
[Federal Register Volume 81, Number 144 (Wednesday, July 27, 2016)]
[Notices]
[Pages 49293-49299]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-17668]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78382; File No. SR-Phlx-2016-62]


Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Related to 
Affiliated Entities

July 21, 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 July 15, 2016, NASDAQ PHLX LLC (``Phlx'' or ``Exchange'') filed with 
the Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule change as described in Items I, II, and III, below, which 
Items have been prepared by the Exchange. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend the Preface, Section B and Section 
II of the Exchange's Pricing Schedule to permit certain affiliated 
market participants to aggregate volume and qualify for various pricing 
incentives in the Pricing Schedule.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqphlx.cchwallstreet.com/ 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 purpose of the proposed rule change is to permit certain 
affiliated market participants to aggregate volume and qualify for 
various pricing incentives in the Pricing Schedule. Specifically, the 
Exchange proposes to amend the Pricing Schedule at Section B, Customer 
\3\ Rebates and at Section II, Multiply-Listed Options Fees,\4\ to 
offer

[[Page 49294]]

Affiliated Entities certain rebate and fee incentives.
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    \3\ 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 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)).
    \4\ These fees include options overlying equities, ETFs, ETNs 
and indexes which are Multiply Listed.
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Affiliated Entity
    The Exchange proposes to add three definitions to the Preface of 
the Pricing Schedule. The Exchange proposes to define the terms 
``Appointed MM,'' ``Appointed OFP,'' and ``Affiliated Entity.'' The 
Exchange proposes to define the term ``Appointed MM'' as a Phlx Market 
Maker \5\ or Specialist \6\ who has been appointed by an Order Flow 
Provider (``OFP'') for purposes of qualifying as an Affiliated Entity. 
An OFP is a member or member organization that submits orders, as agent 
or principal, to the Exchange.\7\ The Exchange proposes to define the 
term ``Appointed OFP'' as an OFP who has been appointed by a Phlx 
Market Maker or Specialist for purposes of qualifying as an Affiliated 
Entity. The Exchange proposes to define the term ``Affiliated Entity'' 
as a relationship between an Appointed MM and an Appointed OFP for 
purposes of qualifying for certain pricing as specified in the Pricing 
Schedule. In order to become an Affiliated Entity, Market Makers or 
Specialists, and OFPs will be required to send an email to the Exchange 
to appoint their counterpart, at least 3 business days prior to the 
last day of the month to qualify for the next month.\8\ For example, 
with this proposal, market participants may submit emails to the 
Exchange to become Affiliated Entities eligible to qualify for 
discounted pricing starting August 1, 2016, provided the emails are 
sent at least 3 business days prior to the first business day of August 
2016. The Exchange will acknowledge receipt of the emails and specify 
the date the Affiliated Entity would be eligible to qualify for 
applicable pricing, as specified in the Pricing Schedule. Each 
Affiliated Entity relationship will commence on the 1st of a month and 
may not be terminated prior to the end of any month. An Affiliated 
Entity relationship will terminate after a one (1) year period, unless 
either party terminates earlier in writing by sending an email to the 
Exchange at least 3 business days prior to the last day of the month to 
terminate for the next month. Affiliated Entity relationships must be 
renewed annually. For example, if the start date of the Affiliated 
Entity relationship is August 1, 2016, the counterparties may determine 
to commence a new relationship as of August 1, 2017 by sending two new 
emails by July 27, 2017 (3 business days prior to the end of the 
month). Members and member organizations under Common Ownership \9\ may 
not qualify as a counterparty comprising an Affiliated Entity. Each 
member or member organization may qualify for only one (1) Affiliated 
Entity relationship at any given time.
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    \5\ The term ``Market Maker'' will be utilized to describe fees 
and rebates applicable to Registered Options Traders (``ROTs''), 
Streaming Quote Traders (``SQTs''), Remote Streaming Quote Traders 
(``RSQTs''). An ROT is defined in Exchange Rule 1014(b) is a regular 
member or a foreign currency options participant of the Exchange 
located on the trading floor who has received permission from the 
Exchange to trade in options for his own account. A ROT includes 
SQTs and RSQTs as well as on and off-floor ROTS. An SQT is defined 
in Exchange Rule 1014(b)(ii)(A) as an ROT who has received 
permission from the Exchange to generate and submit option 
quotations electronically in options to which such SQT is assigned. 
An RSQT is defined in Exchange Rule in 1014(b)(ii)(B) as an ROT that 
is a member affiliated with an RSQTO with no physical trading floor 
presence who has received permission from the Exchange to generate 
and submit option quotations electronically in options to which such 
RSQT has been assigned. A Remote Streaming Quote Trader Organization 
or ``RSQTO,'' which may also be referred to as a Remote Market 
Making Organization (``RMO''), is a member organization in good 
standing that satisfies the RSQTO readiness requirements in Rule 
507(a). RSQTs may also be referred to as Remote Market Markers 
(``RMMs'').
    \6\ The term ``Specialist'' shall apply to the account of a 
Specialist (as defined in Exchange Rule 1020(a)). A Specialist is an 
Exchange member who is registered as an options specialist pursuant 
to Rule 501(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.
    \7\ Specialist and Market Makers submitting quotes to the 
Exchange shall not be considered Appointed OFPs for the purpose of 
becoming an Affiliated Entity.
    \8\ The Exchange shall issue an Options Trader Alert specifying 
the email address and details required to apply to become an 
Affiliated Entity.
    \9\ The term ``Common Ownership'' shall mean members or member 
organizations under 75% common ownership or control. Phlx members or 
member organizations that are under 75% common ownership or control 
shall be considered under Common Ownership for purposes of pricing.
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    As proposed, an Affiliated Entity shall be eligible to aggregate 
their volume for purposes of qualifying for certain pricing specified 
in the Pricing Schedule, as described below.
Section B--Customer Rebates
    The Exchange proposes to amend Section B, entitled ``Customer 
Rebate Program'' to permit Affiliated Entities to aggregate their 
Customer volume for purposes of calculating Customer Rebate Tiers and 
receiving rebates. Currently, the Exchange has a Customer Rebate 
Program consisting of the following five tiers that pay Customer 
rebates on three Categories, A, B and C, of transactions:

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                                       Percentage thresholds of
                                     national customer volume in
                                      multiply-listed equity and
       Customer rebate tiers             ETF Options classes,       Category A      Category B      Category C
                                        excluding SPY Options
                                              (monthly)
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Tier 1.............................  0.00%-0.60%................           $0.00           $0.00           $0.00
Tier 2.............................  Above 0.60%-1.10%..........           $0.10           $0.10           $0.17
Tier 3.............................  Above 1.10%-1.60%..........           $0.15           $0.12           $0.17
Tier 4.............................  Above 1.60%-2.50%..........           $0.20           $0.16           $0.22
Tier 5.............................  Above 2.50%................           $0.21           $0.17           $0.22
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    A Phlx member qualifies for a certain rebate tier based on the 
percentage of total national customer volume in multiply-listed options 
that it transacts monthly on Phlx. The Exchange calculates Customer 
volume in Multiply Listed Options by totaling electronically-delivered 
and executed volume, excluding volume associated with electronic 
Qualified Contingent Cross (``QCC'') Orders, as defined in Exchange 
Rule 1080(o).\10\ The Exchange proposes to incentivize certain members 
and member organizations, who are not under Common Ownership, to enter 
into an Affiliated Entity relationship for the purpose of aggregating 
Customer volume to qualify for Section B Customer Rebates. By 
aggregating volume, the counterparties comprising the Affiliated Entity 
are offered an opportunity to qualify for higher rebates, thereby 
lowering costs and encouraging members to send more order flow. 
Customer liquidity benefits all market participants by providing

[[Page 49295]]

more order flow to the marketplace and more trading opportunities.
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    \10\ In calculating electronically-delivered and executed 
Customer volume in Multiply Listed Options, the numerator of the 
equation includes all electronically-delivered and executed Customer 
volume in Multiply Listed Options. The denominator of that equation 
includes national customer volume in multiply-listed equity and ETF 
options volume, excluding SPY. See Section B of the Pricing 
Schedule.
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    Affiliated Entities may aggregate Customer volume as between the 
Appointed MM and Appointed OFP to qualify for any of the five tiers of 
Customer Rebates that pay Category, A, B or C rebates on transactions. 
An Appointed OFP would be eligible to receive the additional $0.02 per 
contract Category A and B rebate and the additional $0.03 per contract 
Category C rebate, paid in addition to the applicable Tier 2 and 3 
rebate, currently available to a Specialist or Market Maker or its 
member or member organization affiliate under Common Ownership, 
provided the Appointed MM has reached the Monthly Market Maker Cap, as 
defined in Section II.
    The Exchange proposes to amend the language in Section B to clarify 
the applicability of the $0.02 per contract rebate in addition to 
Categories A and B and the $0.03 per contract rebate in addition to 
Category C, applicable to Tiers 2 and 3. The Exchange proposes to 
relocate certain language and add language to amend the sentence as 
follows: ``The Exchange will pay a $0.02 per contract Category A and B 
rebate and a $0.03 per contract Category C rebate in addition to the 
applicable Tier 2 and 3 rebate, provided the Specialist, Market Maker 
or Appointed MM has reached the Monthly Market Maker Cap as defined in 
Section II, to: (1) A Specialist or Market Maker who is not under 
Common Ownership or is not a party of an Affiliated Entity; or (2) an 
OFP member or member organization affiliate under Common Ownership; or 
(3) an Appointed OFP of an Affiliated Entity.''
    The Exchange's proposal would incentivize certain members and 
member organizations, which are not under Common Ownership, to enter 
into an Affiliated Entity relationship for the purpose of aggregating 
Customer volume to qualify the Appointed OFP for Customer Rebates in 
Section B of the Pricing Schedule. Phlx members and member 
organizations that are under 75% common ownership or control will be 
considered under Common Ownership and therefore by definition are not 
eligible to enter an Affiliated Entity relationship.
Section II--Options Transaction Charge
    The Exchange proposes to amend Section II of the Pricing Schedule 
to offer members and member organizations that are Appointed OFPs of 
Affiliated Entities transacting non-Customer orders an opportunity to 
reduce non-Penny Pilot electronic Options Transaction Charges. Today, 
the Exchange assesses a Professional,\11\ Broker-Dealer \12\ and Firm 
\13\ a non-Penny Pilot electronic Options Transaction Charge of $0.75 
per contract and a Specialist and Market Maker a $0.25 per contract 
non-Penny Pilot electronic Options Transaction Charge. The Exchange 
proposes to provide an Appointed OFP of an Affiliated Entity with an 
opportunity to lower the Professional, Broker-Dealer and Firm non-Penny 
Pilot electronic Options Transaction Charge from $0.75 to $0.60 per 
contract provided the Affiliated Entity qualifies for Customer Rebate 
Tiers 4 \14\ or 5 \15\ in Section B of the Pricing Schedule. The 
Exchange proposes to provide an Appointed MM of an Affiliated Entity 
with an opportunity to lower the Specialist and Market Maker non-Penny 
Pilot electronic Options Transaction Charge from $0.25 to $0.23 per 
contract provided the Affiliated Entity qualifies for Customer Rebate 
Tiers 4 or 5 in Section B of the Pricing Schedule.\16\
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    \11\ 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).
    \12\ The term ``Broker-Dealer'' applies to any transaction which 
is not subject to any of the other transaction fees applicable 
within a particular category.
    \13\ The term ``Firm'' applies to any transaction that is 
identified by a member or member organization for clearing in the 
Firm range at The Options Clearing Corporation.
    \14\ The Tier 4 Customer Rebate in Section B of the Pricing 
Schedule requires Customer volume above 1.60% to 2.50% of National 
Customer Volume in Multiply Listed Equity and ETF Options, excluding 
SPY. This rebate tier pays a Category A $0.20 rebate, a Category B 
$0.16 rebate and a Category C $0.22 rebate.
    \15\ The Tier 5 Customer Rebate in Section B of the Pricing 
Schedule requires Customer volume above 2.50% of National Customer 
Volume in Multiply Listed Equity and ETF Options, excluding SPY. 
This rebate tier pays a Category A $0.21 rebate, a Category B $0.17 
rebate and a Category C $0.22 rebate.
    \16\ Today, any member or member organization under Common 
Ownership with another member or member organization that qualifies 
for Customer Rebate Tiers 4 or 5 in Section B of the Pricing 
Schedule is assessed either a $0.23 or $0.60 per contract non-Penny 
Pilot electronic Options Transaction Charge.
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    The Exchange's proposal would incentivize certain members and 
member organizations, who are not under Common Ownership, to enter into 
an Affiliated Entity relationship for the purpose of aggregating 
Customer volume to qualify for reduced non-Penny Pilot Options 
Transaction Charges.
2. Statutory Basis
    The Exchange believes that its proposal to amend its Pricing 
Schedule is consistent with Section 6(b) of the Act,\17\ in general, 
and furthers the objectives of Section 6(b)(4) and (b)(5) of the 
Act,\18\ 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 its facilities, and is not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(4), (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.'' \19\
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    \19\ Securities Exchange Act Release No. 51808 (June 29, 2005), 
70 FR 37496 at 37499 (File No. S7-10-04) (``Regulation NMS Adopting 
Release'').
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    Likewise, in NetCoalition v. Securities and Exchange Commission 
\20\ (``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.\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\ NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010).
    \21\ See id. at 534-535.
    \22\ See 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

[[Page 49296]]

that these views apply with equal force to the options markets.
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    \23\ See id. at 539 (quoting Securities Exchange Act Commission 
at Release No. 59039 (December 2, 2008), 73 FR 74770 at 74782-74783 
(December 9, 2008) (SR-NYSEArca-2006-21)).
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    The Exchange's proposal to amend the Preface of the Pricing 
Schedule to add the definitions of ``Appointed MM,'' ``Appointed OFP'' 
and ``Affiliated Entity'' is reasonable because the Exchange is 
proposing to identify the applicable market participants that may 
qualify to aggregate volume as an Affiliated Entity. Further the 
Exchange seeks to make clear the manner in which members and member 
organizations may participate on the Exchange as Affiliated Entities by 
setting timeframes for communicating agreements among market 
participants and terms of early termination. The Exchange also clearly 
states that no member or member organization under Common Ownership may 
become a counterparty to an Affiliated Entity. Any Phlx member or 
member organization who meets the definition of Common Ownership shall 
not be eligible to become an Affiliated Entity. The Exchange believes 
that these terms are reasonable because they would allow members or 
member organizations to elect to become a counterparty to an Affiliated 
Entity, provided they are not under Common Ownership.
    The Exchange's proposal to amend the Preface of the Pricing 
Schedule to add the definitions of ``Appointed MM,'' ``Appointed OFP'' 
and ``Affiliated Entity'' is equitable and not unfairly discriminatory 
because all member or members that are not under Common Ownership by 
definition may choose to enter into an Affiliated Entity relationship.
Section B Customer Rebates
    The Exchange's proposal to permit Affiliated Entities to aggregate 
Customer volume for purposes of qualifying Appointed OFPs for Section B 
Customer Rebates is reasonable because it will attract additional 
Customer order flow to the Exchange. Customer liquidity benefits all 
market participants by providing more trading opportunities, which 
attracts Market Makers and Specialists. An increase in the activity of 
these market participants in turn facilitates tighter spreads, which 
may cause an additional corresponding increase in order flow from other 
market participants. Appointed OFPs directing order flow to the 
Exchange may be eligible to qualify for a Customer Rebate or a higher 
Customer Rebate tier, with this proposal, as a result of aggregating 
volume with an Appointed MM and thereby qualifying for higher Customer 
Rebates. Permitting members and member organizations to affiliate for 
purposes of qualifying for Section B Customer Rebates may also 
encourage the counterparties that comprise the Affiliated Entities to 
incentivize each other to attract and seek to execute more Customer 
volume on Phlx. In turn, market participants would benefit from the 
increased liquidity with which to interact and potentially tighter 
spreads on orders. Overall, incentivizing market participants with 
increased opportunities to earn higher Customer rebates may increase 
the quality of the liquidity available on Phlx.
    The Exchange's proposal to permit Affiliated Entities to aggregate 
Customer volume for purposes of qualifying Appointed OFPs for Section B 
Customer rebates is equitable and not unfairly discriminatory because 
all Phlx members and member organizations, other than those that meet 
the definition of Common Ownership, may elect to become an Affiliated 
Entity as either an Appointed MM or an Appointed OFP.\24\ Also, each 
member or member organization may participate in only one Affiliated 
Entity relationship at a given time, which imposes a measure of 
exclusivity among market participants, allowing each party to rely on 
the other's executed Customer volume on Phlx to receive a corresponding 
benefit in terms of a higher rebate. Any market participant that by 
definition is not under Common Ownership may elect to become a 
counterparty of an Affiliated Entity.
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    \24\ Both members must elect each other to become an Affiliated 
Entity for one year. Participation is effected by an agreement of 
both parties that have provided proper notification to the Exchange. 
A party may elect to terminate the agreement at any time prior to 
one year.
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    The Exchange's proposal to exclude members and member organizations 
that are under Common Ownership from qualifying as an Affiliated Entity 
is reasonable because members and member organizations under Common 
Ownership may aggregate volume today for purposes of Section B Customer 
Rebates.\25\ The Exchange's proposal to exclude members and member 
organizations that by definition are under Common Ownership from 
qualifying as an Affiliated Entity is equitable and not unfairly 
discriminatory because the Exchange will apply all qualifications in a 
uniform manner when approving Affiliated Entities. Excluding members 
and member organizations that by definition are under Common Ownership 
from also qualifying as an Affiliated Entity is equitable and not 
unfairly discriminatory because they are able to aggregate volume today 
and qualify for Customer Rebates in Section B.
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    \25\ See Section B of the Pricing Schedule.
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Section II--Options Transaction Charges
    The Exchange's proposal to amend note 3 of Section II of the 
Pricing Schedule to offer members and member organizations that are 
Affiliated Entities an opportunity to reduce non-Customer non-Penny 
Pilot electronic Options Transaction Charges is reasonable because the 
Exchange believes it will encourage these market participants to 
transact a greater amount of Customer volume on Phlx. The Exchange's 
proposal to permit Appointed OFPs of Affiliated Entities to qualify for 
the reduced non-Penny Pilot electronic Options Transaction Charges by 
qualifying for Customer Rebate Tiers 4 or 5 in Section B of the Pricing 
Schedule will attract additional Customer order flow to the Exchange. 
Customer liquidity benefits all market participants by providing more 
trading opportunities, which attracts Market Makers and Specialists. An 
increase in the activity of these market participants in turn 
facilitates tighter spreads, which may cause a corresponding increase 
in order flow from other market participants. Appointed OFPs directing 
order flow to the Exchange may be eligible to qualify for these 
Customer rebate tiers as a result of aggregating volume with another 
appointed member and benefit from reduced non-Penny Pilot electronic 
Options Transaction Charges. Permitting members and member 
organizations to affiliate for purposes of qualifying for Section B 
Customer rebates may also encourage the counterparties of an Affiliated 
Entity to incentivize each other to attract and seek to execute more 
Customer volume on Phlx. The Affiliated Entity relationship would 
permit the Appointed OFP to benefit from reduced non-Penny Pilot 
electronic Options Transaction Charges. In turn, market participants 
would benefit from the increased liquidity with which to interact and 
potentially tighter spreads on orders. The Exchange believes that 
lowering these fees for electronic non-Penny Pilot Options Transaction 
Charges, as compared to Penny Pilot Options Transaction Charges, is 
reasonable because today, Penny Pilot Options are the most traded and 
more liquid than Non-Penny Pilot Options. Electronic Penny Pilot 
Options Transaction Charges are lower for Professionals, Broker-Dealers 
and Firms because of the demand in the marketplace. The Exchange is 
offering Appointed OFPs the opportunity to reduce the higher electronic 
non-Penny Pilot Options Transaction Charges for

[[Page 49297]]

Professionals, Broker-Dealers and Firms with this incentive, provided 
they qualify for the reduced non-Penny Pilot electronic Options 
Transaction Charges by qualifying for Customer Rebate Tiers 4 or 5 in 
Section B of the Pricing Schedule.
    The Exchange's proposal to amend note 3 of Section II of the 
Pricing Schedule to offer members and member organizations that are 
Affiliated Entities an opportunity to reduce non-Customer non-Penny 
Pilot electronic Options Transaction Charges is equitable and not 
unfairly discriminatory because the Exchange will assess Appointed OFPs 
a reduced Professional, Broker-Dealer and Firm electronic Options 
Transaction Charge in Non-Penny Pilot Options. The Exchange does not 
assess Customers an electronic Options Transaction Charge in Non-Penny 
Pilot Options because Customer order flow enhances liquidity on the 
Exchange for the benefit of all market participants. Customer liquidity 
benefits all market participants by providing more trading 
opportunities, which attracts Specialists and Market Makers. An 
increase in the activity of these market participants in turn 
facilitates tighter spreads, which may cause an additional 
corresponding increase in order flow from other market participants. 
Specialists and Market Makers are assessed lower electronic Options 
Transaction Charges in Non-Penny Pilot Options as compared to 
Professionals, Broker-Dealers and Firms because they have obligations 
to the market and regulatory requirements, which normally do not apply 
to other market participants.\26\ They have obligations to make 
continuous markets, engage in a course of dealings reasonably 
calculated to contribute to the maintenance of a fair and orderly 
market, and not make bids or offers or enter into transactions that are 
inconsistent with a course of dealings. The proposed differentiation as 
between Customers, Specialists and Market Makers and other market 
participants recognizes the differing contributions made to the 
liquidity and trading environment on the Exchange by these market 
participants. The Exchange believes that offering Appointed OFPs an 
opportunity to lower fees for electronic non-Penny Pilot Options 
Transaction Charges as compared to Penny Pilot Options Transaction 
Charges is equitable and not unfairly discriminatory because the 
Exchange seeks to offer lower fees to those market participants paying 
the highest electronic non-Penny Pilot Options Transaction Charges.
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    \26\ See Rule 1014 titled ``Obligations and Restrictions 
Applicable to Specialists and Registered Options Traders.''
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    The Exchange's proposal to amend note 4 of Section II of the 
Pricing Schedule to offer Appointed MMs of an Affiliated Entity an 
opportunity to reduce the Specialist and Marker Maker electronic non-
Penny Pilot electronic Options Transaction Charges is reasonable 
because today the Exchange offers all market participants, excluding 
Customers who are not assessed a non-Penny Pilot electronic Options 
Transaction Charges, a means to reduce electronic Options Transaction 
Charges by qualifying for a Customer Rebate in Section B of the Pricing 
Schedule. Even with the reduced rate for Professionals, Broker-Dealers 
and Firms of $0.60 per contract, Specialists and Market Makers will 
continue to be assessed the lowest electronic Options Transaction 
Charge in Non-Penny Pilot Options because they have obligations to the 
market and regulatory requirements, which normally do not apply to 
other market participants.\27\ The Exchange believes that offering 
Appointed MMs an opportunity to benefit from lower fees for electronic 
non-Penny Pilot Options Transaction Charges is reasonable because the 
reduced electronic non-Penny Pilot will be consistent with the current 
lower reduced Penny Pilot Options Transaction charges ($0.25 vs. $0.22 
per contract).
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    \27\ Id.
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    The Exchange's proposal to amend note 4 of Section II of the 
Pricing Schedule to offer Appointed MMs of an Affiliated Entity an 
opportunity to reduce the Specialist and Marker Maker electronic non-
Penny Pilot electronic Options Transaction Charges is equitable and not 
unfairly discriminatory because the Exchange seeks to incentivize 
Specialists and Market Makers to increase their activity on Phlx and in 
turn facilitate tighter spreads, which may cause an additional 
corresponding increase in order flow from other market participants. 
Specialists and Market Makers have obligations to the market and 
regulatory requirements, which normally do not apply to other market 
participants.\28\ They have obligations to make continuous markets, 
engage in a course of dealings reasonably calculated to contribute to 
the maintenance of a fair and orderly market, and not make bids or 
offers or enter into transactions that are inconsistent with a course 
of dealings. The Exchange believes that offering Appointed MMs the 
opportunity to receive this additional benefit will continue to benefit 
the marketplace as described herein. The Exchange believes that 
lowering electronic non-Penny Pilot Options Transaction Charges as 
compared to electronic Penny Pilot Options Transaction Charges is 
equitable and not unfairly discriminatory because the Exchange is 
offering market participants the opportunity to reduce the higher 
electronic non-Penny Pilot Options Transaction Charges for Specialists 
and Market Makers with this incentive and permitting Appointed MMs to 
also receive this discount, provided they qualify.
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    \28\ Id.
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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. Specifically, the Exchange does 
not believe that permitting counterparties to an Affiliated Entity to 
aggregate volume to qualify for certain rebates and reduced fees will 
impose any undue burden on competition, as discussed below.
    The Exchange operates in a highly competitive market in which many 
sophisticated and knowledgeable market participants can readily and do 
send order flow to competing exchanges if they deem fee levels or 
rebate incentives at a particular exchange to be excessive or 
inadequate. Additionally, new competitors have entered the market and 
still others are reportedly entering the market shortly. These market 
forces ensure that the Exchange's fees and rebates remain competitive 
with the fee structures at other trading platforms.
    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

[[Page 49298]]

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 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. 
In terms of inter-market competition, the Exchange notes that other 
options markets have similar incentives in place to attract volume to 
their markets.\29\
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    \29\ See NYSE MKT LLC's (``NYSE Amex'') pricing at NYSE Amex 
Options Fee Schedule). NYSE Amex permits aggregation of volume to 
qualify for the Amex Customer Engagement or ACE Program. See Bats 
BZX Exchange, Inc.'s (``BZX'') fee schedule. BZX permits aggregation 
of volume to qualify for tiered pricing. See the Chicago Board 
Options Exchange Incorporated (``CBOE'') Fees Schedule. CBOE permits 
aggregation of volume to qualify for credits available under an 
Affiliated Volume Plan or ``AVP.''
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    The Exchange's proposal to amend the Preface of the Pricing 
Schedule to add the definitions of ``Appointed MM,'' ``Appointed OFP'' 
and ``Affiliated Entity'' does not impose an undue burden on 
competition because these definitions apply to all members and member 
organizations uniformly.
Section B Customer Rebates
    In terms of intra-market competition, the Exchange does not believe 
that its proposal to permit counterparties of an Affiliated Entity to 
aggregate Customer volume for purposes of qualifying for Section B 
Customer Rebates imposes an undue burden on intra-market competition 
because all Phlx members and member organizations, other than those 
under Common Ownership, may become an Affiliated Entity as either an 
Appointed MM or an Appointed OFP. Also, each Phlx member or member 
organization may participate in only one Affiliated Entity relationship 
at a given time, which imposes a measure of exclusivity among market 
participants, allowing each party to rely on the other's executed 
Customer volume on Phlx to receive a corresponding benefit in terms of 
a higher rebate. The Exchange will apply all qualifications in a 
uniform manner to all market participants that elect to become 
counterparties of an Affiliated Entity. Any market participant that is 
by definition a member or member organization under Common Ownership 
may not become a counterparty of an Affiliated Entity.
    Market Makers and Specialists are valuable market participants that 
provide liquidity in the marketplace and incur costs that other market 
participants do not incur. Market Makers and Specialists are subject to 
burdensome quoting obligations \30\ to the market that do not apply to 
other market participants. Incentivizing these market participants to 
execute Customer volume on Phlx may result in tighter spreads. An 
increase in the activity of these market participants in turn 
facilitates tighter spreads, which may cause an additional 
corresponding increase in order flow from other market participants. 
Appointed OFPs directing order flow to the Exchange may be eligible to 
qualify for a Customer Rebate or a higher Customer Rebate tier, with 
this proposal, as a result of aggregating volume with an Appointed MM 
and thereby qualifying for higher Customer Rebates. Permitting members 
and member organizations to affiliate for purposes of qualifying for 
Section B Customer Rebates may also encourage the counterparties that 
comprise the Affiliated Entities to incentivize each other to attract 
and seek to execute more Customer volume on Phlx.
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    \30\ See note 26 above.
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    The Exchange's proposal to exclude members and member organizations 
that are under Common Ownership from becoming an Affiliated Entity does 
not impose and [sic] undue burden on intra-market competition because 
member and member organizations under Common Ownership may aggregate 
volume today for purposes of qualifying for Customer Rebates.
Section II--Options Transaction Charges
    The Exchange's proposal to amend note 3 of Section II of the 
Pricing Schedule to offer Appointed OFPs of Affiliated Entities an 
opportunity to reduce non-Customer non-Penny Pilot electronic Options 
Transaction Charges does not impose an undue burden on intra-market 
competition because the Exchange will assess Appointed OFPs a reduced 
Professional, Broker-Dealer and Firm electronic Options Transaction 
Charge in Non-Penny Pilot Options. The Exchange does not assess 
Customers an electronic Options Transaction Charge in Non-Penny Pilot 
Options because Customer order flow enhances liquidity on the Exchange 
for the benefit of all market participants. Customer liquidity benefits 
all market participants by providing more trading opportunities, which 
attracts Specialists and Market Makers. An increase in the activity of 
these market participants in turn facilitates tighter spreads, which 
may cause an additional corresponding increase in order flow from other 
market participants. Specialists and Market Makers are assessed lower 
electronic Options Transaction Charges in Non-Penny Pilot Options as 
compared to Professionals, Broker-Dealers and Firms because they have 
obligations to the market and regulatory requirements, which normally 
do not apply to other market participants.\31\ They have obligations to 
make continuous markets, engage in a course of dealings reasonably 
calculated to contribute to the maintenance of a fair and orderly 
market, and not make bids or offers or enter into transactions that are 
inconsistent with a course of dealings. The proposed differentiation as 
between Customers, Specialists and Market Makers and other market 
participants recognizes the differing contributions made to the 
liquidity and trading environment on the Exchange by these market 
participants. The Exchange will apply all qualifications for the 
reduced rate in a uniform manner. The Exchange believes that lowering 
these fees for electronic non-Penny Pilot Options Transaction Charges 
as compared to electronic Penny Pilot Options Transaction Charges does 
not impose an undue burden on intra-market competition because the 
Exchange seeks to offer lower fees to those market participants paying 
the highest electronic non-Penny Pilot Options Transaction Charges.
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    \31\ See note 26 above.
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    The Exchange's proposal to amend note 4 of Section II of the 
Pricing Schedule to offer Appointed MMs of Affiliated Entities an 
opportunity to reduce non-Customer electronic non-Penny Pilot 
electronic Options Transaction Charges does not impose an undue burden 
on intra-market competition because the Exchange seeks to incentivize 
Specialists and Market Makers to increase their activity on Phlx and in 
turn facilitate tighter spreads, which may cause an additional 
corresponding increase in order flow from other market participants. 
Specialists and Market have obligations to the market and regulatory 
requirements, which normally do not apply to other market 
participants.\32\ They have obligations to make continuous markets, 
engage in a course of dealings reasonably calculated to contribute to 
the maintenance of a fair and orderly market, and not make bids or 
offers or enter into transactions that are inconsistent with a course 
of dealings. The Exchange believes that permitting Affiliated [sic] MMs 
to receive this additional benefit will continue to benefit the market 
place as

[[Page 49299]]

described herein. The Exchange believes that lowering these fees for 
electronic non-Penny Pilot Options Transaction Charges as compared to 
Penny Pilot Options Transaction Charges does not impose an undue burden 
on intra-market competition because the electronic non-Penny Pilot 
Options Transaction Charges is higher ($0.25 vs. $0.22 per contract).
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    \32\ See note 26 above.
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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.\33\
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    \33\ 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-2016-62 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-2016-62. 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-2016-62 and should be 
submitted on or before August 17, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
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    \34\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-17668 Filed 7-26-16; 8:45 am]
 BILLING CODE 8011-01-P


