
[Federal Register Volume 80, Number 224 (Friday, November 20, 2015)]
[Notices]
[Pages 72768-72773]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-29602]



[[Page 72768]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76446; File No. SR-Phlx-2015-89]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change to a Market 
Access and Routing Subsidy or ``MARS''

November 16, 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 November 2, 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 the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend the Exchange's Pricing Schedule at 
Section IV, entitled ``Other Transaction Fees'' to create a 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 it will be possible for one Phlx member to 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://nasdaqomxphlx.cchwallstreet.com/, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Phlx proposes a new subsidy program, MARS, which would pay 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 proposes to make payments to 
participating Phlx members to subsidize their costs of providing 
routing services to route orders to Phlx. The Exchange believes that 
MARS will attract higher volumes of electronic equity and ETF options 
volume to the Exchange from non-Phlx market participants as well as 
Phlx members.
MARS System Eligibility
    To qualify for MARS, a Phlx member's order routing functionality 
would be required to meet certain criteria. 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. 
Specifically, with respect to Complex Orders,\4\ 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. The Exchange notes that 
these requirements would not make sense for Complex Orders as some 
options exchanges do not offer Complex Order execution systems.
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    \4\ A Complex Order is any order involving the simultaneous 
purchase and/or sale of two or more different options series in the 
same underlying security, priced at a net debit or credit based on 
the relative prices of the individual components, for the same 
account, for the purpose of executing a particular investment 
strategy. Furthermore, a Complex Order can also be a stock-option 
order, which is an order to buy or sell a stated number of units of 
an underlying stock or exchange-traded fund (``ETF'') coupled with 
the purchase or sale of options contract(s). See Exchange Rule 1080, 
Commentary .08(a)(i).
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    The Exchange would require Phlx members desiring to participate in 
MARS \5\ to complete a form, in a manner prescribed by the Exchange, 
and reaffirm their information on a quarterly basis to the Exchange. 
Any Phlx member would be permitted to apply for MARS, provided the 
above-referenced requirements are met, including a robust and reliable 
System. The member would be solely responsible for implementing and 
operating its System.
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    \5\ For example, a Phlx member that desires to qualify for MARS 
in November must complete the form and submit it to the Exchange no 
later than the last business day of November. Such form will require 
the Phlx member to identify the Phlx member seeking the MARS Payment 
and must list, among other things, the connections utilized by the 
Phlx member to provide Exchange access to other Phlx members and/or 
itself. MARS Payments would be made one month in arrears (i.e., a 
MARS Payment earned for activity in November would be paid to the 
qualifying Phlx member in December), as is the case with all other 
transactional payments and assessments made by the Exchange.
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MARS Eligible Contracts
    A MARS Payment would be made to Phlx members that have System 
Eligibility and have routed at least 30,000 Eligible Contracts daily in 
a month, which were executed on Phlx. For the purpose of qualifying for 
the MARS Payment, Eligible Contracts may include Firm,\6\ Broker-
Dealer,\7\ Joint

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Back Office or ``JBO'' \8\ or Professional \9\ equity option orders 
that are electronically delivered and executed. Eligible Contracts do 
not include floor-based orders, qualified contingent cross or ``QCC'' 
orders,\10\ price improvement or ``PIXL'' orders,\11\ Mini-Option 
orders \12\ or Singly-Listed Options \13\ orders.
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    \6\ The term ``Firm'' or (``F'') applies to any transaction that 
is identified by a Participant for clearing in the Firm range at 
OCC.
    \7\ The term ``Broker-Dealer'' applies to any transaction which 
is not subject to any of the other transaction fees applicable 
within a particular category.
    \8\ 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.
    \9\ 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).
    \10\ 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).
    \11\ PIXL is the Exchange's price improvement mechanism known as 
Price Improvement XL or (PIXL\SM\). See Rule 1080(n).
    \12\ Mini Options are further specified in Phlx Rule 1012, 
Commentary .13.
    \13\ 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 using an order routing functionality provided by 
another member or its own functionality will continue to be required to 
comply with best execution obligations.\14\ Specifically, just as with 
any Customer \15\ order and any other routing functionality, a Phlx 
member will continue to have an obligation to consider the availability 
of price improvement at various markets and whether routing a Customer 
order through a functionality that incorporates the features described 
above would allow for access to such opportunities if readily 
available. Moreover, a Phlx member would need to conduct best execution 
evaluations on a regular basis, at a minimum quarterly, that include 
its use of any router incorporating the features described above.
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    \14\ See Phlx Rule 764.
    \15\ The term ``Customer'' applies to any transaction that is 
identified by a member or member organization for clearing in the 
Customer range at The Options Clearing Corporation (``OCC'') which 
is not for the account of a broker or dealer or for the account of a 
``Professional'' (as that term is defined in Rule 1000(b)(14)).
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MARS Payment
    Phlx members that have System Eligibility and have executed the 
Eligible Contracts in a month may receive the MARS Payment of $0.10 per 
contract. The MARS Payment will be paid only on executed Firm orders 
routed to Phlx through a participating member's System. No payment will 
be made with respect to orders that are routed to Phlx, but not 
executed. The Exchange believes that the MARS Payment will subsidize 
the costs of Phlx members in providing the routing services.
    Further, a Phlx member would not be entitled to receive any other 
revenue \16\ for the use of its System specifically with respect to 
orders routed to Phlx, with the exception of Payment for Order 
Flow.\17\
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    \16\ This requirement would not prevent the member from charging 
fees (for example, a flat monthly fee) for the general use of its 
System. Nor would it prevent the member from charging fees or 
commissions in accordance with its general practices with respect to 
transactions effected through its System.
    \17\ The Payment for Order Flow (``PFOF'') Program assesses fees 
to Specialists and Market Makers resulting from Customer orders. 
These PFOF Fees are available to be disbursed by the Exchange 
according to the instructions of the Specialist or Marker Maker to 
order flow providers who are members or 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.
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    The Exchange proposes to add the MARS to new Section IV, Part E of 
the Pricing Schedule, entitled ``Market Access and Routing Subsidy 
(``MARS'').'' Additionally, the Exchange proposes to amend the Table of 
Content to include the new section.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \18\ in general, and furthers the objectives of 
Sections 6(b)(4) and 6(b)(5) of the Act \19\ in particular, in that it 
provides for the equitable allocation of reasonable dues, fees and 
other charges among members and issuers and other persons using any 
facility or system which the Exchange operates or controls, and is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 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, for example, the Commission indicated that market forces should 
generally determine the price of non-core market data because national 
market system regulation ``has been remarkably successful in promoting 
market competition in its broader forms that are most important to 
investors and listed companies.'' \20\ Likewise, in NetCoalition v. 
NYSE Arca, Inc., 615 F.3d 525 (D.C. Cir. 2010), 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.\21\ 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.'' \22\
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    \20\ Exchange Act Release No. 34-51808 (June 9, 2005) 
(``Regulation NMS Adopting Release'').
    \21\ See NetCoalition, 615 F.3d at 534.
    \22\ 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' . . ..'' \23\ Although the Court and 
the SEC were discussing the cash equities markets, the Exchange 
believes that, as discussed above, these views apply with equal force 
to the options markets.
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    \23\ NetCoalition I, 615 F.3d at 539 (quoting ArcaBook Order, 73 
FR at 74782-74783).
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    The Exchange believes that MARS is reasonable because it is 
designed to attract higher volumes of electronic equity and ETF options 
volume to the Exchange, which will benefit all Phlx market participants 
by offering greater price discovery, increased transparency, and an 
increased opportunity to trade on the Exchange. Moreover, the Exchange 
believes that the proposed subsidy offered by MARS is both 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.
MARS System Eligibility
    The Exchange believes that requiring Phlx members to maintain their 
Systems according to the various requirements set forth by the Exchange 
in order to

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qualify for MARS is reasonable because the Exchange seeks to encourage 
market participants to send higher volumes of orders to Phlx, which 
will contribute to the Exchange's depth of book as well as to the top 
of book liquidity. The Exchange also believes that the proposed MARS is 
reasonable because it is designed to 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.\24\ The Exchange believes that requiring members to maintain 
their Systems according to the various requirements set forth by the 
Exchange in order to qualify for MARS is equitable and not unfairly 
discriminatory because these requirements will uniformly apply to all 
market participants desiring to qualify for MARS.
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    \24\ See, e.g., supra note 10; Securities Exchange Act Release 
No. 34-54121 (July 10, 2006), 71 FR 40566 (July 17, 2006) (SR-ISE-
2006-31) (describing PrecISE, which is a front-end, order entry 
application for trading options utilized by International Securities 
Exchange LLC).
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    With respect to Complex Orders,\25\ the Exchange believes that not 
requiring Phlx members 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, provided the transaction 
was effected as a portion of a Complex Order, is reasonable because 
this requirement would not make sense for Complex Orders as some 
options exchanges do not offer Complex Order execution systems. Also, 
Phlx members will be encouraged to provide Complex Order routing 
functionalities. The Exchange believes that limiting these requirements 
for Complex Orders, while still paying a subsidy on these types of 
orders, is equitable and not unfairly discriminatory because Phlx 
members transacting Complex Orders have devoted resources to provide 
the order routing functionalities. All Phlx members that qualify for 
the subsidy will have the ability to count Complex Orders toward their 
Eligible Contracts and be subject to similar requirements.
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    \25\ A Complex Order is any order involving the simultaneous 
purchase and/or sale of two or more different options series in the 
same underlying security, priced at a net debit or credit based on 
the relative prices of the individual components, for the same 
account, for the purpose of executing a particular investment 
strategy. Furthermore, a Complex Order can also be a stock-option 
order, which is an order to buy or sell a stated number of units of 
an underlying stock or exchange-traded fund (``ETF'') coupled with 
the purchase or sale of options contract(s). See Exchange Rule 1080, 
Commentary .08(a)(i).
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    The Exchange also notes that the Chicago Board of Options Exchange, 
Inc. (``CBOE'') currently offers a similar Order Routing Subsidy 
(``ORS'') and Complex Order Routing Subsidy (``CORS'') which, similar 
to the current proposal, allows CBOE members to enter into subsidy 
arrangements with CBOE Trading Permit Holders (``TPHs'') that provide 
certain order routing functionalities to other CBOE TPHs and/or use 
such functionalities themselves.\26\ Also, NYSE MKT LLC (``NYSE MKT'') 
had a Market Access and Connectivity Subsidy (``MAC'') which allowed 
NYSE MKT members to enter into subsidy arrangements with ATP Holders 
that provided certain order routing functionalities to other ATP 
Holders and/or use such functionalities themselves. The NYSE MKT 
program was discontinued.\27\ Finally, in 2007, Phlx offered a Market 
Access Provider Subsidy or ``MAPs'' as a per contract fee payable by 
the Exchange to Eligible Market Access Providers for Eligible Contracts 
submitted by MAPs for execution on the Exchange. The subsidy was 
applicable to any Exchange member organization that qualified as a MAP 
and elected to participate for that calendar month.\28\
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    \26\ See note 43. CBOE's programs permit both CBOE members and 
CBOE non-members to be eligible for a rebate. CBOE members are 
eligible to receive exchange transaction fees on transactions that 
earn a non-CBOE member a subsidy payment.
    \27\ See note 44. See also Securities Exchange Act Release No. 
75609 (August 11, 2015), 80 FR 48132 (August 5, 2015) (SR-NYSEMKT-
2015-059).
    \28\ See Securities Exchange Act Release No. 56274 (August 16, 
2007), 72 FR 48720 (August 24, 2007) (SR-Phlx-2007-54). This program 
is no longer being offered.
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MARS Eligible Contracts
    The Exchange believes that excluding the volumes attributable to 
QCC Orders, PIXL and Mini Options is reasonable, equitable, and not 
unfairly discriminatory for the reasons below. QCC Order volume is 
already counted toward a separate rebate that the Exchange pays on both 
electronic and floor QCC transactions.\29\ If the Exchange were to 
count QCC Orders volumes towards the volume tiers for MARS, the 
Exchange may have to raise fees for all other participants. The 
Exchange does not believe such a result would be reasonable or 
equitable. PIXL Orders are also subject to separate pricing and certain 
discounts.\30\ Mini Options are also subject to separate pricing.\31\ 
The Exchange does not desire to pay an additional subsidy on top of the 
already discounted rates for PIXL and Mini Options. Because all Phlx 
members seeking to qualify for MARS would be treated equally with 
respect to excluding QCC, PIXL and Mini Options volume, the proposal to 
exclude these volumes from the MARS Payment is not inequitable or 
unfairly discriminatory. With respect to excluding Singly Listed 
options, these orders are not subject to a default destination 
exchange, and therefore should not be taken into account in calculating 
Eligible Contracts. The exclusion of these types of orders from MARS is 
equitable and not unfairly discriminatory because the Exchange will 
uniformly exclude these orders from the Eligible Contracts for all 
qualifying Phlx members.
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    \29\ See notes 10 and 39.
    \30\ See Phlx's Pricing Schedule at Section IV, Part A. The 
Exchange offers discounted fees provided certain criteria are met.
    \31\ See Section A of the Phlx Pricing Schedule.
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    With respect to floor orders, the Exchange's exclusion of such 
orders from Eligible Contracts is reasonable because the floor model 
does not lend itself to this type of incentive which requires the 
maintenance of a front-end system to route orders. The Exchange has two 
different methods of handling orders. The non-electronic model is one 
that is represented on the trading floor by a floor broker. An 
electronic order is an entirely different model. Those orders are 
entered by members who are connected to the Phlx's match engine. These 
members are assessed different rates because the Exchange operates two 
different models, a floor-based model and an electronic model, which 
both utilize different processes. The Exchange believes that it is 
appropriate to assess fees and incentivize through rebates and 
subsidies differently for each model. With respect to floor orders, the 
Exchange's exclusion of such order from MARS is equitable and not 
unfairly discriminatory because the Exchange will not permit any floor 
orders to count toward Eligible Contracts for any market participant 
for MARS.
    The Exchange further notes that while MARS is only being offered to 
qualifying Phlx members for electronically-executed Firm, Broker-
Dealer, JBO or Professional equity option orders and not, for example, 
on the electronic volumes of Phlx Customer, Specialist \32\ or Market 
Maker \33\ the Exchange believes this is reasonable, equitable and not 
unfairly

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discriminatory for the reasons below. With respect to Customer orders, 
the Exchange notes that Customer orders have the ability to earn 
rebates today.\34\ Additionally, Customers are not assessed transaction 
fees.\35\ The Exchange believes that the availability of these rebates 
for Customer volumes as well as no transaction fees does not warrant 
paying an additional subsidy on Customer volumes in MARS. With respect 
to Specialists and Market Makers, the Exchange offers Specialists and 
Market Makers certain rebates in SPY,\36\ assesses them lower 
transaction fees as compared to other market participants \37\ and 
offers them the ability cap their transaction fees.\38\ The Exchange 
believes that the SPY rebates, coupled with the lower transaction fees 
and Monthly Market Maker Cap, already provide ample incentive for 
attracting Specialist and Market Maker volumes to the Exchange and that 
no further subsidy is warranted at this time.
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    \32\ A Specialist is an Exchange member who is registered as an 
options specialist pursuant to Rule 1020(a). An options Specialist 
includes a Remote Specialist which is defined as an options 
specialist in one or more classes that does not have a physical 
presence on an Exchange floor and is approved by the Exchange 
pursuant to Rule 501.
    \33\ A ``market maker'' includes Registered Options Traders 
(Rule 1014(b)(i) and (ii)), which includes Streaming Quote Traders 
(see Rule 1014(b)(ii)(A)) and Remote Streaming Quote Traders (see 
Rule 1014(b)(ii)(B)). Directed Participants are also market makers.
    \34\ See Section B of the Phlx Pricing Schedule.
    \35\ See Section II of the Phlx Pricing Schedule.
    \36\ See Section I of SPY Pricing in Phlx Pricing Schedule.
    \37\ See Section II of the Phlx Pricing Schedule.
    \38\ Specialists and Market Makers are subject to a ``Monthly 
Market Maker Cap'' of $550,000 for: (i) Electronic and floor Option 
Transaction Charges; (ii) QCC Transaction Fees (as defined in 
Exchange Rule 1080(o) and Floor QCC Orders, as defined in 1064(e)); 
and (iii) fees related to an order or quote that is contra to a PIXL 
Order or specifically responding to a PIXL auction. The trading 
activity of separate Specialist and Market Maker member 
organizations is aggregated in calculating the Monthly Market Maker 
Cap if there is Common Ownership between the member organizations. 
All dividend, merger, short stock interest, reversal and conversion, 
jelly roll and box spread strategy executions (as defined in Section 
II) are excluded from the Monthly Market Maker Cap.
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    The proposed MAC Subsidy is designed to attract higher margin 
business to the Exchange, business which at present has no opportunity 
to transact at rates anywhere close to the rate assessed to Customers, 
Specialists or Market Makers. To offer the proposed subsidy on 
Customer, Specialist or Market Maker electronic volume would require 
funding from some other source, such as raising fees for other 
participants. As a result, the Exchange believes it is appropriate to 
offer MARS to only Firms, Broker-Dealers and JBO participants that are 
charged higher per contract transaction fees than other market 
participants. The Exchange notes that it is commonplace within the 
options industry for exchanges to charge different rates and/or offer 
different rebates depending upon the capacity in which a participant is 
trading. For these reasons, the Exchange believes that the proposed 
change to offer MARS Payment to qualifying Phlx members on certain 
electronic volumes is reasonable, equitable and not unfairly 
discriminatory for the reasons mentioned herein.
    Finally, the Exchange believes that 30,000 Eligible Contracts is a 
reasonable level of contracts, because the Exchange is only counting 
volume from Firms, Broker-Dealers, JBOs and Professionals which are 
electronically delivered and executed. The Exchange believes that this 
number reflects an appropriate level of commitment from Phlx members to 
earn the MARS Payment. The Exchange believes that 30,000 Eligible 
Contracts is equitable and not unfairly discriminatory because this 
level will be uniformly applied to all qualifying Phlx members.
MARS Payment
    The Exchange believes that it is reasonable, equitable and not 
unfairly discriminatory to pay the proposed MARS Payment to Phlx 
members that have System Eligibility and have executed the Eligible 
Contracts, even when a different Phlx member may be liable for 
transaction charges resulting from the execution of the orders upon 
which the subsidy might be paid. The Exchange notes that this sort of 
arrangement already exists on the Exchange with respect to QCC rebates 
for floor QCC transactions. Today, this arrangement results in a 
situation where the floor broker is earning a rebate and one or more 
different Phlx members are potentially liable for the Exchange 
transaction charges applicable to QCC Orders. With the QCC rebates 
applicable to transactions executed on the trading floor, the Exchange 
does not offer a front-end for order entry; unlike some of the 
competing exchanges, the Exchange believes it is necessary from a 
competitive standpoint to offer this rebate to the executing floor 
broker on a QCC Order. Also, all qualifying Phlx members would be 
uniformly paid the subsidy on all qualifying volume that was routed by 
them to the Exchange and executed.
    The Exchange believes the $0.10 per contract rate that is being 
offered to be paid as a subsidy is reasonable and will allow Phlx 
members to price their services at a level that will enable them to 
attract order flow from 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 trading systems.\39\ The Exchange believes that offering a 
flat rate is reasonable because all qualifying Phlx members would 
receive the same $0.10 per contract subsidy, provided they met the 
qualifications for MARS.
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    \39\ A Floor QCC Order must: (i) Be for at least 1,000 
contracts, (ii) meet the six requirements of Rule 1080(o)(3) which 
are modeled on the QCT Exemption, (iii) be executed at a price at or 
between the NBBO; and (iv) be rejected if a Customer order is 
resting on the Exchange book at the same price. In order to satisfy 
the 1,000-contract requirement, a Floor QCC Order must be for 1,000 
contracts and could not be, for example, two 500-contract orders or 
two 500-contract legs. See Rule 1064(e). See also Securities 
Exchange Act Release No. 64688 (June 16, 2011), 76 FR 36606 (June 
22, 2011) (SR-Phlx-2011-56).
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    The Exchange believes that paying the MARS payments to a Phlx 
member, solely on executed Firm orders submitted by the qualifying Phlx 
member, is reasonable because, as noted herein Customers, Specialists 
and Market Makers are offered other pricing incentives such as rebates, 
no fees or lower fees and the Monthly Market Maker Cap. With respect to 
Professionals, JBOs and Broker-Dealers the Exchange believes it is 
reasonable to differentiate these market participants and Firms for the 
reasons which follow. Firms already benefit from certain pricing 
advantages that Professionals, JBOs and Broker-Dealers do not also 
enjoy, such as the Firm Monthly Fee Cap.\40\ The Exchange desires to 
incentivize Phlx members to transact Firm, JBO, Broker-Dealer and 
Professional orders on the Exchange to qualify for MARS and receive the 
subsidy for Firm orders. The Exchange believes that this proposal may 
incentivize Phlx members that receive reduced rates at other options 
exchanges to select Phlx as a venue to send Firm, JBO, Broker-Dealer 
and Professional orders by offering competitive pricing to these market 
participants in the form of a subsidy, even though the financial 
benefit will only be made with respect to Firm orders. Such 
competitive, differentiated pricing exists today on other options 
exchanges. Further, the Exchange believes there is nothing 
impermissible about the MARS Payment

[[Page 72772]]

being made solely on Firm orders. This practice is consistent with 
longstanding differentials between Firms, other Broker-Dealers and 
Professionals. The options exchanges have differentiated between: 
retail customers and professional customers; broker/dealers clearing in 
the ``Firm'' range at OCC and broker/dealers registered as market 
makers and away market makers; early-adopting market makers; and many 
others. The Commission has also permitted price differentiation based 
on whether an order is processed manually versus electronically. The 
proposal is consistent with previously established pricing proposals 
accepted by the Commission.
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    \40\ Firms are subject to a maximum fee of $75,000 (``Monthly 
Firm Fee Cap''). Firm Floor Option Transaction Charges and QCC 
Transaction Fees, in the aggregate, for one billing month may not 
exceed the Monthly Firm Fee Cap per member organization when such 
members are trading in their own proprietary account. All dividend, 
merger, and short stock interest strategy executions (as defined in 
Section II of the Pricing Schedule) are excluded from the Monthly 
Firm Fee Cap. Reversal and conversion, jelly roll and box spread 
strategy executions (as defined in Section II) are included in the 
Monthly Firm Fee Cap. QCC Transaction Fees are included in the 
calculation of the Monthly Firm Fee Cap. See Section II of the 
Pricing Schedule.
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    The Exchange believes that paying the MARS payments to a Phlx 
member, solely on executed Firm orders submitted by the qualifying Phlx 
member, is equitable and not unfairly discriminatory for the same 
reasons that the Firm Monthly Fee Cap which applies to Firms and not to 
Professionals and Broker-Dealers is equitable and not unfairly 
discriminatory. The MARS Payment, like the Monthly Firm Fee Cap, 
provides an incentive for Firms to transact order flow on the Exchange, 
which order flow brings increased liquidity to the Exchange for the 
benefit of all Exchange participants. To the extent the purpose of the 
proposed MARS is achieved, all the Exchange's market participants, 
including Professionals and Broker-Dealers, should benefit from the 
improved market liquidity.
    The Exchange believes that preventing members from receiving any 
other revenue for the use of its routing system, specifically with 
respect to orders routed to Phlx, with the exception of Payment for 
Order Flow or ``PFOF'' is reasonable because members could still charge 
fees for the general use of its order routing system as well as 
charging fees or commissions in accordance with its general practices 
with respect to transactions effected through its system. PFOF also 
remains eligible under MARS. The Exchange believes that preventing 
members from receiving any other revenue for the use of its routing 
system, specifically with respect to orders routed to Phlx, with the 
exception of PFOF is equitable and not unfairly discriminatory because 
the Exchange would uniformly apply its MARS requirements to all 
qualifying Phlx members.
    Finally, the Exchange believes that adding a new Part E to Section 
IV and amending the Table of Content is reasonable, equitable and not 
unfairly discriminatory as it will make finding MARS in the Pricing 
Schedule easier for all participants.

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.
MARS System Eligibility
    The Exchange believes that requiring members to maintain their 
order routing systems according to the various requirements set forth 
by the Exchange in order to qualify for MARS does not create an undue 
burden on intra-market competition because the proposed requirements 
will uniformly apply to all market participants desiring to qualify for 
MARS.
    With respect to Complex Orders, the Exchange believes that not 
requiring the Phlx members to enable the electronic routing of orders 
to all of the U.S. options exchanges and not requiring Phlx members to 
provide current consolidated market data from the U.S. options 
exchanges, in connection with Complex Orders, does not create an undue 
burden on intra-market competition because all Phlx members that 
qualify for the subsidy will have the ability to count Complex Orders 
toward their Eligible Contracts and be subject to similar requirements. 
The Exchange also notes that CBOE currently offers ORS and CORS which, 
similar to the current proposal, allow CBOE members to enter into 
subsidy arrangements with TPHs that provide certain order routing 
functionalities to other CBOE TPHs and/or use such functionalities 
themselves.\41\
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    \41\ See note 43. CBOE's programs permit both CBOE members and 
CBOE non-members to be eligible for a rebate. CBOE members are 
eligible to receive exchange transaction fees on transactions that 
earn a non-CBOE member a subsidy payment.
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MARS Eligible Contracts
    The Exchange believes that excluding floor, QCC, PIXL, Mini Options 
and Single Listed Orders does not create an undue burden on intra-
market competition because these types of orders will uniformly be 
excluded from the volume calculation for all qualifying Phlx members 
for MARS.
    The Exchange believes that excluding Customer, Market Makers and 
Specialists orders from the types of orders that would be eligible for 
MARS does not create an undue burden on intra-market competition 
because Customers are not assessed transaction fees and are eligible 
for rebates. With respect to Specialists and Market Makers, the 
Exchange offers as Specialists and Market Makers certain rebates in 
SPY, assesses them lower transaction fees as compared to other market 
participants and offers them the ability cap their transaction fees.
    Finally, the Exchange believes that the 30,000 Eligible Contracts 
requirement does not create an undue burden on intra-market competition 
because this level will be uniformly applied to all qualifying Phlx 
members.
MARS Payment
    The Exchange believes that paying the proposed MARS Payment to 
qualifying Phlx members that have System eligibility and have executed 
the Eligible Contracts does not create an undue burden on intra-market 
competition, even when a different Phlx member, other than the Phlx 
member receiving the subsidy, may be liable for transaction charges, 
because this sort of arrangement already exists on the Exchange and 
would be uniformly applied to all qualifying Phlx members.
    The Exchange believes that paying the proposed MARS Payment to 
qualifying Phlx members that have System eligibility and have executed 
the Eligible Contracts in a month, solely on executed Firm orders, does 
not create an undue burden on intra-market competition because the 
Exchange is counting all Firm, JBO, Broker-Dealer and Professional 
volume toward the Eligible Contracts. Customers, Specialists and Market 
Makers are offered other pricing incentives such as rebates, no fees or 
lower fees and the Monthly Market Maker Cap. The increased order flow 
will bring

[[Page 72773]]

increased liquidity to 50the Exchange for the benefit of all Exchange 
participants. To the extent the purpose of the proposed MARS is 
achieved, all the Exchange's market participants, including 
Professionals and Broker-Dealers, should benefit from the improved 
market liquidity.
    The Exchange believes that preventing members from receiving any 
other revenue for the use of its routing system, specifically with 
respect to orders routed to Phlx, with the exception of PFOF, does not 
create undue burden on intra-market competition because the Exchange 
would continue to uniformly apply its MARS requirements to all Phlx 
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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act.\42\
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    \42\ 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-2015-89 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2015-89. 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-2015-89, and should be 
submitted on or before December 11, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\43\
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    \43\ 17 CFR 200.30-3(a)(31).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-29602 Filed 11-19-15; 8:45 am]
BILLING CODE 8011-01-P


