Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Routing Fees to C2, 13925-13928 [2013-04795]

Download as PDF Federal Register / Vol. 78, No. 41 / Friday, March 1, 2013 / Notices Maturity Obligations.7 Because IPAs do not have a legal obligation to honor maturing MMIs in the absence of funding from the issuer, IPAs may communicate to DTC an Issuer Failure/ Refusal to Pay (‘‘RTP’’) for any issuer acronym up to 3:00 p.m. ET on the day of the affected Maturity Obligation. Such an instruction causes DTC, pursuant to its Rules, to reverse all transactions related to that issuer’s acronym, including Maturity Obligations and any new MMI issuances, posing a potential for systemic risk since the reversals may override DTC’s risk management controls such as the Collateral Monitor (‘‘CM’’) 8 and net debit cap (‘‘Net Debit Cap,’’ collectively with CM, ‘‘Settlement Risk Controls’’).9 DTC currently withholds intraday from each MMI member the largest provisional net credit (‘‘LPNC’’) of a single issuer’s acronym for purposes of calculating the member’s position in relation to the Settlement Risk Controls. DTC believes that the LPNC control helps protect DTC against either (i) the single largest issuer failure on a business day, or (ii) multiple failures on a business day that, taken together, do not exceed the largest provisional net credit. Recent market events have increased DTC’s awareness of the possibility of multiple simultaneous MMI issuer failures. Multiple simultaneous MMI issuer failures may cause more IPAs on a given day to communicate an RTP to DTC, which could increase the amount of the reversal that could override the DTC Settlement Risk Controls. As a result, DTC is increasing the LPNC mstockstill on DSK4VPTVN1PROD with NOTICES 7 DTC guidelines suggest that issuers fund their net debit obligations to the IPA by 1:00 p.m. ET to alleviate this credit risk. 8 A DTC ‘‘Participant’’ is a regulated institution that is eligible to use and uses DTC’s services. See DTC Participant Handbook (Sept. 2011). DTC tracks collateral in a Participant’s DTC account through the CM. At all times, the CM reflects the amount by which the collateral value in the account exceeds the net debit balance in the account. When processing a transaction, DTC verifies that the CM of each of the deliverer and receiver will not become negative when the transaction is processed. If the transaction would cause either party to have a negative CM, the transaction will recycle until the deficient account has sufficient collateral to proceed or until the applicable cutoff occurs. See id. 9 The Net Debit Cap control is designed so that DTC may complete settlement even if a Participant fails to settle. Before completing a transaction in which a Participant is the receiver, DTC calculates the effect the transaction would have on such Participant’s account, and determines whether any resulting net debit balance would exceed the Participant’s net debit cap. Any transaction that would cause the net debit balance to exceed the net debit cap is placed on a pending (recycling) queue until the net debit cap will not be exceeded by processing the transaction. See DTC Participant Handbook (Sept. 2011). VerDate Mar<15>2010 16:40 Feb 28, 2013 Jkt 229001 withholding to the two largest net credits (on an acronym basis). In order to alleviate any settlement blockage that may occur as a result of withholding the two largest LPNCs and to promote settlement finality, DTC will no longer process an RTP initiated by an IPA that serves as both an issuing agent and a paying agent in the same acronym on the same day when new MMI issuances in an acronym exceed, in dollar value, the Maturity Obligations in the same acronym on the same day and the receiving members’ Settlement Risk Controls permit completion of the transaction. As a result, DTC will remove the LPNC withholding with respect to such acronyms at the point in time when it eliminates the IPA’s option to initiate an RTP. B. Discussion Section 17A(b)(3)(F) of the Act requires that, among other things, ‘‘[t]he rules of the clearing agency are designed to promote the prompt and accurate clearance and settlement of securities transactions and * * * to assure the safeguarding of securities and funds which are in the custody or control of the clearing agency or for which it is responsible.’’ 10 Furthermore, Commission Rules 17Ad–22(d)(11) regarding Default Procedures and 17Ad– 22(d)(12) regarding Timing of Settlement Finality, both adopted as part of the Clearing Agency Standards,11 require that clearing agencies establish, implement, maintain and enforce written policies and procedures reasonably designed to establish default procedures that ensure that the clearing agency can take timely action to contain losses and liquidity pressures and to continue meeting its obligations in the event of a participant default, and require that intraday or real-time finality be provided where necessary to reduce risks, respectively.12 Here, as described in detail above, DTC’s proposed rule change to increase the LPNC from one to two largest provisional credits should, generally, help further safeguard the securities and settlement process as a whole, and, more specifically, help DTC better contain losses and liquidity pressures, yet continue to meet its obligations; meanwhile, DTC’s proposed rule change to no longer process RTPs for an acronym when the described circumstances are met and, then, remove the LPNC for the same acronym when an RTP is no longer viable should 10 15 U.S.C. 78q–1(b)(3)(F). No. 34–68080 (Oct. 22, 2012), 77 FR 66219 (Nov. 2, 2012). 12 Id. at 131–139. 11 Release PO 00000 Frm 00071 Fmt 4703 Sfmt 4703 13925 improve the prompt and accurate clearance and settlement of securities (i.e., settlement finality), thus reducing DTC’s risk. Since RTPs will no longer be processed when new issuances in an acronym exceed Maturity Obligations in the same acronym in the same day, removing the LPNC control in these cases should not increase DTC’s exposure to MMI issuer credit risk. III. Conclusion On the basis of the foregoing, the Commission finds the Proposed Rule Change, as modified by Amendment No. 2, consistent with the requirements of the Act, particularly with the requirements of Section 17A of the Act,13 and the rules and regulations thereunder. It is therefore ordered, pursuant to Section 19(b)(2) of the Act,14 that the proposed rule change SR–DTC–2012– 10, as modified by Amendment No. 2, be and hereby is APPROVED 15 as of the date of this order or the date of the ‘‘Notice of Filing Amendment No. 1 and No Objection to Advance Notice Filing, as Modified by Amendment No. 1, to Reduce Liquidity Risk Relating to [DTC’s] Processing of Maturity and Income Presentments and Issuances of Money Market Instruments,’’ SR–DTC– 2012–810, whichever is later. For the Commission by the Division of Trading and Markets, pursuant to delegated authority.16 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–04750 Filed 2–28–13; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–68984; File No. SR–Phlx– 2013–17] Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Routing Fees to C2 February 25, 2013. 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 February 12, 2013, NASDAQ OMX PHLX LLC 13 15 U.S.C. 78q–1. U.S.C. 78s(b)(2). 15 In approving the Proposed Rule Change, the Commission considered the proposal’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 16 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 14 15 E:\FR\FM\01MRN1.SGM 01MRN1 13926 Federal Register / Vol. 78, No. 41 / Friday, March 1, 2013 / Notices (‘‘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. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend Section V of the Pricing Schedule entitled ‘‘Routing Fees.’’ The text of the proposed rule change is available on the Exchange’s Web site at https:// nasdaqomxphlx.cchwallstreet.com/, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. mstockstill on DSK4VPTVN1PROD with NOTICES A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The purpose of this filing is to amend Routing Fees in Section V of the Pricing Schedule in order to recoup costs applicable to the C2 Options Exchange, Inc. (‘‘C2’’) that the Exchange incurs for routing and executing orders in equity options. Today, the Exchange calculates Routing Fees by assessing certain Exchange costs related to routing orders to away markets plus the away market’s transaction fee. The Exchange assesses a $0.05 per contract fixed Routing Fee when routing orders to the NASDAQ Options Market LLC (‘‘NOM’’) and NASDAQ OMX BX, Inc. (‘‘BX Options’’) and a $0.11 per contract fixed Routing Fee to all other options exchanges in addition to the actual transaction fee or rebate paid by the away market.3 3 Today, the transaction fee assessed by the Exchange is based on the away market’s actual transaction fee or rebate for a particular market VerDate Mar<15>2010 16:40 Feb 28, 2013 Jkt 229001 The fixed Routing Fee is based on costs that are incurred by the Exchange when routing to an away market in addition to the away market’s transaction fee. For example, the Exchange incurs a fee when it utilizes Nasdaq Options Services LLC (‘‘NOS’’), a member of the Exchange and the Exchange’s exclusive order router,4 to route orders in options listed and open for trading on the PHLX XL system to destination markets. Each time NOS routes to away markets NOS incurs a clearing-related cost 5 and, in the case of certain exchanges, a transaction fee is also charged in certain symbols, which fees are passed through to the Exchange. The Exchange also incurs administrative and technical costs associated with operating NOS, membership fees at away markets, Options Regulatory Fees (‘‘ORFs’’) and technical costs associated with routing options. C2 recently filed a rule change to amend its transaction fees and rebates for simple,6 non-complex orders, in equity options classes which became operative on February 1, 2013.7 C2 assesses its transaction fees based on a formula wherein fees are calculated on a per-contract basis.8 C2 pays rebates based on a formula wherein rebates are participant at the time that the order was entered into the Exchange’s trading system. This transaction fee is calculated on an order-by-order basis, since different away markets charge different amounts. In the event that there is no transaction fee or rebate assessed by the away market, the only fee assessed is the fixed Routing Fee. With respect to the rebate, the Exchange pays a market participant the rebate offered by an away market where there is such a rebate. Any rebate available is netted against a fee assessed by the Exchange. The Exchange is not proposing to amend its calculation of the away market’s transaction fee as described herein. 4 In May 2009, the Exchange adopted Rule 1080(m)(iii)(A) to establish Nasdaq Options Services LLC (‘‘NOS’’), a member of the Exchange, as the Exchange’s exclusive order router. See Securities Exchange Act Release No. 59995 (May 28, 2009), 74 FR 26750 (June 3, 2009) (SR–Phlx– 2009–32). NOS is utilized by the Exchange’s fully automated options trading system, PHLX XL.® ‘‘PHLX XL’’ is the Exchange’s automated options trading system. 5 The Options Clearing Corporation (‘‘OCC’’) assesses a clearing fee of $0.01 per contract side. See Securities Exchange Act Release No. 68025 (October 10, 2012), 77 FR 63398 (October 16, 2012) (SR–OCC–2012–18). 6 C2 defines simple orders to exclude ETFs and indexes. 7 See Securities Exchange Act Release No. 68792 (January 31, 2013), 78 FR 8621 (February 6, 2013) (SR–C2–2013–004). 8 C2 utilizes the following formula to calculate its transaction fees: C2 BBO Market Width at time of execution) x (Market Participant Rate) x 50. The C2 BBO Market Width is the difference between the quoted best offer and best bid in each class on C2 (the displayed C2 ask price minus the displayed C2 bid price). The Market Participant Rates are different rates for different types of market participants, as follows: Market Participant Rate; C2 Market-Maker 30%; Public Customer (Maker) 40%; all other origins 50%. See C2’s Fees Schedule. PO 00000 Frm 00072 Fmt 4703 Sfmt 4703 calculated on a per-contract basis.9 Because of this recent rule change, the Exchange proposes to amend C2 Routing Fees to provide transparency to its market participants. The Exchange proposes to amend its non-Customer C2 Routing Fees to assess the fixed cost of $0.11 per contract plus a flat rate of $0.85 per contract, except with respect to Customers.10 With respect to Customers, the Exchange proposes not to pass the rebate offered by C2, as is the case today for Routing to C2 and other away markets. The Exchange proposes to not assess Customers a Routing Fee when routing orders to C2. This is similar to the manner in which the BATS Exchange, Inc. (‘‘BATS’’) prices Customer orders routed to C2.11 The Exchange proposes to specifically note the amended rates on its Pricing Schedule in order to simplify C2 Routing Fees. As with all fees, the Exchange may adjust these Routing Fees in response to competitive conditions by filing a new proposed rule change. 2. Statutory Basis The Exchange believes that its proposal to amend its Pricing Schedule is consistent with Section 6(b) of the Act 12 in general, and furthers the objectives of Section 6(b)(4) of the Act,13 in particular, in that it is an equitable allocation of reasonable fees and other charges among Exchange members. The Exchange believes that its proposal to amend non-Customer C2 Routing Fees from actual transaction charges to a flat rate, in addition to its fixed cost, is reasonable because the current C2 Routing Fees are not transparent. The Exchange believes that assessing a flat rate in addition to the fixed cost assessed by the Exchange will provide market participants certainty with respect to C2 Routing Fees. Further, each destination market’s transaction charge varies and there is a cost incurred by the Exchange when routing orders to away markets. The costs to the Exchange include clearing 9 C2 utilizes the following formula to compute rebates for simple, non-complex Public Customer orders in all equity options classes that remove liquidity (i.e. takers): Rebate = (C2 BBO Market Width at time of execution) x (Order Size Multiplier) x 50. The order size multiplier is as follows: 1–10 contracts will be 36%; 11–99 contracts will be 30%; 100–250 contracts will be 20% and 251 plus contracts is 0%. The maximum rebate is capped at $0.75 per contract. See C2’s Fees Schedule. 10 Recent pricing changes by C2 will result in a maximum fee of $0.85 per contract for nonCustomer orders executed at C2 and rebates or free executions for Customer orders executed at C2. 11 See SR–BATS–2013–012 (not yet published). 12 15 U.S.C. 78f(b). 13 15 U.S.C. 78f(b)(4). E:\FR\FM\01MRN1.SGM 01MRN1 mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 78, No. 41 / Friday, March 1, 2013 / Notices costs, administrative and technical costs associated with operating NOS, membership fees at away markets, ORFs and technical costs associated with routing options. The Exchange believes that the proposed non-Customer C2 Routing Fees will enable the Exchange to recover the costs it incurs to route orders to C2 in addition to the flat fee to recoup transaction costs. The Exchange believes that its proposal to amend the non-Customer C2 Routing Fees from actual transaction charges to a flat rate, in addition to its fixed cost, is equitable and not unfairly discriminatory because the Exchange would uniformly assess the same C2 Routing Fees to all non-Customer market participants. Under its flat fee structure, taking all costs to the Exchange into account, the Exchange may operate at a slight gain or a slight loss for orders routed to and executed at C2. The Exchange believes that its proposed Routing Fees for routing nonCustomer orders to C2 are reasonable because they are an approximation of the maximum fees the Exchange will be charged for such executions, including costs. As a general matter, the Exchange believes that the proposed fees will allow it to recoup and cover its costs of providing routing services to C2. The Exchange believes that its proposal to not pay a rebate to Customers and assess no Customer Routing Fee is reasonable, equitable and not unfairly discriminatory. The Exchange believes that the pricing structure is reasonable because, although not an approximation of the cost of routing to C2, Customer orders will still receive executions free of charge, whereas all other non-Customer routed orders routed to C2 would be assessed a Routing Fee. The Exchange believes that the proposed pricing for Customer orders is equitable and not unfairly discriminatory because it would apply uniformly to all Customer transactions. Members desiring the rebate offered by C2 can route orders directly in order to take advantage of the rebate. Market participants may submit orders to the Exchange as ineligible for routing or ‘‘DNR’’ to avoid Routing Fees. Further, the Exchange believes that it is equitable and not unfairly discriminatory to assess a fixed cost of $0.05 per contract to route orders to NASDAQ OMX away markets (BX Options and NOM) because the cost, in terms of actual cash outlays, to the Exchange to route to those markets is lower. For example, costs related to routing to BX Options and NOM are lower as compared to other away markets because NOS is utilized by all VerDate Mar<15>2010 16:40 Feb 28, 2013 Jkt 229001 three exchanges to route orders.14 NOS and the three NASDAQ OMX options markets have a common data center and staff that are responsible for the day-today operations of NOS. Because the three exchanges are in a common data center, Routing Fees are reduced because costly expenses related to, for example, telecommunication lines to obtain connectivity are avoided when routing orders in this instance. The costs related to connectivity to route orders to other NASDAQ OMX exchanges are de minimis. When routing orders to non-NASDAQ OMX exchanges, the Exchange incurs costly connectivity charges related to telecommunication lines and other related costs when routing orders. The Exchange believes it is reasonable, equitable and not unfairly discriminatory to pass along savings realized by leveraging NASDAQ OMX’s infrastructure and scale to market participants when those orders are routed to BX Options and NOM. It is important to note with respect to routing to an away market that orders are routed based on price first. PHLX XL will route orders to away markets where the Exchange’s disseminated bid or offer is inferior to the national best bid (best offer) (‘‘NBBO’’) price.15 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. The Exchange believes that the rule change would allow the Exchange to recoup its costs when routing orders designated as available for routing by the market participant to C2. Members and member organizations may choose to mark the order as ineligible for routing to avoid incurring these fees.16 Today, other options exchanges also assess similar fees to recoup costs incurred by the Exchange to route orders to away markets. PHLX XL routes orders to away 14 See Chapter VI, Section 11 of the BX Options and NOM Rules. 15 See Rule 1080(m). The Phlx XL II system will contemporaneously route an order marked as an Intermarket Sweep Order (‘‘ISO’’) to each away market disseminating prices better than the Exchange’s price, for the lesser of: (a) The disseminated size of such away markets, or (b) the order size and, if order size remains after such routing, trade at the Exchange’s disseminated bid or offer up to its disseminated size. If contracts still remain unexecuted after routing, they are posted on the book. Once on the book, should the order subsequently be locked or crossed by another market center, the Phlx XL II system will not route the order to the locking or crossing market center, with some exceptions noted in Rule 1080(m). 16 Id. PO 00000 Frm 00073 Fmt 4703 Sfmt 4703 13927 markets where the Exchange’s disseminated bid or offer is inferior to the national best bid (best offer) (‘‘NBBO’’) price and based on price first.17 The Exchange operates in a highly competitive market, comprised of eleven 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. Accordingly, the fees that are assessed by the Exchange must remain competitive with fees charged 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. 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.18 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. 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 rulecomments@sec.gov. Please include File Number SR–Phlx–2013–17 on the subject line. 17 See 18 15 E:\FR\FM\01MRN1.SGM supra note 15. U.S.C. 78s(b)(3)(A)(ii). 01MRN1 13928 Federal Register / Vol. 78, No. 41 / Friday, March 1, 2013 / Notices 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–2013–17. 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 such filing also will be available for inspection and copying at the principal office Phlx. 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– 2013–17, and should be submitted on or before March 22, 2013. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.19 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–04795 Filed 2–28–13; 8:45 am] [Release No. 34–68976; File No. SR– NASDAQ–2013–029] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Routing Fees to C2 February 25, 2013. 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 February 12, 2013, The NASDAQ Stock Market LLC (‘‘NASDAQ’’ 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 NASDAQ. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change NASDAQ proposes to amend Chapter XV, entitled ‘‘Options Pricing,’’ at Section 2 governing pricing for NASDAQ members using the NASDAQ Options Market (‘‘NOM’’), NASDAQ’s facility for executing and routing standardized equity and index options. Specifically, NOM proposes to amend its Routing Fees to the C2 Options Exchange, Inc. (‘‘C2’’). The text of the proposed rule change is available on the Exchange’s Web site at https:// www.nasdaq.cchwallstreet.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change. 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. BILLING CODE 8011–01–P mstockstill on DSK4VPTVN1PROD with NOTICES SECURITIES AND EXCHANGE COMMISSION 1 15 19 17 CFR 200.30–3(a)(12). VerDate Mar<15>2010 16:40 Feb 28, 2013 2 17 Jkt 229001 PO 00000 U.S.C. 78s(b)(1). CFR 240.19b–4. Frm 00074 Fmt 4703 Sfmt 4703 A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose NASDAQ proposes to amend its Routing Fees at Chapter XV, Section 2(3) of the Exchange Rules in order to recoup costs applicable to the C2 Options Exchange, Inc. (‘‘C2’’) that the Exchange incurs for routing and executing orders in equity options. Today, the Exchange calculates Routing Fees by assessing certain Exchange costs related to routing orders to away markets plus the away market’s transaction fee. The Exchange assesses a $0.05 per contract fixed Routing Fee when routing orders to the NASDAQ OMX PHLX LLC (‘‘PHLX’’) and NASDAQ OMX BX, Inc. (‘‘BX Options’’) and a $0.11 per contract fixed Routing Fee to all other options exchanges in addition to the actual transaction fee or rebate paid by the away market.3 The fixed Routing Fee is based on costs that are incurred by the Exchange when routing to an away market in addition to the away market’s transaction fee. For example, the Exchange incurs a fee when it utilizes Nasdaq Options Services LLC (‘‘NOS’’), a member of the Exchange and the Exchange’s exclusive order router.4 Each time NOS routes to away markets NOS incurs a clearing-related cost 5 and, in the case of certain exchanges, a transaction fee is also charged in certain symbols, which fees are passed through to the Exchange. The Exchange also incurs administrative and technical costs associated with operating NOS, membership fees at away markets, Options Regulatory Fees (‘‘ORFs’’) and technical costs associated with routing options. C2 recently filed a rule change to amend its transaction fees and rebates 3 Today, the transaction fee assessed by the Exchange is based on the away market’s actual transaction fee or rebate for a particular market participant at the time that the order was entered into the Exchange’s trading system. This transaction fee is calculated on an order-by-order basis, since different away markets charge different amounts. In the event that there is no transaction fee or rebate assessed by the away market, the only fee assessed is the fixed Routing Fee. With respect to the rebate, the Exchange pays a market participant the rebate offered by an away market where there is such a rebate. Any rebate available is netted against a fee assessed by the Exchange. The Exchange is not proposing to amend its calculation of the away market’s transaction fee as described herein. 4 See NASDAQ Rules at Chapter VI, Section 11(e) (Order Routing). 5 The Options Clearing Corporation (‘‘OCC’’) assesses a clearing fee of $0.01 per contract side. See Securities Exchange Act Release No. 68025 (October 10, 2012), 77 FR 63398 (October 16, 2012) (SR–OCC–2012–18). E:\FR\FM\01MRN1.SGM 01MRN1

Agencies

[Federal Register Volume 78, Number 41 (Friday, March 1, 2013)]
[Notices]
[Pages 13925-13928]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-04795]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68984; File No. SR-Phlx-2013-17]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend 
Routing Fees to C2

February 25, 2013.
    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 February 12, 2013, NASDAQ OMX PHLX LLC

[[Page 13926]]

(``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 Section V of the Pricing Schedule 
entitled ``Routing Fees.''
    The text of the proposed rule change is available on the Exchange's 
Web site at https://nasdaqomxphlx.cchwallstreet.com/, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    The purpose of this filing is to amend Routing Fees in Section V of 
the Pricing Schedule in order to recoup costs applicable to the C2 
Options Exchange, Inc. (``C2'') that the Exchange incurs for routing 
and executing orders in equity options. Today, the Exchange calculates 
Routing Fees by assessing certain Exchange costs related to routing 
orders to away markets plus the away market's transaction fee. The 
Exchange assesses a $0.05 per contract fixed Routing Fee when routing 
orders to the NASDAQ Options Market LLC (``NOM'') and NASDAQ OMX BX, 
Inc. (``BX Options'') and a $0.11 per contract fixed Routing Fee to all 
other options exchanges in addition to the actual transaction fee or 
rebate paid by the away market.\3\
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    \3\ Today, the transaction fee assessed by the Exchange is based 
on the away market's actual transaction fee or rebate for a 
particular market participant at the time that the order was entered 
into the Exchange's trading system. This transaction fee is 
calculated on an order-by-order basis, since different away markets 
charge different amounts. In the event that there is no transaction 
fee or rebate assessed by the away market, the only fee assessed is 
the fixed Routing Fee. With respect to the rebate, the Exchange pays 
a market participant the rebate offered by an away market where 
there is such a rebate. Any rebate available is netted against a fee 
assessed by the Exchange. The Exchange is not proposing to amend its 
calculation of the away market's transaction fee as described 
herein.
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    The fixed Routing Fee is based on costs that are incurred by the 
Exchange when routing to an away market in addition to the away 
market's transaction fee. For example, the Exchange incurs a fee when 
it utilizes Nasdaq Options Services LLC (``NOS''), a member of the 
Exchange and the Exchange's exclusive order router,\4\ to route orders 
in options listed and open for trading on the PHLX XL system to 
destination markets. Each time NOS routes to away markets NOS incurs a 
clearing-related cost \5\ and, in the case of certain exchanges, a 
transaction fee is also charged in certain symbols, which fees are 
passed through to the Exchange. The Exchange also incurs administrative 
and technical costs associated with operating NOS, membership fees at 
away markets, Options Regulatory Fees (``ORFs'') and technical costs 
associated with routing options.
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    \4\ In May 2009, the Exchange adopted Rule 1080(m)(iii)(A) to 
establish Nasdaq Options Services LLC (``NOS''), a member of the 
Exchange, as the Exchange's exclusive order router. See Securities 
Exchange Act Release No. 59995 (May 28, 2009), 74 FR 26750 (June 3, 
2009) (SR-Phlx-2009-32). NOS is utilized by the Exchange's fully 
automated options trading system, PHLX XL.[supreg] ``PHLX XL'' is 
the Exchange's automated options trading system.
    \5\ The Options Clearing Corporation (``OCC'') assesses a 
clearing fee of $0.01 per contract side. See Securities Exchange Act 
Release No. 68025 (October 10, 2012), 77 FR 63398 (October 16, 2012) 
(SR-OCC-2012-18).
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    C2 recently filed a rule change to amend its transaction fees and 
rebates for simple,\6\ non-complex orders, in equity options classes 
which became operative on February 1, 2013.\7\ C2 assesses its 
transaction fees based on a formula wherein fees are calculated on a 
per-contract basis.\8\ C2 pays rebates based on a formula wherein 
rebates are calculated on a per-contract basis.\9\ Because of this 
recent rule change, the Exchange proposes to amend C2 Routing Fees to 
provide transparency to its market participants.
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    \6\ C2 defines simple orders to exclude ETFs and indexes.
    \7\ See Securities Exchange Act Release No. 68792 (January 31, 
2013), 78 FR 8621 (February 6, 2013) (SR-C2-2013-004).
    \8\ C2 utilizes the following formula to calculate its 
transaction fees: C2 BBO Market Width at time of execution) x 
(Market Participant Rate) x 50. The C2 BBO Market Width is the 
difference between the quoted best offer and best bid in each class 
on C2 (the displayed C2 ask price minus the displayed C2 bid price). 
The Market Participant Rates are different rates for different types 
of market participants, as follows: Market Participant Rate; C2 
Market-Maker 30%; Public Customer (Maker) 40%; all other origins 
50%. See C2's Fees Schedule.
    \9\ C2 utilizes the following formula to compute rebates for 
simple, non-complex Public Customer orders in all equity options 
classes that remove liquidity (i.e. takers): Rebate = (C2 BBO Market 
Width at time of execution) x (Order Size Multiplier) x 50. The 
order size multiplier is as follows: 1-10 contracts will be 36%; 11-
99 contracts will be 30%; 100-250 contracts will be 20% and 251 plus 
contracts is 0%. The maximum rebate is capped at $0.75 per contract. 
See C2's Fees Schedule.
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    The Exchange proposes to amend its non-Customer C2 Routing Fees to 
assess the fixed cost of $0.11 per contract plus a flat rate of $0.85 
per contract, except with respect to Customers.\10\ With respect to 
Customers, the Exchange proposes not to pass the rebate offered by C2, 
as is the case today for Routing to C2 and other away markets. The 
Exchange proposes to not assess Customers a Routing Fee when routing 
orders to C2. This is similar to the manner in which the BATS Exchange, 
Inc. (``BATS'') prices Customer orders routed to C2.\11\ The Exchange 
proposes to specifically note the amended rates on its Pricing Schedule 
in order to simplify C2 Routing Fees.
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    \10\ Recent pricing changes by C2 will result in a maximum fee 
of $0.85 per contract for non-Customer orders executed at C2 and 
rebates or free executions for Customer orders executed at C2.
    \11\ See SR-BATS-2013-012 (not yet published).
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    As with all fees, the Exchange may adjust these Routing Fees in 
response to competitive conditions by filing a new proposed rule 
change.
2. Statutory Basis
    The Exchange believes that its proposal to amend its Pricing 
Schedule is consistent with Section 6(b) of the Act \12\ in general, 
and furthers the objectives of Section 6(b)(4) of the Act,\13\ in 
particular, in that it is an equitable allocation of reasonable fees 
and other charges among Exchange members.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

    The Exchange believes that its proposal to amend non-Customer C2 
Routing Fees from actual transaction charges to a flat rate, in 
addition to its fixed cost, is reasonable because the current C2 
Routing Fees are not transparent. The Exchange believes that assessing 
a flat rate in addition to the fixed cost assessed by the Exchange will 
provide market participants certainty with respect to C2 Routing Fees. 
Further, each destination market's transaction charge varies and there 
is a cost incurred by the Exchange when routing orders to away markets. 
The costs to the Exchange include clearing

[[Page 13927]]

costs, administrative and technical costs associated with operating 
NOS, membership fees at away markets, ORFs and technical costs 
associated with routing options. The Exchange believes that the 
proposed non-Customer C2 Routing Fees will enable the Exchange to 
recover the costs it incurs to route orders to C2 in addition to the 
flat fee to recoup transaction costs.
    The Exchange believes that its proposal to amend the non-Customer 
C2 Routing Fees from actual transaction charges to a flat rate, in 
addition to its fixed cost, is equitable and not unfairly 
discriminatory because the Exchange would uniformly assess the same C2 
Routing Fees to all non-Customer market participants. Under its flat 
fee structure, taking all costs to the Exchange into account, the 
Exchange may operate at a slight gain or a slight loss for orders 
routed to and executed at C2. The Exchange believes that its proposed 
Routing Fees for routing non-Customer orders to C2 are reasonable 
because they are an approximation of the maximum fees the Exchange will 
be charged for such executions, including costs. As a general matter, 
the Exchange believes that the proposed fees will allow it to recoup 
and cover its costs of providing routing services to C2.
    The Exchange believes that its proposal to not pay a rebate to 
Customers and assess no Customer Routing Fee is reasonable, equitable 
and not unfairly discriminatory. The Exchange believes that the pricing 
structure is reasonable because, although not an approximation of the 
cost of routing to C2, Customer orders will still receive executions 
free of charge, whereas all other non-Customer routed orders routed to 
C2 would be assessed a Routing Fee. The Exchange believes that the 
proposed pricing for Customer orders is equitable and not unfairly 
discriminatory because it would apply uniformly to all Customer 
transactions. Members desiring the rebate offered by C2 can route 
orders directly in order to take advantage of the rebate. Market 
participants may submit orders to the Exchange as ineligible for 
routing or ``DNR'' to avoid Routing Fees.
    Further, the Exchange believes that it is equitable and not 
unfairly discriminatory to assess a fixed cost of $0.05 per contract to 
route orders to NASDAQ OMX away markets (BX Options and NOM) because 
the cost, in terms of actual cash outlays, to the Exchange to route to 
those markets is lower. For example, costs related to routing to BX 
Options and NOM are lower as compared to other away markets because NOS 
is utilized by all three exchanges to route orders.\14\ NOS and the 
three NASDAQ OMX options markets have a common data center and staff 
that are responsible for the day-to-day operations of NOS. Because the 
three exchanges are in a common data center, Routing Fees are reduced 
because costly expenses related to, for example, telecommunication 
lines to obtain connectivity are avoided when routing orders in this 
instance. The costs related to connectivity to route orders to other 
NASDAQ OMX exchanges are de minimis. When routing orders to non-NASDAQ 
OMX exchanges, the Exchange incurs costly connectivity charges related 
to telecommunication lines and other related costs when routing orders. 
The Exchange believes it is reasonable, equitable and not unfairly 
discriminatory to pass along savings realized by leveraging NASDAQ 
OMX's infrastructure and scale to market participants when those orders 
are routed to BX Options and NOM. It is important to note with respect 
to routing to an away market that orders are routed based on price 
first. PHLX XL will route orders to away markets where the Exchange's 
disseminated bid or offer is inferior to the national best bid (best 
offer) (``NBBO'') price.\15\
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    \14\ See Chapter VI, Section 11 of the BX Options and NOM Rules.
    \15\ See Rule 1080(m). The Phlx XL II system will 
contemporaneously route an order marked as an Intermarket Sweep 
Order (``ISO'') to each away market disseminating prices better than 
the Exchange's price, for the lesser of: (a) The disseminated size 
of such away markets, or (b) the order size and, if order size 
remains after such routing, trade at the Exchange's disseminated bid 
or offer up to its disseminated size. If contracts still remain 
unexecuted after routing, they are posted on the book. Once on the 
book, should the order subsequently be locked or crossed by another 
market center, the Phlx XL II system will not route the order to the 
locking or crossing market center, with some exceptions noted in 
Rule 1080(m).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange believes that the 
rule change would allow the Exchange to recoup its costs when routing 
orders designated as available for routing by the market participant to 
C2. Members and member organizations may choose to mark the order as 
ineligible for routing to avoid incurring these fees.\16\ Today, other 
options exchanges also assess similar fees to recoup costs incurred by 
the Exchange to route orders to away markets. PHLX XL routes orders to 
away markets where the Exchange's disseminated bid or offer is inferior 
to the national best bid (best offer) (``NBBO'') price and based on 
price first.\17\
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    \16\ Id.
    \17\ See supra note 15.
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    The Exchange operates in a highly competitive market, comprised of 
eleven 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. Accordingly, the fees that are 
assessed by the Exchange must remain competitive with fees charged 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.

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.\18\ 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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    \18\ 15 U.S.C. 78s(b)(3)(A)(ii).
---------------------------------------------------------------------------

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-2013-17 on the subject line.

[[Page 13928]]

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-2013-17. 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 such filing also will be available 
for inspection and copying at the principal office Phlx. 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-2013-17, and should be 
submitted on or before March 22, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-04795 Filed 2-28-13; 8:45 am]
BILLING CODE 8011-01-P
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