Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the Customer Rebate Program, 64136-64140 [2019-25103]
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64136
Federal Register / Vol. 84, No. 224 / Wednesday, November 20, 2019 / Notices
other things: (i) Whether the purchases
were consistent with the investment
objectives and policies of the Fund; (ii)
how the performance of securities
purchased in an Affiliated Underwriting
compares to the performance of
comparable securities purchased during
a comparable period of time in
underwritings other than Affiliated
Underwritings or to a benchmark such
as a comparable market index; and (iii)
whether the amount of securities
purchased by the Fund in Affiliated
Underwritings and the amount
purchased directly from an
Underwriting Affiliate have changed
significantly from prior years. The
Board will take any appropriate actions
based on its review, including, if
appropriate, the institution of
procedures designed to assure that
purchases of securities in Affiliated
Underwritings are in the best interest of
shareholders of the Fund.
17. Each Fund will maintain and
preserve permanently in an easily
accessible place a written copy of the
procedures described in the preceding
condition, and any modifications to
such procedures, and will maintain and
preserve for a period of not less than six
years from the end of the fiscal year in
which any purchase in an Affiliated
Underwriting occurred, the first two
years in an easily accessible place, a
written record of each purchase of
securities in Affiliated Underwritings
once an investment by an Investing
Fund in the securities of the Fund
exceeds the limit of section
12(d)(1)(A)(i) of the Act, setting forth
from whom the securities were
acquired, the identity of the
underwriting syndicate’s members, the
terms of the purchase, and the
information or materials upon which
the Board’s determinations were made.
18. Before investing in a Fund in
excess of the limits in section
12(d)(1)(A), an Investing Fund will
execute a FOF Participation Agreement
with the Fund stating that their
respective boards of directors or trustees
and their investment advisers, or
Trustee and Sponsor, as applicable,
understand the terms and conditions of
the order, and agree to fulfill their
responsibilities under the order. At the
time of its investment in Shares of a
Fund in excess of the limit in section
12(d)(1)(A)(i), an Investing Fund will
notify the Fund of the investment. At
such time, the Investing Fund will also
transmit to the Fund a list of the names
of each Investing Fund Affiliate and
Underwriting Affiliate. The Investing
Fund will notify the Fund of any
changes to the list as soon as reasonably
practicable after a change occurs. The
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17:21 Nov 19, 2019
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Fund and the Investing Fund will
maintain and preserve a copy of the
order, the FOF Participation Agreement,
and the list with any updated
information for the duration of the
investment and for a period of not less
than six years thereafter, the first two
years in an easily accessible place.
19. Before approving any advisory
contract under section 15 of the Act, the
board of directors or trustees of each
Investing Management Company,
including a majority of the independent
directors or trustees, will find that the
advisory fees charged under such
contract are based on services provided
that will be in addition to, rather than
duplicative of, the services provided
under the advisory contract(s) of any
Fund in which the Investing
Management Company may invest.
These findings and their basis will be
recorded fully in the minute books of
the appropriate Investing Management
Company.
20. Any sales charges and/or service
fees charged with respect to shares of an
Investing Fund will not exceed the
limits applicable to a fund of funds as
set forth in FINRA Rule 2341.
21. No Fund will acquire securities of
any investment company or company
relying on section 3(c)(1) or 3(c)(7) of
the Act in excess of the limits contained
in section 12(d)(1)(A) of the Act, except
to the extent permitted by exemptive
relief from the Commission permitting
the Fund to purchase shares of other
investment companies for short-term
cash management purposes.
By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019–25068 Filed 11–19–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87537; File No. SR–Phlx–
2019–48]
Self-Regulatory Organizations; Nasdaq
PHLX LLC; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend the Customer
Rebate Program
November 14, 2019.
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 November
1, 2019, Nasdaq PHLX LLC (‘‘Phlx’’ or
‘‘Exchange’’) filed with the Securities
1 15
2 17
PO 00000
U.S.C. 78s(b)(1).
CFR 240.19b–4.
Frm 00099
Fmt 4703
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and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III, below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend the
Exchange’s Customer Rebate Program,
as set forth in the Pricing Schedule at
Options 7, Section 1, Part B.
The text of the proposed rule change
is available on the Exchange’s website 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 amend the Exchange’s
Customer Rebate Program, as set forth in
the Pricing Schedule at Options 7,
Section 1, Part B. As described in
greater detail below, the Exchange
proposes to adopt an alternative method
for members or member organizations
(hereinafter, ‘‘members’’) to qualify for
the program’s Tier 2 rebates based on
the member meeting a certain
percentage threshold of total national
Customer 3 volume in multiply-listed
options classes, reaching the Monthly
Firm Fee Cap,4 and meeting the
3 The term ‘‘Customer’’ applies to any transaction
that is identified by a member for clearing in the
Customer range at The Options Clearing
Corporation (‘‘OCC’’) which is not for the account
of a broker or dealer or for the account of a
‘‘Professional’’ (as that term is defined in Rule
1000(b)(14)). See Options 7, Section 1.
4 Firms are subject to a maximum fee of $75,000
(‘‘Monthly Firm Fee Cap’’). Firm Floor Option
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Federal Register / Vol. 84, No. 224 / Wednesday, November 20, 2019 / Notices
Exchange’s Market Access and Routing
Subsidy (‘‘MARS’’) System Eligibility 5
requirements. With the proposed
changes, the Exchange seeks to attract
additional liquidity and order flow to
the Exchange, which will benefit all
market participants from increased
opportunities for price improvement.
Background
Options 7, Section 4 sets forth a
Monthly Firm Fee Cap that limits, or
caps, at $75,000 per month the Firm 6
Floor Option Transaction Charges and
Customer Rebate Tiers
Tier
Tier
Tier
Tier
Tier
1
2
3
4
5
.............................
.............................
.............................
.............................
.............................
Firm QCC Transaction Fees incurred by
members trading in their own
proprietary account.7 The Monthly Firm
Fee Cap is designed to provide an
incentive for members to bring
additional Firm floor and QCC order
flow to the Exchange.
Options 7, Section 6, Part E sets forth
the Exchange’s MARS program, which
provides rebates to qualifying members
with System Eligibility and that execute
the requisite number of Eligible
Contracts 8 in a month. MARS is
designed to attract electronic equity and
Percentage Thresholds of National Customer
Volume in Multiply-Listed Equity and ETF
Options Classes, excluding SPY Options
(monthly)
Category
A
0.00%–0.60% ......................................................
Above 0.60%–1.10% ...........................................
Above 1.10%–1.60% ...........................................
Above 1.60%–2.50% ...........................................
Above 2.50% .......................................................
64137
ETF options volume to the Exchange,
particularly electronic Firm, BrokerDealer,9 JBO 10 and Professional 11 order
flow.
As set forth in Options 7, Section 1,
Part B, the Exchange presently offers a
Customer Rebate Program that is
designed to attract electronic Customer
order flow to the Exchange. In
particular, the program consists of the
following five tiers that pay Customer
rebates on four Categories, A,12 B,13 C,14
D,15 of transactions: 16
Category
B
$0.00
0.10
0.15
0.20
0.21
$0.00
0.10
0.12
0.16
0.17
Category
C
$0.00
0.16
0.18
0.22
0.22
Category
D
$0.00
0.21
0.22
0.26
0.27
A Phlx member qualifies for a
particular Customer Rebate Tier based
on the percentage of total national
Customer volume in multiply-listed
options that it transacts monthly on the
Exchange. Specifically, the Exchange
totals Customer volume in multiply
listed options (including SPY) that is
electronically-delivered and executed,
except volume associated with
electronic QCC Orders, as defined in
Exchange Rule 1080(o), and calculates
this as a percentage of total national
customer volume in multiply-listed
equity and ETF options classes,
excluding SPY. Members under
Transaction Charges and QCC Transaction Fees, as
set forth in Options 7, Section 4, in the aggregate,
for one billing month will not exceed the Monthly
Firm Fee Cap per member organization when such
members are trading in their own proprietary
account. All dividend, merger, and short stock
interest strategy executions (as defined in this
Options 7, Section 4) will be excluded from the
Monthly Firm Fee Cap. NDX and NDXP Options
Transactions will be excluded from the Monthly
Firm Fee Cap. Reversal and conversion, jelly roll
and box spread strategy executions (as defined in
this Options 7, Section 4) will be included in the
Monthly Firm Fee Cap. QCC Transaction Fees are
included in the calculation of the Monthly Firm Fee
Cap. See Options 7, Section 4.
5 To qualify for MARS, a Phlx member’s routing
system (hereinafter ‘‘System’’) would be required to:
(1) Enable the electronic routing of orders to all of
the U.S. options exchanges, including Phlx; (2)
provide current consolidated market data from the
U.S. options exchanges; and (3) be capable of
interfacing with Phlx’s API to access current Phlx
match engine functionality. Further, the member’s
System would also need to cause Phlx to be the one
of the top five default destination exchanges for
individually executed marketable orders if Phlx is
at the national best bid or offer (‘‘NBBO’’),
regardless of size or time, but allow any user to
manually override Phlx as a default destination on
an order-by-order basis. Notwithstanding the above,
with respect to Complex Orders a Phlx member’s
routing system would not be required to enable the
electronic routing of orders to all of the U.S. options
exchanges or provide current consolidated market
data from the U.S. options exchanges. Any Phlx
member would be permitted to avail itself of this
arrangement, provided that its order routing
functionality incorporates the features described
above and satisfies Phlx that it appears to be robust
and reliable. The member remains solely
responsible for implementing and operating its
system. See Options 7, Section 6, Part E.
6 The term ‘‘Firm’’ applies to any transaction that
is identified by a member or member organization
for clearing in the Firm range at OCC. See Options
7, Section 1.
7 The Firm Floor Option Transaction Charges and
QCC Transaction Fees are set forth in Options 7,
Section 4. QCC Transaction Fees apply to both
electronic and floor QCC orders.
8 Eligible Contracts include the following: Firm,
Broker-Dealer, Joint Back Office or ‘‘JBO’’ or
Professional equity option orders that are
electronically delivered and executed. Eligible
Contracts do not include floor-based orders,
qualified contingent cross or ‘‘QCC’’ orders, price
improvement or ‘‘PIXL’’ orders, Mini Option orders
or Singly Listed Orders. Options overlying NDX and
NDXP are not considered Eligible Contracts. See
Options 7, Section 6, Part E.
9 The term ‘‘Broker-Dealer’’ applies to any
transaction which is not subject to any of the other
transaction fees applicable within a particular
category.
10 The term ‘‘Joint Back Office’’ or ‘‘JBO’’ applies
to any transaction that is identified by a member or
member organization for clearing in the Firm range
at OCC and is identified with an origin code as a
JBO. A JBO will be priced the same as a BrokerDealer. A JBO participant is a member, member
organization or non-member organization that
maintains a JBO arrangement with a clearing
broker-dealer (‘‘JBO Broker’’) subject to the
requirements of Regulation T Section 220.7 of the
Federal Reserve System as further discussed at
Exchange Rule 703.
11 The term ‘‘Professional’’ applies to transactions
for the accounts of Professionals, as defined in
Exchange Rule 1000(b)(14) 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).
12 The Category A Rebate is paid to members
executing electronically-delivered Customer Simple
Orders in Penny Pilot Options and Customer
Simple Orders in Non-Penny Pilot Options in
Options 7, Section 4 symbols.
13 The Category B Rebate is paid on Customer
PIXL Orders in Options 7, Section 4 symbols that
execute against non-Initiating Order interest. In the
instance where member qualify for Tier 4 or higher
in the Customer Rebate Program, Customer PIXL
Orders that execute against a PIXL Initiating Order
are paid a rebate of $0.14 per contract. Rebates on
Customer PIXL Orders are capped at 4,000 contracts
per order for Simple PIXL Orders.
14 The Category C Rebate is paid to members
executing electronically-delivered Customer
Complex Orders in Penny Pilot Options in Options
7, Section 4 symbols. Rebates are paid on Customer
PIXL Complex Orders in Options 7, Section 4
symbols that execute against non-Initiating Order
interest. Customer Complex PIXL Orders that
execute against a Complex PIXL Initiating Order are
not paid a rebate under any circumstances. The
Category C Rebate is not paid when an
electronically-delivered Customer Complex Order,
including Customer Complex PIXL Order, executes
against another electronically-delivered Customer
Complex Order.
15 The Category D Rebate is paid to members
executing electronically-delivered Customer
Complex Orders in Non-Penny Pilot Options in
Options 7, Section 4 symbols. Rebates are paid on
Customer PIXL Complex Orders in Options 7,
Section 4 symbols that execute against nonInitiating Order interest. Customer Complex PIXL
Orders that execute against a Complex PIXL
Initiating Order are not paid a rebate under any
circumstances. The Category D Rebate is not paid
when an electronically-delivered Customer
Complex Order, including Customer Complex PIXL
Order, executes against another electronicallydelivered Customer Complex Order.
16 Rebates are not paid on NDX or NDXP contracts
in any Category; however, NDX and NDXP contracts
count toward the volume requirement to qualify for
a Customer Rebate Tier.
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Federal Register / Vol. 84, No. 224 / Wednesday, November 20, 2019 / Notices
Common Ownership 17 may aggregate
their Customer volume for purposes of
calculating the Customer Rebate Tiers
and receiving rebates. Affiliated
Entities 18 may aggregate their Customer
volume for purposes of calculating the
Customer Rebate Tiers and receiving
rebates.
Proposal
The Exchange now proposes to adopt
an alternative method for members to
qualify for the applicable Tier 2 rebates
described above. As discussed above,
the proposed alternative will be based
on the member meeting a certain
percentage threshold of total national
Customer volume in multiply-listed
options classes, reaching the Monthly
Firm Fee Cap, and meeting the MARS
System Eligibility requirements.
Specifically, the Exchange proposes to
add the following language at the end of
Options 7, Section 1, Part B: ‘‘The
Exchange will pay the applicable Tier 2
rebates to qualifying members or
member organizations, qualifying
affiliates under Common Ownership, or
qualifying Affiliated Entities, provided
they: (1) Execute a Percentage Threshold
of National Customer Volume in
Multiply-Listed Equity and ETF Options
Classes, excluding SPY Options
(monthly), of above 0.25%; (2) reach the
Monthly Firm Fee Cap as defined in
Options 7, Section 4; and (3) meet the
MARS System Eligibility requirements
as provided in Options 7, Section 6, Part
E.’’
Applicability to and Impact on
Participants
The proposed change is designed to
incentivize members who reach the
Monthly Firm Fee Cap and have MARS
System Eligibility to increase their
electronic Customer volume to qualify
for the applicable Tier 2 rebates. The
proposal may correspondingly
encourage members to qualify for the
Monthly Firm Fee Cap and the MARS
System Eligibility requirements (which
should increase Firm floor volume and
Firm QCC volume as well as electronic
Firm, Broker-Dealer, JBO and
Professional volume). The Exchange
notes that all market participants stand
17 The term ‘‘Common Ownership’’ shall mean
members or member organizations under 75%
common ownership or control. See Options 7,
Section 1.
18 The term ‘‘Affiliated Entity’’ is a relationship
between an Appointed MM and an Appointed OFP
for purposes of qualifying for certain pricing
specified in the Pricing Schedule. Members under
Common Ownership may not qualify as a
counterparty comprising an Affiliated Entity. Each
member may qualify for only one (1) Affiliated
Entity relationship at any given time. See Options
7, Section 1.
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to benefit from increased volume, which
facilitates tighter spreads and enhances
price discovery, and may lead to a
corresponding increase in order flow
from other market participants.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,19 in general, and furthers the
objectives of Sections 6(b)(4) and 6(b)(5)
of the Act,20 in particular, in that it
provides for the equitable allocation of
reasonable dues, fees and other charges
among members and issuers and other
persons using any facility, and is not
designed to permit unfair
discrimination between customers,
issuers, brokers, or dealers.
The Proposal is Reasonable
The Exchange believes that the
proposed alternative method to qualify
for the applicable Tier 2 rebates in the
Customer Rebate Program is reasonable
for several reasons. As a threshold
matter, the Exchange is subject to
significant competitive forces in the
market for options transaction services
that constrain its pricing determinations
in that market. The fact that this market
is competitive has long been recognized
by the courts. In NetCoalition v.
Securities and Exchange Commission,
the D.C. Circuit stated as follows: ‘‘[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’. . . .’’ 21
Numerous indicia demonstrate the
competitive nature of this market. For
example, clear substitutes to the
Exchange exist in the market for options
transaction services. The Exchange is
only one of sixteen options exchanges to
which market participants may direct
their order flow. Competing options
exchanges offer similar tiered pricing
structures to that of the Exchange,
including tiered rebates that apply
based upon members achieving certain
19 15
U.S.C. 78f(b).
U.S.C. 78f(b)(4) and (5).
21 NetCoalition v. SEC, 615 F.3d 525, 539 (D.C.
Cir. 2010) (quoting Securities Exchange Act Release
No. 59039 (December 2, 2008), 73 FR 74770, 74782–
83 (December 9, 2008) (SR–NYSEArca–2006–21)).
20 15
PO 00000
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volume thresholds.22 Within this
environment, market participants can
freely and often do shift their order flow
among the Exchange and competing
venues in response to changes in their
respective pricing schedules.
Within the foregoing context, the
proposal represents a reasonable
attempt by the Exchange to increase its
liquidity and market share relative to its
competitors. The Exchange’s proposal is
designed to attract additional liquidity
and order flow to the Exchange, similar
to other exchange programs with
competitive pricing programs,23 thereby
promoting market depth, price
discovery and improvement, and
enhancing order execution
opportunities for market participants.
As discussed above, the proposed
changes provide an additional
opportunity for members to earn the
applicable Tier 2 Customer rebates if
they execute a percentage threshold of
national Customer volume in multiplylisted equity and ETF options classes,
excluding SPY options, of above 0.25%
on the Exchange, reach the Monthly
Firm Fee Cap, and have MARS System
Eligibility. Today, the Exchange
provides the same Tier 2 rebates to
members that execute a percentage
threshold of national Customer volume
in multiply-listed equity and ETF
options classes, excluding SPY options,
of above 0.60% to 1.10% on the
Exchange. This proposal would offer
members an alternative route to earn the
same Tier 2 rebates, provided they meet
the lower percentage threshold of above
0.25% and also qualify for both the
Monthly Firm Fee Cap and the MARS
System Eligibility requirements. The
Exchange believes that the proposed
percentage threshold is set at an
appropriate level that would encourage
members to bring more Customer order
flow to the Exchange to qualify for the
applicable Tier 2 rebates. While the
Exchange cannot predict with certainty
whether any members would avail
themselves of the proposed incentive
22 See, e.g., NYSE American Options Fee
Schedule, Section I.E (setting forth the American
Customer Engagement (‘‘ACE’’) Program that
provides tiered customer credits on customer
electronic volume, provided the member achieves
certain total industry customer equity and ETF
option average daily volume percentage thresholds),
Section I.H (setting forth the Professional Step-Up
Incentive that provides discounted rates or credits,
as applicable, to professional customer, brokerdealer, non-NYSE American Options market maker,
and firm ranges, and also ties some of these benefits
to the ACE Program), and Section I.I (setting forth
the Firm Monthly Fee Cap that caps at $100,000 per
month the fees associated with Firm Manual
transactions, and also lowers the firm fee cap for
members that achieve the applicable ACE Program
tiers).
23 Id.
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Federal Register / Vol. 84, No. 224 / Wednesday, November 20, 2019 / Notices
given that this incentive is new,
assuming historical behavior can be
predictive of future behavior, the
Exchange believes that at present
participation rates, almost 30% of active
firms on the Exchange have comparable
trading volume in the Customer
category. The Exchange also believes
that the proposed lower percentage
threshold (i.e., above 0.25% versus the
current Tier 2 threshold of above 0.60%
to 1.10%) is reasonable because
members must meet additional
qualifications (i.e., reach the Monthly
Firm Fee Cap and have MARS System
Eligibility) under the proposed
alternative method to receive the Tier 2
rebates on Customer transactions.
Furthermore, the Exchange believes
that its proposal will encourage
members to increase the amount of
Customer order flow directed to the
Exchange. In addition, because members
will also be required to reach the
Monthly Firm Fee Cap and have MARS
System Eligibility to receive the
applicable Tier 2 Customer rebates, the
proposed program may encourage
members to direct Firm floor and QCC
order flow as well as electronic Firm,
Broker-Dealer, JBO and Professional
order flow, in addition to electronic
Customer order flow. The Exchange
notes that all market participants stand
to benefit from increased order flow—
whether Customer, Firm, Broker-Dealer,
JBO or Professional, and whether floor
or electronic—as such increase
promotes market depth, facilitates
tighter spreads, enhances price
discovery, and may lead to an increase
in order flow from other market
participants that would not otherwise
qualify for the proposed alternative
route to the Tier 2 Customer rebates.
The Proposal Is an Equitable Allocation
of Rebates
The Exchange believes that its
proposal is an equitable allocation of the
applicable Tier 2 rebates. The proposal
is based on the amount and type of
business transacted on the Exchange,
and members can opt to avail
themselves of these rebates or not.
Furthermore, this proposal is designed
to encourage members to bring and
execute their order flow (particularly
electronic Customer volume and, in
turn, Firm floor, QCC, and electronic
Firm, Broker-Dealer, JBO and
Professional volume) to the Exchange.
To the extent at the proposed changes
attract such additional volume to the
Exchange, this increased order flow
would continue to make the Exchange a
more competitive venue for, among
other things, order execution. Thus, the
Exchange believes the proposed changes
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would improve market quality for all
market participants on the Exchange,
and increase its attractiveness to
existing and prospective members.
The Proposal Is Not Unfairly
Discriminatory
The Exchange believes that its
proposal is not unfairly discriminatory.
As an initial matter, the Exchange
believes that nothing about its volumebased tiered pricing model is inherently
unfair; instead, it is a rational pricing
model that is well-established and
ubiquitous in today’s economy among
firms in various industries—from cobranded credit cards to grocery stores to
cellular telephone data plans—that use
it to reward the loyalty of their best
customers that provide high levels of
business activity and incent other
customers to increase the extent of their
business activity. It is also a pricing
model that the Exchange and its
competitors have long employed with
the assent of the Commission. It is fair
because it incentivizes customer activity
that increases liquidity, enhances price
discovery, and improves the overall
quality of the options market.
As discussed above, the proposal is
based on the amount and type of
business transacted on the Exchange,
and members are not obligated to try to
achieve the proposed alternative route
to the Tier 2 Customer rebates. Rather,
the proposal is designed to encourage
these members to bring additional order
flow (particularly electronic Customer
volume and, in turn, Firm floor, QCC,
and electronic Firm, Broker-Dealer, JBO
and Professional volume) to the Phlx
market, improving market quality and
price discovery. The Exchange believes
that the proposed qualification for the
Tier 2 Customer rebates is not unfairly
discriminatory because to the extent the
proposed changes attract more volume
to the Exchange, this increased order
flow would continue to make the
Exchange a more competitive venue for
order execution, among other things. As
noted above, all market participants
stand to benefit from increased order
flow—whether Customer, Firm, BrokerDealer, JBO or Professional, and
whether floor or electronic—as such
increase promotes market depth,
facilitates tighter spreads, enhances
price discovery, and may lead to an
increase in order flow from other market
participants that would not otherwise
qualify for the proposed alternative
route to the Tier 2 Customer rebates.
Thus, the Exchange believes the
proposed changes will help to improve
market quality and the attractiveness of
the Exchange’s options market to all
existing and prospective members.
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64139
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.
Intramarket Competition
The proposed amendments to the
Exchange’s Customer Rebate Program
described above do not impose an
undue burden on intra-market
competition. By fortifying participation
in this program, the proposed changes
are designed to attract additional order
flow (particularly electronic Customer
volume and, in turn, Firm floor, QCC,
and electronic Firm, Broker-Dealer, JBO
and Professional volume) to the
Exchange. The Exchange believes that
its proposal would incentivize market
participants to direct additional volume
to the Exchange. As noted above, all
market participants stand to benefit
from increased order flow as such
increase promotes market depth,
facilitates tighter spreads, enhances
price discovery, and may attract
additional liquidity and volume to the
Exchange. For these reasons, the
Exchange does not believe that its
proposal will place any category of
Exchange market participant at a
competitive disadvantage.
Inter-Market Competition
The Exchange operates in a highly
competitive market in which market
participants can readily favor one of 16
competing options exchanges 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 and rebates to remain competitive
with other exchanges and to attract
order flow to the Exchange. Because
competitors are free to modify their own
fees and rebates in response, the
Exchange believes that the degree to
which pricing changes in this market
may impose any burden on competition
is extremely limited.
Moreover, as noted above, price
competition between exchanges is
fierce, with liquidity and market share
moving freely between exchanges in
reaction to fee and rebate changes. 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
E:\FR\FM\20NON1.SGM
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64140
Federal Register / Vol. 84, No. 224 / Wednesday, November 20, 2019 / Notices
competitive standing in the financial
markets.
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.24
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–2019–48 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–2019–48. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (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
24 15
U.S.C. 78s(b)(3)(A)(ii).
VerDate Sep<11>2014
17:21 Nov 19, 2019
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–Phlx–2019–48 and should
be submitted on or before December 11,
2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.25
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019–25103 Filed 11–19–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No.
33683; 812–14364]
Fidelity Beach Street Trust, et al.;
Notice of Application
November 14, 2019.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice of an application for
exemptive relief.
AGENCY:
Applicants
request an order under section 6(c) of
the Investment Company Act of 1940
(‘‘Act’’) for an exemption from sections
2(a)(32), 5(a)(1), 22(d), and 22(e) of the
Act and rule 22c–1 under the Act, under
sections 6(c) and 17(b) of the Act for an
exemption from sections 17(a)(1) and
17(a)(2) of the Act, and under section
12(d)(1)(J) of the Act for an exemption
from sections 12(d)(1)(A) and
12(d)(1)(B) of the Act. If granted, the
requested order would permit registered
open-end investment companies that are
exchange-traded funds (‘‘ETFs’’) and are
actively managed to operate without
SUMMARY OF APPLICATION:
25 17
Jkt 250001
PO 00000
CFR 200.30–3(a)(12).
Frm 00103
Fmt 4703
Sfmt 4703
being subject to a daily portfolio
transparency condition.
APPLICANTS: Fidelity Management &
Research Company and FMR Co., Inc.
(collectively, ‘‘FMR’’); Fidelity Beach
Street Trust (the ‘‘Trust’’); and Fidelity
Distributors Corporation.
FILING DATES: The application was filed
on September 26, 2014, and amended
on January 26, 2018, May 18, 2018,
August 8, 2018, April 30, 2019, June 7,
2019, July 16, 2019, October 15, 2019,
October 22, 2019 and November 8, 2019.
HEARING OR NOTIFICATION OF HEARING: An
order granting the requested relief will
be issued unless the Commission orders
a hearing. Interested persons may
request a hearing by writing to the
Commission’s Secretary and serving
Applicants with a copy of the request,
personally or by mail. Hearing requests
should be received by the Commission
by 5:30 p.m. on December 9, 2019, and
should be accompanied by proof of
service on Applicants, in the form of an
affidavit, or for lawyers, a certificate of
service. Pursuant to rule 0–5 under the
Act, hearing requests should state the
nature of the writer’s interest, any facts
bearing upon the desirability of a
hearing on the matter, the reason for the
request, and the issues contested.
Persons who wish to be notified of a
hearing may request notification by
writing to the Commission’s Secretary.
ADDRESSES: Secretary, Securities and
Exchange Commission, 100 F Street NE,
Washington, DC 20549–1090;
Applicants: Fidelity Beach Street Trust,
Fidelity Management & Research
Company, FMR Co., Inc., and Fidelity
Distributors Corporation, 245 Summer
Street, Boston, Massachusetts 02210.
FOR FURTHER INFORMATION CONTACT:
Bradley Gude, Senior Counsel; Andrea
Ottomanelli Magovern, Branch Chief, at
(202) 551–6821 (Division of Investment
Management, Chief Counsel’s Office).
SUPPLEMENTARY INFORMATION: The
following is a summary of the
application. The complete application
may be obtained via the Commission’s
website by searching for the file
number, or for an applicant using the
Company name box, at https://
www.sec.gov/search/search.htm or by
calling (202) 551–8090.
I. Introduction
1. Applicants seek to introduce a
novel type of actively-managed ETF that
would not be required to disclose its
portfolio holdings on a daily basis (each,
a ‘‘Fund’’). Due to their characteristics,
ETFs (including those proposed by
Applicants) are only permitted to
operate in reliance on Commission
exemptive relief from certain provisions
E:\FR\FM\20NON1.SGM
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]]>Agencies
[Federal Register Volume 84, Number 224 (Wednesday, November 20, 2019)]
[Notices]
[Pages 64136-64140]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-25103]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87537; File No. SR-Phlx-2019-48]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend the
Customer Rebate Program
November 14, 2019.
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 November 1, 2019, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III, below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend the Exchange's Customer Rebate
Program, as set forth in the Pricing Schedule at Options 7, Section 1,
Part B.
The text of the proposed rule change is available on the Exchange's
website 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 amend the Exchange's
Customer Rebate Program, as set forth in the Pricing Schedule at
Options 7, Section 1, Part B. As described in greater detail below, the
Exchange proposes to adopt an alternative method for members or member
organizations (hereinafter, ``members'') to qualify for the program's
Tier 2 rebates based on the member meeting a certain percentage
threshold of total national Customer \3\ volume in multiply-listed
options classes, reaching the Monthly Firm Fee Cap,\4\ and meeting the
[[Page 64137]]
Exchange's Market Access and Routing Subsidy (``MARS'') System
Eligibility \5\ requirements. With the proposed changes, the Exchange
seeks to attract additional liquidity and order flow to the Exchange,
which will benefit all market participants from increased opportunities
for price improvement.
---------------------------------------------------------------------------
\3\ The term ``Customer'' applies to any transaction that is
identified by a member for clearing in the Customer range at The
Options Clearing Corporation (``OCC'') which is not for the account
of a broker or dealer or for the account of a ``Professional'' (as
that term is defined in Rule 1000(b)(14)). See Options 7, Section 1.
\4\ Firms are subject to a maximum fee of $75,000 (``Monthly
Firm Fee Cap''). Firm Floor Option Transaction Charges and QCC
Transaction Fees, as set forth in Options 7, Section 4, in the
aggregate, for one billing month will not exceed the Monthly Firm
Fee Cap per member organization when such members are trading in
their own proprietary account. All dividend, merger, and short stock
interest strategy executions (as defined in this Options 7, Section
4) will be excluded from the Monthly Firm Fee Cap. NDX and NDXP
Options Transactions will be excluded from the Monthly Firm Fee Cap.
Reversal and conversion, jelly roll and box spread strategy
executions (as defined in this Options 7, Section 4) will be
included in the Monthly Firm Fee Cap. QCC Transaction Fees are
included in the calculation of the Monthly Firm Fee Cap. See Options
7, Section 4.
\5\ To qualify for MARS, a Phlx member's routing system
(hereinafter ``System'') would be required to: (1) Enable the
electronic routing of orders to all of the U.S. options exchanges,
including Phlx; (2) provide current consolidated market data from
the U.S. options exchanges; and (3) be capable of interfacing with
Phlx's API to access current Phlx match engine functionality.
Further, the member's System would also need to cause Phlx to be the
one of the top five default destination exchanges for individually
executed marketable orders if Phlx is at the national best bid or
offer (``NBBO''), regardless of size or time, but allow any user to
manually override Phlx as a default destination on an order-by-order
basis. Notwithstanding the above, with respect to Complex Orders a
Phlx member's routing system would not be required to enable the
electronic routing of orders to all of the U.S. options exchanges or
provide current consolidated market data from the U.S. options
exchanges. Any Phlx member would be permitted to avail itself of
this arrangement, provided that its order routing functionality
incorporates the features described above and satisfies Phlx that it
appears to be robust and reliable. The member remains solely
responsible for implementing and operating its system. See Options
7, Section 6, Part E.
---------------------------------------------------------------------------
Background
Options 7, Section 4 sets forth a Monthly Firm Fee Cap that limits,
or caps, at $75,000 per month the Firm \6\ Floor Option Transaction
Charges and Firm QCC Transaction Fees incurred by members trading in
their own proprietary account.\7\ The Monthly Firm Fee Cap is designed
to provide an incentive for members to bring additional Firm floor and
QCC order flow to the Exchange.
---------------------------------------------------------------------------
\6\ The term ``Firm'' applies to any transaction that is
identified by a member or member organization for clearing in the
Firm range at OCC. See Options 7, Section 1.
\7\ The Firm Floor Option Transaction Charges and QCC
Transaction Fees are set forth in Options 7, Section 4. QCC
Transaction Fees apply to both electronic and floor QCC orders.
---------------------------------------------------------------------------
Options 7, Section 6, Part E sets forth the Exchange's MARS
program, which provides rebates to qualifying members with System
Eligibility and that execute the requisite number of Eligible Contracts
\8\ in a month. MARS is designed to attract electronic equity and ETF
options volume to the Exchange, particularly electronic Firm, Broker-
Dealer,\9\ JBO \10\ and Professional \11\ order flow.
---------------------------------------------------------------------------
\8\ Eligible Contracts include the following: Firm, Broker-
Dealer, Joint Back Office or ``JBO'' or Professional equity option
orders that are electronically delivered and executed. Eligible
Contracts do not include floor-based orders, qualified contingent
cross or ``QCC'' orders, price improvement or ``PIXL'' orders, Mini
Option orders or Singly Listed Orders. Options overlying NDX and
NDXP are not considered Eligible Contracts. See Options 7, Section
6, Part E.
\9\ The term ``Broker-Dealer'' applies to any transaction which
is not subject to any of the other transaction fees applicable
within a particular category.
\10\ The term ``Joint Back Office'' or ``JBO'' applies to any
transaction that is identified by a member or member organization
for clearing in the Firm range at OCC and is identified with an
origin code as a JBO. A JBO will be priced the same as a Broker-
Dealer. A JBO participant is a member, member organization or non-
member organization that maintains a JBO arrangement with a clearing
broker-dealer (``JBO Broker'') subject to the requirements of
Regulation T Section 220.7 of the Federal Reserve System as further
discussed at Exchange Rule 703.
\11\ The term ``Professional'' applies to transactions for the
accounts of Professionals, as defined in Exchange Rule 1000(b)(14)
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).
---------------------------------------------------------------------------
As set forth in Options 7, Section 1, Part B, the Exchange
presently offers a Customer Rebate Program that is designed to attract
electronic Customer order flow to the Exchange. In particular, the
program consists of the following five tiers that pay Customer rebates
on four Categories, A,\12\ B,\13\ C,\14\ D,\15\ of transactions: \16\
---------------------------------------------------------------------------
\12\ The Category A Rebate is paid to members executing
electronically-delivered Customer Simple Orders in Penny Pilot
Options and Customer Simple Orders in Non-Penny Pilot Options in
Options 7, Section 4 symbols.
\13\ The Category B Rebate is paid on Customer PIXL Orders in
Options 7, Section 4 symbols that execute against non-Initiating
Order interest. In the instance where member qualify for Tier 4 or
higher in the Customer Rebate Program, Customer PIXL Orders that
execute against a PIXL Initiating Order are paid a rebate of $0.14
per contract. Rebates on Customer PIXL Orders are capped at 4,000
contracts per order for Simple PIXL Orders.
\14\ The Category C Rebate is paid to members executing
electronically-delivered Customer Complex Orders in Penny Pilot
Options in Options 7, Section 4 symbols. Rebates are paid on
Customer PIXL Complex Orders in Options 7, Section 4 symbols that
execute against non-Initiating Order interest. Customer Complex PIXL
Orders that execute against a Complex PIXL Initiating Order are not
paid a rebate under any circumstances. The Category C Rebate is not
paid when an electronically-delivered Customer Complex Order,
including Customer Complex PIXL Order, executes against another
electronically-delivered Customer Complex Order.
\15\ The Category D Rebate is paid to members executing
electronically-delivered Customer Complex Orders in Non-Penny Pilot
Options in Options 7, Section 4 symbols. Rebates are paid on
Customer PIXL Complex Orders in Options 7, Section 4 symbols that
execute against non-Initiating Order interest. Customer Complex PIXL
Orders that execute against a Complex PIXL Initiating Order are not
paid a rebate under any circumstances. The Category D Rebate is not
paid when an electronically-delivered Customer Complex Order,
including Customer Complex PIXL Order, executes against another
electronically-delivered Customer Complex Order.
\16\ Rebates are not paid on NDX or NDXP contracts in any
Category; however, NDX and NDXP contracts count toward the volume
requirement to qualify for a Customer Rebate Tier.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Percentage Thresholds of National
Customer Volume in Multiply-Listed
Customer Rebate Tiers Equity and ETF Options Classes, Category A Category B Category C Category D
excluding SPY Options (monthly)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Tier 1......................................... 0.00%-0.60%............................ $0.00 $0.00 $0.00 $0.00
Tier 2......................................... Above 0.60%-1.10%...................... 0.10 0.10 0.16 0.21
Tier 3......................................... Above 1.10%-1.60%...................... 0.15 0.12 0.18 0.22
Tier 4......................................... Above 1.60%-2.50%...................... 0.20 0.16 0.22 0.26
Tier 5......................................... Above 2.50%............................ 0.21 0.17 0.22 0.27
--------------------------------------------------------------------------------------------------------------------------------------------------------
A Phlx member qualifies for a particular Customer Rebate Tier based
on the percentage of total national Customer volume in multiply-listed
options that it transacts monthly on the Exchange. Specifically, the
Exchange totals Customer volume in multiply listed options (including
SPY) that is electronically-delivered and executed, except volume
associated with electronic QCC Orders, as defined in Exchange Rule
1080(o), and calculates this as a percentage of total national customer
volume in multiply-listed equity and ETF options classes, excluding
SPY. Members under
[[Page 64138]]
Common Ownership \17\ may aggregate their Customer volume for purposes
of calculating the Customer Rebate Tiers and receiving rebates.
Affiliated Entities \18\ may aggregate their Customer volume for
purposes of calculating the Customer Rebate Tiers and receiving
rebates.
---------------------------------------------------------------------------
\17\ The term ``Common Ownership'' shall mean members or member
organizations under 75% common ownership or control. See Options 7,
Section 1.
\18\ The term ``Affiliated Entity'' is a relationship between an
Appointed MM and an Appointed OFP for purposes of qualifying for
certain pricing specified in the Pricing Schedule. Members under
Common Ownership may not qualify as a counterparty comprising an
Affiliated Entity. Each member may qualify for only one (1)
Affiliated Entity relationship at any given time. See Options 7,
Section 1.
---------------------------------------------------------------------------
Proposal
The Exchange now proposes to adopt an alternative method for
members to qualify for the applicable Tier 2 rebates described above.
As discussed above, the proposed alternative will be based on the
member meeting a certain percentage threshold of total national
Customer volume in multiply-listed options classes, reaching the
Monthly Firm Fee Cap, and meeting the MARS System Eligibility
requirements. Specifically, the Exchange proposes to add the following
language at the end of Options 7, Section 1, Part B: ``The Exchange
will pay the applicable Tier 2 rebates to qualifying members or member
organizations, qualifying affiliates under Common Ownership, or
qualifying Affiliated Entities, provided they: (1) Execute a Percentage
Threshold of National Customer Volume in Multiply-Listed Equity and ETF
Options Classes, excluding SPY Options (monthly), of above 0.25%; (2)
reach the Monthly Firm Fee Cap as defined in Options 7, Section 4; and
(3) meet the MARS System Eligibility requirements as provided in
Options 7, Section 6, Part E.''
Applicability to and Impact on Participants
The proposed change is designed to incentivize members who reach
the Monthly Firm Fee Cap and have MARS System Eligibility to increase
their electronic Customer volume to qualify for the applicable Tier 2
rebates. The proposal may correspondingly encourage members to qualify
for the Monthly Firm Fee Cap and the MARS System Eligibility
requirements (which should increase Firm floor volume and Firm QCC
volume as well as electronic Firm, Broker-Dealer, JBO and Professional
volume). The Exchange notes that all market participants stand to
benefit from increased volume, which facilitates tighter spreads and
enhances price discovery, and may lead to a corresponding increase in
order flow from other market participants.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\19\ in general, and furthers the objectives of
Sections 6(b)(4) and 6(b)(5) of the Act,\20\ in particular, in that it
provides for the equitable allocation of reasonable dues, fees and
other charges among members and issuers and other persons using any
facility, and is not designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------
\19\ 15 U.S.C. 78f(b).
\20\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------
The Proposal is Reasonable
The Exchange believes that the proposed alternative method to
qualify for the applicable Tier 2 rebates in the Customer Rebate
Program is reasonable for several reasons. As a threshold matter, the
Exchange is subject to significant competitive forces in the market for
options transaction services that constrain its pricing determinations
in that market. The fact that this market is competitive has long been
recognized by the courts. In NetCoalition v. Securities and Exchange
Commission, the D.C. Circuit stated as follows: ``[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'. . . .'' \21\
---------------------------------------------------------------------------
\21\ NetCoalition v. SEC, 615 F.3d 525, 539 (D.C. Cir. 2010)
(quoting Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-
21)).
---------------------------------------------------------------------------
Numerous indicia demonstrate the competitive nature of this market.
For example, clear substitutes to the Exchange exist in the market for
options transaction services. The Exchange is only one of sixteen
options exchanges to which market participants may direct their order
flow. Competing options exchanges offer similar tiered pricing
structures to that of the Exchange, including tiered rebates that apply
based upon members achieving certain volume thresholds.\22\ Within this
environment, market participants can freely and often do shift their
order flow among the Exchange and competing venues in response to
changes in their respective pricing schedules.
---------------------------------------------------------------------------
\22\ See, e.g., NYSE American Options Fee Schedule, Section I.E
(setting forth the American Customer Engagement (``ACE'') Program
that provides tiered customer credits on customer electronic volume,
provided the member achieves certain total industry customer equity
and ETF option average daily volume percentage thresholds), Section
I.H (setting forth the Professional Step-Up Incentive that provides
discounted rates or credits, as applicable, to professional
customer, broker-dealer, non-NYSE American Options market maker, and
firm ranges, and also ties some of these benefits to the ACE
Program), and Section I.I (setting forth the Firm Monthly Fee Cap
that caps at $100,000 per month the fees associated with Firm Manual
transactions, and also lowers the firm fee cap for members that
achieve the applicable ACE Program tiers).
---------------------------------------------------------------------------
Within the foregoing context, the proposal represents a reasonable
attempt by the Exchange to increase its liquidity and market share
relative to its competitors. The Exchange's proposal is designed to
attract additional liquidity and order flow to the Exchange, similar to
other exchange programs with competitive pricing programs,\23\ thereby
promoting market depth, price discovery and improvement, and enhancing
order execution opportunities for market participants. As discussed
above, the proposed changes provide an additional opportunity for
members to earn the applicable Tier 2 Customer rebates if they execute
a percentage threshold of national Customer volume in multiply-listed
equity and ETF options classes, excluding SPY options, of above 0.25%
on the Exchange, reach the Monthly Firm Fee Cap, and have MARS System
Eligibility. Today, the Exchange provides the same Tier 2 rebates to
members that execute a percentage threshold of national Customer volume
in multiply-listed equity and ETF options classes, excluding SPY
options, of above 0.60% to 1.10% on the Exchange. This proposal would
offer members an alternative route to earn the same Tier 2 rebates,
provided they meet the lower percentage threshold of above 0.25% and
also qualify for both the Monthly Firm Fee Cap and the MARS System
Eligibility requirements. The Exchange believes that the proposed
percentage threshold is set at an appropriate level that would
encourage members to bring more Customer order flow to the Exchange to
qualify for the applicable Tier 2 rebates. While the Exchange cannot
predict with certainty whether any members would avail themselves of
the proposed incentive
[[Page 64139]]
given that this incentive is new, assuming historical behavior can be
predictive of future behavior, the Exchange believes that at present
participation rates, almost 30% of active firms on the Exchange have
comparable trading volume in the Customer category. The Exchange also
believes that the proposed lower percentage threshold (i.e., above
0.25% versus the current Tier 2 threshold of above 0.60% to 1.10%) is
reasonable because members must meet additional qualifications (i.e.,
reach the Monthly Firm Fee Cap and have MARS System Eligibility) under
the proposed alternative method to receive the Tier 2 rebates on
Customer transactions.
---------------------------------------------------------------------------
\23\ Id.
---------------------------------------------------------------------------
Furthermore, the Exchange believes that its proposal will encourage
members to increase the amount of Customer order flow directed to the
Exchange. In addition, because members will also be required to reach
the Monthly Firm Fee Cap and have MARS System Eligibility to receive
the applicable Tier 2 Customer rebates, the proposed program may
encourage members to direct Firm floor and QCC order flow as well as
electronic Firm, Broker-Dealer, JBO and Professional order flow, in
addition to electronic Customer order flow. The Exchange notes that all
market participants stand to benefit from increased order flow--whether
Customer, Firm, Broker-Dealer, JBO or Professional, and whether floor
or electronic--as such increase promotes market depth, facilitates
tighter spreads, enhances price discovery, and may lead to an increase
in order flow from other market participants that would not otherwise
qualify for the proposed alternative route to the Tier 2 Customer
rebates.
The Proposal Is an Equitable Allocation of Rebates
The Exchange believes that its proposal is an equitable allocation
of the applicable Tier 2 rebates. The proposal is based on the amount
and type of business transacted on the Exchange, and members can opt to
avail themselves of these rebates or not. Furthermore, this proposal is
designed to encourage members to bring and execute their order flow
(particularly electronic Customer volume and, in turn, Firm floor, QCC,
and electronic Firm, Broker-Dealer, JBO and Professional volume) to the
Exchange. To the extent at the proposed changes attract such additional
volume to the Exchange, this increased order flow would continue to
make the Exchange a more competitive venue for, among other things,
order execution. Thus, the Exchange believes the proposed changes would
improve market quality for all market participants on the Exchange, and
increase its attractiveness to existing and prospective members.
The Proposal Is Not Unfairly Discriminatory
The Exchange believes that its proposal is not unfairly
discriminatory. As an initial matter, the Exchange believes that
nothing about its volume-based tiered pricing model is inherently
unfair; instead, it is a rational pricing model that is well-
established and ubiquitous in today's economy among firms in various
industries--from co-branded credit cards to grocery stores to cellular
telephone data plans--that use it to reward the loyalty of their best
customers that provide high levels of business activity and incent
other customers to increase the extent of their business activity. It
is also a pricing model that the Exchange and its competitors have long
employed with the assent of the Commission. It is fair because it
incentivizes customer activity that increases liquidity, enhances price
discovery, and improves the overall quality of the options market.
As discussed above, the proposal is based on the amount and type of
business transacted on the Exchange, and members are not obligated to
try to achieve the proposed alternative route to the Tier 2 Customer
rebates. Rather, the proposal is designed to encourage these members to
bring additional order flow (particularly electronic Customer volume
and, in turn, Firm floor, QCC, and electronic Firm, Broker-Dealer, JBO
and Professional volume) to the Phlx market, improving market quality
and price discovery. The Exchange believes that the proposed
qualification for the Tier 2 Customer rebates is not unfairly
discriminatory because to the extent the proposed changes attract more
volume to the Exchange, this increased order flow would continue to
make the Exchange a more competitive venue for order execution, among
other things. As noted above, all market participants stand to benefit
from increased order flow--whether Customer, Firm, Broker-Dealer, JBO
or Professional, and whether floor or electronic--as such increase
promotes market depth, facilitates tighter spreads, enhances price
discovery, and may lead to an increase in order flow from other market
participants that would not otherwise qualify for the proposed
alternative route to the Tier 2 Customer rebates. Thus, the Exchange
believes the proposed changes will help to improve market quality and
the attractiveness of the Exchange's options market to all existing and
prospective members.
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.
Intramarket Competition
The proposed amendments to the Exchange's Customer Rebate Program
described above do not impose an undue burden on intra-market
competition. By fortifying participation in this program, the proposed
changes are designed to attract additional order flow (particularly
electronic Customer volume and, in turn, Firm floor, QCC, and
electronic Firm, Broker-Dealer, JBO and Professional volume) to the
Exchange. The Exchange believes that its proposal would incentivize
market participants to direct additional volume to the Exchange. As
noted above, all market participants stand to benefit from increased
order flow as such increase promotes market depth, facilitates tighter
spreads, enhances price discovery, and may attract additional liquidity
and volume to the Exchange. For these reasons, the Exchange does not
believe that its proposal will place any category of Exchange market
participant at a competitive disadvantage.
Inter-Market Competition
The Exchange operates in a highly competitive market in which
market participants can readily favor one of 16 competing options
exchanges 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 and rebates to remain competitive with other exchanges and to
attract order flow to the Exchange. Because competitors are free to
modify their own fees and rebates in response, the Exchange believes
that the degree to which pricing changes in this market may impose any
burden on competition is extremely limited.
Moreover, as noted above, price competition between exchanges is
fierce, with liquidity and market share moving freely between exchanges
in reaction to fee and rebate changes. 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
[[Page 64140]]
competitive standing in the financial markets.
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.\24\
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\24\ 15 U.S.C. 78s(b)(3)(A)(ii).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is: (i)
Necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission shall institute proceedings to determine whether the
proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-Phlx-2019-48 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-2019-48. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (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 website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-Phlx-2019-48 and should be submitted on
or before December 11, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-25103 Filed 11-19-19; 8:45 am]
BILLING CODE 8011-01-P
