Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), and Rule 19b-4 thereunder, notice is hereby given that on February 29, 2016, NASDAQ PHLX LLC (“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.
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 Pricing Schedule at Section I, entitled “Rebates and Fees for Adding and Removing Liquidity in SPY.”
While changes to the Pricing Schedule pursuant to this proposal are effective upon filing, the Exchange has designated these changes to be operative on March 1, 2016.
The text of the proposed rule change is available on the Exchange's Web site at http://nasdaqomxphlx.cchwallstreet.com/,, at the principal office of the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to amend the Exchange's Pricing Schedule at Section I, entitled “Rebates and Fees for Adding and Removing Liquidity in SPY,” to (i) amend the Specialist and Market Maker Rebate for Adding Liquidity in Simple Orders; and (ii) reduce all Fees for Removing Liquidity in Simple Orders. The amendments will be described in greater detail below.
The term “Specialist” applies to transactions for the account of a Specialist (as defined in Exchange Rule 1020(a)).
The term “Market Maker” describes fees and rebates applicable to Registered Options Traders (“ROT”), Streaming Quote Traders (“SQT”) and Remote Streaming Quote Traders (“RSQT”). A ROT is defined in Exchange Rule 1014(b) as a regular member of the Exchange located on the trading floor who has received permission from the Exchange to trade in options for his own account. 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).
Fees and rebates applicable to options overlying Standard and Poor's Depositary Receipts/SPDRs (“SPY”) are located in Section I of the Exchange's Pricing Schedule. The Exchange specifies which fees and rebates apply to Simple Orders and Complex Orders. This proposal specifically applies to Simple Order pricing in SPY in Part A. The Exchange is not amending the Complex Order pricing in SPY in Part B.
Options overlying Standard and Poor's Depositary Receipts/SPDRs (“SPY”) are based on the SPDR exchange-traded fund (“ETF”), which is designed to track the performance of the S&P 500 Index.
A Complex Order is an order involving the simultaneous purchase and/or sale of two or more different options series in the same underlying security, priced as a net debit or credit based on the relative prices of the individual components, for the same account, for the purpose of executing a particular investment strategy.
Simple Order—Rebate for Adding Liquidity
Today, the Exchange pays a SPY Simple Order Rebate for Adding Liquidity of $0.20 per contract to Specialists and Market Makers. All other market participants do not receive a SPY Simple Order Rebate for Adding Liquidity. The Exchange proposes to replace the $0.20 per contract SPY Simple Order Rebate for Adding Liquidity with tiered rebates.
The Exchange proposes to pay a $0.15 per contract Specialist and Market Maker SPY Simple Order Rebate for Adding Liquidity to participants that add 1 to 2,499 electronically executed Simple Order contracts per day in a month in SPY. The Exchange proposes to pay a $0.20 per contract Specialist and Market Maker SPY Simple Order Rebate for Adding Liquidity to participants that add 2,500 to 4,999 electronically executed Simple Order contracts per day in a month in SPY. The Exchange proposes to pay a $0.25 per contract Specialist and Market Maker SPY Simple Order Rebate for Adding Liquidity to participants that add 5,000 to 19,999 electronically executed Simple Order contracts per day in a month in SPY. Finally, the Exchange proposes to pay a $0.30 per contract Specialist and Market Maker SPY Simple Order Rebate for Adding Liquidity to participants that add greater than 20,000 electronically executed Simple Order contracts per day in a month in SPY. The Exchange believes that the proposed four tier rebate structure would incentive market participants to add more Specialist and Market Maker liquidity in SPY on the Exchange.
Today, if a SPY transaction originates from the Exchange floor, that transaction is subject to the Multiply Listed Options Fees. However, if one side of the transaction originates on the Exchange floor and any other side of the trade was the result of an electronically submitted order or a quote, then the Section I fees apply to the transactions which originated on the Exchange floor and contracts that are executed electronically on all sides of the transaction. The Exchange will continue to treat the one side of the transaction which originates on the Exchange floor in the same manner and will count the one side of the transaction which originates on the Exchange floor toward the number of contracts to qualify for the Simple Order Rebate for Adding Liquidity for Specialists and Market Makers in SPY.
See Multiply Listed Options Fees in Section II of the Exchange's Pricing Schedule.
See Part C of Section I of the Exchange's Pricing Schedule.
Simple Order—Fee for Removing Liquidity
Today, the Exchange assesses a $0.44 per contract Customer Simple Order Fee for Removing Liquidity in SPY and a $0.49 per contract Simple Order Fee for Removing Liquidity in SPY to Specialists, Market Makers, Firms, Broker-Dealers and Professionals. The Exchange proposes to decrease the Simple Order Fees for Removing Liquidity and assess a $0.43 per contract Customer Simple Order Fee for Removing Liquidity in SPY and a $0.47 per contract Simple Order Fee for Removing Liquidity in SPY to Specialists, Market Makers, Firms, Broker-Dealers and Professionals. The Exchange believes that the reduction of the Simple Order Fees for Removing Liquidity in SPY will encourage participants to send additional order flow to the Exchange.
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)).
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.
The term “Broker-Dealer” applies to any transaction which is not subject to any of the other transaction fees applicable within a particular category.
The term “Professional” applies to transactions for the accounts of Professionals, as defined in Exchange Rule 1000(b)(14).
Cross-Reference and Marketing Fee
The Exchange proposes to correct a typographical error related to a cross reference in the beginning of this section by removing the reference to Section “C” and properly adding the Section “I” reference.
The Exchange proposes to replace the words “Payment for Order Flow Fee” with the words “Marketing Fee” to conform this term throughout the Pricing Schedule. The Exchange recently amended this term throughout the Pricing Schedule in a prior rule change and inadvertently did not mark this term to be amended as well.
See SR-Phlx-2016-30 (not yet published).
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section 6(b) of the Act in general, and furthers the objectives of Sections 6(b)(4) and 6(b)(5) of the Act 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 or system which the Exchange operates or controls, and is not designed to permit unfair discrimination between customers, issuers, brokers, or dealers.
15 U.S.C. 78f(b)(4) and (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.” Likewise, in NetCoalition v. Securities and Exchange Commission (“NetCoalition”) the DC 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. 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.”
Securities Exchange Act Release No. 51808 at 37499 (June 9, 2005) (“Regulation NMS Adopting Release”).
NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010).
See NetCoalition, at 534.
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'. . . . ” Although the court and the SEC were discussing the cash equities markets, the Exchange believes that these views apply with equal force to the options markets.
Id. at 539 (quoting ArcaBook Order, 73 FR at 74782-74783).
The Exchange continues to offer pricing specific to SPY because these options are currently the most actively traded options class. Pricing by symbol is a common practice on many U.S. options exchanges as a means to incentive order flow to be sent to an exchange for execution.
See International Securities Exchange LLC's (“ISE”) Schedule of Fees.
Simple Order—Rebate for Adding Liquidity
The Exchange's proposal to replace the $0.20 per contract SPY Simple Order Rebate for Adding Liquidity with tiered rebates is reasonable because the Exchange desires to incentivize market participants to transact a greater number of SPY options. All participants [sic] will continue to receive a SPY Simple Order Rebate for Adding Liquidity for Specialists and Market Makers provided they execute one electronic Simple Order SPY contract. In some cases, the rebate will be lower, if 2,499 or less electronic Simple Order SPY contracts are added, the SPY Simple Order Rebate for Adding Liquidity for Specialists and Market Makers will be $0.15 as compared to $0.20 per contract (today's rebate). Despite this decrease, the Exchange believes that participants will continue to be incentivized to add SPY order flow to the Exchange to receive the rebate. With this proposal, the Exchange is also offering the opportunity to earn higher rebates provided the participant adds at least 5,000 electronic Simple Order SPY contracts. In some cases the rebate will remain the same. The Exchange believes that the rebate will continue to encourage participants to direct SPY order flow to the Exchange.
The Exchange will pay a $0.25 per contract rebate if participant adds 5,000 to 19,999 contracts per day in a month and a $0.30 per contract rebate if participant adds greater than 20,000 contracts per day in a month in SPY.
The Exchange will continue to pay a $0.20 per contract rebate if participant adds 2,500 to 4,999 contracts per day in a month in SPY.
The Exchange's proposal to replace the $0.20 per contract SPY Simple Order Rebate for Adding Liquidity for Specialists and Market Makers with tiered rebates is equitable and not unfairly discriminatory because Specialists and Market Makers have obligations to the market and regulatory requirements, which normally do not apply to other market participants. 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 differentiation as between Specialists and Market Makers and all other market participants recognizes the differing contributions made to the liquidity and trading environment on the Exchange by these market participants. 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.
See Rule 1014 titled “Obligations and Restrictions Applicable to Specialists and Registered Options Traders.”
The Exchange believes that continuing to pay the Simple Order Rebate for Adding Liquidity [sic] to all [sic] transactions executed within the Exchange's order book, including transactions where one side of the transaction originates on the Exchange floor and any other side of the trade was the result of an electronically submitted order or a quote, is reasonable because the Exchange's treatment of these orders is consistent with its treatment of all other orders executed in the order book as compared to a floor order executed on the Exchange's trading floor. Further, the Exchange believes it is reasonable to count the one side of the transaction which originates on the Exchange floor toward the number of contracts to qualify for the Simple Order Rebate for Adding Liquidity for Specialists and Market Makers in SPY because this treatment of the floor order which executes in the order book is consistent with the treatment of all other electronically executed orders which qualify for the Section I pricing.
The Exchange believes that continuing to pay the Simple Order Rebate for Adding Liquidity to all transactions executed within the Exchange's order book, including transactions where one side of the transaction originates on the Exchange floor and any other side of the trade was the result of an electronically submitted order or a quote, is equitable and not unfairly discriminatory because the Exchange is treating these orders similar to all other orders executed in the order book as compared to a floor order executed on the Exchange's trading floor. Further, the Exchange believes it is equitable and not unfairly discriminatory to count the one side of the transaction which originates on the Exchange floor toward the number of contracts to qualify for the Simple Order Rebate for Adding Liquidity for Specialists and Market Makers because today all electronically executed orders qualify for the Section I pricing. The transaction where one side of the transaction originates on the Exchange floor and any other side of the trade was the result of an electronically submitted order or a quote will be treated in the same manner as all other orders executed in the order book.
Simple Order—Fee for Removing Liquidity
The Exchange's proposal to decrease the Customer Simple Order Fee in SPY for Removing Liquidity from $0.44 to $0.43 per contract and all other Simple Order Fees for Removing Liquidity in SPY for Specialists, Market Makers, Firms, Broker-Dealers and Professionals from $0.49 to $0.47 per contract is reasonable because the reduction of these fees will encourage participants to send additional order flow to the Exchange.
The Exchange's proposal to decrease the Customer Simple Order Fee for Removing Liquidity in SPY from $0.44 to $0.43 per contract and all other Simple Order Fees for Removing Liquidity in SPY for Specialists, Market Makers, Firms, Broker-Dealers and Professionals from $0.49 to $0.47 per contract is equitable and not unfairly discriminatory because all participants will be assessed the same lower Simple Order Fee for Removing Liquidity in SPY of $0.47 per contract, except for Customers. The Exchange believes that assessing Customers a lower fee is equitable and not unfairly discriminatory because Customer orders bring valuable liquidity to the market, which liquidity benefits other 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.
Cross-Reference and Marketing Fee
The Exchange's proposal to correct a typographical error related to a cross reference is reasonable, equitable and not unfairly discriminatory because it will clarify the Pricing Schedule. This amendment is non-substantive.
The Exchange's proposal to replace the words “Payment for Order Flow Fee” with the words “Marketing Fee” is reasonable, equitable and not unfairly discriminatory because the proposal will conform the rule text to other parts of the Rulebook. The usage of the term Marketing Fee would be consistent throughout the Rulebook.
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. 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 changes in this market may impose any burden on competition is extremely limited.
In terms of intra-market competition, the Exchange believes that its proposed rebates and fees continue to remain competitive in SPY, which is the most actively traded options class. 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.
The Exchange continues to incentive market participants to transact SPY by offering rebates in this Penny Pilot Option similar to ISE which pays rebates on Penny Pilot Options. See ISE's Fee Schedule. ISE Gemini, LLC (“ISE Gemini”) assesses a SPY tiered taker fee ranging from $0.44 to $0.45 for a priority customer and a tiered taker fee ranging from $0.48 to $0.49 per contract for all other market participants. See ISE Gemini's Fee Schedule. Also, the Exchange's Simple Order Fee for Removing Liquidity in SPY is lower as compared to pricing at C2 Options Exchange, Incorporated (“C2”). C2's penny pilot options pricing is $0.47 per contract for Priority [sic] Customers and $0.48 per contract for all other participants when removing liquidity. See C2's Fees Schedule.
Simple Order—Rebate for Adding Liquidity
The Exchange's proposal to replace the $0.20 per contract SPY Simple Order Rebate for Adding Liquidity with tiered rebates does not impose an undue burden on intra-market competition because Specialists and Market Makers have obligations to the market and regulatory requirements, which normally do not apply to other market participants. The differentiation as between 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. 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.
See note 24. Specialists and Market Makers 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 continuing to pay the SPY Simple Order Rebate for Adding Liquidity to all transactions executed within the Exchange's order book, including transactions where one side of the transaction originates on the Exchange floor and any other side of the trade was the result of an electronically submitted order or a quote, does not impose an undue burden on intra-market competition because the Exchange is treating these orders similar to all other orders executed in the order book as compared to a floor order executed on the Exchange's trading floor. Further, the Exchange believes counting the one side of the transaction which originates on the Exchange floor toward the number of contracts to qualify for the SPY Simple Order Rebate for Adding Liquidity for Specialists and Market Makers does not impose an undue burden on intra-market competition because today all electronically executed orders qualify for the Section I pricing. The transaction where one side of the transaction originates on the Exchange floor and any other side of the trade was the result of an electronically submitted order or a quote will be treated in the same manner as all other orders executed in the order book.
Simple Order—Fee for Removing Liquidity
The Exchange's proposal to decrease the Customer Simple Order for Removing Liquidity in SPY from $0.44 to $0.43 per contract and all other Simple Order Fees for Removing Liquidity in SPY for Specialists, Market Makers, Firms, Broker-Dealers and Professionals from $0.49 to $0.47 per contract does not impose an undue burden on intra-market competition because all participants will be assessed the same lower Simple Order Fee for Removing Liquidity in SPY of $0.47 per contract, except for Customers. Customer orders bring valuable liquidity to the market, which liquidity benefits other 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.
Cross-Reference and Marketing Fee
The Exchange's proposal to correct a typographical error related to a cross reference does not impose an undue burden on intra-market competition because the amendment is non-substantive.
The Exchange's proposal to replace the words “Payment for Order Flow Fee” with the words “Marketing Fee” does not impose an undue burden on intra-market competition because the proposal will conform the rule text to other parts of the Rulebook.
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.
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 ( http://www.sec.gov/rules/sro.shtml);; or
- Send an email to rule-comments@sec.gov. Please include File Number SR-Phlx-2016-33 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-2016-33. 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 ( http://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-2016-33 and should be submitted on or before April 7, 2016.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Lynn M. Powalski,
Deputy Secretary.
[FR Doc. 2016-05975 Filed 3-16-16; 8:45 am]
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