80 FR 12662 - Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend One Aspect of the Administration of Income Generated by Payment for Order Flow Fees

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 80, Issue 46 (March 10, 2015)

Page Range		12662-12664
FR Document		2015-05481
Federal Register, Volume 80 Issue 46 (Tuesday, March 10, 2015)
[Federal Register Volume 80, Number 46 (Tuesday, March 10, 2015)]
[Notices]
[Pages 12662-12664]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-05481]



[[Page 12662]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74434; File No. SR-PHLX-2015-20]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend One 
Aspect of the Administration of Income Generated by Payment for Order 
Flow Fees

March 4, 2015.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 20, 2015, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend one aspect of the administration of 
income generated by Payment for Order Flow fees which are assessed 
under Section II of the Pricing Schedule which pertains to Multiply 
Listed Options fees.

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 this filing is to streamline the Exchange's 
administration of its payment for order flow (``PFOF'') program, by 
allowing the Exchange to consolidate on its books two separate pools of 
PFOF funds per Specialist \3\ into one consolidated pool of PFOF funds 
per Specialist, as explained below. The Exchange is proposing no change 
in the level or manner of imposition of PFOF fees. Rather, it is simply 
proposing to change the manner in which income from PFOF fees is 
reflected on the Exchange's books for each Specialist.
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    \3\ A Specialist is an Exchange member who is registered as an 
options Specialist pursuant to Rule 1020(a).
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    The Exchange's PFOF program helps its Specialists and Directed 
Registered Options Traders (``Directed ROTs'') \4\ establish PFOF 
arrangements with an order flow provider in exchange for that order 
flow provider directing some or all of its order flow to that 
Specialist or Directed ROT. This program is funded through fees paid by 
Registered Options Traders (``ROTs''), Specialists and Directed ROTs 
and assessed on transactions resulting from customer orders (the ``PFOF 
Fees'').\5\
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    \4\ A Registered Option Trader is defined in Exchange Rule 
1014(b) as a regular member of the Exchange located on the trading 
floor who has received permission from the Exchange to trade in 
options for his own account. See Exchange Rule 1014 (b)(i) and (ii). 
A ``Directed ROT'' is an ROT who is a Directed Participant. The term 
``Directed Participant'' applies to transactions for the account of 
a Specialist or ROT resulting from a customer order that is (1) 
directed to it by an order flow provider, and (2) executed by it 
electronically on Phlx XL II.
    \5\ See Securities Exchange Act Release No. 59841 (April 29, 
2009), 74 FR 21035 (May 6, 2009) (SR-Phlx-2009-38).
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    These PFOF Fees are available to be disbursed by the Exchange 
according to the instructions of the Specialists or Directed ROTs to 
order flow providers who are members or member organizations, who 
submit, as agent, customer orders to the Exchange or non-members or 
non-member organizations who submit, as agent, customer orders to the 
Exchange through a member or member organization who is acting as agent 
for those customer orders. Any excess PFOF funds billed but not 
utilized by the Specialist or Directed ROT are carried forward unless 
the Directed ROT or Specialist elects to have those funds rebated to 
the applicable ROT, Directed ROT or Specialist on a pro rata basis, 
reflected as a credit on the monthly invoices. At the end of each 
calendar quarter, the Exchange calculates the amount of excess funds 
from the previous quarter and subsequently rebates excess funds on a 
pro-rata basis to the applicable ROT, Directed ROT or Specialist who 
paid into that pool of funds.
    The Exchange provides administrative support for the PFOF program 
by maintaining the funds generated by PFOF fees, keeping track of the 
number of qualified orders each Specialist and Directed ROT has 
directed to the Exchange, and making payments to order flow providers 
on behalf of, and at the direction of, the Specialist or Directed ROT. 
The Exchange collects and holds the funds generated by the PFOF fees to 
be disbursed according to the instructions of the Specialists or 
Directed ROTs to order flow providers as stated above. The PFOF fees 
are collected by the Exchange for use by these Specialists and Directed 
ROTs to attract Customer orders to the Exchange from order flow 
providers that accept payment as a factor in making their order routing 
decisions.
    The Exchange currently maintains on its books individual pools of 
PFOF funds for each Directed ROT and Specialist participating in the 
PFOF program. Further, the Exchange maintains two separate pools of 
funds for each Specialist who elects to participate in the PFOF 
program.\6\ PFOF fees resulting from undirected orders in a 
Specialist's option are reflected on the Exchange's books as the 
Specialist's ``Specialist'' pool. PFOF fees resulting from orders 
directed to the Specialist as a Directed Specialist are maintained on 
the Exchange's books for the Specialist as a separate ``Directed ROT'' 
pool.\7\ The Exchange is now proposing to consolidate each Specialist's

[[Page 12663]]

``Specialist'' pool and ``Directed ROT'' pool into one single pool of 
PFOF funds per Specialist on the Exchange's books. The Exchange 
believes that maintaining two separate PFOF pools for a single 
Specialist imposes an unnecessary administrative burden on the Exchange 
and the Specialist. Instead, the Exchange will establish and administer 
on its books only one pool per Specialist which will reflect funds 
resulting from all PFOF fees allocable to that Specialist, whether 
resulting from Directed Orders or non-Directed Orders.
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    \6\ By contrast, the Exchange maintains only a single pool of 
PFOF funds allocated for use by each Directed ROT. The pool consists 
of PFOF fees attributable to Directed Orders that were directed to 
that ROT. The Exchange established the separate pools of funds for 
each Directed ROT and each Specialist that participates in the 
Exchange's PFOF program in 2005. See Securities Exchange Act Release 
No. 52568 (October 6, 2005) 70 FR 60120 (October 14, 2005) (SR-Phlx-
2005-58). In that filing, the Exchange stated that separate pools of 
funds would be available to each Specialist unit and Directed ROT 
solely for those trades where the PFOF fee was assessed and would be 
aggregated for use by each Specialist unit and each Directed ROT to 
attract customer orders to the Exchange from Order Flow Providers 
that accept payment as a factor in making their order routing 
decisions. For Directed Orders, PFOF fees would be assessed on a per 
contract basis (when the Specialist or Directed ROT opts into the 
program) and would be aggregated into separate pools of funds for 
use by each Specialist unit or Directed ROT. For non-directed 
electronically-delivered orders, PFOF fees would continue to be 
assessed on a per contract basis and would be allocated for use by 
the participating Specialist.
    \7\ For purposes of assessing PFOF fees, the Exchange does not 
differentiate between Specialists and Specialists who receive 
Directed Orders. The Specialist's pool generated by PFOF fees 
associated with orders directed to the Specialist has long been 
known as the ``Directed ROT'' pool, which is a slight misnomer as a 
Specialist receiving Directed Orders is known as a Directed 
Specialist rather than a Directed ROT. Nevertheless, the Directed 
ROT pool is the pool reflecting PFOF resulting from Directed Orders; 
the other pool reflects PFOF resulting from non-Directed orders.
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    The Exchange originally established the separate ``Directed ROT'' 
pool and ``Specialist'' pool for each Specialist for purposes of 
transparency when Directed ROTs were first permitted, like Specialists, 
to opt in to the PFOF program and to use the funds generated by the fee 
applicable to Directed Orders to pay order flow providers, to attract 
orders to the Exchange.\8\ The inclusion of Directed ROTs in the PFOF 
program in addition to Specialists was a significant change at the 
time. Specialists who opted into PFOF would be eligible to receive a 
pool of funds even if orders were not directed to them--the key was 
that they opted in, and their standing as Specialist. On the other 
hand, Directed ROTs who opted into the PFOF program would be eligible 
to receive a PFOF pool of funds on only those orders that were directed 
to them.
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    \8\ See Securities Exchange Act Release No. 52568 (October 6, 
2005) 70 FR 60120 (October 14, 2005) (SR-Phlx-2005-58). See also 
Securities Exchange Act Release Nos. 51909 (June 22, 2005), 70 FR 
37484 (June 29, 2005) (SR-Phlx-2005-37, modifying the Exchange's 
schedule of dues, fees, and charges to revise its equity option 
payment for order flow program to establish a payment for order flow 
program that takes into account Directed Orders) and 51984 (July 7, 
2005), 70 FR 40413 (July 13, 2005) (order abrogating SR-Phlx-2005-
37).
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    Specialists also became eligible to receive Directed Orders. Having 
two separate pools for Specialists reflecting (a) PFOF fees 
attributable to undirected Orders (the ``Specialist'' pool), and (b) 
PFOF fees attributable to Directed Orders directed to the Specialist 
(the ``Directed ROT'' pool) provided transparency and clarity as to the 
source of the PFOF funds. Today, the need for transparency provided by 
two separate pools per Specialist is not as necessary, as Specialists 
receive significantly detailed PFOF marketing reports, driven by the 
enhanced technology and supporting automated processes that underscore 
the Exchange's billing and reporting systems.
    Additionally, the report accompanying payments that the Exchange 
makes to order flow providers on behalf of the pool-owners specifies 
only the Specialist from which the funds are coming. The report does 
not identify the type of pool that is the source of the payment. From 
the Exchange's perspective, there is no benefit to maintaining the two 
separate types of pools on its books for each Specialist. Additionally, 
from an external perspective, based on the Exchange's interaction with 
Specialists who are pool-owners and with order-flow providers, the 
maintenance of separate pools of funds on the Exchange's books is no 
longer necessary. The single pool will be termed the PFOF pool.
    Lastly, the above proposal will result in each Specialist or 
Directed ROT having only one PFOF pool. This will also streamline their 
administrative and accounting processes with regard to the information 
provided by the Exchange and instructions they in turn provide to the 
Exchange. To illustrate, assume Market Maker A \9\ is both a Specialist 
and a Directed ROT. Market Maker B is a Directed ROT that has opted 
into the PFOF program. Today, after the Exchange collects and processes 
the PFOF fees, Market Maker A will receive information on their 
``Specialist'' pool and separate information on their ``Directed ROT'' 
pool. Market Maker B receives information on their ``Directed ROT'' 
pool. After the proposal is in effect, Market Maker A will receive 
information on its PFOF pool and Market Maker B will receive 
information on its PFOF pool. The distinction between ``Specialist'' 
pools and ``Directed ROT'' pools will be eliminated.
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    \9\ As used in this paragraph, the term ``Market Maker'' 
includes both Specialists and ROTs.
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2. Statutory Basis
    Phlx believes that the proposed rule change is consistent with the 
provisions of Section 6 of the Act,\10\ in general, and with Section 
6(b)(5) of the Act \11\ in particular, in that the proposal is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \10\ 15 U.S.C. 78f.
    \11\ 15 U.S.C. 78f(b)(5).
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    The proposal is designed simply to eliminate an unnecessary 
administrative burden on the Exchange and its members, and to result in 
accounting and operational efficiencies for both. All Specialists 
opting into the PFOF program will be treated equally under the proposal 
and will realize the administrative benefits of the proposal uniformly.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange's proposal to 
combine the PFOF pools will simply result in administrative 
efficiencies for the Exchange and its members.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(ii) of the Act \12\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(a)(ii).
    \13\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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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,

[[Page 12664]]

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 [email protected]. Please include 
File Number SR-PHLX-2015-20 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549.

All submissions should refer to File Number SR-PHLX-2015-20. 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 such 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-2015-20 and should be 
submitted on or before March 31, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-05481 Filed 3-9-15; 8:45 am]
 BILLING CODE 8011-01-P
12664 Federal Register / Vol. 80, No. 46 / Tuesday, March 10, 2015 / Notices

including whether the proposed rule SECURITIES AND EXCHANGE National Best Bid (‘‘NBB’’) or National
change is consistent with the Act. COMMISSION Best Offer (‘‘NBO’’) (‘‘Limit Order
Comments may be submitted by any of Filter’’). To clarify that Exchange Rule
[Release No. 34–74441; File No. SR–
the following methods: NYSEArca–2014–150]
6.60 applies only to orders, the
Exchange proposed to append the word
Electronic Comments
Self-Regulatory Organizations; NYSE ‘‘Orders’’ to the Exchange Rule 6.60
• Use the Commission’s Internet Arca, Inc.; Order Granting Approval of header to provide ‘‘Rule 6.60. Price
comment form (http://www.sec.gov/ a Proposed Rule Change, as Modified Protection—Orders.’’ 6
rules/sro.shtml); or by Amendment No. 1, To Amend Rule
• Send an email to rule-comments@ 6.60 and To Adopt Rule 6.61, Which
Was Previously Reserved, To Provide A. Proposed Market Maker Quote Price
sec.gov. Please include File Number SR– Protection
PHLX–2015–20 on the subject line. Price Protection for Market Maker
Quotes The Exchange proposed to adopt new
Paper Comments Exchange Rule 6.61 to provide for a
March 4, 2015.
price protection mechanism for quotes
• Send paper comments in triplicate I. Introduction entered by a Market Maker. Exchange
to Brent J. Fields, Secretary, Securities Rule 6.61(a) will provide price
and Exchange Commission, 100 F Street On December 29, 2014, NYSE Arca,
Inc. (‘‘Exchange’’) filed with the protection filters applicable only for
NE., Washington, DC 20549. quotes entered by a Market Maker
Securities and Exchange Commission
All submissions should refer to File (‘‘Commission’’), pursuant to Section pursuant to Rule 6.37B and will not be
Number SR–PHLX–2015–20. This file 19(b)(1) of the Securities Exchange Act applicable to orders entered by a Market
number should be included on the of 1934 (‘‘Act’’) 1 and Rule 19b–4 Maker. The Exchange proposed to
subject line if email is used. To help the thereunder,2 a proposed rule change to provide for two layers of price
Commission process and review your amend Exchange Rule 6.60 (Price protection that will be applicable to all
comments more efficiently, please use Protection) and to adopt Exchange Rule incoming Market Maker quotes.7 The
only one method. The Commission will 6.61 to provide price protection for first layer of price protection will assess
post all comments on the Commission’s Market Maker quotes. The proposed rule incoming sell quotes against the NBB
Internet Web site (http://www.sec.gov/ change was published for comment in and incoming buy quotes against the
rules/sro.shtml). Copies of the the Federal Register on January 14, NBO.8 The second layer of price
submission, all subsequent 2015.3 The Commission received no protection will assess the price of call or
amendments, all written statements comment letters on the proposal. On put bids against a specified benchmark.
with respect to the proposed rule March 2, 2015, the Exchange filed 1. NBBO Price Reasonability Check
change that are filed with the Amendment No. 1 to the proposed rule
Commission, and all written change.4 This order approves the Proposed Exchange Rule 6.61(a)(1)
communications relating to the proposed rule change, as modified by sets forth the Exchange’s proposed
proposed rule change between the Amendment No. 1 thereto. NBBO price reasonability check, which
Commission and any person, other than will compare Market Maker bids with
II. Description of the Proposal the NBO and Market Maker offers with
those that may be withheld from the
public in accordance with the The Exchange proposed to amend the NBB. Specifically, provided that an
provisions of 5 U.S.C. 552, will be Exchange Rule 6.60 and to adopt NBBO is available, a Market Maker
available for Web site viewing and Exchange Rule 6.61, which was quote will be rejected if it is priced a
printing in the Commission’s Public previously Reserved, to provide price specified dollar amount or percentage
Reference Room, 100 F Street NE., protection for Market Maker quotes. through the contra-side NBBO as
Washington, DC 20549, on official Exchange Rule 6.60 currently applies follows:
business days between the hours of and will continue to apply solely to (A) $1.00 for Market Maker bids when
10:00 a.m. and 3:00 p.m. Copies of such orders. Exchange Rule 6.60(b), provides the contra-side NBO is priced at or
filing also will be available for a price protection filter for incoming below $1.00; or
inspection and copying at the principal limit orders, pursuant to which the (B) 50% for Market Maker bids (offers)
office of the Exchange. All comments Exchange rejects limit orders priced a when the contra-side NBO (NBB) is
received will be posted without change; specified percentage 5 through the priced above $1.00.
the Commission does not edit personal The Exchange will reject inbound
identifying information from
1 15 U.S.C. 78s(b)(1). Market Maker quotes that exceed the
submissions. You should submit only
2 17 CFR 240.19b–4. parameters set forth in proposed
3 See Securities Exchange Act Release No. 74018
information that you wish to make Exchange Rule 6.61(a)(1)(A)–(B).9 The
(January 8, 2015), 80 FR 1982 (‘‘Notice’’).
available publicly. All submissions 4 In Amendment No. 1, the Exchange clarified
6 See
that it believes that Market Maker bids should not Notice, supra note 3, at 1983.
should refer to File Number SR–PHLX– 7 The Exchange states that the proposal will assist
be priced the same as or higher than the
2015–20 and should be submitted on or corresponding benchmark, which would be the with the maintenance of fair and orderly markets
before March 31, 2015. price of the underlying security for call options and by averting the risk of Market Maker quotes
the strike price for put options. Amendment No. 1 sweeping through multiple price points resulting in
For the Commission, by the Division of executions at prices that are through the last sale
does not change any of the proposed rule text that
Trading and Markets, pursuant to delegated was submitted in the original filing. Amendment price or National Best Bid or Best Offer (‘‘NBBO’’).
mstockstill on DSK4VPTVN1PROD with NOTICES

authority.14 No. 1 is technical in nature and, therefore, the See Notice, supra note 3, at 1983.
Commission is not publishing it for comment. 8 The Exchange represents that this proposed
Brent J. Fields,
5 Pursuant to Exchange Rule 6.60(b), unless price protection mechanism is similar to the
Secretary. determined otherwise by the Exchange and Exchange’s Limit Order Filter. See Notice, supra
[FR Doc. 2015–05481 Filed 3–9–15; 8:45 am] announced to OTP Holders and OTP Firms via note 3, at 1983.
BILLING CODE 8011–01–P
Trader Update, the specified percentage is 100% for 9 The Exchange states that the proposed

the contra-side NBB or NBO priced at or below percentages are appropriate because they are based
$1.00 and 50% for contra-side NBB or NBO priced on the percentages established for the Limit Order
14 17 CFR 200.30–3(a)(12). above $1.00. See Notice, supra note 3, at 1983. Filter. See Notice, supra note 3, at 1983.

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Document Created: 2018-02-21 09:34:55
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Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Notices
FR Citation		80 FR 12662