82_FR_10980 82 FR 10949 - Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Market Access and Routing Subsidy

82 FR 10949 - Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Market Access and Routing Subsidy

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 31 (February 16, 2017)

Page Range10949-10952
FR Document2017-03098

Federal Register, Volume 82 Issue 31 (Thursday, February 16, 2017) 
[Federal Register Volume 82, Number 31 (Thursday, February 16, 2017)]
[Notices]
[Pages 10949-10952]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-03098]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80007; File No. SR-Phlx-2017-13]


Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend the Market 
Access and Routing Subsidy

February 10, 2017.
    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 8, 2017, NASDAQ PHLX LLC (``Phlx'' or

[[Page 10950]]

``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 the Exchange's Pricing Schedule at 
Section IV, entitled ``Other Transaction Fees.'' Specifically, the 
Exchange proposes to amend its subsidy program, the Market Access and 
Routing Subsidy or ``MARS,'' for Phlx members that provide certain 
order routing functionalities \3\ to other Phlx members and/or use such 
functionalities themselves.
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    \3\ The order routing functionalities permit a Phlx member to 
provide access and connectivity to other members as well utilize 
such access for themselves. The Exchange notes that under this 
arrangement one Phlx member may be eligible for payments under MARS, 
while another Phlx member might potentially be liable for 
transaction charges associated with the execution of the order, 
because those orders were delivered to the Exchange through a Phlx 
member's connection to the Exchange and that member qualified for 
the MARS Payment. Consider the following example: Both members A and 
B are Phlx members but A does not utilize its own connections to 
route orders to the Exchange, and instead utilizes B's connections. 
Under this program, B will be eligible for the MARS Payment while A 
is liable for any transaction charges resulting from the execution 
of orders that originate from A, arrive at the Exchange via B's 
connectivity, and subsequently execute and clear at The Options 
Clearing Corporation or ``OCC,'' where A is the valid executing 
clearing member or give-up on the transaction. Similarly, where B 
utilizes its own connections to execute transactions, B will be 
eligible for the MARS Payment, but would also be liable for any 
transaction resulting from the execution of orders that originate 
from B, arrive at the Exchange via B's connectivity, and 
subsequently execute and clear at OCC, where B is the valid 
executing clearing member or give-up on the transaction.
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://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
    Phlx proposes to amend its subsidy program, MARS, which pays a 
subsidy to Phlx members that provide certain order routing 
functionalities to other Phlx members and/or use such functionalities 
themselves. Generally, under MARS, Phlx pays participating Phlx members 
to subsidize their costs of providing routing services to route orders 
to Phlx. The Exchange believes that MARS will continue to attract 
higher volumes of electronic equity and ETF options volume to the 
Exchange from non-Phlx market participants as well as Phlx members with 
the proposed amendments.
    Today, to qualify for MARS, a Phlx member's order routing 
functionality would be required to meet certain criteria.\4\ With 
respect to Complex Orders, the Exchange would not require Complex 
Orders 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 may apply for MARS, provided 
the requirements are met, including a robust and reliable System. The 
member is solely responsible for implementing and operating its System. 
The Exchange is not proposing to amend this [sic] eligibility 
standards.
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    \4\ Specifically the 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. The member's System 
would also need to cause Phlx to be one of the top three 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 the 
default destination on an order-by-order basis. The Exchange does 
not require Complex Orders 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.
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    Today, a MARS Payment would be made to Phlx members that have 
System Eligibility and have routed the requisite number of Eligible 
Contracts daily in a month, which were executed on Phlx. For the 
purpose of qualifying for the MARS Payment, Eligible Contracts include 
Firm,\5\ Broker-Dealer,\6\ Joint Back Office or ``JBO'' \7\ or 
Professional \8\ equity option orders that are electronically delivered 
and executed. Eligible Contracts do not include floor-based orders, 
qualified contingent cross or ``QCC'' orders,\9\ price improvement or 
``PIXL'' orders,\10\ Mini-Option orders \11\ or Singly-Listed Options 
\12\ orders. The Eligible Contracts requirements are not being amended.
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    \5\ The term ``Firm'' or (``F'') applies to any transaction that 
is identified by a Participant for clearing in the Firm range at 
OCC.
    \6\ The term ``Broker-Dealer'' applies to any transaction which 
is not subject to any of the other transaction fees applicable 
within a particular category.
    \7\ 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.
    \8\ The term ``professional'' means any person or entity that 
(i) is not a broker or dealer in securities, and (ii) places more 
than 390 orders in listed options per day on average during a 
calendar month for its own beneficial account(s). See Rule 
1000(b)(14).
    \9\ A QCC Order is comprised of an order to buy or sell at least 
1000 contracts that is identified as being part of a qualified 
contingent trade, as that term is defined in Rule 1080(o)(3), 
coupled with a contra-side order to buy or sell an equal number of 
contracts. The QCC Order must be executed at a price at or between 
the NBBO and be rejected if a Customer order is resting on the 
Exchange book at the same price. A QCC Order shall only be submitted 
electronically from off the floor to the Exchange's match engine. 
See Rule 1080(o).
    \10\ PIXL is the Exchange's price improvement mechanism known as 
Price Improvement XL or (PIXL\SM\). See Rule 1080(n).
    \11\ Mini Options are further specified in Phlx Rule 1012, 
Commentary .13.
    \12\ Singly Listed Options are options overlying currencies, 
equities, ETFs, ETNs treasury securities and indexes not listed on 
another exchange.
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    Phlx members that have System Eligibility and have executed the 
requisite number of Eligible Contracts in a month are paid rebates 
today as follows:

 
------------------------------------------------------------------------
                                           Average daily
                  Tiers                       volume       MARS payment
                                             (``ADV'')
------------------------------------------------------------------------
1.......................................           1,000           $0.01
2.......................................          30,000            0.10
------------------------------------------------------------------------

    The Exchange proposes to modify Tier 2 to require an ADV of 27,500 
contracts. As proposed, Tier 2 would pay a reduced rebate of $0.08 on 
all executed Eligible Contracts which are routed to Phlx through a 
participating Phlx member's System and meet the

[[Page 10951]]

requisite Eligible Contracts ADV. The Exchange also proposes to adopt 2 
new tiers. Proposed new Tier 3 would require an ADV of 32,500 contracts 
and pay a rebate of $0.10 on all executed Eligible Contracts which are 
routed to Phlx through a participating Phlx member's System and meet 
the requisite Eligible Contracts ADV. Proposed tier 4 would require an 
ADV of 40,000 contracts and pay a rebate of $0.12 on all executed 
Eligible Contracts which are routed to Phlx through a participating 
Phlx member's System and meet the requisite Eligible Contracts ADV. The 
proposed tier schedule would therefore be as follows:

 
------------------------------------------------------------------------
                                           Average daily
                  Tiers                       volume       MARS payment
                                             (``ADV'')
------------------------------------------------------------------------
1.......................................           1,000           $0.01
2.......................................          27,500            0.08
3.......................................          32,500            0.10
4.......................................          40,000            0.12
------------------------------------------------------------------------

    As is the case today, no payment will be made with respect to 
orders that are routed to Phlx, but not executed.\13\
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    \13\ A Phlx member will not be entitled to receive any other 
revenue for the use of its System specifically with respect to 
orders routed to Phlx with the exception of the Marketing Fee.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\14\ in general, and furthers the objectives of 
Sections 6(b)(4) and 6(b)(5) of the Act,\15\ 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.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(4) and (5).
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    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.'' \16\
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    \16\ Securities Exchange Act Release No. 51808 (June 9, 2005), 
70 FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting 
Release'').
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    Likewise, in NetCoalition v. Securities and Exchange Commission 
\17\ (``NetCoalition'') the D.C. Circuit upheld the Commission's use of 
a market-based approach in evaluating the fairness of market data fees 
against a challenge claiming that Congress mandated a cost-based 
approach.\18\ 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.'' \19\
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    \17\ NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010).
    \18\ See NetCoalition, at 534-535.
    \19\ Id. at 537.
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    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'. . . .'' \20\ 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.
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    \20\ Id. at 539 (quoting Securities Exchange Act Release No. 
59039 (December 2, 2008), 73 FR 74770, 74782-83 (December 9, 2008) 
(SR-NYSEArca-2006-21)).
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    The Exchange believes that lowering the Tier 2 ADV to 27,500 
contracts and paying a lower MARS Payment of $0.08 while offering two 
new tiers for ADV of 32,500 and 40,000 contracts, which pay rebates of 
$0.10 and $0.12, respectively, is reasonable because all qualifying 
Phlx members may qualify, provided they meet the qualifications for 
MARS. The proposed tiers should attract higher volumes of electronic 
equity and ETF options volume to the Exchange, which will benefit all 
Phlx members by offering greater price discovery, increased 
transparency, and an increased opportunity to trade on the Exchange. 
The expanded MARS Payments should enhance the competitiveness of the 
Exchange, particularly with respect to those exchanges that offer their 
own front-end order entry system or one they subsidize in some manner. 
The amendment to add new Tiers 3 and 4 will incentivize Phlx members to 
achieve an even higher rebate, provided the Phlx member is eligible for 
MARS. Further, the tier structure will allow Phlx members to price 
their services at a level that will enable them to attract order flow 
from market participants who would otherwise utilize an existing front-
end order entry mechanism offered by the Exchange's competitors instead 
of incurring the cost in time and money to develop their own internal 
systems to be able to deliver orders directly to the Exchange's System.
    The Exchange believes that lowering the Tier 2 ADV to 27,500 
contracts and paying a lower MARS Payment of $0.08 while offering two 
new tiers for ADV of 32,500 and 40,000 contracts, which pay rebates of 
$0.10 and $0.12, respectively, is equitable and not unfairly 
discriminatory because the Exchange will uniformly pay all Phlx members 
the rebates specified in the proposed MARS Payment tiers provided the 
Phlx member has executed the requisite number of Eligible Contracts. 
Moreover, the Exchange believes that the proposed MARS Payments offered 
by the Exchange are equitable and not unfairly discriminatory because 
any qualifying Phlx member that offers market access and connectivity 
to the Exchange and/or utilize such functionality themselves may earn 
the MARS Payment for all Eligible Contracts.

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 
sum, if the changes proposed herein are unattractive to market 
participants, it is likely that the

[[Page 10952]]

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 believes that lowering the Tier 2 ADV to 27,500 
contracts and paying a lower MARS Payment of $0.08 while offering two 
new tiers for ADV of 32,500 and 40,000 contracts, which pay rebates of 
$0.10 and $0.12, respectively, does not impose an undue burden on 
intra-market competition because the Exchange will uniformly pay all 
Phlx members the rebates specified in the proposed MARS Payment tiers 
provided the Phlx member has executed the requisite number of Eligible 
Contracts. Moreover, the Exchange believes that the proposed MARS 
Payments offered by the Exchange are equitable and not unfairly 
discriminatory because any qualifying Phlx member that offers market 
access and connectivity to the Exchange and/or utilizes such 
functionality themselves may earn the MARS Payment for all Eligible 
Contracts.

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.\21\
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    \21\ 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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2017-13 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 20549-1090.

All submissions should refer to File Number SR-Phlx-2017-13. 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-2017-13, and should be 
submitted on or before March 9, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-03098 Filed 2-15-17; 8:45 am]
BILLING CODE 8011-01-P

Federal Register / Vol. 82, No. 31 / Thursday, February 16, 2017 / Notices 10949 advised that the Exchange will System as of February 1, 2017, before All submissions should refer to File terminate their ETP status as of market open.13 Number SR–NSX–2017–04. This file February 1, 2017. The Exchange has represented that (i) number should be included on the ETP Holders have had sufficient time to subject line if email is used. To help the B. Self-Regulatory Organization’s determine to which exchanges and Commission process and review your Statement on Burden on Competition comments more efficiently, please use trading venues they may direct orders The Exchange does not believe that after trading ceases on the Exchange and only one method. The Commission will the proposed rule change will impose to make necessary adjustments to their post all comments on the Commission’s any burden on competition that is not respective trading systems; (ii) the Internet Web site (http://www.sec.gov/ necessary or appropriate in furtherance Exchange will advise all ETP Holders rules/sro.shtml). Copies of the of the purposes of the Act. The decision that the Exchange will terminate their submission, all subsequent to cease trading activity as of February ETP status as of February 1, 2017; and amendments, all written statements 1, 2017 will result in one less (iii) the Exchange, as of the date of filing with respect to the proposed rule operational trading venue for equity the instant proposed rule change, had change that are filed with the securities. The Exchange notes that approximately 0.02% of market share Commission, and all written there are numerous stock exchanges and among national securities exchanges. communications relating to the other trading venues available to market For these reasons, the Commission proposed rule change between the participants to trade equity securities, believes that waiving the 30-day Commission and any person, other than including the Exchange’s affiliates. The operative delay is consistent with the those that may be withheld from the Exchange currently has approximately protection of investors and the public public in accordance with the 0.02% of market share among national interest. Therefore, the Commission provisions of 5 U.S.C. 552, will be stock exchanges. In light of the low hereby waives the 30-day operative available for Web site viewing and trading volume on the Exchange and the delay and designates the proposed rule printing in the Commission’s Public ability of ETP Holders to trade equity change to be operative upon filing with Reference Room, 100 F Street NE., securities on other venues, the Exchange the Commission.14 Washington, DC 20549 on official does not believe that its proposal will At any time within 60 days of the business days between the hours of have any substantial competitive filing of the proposed rule change, the 10:00 a.m. and 3:00 p.m. Copies of such impact. Commission summarily may filing also will be available for temporarily suspend such rule change if inspection and copying at the principal C. Self-Regulatory Organization’s offices of the Exchange. All comments Statement on Comments on the it appears to the Commission that such action is: (i) Necessary or appropriate in received will be posted without change; Proposed Rule Change Received From the Commission does not edit personal Members, Participants, or Others the public interest; (ii) for the protection of investors; or (iii) otherwise in identifying information from No written comments were solicited furtherance of the purposes of the Act. submissions. You should submit only or received with respect to the proposed If the Commission takes such action, the information that you wish to make rule change. Commission shall institute proceedings available publicly. All submissions to determine whether the proposed rule should refer to File Number SR–NSX– III. Date of Effectiveness of the 2017–04, and should be submitted on or Proposed Rule Change and Timing for should be approved or disapproved. before March 9, 2017. Commission Action IV. Solicitation of Comments For the Commission, by the Division of Because the foregoing proposed rule Interested persons are invited to Trading and Markets, pursuant to delegated change does not: (i) Significantly affect submit written data, views, and authority.15 the protection of investors or the public arguments concerning the foregoing, Eduardo A. Aleman, interest; (ii) impose any significant including whether the proposed rule Assistant Secretary. burden on competition; and (iii) become change is consistent with the Act. [FR Doc. 2017–03107 Filed 2–15–17; 8:45 am] operative for 30 days from the date on Comments may be submitted by any of BILLING CODE 8011–01–P which it was filed, or such shorter time the following methods: as the Commission may designate, it has become effective pursuant to Section Electronic Comments SECURITIES AND EXCHANGE 19(b)(3)(A)(iii) of the Act 10 and • Use the Commission’s Internet COMMISSION subparagraph (f)(6) of Rule 19b–4 comment form (http://www.sec.gov/ thereunder.11 [Release No. 34–80007; File No. SR–Phlx– rules/sro.shtml); or 2017–13] A proposed rule change filed under • Send an email to rule-comments@ Rule 19b–4(f)(6) normally does not sec.gov. Please include File Number SR– Self-Regulatory Organizations; become operative before 30 days from NSX–2017–04 on the subject line. NASDAQ PHLX LLC; Notice of Filing the date of the filing. However, pursuant and Immediate Effectiveness of to Rule 19b–4(f)(6)(iii),12 the Paper Comments Proposed Rule Change To Amend the Commission may designate a shorter • Send paper comments in triplicate Market Access and Routing Subsidy time if such action is consistent with the to Secretary, Securities and Exchange protection of investors and the public Commission, 100 F Street NE., February 10, 2017. asabaliauskas on DSK3SPTVN1PROD with NOTICES interest. Washington, DC 20549–1090. Pursuant to Section 19(b)(1) of the The Exchange has asked the Securities Exchange Act of 1934 Commission to waive the 30-day 13 The Exchange also asked the Commission to (‘‘Act’’),1 and Rule 19b–4 thereunder,2 operative delay. Such waiver will allow waive the 5-day pre-filing requirement in Rule 19b– notice is hereby given that, on February 4(f)(6). The Commission waived the requirement. the Exchange to cease trading on the 14 For purposes only of waiving the operative 8, 2017, NASDAQ PHLX LLC (‘‘Phlx’’ or delay for this proposal, the Commission has 10 15 U.S.C. 78s(b)(3)(A)(iii). 15 17 CFR 200.30–3(a)(12). considered the proposed rule’s impact on 11 17 CFR 240.19b–4(f)(6). 1 15 U.S.C. 78s(b)(1). efficiency, competition, and capital formation. See 12 17 CFR 240.19b–4(f)(6)(iii). 15 U.S.C. 78c(f). 2 17 CFR 240.19b–4. VerDate Sep<11>2014 19:05 Feb 15, 2017 Jkt 241001 PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 E:\FR\FM\16FEN1.SGM 16FEN1

10950 Federal Register / Vol. 82, No. 31 / Thursday, February 16, 2017 / Notices ‘‘Exchange’’) filed with the Securities forth in sections A, B, and C below, of include Firm,5 Broker-Dealer,6 Joint and Exchange Commission (‘‘SEC’’ or the most significant aspects of such Back Office or ‘‘JBO’’ 7 or Professional 8 ‘‘Commission’’) the proposed rule statements. equity option orders that are change as described in Items I, II, and electronically delivered and executed. III below, which Items have been A. Self-Regulatory Organization’s Eligible Contracts do not include floor- prepared by the Exchange. The Statement of the Purpose of, and based orders, qualified contingent cross Commission is publishing this notice to Statutory Basis for, the Proposed Rule or ‘‘QCC’’ orders,9 price improvement or solicit comments on the proposed rule Change ‘‘PIXL’’ orders,10 Mini-Option orders 11 change from interested persons. 1. Purpose or Singly-Listed Options 12 orders. The Eligible Contracts requirements are not I. Self-Regulatory Organization’s Phlx proposes to amend its subsidy being amended. Statement of the Terms of Substance of Phlx members that have System the Proposed Rule Change program, MARS, which pays a subsidy to Phlx members that provide certain Eligibility and have executed the The Exchange proposes to amend the order routing functionalities to other requisite number of Eligible Contracts in Exchange’s Pricing Schedule at Section a month are paid rebates today as Phlx members and/or use such IV, entitled ‘‘Other Transaction Fees.’’ follows: functionalities themselves. Generally, Specifically, the Exchange proposes to amend its subsidy program, the Market under MARS, Phlx pays participating Access and Routing Subsidy or Phlx members to subsidize their costs of ‘‘MARS,’’ for Phlx members that provide providing routing services to route Average daily orders to Phlx. The Exchange believes MARS certain order routing functionalities 3 to Tiers volume payment other Phlx members and/or use such that MARS will continue to attract (‘‘ADV’’) functionalities themselves. higher volumes of electronic equity and 1 ................ 1,000 $0.01 The text of the proposed rule change ETF options volume to the Exchange 2 ................ 30,000 0.10 is available on the Exchange’s Web site from non-Phlx market participants as at http://nasdaqphlx.cchwallstreet well as Phlx members with the The Exchange proposes to modify .com/, at the principal office of the proposed amendments. Tier 2 to require an ADV of 27,500 Exchange, and at the Commission’s Today, to qualify for MARS, a Phlx contracts. As proposed, Tier 2 would Public Reference Room. member’s order routing functionality pay a reduced rebate of $0.08 on all II. Self-Regulatory Organization’s would be required to meet certain executed Eligible Contracts which are Statement of the Purpose of, and criteria.4 With respect to Complex routed to Phlx through a participating Statutory Basis for, the Proposed Rule Orders, the Exchange would not require Phlx member’s System and meet the Change Complex Orders to enable the electronic 5 The term ‘‘Firm’’ or (‘‘F’’) applies to any In its filing with the Commission, the routing of orders to all of the U.S. transaction that is identified by a Participant for Exchange included statements options exchanges or provide current clearing in the Firm range at OCC. concerning the purpose of and basis for consolidated market data from the U.S. 6 The term ‘‘Broker-Dealer’’ applies to any options exchanges. Any Phlx member transaction which is not subject to any of the other the proposed rule change and discussed transaction fees applicable within a particular any comments it received on the may apply for MARS, provided the category. proposed rule change. The text of these requirements are met, including a robust 7 The term ‘‘Joint Back Office’’ or ‘‘JBO’’ applies statements may be examined at the and reliable System. The member is to any transaction that is identified by a member or solely responsible for implementing and member organization for clearing in the Firm range places specified in Item IV below. The at OCC and is identified with an origin code as a Exchange has prepared summaries, set operating its System. The Exchange is JBO. A JBO will be priced the same as a Broker- not proposing to amend this [sic] Dealer. A JBO participant is a member, member 3 The order routing functionalities permit a Phlx eligibility standards. organization or non-member organization that member to provide access and connectivity to other maintains a JBO arrangement with a clearing members as well utilize such access for themselves. Today, a MARS Payment would be broker-dealer (‘‘JBO Broker’’) subject to the The Exchange notes that under this arrangement made to Phlx members that have System requirements of Regulation T Section 220.7 of the one Phlx member may be eligible for payments Federal Reserve System as further discussed at Eligibility and have routed the requisite Exchange Rule 703. under MARS, while another Phlx member might potentially be liable for transaction charges number of Eligible Contracts daily in a 8 The term ‘‘professional’’ means any person or associated with the execution of the order, because month, which were executed on Phlx. entity that (i) is not a broker or dealer in securities, those orders were delivered to the Exchange For the purpose of qualifying for the and (ii) places more than 390 orders in listed through a Phlx member’s connection to the options per day on average during a calendar month MARS Payment, Eligible Contracts for its own beneficial account(s). See Rule Exchange and that member qualified for the MARS Payment. Consider the following example: Both 1000(b)(14). 4 Specifically the member’s routing system 9 A QCC Order is comprised of an order to buy members A and B are Phlx members but A does not utilize its own connections to route orders to the (hereinafter ‘‘System’’) would be required to: (1) or sell at least 1000 contracts that is identified as Exchange, and instead utilizes B’s connections. Enable the electronic routing of orders to all of the being part of a qualified contingent trade, as that Under this program, B will be eligible for the MARS U.S. options exchanges, including Phlx; (2) provide term is defined in Rule 1080(o)(3), coupled with a Payment while A is liable for any transaction current consolidated market data from the U.S. contra-side order to buy or sell an equal number of charges resulting from the execution of orders that options exchanges; and (3) be capable of interfacing contracts. The QCC Order must be executed at a originate from A, arrive at the Exchange via B’s with Phlx’s API to access current Phlx match engine price at or between the NBBO and be rejected if a connectivity, and subsequently execute and clear at functionality. The member’s System would also Customer order is resting on the Exchange book at the same price. A QCC Order shall only be asabaliauskas on DSK3SPTVN1PROD with NOTICES The Options Clearing Corporation or ‘‘OCC,’’ where need to cause Phlx to be one of the top three default A is the valid executing clearing member or give- destination exchanges for individually executed submitted electronically from off the floor to the up on the transaction. Similarly, where B utilizes marketable orders if Phlx is at the national best bid Exchange’s match engine. See Rule 1080(o). 10 PIXL is the Exchange’s price improvement its own connections to execute transactions, B will or offer (‘‘NBBO’’), regardless of size or time, but be eligible for the MARS Payment, but would also allow any user to manually override Phlx as the mechanism known as Price Improvement XL or be liable for any transaction resulting from the default destination on an order-by-order basis. The (PIXLSM). See Rule 1080(n). 11 Mini Options are further specified in Phlx Rule execution of orders that originate from B, arrive at Exchange does not require Complex Orders to the Exchange via B’s connectivity, and enable the electronic routing of orders to all of the 1012, Commentary .13. subsequently execute and clear at OCC, where B is U.S. options exchanges or provide current 12 Singly Listed Options are options overlying the valid executing clearing member or give-up on consolidated market data from the U.S. options currencies, equities, ETFs, ETNs treasury securities the transaction. exchanges. and indexes not listed on another exchange. VerDate Sep<11>2014 19:05 Feb 15, 2017 Jkt 241001 PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 E:\FR\FM\16FEN1.SGM 16FEN1

Federal Register / Vol. 82, No. 31 / Thursday, February 16, 2017 / Notices 10951 requisite Eligible Contracts ADV. The broader forms that are most important to members to achieve an even higher Exchange also proposes to adopt 2 new investors and listed companies.’’ 16 rebate, provided the Phlx member is tiers. Proposed new Tier 3 would Likewise, in NetCoalition v. Securities eligible for MARS. Further, the tier require an ADV of 32,500 contracts and and Exchange Commission 17 structure will allow Phlx members to pay a rebate of $0.10 on all executed (‘‘NetCoalition’’) the D.C. Circuit upheld price their services at a level that will Eligible Contracts which are routed to the Commission’s use of a market-based enable them to attract order flow from Phlx through a participating Phlx approach in evaluating the fairness of market participants who would member’s System and meet the requisite market data fees against a challenge otherwise utilize an existing front-end Eligible Contracts ADV. Proposed tier 4 claiming that Congress mandated a cost- order entry mechanism offered by the based approach.18 As the court Exchange’s competitors instead of would require an ADV of 40,000 emphasized, the Commission ‘‘intended incurring the cost in time and money to contracts and pay a rebate of $0.12 on in Regulation NMS that ‘market forces, develop their own internal systems to be all executed Eligible Contracts which able to deliver orders directly to the rather than regulatory requirements’ are routed to Phlx through a Exchange’s System. play a role in determining the market participating Phlx member’s System and data . . . to be made available to The Exchange believes that lowering meet the requisite Eligible Contracts investors and at what cost.’’ 19 the Tier 2 ADV to 27,500 contracts and ADV. The proposed tier schedule would Further, ‘‘[n]o one disputes that paying a lower MARS Payment of $0.08 therefore be as follows: competition for order flow is ‘fierce.’ while offering two new tiers for ADV of . . . As the SEC explained, ‘[i]n the U.S. 32,500 and 40,000 contracts, which pay national market system, buyers and rebates of $0.10 and $0.12, respectively, sellers of securities, and the broker- is equitable and not unfairly Average daily MARS dealers that act as their order-routing discriminatory because the Exchange Tiers volume will uniformly pay all Phlx members the (‘‘ADV’’) payment agents, have a wide range of choices of where to route orders for execution’; rebates specified in the proposed MARS 1 ................ 1,000 $0.01 [and] ‘no exchange can afford to take its Payment tiers provided the Phlx 2 ................ 27,500 0.08 market share percentages for granted’ member has executed the requisite 3 ................ 32,500 0.10 because ‘no exchange possesses a number of Eligible Contracts. Moreover, 4 ................ 40,000 0.12 monopoly, regulatory or otherwise, in the Exchange believes that the proposed the execution of order flow from broker MARS Payments offered by the dealers’. . . .’’ 20 Although the court and Exchange are equitable and not unfairly As is the case today, no payment will discriminatory because any qualifying the SEC were discussing the cash be made with respect to orders that are Phlx member that offers market access equities markets, the Exchange believes routed to Phlx, but not executed.13 and connectivity to the Exchange and/ that these views apply with equal force 2. Statutory Basis to the options markets. or utilize such functionality themselves The Exchange believes that lowering may earn the MARS Payment for all The Exchange believes that its the Tier 2 ADV to 27,500 contracts and Eligible Contracts. proposal is consistent with Section 6(b) paying a lower MARS Payment of $0.08 B. Self-Regulatory Organization’s of the Act,14 in general, and furthers the while offering two new tiers for ADV of Statement on Burden on Competition objectives of Sections 6(b)(4) and 6(b)(5) 32,500 and 40,000 contracts, which pay The Exchange does not believe that of the Act,15 in particular, in that it rebates of $0.10 and $0.12, respectively, the proposed rule change will impose provides for the equitable allocation of is reasonable because all qualifying Phlx any burden on competition not reasonable dues, fees and other charges members may qualify, provided they necessary or appropriate in furtherance among members and issuers and other meet the qualifications for MARS. The of the purposes of the Act. In terms of persons using any facility, and is not proposed tiers should attract higher inter-market competition, the Exchange designed to permit unfair volumes of electronic equity and ETF notes that it operates in a highly discrimination between customers, options volume to the Exchange, which competitive market in which market issuers, brokers, or dealers. will benefit all Phlx members by participants can readily favor competing offering greater price discovery, venues if they deem fee levels at a The Commission and the courts have increased transparency, and an repeatedly expressed their preference particular venue to be excessive, or increased opportunity to trade on the rebate opportunities available at other for competition over regulatory Exchange. The expanded MARS intervention in determining prices, venues to be more favorable. In such an Payments should enhance the environment, the Exchange must products, and services in the securities competitiveness of the Exchange, markets. In Regulation NMS, while continually adjust its fees to remain particularly with respect to those competitive with other exchanges and adopting a series of steps to improve the exchanges that offer their own front-end with alternative trading systems that current market model, the Commission order entry system or one they subsidize have been exempted from compliance highlighted the importance of market in some manner. The amendment to add with the statutory standards applicable forces in determining prices and SRO new Tiers 3 and 4 will incentivize Phlx to exchanges. Because competitors are revenues and, also, recognized that free to modify their own fees in current regulation of the market system 16 Securities Exchange Act Release No. 51808 response, and because market asabaliauskas on DSK3SPTVN1PROD with NOTICES ‘‘has been remarkably successful in (June 9, 2005), 70 FR 37496, 37499 (June 29, 2005) (‘‘Regulation NMS Adopting Release’’). participants may readily adjust their promoting market competition in its 17 NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. order routing practices, the Exchange 2010). believes that the degree to which fee 13 A Phlx member will not be entitled to receive 18 See NetCoalition, at 534–535. changes in this market may impose any any other revenue for the use of its System 19 Id. at 537. specifically with respect to orders routed to Phlx 20 Id. at 539 (quoting Securities Exchange Act burden on competition is extremely with the exception of the Marketing Fee. Release No. 59039 (December 2, 2008), 73 FR limited. In sum, if the changes proposed 14 15 U.S.C. 78f(b). 74770, 74782–83 (December 9, 2008) (SR– herein are unattractive to market 15 15 U.S.C. 78f(b)(4) and (5). NYSEArca–2006–21)). participants, it is likely that the VerDate Sep<11>2014 19:05 Feb 15, 2017 Jkt 241001 PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 E:\FR\FM\16FEN1.SGM 16FEN1

10952 Federal Register / Vol. 82, No. 31 / Thursday, February 16, 2017 / Notices Exchange will lose market share as a Electronic Comments SECURITIES AND EXCHANGE result. Accordingly, the Exchange does COMMISSION not believe that the proposed changes • Use the Commission’s Internet will impair the ability of members or comment form (http://www.sec.gov/ [Release No. 34–80014; File No. SR– competing order execution venues to rules/sro.shtml); or ISEGemini–2016–18] maintain their competitive standing in • Send an email to rule-comments@ the financial markets. sec.gov. Please include File Number SR– Self-Regulatory Organizations; ISE The Exchange believes that lowering Phlx–2017–13 on the subject line. Gemini, LLC; Order Approving the Tier 2 ADV to 27,500 contracts and Proposed Rule Change, as Modified by paying a lower MARS Payment of $0.08 Paper Comments Amendment No. 1, To Amend the while offering two new tiers for ADV of Exchange Opening Process • Send paper comments in triplicate 32,500 and 40,000 contracts, which pay to Brent J. Fields, Secretary, Securities February 10, 2017. rebates of $0.10 and $0.12, respectively, and Exchange Commission, 100 F Street I. Introduction does not impose an undue burden on NE., Washington, DC 20549–1090. intra-market competition because the On December 16, 2016, ISE Gemini, Exchange will uniformly pay all Phlx All submissions should refer to File LLC (‘‘ISE Gemini’’ or ‘‘Exchange’’) filed members the rebates specified in the Number SR–Phlx–2017–13. This file with the Securities and Exchange proposed MARS Payment tiers provided number should be included on the Commission (‘‘Commission’’), pursuant the Phlx member has executed the subject line if email is used. To help the to Section 19(b)(1) of the Securities requisite number of Eligible Contracts. Commission process and review your Exchange Act of 1934 (‘‘Act’’),1 and Moreover, the Exchange believes that comments more efficiently, please use Rule 19b–4 thereunder,2 a proposed rule the proposed MARS Payments offered only one method. The Commission will change to amend the Exchange’s by the Exchange are equitable and not post all comments on the Commission’s opening process. The proposed rule unfairly discriminatory because any Internet Web site (http://www.sec.gov/ change was published for comment in qualifying Phlx member that offers rules/sro.shtml). Copies of the the Federal Register on December 29, market access and connectivity to the 2016.3 On February 1, 2017, the submission, all subsequent Exchange and/or utilizes such Exchange filed Amendment No. 1 to the amendments, all written statements functionality themselves may earn the proposed rule change.4 The Commission with respect to the proposed rule MARS Payment for all Eligible received no comment letters on the Contracts. change that are filed with the Commission, and all written proposed rule change. This order C. Self-Regulatory Organization’s communications relating to the approves the proposed rule change, as Statement on Comments on the proposed rule change between the modified by Amendment No. 1. Proposed Rule Change Received From Commission and any person, other than II. Description of the Proposal, as Members, Participants, or Others those that may be withheld from the Modified by Amendment No. 1 No written comments were either public in accordance with the The Exchange proposes to delete the solicited or received. provisions of 5 U.S.C. 552, will be entirety of current ISE Gemini Rule 701 available for Web site viewing and and replace the current Exchange III. Date of Effectiveness of the printing in the Commission’s Public opening process with an opening Proposed Rule Change and Timing for Reference Room, 100 F Street NE., process reflected in proposed ISE Commission Action Washington, DC 20549 on official Gemini Rules 701 and 715(t).5 The The foregoing rule change has become business days between the hours of Exchange notes that the new opening effective pursuant to Section 10:00 a.m. and 3:00 p.m. Copies of such process is similar to the process used by 19(b)(3)(A)(ii) of the Act.21 filing also will be available for At any time within 60 days of the inspection and copying at the principal 1 15 U.S.C. 78s(b)(1). filing of the proposed rule change, the office of the Exchange. All comments 2 17 CFR 240.19b–4. Commission summarily may received will be posted without change; 3 See Securities Exchange Act Release No. 79679 temporarily suspend such rule change if the Commission does not edit personal (December 22, 2016), 81 FR 96062 (‘‘Notice’’). 4 In Amendment No. 1, the Exchange provided it appears to the Commission that such identifying information from clarifying details to its proposal, including: (i) action is: (i) Necessary or appropriate in submissions. You should submit only Expanding its proposed definition of ‘‘Quality the public interest; (ii) for the protection information that you wish to make Opening Market’’; (ii) clarifying that only Public of investors; or (iii) otherwise in available publicly. All submissions Customer interest is routable during the Opening furtherance of the purposes of the Act. Process; and (iii) clarifying that when routing orders should refer to File Number SR–Phlx– during the Opening Process the Exchange will do If the Commission takes such action, the 2017–13, and should be submitted on or so based on price/time priority of routable interest. Commission shall institute proceedings The Exchange also made technical corrections and to determine whether the proposed rule before March 9, 2017. revisions to the proposed rule text for readability should be approved or disapproved. For the Commission, by the Division of and consistency. Amendment No. 1 amends and Trading and Markets, pursuant to delegated replaces the original filing in its entirety. Because IV. Solicitation of Comments authority.22 Amendment No. 1 does not materially alter the substance of the proposed rule change or raise Interested persons are invited to Eduardo A. Aleman, unique or novel regulatory issues, it is not subject asabaliauskas on DSK3SPTVN1PROD with NOTICES submit written data, views, and to notice and comment. The amendment is Assistant Secretary. available at: https://www.sec.gov/comments/sr- arguments concerning the foregoing, [FR Doc. 2017–03098 Filed 2–15–17; 8:45 am] isegemini-2016-18/isegemini201618.htm. including whether the proposed rule 5 The Exchange represents that this proposed rule BILLING CODE 8011–01–P change is consistent with the Act. change is being made in connection with a Comments may be submitted by any of technology migration to a Nasdaq, Inc. (‘‘Nasdaq’’) the following methods: supported architecture called INET which is utilized on The NASDAQ Options Market LLC, NASDAQ PHLX LLC (‘‘Phlx’’) and NASDAQ BX, 21 15 U.S.C. 78s(b)(3)(A)(ii). 22 17 CFR 200.30–3(a)(12). Inc. See id. VerDate Sep<11>2014 19:05 Feb 15, 2017 Jkt 241001 PO 00000 Frm 00082 Fmt 4703 Sfmt 4703 E:\FR\FM\16FEN1.SGM 16FEN1


Document Created: 2018-02-01 15:02:18
Document Modified: 2018-02-01 15:02:18
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionNotices
FR Citation82 FR 10949 
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