with such Directed Specialist’s
quote, Streaming Quote Trader (‘‘SQT’’) and Remote
Streaming Quote Trader (‘‘RSQT’’) quotes, and nonSQT Registered Options Trader (‘‘ROT’’) limit
orders entered on the book at the disseminated
price represented by the size of the Directed
Specialist’s quote; (b) the Enhanced Specialist
Participation as described in Rule 1014(g)(ii); or (c)
40% of the remaining contracts. See Rule
1014(g)(viii). Thereafter, SQTs and RSQTs quoting
at the disseminated price, and non-SQT ROTs that
have placed limit orders on the limit order book via
electronic interface at the Exchange’s disseminated
price shall be allocated contracts according to a
VerDate Mar<15>2010
15:20 May 03, 2012
Jkt 226001
Market Maker executions against
Customer orders that are directed by an
OFP and executed by that specific
Market Maker receive the Complex
Order Directed Participant fee; 10 (iii)
Market Makers are unaware of the
identity of the contra-party at the time
of the trade and are also required to
execute at the best price, pursuant to
Exchange Rules; (iv) Market Makers
compete in offering price improvement
in auctions; and (v) the Directed
Participant and Market Maker Fees for
Removing Liquidity in Complex Orders,
along with other Complex Order fee
increases proposed in SR–Phlx–2012–
27,11 provide the Exchange an
opportunity to offer increased Customer
rebates,12 which attracts additional
Customer order flow and benefits all
market participants.
As noted above, SR–Phlx–2012–27
increased Complex Order Fees for
Removing Liquidity in Select Symbols
for all market participants, except
Customers who pay no fee, in order to
offer greater Customer Complex Order
rebates. Market Makers are assessed
lower fees than Professionals,13 Firms
and Broker-Dealers. By way of
background, Specialists,14 ROTs,15
formula specified in Rule 1014(g)(viii). If any
contracts remain to be allocated after the specialist,
SQTs, RSQTs and non-SQT ROTs with limit orders
on the limit order book have received their
respective allocations, off-floor broker-dealers (as
defined in Rule 1080(b)(i)(C)) that have placed limit
orders on the limit order book which represent the
Exchange’s disseminated price shall be entitled to
receive a number of contracts that is the proportion
of the aggregate size associated with off-floor
broker-dealer limit orders on the limit order book
at the disseminated price represented by the size of
the limit order they have placed on the limit order
book.
10 Other markets discount their directed fee for
other classes of market participants in addition to
customers. For example, Amex assesses an NYSE
Amex Options Market Maker-Non Directed a fee of
$0.20 per contract and a NYSE Amex Options
Market Maker-Directed a fee of $0.18 per contract.
See Amex’s Fee Schedule. Phlx only assesses the
Directed Participant Fee for Removing Liquidity
with respect to Customer orders.
11 SR–Phlx–2012–27 amended the Complex Order
Fees for Removing Liquidity in Select Symbols to
assess Directed Participants $0.32 per contract,
Market Makers $0.37 per contract, and Firms,
Broker-Dealer and Professionals $0.38 per contract.
12 The Exchange amended its Pricing Schedule to
offer a higher Customer Complex Order Rebate for
Adding Liquidity ($0.32 per contract) and offer a
new Customer Complex Order Rebate for Removing
Liquidity ($0.06 per contract) in SR–Phlx–2012–27.
13 The term ‘‘professional’’ means any person or
entity that (i) is not a broker or dealer in securities,
and (ii) places more than 390 orders in listed
options per day on average during a calendar month
for its own beneficial account(s). See Rule
1000(b)(14).
14 A Specialist is an Exchange member who is
registered as an options specialist pursuant to Rule
1020(a).
15 A ROT includes an SQT, an RSQT and a NonSQT, which by definition is neither a SQT or a
RSQT. A ROT is defined in Exchange Rule 1014(b)
PO 00000
Frm 00106
Fmt 4703
Sfmt 4703
SQTs 16 and RSQTs 17 are Market
Makers. Such Market Makers may also
be categorized as Directed Participants
only at the time when such Market
Makers execute against a Customer
order directed to that Market Maker for
execution by an Order Flow Provider
(‘‘OFP’’).18 For example, a Market Maker
is assessed the Directed Participant
category fee for trading against a
Customer order directed to it for
execution by an OFP. That Market
Maker is not assessed the Directed
Participant category fee for executing a
Customer order directed to different
Market Maker, but rather is assessed the
Market Maker category fee.19
The fee structure is consistent with fee
structures at other options exchanges.
Market Makers are valuable market
participants that provide liquidity in the
marketplace and incur costs unlike
other market participants including, but
not limited to, SQF Port Fees 20 to assist
them in responding to auctions and
providing liquidity to the market.21 The
Directed Participant and Market Maker
fees were lower as compared to those
charged to other market participants
prior to the amendment which became
effective on March 1, 2012 with SR–
Phlx–2012–27 and continue to be lower.
In addition, the Exchange believes that
its fee differentiation is within the range
of other exchanges, as mentioned
previously with respect to ISE and
Amex, and lower than other fee
as a regular member 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).
16 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.
17 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.
18 The term ‘‘Order Flow Provider’’ means any
member or member organization that submits, as
agent, orders to the Exchange. See Rule
1080(l)(i)(B).
19 Neither a Market Maker nor a Directed
Participant is entitled to a rebate for transacting a
Customer Complex Order today.
20 SQF Port Fees are listed in the Exchange’s
Pricing Schedule at Section VII.
21 Also important are the continuous quoting
obligations applicable to Market Makers. Market
Makers have these obligations for each series in
which they are assigned pursuant to Rule 1014
entitled ‘‘Obligations and Restrictions Applicable to
Specialists and Registered Options Traders.’’ These
burdensome quoting obligations to the market do
not apply to Customers, Firms, Professionals and
Broker-Dealers. Also, Market Makers that receive
Directed Orders have higher quoting obligations
compared to other Market Makers.
E:\FR\FM\04MYN1.SGM
04MYN1
Federal Register / Vol. 77, No. 87 / Friday, May 4, 2012 / Notices
differentiations that exist today, and
have for some time, at Amex. The
Exchange notes that Amex has three
classes of market makers on its fee
schedule: (1) Specialist, eSpecialist; (2)
NYSE Amex Options Market MakerNon-Directed; and (3) NYSE Amex
Options Market Maker-Directed (taken
together, ‘‘Amex Market Makers’’).
Amex imposes the standard per contract
fees on electronic trades for simple and
complex orders.22 Pursuant to Amex
rules, Amex Market Makers have no
allocation rights or quoting obligations
in the Amex complex order system and
Amex Market Makers are eligible to
receive orders directed to them for
execution.23 With no additional quoting
obligations or other requirements for
complex orders, Amex assesses a
Specialist and eSpecialist a fee of $.13
per contract while assessing a NYSE
Amex Options Market Maker-NonDirected a fee of $.20 per contract. This
fee differentiation is greater than that
currently in place on the Exchange.
Amex differentiates one type of market
maker, the Specialist and eSpecialist,
from other Amex Market Makers who
receive directed orders, in its pricing
with a $.07 per contract fee
differential.24 As mentioned herein, a
Market Maker on Phlx includes
Specialists and Remote Specialists.25
For this reason, the Exchange believes
that its current fee differentiation is
equitable and not unfairly
discriminatory because the fees and fee
differentiation in place at the Exchange
erowe on DSK2VPTVN1PROD with NOTICES
22 See Securities Exchange Act Release No. 65549
(October 13, 2011), 76 FR 64983 (SR–NYSEAmex–
2011–77) (notice of filing and immediate
effectiveness amending electronic complex orders).
Amex noted in that filing that the standard per
contract fees apply to electronic complex orders.
23 See Amex Rule 964NY entitled ‘‘Display,
Priority and Order Allocation-Trading Systems.’’
See also Amex Rule 980NY ‘‘Electronic Complex
Order Trading.’’
24 Pursuant to Amex’s Rules, specialists and
market makers may receive directed orders in their
appointed classes. See Amex Rule 964.1NY entitled
‘‘Directed Orders.’’
25 See Exchange Rule 1020. An options Specialist
includes a Remote Specialist which is a 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.
VerDate Mar<15>2010
15:20 May 03, 2012
Jkt 226001
are competitive with and lower than
fees and differentials at other options
exchanges.26
Only Market Maker executions against
Customer orders that are directed by an
OFP and executed by that specific
Market Maker receive the Complex
Order Directed Participant fee.
The Exchange’s Fee for Removing
Liquidity for Single contra-side
transactions in Select Symbols for the
Directed Participant category is two
cents lower than the Fee for Removing
Liquidity for the Market Maker
category.27 The Exchange amended the
Complex Order Fees for Removing
Liquidity in Select Symbols to increase
the fee differential between the Directed
Participant and Market Maker categories
from $0.02 per contract to $0.05 per
contract for Complex Order transactions
to also reflect the fact that unlike in the
case of a Single contra-side order, a
Directed Participant does not have a
guaranteed allocation in a Complex
Order. Market Makers receive no
allocation guarantee when a Customer
Complex Order is directed to them by
an OFP and the order is executed.
Directed Specialists, Directed ROTs,
Directed SQTs and Directed RSQTs are
guaranteed a 40% allocation with
respect to Single contra-side
transactions eligible as a Directed
Order.28
Market Makers are unaware of the
identity of the contra-party at the time
26 By way of further example, the Exchange notes
that Amex assesses a NYSE Amex Options Market
Maker-Directed a fee of $.18 per contract which
creates a $.05 per contract fee differential when
compared to the Specialist and eSpecialist fee of
$.13 per contract for electronic executions in
complex orders.
27 Today, the Exchange assess Directed
Participants a fee of $0.36 per contract and Market
Makers a fee of $0.38 per contract for Single contraside transactions in Select Symbols.
28 Complex Orders can be distinguished from
Single contra-side transactions with respect to
allocation guarantees applicable to Directed
Specialists, Directed ROTs, Directed SQTs and
Directed RSQTs pursuant to Rule 1014(g)(viii). See
also Securities Exchange Act Release No. 57844
(May 21, 2008), 73 FR 30988 (May 29, 2008) (SR–
Phlx–2008–39) (notice of filing and order granting
accelerated approval relating to the permanent
approval of the Exchange’s Directed Order Flow
program.)
PO 00000
Frm 00107
Fmt 4703
Sfmt 4703
26593
of the trade and are required to execute
at the best price.
Also, only Customer Complex Order
flow which is directed to a Market
Maker by an OFP and is executed by
that particular Market Maker is eligible
for Directed Participant fees for
Complex Orders.29 When a Market
Maker executes against a Customer
Complex Order the Market Maker may
do so by responding to an auction,30
executing against an order on the
Complex Order Book (‘‘CBOOK’’), or
sweeping a resting Customer Complex
Order.31 The Customer Complex Order
may also be executed against existing
quote and or limit orders on the limit
order book for the individual
components of the Complex Order.32 In
each of these cases, the order will trade
based on the best price or prices
available pursuant to Exchange Rules.33
Therefore, in order to enjoy the benefits
of trading against a directed Complex
Customer order by receiving a lower
transaction fee (the Directed Participant
Complex Order Fee for Removing
Liquidity), the transaction must: (i)
Occur at the best price; and (ii) be
directed, by an OFP, to the particular
Market Maker that executed the order.
Also, it is important to note that all
market participants may compete
equally for Customer Complex Order
executions, even if that Customer
Complex Order is directed to a specific
Market Maker.
29 All other types of directed non-Customer order
flow are not eligible for Directed Participant
pricing.
30 The Complex Order Live Auction (‘‘COLA’’) is
the auction for eligible Complex Orders. See Rule
1080, Commentary .08.
31 A COLA Sweep is when a Phlx XL participant
bids and/or offers on either or both sides of the
market during the COLA Timer (a timing
mechanism which is a counting period not to
exceed 5 seconds) by submitting one or more bids
or offers that improve the cPPBO (the best net debit
or credit price for a Complex Order Strategy based
on the PBBO for individual components of such
Complex Order Strategy). See Rule 1080,
Commentary .08.
32 In this scenario the Customer order is ‘‘legged’’
against interest present in the disseminated market.
33 See Rule 1080.
E:\FR\FM\04MYN1.SGM
04MYN1
26594
Federal Register / Vol. 77, No. 87 / Friday, May 4, 2012 / Notices
A Market Maker, at the time of the
trade, is unaware of the identity of the
contra-party to the trade. In other words,
it is only sometime after the trade
occurs that the Market Maker learns
whether the Market Maker or Directed
Participant fees will be assessed on a
particular transaction.34 It is important
to note that Customer Complex Orders
do not always interact with the intended
recipient of the order where such an
order was directed because the Market
Maker may not have been at the best
price at the time the order was executed.
October
2011
September 2011
November
2011
Generally, a Market Maker will be
assessed the Market Maker Fee for
Removing Liquidity in Complex Orders
when the Market Maker is not executing
a Customer order intended for that
Market Maker. Moreover, in a given
month the effective Complex Order Fee
for Removing Liquidity for a Market
Maker that also has executions subject
to the Directed Participant rate is
approximately $0.02 below the Market
Maker Complex Order Fee for Removing
Liquidity.35
Market Makers compete in offering
price improvement in auctions.
The Exchange bases its belief that the
fees are reasonable, in part, on an
analysis of the level of price
improvement currently received by
Customer Complex Orders trading in an
auction process. Based on an analysis of
the week of October 10, 2011, Customer
Complex Orders received price
improvement 29% of the time and the
average level of price improvement was
$0.059 per option or $5.90 per contract
for options receiving price
improvement. Based on an analysis of
the week of April 9, 2012, Customer
Complex Orders received price
improvement 29% of the time and the
average level of price improvement was
$0.056 per option or $5.60 per contract
for options receiving price
improvement.
Market Makers compete in offering
price improvement in auctions. The
significant difference in magnitude
between the proposed $0.05 per contract
increased fee differential (between
Market Makers and Directed
Participants) and the extent of price
improvement supports the Exchange’s
belief that the fee is reasonable and will
erowe on DSK2VPTVN1PROD with NOTICES
16.16%
have a negligible impact on Directed
and non-Directed Market Makers.
The Directed Participant and Market
Maker Complex Order Fees for
Removing Liquidity provide the
Exchange an opportunity to offer
increased Customer rebates to attract
Customer order flow.
Today, options exchanges
aggressively compete for Complex order
flow. In January 2012, based on data
from the Options Price Reporting
Authority (‘‘OPRA’’), the average daily
equity options complex order
transactions on the various option
exchanges totaled 117,539. The
combined total for the last six months
of 2011 was 593,286. With respect to
market share, the six options exchanges
handling complex orders had market
share in complex orders ranging from
2.4% to 40.1% in January 2012. The
Exchange believes the increased fees,
which fund Customer Complex Order
rebates, bring more Customer order flow
to the market and, in turn, benefit all
market participants.
The Exchange operates in a highly
competitive market, comprised of nine
exchanges, in which market participants
can easily and readily direct order flow
to competing venues if they deem fee
levels at a particular venue to be
excessive or rebates offered to be
insufficient. Accordingly, the fees that
are assessed by the Exchange and the
rebates it pays for options overlying the
various Select Symbols in Complex
Orders must remain competitive with
fees and rebates charged/paid by other
venues and therefore must continue to
be reasonable and equitably allocated to
those members that opt to direct orders
to the Exchange rather than competing
venues.
34 This distinction holds true today for Market
Makers and Directed Participants executing either
Single contra-side transactions (Part A of Section I
of the Pricing Schedule) or Complex Orders (Part
B of Section I of the Pricing Schedule). When a
Single contra-side transaction is executed against
the individual components of a Complex Order, the
Single contra-side part of the order will be subject
to the fees in Part A of the Pricing Schedule and
the individual components will be subject to the
fees in Part B.
35 For example if a Market Maker, that is the
intended recipient of a Customer Complex Order,
only executes the Customer Complex Order 14.5%
of the time (paying the Directed Participant
Complex Order fee of $0.32 per contract), then that
Market Maker is paying the proposed Market Maker
Complex Order fee of $0.37 per contract the other
85.5% of the time. The effective Complex Order Fee
for Removing Liquidity for that Market Maker is
$0.3613 in a given month, less than $0.01 below the
rate paid by a Market Maker that never receives a
15:20 May 03, 2012
Jkt 226001
PO 00000
Frm 00108
Fmt 4703
14.01%
January
2012
17.02% .....................................................
VerDate Mar<15>2010
17.94%
December
2011
Sfmt 4703
For the time period from September 1,
2011 through April 19, 2012, the
percentage of Customer Complex
directed orders that traded with the
Market Maker to which the trade was
directed is reflected in the table below:
February
2012
6.19%
11.47%
March 2012
14.19%
April 1–19,
2012
17.13%
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.36 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.37
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:
Customer Complex Order directed to it for
execution.
36 15 U.S.C. 78s(b)(3)(A)(ii).
37 In a separate order, the Commission is
temporarily suspending and instituting proceedings
to determine whether the proposed rule change SR–
Phlx–2012–54, as well as SR–Phlx–2012–27, should
be approved or disapproved. See Securities
Exchange Act Release No. 66884 (April 30, 2012).
E:\FR\FM\04MYN1.SGM
04MYN1
Federal Register / Vol. 77, No. 87 / Friday, May 4, 2012 / Notices
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–Phlx–2012–54 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.
erowe on DSK2VPTVN1PROD with NOTICES
All submissions should refer to File
Number SR–Phlx–2012–54. 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
10:00 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;
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–
2012–54 and should be submitted on or
before May 25, 2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.38
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–10754 Filed 5–3–12; 8:45 am]
BILLING CODE 8011–01–P
38 17
CFR 200.30–3(a)(12).
VerDate Mar<15>2010
15:20 May 03, 2012
Jkt 226001
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–66884; File Nos. SR–Phlx–
2012–27; SR–Phlx–2012–54]
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Suspension
of and Order Instituting Proceedings
To Determine Whether To Approve or
Disapprove Proposed Rule Changes
Relating to Complex Order Fees and
Rebates for Adding and Removing
Liquidity in Select Symbols
April 30, 2012.
change was immediately effective upon
filing with the Commission pursuant to
Section 19(b)(3)(A) of the Act.7
To date, the Commission has not
received any comment letters on the
Exchange’s proposed rule changes.
Under Section 19(b)(3)(C) of the Act,
the Commission is: (1) Hereby
temporarily suspending the Phlx
Proposals; and (2) instituting
proceedings to determine whether to
approve or disapprove the Phlx
Proposals.
II. Summary of the Proposed Rule
Changes
I. Introduction
On March 1, 2012 and April 23, 2012,
NASDAQ OMX PHLX LLC (‘‘Phlx’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission (the
‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Exchange Act’’ or ‘‘Act’’) 1 and
Rule 19b–4 thereunder,2 two proposed
rule changes relating to the transaction
fees for certain Complex Order
transactions.3
In SR–Phlx–2012–27 (filed on March
1, 2012), Phlx proposed to amend the
Exchange’s Fee Schedule to increase the
transaction fees and rebates for certain
Complex Order transactions and create
a new rebate for certain Complex
Orders. The proposed rule change was
immediately effective upon filing with
the Commission pursuant to Section
19(b)(3)(A) of the Act.4 Notice of filing
of the proposed rule change was
published in the Federal Register on
March 15, 2012.5
In SR–Phlx–2012–54 (filed on April
23, 2012), Phlx proposed to replace a
portion of SR–Phlx–2012–27 to provide
additional information concerning the
Directed Participant and Market Maker
fees for removing liquidity in Complex
orders (‘‘Second Proposal,’’ and,
together with SR–Phlx–2012–27, the
‘‘Phlx Proposals’’).6 The proposed rule
SR–Phlx–2012–27
The Exchange’s proposal amended
Complex Order fees and rebates for
adding and removing liquidity in its
Select Symbols.8 Specifically, Phlx’s
proposal: (1) Increased the Customer
Rebate for Adding Liquidity from $0.30
per contract to $0.32 per contract; (2)
created a new Rebate for Removing
Liquidity of $0.06 per contract for each
contract of liquidity removed by an
order designated as a Customer
Complex Order; (3) amended the Fee for
Removing Liquidity for all participants
who are assessed such a fee; and (4)
created a volume incentive for certain
market participants that transact
significant volumes of Complex Orders
on the Exchange.
Phlx’s proposal to amend the Fee for
Removing Liquidity increased the
Complex Order Fees for Removing
Liquidity for the Directed Participant,9
Market Maker,10 Firm, Broker-Dealer,
and Professional 11 categories of market
participants. The fee for Directed
Participant transactions increased from
$0.30 to $0.32 per contract; the fee for
Market Makers increased from $0.32 to
$0.37 per contract; and the fee for Firms,
Broker-Dealers, or Professionals
7 15
1 15
U.S.C. 78s(b)(1).
2 17 CFR 240.19b 4.
3 A Complex Order is any order involving the
simultaneous purchase and/or sale of two or more
different options series in the same underlying
security, priced at a net debit or credit based on the
relative prices of the individual components, for the
same account, for the purpose of executing a
particular investment strategy. A Complex Order
may also be a stock-option order, which is an order
to buy or sell a stated number of units of an
underlying stock or exchange-traded fund (‘‘ETF’’)
coupled with the purchase or sale of options
contract(s). See Exchange Rule 1080, Commentary
.08(a)(i).
4 15 U.S.C. 78s(b)(3)(A).
5 See Securities Exchange Act Release No. 66551
(March 9, 2012) 77 FR 15400 (‘‘Notice’’).
6 See Securities Exchange Act Release No. 66883
(April 30, 2012) (SR–Phlx–2012–54) (notice of filing
of the proposed rule change).
PO 00000
Frm 00109
Fmt 4703
26595
Sfmt 4703
U.S.C. 78s(b)(3)(A).
Select Symbols are listed in Section I of the
Phlx Fee Schedule.
9 The term ‘‘Directed Participant’’ applies to
transactions for the account of a Specialist,
Streaming Quote Trader (‘‘SQT’’) or Remote
Streaming Quote Trader (‘‘RSQT’’) resulting from a
Customer order that is (1) directed to it by an order
flow provider, and (2) executed by it electronically
on Phlx XL II. See Phlx Fee Schedule at 3.
10 A ‘‘Market Maker’’ includes Specialists (see
Exchange Rule 1020) and Registered Options
Traders (‘‘ROTs’’) (see Exchange Rule 1014(b)(i) and
(ii), which includes SQTs (see Exchange Rule
1014(b)(ii)(A)) and RSQTs (see Exchange Rule
1014(b)(ii)(B)).
11 The term ‘‘professional’’ means any person or
entity that (i) is not a broker or dealer in securities,
and (ii) places more than 390 orders in listed
options per day on average during a calendar month
for its own beneficial account(s). See Exchange Rule
1000(b)(14).
8 The
E:\FR\FM\04MYN1.SGM
04MYN1
]]>Agencies
[Federal Register Volume 77, Number 87 (Friday, May 4, 2012)]
[Notices]
[Pages 26591-26595]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-10754]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66883; File No. SR-Phlx-2012-54]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change Relating to
Complex Order Fees for Removing Liquidity in Select Symbols
April 30, 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 April 23, 2012, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to replace a portion of a previously filed
rule change. Specifically, PHLX is replacing SR-Phlx-2012-27,\3\ which
amended Section I of the Exchange's Pricing Schedule titled ``Rebates
and Fees for Adding and Removing Liquidity in Select Symbols,'' with
this filing which provides additional information concerning the
current Complex Order Directed Participant and Market Maker Fees for
Removing Liquidity in Select Symbols. Those fees became effective on
March 1, 2012 pursuant to SR-Phlx-2012-27, and they will remain in
effect, unchanged by this filing.
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 66551 (March 9,
2012), 77 FR 15400 (March 15, 2012) (SR-Phlx-2012-27). This rule
proposal amended the Customer Complex Order Rebate to Add Liquidity,
adopted a new category of Complex Order ``Rebate to Remove
Liquidity,'' amended various Complex Order Fees for Removing
Liquidity and created a volume tier for certain market participants
that transact significant volumes of Complex Orders. These fees
became effective on March 1, 2012. The Exchange does not intend to
amend any pricing changes that became effective in SR-Phlx-2012-27.
---------------------------------------------------------------------------
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, 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
This rule change seeks to replace a portion of SR-Phlx-2012-27 to
provide additional information concerning the Directed Participant and
Market Maker Fees for Removing Liquidity in Complex Orders.\4\ The
Exchange filed SR-Phlx-2012-27 in order to attract additional Customer
Complex Orders from competing exchanges because increased order flow
benefits all market participants and investors that trade on the
Exchange. This filing maintains the fees adopted in SR-Phlx-2012-27
related to Directed Participants and Market Makers because the evidence
(set forth below) demonstrates that while those fees have been in
effect, since March 1, 2012 to the present, the Exchange has
experienced increased Customer order flow. The Exchange continues to
believe such Customer order flow will encourage Market Makers to
compete more aggressively to trade against that order flow.
---------------------------------------------------------------------------
\4\ A Complex Order is any order involving the simultaneous
purchase and/or sale of two or more different options series in the
same underlying security, priced at a net debit or credit based on
the relative prices of the individual components, for the same
account, for the purpose of executing a particular investment
strategy. Furthermore, a Complex Order can also be a stock-option
order, which is an order to buy or sell a stated number of units of
an underlying stock or exchange-traded fund (``ETF'') coupled with
the purchase or sale of options contract(s). See Exchange Rule 1080,
Commentary .08(a)(i).
---------------------------------------------------------------------------
Specifically, the Exchange amended certain fees in Section I of the
Exchange's Pricing Schedule, entitled ``Rebates and Fees for Adding and
Removing Liquidity in Select Symbols.'' \5\ The Directed Participant
Complex Order Fee for Removing Liquidity was increased from $0.30 per
contract to $0.32 per contract and the Market Maker Complex Order Fee
for Removing Liquidity was increased from $0.32 per contract to $0.37
per contract. Today, the Complex Order Fees for Removing Liquidity are
as follows:
---------------------------------------------------------------------------
\5\ The Select Symbols are listed in Section I of the Pricing
Schedule.
----------------------------------------------------------------------------------------------------------------
Directed Market Broker-
Customer participant maker Firm dealer Professional
----------------------------------------------------------------------------------------------------------------
Fee for Removing Liquidity............... $0.00 $0.32 $0.37 $0.38 $0.38 $0.38
----------------------------------------------------------------------------------------------------------------
The Exchange is not amending any of these prices in this proposal.
Rather, this proposal is intended to justify further the differential
between the fees paid by different participants that trade Complex
Orders. Specifically, the filing addresses the Directed Participant
Complex Order Fee for Removing Liquidity, which was increased from
$0.30 per contract to $0.32 per contract, and the Market Maker Complex
Order Fee for Removing Liquidity, which was increased from $0.32 per
contract to $0.37 per contract.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \6\ in general, and furthers the objectives of Section
6(b)(4) of the Act \7\ in particular, in that it is an equitable
[[Page 26592]]
allocation of reasonable fees and other charges among Exchange members
and other persons using its facilities.
---------------------------------------------------------------------------
\6\ 15 U.S.C. 78f(b).
\7\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------
SR-Phlx-2012-27 amended the Complex Order Fees for Removing
Liquidity in Select Symbols to assess a $0.32 per contract Complex
Order Directed Participant Fee for Removing Liquidity and a $0.37 per
contract Complex Order Market Maker Fee for Removing Liquidity. The
Exchange argued in SR-Phlx-2012-27 that it is reasonable, equitable and
not unfairly discriminatory to increase the Market Maker Complex Order
Fee for Removing Liquidity from $0.32 to $0.37 per contract and
increase the Directed Participant Complex Order Fee for Removing
Liquidity from $0.30 to $0.32 per contract. The Exchange intends in
this filing to justify further the differential by indicating that the
differential is reasonable, equitable and not unfairly discriminatory
because (i) the current fee structure is consistent with fee structures
at other options exchanges, and reflects a degree of price
differentiation that is comparable to or lower than the degree that
exists elsewhere; \8\ (ii) Market Makers are not entitled to guaranteed
allocations for directed Complex Orders; \9\ (ii) [sic] only Market
Maker executions against Customer orders that are directed by an OFP
and executed by that specific Market Maker receive the Complex Order
Directed Participant fee; \10\ (iii) Market Makers are unaware of the
identity of the contra-party at the time of the trade and are also
required to execute at the best price, pursuant to Exchange Rules; (iv)
Market Makers compete in offering price improvement in auctions; and
(v) the Directed Participant and Market Maker Fees for Removing
Liquidity in Complex Orders, along with other Complex Order fee
increases proposed in SR-Phlx-2012-27,\11\ provide the Exchange an
opportunity to offer increased Customer rebates,\12\ which attracts
additional Customer order flow and benefits all market participants.
---------------------------------------------------------------------------
\8\ The Exchange believes that its fee differentiation as
between Directed Participants and Market Makers is comparable to a
fee differentiation at The International Securities Exchange LLC
(``ISE'') which assesses a complex order take fee in Select Symbols
of $0.32 per contract for preferenced market makers, $0.34 per
contract for non-preferenced market makers, firm proprietary and
customer professionals and $0.38 per contract for the non-ISE market
maker (FARMM). See ISE's Fee Schedule. The Exchange believes that
its fee differentiation as between Directed Participants and Market
Makers is lower than a similar fee differentiation in place at NYSE
Amex, LLC (``Amex'') which assesses $0.13 per contract for
Specialists and eSpecialists complex orders, $0.20 per contract for
an NYSE Amex Options Market Maker-Non Directed and $0.18 per
contract for a NYSE Amex Options Market Maker-Directed.
\9\ Unlike Complex Orders, Single contra-side orders are
governed by Rule 1014. Specifically, Directed Orders that are
executed electronically shall be automatically allocated as follows:
(A) First, to customer limit orders resting on the limit order book
at the execution price; (B) Thereafter, contracts remaining in the
Directed Order, if any, shall be allocated automatically as follows:
(1) [sic] The Directed Specialist (where applicable), shall be
allocated a number of contracts that is the greater of: (a) the
proportion of the aggregate size at the NBBO associated with such
Directed Specialist's quote, Streaming Quote Trader (``SQT'') and
Remote Streaming Quote Trader (``RSQT'') quotes, and non-SQT
Registered Options Trader (``ROT'') limit orders entered on the book
at the disseminated price represented by the size of the Directed
Specialist's quote; (b) the Enhanced Specialist Participation as
described in Rule 1014(g)(ii); or (c) 40% of the remaining
contracts. See Rule 1014(g)(viii). Thereafter, SQTs and RSQTs
quoting at the disseminated price, and non-SQT ROTs that have placed
limit orders on the limit order book via electronic interface at the
Exchange's disseminated price shall be allocated contracts according
to a formula specified in Rule 1014(g)(viii). If any contracts
remain to be allocated after the specialist, SQTs, RSQTs and non-SQT
ROTs with limit orders on the limit order book have received their
respective allocations, off-floor broker-dealers (as defined in Rule
1080(b)(i)(C)) that have placed limit orders on the limit order book
which represent the Exchange's disseminated price shall be entitled
to receive a number of contracts that is the proportion of the
aggregate size associated with off-floor broker-dealer limit orders
on the limit order book at the disseminated price represented by the
size of the limit order they have placed on the limit order book.
\10\ Other markets discount their directed fee for other classes
of market participants in addition to customers. For example, Amex
assesses an NYSE Amex Options Market Maker-Non Directed a fee of
$0.20 per contract and a NYSE Amex Options Market Maker-Directed a
fee of $0.18 per contract. See Amex's Fee Schedule. Phlx only
assesses the Directed Participant Fee for Removing Liquidity with
respect to Customer orders.
\11\ SR-Phlx-2012-27 amended the Complex Order Fees for Removing
Liquidity in Select Symbols to assess Directed Participants $0.32
per contract, Market Makers $0.37 per contract, and Firms, Broker-
Dealer and Professionals $0.38 per contract.
\12\ The Exchange amended its Pricing Schedule to offer a higher
Customer Complex Order Rebate for Adding Liquidity ($0.32 per
contract) and offer a new Customer Complex Order Rebate for Removing
Liquidity ($0.06 per contract) in SR-Phlx-2012-27.
---------------------------------------------------------------------------
As noted above, SR-Phlx-2012-27 increased Complex Order Fees for
Removing Liquidity in Select Symbols for all market participants,
except Customers who pay no fee, in order to offer greater Customer
Complex Order rebates. Market Makers are assessed lower fees than
Professionals,\13\ Firms and Broker-Dealers. By way of background,
Specialists,\14\ ROTs,\15\ SQTs \16\ and RSQTs \17\ are Market Makers.
Such Market Makers may also be categorized as Directed Participants
only at the time when such Market Makers execute against a Customer
order directed to that Market Maker for execution by an Order Flow
Provider (``OFP'').\18\ For example, a Market Maker is assessed the
Directed Participant category fee for trading against a Customer order
directed to it for execution by an OFP. That Market Maker is not
assessed the Directed Participant category fee for executing a Customer
order directed to different Market Maker, but rather is assessed the
Market Maker category fee.\19\
---------------------------------------------------------------------------
\13\ The term ``professional'' means any person or entity that
(i) is not a broker or dealer in securities, and (ii) places more
than 390 orders in listed options per day on average during a
calendar month for its own beneficial account(s). See Rule
1000(b)(14).
\14\ A Specialist is an Exchange member who is registered as an
options specialist pursuant to Rule 1020(a).
\15\ A ROT includes an SQT, an RSQT and a Non-SQT, which by
definition is neither a SQT or a RSQT. A ROT is defined in Exchange
Rule 1014(b) as a regular member 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).
\16\ 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.
\17\ 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.
\18\ The term ``Order Flow Provider'' means any member or member
organization that submits, as agent, orders to the Exchange. See
Rule 1080(l)(i)(B).
\19\ Neither a Market Maker nor a Directed Participant is
entitled to a rebate for transacting a Customer Complex Order today.
---------------------------------------------------------------------------
The fee structure is consistent with fee structures at other
options exchanges.
Market Makers are valuable market participants that provide
liquidity in the marketplace and incur costs unlike other market
participants including, but not limited to, SQF Port Fees \20\ to
assist them in responding to auctions and providing liquidity to the
market.\21\ The Directed Participant and Market Maker fees were lower
as compared to those charged to other market participants prior to the
amendment which became effective on March 1, 2012 with SR-Phlx-2012-27
and continue to be lower. In addition, the Exchange believes that its
fee differentiation is within the range of other exchanges, as
mentioned previously with respect to ISE and Amex, and lower than other
fee
[[Page 26593]]
differentiations that exist today, and have for some time, at Amex. The
Exchange notes that Amex has three classes of market makers on its fee
schedule: (1) Specialist, eSpecialist; (2) NYSE Amex Options Market
Maker-Non-Directed; and (3) NYSE Amex Options Market Maker-Directed
(taken together, ``Amex Market Makers''). Amex imposes the standard per
contract fees on electronic trades for simple and complex orders.\22\
Pursuant to Amex rules, Amex Market Makers have no allocation rights or
quoting obligations in the Amex complex order system and Amex Market
Makers are eligible to receive orders directed to them for
execution.\23\ With no additional quoting obligations or other
requirements for complex orders, Amex assesses a Specialist and
eSpecialist a fee of $.13 per contract while assessing a NYSE Amex
Options Market Maker-Non-Directed a fee of $.20 per contract. This fee
differentiation is greater than that currently in place on the
Exchange. Amex differentiates one type of market maker, the Specialist
and eSpecialist, from other Amex Market Makers who receive directed
orders, in its pricing with a $.07 per contract fee differential.\24\
As mentioned herein, a Market Maker on Phlx includes Specialists and
Remote Specialists.\25\ For this reason, the Exchange believes that its
current fee differentiation is equitable and not unfairly
discriminatory because the fees and fee differentiation in place at the
Exchange are competitive with and lower than fees and differentials at
other options exchanges.\26\
---------------------------------------------------------------------------
\20\ SQF Port Fees are listed in the Exchange's Pricing Schedule
at Section VII.
\21\ Also important are the continuous quoting obligations
applicable to Market Makers. Market Makers have these obligations
for each series in which they are assigned pursuant to Rule 1014
entitled ``Obligations and Restrictions Applicable to Specialists
and Registered Options Traders.'' These burdensome quoting
obligations to the market do not apply to Customers, Firms,
Professionals and Broker-Dealers. Also, Market Makers that receive
Directed Orders have higher quoting obligations compared to other
Market Makers.
\22\ See Securities Exchange Act Release No. 65549 (October 13,
2011), 76 FR 64983 (SR-NYSEAmex-2011-77) (notice of filing and
immediate effectiveness amending electronic complex orders). Amex
noted in that filing that the standard per contract fees apply to
electronic complex orders.
\23\ See Amex Rule 964NY entitled ``Display, Priority and Order
Allocation-Trading Systems.'' See also Amex Rule 980NY ``Electronic
Complex Order Trading.''
\24\ Pursuant to Amex's Rules, specialists and market makers may
receive directed orders in their appointed classes. See Amex Rule
964.1NY entitled ``Directed Orders.''
\25\ See Exchange Rule 1020. An options Specialist includes a
Remote Specialist which is a 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.
\26\ By way of further example, the Exchange notes that Amex
assesses a NYSE Amex Options Market Maker-Directed a fee of $.18 per
contract which creates a $.05 per contract fee differential when
compared to the Specialist and eSpecialist fee of $.13 per contract
for electronic executions in complex orders.
---------------------------------------------------------------------------
Only Market Maker executions against Customer orders that are
directed by an OFP and executed by that specific Market Maker receive
the Complex Order Directed Participant fee.
The Exchange's Fee for Removing Liquidity for Single contra-side
transactions in Select Symbols for the Directed Participant category is
two cents lower than the Fee for Removing Liquidity for the Market
Maker category.\27\ The Exchange amended the Complex Order Fees for
Removing Liquidity in Select Symbols to increase the fee differential
between the Directed Participant and Market Maker categories from $0.02
per contract to $0.05 per contract for Complex Order transactions to
also reflect the fact that unlike in the case of a Single contra-side
order, a Directed Participant does not have a guaranteed allocation in
a Complex Order. Market Makers receive no allocation guarantee when a
Customer Complex Order is directed to them by an OFP and the order is
executed. Directed Specialists, Directed ROTs, Directed SQTs and
Directed RSQTs are guaranteed a 40% allocation with respect to Single
contra-side transactions eligible as a Directed Order.\28\
---------------------------------------------------------------------------
\27\ Today, the Exchange assess Directed Participants a fee of
$0.36 per contract and Market Makers a fee of $0.38 per contract for
Single contra-side transactions in Select Symbols.
\28\ Complex Orders can be distinguished from Single contra-side
transactions with respect to allocation guarantees applicable to
Directed Specialists, Directed ROTs, Directed SQTs and Directed
RSQTs pursuant to Rule 1014(g)(viii). See also Securities Exchange
Act Release No. 57844 (May 21, 2008), 73 FR 30988 (May 29, 2008)
(SR-Phlx-2008-39) (notice of filing and order granting accelerated
approval relating to the permanent approval of the Exchange's
Directed Order Flow program.)
---------------------------------------------------------------------------
Market Makers are unaware of the identity of the contra-party at
the time of the trade and are required to execute at the best price.
Also, only Customer Complex Order flow which is directed to a
Market Maker by an OFP and is executed by that particular Market Maker
is eligible for Directed Participant fees for Complex Orders.\29\ When
a Market Maker executes against a Customer Complex Order the Market
Maker may do so by responding to an auction,\30\ executing against an
order on the Complex Order Book (``CBOOK''), or sweeping a resting
Customer Complex Order.\31\ The Customer Complex Order may also be
executed against existing quote and or limit orders on the limit order
book for the individual components of the Complex Order.\32\ In each of
these cases, the order will trade based on the best price or prices
available pursuant to Exchange Rules.\33\ Therefore, in order to enjoy
the benefits of trading against a directed Complex Customer order by
receiving a lower transaction fee (the Directed Participant Complex
Order Fee for Removing Liquidity), the transaction must: (i) Occur at
the best price; and (ii) be directed, by an OFP, to the particular
Market Maker that executed the order. Also, it is important to note
that all market participants may compete equally for Customer Complex
Order executions, even if that Customer Complex Order is directed to a
specific Market Maker.
---------------------------------------------------------------------------
\29\ All other types of directed non-Customer order flow are not
eligible for Directed Participant pricing.
\30\ The Complex Order Live Auction (``COLA'') is the auction
for eligible Complex Orders. See Rule 1080, Commentary .08.
\31\ A COLA Sweep is when a Phlx XL participant bids and/or
offers on either or both sides of the market during the COLA Timer
(a timing mechanism which is a counting period not to exceed 5
seconds) by submitting one or more bids or offers that improve the
cPPBO (the best net debit or credit price for a Complex Order
Strategy based on the PBBO for individual components of such Complex
Order Strategy). See Rule 1080, Commentary .08.
\32\ In this scenario the Customer order is ``legged'' against
interest present in the disseminated market.
\33\ See Rule 1080.
---------------------------------------------------------------------------
[[Page 26594]]
A Market Maker, at the time of the trade, is unaware of the
identity of the contra-party to the trade. In other words, it is only
sometime after the trade occurs that the Market Maker learns whether
the Market Maker or Directed Participant fees will be assessed on a
particular transaction.\34\ It is important to note that Customer
Complex Orders do not always interact with the intended recipient of
the order where such an order was directed because the Market Maker may
not have been at the best price at the time the order was executed. For
the time period from September 1, 2011 through April 19, 2012, the
percentage of Customer Complex directed orders that traded with the
Market Maker to which the trade was directed is reflected in the table
below:
---------------------------------------------------------------------------
\34\ This distinction holds true today for Market Makers and
Directed Participants executing either Single contra-side
transactions (Part A of Section I of the Pricing Schedule) or
Complex Orders (Part B of Section I of the Pricing Schedule). When a
Single contra-side transaction is executed against the individual
components of a Complex Order, the Single contra-side part of the
order will be subject to the fees in Part A of the Pricing Schedule
and the individual components will be subject to the fees in Part B.
--------------------------------------------------------------------------------------------------------------------------------------------------------
October November December January February April 1-19,
September 2011 2011 2011 2011 2012 2012 March 2012 2012
--------------------------------------------------------------------------------------------------------------------------------------------------------
17.02%....................................................... 16.16% 17.94% 14.01% 6.19% 11.47% 14.19% 17.13%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Generally, a Market Maker will be assessed the Market Maker Fee
for Removing Liquidity in Complex Orders when the Market Maker is not
executing a Customer order intended for that Market Maker. Moreover, in
a given month the effective Complex Order Fee for Removing Liquidity
for a Market Maker that also has executions subject to the Directed
Participant rate is approximately $0.02 below the Market Maker Complex
Order Fee for Removing Liquidity.\35\
---------------------------------------------------------------------------
\35\ For example if a Market Maker, that is the intended
recipient of a Customer Complex Order, only executes the Customer
Complex Order 14.5% of the time (paying the Directed Participant
Complex Order fee of $0.32 per contract), then that Market Maker is
paying the proposed Market Maker Complex Order fee of $0.37 per
contract the other 85.5% of the time. The effective Complex Order
Fee for Removing Liquidity for that Market Maker is $0.3613 in a
given month, less than $0.01 below the rate paid by a Market Maker
that never receives a Customer Complex Order directed to it for
execution.
---------------------------------------------------------------------------
Market Makers compete in offering price improvement in auctions.
The Exchange bases its belief that the fees are reasonable, in
part, on an analysis of the level of price improvement currently
received by Customer Complex Orders trading in an auction process.
Based on an analysis of the week of October 10, 2011, Customer Complex
Orders received price improvement 29% of the time and the average level
of price improvement was $0.059 per option or $5.90 per contract for
options receiving price improvement. Based on an analysis of the week
of April 9, 2012, Customer Complex Orders received price improvement
29% of the time and the average level of price improvement was $0.056
per option or $5.60 per contract for options receiving price
improvement.
Market Makers compete in offering price improvement in auctions.
The significant difference in magnitude between the proposed $0.05 per
contract increased fee differential (between Market Makers and Directed
Participants) and the extent of price improvement supports the
Exchange's belief that the fee is reasonable and will have a negligible
impact on Directed and non-Directed Market Makers.
The Directed Participant and Market Maker Complex Order Fees for
Removing Liquidity provide the Exchange an opportunity to offer
increased Customer rebates to attract Customer order flow.
Today, options exchanges aggressively compete for Complex order
flow. In January 2012, based on data from the Options Price Reporting
Authority (``OPRA''), the average daily equity options complex order
transactions on the various option exchanges totaled 117,539. The
combined total for the last six months of 2011 was 593,286. With
respect to market share, the six options exchanges handling complex
orders had market share in complex orders ranging from 2.4% to 40.1% in
January 2012. The Exchange believes the increased fees, which fund
Customer Complex Order rebates, bring more Customer order flow to the
market and, in turn, benefit all market participants.
The Exchange operates in a highly competitive market, comprised of
nine exchanges, in which market participants can easily and readily
direct order flow to competing venues if they deem fee levels at a
particular venue to be excessive or rebates offered to be insufficient.
Accordingly, the fees that are assessed by the Exchange and the rebates
it pays for options overlying the various Select Symbols in Complex
Orders must remain competitive with fees and rebates charged/paid by
other venues and therefore must continue to be reasonable and equitably
allocated to those members that opt to direct orders to the Exchange
rather than competing venues.
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.\36\ 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.\37\
---------------------------------------------------------------------------
\36\ 15 U.S.C. 78s(b)(3)(A)(ii).
\37\ In a separate order, the Commission is temporarily
suspending and instituting proceedings to determine whether the
proposed rule change SR-Phlx-2012-54, as well as SR-Phlx-2012-27,
should be approved or disapproved. See Securities Exchange Act
Release No. 66884 (April 30, 2012).
---------------------------------------------------------------------------
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:
[[Page 26595]]
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-2012-54 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-2012-54. 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
10:00 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; 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-2012-54 and should be
submitted on or before May 25, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\38\
---------------------------------------------------------------------------
\38\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-10754 Filed 5-3-12; 8:45 am]
BILLING CODE 8011-01-P
