[Federal Register Volume 85, Number 71 (Monday, April 13, 2020)]
[Notices]
[Pages 20548-20551]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-07655]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88581; File No. SR-Phlx-2020-17]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend Phlx's
Pricing Schedule at Options 7, Section 4
April 7, 2020.
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 30, 2020, 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 Phlx's Pricing Schedule at Options
7, Section 4, ``Multiply Listed Options Fees (Includes options
overlying equities, ETFs, ETNs and indexes which are Multiply
Listed).''
The text of the proposed rule change is available on the Exchange's
website at http://nasdaqphlx.cchwallstreet.com/, at the principal
office of the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the
[[Page 20549]]
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Phlx proposes to amend its pricing within Options 7, Section 4,
``Multiply Listed Options Fees (Includes options overlying equities,
ETFs, ETNs and indexes which are Multiply Listed)'' to permit the
strategy caps, which currently apply to the buy and sell side of a
transaction that originate from the Exchange floor, to also apply to
Floor Qualified Contingent Cross Orders.
Phlx open outcry trading closed on March 17, 2020 due to measures
taken by the Exchange to prevent the spread of the Coronavirus Disease
(COVID-19).\3\ Phlx intends to permit Floor Brokers, on a temporary
basis, to access and utilize, in a limited capacity, the Floor Based
Management System (FBMS) from a remote location other than the Phlx
Trading Floor. Phlx will permit, pursuant to Options 8, Section 32, to
make all order types unavailable, with the exception of Section 32(e)
Floor Qualified Contingent Cross Orders (``QCC''), for execution within
FBMS.\4\ Today, Phlx applies the below strategy caps to the buy and
sell side of a transaction, which must originate from the Exchange
floor:
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\3\ See Options Trader Alert #2020-7.
\4\ Floor QCC transactions do not require exposure in open
outcry. Additionally, Floor Brokers may also place orders on the
limit order book electronically through the FBMS pursuant to Options
8, Section 28(g).
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Floor options transactions--multiply
listed options Strategy Qualification Cap
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Lead Market Maker, Market Maker, dividend.................. executed on the same $1,100
Professional, Firm and Broker-Dealer. trading day in the same
options class when such
members are trading: (1)
In their own proprietary
accounts; or (2) on an
agency basis. If
transacted on an agency
basis, the daily cap will
apply per beneficial
account.
Lead Market Maker, Market Maker, reversal and conversion, executed on the same $1,100
Professional, Firm and Broker-Dealer. merger, short stock trading day for all
interest, jelly roll, and options classes in the
box spread strategies. aggregate when such
members are trading (1)
in their own proprietary
accounts; or (2) on an
agency basis. If
transacted on an agency
basis, the daily cap will
apply per beneficial
account.
Per member organization................. dividend, merger, short combined executions in a $65,000
stock interest, reversal month when trading in its
and conversion, jelly own proprietary accounts.
roll and box spread
strategies (``Monthly
Strategy Cap'').
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Reversal and conversion, jelly roll and box spread strategy executions will not be included in the
Monthly Strategy Cap for a Firm. Reversal and conversion, jelly roll and box spread strategy executions (as
defined in this Options 7, Section 4) are included in the Monthly Firm Fee Cap. All dividend, merger, short
stock interest, reversal and conversion, jelly roll and box spread strategy executions (as defined in this
Options 7, Section 4) will be excluded from the Monthly Market Maker Cap. NDX and NDXP Options Transactions
will be excluded from Strategy Cap pricing.
In light of the recent closure of open outcry, the Exchange
proposes to apply the strategy caps within Options 7, Section 4 to
qualifying strategies executed as Floor QCC Orders. The Exchange offers
strategy caps for various types of strategies, including dividend,\5\
merger,\6\ short stock interest,\7\ reversal and conversion,\8\ jelly
roll \9\ and box spread \10\ strategies. The Exchange proposes to amend
the rule text within Options 7, Section 4 to provide, ``To qualify for
a strategy cap, the buy and sell side of a transaction must originate
either from the Exchange Trading Floor or as a Floor Qualified
Contingent Cross Order.'' The Exchange is changing ``floor'' to
``Trading Floor'' to be more specific. The Exchange believes that this
proposal will allow members to avail themselves of the strategy caps
within Options 7, Section 4 to the extent that they execute qualifying
strategies as Floor QCC Orders, as open outcry is unavailable.
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\5\ A dividend strategy is defined as transactions done to
achieve a dividend arbitrage involving the purchase, sale and
exercise of in-the-money options of the same class, executed the
first business day prior to the date on which the underlying stock
goes ex-dividend. See Options 7, Section 4.
\6\ A merger strategy is defined as transactions done to achieve
a merger arbitrage involving the purchase, sale and exercise of
options of the same class and expiration date, executed the first
business day prior to the date on which shareholders of record are
required to elect their respective form of consideration, i.e., cash
or stock. See Options 7, Section 4.
\7\ A short stock interest strategy is defined as transactions
done to achieve a short stock interest arbitrage involving the
purchase, sale and exercise of in-the-money options of the same
class. See Options 7, Section 4.
\8\ Reversal and conversion strategies are transactions that
employ calls and puts of the same strike price and the underlying
stock. Reversals are established by combining a short stock position
with a short put and a long call position that shares the same
strike and expiration. Conversions employ long positions in the
underlying stock that accompany long puts and short calls sharing
the same strike and expiration. See Options 7, Section 4.
\9\ A jelly roll strategy is defined as transactions created by
entering into two separate positions simultaneously. One position
involves buying a put and selling a call with the same strike price
and expiration. The second position involves selling a put and
buying a call, with the same strike price, but with a different
expiration from the first position. See Options 7, Section 4.
\10\ A box spread strategy is a strategy that synthesizes long
and short stock positions to create a profit. Specifically, a long
call and short put at one strike is combined with a short call and
long put at a different strike to create synthetic long and
synthetic short stock positions, respectively. See Options 7,
Section 4.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\11\ in general, and furthers the
[[Page 20550]]
objectives of Sections 6(b)(4) and 6(b)(5) of the Act,\12\ in
particular, in that it provides for the equitable allocation of
reasonable dues, fees and other charges among members and issuers and
other persons using any facility, and is not designed to permit unfair
discrimination between customers, issuers, brokers, or dealers.
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\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(4) and (5).
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The Commission and the courts have repeatedly expressed their
preference for competition over regulatory intervention in determining
prices, products, and services in the securities markets. In Regulation
NMS, while adopting a series of steps to improve the current market
model, the Commission highlighted the importance of market forces in
determining prices and SRO revenues and, also, recognized that current
regulation of the market system ``has been remarkably successful in
promoting market competition in its broader forms that are most
important to investors and listed companies.'' \13\
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\13\ Securities Exchange Act Release No. 51808 (June 9, 2005),
70 FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting
Release'').
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Likewise, in NetCoalition v. Securities and Exchange Commission
\14\ (``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.\15\ 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.'' \16\
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\14\ NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010).
\15\ See NetCoalition, at 534-535.
\16\ 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'. . . .'' \17\ 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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\17\ Id. at 539 (quoting Securities Exchange Act Release No.
59039 (December 2, 2008), 73 FR 74770, 74782-83 (December 9, 2008)
(SR-NYSEArca-2006-21)).
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The Exchange's proposal to permit qualifying strategies executed as
Floor QCC Orders to qualify for a strategy cap is reasonable. Since
Phlx's open outcry trading is currently unavailable, members are unable
to qualify for strategy caps by transacting qualifying strategies that
originate from the Trading Floor. Members are able to execute Floor QCC
Orders through a remote connection to FBMS as Floor QCC Orders do not
require exposure in open outcry. Floor QCC Orders are distinct from
Qualified Contingent Cross orders submitted electronically.\18\ The
Exchange continues to permit strategy caps to apply to Trading Floor
members only with this proposal. The Exchange's proposal to amend
Options 7, Section 4 to extend the criteria to qualify for a strategy
cap to Floor QCC Orders that qualify as a strategy will allow members
to benefit from the strategy caps within Options 7, Section 4.
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\18\ See Options 3, Section 7(b)(8).
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The Exchange's proposal to permit qualifying strategies executed as
Floor QCC Orders to qualify for a strategy cap is equitable and not
unreasonably discriminatory. Any member who transacts a qualifying
strategy as a Floor QCC Order will be entitled to cap their strategies
as provided for within Options 7, Section 4, provided the cap
qualifications within Options 7, Section 4 are met.
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.
Inter-Market Competition
The proposal does not impose an undue burden on inter-market
competition. The Exchange believes its proposal remains competitive
with other options markets and will offer market participants with
another choice of where to transact options. 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 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.
Intra-Market Competition
The proposed amendments do not impose an undue burden on intra-
market competition.
The Exchange's proposal to permit qualifying strategies executed as
Floor QCC Orders to qualify for a strategy cap does not impose an undue
burden on competition. Any member who transacts a qualifying strategy
as a Floor QCC Order will be entitled to cap their strategies as
provided for within Options 7, Section 4, provided the cap
qualifications within Options 7, Section 4 are met.
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.\19\
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\19\ 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 [email protected]. Please include
File Number SR-Phlx-2020-17 on the subject line.
[[Page 20551]]
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-2020-17. 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 website (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 website 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. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-Phlx-2020-17 and should be submitted on
or before May 4, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-07655 Filed 4-10-20; 8:45 am]
BILLING CODE 8011-01-P