[Federal Register Volume 85, Number 96 (Monday, May 18, 2020)]
[Notices]
[Pages 29770-29773]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-10517]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88858; File No. SR-Phlx-2020-26]
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
May 12, 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 April 30, 2020, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed
with the Securities and Exchange Commission (``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 Exchange also proposes to correct a technical amendment
within Options 7, Section 1.
While the changes proposed herein are effective upon filing, the
Exchange has designated the amendments become operative on May 1, 2020.
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 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: (1) Decrease an
existing strategy cap for certain strategies; and (2) establish a new
daily cap for certain strategies in a single class of options.\3\ The
Exchange also proposes to correct a technical amendment within Options
7, Section 1.
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\3\ The term ``class of options'' means all option contracts of
the same type of option covering the same underlying stock or
Exchange-Traded Fund Share (in the case of options on a stock or
Exchange-Traded Fund Share) or the same underlying foreign currency
(in the case of options on a foreign currency). See Options 1,
Section 1(b)(9). The Exchange proposes to replace the terms
``options class'' and ``options classes'' in the current rule text,
within Options 7, Section 4, with the terms ``class of options'' and
``classes of options'', respectively, to conform to the defined
term.
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Today, 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.\4\
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\4\ See Phlx's Pricing Schedule at Options 7, Section 4.
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Currently, the Exchange offers the following strategy caps:
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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 trading $1,100
Professional, Firm and Broker-Dealer. 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 trading 1,100
Professional, Firm and Broker-Dealer. merger, short stock day for all options classes
interest, jelly roll, in the aggregate when such
and box spread members are trading (1) in
strategies. 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,
[[Page 29771]]
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.
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.
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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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The Exchange proposes to add the phrase ``(daily)'' next to the
daily caps and ``(monthly)'' next to the monthly cap in the Cap column
for clarity. The Exchange also proposes to rename the ``Cap'' column as
``Daily/Monthly Cap.''
The Exchange proposes to amend the strategy cap applicable to Lead
Market Makers,\11\ Market Makers,\12\ Professionals,\13\ Firms \14\ and
Broker-Dealers \15\ with respect to reversal and conversion, merger,
short stock interest, jelly roll and box spread strategies from $1,100
to $1,000. The Exchange believes that its proposal will incentivize
members to transact a greater number of reversal and conversion,
merger, short stock interest, jelly roll and box spread strategies
because the cap for these strategies is being lowered from $1,100 to
$1,000. As proposed, the Exchange notes that this daily cap applies to
strategies that were executed on the same trading day for all classes
of options in the 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. The
Exchange also proposes to state within the rule text, after the amended
$1,000 cap and the term ``(daily),'' ``if more than one class of
options.'' The daily cap applies to executions for all classes of
options. The Exchange proposes to add this rule text because it is
proposing a new daily cap applicable to executions in a single class of
options.
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\11\ The term ``Lead Market Maker'' applies to transactions for
the account of a Lead Market Maker (as defined in Options 2, Section
12(a)). A Lead Market Maker is an Exchange member who is registered
as an options Lead Market Maker pursuant to Rule Options 2, Section
12(a). An options Lead Market Maker includes a Remote Lead Market
Maker which is defined as an options Lead Market Maker in one or
more classes that does not have a physical presence on an Exchange
floor and is approved by the Exchange pursuant to Options 2, Section
11. See Options 7, Section 1.
\12\ The term ``Market Maker'' is defined in Options 1, Section
1(b)(28) as a member of the Exchange who is registered as an options
Market Maker pursuant to Options 2, Section 12(a). A Market Maker
includes SQTs and RSQTs as well as on and Floor Market Makers. See
Options 7, Section 1.
\13\ The term ``Professional'' applies to transactions for the
accounts of Professionals, as defined in Exchange Rule 1000(b)(43)
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 Options 7, Section 1.
\14\ 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. See Options 7,
Section 1.
\15\ The term ``Broker-Dealer'' applies to any transaction which
is not subject to any of the other transaction fees applicable
within a particular category. See Options 7, Section 1.
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The Exchange proposes to establish a new daily cap of $700 for
reversal and conversion, merger, short stock interest, jelly roll and
box spread strategies in a single class of options. Lead Market Makers,
Market Makers, Professionals, Firms and Broker-Dealers who execute
reversal and conversion, merger, short stock interest, jelly roll and
box spread strategies on the same trading day in a single class of
options will be subject to the daily strategy cap of $700. The Exchange
qualifications, as proposed, executed on the same trading day for all
classes of options in the aggregate when such members are trading (1)
in their own proprietary accounts; or (2) on an agency basis still
apply.\16\ For example, if a Lead Market Maker executed reversal and
conversion strategies only in AAPL options, and otherwise met the
qualifications for a reversal and conversion cap, the proposed $700
daily cap would apply. If the Lead Market Maker executed reversal and
conversion strategies in AAPL and SPY options, and otherwise met the
qualifications for a reversal and conversion cap, the proposed $1,000
daily cap would apply. The Exchange believes that offering a daily cap,
when executions are only in a single class of options, will incentivize
members to transact a greater number of reversal and conversion,
merger, short stock interest, jelly roll and box spread strategies.
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\16\ If transacted on an agency basis, the daily cap will apply
per beneficial account.
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The Exchange proposes to amend a cross-reference within the
description of the term ``Customer'' within Options 7, Section 1.
Specifically, the Exchange proposes to amend the cross-reference to the
term ``Professional,'' within that description of Customer, from Rule
1000(b)(43) to Options 1, Section 1(b)(45).
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\17\ in general, and furthers the objectives of
Sections 6(b)(4) and 6(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 any
facility, 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) 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
[[Page 29772]]
broader forms that are most important to investors and listed
companies.'' \19\
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\19\ 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
\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 NetCoalition, at 534-535.
\22\ Id. at 537.
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Further, ``[n]o one disputes that competition for order flow is
`fierce.' . . . As the SEC explained, `[i]n the U.S. national market
system, buyers and sellers of securities, and the broker-dealers that
act as their order-routing agents, have a wide range of choices of
where to route orders for execution'; [and] `no exchange can afford to
take its market share percentages for granted' because `no exchange
possesses a monopoly, regulatory or otherwise, in the execution of
order flow from broker dealers'. . . .'' \23\ Although the court and
the SEC were discussing the cash equities markets, the Exchange
believes that these views apply with equal force to the options
markets.
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\23\ 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 decrease the strategy cap applicable to
Lead Market Makers, Market Makers, Professionals, Firms and Broker-
Dealers with respect to reversal and conversion, merger, short stock
interest, jelly roll and box spread strategies from $1,100 to $1,000 is
reasonable because it will incentivize Lead Market Makers, Market
Makers, Professionals, Firms and Broker-Dealers to transact a greater
number of reversal and conversion, merger, short stock interest, jelly
roll and box spread strategies with the lower cap.
The Exchange's proposal to decrease the strategy cap applicable to
Lead Market Makers, Market Makers, Professionals, Firms and Broker-
Dealers with respect to reversal and conversion, merger, short stock
interest, jelly roll and box spread strategies from $1,100 to $1,000 is
equitable and not unfairly discriminatory because all Lead Market
Makers, Market Makers, Professionals, Firms and Broker-Dealers may
qualify for the reversal and conversion, merger, short stock interest,
jelly roll and box spread strategy cap provided they transact the
requisite amount of reversal and conversion, merger, short stock
interest, jelly roll and box spread strategies, wherein the buy and
sell side of a transaction originated either from the Exchange Trading
Floor or as a Floor Qualified Contingent Cross Order. The Exchange
notes that while Customers \24\ are not offered the strategy caps,
Customers are not assessed the Options Transaction Charges within
Options 7, Section 4.
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\24\ The term ``Customer'' applies to any transaction that is
identified by a member or member organization for clearing in the
Customer range at The Options Clearing Corporation (``OCC'') which
is not for the account of a broker or dealer or for the account of a
``Professional'' (as that term is defined in Options 1, Section
1(b)(45)). See proposed Options 7, Section 1.
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The Exchange's proposal to establish a new daily cap of $700 for
reversal and conversion, merger, short stock interest, jelly roll and
box spread strategies in a single class of options, with the same
qualifications as today, is reasonable. The proposed daily cap will
incentivize Lead Market Makers, Market Makers, Professionals, Firms and
Broker-Dealers to execute a greater number of reversal and conversion,
merger, short stock interest, jelly roll and box spread strategies for
the opportunity to qualify for the new daily cap.
The Exchange's proposal to establish a new daily cap of $700 for
reversal and conversion, merger, short stock interest, jelly roll and
box spread strategies in a single class of options, with the same
qualifications as today, is equitable and not unfairly discriminatory
because all Lead Market Makers, Market Makers, Professionals, Firms and
Broker-Dealers may qualify for the reversal and conversion, merger,
short stock interest, jelly roll and box spread daily strategy cap
provided they transact the requisite amount of reversal and conversion,
merger, short stock interest, jelly roll and box spread strategies,
wherein the buy and sell side of a transaction originated either from
the Exchange Trading Floor or as a Floor Qualified Contingent Cross
Order in a single class of options. The Exchange notes that while
Customers are not offered the strategy caps, Customers are not assessed
the Options Transaction Charges within Options 7, Section 4.
The Exchange's proposal to amend a cross-reference within the
description of the term ``Customer'' within Options 7, Section 1 from
Rule 1000(b)(43) to Options 1, Section 1(b)(45) is a non-substantive
amendment.
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 decrease the strategy cap applicable to
Lead Market Makers, Market Makers, Professionals, Firms and Broker-
Dealers with respect to reversal and conversion, merger, short stock
interest, jelly roll and box spread strategies from $1,100 to $1,000
does not impose an undue burden on competition because all Lead Market
Makers, Market Makers, Professionals, Firms and Broker-Dealers may
qualify for the reversal and conversion, merger, short stock interest,
jelly roll and box spread strategy cap provided they transact the
requisite amount of reversal and conversion, merger, short stock
interest, jelly roll and box spread strategies, wherein the buy and
sell side of a transaction originated either from the Exchange Trading
Floor or as a Floor Qualified Contingent Cross Order. The Exchange
notes that while Customers are not offered the strategy caps, Customers
are
[[Page 29773]]
not assessed the Options Transaction Charges within Options 7, Section
4.
The Exchange's proposal to establish a new daily cap of $700 for
reversal and conversion, merger, short stock interest, jelly roll and
box spread strategies in a single class of options, with the same
qualifications as today, does not impose an undue burden on competition
because all Lead Market Makers, Market Makers, Professionals, Firms and
Broker-Dealers may qualify for the reversal and conversion, merger,
short stock interest, jelly roll and box spread daily strategy cap
provided they transact the requisite amount of reversal and conversion,
merger, short stock interest, jelly roll and box spread strategies,
wherein the buy and sell side of a transaction originated either from
the Exchange Trading Floor or as a Floor Qualified Contingent Cross
Order in a single class of options. The Exchange notes that while
Customers are not offered the strategy caps, Customers are not assessed
the Options Transaction Charges within Options 7, Section 4.
The Exchange's proposal to amend a cross-reference within the
description of the term ``Customer'' within Options 7, Section 1 from
Rule 1000(b)(43) to Options 1, Section 1(b)(45) is a non-substantive
amendment.
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.\25\
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\25\ 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-2020-26 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-2020-26. 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-2020-26 and should be submitted on
or before June 8, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\26\
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\26\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-10517 Filed 5-15-20; 8:45 am]
BILLING CODE 8011-01-P