
[Federal Register Volume 81, Number 57 (Thursday, March 24, 2016)]
[Notices]
[Pages 15761-15765]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-06604]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77402; File No. SR-Phlx-2016-21]


Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Rebates 
and Fees for Adding and Removing Liquidity in SPY

DATE: March 18, 2016.

    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 March 10, 2016, NASDAQ PHLX LLC (``Exchange'') filed with the 
Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule change as described in Items I, II, and III, below, which 
Items have been prepared by the Exchange. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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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 Phlx Pricing Schedule at Section 
I, entitled ``Rebates and Fees for Adding and Removing Liquidity in 
SPY,'' specifically related to PIXL \3\ executions in options overlying 
SPY.\4\
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    \3\ PIXL\SM\ is the Exchange's price improvement mechanism known 
as Price Improvement XL or PIXL. A member may electronically submit 
for execution an order it represents as agent on behalf of a public 
customer, broker-dealer, or any other entity (``PIXL Order'') 
against principal interest or against any other order (except as 
provided in Rule 1080(n)(i)(E)) it represents as agent (``Initiating 
Order''), provided it submits the PIXL order for electronic 
execution into the PIXL Auction pursuant to Rule 1080. See Exchange 
Rule 1080(n).
    \4\ Options overlying Standard and Poor's Depositary Receipts/
SPDRs (``SPY'') are based on the SPDR exchange-traded fund, which is 
designed to track the performance of the S&P 500 Index.
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    The text of the proposed rule change is available on the Exchange's 
Web site

[[Page 15762]]

at http://nasdaqomxphlx.cchwallstreet.com/, at the principal office of 
the Exchange, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to amend language in the Pricing Schedule at 
Section I, entitled ``Rebates and Fees for Adding and Removing 
Liquidity in SPY,'' related to PIXL executions in SPY.
Background
SR-Phlx-2013-61
    Effective June 3, 2013, the Exchange filed a rule change \5\ to 
adopt new pricing specific to options overlying Standard and Poor's 
Depositary Receipts/SPDRs (``SPY'').\6\ The Exchange adopted ``Make/
Take'' pricing for SPY in both Simple and Complex Orders. The Exchange 
adopted SPY PIXL Pricing at that time. The Exchange adopted the 
following rule text concerning PIXL Orders:
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    \5\ See Securities Exchange Act Release No. 69768 (June 14, 
2013), 78 FR 37250 (June 20, 2013) (SR-Phlx-2013-61) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend 
Various Sections of the Exchange's Pricing Schedule).
    \6\ SPY options are based on the SPDR exchange-traded fund 
(``ETF''), which is designed to track the performance of the S&P 500 
Index.

    `When the PIXL Order is contra to other than the Initiating 
Order, the PIXL Order will be assessed $0.00 per contract, unless 
the order is a Customer, in which case the Customer will receive a 
rebate of $0.38 per contract. All other contra parties to the PIXL 
Order, other than the Initiating Order, will be assessed a Fee for 
Removing Liquidity of $0.38 per contract or will receive the Rebate 
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for Adding Liquidity.'

    In that rule change, the Exchange noted that it was adopting PIXL 
Pricing to ``. . . assess Initiating Orders in SPY options $0.05 per 
contract for all market participants. In addition, when the PIXL Order 
is contra to the Initiating Order, a Customer PIXL Order will be 
assessed $0.00 per contact and all non-Customer market participants 
will be assessed a $0.38 per contract fee when contra to the Initiating 
Order. Also, when a PIXL Order is contra to other than the Initiating 
Order, the PIXL Order will be assessed $0.00 per contract, unless the 
order is a Customer, in which case the Customer will receive a rebate 
of $0.38 per contract. All other contra parties to the PIXL Order, 
other than the Initiating Order, will be assessed a reduced Fee for 
Removing Liquidity of $0.38 per contract or will receive the Rebate to 
Add Liquidity.'' The Exchange added a footnote in that filing, footnote 
21, to further describe the phrase ``other than an Initiating Order,'' 
as, for example, a PIXL Auction Responder or a resting order or quote 
that was on the Phlx book prior to the auction. In that proposal, the 
Exchange reasoned, ``The Exchange believes it is reasonable that all 
other contra parties to the PIXL Order, other than the Initiating 
Order, will be equally assessed a reduced Fee for Removing Liquidity of 
$0.38 per contract when removing or they will receive the Rebate for 
Adding Liquidity if adding because the Exchange desires to equally 
provide all market participants the same incentivizes to encourage them 
to transact a greater number of SPY PIXL Orders.''
    The Exchange also reasoned that ``[a]lso, the Exchange proposes to 
uniformly assess all market participants a fee when a Customer rebate 
would be paid to enable the Exchange to offer the rebate. The Exchange 
believes that widening the differential as between the Initiating Order 
Fee and the contra party to the PIXL Order ($0.05 vs. $0.38) as 
compared to the cost to transact a PIXL Order today ($0.05 or $0.07 per 
contract vs. $0.30) does not misalign the cost of these transactions 
depending on the market participant because the Exchange would now not 
assess a fee in the case that PIXL Order is contra to other than the 
Initiating Order, which is not a Customer, and would pay the Customer a 
rebate in the case where the contra party is a Customer.''
    The Exchange assessed all contra-parties to the SPY PIXL Order, 
other than the Initiating Order, a fee of $0.38 per contract as a 
result of this rule change.
SR-Phlx-2015-25
    On March 11, 2015, the Exchange filed a rule change to amend the 
SPY PIXL pricing established by SR-Phlx-2013-61.\7\ In that filing, the 
Exchange proposed to amend the following rule text, ``All other contra 
parties to the PIXL Order, other than the Initiating Order, will be 
assessed a Fee for Removing Liquidity of $0.38 per contract or will 
receive the Rebate for Adding Liquidity'' \8\ to add the term ``Non-
Customer'' to the sentence and increase the Fee for Removing Liquidity 
from $0.38 to $0.42 per contract. The term Non-Customer was being 
introduced in this rule change into the Pricing Schedule.\9\ The 
Exchange at that time stated in the purpose section to SR-Phlx-2015-25,
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    \7\ See Securities Exchange Act Release No. 74531 (March 19, 
2015), 80 FR 15850 (March 25, 2015) (SR-Phlx-2015-25) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating 
to the Pricing Schedule's Preface and Sections I, II and IV).
    \8\ The quoted text is the original text which was amended by 
SR-Phlx-2015-25.
    \9\ The term ``Non-Customer'' applies to transactions for the 
accounts of Specialists, Market Makers, Firms, Professionals, 
Broker-Dealers and JBOs.

    `The Exchange also proposes to amend PIXL fees in SPY in Section 
I of the Pricing Schedule. Today, when a PIXL Order is contra to 
other than the Initiating Order, the PIXL Order will be assessed 
$0.00 per contract, unless the order is a Customer, in which case 
the Customer will receive a rebate of $0.38 per contract. All other 
contra parties to the PIXL Order, other than the Initiating Order, 
will be assessed a Fee for Removing Liquidity of $0.38 per contract 
or will receive the Rebate for Adding Liquidity. The Exchange is 
proposing to increase the amount that all other contra parties to 
the PIXL Order, other than the Initiating Order, will be assessed to 
remove liquidity from $0.38 to $0.42 per contract. These contra 
parties will continue to be entitled to receive the Rebate for 
Adding Liquidity, as is the case today. Despite, the increase [the 
Exchange] believes that its current SPY PIXL fees remain 
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competitive.'

    Footnote 13 in that rule change indicated that a member may 
electronically submit for execution an order it represents as agent on 
behalf of a public customer, broker-dealer, or any other entity (``PIXL 
Order'') against principal interest or against any other order (except 
as provided in Rule 1080(n)(i)(E)) it represents as agent (``Initiating 
Order'') provided it submits the PIXL order for electronic execution 
into the PIXL Auction (``Auction'') pursuant to Rule 1080. Non-
Initiating Order interest could be a PIXL Auction Responder or a 
resting order or quote that was on the Phlx book prior to the auction.
    As a result of the amendments to SR-Phlx-2015-25, the Exchange's 
current rule text does not address the amount a Customer would be 
assessed if the

[[Page 15763]]

Customer was a contra-party responder to a SPY PIXL Order, other than 
the Initiating Order. Today, no fee is assessed to the Customer contra 
party to a SPY PIXL Order.
Proposal
    The Exchange proposes to assess a Customer contra party to a PIXL 
Order a Fee for Removing Liquidity of $0.42 per contract, similar to 
all other contra parties to a SPY PIXL Order. The Exchange's proposal 
would increase the Customer Fee for Removing Liquidity, when the 
Customer is a contra party to the PIXL Order, other than the Initiating 
Order, from $0.00 to $0.42 per contract.
    The Exchange proposes to (i) add the word ``PIXL'' in the first 
sentence to clarify the type of order being discussed; and (ii) remove 
the reference to ``other Non-Customer'' in the second sentence, to 
assess the $0.42 per contract Fee for Removing to Liquidity to all 
participants, including a Customer and make the second sentence its own 
paragraph. The proposed rule text would be as follows, ``When the PIXL 
Order is contra to other than the Initiating Order, the PIXL Order will 
be assessed $0.00 per contract, unless the PIXL Order is a Customer, in 
which case the Customer will receive a rebate of $0.38 per contract.'' 
Separately, in another paragraph, the proposed rule text would be as 
follows, ``All contra parties to the PIXL Order that are not the 
Initiating Order will be assessed a Fee for Removing Liquidity of $0.42 
per contract or will receive the Rebate for Adding Liquidity.'' The 
Exchange is also adding some clarifying language in this sentence to 
make clear that the contra parties are note [sic] the Initiating Order.
    To further explain this amendment and the role of the contra party, 
during a PIXL Auction, a paired order may be entered into the auction 
consisting of a PIXL Order and an Initiating Order. If during the 
auction, non-Initiating Order interest \10\ executes against the PIXL 
Order, the Exchange would assess a Fee for Removing Liquidity of $0.42 
per contract or will receive the Rebate for Adding Liquidity, 
regardless of the capacity of the contra party. The contra party in 
this example may be a Customer order.\11\
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    \10\ Non-Initiating Order interest could be a PIXL Auction 
Responder or a resting order or quote that was on the Phlx book 
prior to the auction.
    \11\ This contra party Customer order would be different than 
the original Customer PIXL Order.
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    The Exchange proposes to correct a typographical error in this 
section to capitalize ``non-Customer'' to state ``Non-Customer'' to 
properly refer to the defined term. The Exchange also proposes to 
remove extraneous parentheticals from Section I in the Simple Order 
Rebate for Adding Liquidity in the Specialist and Market Maker pricing.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \12\ in general, and furthers the objectives of 
Sections 6(b)(4) and 6(b)(5) of the Act \13\ 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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    \12\ 15 U.S.C. 78f(b).
    \13\ 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.'' \14\ Likewise, in NetCoalition v. 
Securities and Exchange Commission \15\ (``NetCoalition'') the DC 
Circuit upheld the Commission's use of a market-based approach in 
evaluating the fairness of market data fees against a challenge 
claiming that Congress mandated a cost-based approach.\16\ 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.'' \17\
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    \14\ Securities Exchange Act Release No. 51808 at 37499 (June 9, 
2005) (``Regulation NMS Adopting Release'').
    \15\ NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010).
    \16\ See NetCoalition, at 534.
    \17\ 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'. . . .'' \18\ 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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    \18\ Id. at 539 (quoting ArcaBook Order, 73 FR at 74782-74783).
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    The Exchange's proposal to increase the amount that Customer contra 
parties to a PIXL Order that were not the Initiating Order will be 
assessed to remove liquidity from $0.00 to $0.42 per contract is 
reasonable because despite the increase in the fee, the Exchange 
believes this pricing will continue to incentivize market participants 
to transact a greater number of SPY options. Customers will continue to 
receive a rebate of $0.38 per contract when the PIXL Order is a 
Customer order and is contra to other than the Initiating Order. The 
Exchange's proposal to increase the Fee for Removing Liquidity for 
Customer contra-parties to the PIXL Order in SPY that are not the 
Initiating Order from $0.00 to $0.42 per contract remains lower than 
the $0.43 per contract Simple Order Fee for Removing Liquidity that is 
assessed for Simple Orders in SPY.\19\ Today, all other market 
participants that are not the Initiating Order, other than a Customer, 
who execute against the PIXL Order, are assessed a Fee for Removing 
Liquidity of $0.42 per contract. The Exchange believes that it should 
assess the Customer a fee similar to other market participants. The 
Exchange notes that today, a Customer is assessed a $0.43 per contract 
Simple Order Fee for Removing Liquidity in SPY. The proposed $0.42 per 
contract Customer Fee for Removing Liquidity for Customer contra-
parties to the PIXL Order which are not the Initiating Order in SPY 
would continue to be lower than the Simple Order Fee for Removing 
Liquidity.
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    \19\ See Section I of the Pricing Schedule. Customers are 
assessed a $0.43 per contract Simple Order Fee for Removing 
Liquidity in SPY while Non-Customers are assessed a $0.47 per 
contract Simple Order Fee for Removing Liquidity in SPY.
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    SPY options are currently the most actively traded options class 
and therefore the Exchange believes that incentivizing Customers to 
remove liquidity in SPY options by continuing to offer a lower rate as 
compared to Simple Order Fees for Removing Liquidity in SPY will 
benefit all market participants by providing incentives for price 
improvement, such as this reduction in the Fee for Removing Liquidity. 
Despite the increase, the Exchange believes the Fee for Removing

[[Page 15764]]

Liquidity will continue to encourage a greater number of market 
participants to remove Customer liquidity in SPY on Phlx because the 
proposed rate of $0.42 per contract is lower the $0.43 per contract 
Simple Order Fee for Removing Liquidity that is assessed for Simple 
Orders in SPY. Customer orders bring valuable liquidity to the market 
which liquidity benefits other market participants.
    The Exchange's proposal to increase the amount that Customer contra 
parties to the PIXL Order that are not the Initiating Order will be 
assessed to remove liquidity from $0.00 to $0.42 per contract is 
equitable and not unfairly discriminatory because the Exchange will be 
assessing the same Fees for Removing Liquidity for SPY PIXL options to 
all market participants that are contra parties to the PIXL Order in 
SPY, other than the Initiating Order. Customer liquidity benefits all 
market participants by providing more trading opportunities, which 
attracts Specialists and Market Makers. A higher percentage of SPY 
Orders in PIXL leads to increased auctions and better opportunities for 
price improvement.
    The Exchange believes that it is reasonable, equitable and not 
unfairly discriminatory to correct the typographical error to properly 
refer to a defined term, remove extraneous parentheticals from Section 
I and make other clarifying language. These rule changes are non-
substantive.

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.
    The proposed increase to the amount that Customer contra parties to 
the PIXL Order that are not the Initiating Order will be assessed to 
remove liquidity does not impose a burden on inter-market competition, 
because the Exchange is competing with other options markets which 
offer price improvement mechanisms. A higher percentage of SPY Orders 
in PIXL leads to increased auctions and better opportunities for price 
improvement for all market participants. In sum, if the changes 
proposed herein are unattractive to market participants, it is likely 
that the Exchange will lose market share as a result. Accordingly, the 
Exchange does not believe that the proposed changes will impair the 
ability of members or competing order execution venues to maintain 
their competitive standing in the financial markets.
    The Exchange's proposal to amend the Fee for Removing Liquidity 
applicable to Customers that are contra to a SPY PIXL Order, other than 
the Initiating Order, does not impose any undue burden on intra-market 
competition as all market participants will be assessed the same fee of 
$0.42 per contract to remove liquidity as other contra party market 
participants. Customer orders bring valuable liquidity to the market, 
which liquidity benefits all market participants. This proposal also 
corrects a discrepancy in the rule text which does not currently 
address fees for Customer responders.
    The Exchange's proposal to correct a typographical error to 
properly refer to a defined term, remove extraneous parentheticals from 
Section I and make other clarifying language does not impose any undue 
burden on intra-market competition as these rule changes are non-
substantive.

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.\20\
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    \20\ 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-2016-21 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-Phlx-2016-21. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml).

    Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for Web site viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE., Washington, 
DC 20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly.
    All submissions should refer to File Number SR-Phlx-2016-21 and 
should

[[Page 15765]]

be submitted on or before April 14, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-06604 Filed 3-23-16; 8:45 am]
 BILLING CODE 8011-01-P


