Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Related to Affiliated Entities, 49293-49299 [2016-17668]
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Federal Register / Vol. 81, No. 144 / Wednesday, July 27, 2016 / Notices
Appointed MM or an Appointed OFP.
Also, all NOM Participants may qualify
for a MARS Payment provided they
meet applicable System Eligibility
requirements. NOM Participants may
participate in only one Affiliated Entity
relationship at a given time, which
imposes a measure of exclusivity among
market participants, allowing each party
to rely on the other’s executed volume
on NOM to receive a corresponding
benefit in terms of a rebate. The
Exchange will apply all qualifications in
a uniform manner to all market
participants that elect to become
counterparties of an Affiliated Entity.
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.31
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is: (i) Necessary or appropriate in
the public interest; (ii) for the protection
of investors; or (iii) otherwise in
furtherance of the purposes of the Act.
If the Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
IV. Solicitation of Comments
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.32
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–17666 Filed 7–26–16; 8:45 am]
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–
NASDAQ–2016–090 on the subject line.
sradovich on DSK3GMQ082PROD with NOTICES
All submissions should refer to File
Number SR–NASDAQ–2016–090. 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–
NASDAQ–2016–090 and should be
submitted on or before August 17, 2016.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78382; File No. SR–Phlx–
2016–62]
Self-Regulatory Organizations;
NASDAQ PHLX LLC; Notice of Filing
and Immediate Effectiveness of
Proposed Rule Change Related to
Affiliated Entities
July 21, 2016.
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 July 15,
2016, NASDAQ PHLX LLC (‘‘Phlx’’ or
32 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
31 15
U.S.C. 78s(b)(3)(A)(ii).
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49293
‘‘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 the
Preface, Section B and Section II of the
Exchange’s Pricing Schedule to permit
certain affiliated market participants to
aggregate volume and qualify for various
pricing incentives in the Pricing
Schedule.
The text of the proposed rule change
is available on the Exchange’s Web site
at https://nasdaqphlx.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
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of the proposed rule
change is to permit certain affiliated
market participants to aggregate volume
and qualify for various pricing
incentives in the Pricing Schedule.
Specifically, the Exchange proposes to
amend the Pricing Schedule at Section
B, Customer 3 Rebates and at Section II,
Multiply-Listed Options Fees,4 to offer
3 The term ‘‘Customer’’ applies to any transaction
that is identified by a member or member
organization for clearing in the Customer range at
The Options Clearing Corporation which is not for
the account of a broker or dealer or for the account
of a ‘‘Professional’’ (as that term is defined in Rule
1000(b)(14)).
4 These fees include options overlying equities,
ETFs, ETNs and indexes which are Multiply Listed.
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Federal Register / Vol. 81, No. 144 / Wednesday, July 27, 2016 / Notices
Affiliated Entities certain rebate and fee
incentives.
Affiliated Entity
The Exchange proposes to add three
definitions to the Preface of the Pricing
Schedule. The Exchange proposes to
define the terms ‘‘Appointed MM,’’
‘‘Appointed OFP,’’ and ‘‘Affiliated
Entity.’’ The Exchange proposes to
define the term ‘‘Appointed MM’’ as a
Phlx Market Maker 5 or Specialist 6 who
has been appointed by an Order Flow
Provider (‘‘OFP’’) for purposes of
qualifying as an Affiliated Entity. An
OFP is a member or member
organization that submits orders, as
agent or principal, to the Exchange.7
The Exchange proposes to define the
term ‘‘Appointed OFP’’ as an OFP who
has been appointed by a Phlx Market
Maker or Specialist for purposes of
qualifying as an Affiliated Entity. The
Exchange proposes to define the term
‘‘Affiliated Entity’’ as a relationship
between an Appointed MM and an
Appointed OFP for purposes of
qualifying for certain pricing as
specified in the Pricing Schedule. In
order to become an Affiliated Entity,
Market Makers or Specialists, and OFPs
Customer rebate tiers
Tier
Tier
Tier
Tier
Tier
1
2
3
4
5
.......................................
.......................................
.......................................
.......................................
.......................................
will be required to send an email to the
Exchange to appoint their counterpart,
at least 3 business days prior to the last
day of the month to qualify for the next
month.8 For example, with this
proposal, market participants may
submit emails to the Exchange to
become Affiliated Entities eligible to
qualify for discounted pricing starting
August 1, 2016, provided the emails are
sent at least 3 business days prior to the
first business day of August 2016. The
Exchange will acknowledge receipt of
the emails and specify the date the
Affiliated Entity would be eligible to
qualify for applicable pricing, as
specified in the Pricing Schedule. Each
Affiliated Entity relationship will
commence on the 1st of a month and
may not be terminated prior to the end
of any month. An Affiliated Entity
relationship will terminate after a one
(1) year period, unless either party
terminates earlier in writing by sending
an email to the Exchange at least 3
business days prior to the last day of the
month to terminate for the next month.
Affiliated Entity relationships must be
renewed annually. For example, if the
start date of the Affiliated Entity
Percentage thresholds of national customer volume in
multiply-listed equity and ETF Options classes, excluding
SPY Options (monthly)
relationship is August 1, 2016, the
counterparties may determine to
commence a new relationship as of
August 1, 2017 by sending two new
emails by July 27, 2017 (3 business days
prior to the end of the month). Members
and member organizations under
Common Ownership 9 may not qualify
as a counterparty comprising an
Affiliated Entity. Each member or
member organization may qualify for
only one (1) Affiliated Entity
relationship at any given time.
As proposed, an Affiliated Entity shall
be eligible to aggregate their volume for
purposes of qualifying for certain
pricing specified in the Pricing
Schedule, as described below.
Section B—Customer Rebates
The Exchange proposes to amend
Section B, entitled ‘‘Customer Rebate
Program’’ to permit Affiliated Entities to
aggregate their Customer volume for
purposes of calculating Customer Rebate
Tiers and receiving rebates. Currently,
the Exchange has a Customer Rebate
Program consisting of the following five
tiers that pay Customer rebates on three
Categories, A, B and C, of transactions:
Category A
0.00%–0.60% .........................................................................
Above 0.60%–1.10% ..............................................................
Above 1.10%–1.60% ..............................................................
Above 1.60%–2.50% ..............................................................
Above 2.50% ..........................................................................
$0.00
$0.10
$0.15
$0.20
$0.21
Category B
$0.00
$0.10
$0.12
$0.16
$0.17
Category C
$0.00
$0.17
$0.17
$0.22
$0.22
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A Phlx member qualifies for a certain
rebate tier based on the percentage of
total national customer volume in
multiply-listed options that it transacts
monthly on Phlx. The Exchange
calculates Customer volume in Multiply
Listed Options by totaling
electronically-delivered and executed
volume, excluding volume associated
with electronic Qualified Contingent
Cross (‘‘QCC’’) Orders, as defined in
Exchange Rule 1080(o).10 The Exchange
proposes to incentivize certain members
and member organizations, who are not
under Common Ownership, to enter
into an Affiliated Entity relationship for
the purpose of aggregating Customer
volume to qualify for Section B
Customer Rebates. By aggregating
volume, the counterparties comprising
the Affiliated Entity are offered an
opportunity to qualify for higher
rebates, thereby lowering costs and
encouraging members to send more
order flow. Customer liquidity benefits
all market participants by providing
5 The term ‘‘Market Maker’’ will be utilized to
describe fees and rebates applicable to Registered
Options Traders (‘‘ROTs’’), Streaming Quote
Traders (‘‘SQTs’’), Remote Streaming Quote Traders
(‘‘RSQTs’’). An ROT is defined in Exchange Rule
1014(b) is a regular member or a foreign currency
options participant of the Exchange located on the
trading floor who has received permission from the
Exchange to trade in options for his own account.
A ROT includes SQTs and RSQTs as well as on and
off-floor ROTS. 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. An RSQT is defined
in Exchange Rule in 1014(b)(ii)(B) as an ROT that
is a member affiliated with an RSQTO 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. A Remote
Streaming Quote Trader Organization or ‘‘RSQTO,’’
which may also be referred to as a Remote Market
Making Organization (‘‘RMO’’), is a member
organization in good standing that satisfies the
RSQTO readiness requirements in Rule 507(a).
RSQTs may also be referred to as Remote Market
Markers (‘‘RMMs’’).
6 The term ‘‘Specialist’’ shall apply to the account
of a Specialist (as defined in Exchange Rule
1020(a)). A Specialist is an Exchange member who
is registered as an options specialist pursuant to
Rule 501(a). An options Specialist includes a
Remote Specialist which is 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.
7 Specialist and Market Makers submitting quotes
to the Exchange shall not be considered Appointed
OFPs for the purpose of becoming an Affiliated
Entity.
8 The Exchange shall issue an Options Trader
Alert specifying the email address and details
required to apply to become an Affiliated Entity.
9 The term ‘‘Common Ownership’’ shall mean
members or member organizations under 75%
common ownership or control. Phlx members or
member organizations that are under 75% common
ownership or control shall be considered under
Common Ownership for purposes of pricing.
10 In calculating electronically-delivered and
executed Customer volume in Multiply Listed
Options, the numerator of the equation includes all
electronically-delivered and executed Customer
volume in Multiply Listed Options. The
denominator of that equation includes national
customer volume in multiply-listed equity and ETF
options volume, excluding SPY. See Section B of
the Pricing Schedule.
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Federal Register / Vol. 81, No. 144 / Wednesday, July 27, 2016 / Notices
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more order flow to the marketplace and
more trading opportunities.
Affiliated Entities may aggregate
Customer volume as between the
Appointed MM and Appointed OFP to
qualify for any of the five tiers of
Customer Rebates that pay Category, A,
B or C rebates on transactions. An
Appointed OFP would be eligible to
receive the additional $0.02 per contract
Category A and B rebate and the
additional $0.03 per contract Category C
rebate, paid in addition to the
applicable Tier 2 and 3 rebate, currently
available to a Specialist or Market
Maker or its member or member
organization affiliate under Common
Ownership, provided the Appointed
MM has reached the Monthly Market
Maker Cap, as defined in Section II.
The Exchange proposes to amend the
language in Section B to clarify the
applicability of the $0.02 per contract
rebate in addition to Categories A and
B and the $0.03 per contract rebate in
addition to Category C, applicable to
Tiers 2 and 3. The Exchange proposes
to relocate certain language and add
language to amend the sentence as
follows: ‘‘The Exchange will pay a $0.02
per contract Category A and B rebate
and a $0.03 per contract Category C
rebate in addition to the applicable Tier
2 and 3 rebate, provided the Specialist,
Market Maker or Appointed MM has
reached the Monthly Market Maker Cap
as defined in Section II, to: (1) A
Specialist or Market Maker who is not
under Common Ownership or is not a
party of an Affiliated Entity; or (2) an
OFP member or member organization
affiliate under Common Ownership; or
(3) an Appointed OFP of an Affiliated
Entity.’’
The Exchange’s proposal would
incentivize certain members and
member organizations, which are not
under Common Ownership, to enter
into an Affiliated Entity relationship for
the purpose of aggregating Customer
volume to qualify the Appointed OFP
for Customer Rebates in Section B of the
Pricing Schedule. Phlx members and
member organizations that are under
75% common ownership or control will
be considered under Common
Ownership and therefore by definition
are not eligible to enter an Affiliated
Entity relationship.
Section II—Options Transaction Charge
The Exchange proposes to amend
Section II of the Pricing Schedule to
offer members and member
organizations that are Appointed OFPs
of Affiliated Entities transacting nonCustomer orders an opportunity to
reduce non-Penny Pilot electronic
Options Transaction Charges. Today,
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the Exchange assesses a Professional,11
Broker-Dealer 12 and Firm 13 a nonPenny Pilot electronic Options
Transaction Charge of $0.75 per contract
and a Specialist and Market Maker a
$0.25 per contract non-Penny Pilot
electronic Options Transaction Charge.
The Exchange proposes to provide an
Appointed OFP of an Affiliated Entity
with an opportunity to lower the
Professional, Broker-Dealer and Firm
non-Penny Pilot electronic Options
Transaction Charge from $0.75 to $0.60
per contract provided the Affiliated
Entity qualifies for Customer Rebate
Tiers 4 14 or 5 15 in Section B of the
Pricing Schedule. The Exchange
proposes to provide an Appointed MM
of an Affiliated Entity with an
opportunity to lower the Specialist and
Market Maker non-Penny Pilot
electronic Options Transaction Charge
from $0.25 to $0.23 per contract
provided the Affiliated Entity qualifies
for Customer Rebate Tiers 4 or 5 in
Section B of the Pricing Schedule.16
The Exchange’s proposal would
incentivize certain members and
member organizations, who are not
under Common Ownership, to enter
into an Affiliated Entity relationship for
the purpose of aggregating Customer
volume to qualify for reduced nonPenny Pilot Options Transaction
Charges.
2. Statutory Basis
The Exchange believes that its
proposal to amend its Pricing Schedule
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 Rule
1000(b)(14).
12 The term ‘‘Broker-Dealer’’ applies to any
transaction which is not subject to any of the other
transaction fees applicable within a particular
category.
13 The term ‘‘Firm’’ applies to any transaction that
is identified by a member or member organization
for clearing in the Firm range at The Options
Clearing Corporation.
14 The Tier 4 Customer Rebate in Section B of the
Pricing Schedule requires Customer volume above
1.60% to 2.50% of National Customer Volume in
Multiply Listed Equity and ETF Options, excluding
SPY. This rebate tier pays a Category A $0.20
rebate, a Category B $0.16 rebate and a Category C
$0.22 rebate.
15 The Tier 5 Customer Rebate in Section B of the
Pricing Schedule requires Customer volume above
2.50% of National Customer Volume in Multiply
Listed Equity and ETF Options, excluding SPY.
This rebate tier pays a Category A $0.21 rebate, a
Category B $0.17 rebate and a Category C $0.22
rebate.
16 Today, any member or member organization
under Common Ownership with another member or
member organization that qualifies for Customer
Rebate Tiers 4 or 5 in Section B of the Pricing
Schedule is assessed either a $0.23 or $0.60 per
contract non-Penny Pilot electronic Options
Transaction Charge.
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49295
is consistent with Section 6(b) of the
Act,17 in general, and furthers the
objectives of Section 6(b)(4) and (b)(5) of
the Act,18 in particular, in that it
provides for the equitable allocation of
reasonable dues, fees and other charges
among members and issuers and other
persons using its facilities, and is not
designed to permit unfair
discrimination between customers,
issuers, brokers, or dealers.
The Commission and the courts have
repeatedly expressed their preference
for competition over regulatory
intervention in determining prices,
products, and services in the securities
markets. In Regulation NMS, while
adopting a series of steps to improve the
current market model, the Commission
highlighted the importance of market
forces in determining prices and SRO
revenues and, also, recognized that
current regulation of the market system
‘‘has been remarkably successful in
promoting market competition in its
broader forms that are most important to
investors and listed companies.’’ 19
Likewise, in NetCoalition v. Securities
and Exchange Commission 20
(‘‘NetCoalition’’) the D.C. Circuit upheld
the Commission’s use of a market-based
approach in evaluating the fairness of
market data fees against a challenge
claiming that Congress mandated a costbased approach.21 As the court
emphasized, the Commission ‘‘intended
in Regulation NMS that ‘market forces,
rather than regulatory requirements’
play a role in determining the market
data . . . to be made available to
investors and at what cost.’’ 22
Further, ‘‘[n]o one disputes that
competition for order flow is ‘fierce.’
. . . As the SEC explained, ‘[i]n the U.S.
national market system, buyers and
sellers of securities, and the brokerdealers that act as their order-routing
agents, have a wide range of choices of
where to route orders for execution’;
[and] ‘no exchange can afford to take its
market share percentages for granted’
because ‘no exchange possesses a
monopoly, regulatory or otherwise, in
the execution of order flow from broker
dealers’ . . . .’’ 23 Although the court
and the SEC were discussing the cash
equities markets, the Exchange believes
17 15
U.S.C. 78f(b).
U.S.C. 78f(b)(4), (5).
19 Securities Exchange Act Release No. 51808
(June 29, 2005), 70 FR 37496 at 37499 (File No. S7–
10–04) (‘‘Regulation NMS Adopting Release’’).
20 NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir.
2010).
21 See id. at 534–535.
22 See id. at 537.
23 See id. at 539 (quoting Securities Exchange Act
Commission at Release No. 59039 (December 2,
2008), 73 FR 74770 at 74782–74783 (December 9,
2008) (SR–NYSEArca–2006–21)).
18 15
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that these views apply with equal force
to the options markets.
The Exchange’s proposal to amend
the Preface of the Pricing Schedule to
add the definitions of ‘‘Appointed MM,’’
‘‘Appointed OFP’’ and ‘‘Affiliated
Entity’’ is reasonable because the
Exchange is proposing to identify the
applicable market participants that may
qualify to aggregate volume as an
Affiliated Entity. Further the Exchange
seeks to make clear the manner in
which members and member
organizations may participate on the
Exchange as Affiliated Entities by
setting timeframes for communicating
agreements among market participants
and terms of early termination. The
Exchange also clearly states that no
member or member organization under
Common Ownership may become a
counterparty to an Affiliated Entity. Any
Phlx member or member organization
who meets the definition of Common
Ownership shall not be eligible to
become an Affiliated Entity. The
Exchange believes that these terms are
reasonable because they would allow
members or member organizations to
elect to become a counterparty to an
Affiliated Entity, provided they are not
under Common Ownership.
The Exchange’s proposal to amend
the Preface of the Pricing Schedule to
add the definitions of ‘‘Appointed MM,’’
‘‘Appointed OFP’’ and ‘‘Affiliated
Entity’’ is equitable and not unfairly
discriminatory because all member or
members that are not under Common
Ownership by definition may choose to
enter into an Affiliated Entity
relationship.
Section B Customer Rebates
The Exchange’s proposal to permit
Affiliated Entities to aggregate Customer
volume for purposes of qualifying
Appointed OFPs for Section B Customer
Rebates is reasonable because it will
attract additional Customer order flow
to the Exchange. Customer liquidity
benefits all market participants by
providing more trading opportunities,
which attracts Market Makers and
Specialists. An increase in the activity
of these market participants in turn
facilitates tighter spreads, which may
cause an additional corresponding
increase in order flow from other market
participants. Appointed OFPs directing
order flow to the Exchange may be
eligible to qualify for a Customer Rebate
or a higher Customer Rebate tier, with
this proposal, as a result of aggregating
volume with an Appointed MM and
thereby qualifying for higher Customer
Rebates. Permitting members and
member organizations to affiliate for
purposes of qualifying for Section B
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Customer Rebates may also encourage
the counterparties that comprise the
Affiliated Entities to incentivize each
other to attract and seek to execute more
Customer volume on Phlx. In turn,
market participants would benefit from
the increased liquidity with which to
interact and potentially tighter spreads
on orders. Overall, incentivizing market
participants with increased
opportunities to earn higher Customer
rebates may increase the quality of the
liquidity available on Phlx.
The Exchange’s proposal to permit
Affiliated Entities to aggregate Customer
volume for purposes of qualifying
Appointed OFPs for Section B Customer
rebates is equitable and not unfairly
discriminatory because all Phlx
members and member organizations,
other than those that meet the definition
of Common Ownership, may elect to
become an Affiliated Entity as either an
Appointed MM or an Appointed OFP.24
Also, each member or member
organization may participate in only one
Affiliated Entity relationship at a given
time, which imposes a measure of
exclusivity among market participants,
allowing each party to rely on the
other’s executed Customer volume on
Phlx to receive a corresponding benefit
in terms of a higher rebate. Any market
participant that by definition is not
under Common Ownership may elect to
become a counterparty of an Affiliated
Entity.
The Exchange’s proposal to exclude
members and member organizations that
are under Common Ownership from
qualifying as an Affiliated Entity is
reasonable because members and
member organizations under Common
Ownership may aggregate volume today
for purposes of Section B Customer
Rebates.25 The Exchange’s proposal to
exclude members and member
organizations that by definition are
under Common Ownership from
qualifying as an Affiliated Entity is
equitable and not unfairly
discriminatory because the Exchange
will apply all qualifications in a
uniform manner when approving
Affiliated Entities. Excluding members
and member organizations that by
definition are under Common
Ownership from also qualifying as an
Affiliated Entity is equitable and not
unfairly discriminatory because they are
able to aggregate volume today and
24 Both members must elect each other to become
an Affiliated Entity for one year. Participation is
effected by an agreement of both parties that have
provided proper notification to the Exchange. A
party may elect to terminate the agreement at any
time prior to one year.
25 See Section B of the Pricing Schedule.
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qualify for Customer Rebates in Section
B.
Section II—Options Transaction Charges
The Exchange’s proposal to amend
note 3 of Section II of the Pricing
Schedule to offer members and member
organizations that are Affiliated Entities
an opportunity to reduce non-Customer
non-Penny Pilot electronic Options
Transaction Charges is reasonable
because the Exchange believes it will
encourage these market participants to
transact a greater amount of Customer
volume on Phlx. The Exchange’s
proposal to permit Appointed OFPs of
Affiliated Entities to qualify for the
reduced non-Penny Pilot electronic
Options Transaction Charges by
qualifying for Customer Rebate Tiers 4
or 5 in Section B of the Pricing Schedule
will attract additional Customer order
flow to the Exchange. Customer
liquidity benefits all market participants
by providing more trading
opportunities, which attracts Market
Makers and Specialists. An increase in
the activity of these market participants
in turn facilitates tighter spreads, which
may cause a corresponding increase in
order flow from other market
participants. Appointed OFPs directing
order flow to the Exchange may be
eligible to qualify for these Customer
rebate tiers as a result of aggregating
volume with another appointed member
and benefit from reduced non-Penny
Pilot electronic Options Transaction
Charges. Permitting members and
member organizations to affiliate for
purposes of qualifying for Section B
Customer rebates may also encourage
the counterparties of an Affiliated Entity
to incentivize each other to attract and
seek to execute more Customer volume
on Phlx. The Affiliated Entity
relationship would permit the
Appointed OFP to benefit from reduced
non-Penny Pilot electronic Options
Transaction Charges. In turn, market
participants would benefit from the
increased liquidity with which to
interact and potentially tighter spreads
on orders. The Exchange believes that
lowering these fees for electronic nonPenny Pilot Options Transaction
Charges, as compared to Penny Pilot
Options Transaction Charges, is
reasonable because today, Penny Pilot
Options are the most traded and more
liquid than Non-Penny Pilot Options.
Electronic Penny Pilot Options
Transaction Charges are lower for
Professionals, Broker-Dealers and Firms
because of the demand in the
marketplace. The Exchange is offering
Appointed OFPs the opportunity to
reduce the higher electronic non-Penny
Pilot Options Transaction Charges for
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Professionals, Broker-Dealers and Firms
with this incentive, provided they
qualify for the reduced non-Penny Pilot
electronic Options Transaction Charges
by qualifying for Customer Rebate Tiers
4 or 5 in Section B of the Pricing
Schedule.
The Exchange’s proposal to amend
note 3 of Section II of the Pricing
Schedule to offer members and member
organizations that are Affiliated Entities
an opportunity to reduce non-Customer
non-Penny Pilot electronic Options
Transaction Charges is equitable and not
unfairly discriminatory because the
Exchange will assess Appointed OFPs a
reduced Professional, Broker-Dealer and
Firm electronic Options Transaction
Charge in Non-Penny Pilot Options. The
Exchange does not assess Customers an
electronic Options Transaction Charge
in Non-Penny Pilot Options because
Customer order flow enhances liquidity
on the Exchange for the benefit of all
market participants. Customer liquidity
benefits all market participants by
providing more trading opportunities,
which attracts Specialists and Market
Makers. An increase in the activity of
these market participants in turn
facilitates tighter spreads, which may
cause an additional corresponding
increase in order flow from other market
participants. Specialists and Market
Makers are assessed lower electronic
Options Transaction Charges in NonPenny Pilot Options as compared to
Professionals, Broker-Dealers and Firms
because they have obligations to the
market and regulatory requirements,
which normally do not apply to other
market participants.26 They have
obligations to make continuous markets,
engage in a course of dealings
reasonably calculated to contribute to
the maintenance of a fair and orderly
market, and not make bids or offers or
enter into transactions that are
inconsistent with a course of dealings.
The proposed differentiation as between
Customers, Specialists and Market
Makers and other market participants
recognizes the differing contributions
made to the liquidity and trading
environment on the Exchange by these
market participants. The Exchange
believes that offering Appointed OFPs
an opportunity to lower fees for
electronic non-Penny Pilot Options
Transaction Charges as compared to
Penny Pilot Options Transaction
Charges is equitable and not unfairly
discriminatory because the Exchange
seeks to offer lower fees to those market
participants paying the highest
electronic non-Penny Pilot Options
Transaction Charges.
The Exchange’s proposal to amend
note 4 of Section II of the Pricing
Schedule to offer Appointed MMs of an
Affiliated Entity an opportunity to
reduce the Specialist and Marker Maker
electronic non-Penny Pilot electronic
Options Transaction Charges is
reasonable because today the Exchange
offers all market participants, excluding
Customers who are not assessed a nonPenny Pilot electronic Options
Transaction Charges, a means to reduce
electronic Options Transaction Charges
by qualifying for a Customer Rebate in
Section B of the Pricing Schedule. Even
with the reduced rate for Professionals,
Broker-Dealers and Firms of $0.60 per
contract, Specialists and Market Makers
will continue to be assessed the lowest
electronic Options Transaction Charge
in Non-Penny Pilot Options because
they have obligations to the market and
regulatory requirements, which
normally do not apply to other market
participants.27 The Exchange believes
that offering Appointed MMs an
opportunity to benefit from lower fees
for electronic non-Penny Pilot Options
Transaction Charges is reasonable
because the reduced electronic nonPenny Pilot will be consistent with the
current lower reduced Penny Pilot
Options Transaction charges ($0.25 vs.
$0.22 per contract).
The Exchange’s proposal to amend
note 4 of Section II of the Pricing
Schedule to offer Appointed MMs of an
Affiliated Entity an opportunity to
reduce the Specialist and Marker Maker
electronic non-Penny Pilot electronic
Options Transaction Charges is
equitable and not unfairly
discriminatory because the Exchange
seeks to incentivize Specialists and
Market Makers to increase their activity
on Phlx and in turn facilitate tighter
spreads, which may cause an additional
corresponding increase in order flow
from other market participants.
Specialists and Market Makers have
obligations to the market and regulatory
requirements, which normally do not
apply to other market participants.28
They have obligations to make
continuous markets, engage in a course
of dealings reasonably calculated to
contribute to the maintenance of a fair
and orderly market, and not make bids
or offers or enter into transactions that
are inconsistent with a course of
dealings. The Exchange believes that
offering Appointed MMs the
opportunity to receive this additional
benefit will continue to benefit the
26 See Rule 1014 titled ‘‘Obligations and
Restrictions Applicable to Specialists and
Registered Options Traders.’’
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27 Id.
28 Id.
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Frm 00090
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49297
marketplace as described herein. The
Exchange believes that lowering
electronic non-Penny Pilot Options
Transaction Charges as compared to
electronic Penny Pilot Options
Transaction Charges is equitable and not
unfairly discriminatory because the
Exchange is offering market participants
the opportunity to reduce the higher
electronic non-Penny Pilot Options
Transaction Charges for Specialists and
Market Makers with this incentive and
permitting Appointed MMs to also
receive this discount, provided they
qualify.
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. Specifically,
the Exchange does not believe that
permitting counterparties to an
Affiliated Entity to aggregate volume to
qualify for certain rebates and reduced
fees will impose any undue burden on
competition, as discussed below.
The Exchange operates in a highly
competitive market in which many
sophisticated and knowledgeable
market participants can readily and do
send order flow to competing exchanges
if they deem fee levels or rebate
incentives at a particular exchange to be
excessive or inadequate. Additionally,
new competitors have entered the
market and still others are reportedly
entering the market shortly. These
market forces ensure that the Exchange’s
fees and rebates remain competitive
with the fee structures at other trading
platforms.
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. In terms of
inter-market competition, the Exchange
notes that it operates in a highly
competitive market in which market
participants can readily favor competing
venues if they deem fee levels at a
particular venue to be excessive, or
rebate opportunities available at other
venues to be more favorable. In such an
environment, the Exchange must
continually adjust its fees to remain
competitive with other exchanges and
with alternative trading systems that
have been exempted from compliance
with the statutory standards applicable
to exchanges. Because competitors are
free to modify their own fees in
response, and because market
participants may readily adjust their
order routing practices, the Exchange
believes that the degree to which fee
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49298
Federal Register / Vol. 81, No. 144 / Wednesday, July 27, 2016 / Notices
changes in this market may impose any
burden on competition is extremely
limited.
In sum, if the changes proposed
herein are unattractive to market
participants, it is likely that the
Exchange will lose market share as a
result. Accordingly, the Exchange does
not believe that the proposed changes
will impair the ability of members or
competing order execution venues to
maintain their competitive standing in
the financial markets. In terms of intermarket competition, the Exchange notes
that other options markets have similar
incentives in place to attract volume to
their markets.29
The Exchange’s proposal to amend
the Preface of the Pricing Schedule to
add the definitions of ‘‘Appointed MM,’’
‘‘Appointed OFP’’ and ‘‘Affiliated
Entity’’ does not impose an undue
burden on competition because these
definitions apply to all members and
member organizations uniformly.
sradovich on DSK3GMQ082PROD with NOTICES
Section B Customer Rebates
In terms of intra-market competition,
the Exchange does not believe that its
proposal to permit counterparties of an
Affiliated Entity to aggregate Customer
volume for purposes of qualifying for
Section B Customer Rebates imposes an
undue burden on intra-market
competition because all Phlx members
and member organizations, other than
those under Common Ownership, may
become an Affiliated Entity as either an
Appointed MM or an Appointed OFP.
Also, each Phlx member or member
organization may participate in only one
Affiliated Entity relationship at a given
time, which imposes a measure of
exclusivity among market participants,
allowing each party to rely on the
other’s executed Customer volume on
Phlx to receive a corresponding benefit
in terms of a higher rebate. The
Exchange will apply all qualifications in
a uniform manner to all market
participants that elect to become
counterparties of an Affiliated Entity.
Any market participant that is by
definition a member or member
organization under Common Ownership
may not become a counterparty of an
Affiliated Entity.
Market Makers and Specialists are
valuable market participants that
29 See NYSE MKT LLC’s (‘‘NYSE Amex’’) pricing
at NYSE Amex Options Fee Schedule). NYSE Amex
permits aggregation of volume to qualify for the
Amex Customer Engagement or ACE Program. See
Bats BZX Exchange, Inc.’s (‘‘BZX’’) fee schedule.
BZX permits aggregation of volume to qualify for
tiered pricing. See the Chicago Board Options
Exchange Incorporated (‘‘CBOE’’) Fees Schedule.
CBOE permits aggregation of volume to qualify for
credits available under an Affiliated Volume Plan
or ‘‘AVP.’’
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17:01 Jul 26, 2016
Jkt 238001
provide liquidity in the marketplace and
incur costs that other market
participants do not incur. Market
Makers and Specialists are subject to
burdensome quoting obligations 30 to
the market that do not apply to other
market participants. Incentivizing these
market participants to execute Customer
volume on Phlx may result in tighter
spreads. An increase in the activity of
these market participants in turn
facilitates tighter spreads, which may
cause an additional corresponding
increase in order flow from other market
participants. Appointed OFPs directing
order flow to the Exchange may be
eligible to qualify for a Customer Rebate
or a higher Customer Rebate tier, with
this proposal, as a result of aggregating
volume with an Appointed MM and
thereby qualifying for higher Customer
Rebates. Permitting members and
member organizations to affiliate for
purposes of qualifying for Section B
Customer Rebates may also encourage
the counterparties that comprise the
Affiliated Entities to incentivize each
other to attract and seek to execute more
Customer volume on Phlx.
The Exchange’s proposal to exclude
members and member organizations that
are under Common Ownership from
becoming an Affiliated Entity does not
impose and [sic] undue burden on intramarket competition because member
and member organizations under
Common Ownership may aggregate
volume today for purposes of qualifying
for Customer Rebates.
Section II—Options Transaction Charges
The Exchange’s proposal to amend
note 3 of Section II of the Pricing
Schedule to offer Appointed OFPs of
Affiliated Entities an opportunity to
reduce non-Customer non-Penny Pilot
electronic Options Transaction Charges
does not impose an undue burden on
intra-market competition because the
Exchange will assess Appointed OFPs a
reduced Professional, Broker-Dealer and
Firm electronic Options Transaction
Charge in Non-Penny Pilot Options. The
Exchange does not assess Customers an
electronic Options Transaction Charge
in Non-Penny Pilot Options because
Customer order flow enhances liquidity
on the Exchange for the benefit of all
market participants. Customer liquidity
benefits all market participants by
providing more trading opportunities,
which attracts Specialists and Market
Makers. An increase in the activity of
these market participants in turn
facilitates tighter spreads, which may
cause an additional corresponding
increase in order flow from other market
PO 00000
participants. Specialists and Market
Makers are assessed lower electronic
Options Transaction Charges in NonPenny Pilot Options as compared to
Professionals, Broker-Dealers and Firms
because they have obligations to the
market and regulatory requirements,
which normally do not apply to other
market participants.31 They have
obligations to make continuous markets,
engage in a course of dealings
reasonably calculated to contribute to
the maintenance of a fair and orderly
market, and not make bids or offers or
enter into transactions that are
inconsistent with a course of dealings.
The proposed differentiation as between
Customers, Specialists and Market
Makers and other market participants
recognizes the differing contributions
made to the liquidity and trading
environment on the Exchange by these
market participants. The Exchange will
apply all qualifications for the reduced
rate in a uniform manner. The Exchange
believes that lowering these fees for
electronic non-Penny Pilot Options
Transaction Charges as compared to
electronic Penny Pilot Options
Transaction Charges does not impose an
undue burden on intra-market
competition because the Exchange seeks
to offer lower fees to those market
participants paying the highest
electronic non-Penny Pilot Options
Transaction Charges.
The Exchange’s proposal to amend
note 4 of Section II of the Pricing
Schedule to offer Appointed MMs of
Affiliated Entities an opportunity to
reduce non-Customer electronic nonPenny Pilot electronic Options
Transaction Charges does not impose an
undue burden on intra-market
competition because the Exchange seeks
to incentivize Specialists and Market
Makers to increase their activity on Phlx
and in turn facilitate tighter spreads,
which may cause an additional
corresponding increase in order flow
from other market participants.
Specialists and Market have obligations
to the market and regulatory
requirements, which normally do not
apply to other market participants.32
They have obligations to make
continuous markets, engage in a course
of dealings reasonably calculated to
contribute to the maintenance of a fair
and orderly market, and not make bids
or offers or enter into transactions that
are inconsistent with a course of
dealings. The Exchange believes that
permitting Affiliated [sic] MMs to
receive this additional benefit will
continue to benefit the market place as
31 See
30 See
note 26 above.
Frm 00091
Fmt 4703
32 See
Sfmt 4703
E:\FR\FM\27JYN1.SGM
note 26 above.
note 26 above.
27JYN1
Federal Register / Vol. 81, No. 144 / Wednesday, July 27, 2016 / Notices
described herein. The Exchange believes
that lowering these fees for electronic
non-Penny Pilot Options Transaction
Charges as compared to Penny Pilot
Options Transaction Charges does not
impose an undue burden on intramarket competition because the
electronic non-Penny Pilot Options
Transaction Charges is higher ($0.25 vs.
$0.22 per contract).
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.33
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is: (i) Necessary or appropriate in
the public interest; (ii) for the protection
of investors; or (iii) otherwise in
furtherance of the purposes of the Act.
If the Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
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–
2016–62 and should be submitted on or
before August 17, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.34
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–17668 Filed 7–26–16; 8:45 am]
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–2016–62 on the subject line.
sradovich on DSK3GMQ082PROD with NOTICES
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:
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Designation of a
Longer Period for Commission Action
on a Proposed Rule Change Relating
to the Listing and Trading of Shares of
the Virtus Japan Alpha ETF Under
NYSE Arca Equities Rule 8.600
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–Phlx–2016–62. 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
49299
was published for comment in the
Federal Register on June 9, 2016.3 On
June 20, 2016, the Exchange filed
Amendment No. 1 to the proposed rule
change. The Commission received no
comments on the proposed rule change.
Section 19(b)(2) of the Act 4 provides
that within 45 days of the publication of
notice of the filing of a proposed rule
change, or within such longer period up
to 90 days as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding, or as to which the
self-regulatory organization consents,
the Commission shall either approve the
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether the
proposed rule change should be
disapproved. The 45th day after
publication of the notice for this
proposed rule change is July 24, 2016.
The Commission is extending this 45day time period.
The Commission finds it appropriate
to designate a longer period within
which to take action on the proposed
rule change so that it has sufficient time
to consider this proposed rule change.
Accordingly, the Commission, pursuant
to Section 19(b)(2) of the Act,5
designates September 7, 2016, as the
date by which the Commission shall
either approve or disapprove, or
institute proceedings to determine
whether to disapprove, the proposed
rule change (File No. SR–NYSEArca–
2016–79).
July 21, 2016.
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78386; File No. SR–
NYSEArca–2016–79)]
On May 24, 2016, NYSE Arca, Inc.
(‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
list and trade shares of the Virtus Japan
Alpha ETF under NYSE Arca Equities
Rule 8.600. The proposed rule change
34 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
33 15
U.S.C. 78s(b)(3)(A)(ii).
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PO 00000
Frm 00092
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Sfmt 9990
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.6
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–17672 Filed 7–26–16; 8:45 am]
BILLING CODE 8011–01–P
3 See Securities Exchange Act Release No. 77992
(Jun. 3, 2016) 81 FR 37222.
4 15 U.S.C. 78s(b)(2).
5 15 U.S.C. 78s(b)(2).
6 17 CFR 200.30–3(a)(31).
E:\FR\FM\27JYN1.SGM
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]]>Agencies
[Federal Register Volume 81, Number 144 (Wednesday, July 27, 2016)]
[Notices]
[Pages 49293-49299]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-17668]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78382; File No. SR-Phlx-2016-62]
Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change Related to
Affiliated Entities
July 21, 2016.
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 July 15, 2016, NASDAQ PHLX LLC (``Phlx'' or ``Exchange'') filed with
the Securities and Exchange Commission (``SEC'' or ``Commission'') the
proposed rule change as described in Items I, II, and III, below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
---------------------------------------------------------------------------
\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 amend the Preface, Section B and Section
II of the Exchange's Pricing Schedule to permit certain affiliated
market participants to aggregate volume and qualify for various pricing
incentives in the Pricing Schedule.
The text of the proposed rule change is available on the Exchange's
Web site at https://nasdaqphlx.cchwallstreet.com/ 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
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to permit certain
affiliated market participants to aggregate volume and qualify for
various pricing incentives in the Pricing Schedule. Specifically, the
Exchange proposes to amend the Pricing Schedule at Section B, Customer
\3\ Rebates and at Section II, Multiply-Listed Options Fees,\4\ to
offer
[[Page 49294]]
Affiliated Entities certain rebate and fee incentives.
---------------------------------------------------------------------------
\3\ The term ``Customer'' applies to any transaction that is
identified by a member or member organization for clearing in the
Customer range at The Options Clearing Corporation which is not for
the account of a broker or dealer or for the account of a
``Professional'' (as that term is defined in Rule 1000(b)(14)).
\4\ These fees include options overlying equities, ETFs, ETNs
and indexes which are Multiply Listed.
---------------------------------------------------------------------------
Affiliated Entity
The Exchange proposes to add three definitions to the Preface of
the Pricing Schedule. The Exchange proposes to define the terms
``Appointed MM,'' ``Appointed OFP,'' and ``Affiliated Entity.'' The
Exchange proposes to define the term ``Appointed MM'' as a Phlx Market
Maker \5\ or Specialist \6\ who has been appointed by an Order Flow
Provider (``OFP'') for purposes of qualifying as an Affiliated Entity.
An OFP is a member or member organization that submits orders, as agent
or principal, to the Exchange.\7\ The Exchange proposes to define the
term ``Appointed OFP'' as an OFP who has been appointed by a Phlx
Market Maker or Specialist for purposes of qualifying as an Affiliated
Entity. The Exchange proposes to define the term ``Affiliated Entity''
as a relationship between an Appointed MM and an Appointed OFP for
purposes of qualifying for certain pricing as specified in the Pricing
Schedule. In order to become an Affiliated Entity, Market Makers or
Specialists, and OFPs will be required to send an email to the Exchange
to appoint their counterpart, at least 3 business days prior to the
last day of the month to qualify for the next month.\8\ For example,
with this proposal, market participants may submit emails to the
Exchange to become Affiliated Entities eligible to qualify for
discounted pricing starting August 1, 2016, provided the emails are
sent at least 3 business days prior to the first business day of August
2016. The Exchange will acknowledge receipt of the emails and specify
the date the Affiliated Entity would be eligible to qualify for
applicable pricing, as specified in the Pricing Schedule. Each
Affiliated Entity relationship will commence on the 1st of a month and
may not be terminated prior to the end of any month. An Affiliated
Entity relationship will terminate after a one (1) year period, unless
either party terminates earlier in writing by sending an email to the
Exchange at least 3 business days prior to the last day of the month to
terminate for the next month. Affiliated Entity relationships must be
renewed annually. For example, if the start date of the Affiliated
Entity relationship is August 1, 2016, the counterparties may determine
to commence a new relationship as of August 1, 2017 by sending two new
emails by July 27, 2017 (3 business days prior to the end of the
month). Members and member organizations under Common Ownership \9\ may
not qualify as a counterparty comprising an Affiliated Entity. Each
member or member organization may qualify for only one (1) Affiliated
Entity relationship at any given time.
---------------------------------------------------------------------------
\5\ The term ``Market Maker'' will be utilized to describe fees
and rebates applicable to Registered Options Traders (``ROTs''),
Streaming Quote Traders (``SQTs''), Remote Streaming Quote Traders
(``RSQTs''). An ROT is defined in Exchange Rule 1014(b) is a regular
member or a foreign currency options participant of the Exchange
located on the trading floor who has received permission from the
Exchange to trade in options for his own account. A ROT includes
SQTs and RSQTs as well as on and off-floor ROTS. 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.
An RSQT is defined in Exchange Rule in 1014(b)(ii)(B) as an ROT that
is a member affiliated with an RSQTO 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. A Remote Streaming Quote Trader Organization
or ``RSQTO,'' which may also be referred to as a Remote Market
Making Organization (``RMO''), is a member organization in good
standing that satisfies the RSQTO readiness requirements in Rule
507(a). RSQTs may also be referred to as Remote Market Markers
(``RMMs'').
\6\ The term ``Specialist'' shall apply to the account of a
Specialist (as defined in Exchange Rule 1020(a)). A Specialist is an
Exchange member who is registered as an options specialist pursuant
to Rule 501(a). An options Specialist includes a Remote Specialist
which is 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.
\7\ Specialist and Market Makers submitting quotes to the
Exchange shall not be considered Appointed OFPs for the purpose of
becoming an Affiliated Entity.
\8\ The Exchange shall issue an Options Trader Alert specifying
the email address and details required to apply to become an
Affiliated Entity.
\9\ The term ``Common Ownership'' shall mean members or member
organizations under 75% common ownership or control. Phlx members or
member organizations that are under 75% common ownership or control
shall be considered under Common Ownership for purposes of pricing.
---------------------------------------------------------------------------
As proposed, an Affiliated Entity shall be eligible to aggregate
their volume for purposes of qualifying for certain pricing specified
in the Pricing Schedule, as described below.
Section B--Customer Rebates
The Exchange proposes to amend Section B, entitled ``Customer
Rebate Program'' to permit Affiliated Entities to aggregate their
Customer volume for purposes of calculating Customer Rebate Tiers and
receiving rebates. Currently, the Exchange has a Customer Rebate
Program consisting of the following five tiers that pay Customer
rebates on three Categories, A, B and C, of transactions:
----------------------------------------------------------------------------------------------------------------
Percentage thresholds of
national customer volume in
multiply-listed equity and
Customer rebate tiers ETF Options classes, Category A Category B Category C
excluding SPY Options
(monthly)
----------------------------------------------------------------------------------------------------------------
Tier 1............................. 0.00%-0.60%................ $0.00 $0.00 $0.00
Tier 2............................. Above 0.60%-1.10%.......... $0.10 $0.10 $0.17
Tier 3............................. Above 1.10%-1.60%.......... $0.15 $0.12 $0.17
Tier 4............................. Above 1.60%-2.50%.......... $0.20 $0.16 $0.22
Tier 5............................. Above 2.50%................ $0.21 $0.17 $0.22
----------------------------------------------------------------------------------------------------------------
A Phlx member qualifies for a certain rebate tier based on the
percentage of total national customer volume in multiply-listed options
that it transacts monthly on Phlx. The Exchange calculates Customer
volume in Multiply Listed Options by totaling electronically-delivered
and executed volume, excluding volume associated with electronic
Qualified Contingent Cross (``QCC'') Orders, as defined in Exchange
Rule 1080(o).\10\ The Exchange proposes to incentivize certain members
and member organizations, who are not under Common Ownership, to enter
into an Affiliated Entity relationship for the purpose of aggregating
Customer volume to qualify for Section B Customer Rebates. By
aggregating volume, the counterparties comprising the Affiliated Entity
are offered an opportunity to qualify for higher rebates, thereby
lowering costs and encouraging members to send more order flow.
Customer liquidity benefits all market participants by providing
[[Page 49295]]
more order flow to the marketplace and more trading opportunities.
---------------------------------------------------------------------------
\10\ In calculating electronically-delivered and executed
Customer volume in Multiply Listed Options, the numerator of the
equation includes all electronically-delivered and executed Customer
volume in Multiply Listed Options. The denominator of that equation
includes national customer volume in multiply-listed equity and ETF
options volume, excluding SPY. See Section B of the Pricing
Schedule.
---------------------------------------------------------------------------
Affiliated Entities may aggregate Customer volume as between the
Appointed MM and Appointed OFP to qualify for any of the five tiers of
Customer Rebates that pay Category, A, B or C rebates on transactions.
An Appointed OFP would be eligible to receive the additional $0.02 per
contract Category A and B rebate and the additional $0.03 per contract
Category C rebate, paid in addition to the applicable Tier 2 and 3
rebate, currently available to a Specialist or Market Maker or its
member or member organization affiliate under Common Ownership,
provided the Appointed MM has reached the Monthly Market Maker Cap, as
defined in Section II.
The Exchange proposes to amend the language in Section B to clarify
the applicability of the $0.02 per contract rebate in addition to
Categories A and B and the $0.03 per contract rebate in addition to
Category C, applicable to Tiers 2 and 3. The Exchange proposes to
relocate certain language and add language to amend the sentence as
follows: ``The Exchange will pay a $0.02 per contract Category A and B
rebate and a $0.03 per contract Category C rebate in addition to the
applicable Tier 2 and 3 rebate, provided the Specialist, Market Maker
or Appointed MM has reached the Monthly Market Maker Cap as defined in
Section II, to: (1) A Specialist or Market Maker who is not under
Common Ownership or is not a party of an Affiliated Entity; or (2) an
OFP member or member organization affiliate under Common Ownership; or
(3) an Appointed OFP of an Affiliated Entity.''
The Exchange's proposal would incentivize certain members and
member organizations, which are not under Common Ownership, to enter
into an Affiliated Entity relationship for the purpose of aggregating
Customer volume to qualify the Appointed OFP for Customer Rebates in
Section B of the Pricing Schedule. Phlx members and member
organizations that are under 75% common ownership or control will be
considered under Common Ownership and therefore by definition are not
eligible to enter an Affiliated Entity relationship.
Section II--Options Transaction Charge
The Exchange proposes to amend Section II of the Pricing Schedule
to offer members and member organizations that are Appointed OFPs of
Affiliated Entities transacting non-Customer orders an opportunity to
reduce non-Penny Pilot electronic Options Transaction Charges. Today,
the Exchange assesses a Professional,\11\ Broker-Dealer \12\ and Firm
\13\ a non-Penny Pilot electronic Options Transaction Charge of $0.75
per contract and a Specialist and Market Maker a $0.25 per contract
non-Penny Pilot electronic Options Transaction Charge. The Exchange
proposes to provide an Appointed OFP of an Affiliated Entity with an
opportunity to lower the Professional, Broker-Dealer and Firm non-Penny
Pilot electronic Options Transaction Charge from $0.75 to $0.60 per
contract provided the Affiliated Entity qualifies for Customer Rebate
Tiers 4 \14\ or 5 \15\ in Section B of the Pricing Schedule. The
Exchange proposes to provide an Appointed MM of an Affiliated Entity
with an opportunity to lower the Specialist and Market Maker non-Penny
Pilot electronic Options Transaction Charge from $0.25 to $0.23 per
contract provided the Affiliated Entity qualifies for Customer Rebate
Tiers 4 or 5 in Section B of the Pricing Schedule.\16\
---------------------------------------------------------------------------
\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 Rule
1000(b)(14).
\12\ The term ``Broker-Dealer'' applies to any transaction which
is not subject to any of the other transaction fees applicable
within a particular category.
\13\ The term ``Firm'' applies to any transaction that is
identified by a member or member organization for clearing in the
Firm range at The Options Clearing Corporation.
\14\ The Tier 4 Customer Rebate in Section B of the Pricing
Schedule requires Customer volume above 1.60% to 2.50% of National
Customer Volume in Multiply Listed Equity and ETF Options, excluding
SPY. This rebate tier pays a Category A $0.20 rebate, a Category B
$0.16 rebate and a Category C $0.22 rebate.
\15\ The Tier 5 Customer Rebate in Section B of the Pricing
Schedule requires Customer volume above 2.50% of National Customer
Volume in Multiply Listed Equity and ETF Options, excluding SPY.
This rebate tier pays a Category A $0.21 rebate, a Category B $0.17
rebate and a Category C $0.22 rebate.
\16\ Today, any member or member organization under Common
Ownership with another member or member organization that qualifies
for Customer Rebate Tiers 4 or 5 in Section B of the Pricing
Schedule is assessed either a $0.23 or $0.60 per contract non-Penny
Pilot electronic Options Transaction Charge.
---------------------------------------------------------------------------
The Exchange's proposal would incentivize certain members and
member organizations, who are not under Common Ownership, to enter into
an Affiliated Entity relationship for the purpose of aggregating
Customer volume to qualify for reduced non-Penny Pilot Options
Transaction Charges.
2. Statutory Basis
The Exchange believes that its proposal to amend its Pricing
Schedule is consistent with Section 6(b) of the Act,\17\ in general,
and furthers the objectives of Section 6(b)(4) and (b)(5) of the
Act,\18\ in particular, in that it provides for the equitable
allocation of reasonable dues, fees and other charges among members and
issuers and other persons using its facilities, and is not designed to
permit unfair discrimination between customers, issuers, brokers, or
dealers.
---------------------------------------------------------------------------
\17\ 15 U.S.C. 78f(b).
\18\ 15 U.S.C. 78f(b)(4), (5).
---------------------------------------------------------------------------
The Commission and the courts have repeatedly expressed their
preference for competition over regulatory intervention in determining
prices, products, and services in the securities markets. In Regulation
NMS, while adopting a series of steps to improve the current market
model, the Commission highlighted the importance of market forces in
determining prices and SRO revenues and, also, recognized that current
regulation of the market system ``has been remarkably successful in
promoting market competition in its broader forms that are most
important to investors and listed companies.'' \19\
---------------------------------------------------------------------------
\19\ Securities Exchange Act Release No. 51808 (June 29, 2005),
70 FR 37496 at 37499 (File No. S7-10-04) (``Regulation NMS Adopting
Release'').
---------------------------------------------------------------------------
Likewise, in NetCoalition v. Securities and Exchange Commission
\20\ (``NetCoalition'') the D.C. Circuit upheld the Commission's use of
a market-based approach in evaluating the fairness of market data fees
against a challenge claiming that Congress mandated a cost-based
approach.\21\ As the court emphasized, the Commission ``intended in
Regulation NMS that `market forces, rather than regulatory
requirements' play a role in determining the market data . . . to be
made available to investors and at what cost.'' \22\
---------------------------------------------------------------------------
\20\ NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010).
\21\ See id. at 534-535.
\22\ See id. at 537.
---------------------------------------------------------------------------
Further, ``[n]o one disputes that competition for order flow is
`fierce.' . . . As the SEC explained, `[i]n the U.S. national market
system, buyers and sellers of securities, and the broker-dealers that
act as their order-routing agents, have a wide range of choices of
where to route orders for execution'; [and] `no exchange can afford to
take its market share percentages for granted' because `no exchange
possesses a monopoly, regulatory or otherwise, in the execution of
order flow from broker dealers' . . . .'' \23\ Although the court and
the SEC were discussing the cash equities markets, the Exchange
believes
[[Page 49296]]
that these views apply with equal force to the options markets.
---------------------------------------------------------------------------
\23\ See id. at 539 (quoting Securities Exchange Act Commission
at Release No. 59039 (December 2, 2008), 73 FR 74770 at 74782-74783
(December 9, 2008) (SR-NYSEArca-2006-21)).
---------------------------------------------------------------------------
The Exchange's proposal to amend the Preface of the Pricing
Schedule to add the definitions of ``Appointed MM,'' ``Appointed OFP''
and ``Affiliated Entity'' is reasonable because the Exchange is
proposing to identify the applicable market participants that may
qualify to aggregate volume as an Affiliated Entity. Further the
Exchange seeks to make clear the manner in which members and member
organizations may participate on the Exchange as Affiliated Entities by
setting timeframes for communicating agreements among market
participants and terms of early termination. The Exchange also clearly
states that no member or member organization under Common Ownership may
become a counterparty to an Affiliated Entity. Any Phlx member or
member organization who meets the definition of Common Ownership shall
not be eligible to become an Affiliated Entity. The Exchange believes
that these terms are reasonable because they would allow members or
member organizations to elect to become a counterparty to an Affiliated
Entity, provided they are not under Common Ownership.
The Exchange's proposal to amend the Preface of the Pricing
Schedule to add the definitions of ``Appointed MM,'' ``Appointed OFP''
and ``Affiliated Entity'' is equitable and not unfairly discriminatory
because all member or members that are not under Common Ownership by
definition may choose to enter into an Affiliated Entity relationship.
Section B Customer Rebates
The Exchange's proposal to permit Affiliated Entities to aggregate
Customer volume for purposes of qualifying Appointed OFPs for Section B
Customer Rebates is reasonable because it will attract additional
Customer order flow to the Exchange. Customer liquidity benefits all
market participants by providing more trading opportunities, which
attracts Market Makers and Specialists. An increase in the activity of
these market participants in turn facilitates tighter spreads, which
may cause an additional corresponding increase in order flow from other
market participants. Appointed OFPs directing order flow to the
Exchange may be eligible to qualify for a Customer Rebate or a higher
Customer Rebate tier, with this proposal, as a result of aggregating
volume with an Appointed MM and thereby qualifying for higher Customer
Rebates. Permitting members and member organizations to affiliate for
purposes of qualifying for Section B Customer Rebates may also
encourage the counterparties that comprise the Affiliated Entities to
incentivize each other to attract and seek to execute more Customer
volume on Phlx. In turn, market participants would benefit from the
increased liquidity with which to interact and potentially tighter
spreads on orders. Overall, incentivizing market participants with
increased opportunities to earn higher Customer rebates may increase
the quality of the liquidity available on Phlx.
The Exchange's proposal to permit Affiliated Entities to aggregate
Customer volume for purposes of qualifying Appointed OFPs for Section B
Customer rebates is equitable and not unfairly discriminatory because
all Phlx members and member organizations, other than those that meet
the definition of Common Ownership, may elect to become an Affiliated
Entity as either an Appointed MM or an Appointed OFP.\24\ Also, each
member or member organization may participate in only one Affiliated
Entity relationship at a given time, which imposes a measure of
exclusivity among market participants, allowing each party to rely on
the other's executed Customer volume on Phlx to receive a corresponding
benefit in terms of a higher rebate. Any market participant that by
definition is not under Common Ownership may elect to become a
counterparty of an Affiliated Entity.
---------------------------------------------------------------------------
\24\ Both members must elect each other to become an Affiliated
Entity for one year. Participation is effected by an agreement of
both parties that have provided proper notification to the Exchange.
A party may elect to terminate the agreement at any time prior to
one year.
---------------------------------------------------------------------------
The Exchange's proposal to exclude members and member organizations
that are under Common Ownership from qualifying as an Affiliated Entity
is reasonable because members and member organizations under Common
Ownership may aggregate volume today for purposes of Section B Customer
Rebates.\25\ The Exchange's proposal to exclude members and member
organizations that by definition are under Common Ownership from
qualifying as an Affiliated Entity is equitable and not unfairly
discriminatory because the Exchange will apply all qualifications in a
uniform manner when approving Affiliated Entities. Excluding members
and member organizations that by definition are under Common Ownership
from also qualifying as an Affiliated Entity is equitable and not
unfairly discriminatory because they are able to aggregate volume today
and qualify for Customer Rebates in Section B.
---------------------------------------------------------------------------
\25\ See Section B of the Pricing Schedule.
---------------------------------------------------------------------------
Section II--Options Transaction Charges
The Exchange's proposal to amend note 3 of Section II of the
Pricing Schedule to offer members and member organizations that are
Affiliated Entities an opportunity to reduce non-Customer non-Penny
Pilot electronic Options Transaction Charges is reasonable because the
Exchange believes it will encourage these market participants to
transact a greater amount of Customer volume on Phlx. The Exchange's
proposal to permit Appointed OFPs of Affiliated Entities to qualify for
the reduced non-Penny Pilot electronic Options Transaction Charges by
qualifying for Customer Rebate Tiers 4 or 5 in Section B of the Pricing
Schedule will attract additional Customer order flow to the Exchange.
Customer liquidity benefits all market participants by providing more
trading opportunities, which attracts Market Makers and Specialists. An
increase in the activity of these market participants in turn
facilitates tighter spreads, which may cause a corresponding increase
in order flow from other market participants. Appointed OFPs directing
order flow to the Exchange may be eligible to qualify for these
Customer rebate tiers as a result of aggregating volume with another
appointed member and benefit from reduced non-Penny Pilot electronic
Options Transaction Charges. Permitting members and member
organizations to affiliate for purposes of qualifying for Section B
Customer rebates may also encourage the counterparties of an Affiliated
Entity to incentivize each other to attract and seek to execute more
Customer volume on Phlx. The Affiliated Entity relationship would
permit the Appointed OFP to benefit from reduced non-Penny Pilot
electronic Options Transaction Charges. In turn, market participants
would benefit from the increased liquidity with which to interact and
potentially tighter spreads on orders. The Exchange believes that
lowering these fees for electronic non-Penny Pilot Options Transaction
Charges, as compared to Penny Pilot Options Transaction Charges, is
reasonable because today, Penny Pilot Options are the most traded and
more liquid than Non-Penny Pilot Options. Electronic Penny Pilot
Options Transaction Charges are lower for Professionals, Broker-Dealers
and Firms because of the demand in the marketplace. The Exchange is
offering Appointed OFPs the opportunity to reduce the higher electronic
non-Penny Pilot Options Transaction Charges for
[[Page 49297]]
Professionals, Broker-Dealers and Firms with this incentive, provided
they qualify for the reduced non-Penny Pilot electronic Options
Transaction Charges by qualifying for Customer Rebate Tiers 4 or 5 in
Section B of the Pricing Schedule.
The Exchange's proposal to amend note 3 of Section II of the
Pricing Schedule to offer members and member organizations that are
Affiliated Entities an opportunity to reduce non-Customer non-Penny
Pilot electronic Options Transaction Charges is equitable and not
unfairly discriminatory because the Exchange will assess Appointed OFPs
a reduced Professional, Broker-Dealer and Firm electronic Options
Transaction Charge in Non-Penny Pilot Options. The Exchange does not
assess Customers an electronic Options Transaction Charge in Non-Penny
Pilot Options because Customer order flow enhances liquidity on the
Exchange for the benefit of all market participants. Customer liquidity
benefits all market participants by providing more trading
opportunities, which attracts Specialists and Market Makers. An
increase in the activity of these market participants in turn
facilitates tighter spreads, which may cause an additional
corresponding increase in order flow from other market participants.
Specialists and Market Makers are assessed lower electronic Options
Transaction Charges in Non-Penny Pilot Options as compared to
Professionals, Broker-Dealers and Firms because they have obligations
to the market and regulatory requirements, which normally do not apply
to other market participants.\26\ They have obligations to make
continuous markets, engage in a course of dealings reasonably
calculated to contribute to the maintenance of a fair and orderly
market, and not make bids or offers or enter into transactions that are
inconsistent with a course of dealings. The proposed differentiation as
between Customers, Specialists and Market Makers and other market
participants recognizes the differing contributions made to the
liquidity and trading environment on the Exchange by these market
participants. The Exchange believes that offering Appointed OFPs an
opportunity to lower fees for electronic non-Penny Pilot Options
Transaction Charges as compared to Penny Pilot Options Transaction
Charges is equitable and not unfairly discriminatory because the
Exchange seeks to offer lower fees to those market participants paying
the highest electronic non-Penny Pilot Options Transaction Charges.
---------------------------------------------------------------------------
\26\ See Rule 1014 titled ``Obligations and Restrictions
Applicable to Specialists and Registered Options Traders.''
---------------------------------------------------------------------------
The Exchange's proposal to amend note 4 of Section II of the
Pricing Schedule to offer Appointed MMs of an Affiliated Entity an
opportunity to reduce the Specialist and Marker Maker electronic non-
Penny Pilot electronic Options Transaction Charges is reasonable
because today the Exchange offers all market participants, excluding
Customers who are not assessed a non-Penny Pilot electronic Options
Transaction Charges, a means to reduce electronic Options Transaction
Charges by qualifying for a Customer Rebate in Section B of the Pricing
Schedule. Even with the reduced rate for Professionals, Broker-Dealers
and Firms of $0.60 per contract, Specialists and Market Makers will
continue to be assessed the lowest electronic Options Transaction
Charge in Non-Penny Pilot Options because they have obligations to the
market and regulatory requirements, which normally do not apply to
other market participants.\27\ The Exchange believes that offering
Appointed MMs an opportunity to benefit from lower fees for electronic
non-Penny Pilot Options Transaction Charges is reasonable because the
reduced electronic non-Penny Pilot will be consistent with the current
lower reduced Penny Pilot Options Transaction charges ($0.25 vs. $0.22
per contract).
---------------------------------------------------------------------------
\27\ Id.
---------------------------------------------------------------------------
The Exchange's proposal to amend note 4 of Section II of the
Pricing Schedule to offer Appointed MMs of an Affiliated Entity an
opportunity to reduce the Specialist and Marker Maker electronic non-
Penny Pilot electronic Options Transaction Charges is equitable and not
unfairly discriminatory because the Exchange seeks to incentivize
Specialists and Market Makers to increase their activity on Phlx and in
turn facilitate tighter spreads, which may cause an additional
corresponding increase in order flow from other market participants.
Specialists and Market Makers have obligations to the market and
regulatory requirements, which normally do not apply to other market
participants.\28\ They have obligations to make continuous markets,
engage in a course of dealings reasonably calculated to contribute to
the maintenance of a fair and orderly market, and not make bids or
offers or enter into transactions that are inconsistent with a course
of dealings. The Exchange believes that offering Appointed MMs the
opportunity to receive this additional benefit will continue to benefit
the marketplace as described herein. The Exchange believes that
lowering electronic non-Penny Pilot Options Transaction Charges as
compared to electronic Penny Pilot Options Transaction Charges is
equitable and not unfairly discriminatory because the Exchange is
offering market participants the opportunity to reduce the higher
electronic non-Penny Pilot Options Transaction Charges for Specialists
and Market Makers with this incentive and permitting Appointed MMs to
also receive this discount, provided they qualify.
---------------------------------------------------------------------------
\28\ Id.
---------------------------------------------------------------------------
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. Specifically, the Exchange does
not believe that permitting counterparties to an Affiliated Entity to
aggregate volume to qualify for certain rebates and reduced fees will
impose any undue burden on competition, as discussed below.
The Exchange operates in a highly competitive market in which many
sophisticated and knowledgeable market participants can readily and do
send order flow to competing exchanges if they deem fee levels or
rebate incentives at a particular exchange to be excessive or
inadequate. Additionally, new competitors have entered the market and
still others are reportedly entering the market shortly. These market
forces ensure that the Exchange's fees and rebates remain competitive
with the fee structures at other trading platforms.
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. In terms of inter-market
competition, the Exchange notes that it operates in a highly
competitive market in which market participants can readily favor
competing venues if they deem fee levels at a particular venue to be
excessive, or rebate opportunities available at other venues to be more
favorable. In such an environment, the Exchange must continually adjust
its fees to remain competitive with other exchanges and with
alternative trading systems that have been exempted from compliance
with the statutory standards applicable to exchanges. Because
competitors are free to modify their own fees in response, and because
market participants may readily adjust their order routing practices,
the Exchange believes that the degree to which fee
[[Page 49298]]
changes in this market may impose any burden on competition is
extremely limited.
In sum, if the changes proposed herein are unattractive to market
participants, it is likely that the Exchange will lose market share as
a result. Accordingly, the Exchange does not believe that the proposed
changes will impair the ability of members or competing order execution
venues to maintain their competitive standing in the financial markets.
In terms of inter-market competition, the Exchange notes that other
options markets have similar incentives in place to attract volume to
their markets.\29\
---------------------------------------------------------------------------
\29\ See NYSE MKT LLC's (``NYSE Amex'') pricing at NYSE Amex
Options Fee Schedule). NYSE Amex permits aggregation of volume to
qualify for the Amex Customer Engagement or ACE Program. See Bats
BZX Exchange, Inc.'s (``BZX'') fee schedule. BZX permits aggregation
of volume to qualify for tiered pricing. See the Chicago Board
Options Exchange Incorporated (``CBOE'') Fees Schedule. CBOE permits
aggregation of volume to qualify for credits available under an
Affiliated Volume Plan or ``AVP.''
---------------------------------------------------------------------------
The Exchange's proposal to amend the Preface of the Pricing
Schedule to add the definitions of ``Appointed MM,'' ``Appointed OFP''
and ``Affiliated Entity'' does not impose an undue burden on
competition because these definitions apply to all members and member
organizations uniformly.
Section B Customer Rebates
In terms of intra-market competition, the Exchange does not believe
that its proposal to permit counterparties of an Affiliated Entity to
aggregate Customer volume for purposes of qualifying for Section B
Customer Rebates imposes an undue burden on intra-market competition
because all Phlx members and member organizations, other than those
under Common Ownership, may become an Affiliated Entity as either an
Appointed MM or an Appointed OFP. Also, each Phlx member or member
organization may participate in only one Affiliated Entity relationship
at a given time, which imposes a measure of exclusivity among market
participants, allowing each party to rely on the other's executed
Customer volume on Phlx to receive a corresponding benefit in terms of
a higher rebate. The Exchange will apply all qualifications in a
uniform manner to all market participants that elect to become
counterparties of an Affiliated Entity. Any market participant that is
by definition a member or member organization under Common Ownership
may not become a counterparty of an Affiliated Entity.
Market Makers and Specialists are valuable market participants that
provide liquidity in the marketplace and incur costs that other market
participants do not incur. Market Makers and Specialists are subject to
burdensome quoting obligations \30\ to the market that do not apply to
other market participants. Incentivizing these market participants to
execute Customer volume on Phlx may result in tighter spreads. An
increase in the activity of these market participants in turn
facilitates tighter spreads, which may cause an additional
corresponding increase in order flow from other market participants.
Appointed OFPs directing order flow to the Exchange may be eligible to
qualify for a Customer Rebate or a higher Customer Rebate tier, with
this proposal, as a result of aggregating volume with an Appointed MM
and thereby qualifying for higher Customer Rebates. Permitting members
and member organizations to affiliate for purposes of qualifying for
Section B Customer Rebates may also encourage the counterparties that
comprise the Affiliated Entities to incentivize each other to attract
and seek to execute more Customer volume on Phlx.
---------------------------------------------------------------------------
\30\ See note 26 above.
---------------------------------------------------------------------------
The Exchange's proposal to exclude members and member organizations
that are under Common Ownership from becoming an Affiliated Entity does
not impose and [sic] undue burden on intra-market competition because
member and member organizations under Common Ownership may aggregate
volume today for purposes of qualifying for Customer Rebates.
Section II--Options Transaction Charges
The Exchange's proposal to amend note 3 of Section II of the
Pricing Schedule to offer Appointed OFPs of Affiliated Entities an
opportunity to reduce non-Customer non-Penny Pilot electronic Options
Transaction Charges does not impose an undue burden on intra-market
competition because the Exchange will assess Appointed OFPs a reduced
Professional, Broker-Dealer and Firm electronic Options Transaction
Charge in Non-Penny Pilot Options. The Exchange does not assess
Customers an electronic Options Transaction Charge in Non-Penny Pilot
Options because Customer order flow enhances liquidity on the Exchange
for the benefit of all market participants. Customer liquidity benefits
all market participants by providing more trading opportunities, which
attracts Specialists and Market Makers. An increase in the activity of
these market participants in turn facilitates tighter spreads, which
may cause an additional corresponding increase in order flow from other
market participants. Specialists and Market Makers are assessed lower
electronic Options Transaction Charges in Non-Penny Pilot Options as
compared to Professionals, Broker-Dealers and Firms because they have
obligations to the market and regulatory requirements, which normally
do not apply to other market participants.\31\ They have obligations to
make continuous markets, engage in a course of dealings reasonably
calculated to contribute to the maintenance of a fair and orderly
market, and not make bids or offers or enter into transactions that are
inconsistent with a course of dealings. The proposed differentiation as
between Customers, Specialists and Market Makers and other market
participants recognizes the differing contributions made to the
liquidity and trading environment on the Exchange by these market
participants. The Exchange will apply all qualifications for the
reduced rate in a uniform manner. The Exchange believes that lowering
these fees for electronic non-Penny Pilot Options Transaction Charges
as compared to electronic Penny Pilot Options Transaction Charges does
not impose an undue burden on intra-market competition because the
Exchange seeks to offer lower fees to those market participants paying
the highest electronic non-Penny Pilot Options Transaction Charges.
---------------------------------------------------------------------------
\31\ See note 26 above.
---------------------------------------------------------------------------
The Exchange's proposal to amend note 4 of Section II of the
Pricing Schedule to offer Appointed MMs of Affiliated Entities an
opportunity to reduce non-Customer electronic non-Penny Pilot
electronic Options Transaction Charges does not impose an undue burden
on intra-market competition because the Exchange seeks to incentivize
Specialists and Market Makers to increase their activity on Phlx and in
turn facilitate tighter spreads, which may cause an additional
corresponding increase in order flow from other market participants.
Specialists and Market have obligations to the market and regulatory
requirements, which normally do not apply to other market
participants.\32\ They have obligations to make continuous markets,
engage in a course of dealings reasonably calculated to contribute to
the maintenance of a fair and orderly market, and not make bids or
offers or enter into transactions that are inconsistent with a course
of dealings. The Exchange believes that permitting Affiliated [sic] MMs
to receive this additional benefit will continue to benefit the market
place as
[[Page 49299]]
described herein. The Exchange believes that lowering these fees for
electronic non-Penny Pilot Options Transaction Charges as compared to
Penny Pilot Options Transaction Charges does not impose an undue burden
on intra-market competition because the electronic non-Penny Pilot
Options Transaction Charges is higher ($0.25 vs. $0.22 per contract).
---------------------------------------------------------------------------
\32\ See note 26 above.
---------------------------------------------------------------------------
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.\33\
---------------------------------------------------------------------------
\33\ 15 U.S.C. 78s(b)(3)(A)(ii).
---------------------------------------------------------------------------
At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is: (i)
Necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission shall institute proceedings to determine whether the
proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-Phlx-2016-62 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2016-62. 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-2016-62 and should be
submitted on or before August 17, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\34\
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\34\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-17668 Filed 7-26-16; 8:45 am]
BILLING CODE 8011-01-P
