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)

[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