[Federal Register: November 29, 2010 (Volume 75, Number 228)]
[Notices]
[Page 73140-73144]
[DOCID:fr29no10-141]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63351; File No. SR-Phlx-2010-154]

Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change Relating to
Fees for the PHOTO Historical Data Product

November 19, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on November 8, 2010, NASDAQ OMX PHLX, Inc. (``Phlx'' or the
``Exchange'') filed with the Securities and Exchange Commission (the
``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 its fee schedule by establishing
fees for a new market data product, PHLX Options Trade Outline
(``PHOTO'') Historical Data. PHOTO Historical Data provides subscribers
with historical information about the past activity on the Exchange
during a particular calendar month, broken down by each option series
traded on the Exchange.\3\ The proposed fees would become effective on
and after November 15, 2010. PHOTO Historical Data is available only
for internal use and distribution by subscribers.
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    \3\ PHOTO Historical Data will be available for the month of
August 2010 and for each calendar month dating back to January 2009.
PHOTO Historical Data will not be available for any calendar month
prior to January 2009.
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    The text of the proposed rule change is available on the Exchange's
Web site at http://nasdaqtrader.com/micro.aspx?id=PHLXfilings, 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 the
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to establish fees for
the PHOTO Historical Data market data product.
PHOTO
    In September 2010, the Exchange established fees for its PHOTO
market data product.\4\ PHOTO is a market data product offered by the
Exchange that is designed to provide proprietary electronic trade data
to subscribers. PHOTO is available as either an ``End-of-Day'' data
product or an ``Intra-Day'' data product, as described more fully
below. PHOTO Historical Data will permit a subscriber to select a
particular prior calendar month or months and receive the ``End of
Day'' or ``Intra-Day'' data for each trading session conducted during
the calendar month(s) selected. Like PHOTO, the PHOTO Historical Data
product is available to any person who wishes to subscribe to it,
regardless of whether or not they are a member of the Exchange. The
fees for the PHOTO Historical Data product are uniform for all
subscribers.
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    \4\ See Securities Exchange Act Release No. 62887 (September 10,
2010), 75 FR 57092 (September 17, 2010) (SR-Phlx-2010-121).
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PHOTO Historical Data
    PHOTO Historical Data provides information about the past activity
of all option series for each trading session conducted during a
particular prior calendar month, as selected by the subscriber. PHOTO
Historical Data subscribers will receive the following data:
     Aggregate number of buy and sell transactions in the
affected series for each trading session conducted during the specified
calendar month(s);
     Aggregate volume traded electronically on the Exchange in
the affected series for each trading session conducted during the
specified calendar month(s);
     Aggregate number of trades effected on the Exchange to
open a position \5\ for each trading session conducted during the
specified calendar month(s);
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    \5\ PHOTO Historical Data will provide subscribers with the
aggregate number of ``opening purchase transactions'' in the
affected series for each trading session conducted during the
calendar month(s) selected. An opening purchase transaction is an
Exchange options transaction in which the purchaser's intention is
to create or increase a long position in the series of options
involved in such transaction. See Exchange Rule 1000(b)(24). PHOTO
Historical Data will also provide subscribers with the aggregate
number of ``opening writing transactions'' in the affected series
for each trading session conducted during the calendar month(s)
selected. An opening writing transaction is an Exchange options
transaction in which the seller's (writer's) intention is to create
or increase a short position in the series of options involved in
such transaction. See Exchange Rule 1000(b)(25).
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     Aggregate number of trades effected on the Exchange to
close a position \6\ for each trading session conducted during the
specified calendar month(s);
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    \6\ PHOTO Historical Data will provide subscribers with the
aggregate number of ``closing purchase transactions'' in the
affected series for each trading session conducted during the
calendar month(s) selected. A closing purchase transaction is an
Exchange options transaction in which the purchaser's intention is
to reduce or eliminate a short position in the series of options
involved in such transaction. See Exchange Rule 1000(b)(27). PHOTO
Historical Data will also provide subscribers with the aggregate
number of ``closing sale transactions'' in the affected series for
each trading session conducted during the calendar month(s)
selected. A closing sale transaction is an Exchange options
transaction in which the seller's intention is to reduce or
eliminate a long position in the series of options involved in such
transaction. See Exchange Rule 1000(b)(26).
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     Origin of the orders involved in trades on the Exchange in
the affected series for each trading session conducted during the
specified calendar month(s), specifically aggregated in the following
categories of participants: Customers, broker-dealers, market makers
(including specialists, Registered Options Traders (``ROTs''),
Streaming Quote Traders (``SQTs'') \7\ and Remote Streaming Quote
Traders (``RSQTs'') \8\), and professionals.\9\
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    \7\ An SQT is an Exchange Registered Options Trader (``ROT'')
who has received permission from the Exchange to generate and submit
option quotations electronically in options to which such SQT is
assigned. See Exchange Rule 1014(b)(ii)(A).
    \8\ An RSQT is an ROT that is a member or member organization
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. An
RSQT may only submit such quotations electronically from off the
floor of the Exchange. See Exchange Rule 1014(b)(ii)(B).
    \9\ The term ``professional'' means any person or entity that
(i) is not a broker or dealer in securities, and (ii) places more
than 390 orders in listed options per day on average during a
calendar month for its own beneficial account(s). A professional
will be treated in the same manner as an off-floor broker-dealer for
purposes of Rules 1014(g) (except with respect to all-or-none
orders, which will be treated like customer orders), 1033(e),
1064.02 (except professional orders will be considered customer
orders subject to facilitation), and 1080.08 as well as Options
Floor Procedure Advices B-6, B-11 and F-5. Member organizations must
indicate whether orders are for professionals. See Exchange Rule
1000(b)(14).

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End of Day Product
    The End-of-Day product includes the aggregate data described above
representing the entire trading session. It is calculated during an
overnight process after each trading session and is available to
subscribers for download the following morning at approximately 7 a.m.,
ET. PHOTO Historical Data will provide this data for each trading
session conducted during the calendar month(s) selected by the
subscriber.
    The fee for the PHOTO Historical Data End of Day product for
subscribers is $400.00 per calendar month selected.\10\
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    \10\ For example, a subscriber who requests End of Day PHOTO
Historical Data for the month of March, 2009 would be charged
$400.00. A subscriber who requests End of Day PHOTO Historical Data
for the months of March, 2009 and April, 2009 would be charged
$400.00 for the March, 2009 End of Day PHOTO Historical Data and
$400.00 for the April, 2009 End of Day PHOTO Historical Data, for a
total of $800.00, etc.
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Intra-Day Product
    The Intra-Day product includes periodic, cumulative data for a
particular trading session. The Intra-Day product is produced and
updated every ten minutes during the trading day. Data is captured in
``snapshots'' taken every 10 minutes throughout the trading day and is
available to subscribers within 5 minutes of the conclusion of each 10-
minute period. For example, subscribers to the Intra-Day product will
receive the first calculation of intra-day data at 9:44 a.m. ET, which
represents data captured from 9:30 a.m. to 9:39 a.m. Subscribers will
receive the next update at 9:54 a.m., representing the data previously
provided together with data captured from 9:40 a.m. through 9:49 a.m.,
and so forth. Each update will represent the aggregate data captured
from the current ``snapshot'' and all previous ``snapshots.''
    PHOTO Historical Data will provide this regularly updated data for
each trading session conducted during the specified calendar month(s)
selected by the subscriber. The fee for the PHOTO Historical Data
Intra-Day product subscribers is $750.00 per calendar month
selected.\11\
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    \11\ For example, a subscriber who requests Intra-Day PHOTO
Historical Data for the Month of March, 2009 would be charged
$750.00. A subscriber who requests Intra-Day PHOTO Historical Data
for the months of March, 2009 and April, 2009 would be charged
$750.00 for the March, 2009 Intra-Day PHOTO Historical Data and
$750.00 for the April, 2009 Intra-Day PHOTO Historical Data, for a
total of $1,500.00, etc.
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    PHOTO Historical Data provides subscribers data that should enhance
their ability to analyze option trade and volume data, to evaluate
historical trends in the trading activity of a particular option
series, and to create and test trading models and analytical
strategies. The Exchange believes that PHOTO Historical Data is a
valuable tool that subscribers can use to gain comprehensive insight
into the trading activity in a particular series.
2. Statutory Basis
    PHLX believes that the proposed rule change is consistent with the
provisions of Section 6 of the Act,\12\ in general, and with Section
6(b)(4) of the Act,\13\ in particular, in that it provides an equitable
allocation of reasonable fees among users and recipients of PHLX data.
In adopting Regulation NMS, the Commission granted self-regulatory
organizations and broker-dealers increased authority and flexibility to
offer new and unique market data to the public. It was believed that
this authority would expand the amount of data available to consumers,
and also spur innovation and competition for the provision of market
data.
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    \12\ 15 U.S.C. 78f.
    \13\ 15 U.S.C. 78f(b)(4).
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    The Commission concluded that Regulation NMS--by deregulating the
market in proprietary data--would itself further the Act's goals of
facilitating efficiency and competition:

    ``[E]fficiency is promoted when broker-dealers who do not need
the data beyond the prices, sizes, market center identifications of
the NBBO and consolidated last sale information are not required to
receive (and pay for) such data. The Commission also believes that
efficiency is promoted when broker-dealers may choose to receive
(and pay for) additional market data based on their own internal
analysis of the need for such data.''\14\
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    \14\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496 (June 29, 2005).

    By removing ``unnecessary regulatory restrictions'' on the ability
of exchanges to sell their own data, Regulation NMS advanced the goals
of the Act and the principles reflected in its legislative history. If
the free market should determine whether proprietary data is sold to
broker-dealers at all, it follows that the price at which such data is
sold should be set by the market as well. PHOTO is precisely the sort
of market data product that the Commission envisioned when it adopted
Regulation NMS.
    On July 21, 2010, President Barak Obama signed into law H.R. 4173,
the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
(``Dodd-Frank Act''), which amended Section 19 of the Act. Among other
things, Section 916 of the Dodd-Frank Act amended paragraph (A) of
Section 19(b)(3) of the Act by inserting the phrase ``on any person,
whether or not the person is a member of the self-regulatory
organization'' after ``due, fee or other charge imposed by the self-
regulatory organization.'' As a result, all SRO rule proposals
establishing or changing dues, fees, or other charges are immediately
effective upon filing regardless of whether such dues, fees, or other
charges are imposed on members of the SRO, non-members, or both.
Section 916 further amended paragraph (C) of Section 19(b)(3) of the
Exchange Act to read, in pertinent part, ``At any time within the 60-
day period beginning on the date of filing of such a proposed rule
change in accordance with the provisions of paragraph (1) [of Section
19(b)], the Commission summarily may temporarily suspend the change in
the rules of the self-regulatory organization made thereby, if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of this title. If the Commission takes
such action, the Commission shall institute proceedings under paragraph
(2)(B) [of Section 19(b)] to determine whether the proposed rule should
be approved or disapproved.''
    PHLX believes that these amendments to Section 19 of the Act
reflect Congress' intent to allow the Commission to rely upon the
forces of competition to ensure that fees for market data are
reasonable and equitably allocated. Although Section 19(b) had formerly
authorized immediate effectiveness for a ``due, fee or other charge
imposed by the self-regulatory organization,'' the Commission adopted a
policy and subsequently a rule stipulating that fees for data and other
products available to persons that are not members of the self-
regulatory organization must be approved by the Commission after first
being published for comment. At the time, the Commission supported the
adoption of the policy and the rule by pointing out that unlike
members, whose representation in self-regulatory organization
governance was mandated by the Act, non-members should be given the
opportunity to comment on fees before being required to pay them, and
that the Commission should specifically approve all such fees.
    PHLX believes that the amendment to Section 19 reflects Congress'
conclusion that the evolution of self-regulatory organization
governance and competitive market structure have rendered the
Commission's prior policy on non-member fees obsolete.
    Specifically, many exchanges have evolved from member-owned not-
for-profit corporations into for-profit investor-owned corporations (or
subsidiaries of investor owned

corporations). Accordingly, exchanges no longer have narrow incentives
to manage their affairs for the exclusive benefit of their members, but
rather have incentives to maximize the appeal of their products to all
customers, whether members or nonmembers, so as to broaden distribution
and grow revenues. Moreover, we believe that the change also reflects
an endorsement of the Commission's determinations that reliance on
competitive markets is an appropriate means to ensure equitable and
reasonable prices. Simply put, the change reflects a presumption that
all fee changes should be permitted to take effect immediately, since
the level of all fees are constrained by competitive forces.
    The recent decision of the United States Court of Appeals for the
District of Columbia Circuit in NetCoaliton [sic] v. SEC, No. 09-1042
(DC Cir. 2010), although reviewing a Commission decision made prior to
the effective date of the Dodd-Frank Act, upheld the Commission's
reliance upon competitive markets to set reasonable and equitably
allocated fees for market data. ``In fact, the legislative history
indicates that the Congress intended that the market system `evolve
through the interplay of competitive forces as unnecessary regulatory
restrictions are removed' and that the SEC wield its regulatory power
`in those situations where competition may not be sufficient,' such as
in the creation of a `consolidated transactional reporting system.' ''
\15\
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    \15\ NetCoaltion [sic], at 15 (quoting H.R. Rep. No. 94-229, at
92 (1975), as reprinted in 1975 U.S.C.C.A.N. 321, 323).
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    The court's conclusions about Congressional intent are therefore
reinforced by the Dodd-Frank Act amendments, which create a presumption
that exchange fees, including market data fees, may take effect
immediately, without prior Commission approval, and that the Commission
should take action to suspend a fee change and institute a proceeding
to determine whether the fee change should be approved or disapproved
only where the Commission has concerns that the change may not be
consistent with the Act.

B. Self-Regulatory Organization's Statement on Burden on Competition

    PHLX does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended. Notwithstanding its
determination that the Commission may rely upon competition to
establish fair and equitably allocated fees for market data, the
NetCoaltion [sic] court found that the Commission had not, in that
case, compiled a record that adequately supported its conclusion that
the market for the data at issue in the case was competitive.
    For the reasons discussed above, PHLX believes that the Dodd-Frank
Act amendments to Section 19 materially alter the scope of the
Commission's review of future market data filings, by creating a
presumption that all fees may take effect immediately, without prior
analysis by the Commission of the competitive environment.
    Even in the absence of this important statutory change, however,
PHLX believes that a record may readily be established to demonstrate
the competitive nature of the market in question.
    There is intense competition between trading platforms that provide
transaction execution and routing services and proprietary data
products. Transaction execution and proprietary data products are
complementary in that market data is both an input and a by-product of
the execution service. In fact, market data and trade execution are a
paradigmatic example of joint products with joint costs. The decision
whether and on which platform to post an order will depend on the
attributes of the platform where the order can be posted, including the
execution fees, data quality and price and distribution of its data
products. Without the prospect of a taking order seeing and reacting to
a posted order on a particular platform, the posting of the order would
accomplish little.
    Without trade executions, exchange data products cannot exist. Data
products are valuable to many end users only insofar as they provide
information that end users expect will assist them or their customers
in making trading decisions.
    The costs of producing market data include not only the costs of
the data distribution infrastructure, but also the costs of designing,
maintaining, and operating the exchange's transaction execution
platform and the cost of regulating the exchange to ensure its fair
operation and maintain investor confidence. The total return that a
trading platform earns reflects the revenues it receives from both
products and the joint costs it incurs. Moreover, an exchange's
customers view the costs of transaction executions and of data as a
unified cost of doing business with the exchange. A broker-dealer will
direct orders to a particular exchange only if the expected revenues
from executing trades on the exchange exceed net transaction execution
costs and the cost of data that the broker-dealer chooses to buy to
support its trading decisions (or those of its customers). The choice
of data products is, in turn, a product of the value of the products in
making profitable trading decisions. If the cost of the product exceeds
its expected value, the broker-dealer will choose not to buy it.
Moreover, as a broker-dealer chooses to direct fewer orders to a
particular exchange, the value of the product to that broker-dealer
decreases, for two reasons. First, the product will contain less
information, because executions of the broker-dealer's orders will not
be reflected in it. Second, and perhaps more important, the product
will be less valuable to that broker-dealer because it does not provide
information about the venue to which it is directing its orders. Data
from the competing venue to which the broker-dealer is directing orders
will become correspondingly more valuable.
    Thus, a super-competitive increase in the fees charged for either
transactions or data has the potential to impair revenues from both
products. ``No one disputes that competition for order flow is
`fierce'.'' \16\ However, the existence of fierce competition for order
flow implies a high degree of price sensitivity on the part of broker-
dealers with order flow, since they may readily reduce costs by
directing orders toward the lowest-cost trading venues. A broker-dealer
that shifted its order flow from one platform to another in response to
order execution price differentials would both reduce the value of that
platform's market data and reduce its own need to consume data from the
disfavored platform. Similarly, if a platform increases its market data
fees, the change will affect the overall cost of doing business with
the platform, and affected broker-dealers will assess whether they can
lower their trading costs by directing orders elsewhere and thereby
lessening the need for the more expensive data.
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    \16\ NetCoalition at 24.
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    Analyzing the cost of market data distribution in isolation from
the cost of all of the inputs supporting the creation of market data
will inevitably underestimate the cost of the data. Thus, because it is
impossible to create data without a fast, technologically robust, and
well-regulated execution system, system costs and regulatory costs
affect the price of market data. It would be equally misleading,
however, to attribute all of the exchange's costs to the market data
portion of an exchange's

joint product. Rather, all of the exchange's costs are incurred for the
unified purposes of attracting order flow, executing and/or routing
orders, and generating and selling data about market activity. The
total return that an exchange earns reflects the revenues it receives
from the joint products and the total costs of the joint products.
    Competition among trading platforms can be expected to constrain
the aggregate return each platform earns from the sale of its joint
products, but different platforms may choose from a range of possible,
and equally reasonable, pricing strategies as the means of recovering
total costs. For example, some platforms may choose to pay rebates to
attract orders, charge relatively low prices for market information (or
provide information free of charge) and charge relatively high prices
for accessing posted liquidity. Other platforms may choose a strategy
of paying lower rebates (or no rebates) to attract orders, setting
relatively high prices for market information, and setting relatively
low prices for accessing posted liquidity. In this environment, there
is no economic basis for regulating maximum prices for one of the joint
products in an industry in which suppliers face competitive constraints
with regard to the joint offering. This would be akin to strictly
regulating the price that an automobile manufacturer can charge for car
sound systems despite the existence of a highly competitive market for
cars and the availability of aftermarket alternatives to the
manufacturer-supplied system.
    The market for market data products is competitive and inherently
contestable because there is fierce competition for the inputs
necessary to the creation of proprietary data and strict pricing
discipline for the proprietary products themselves. Numerous exchanges
compete with each other for listings, trades, and market data itself,
providing virtually limitless opportunities for entrepreneurs who wish
to produce and distribute their own market data. This proprietary data
is produced by each individual exchange, as well as other entities, in
a vigorously competitive market. Broker-dealers currently have numerous
alternative venues for their order flow, including ten self-regulatory
organization (``SRO'') markets, as well as internalizing broker-dealers
(``BDs'') and various forms of alternative trading systems (``ATSs''),
including dark pools and electronic communication networks (``ECNs'').
Each SRO market competes to produce transaction reports via trade
executions, and two FINRA regulated Trade Reporting Facilities
(``TRFs'') compete to attract internalized transaction reports.
Competitive markets for order flow, executions, and transaction reports
provide pricing discipline for the inputs of proprietary data products.
For example, the Exchange notes that at least one other U.S. options
exchange offers a market data product that is substantially similar to
the PHOTO Historical Data product, which the PHLX must consider in its
pricing discipline in order to compete for listings, trades, and the
market data itself.\17\
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    \17\ The International Securities Exchange, Inc. (``ISE'') Open/
Close Trade Profile and the ISE Open/Close Trade Profile Intra-Day
contain substantially similar data to that included in PHOTO End of
Day and PHOTO Intra-Day. See Securities Exchange Act Release No.
56254 (August 15, 2007), 72 FR 47104 (August 22, 2007) (SR-ISE-2007-
70). ISE currently sells the ISE Open/Close Trade Profile with
historical data available back to May 2005, and sells the ISE Open/
Close Trade Profile Intraday with historical data available
separately back to October 2009. See Securities Exchange act Release
No. 61317 (January 8, 2010), 75 FR 2915 (January 19, 2010) (SR-ISE-
2009-103).
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    The large number of SROs, TRFs, BDs, and ATSs that currently
produce proprietary data or are currently capable of producing it
provides further pricing discipline for proprietary data products. Each
SRO, TRF, ATS, and BD is currently permitted to produce proprietary
data products, and many currently do or have announced plans to do so,
including PHLX, NASDAQ, NYSE, NYSE Amex, NYSEArca, and BATS.
    Any ATS or BD can combine with any other ATS, BD, or multiple ATSs
or BDs to produce joint proprietary data products. Additionally, order
routers and market data vendors can facilitate single or multiple
broker-dealers' production of proprietary data products. The potential
sources of proprietary products are virtually limitless.
    The fact that proprietary data from ATSs, BDs, and vendors can by-
pass SROs is significant in two respects. First, non-SROs can compete
directly with SROs for the production and sale of proprietary data
products, as BATS and Arca did before registering as exchanges by
publishing proprietary book data on the Internet. Second, because a
single order or transaction report can appear in an SRO proprietary
product, a non-SRO proprietary product, or both, the data available in
proprietary products is exponentially greater than the actual number of
orders and transaction reports that exist in the marketplace.
    Market data vendors provide another form of price discipline for
proprietary data products because they control the primary means of
access to end users. Vendors impose price restraints based upon their
business models. For example, vendors such as Bloomberg and Reuters
that assess a surcharge on data they sell may refuse to offer
proprietary products that end users will not purchase in sufficient
numbers. Internet portals, such as Yahoo, impose a discipline by
providing only data that will enable them to attract ``eyeballs'' that
contribute to their advertising revenue. Retail broker-dealers, such as
Schwab and Fidelity, offer their customers proprietary data only if it
promotes trading and generates sufficient commission revenue. Although
the business models may differ, these vendors' pricing discipline is
the same: They can simply refuse to purchase any proprietary data
product that fails to provide sufficient value. PHLX and other
producers of proprietary data products must understand and respond to
these varying business models and pricing disciplines in order to
market proprietary data products successfully.
    In addition to the competition and price discipline described
above, the market for proprietary data products is also highly
contestable because market entry is rapid, inexpensive, and profitable.
The history of electronic trading is replete with examples of entrants
that swiftly grew into some of the largest electronic trading platforms
and proprietary data producers: Archipelago, Bloomberg Tradebook,
Island, RediBook, Attain, TracECN, BATS Trading and Direct Edge. A
proliferation of dark pools and other ATSs operate profitably with
fragmentary shares of consolidated market volume.
    Regulation NMS, by deregulating the market for proprietary data,
has increased the contestability of that market. While broker-dealers
have previously published their proprietary data individually,
Regulation NMS encourages market data vendors and broker-dealers to
produce proprietary products cooperatively in a manner never before
possible. Multiple market data vendors already have the capability to
aggregate data and disseminate it on a profitable scale, including
Bloomberg, and Thomson-Reuters.
    The court in NetCoalition concluded that the Commission had failed
to demonstrate that the market for market data was competitive based on
the reasoning of the Commission's NetCoalition order because, in the
court's view, the Commission had not adequately demonstrated that the
depth-of-book data at issue in the case is used to attract order flow.
PHLX believes, however, that evidence not before the

court clearly demonstrates that availability of depth data attracts
order flow.
    Competition among platforms has driven PHLX continually to improve
its platform data offerings and to cater to customers' data needs. For
example, PHLX offers front end applications such as its Top of PHLX
Options (``TOPO'') and TOPO Plus Orders data products to help customers
utilize data.
    For the foregoing reasons, PHLX does not believe that the proposed
rule change will result in any burden on competition that is not
necessary or appropriate in furtherance of the purpose of the Act.

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.\18\ 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 necessary or appropriate in the public interest,
for the protection of investors, or 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.
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    \18\ 15 U.S.C. 78s(b)(3)(A)(ii).
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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 e-mail to<EMAIL_ADDRESS>Please include
File Number SR-Phlx-2010-154 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-Phlx-2010-154. This file
number should be included on the subject line if e-mail 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, on official
business days between the hours of 10 a.m. and 3 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-2010-154 and should be submitted on or before
December 20, 2010.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-29892 Filed 11-26-10; 8:45 am]
BILLING CODE 8011-01-P


[Federal Register Volume 83, Number 227 (Monday, November 26, 2018)]
[Notices]
[Pages 60547-60550]
[FR Doc No: 2018-25601]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84624; File No. SR-Phlx-2018-72]

Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
of Proposed Rule Change To Establish Rules Governing the Give Up of a
Clearing Member by a Member Organization on Exchange Transactions

November 19, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on November 6, 2018, 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 establish rules governing the give up of a
Clearing Member \3\ by a member organization on Exchange transactions.
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    \3\ Clearing Member means a member organization which has been
admitted to membership in the Options Clearing Corporation pursuant
to the provisions of the rules of the Options Clearing Corporation.
See Rule 1000(b)(3).
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    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
    The Exchange proposes to amend Phlx Rule 1037, which is currently
reserved, to establish requirements related to the give up of a
Clearing Member by a member organization on Exchange transactions.
    By way of background, to enter transactions on the Exchange, a
member organization must either be a Clearing Member or have a clearing
arrangement with a Clearing Member.\4\ Rule 1052 currently provides
that every Clearing Member shall be responsible for the clearance of
the Exchange options transactions of such Clearing Member and of each
member organization who gives up the name of such Clearing Member in an
Exchange options transaction, provided the Clearing Member has
authorized such member organization to give up its name with respect to
Exchange options transactions.
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    \4\ See Rule 1046.
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    Recently, certain Clearing Members, in conjunction with the
Securities Industry and Financial Markets Association (``SIFMA''),
expressed concerns related to the process by which executing brokers on
U.S. options exchanges (``Exchanges'') are allowed to designate or
`give up' a clearing firm for purposes of clearing particular
transactions. The SIFMA-affiliated Clearing Members have recently
identified the current give up process as a significant source of risk
for clearing firms, and subsequently requested that the Exchanges
alleviate this risk by amending Exchange rules governing the give up
process.\5\
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    \5\ NYSE Arca Inc. (``Arca'') recently filed to amend its give
up procedures. Arca's proposal would allow a Designated Give Up to
opt out of acting as the give up for certain OTP Holders and OTP
Firms. See Securities Exchange Act Release No. 84284 (September 25,
2018), 83 FR 49434 (October 1, 2018) (SR-NYSEArca-2018-68). The
Exchange's proposal leads to the same result of providing its
Clearing Members the ability to control risk, but it differs in
process from Arca's proposal.

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Proposed Rule Change
    Based on the above, the Exchange now seeks to amend its rules
regarding the current give up process in order to allow a Clearing
Member to opt in, at The Options Clearing Corporation (``OCC'')
clearing number level, to a feature that, if enabled by the Clearing
Member, will allow the Clearing Member to specify which member
organizations are authorized to give up that OCC clearing number. As
proposed, Rule 1037, which is currently reserved, will be titled as
``Authorization to Give Up'' and will provide that for each transaction
in which a member organization participates, the member organization
may indicate, at the time of the trade, with respect to floor trading
only, or through post trade allocation, any OCC number of a Clearing
Member through which a transaction will be cleared (``Give Up''),
provided the Clearing Member has not elected to ``Opt In,'' as defined
in paragraph (b) of the proposed Rule, and restrict one or more of its
OCC number(s) (``Restricted OCC Number'').\6\ A member organization may
Give Up a Restricted OCC Number provided the member organization has
written authorization as described in paragraph (b)(ii) (``Authorized
Member Organization'').
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    \6\ Today, electronic trades need a valid mnemonic, which is
only set up if there is a clearing arrangement already in place
through a Letter of Guarantee. As such, electronic trades
automatically clear through the guarantor associated with the
mnemonic at the time of the trade, so a member organization may only
amend its Give Up post-trade. As proposed, the Exchange will also
restrict the post-trade allocation portion of an electronic trade
systematically. See note 13 below.
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    Proposed Rule 1037(b) provides that Clearing Members may request
the Exchange restrict one or more of their OCC clearing numbers (``Opt
In'') as described in subparagraph (b)(i) of Rule 1037. If a Clearing
Member Opts In, the Exchange will require written authorization from
the Clearing Member permitting a member organization to Give Up a
Clearing Member's Restricted OCC Number. An Opt In would remain in
effect until the Clearing Member terminates the Opt In as described in
subparagraph (iii). If a Clearing Member does not Opt In, that Clearing
Member's OCC number may be subject to Give Up by any member
organization.
    Proposed Rule 1037(b)(i) will set forth the process by which a
Clearing Member may Opt In. Specifically, a Clearing Member may Opt In
by sending a completed ``Clearing Member Restriction Form'' listing all
Restricted OCC Numbers and Authorized Member Organizations.\7\ A copy
of the proposed form is attached in Exhibit 3 to the filing. A Clearing
Member may elect to restrict one or more OCC clearing numbers that are
registered in its name at OCC. The Clearing Member would be required to
submit the Clearing Member Restriction Form to the Exchange's
Membership Department as described on the form. Once submitted, the
Exchange requires ninety days before a Restricted OCC Number is
effective within the System. This time period is to provide adequate
time for the member users of that Restricted OCC Number who are not
initially specified by the Clearing Member as Authorized Member
Organizations to obtain the required written authorization from the
Clearing Member for that Restricted OCC Number. Such member users would
still be able to Give Up that Restricted OCC Number during this ninety
day period (i.e., until the number becomes restricted within the
System).
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    \7\ This form will be available on the Exchange's website. The
Exchange will also maintain, on its website, a list of the
Restricted OCC Numbers, which will be updated on a regular basis,
and the Clearing Member's contact information to assist member
organizations (to the extent they are not already Authorized Member
Organizations) with requesting authorization for a Restricted OCC
Number. The Exchange may utilize additional means to inform its
members of such updates on a periodic basis.
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    Proposed Rule 1037(b)(ii) will set forth the process for member
organizations to Give Up a Clearing Member's Restricted OCC Number.
Specifically, a member organization desiring to Give Up a Restricted
OCC Number must become an Authorized Member Organization.\8\ The
Clearing Member will be required to authorize a member organization as
described in subparagraph (i) or (iii) of Rule 1037(b) (i.e., through a
Clearing Member Restriction Form), unless the Restricted OCC Number is
already subject to a Letter of Guarantee that the member organization
is a party to, as set forth in Rule 1037(d).
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    \8\ The Exchange will develop procedures for notifying member
organizations that they are authorized or unauthorized by Clearing
Members.
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    Pursuant to proposed Rule 1037(b)(iii), a Clearing Member may amend
the list of its Authorized Member Organizations or Restricted OCC
Numbers by submitting a new Clearing Member Restriction Form to the
Exchange's Membership Department indicating the amendment as described
on the form. Once a Restricted OCC Number is effective within the
System pursuant to Rule 1037(b)(i), the Exchange may permit the
Clearing Member to authorize, or remove authorization for, a member
organization to Give Up the Restricted OCC Number intra-day only in
unusual circumstances, and on the next business day in all regular
circumstances. The Exchange will promptly notify the member
organizations if they are no longer authorized to Give Up a Clearing
Member's Restricted OCC Number. If a Clearing Member removes a
Restricted OCC Number, any member organization may Give Up that OCC
clearing number once the removal has become effective on or before the
next business day.
    Proposed Rule 1037(c) will provide that the System will not allow
an unauthorized member organization to Give Up a Restricted OCC
Number.\9\ Specifically:
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    \9\ As described below, the Exchange's proposed process closely
follows the current process.
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     For orders that are executed on the trading floor in open
outcry using the Options Floor Based Management System (``FBMS''),\10\
the System will reject the clearing portion of the trade if an
unauthorized Give Up with a Restricted OCC Number was entered. The
member organization will receive notification of the rejected clearing
information, and will be required to modify the clearing information by
contacting the Exchange.\11\
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    \10\ See Phlx Rules 1063(e) and 1080(a)(i)(C).
    \11\ In this case, the FBMS order will be executed, provided the
terms of the trade comply with the relevant Exchange rules, and the
execution reported to the consolidated tape. The System will,
however, reject the clearing portion, and the member organization
will have to amend the clearing information by contacting the Nasdaq
Correction Post once it receives the reject notification. The
Exchange will then promptly process the requested change. This is
how such orders are processed today if, for instance, a member
organization enters an erroneous OCC clearing number (i.e.,
`keypunch errors').
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     For all other orders (i.e., orders that are submitted
directly to the System through the Exchange's various protocols),\12\
the System will not allow an unauthorized Give Up with a Restricted OCC
Number to be submitted at the firm mnemonic level at the point of order
entry.\13\
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    \12\ See Phlx Rule 1080(a)(i).
    \13\ Specifically, the System will block the entry of the order
from the outset. This is because a valid mnemonic will be required
for any order to be submitted directly to the System, and a mnemonic
will only be set up for a member organization if there is already a
clearing arrangement in place for that firm either through a Letter
of Guarantee (as is the case today) or in the case of a Restricted
OCC Number, the member organization becoming an Authorized Member
Organization. The System will also restrict any post-trade
allocation changes if the member organization is not authorized to
use a Restricted OCC Number.
---------------------------------------------------------------------------

    Furthermore, the Exchange proposes to adopt paragraph (d) to Rule
1037 to

provide, as is the case today, that a clearing arrangement subject to a
Letter of Guarantee would immediately permit the Give Up of a
Restricted OCC Number by the member organization that is party to the
arrangement. Since there is an OCC clearing arrangement already
established in this case, no further action is needed on the part of
the Clearing Member or the member organization.
    The Exchange also proposes to adopt paragraph (e) to Rule 1037 to
provide that an intentional misuse of this Rule is impermissible, and
may be treated as a violation of Rule 707, titled ``Conduct
Inconsistent with Just and Equitable Principles of Trade,'' or Rule
708, titled ``Acts Detrimental to the Interest or Welfare of the
Exchange.'' This language will make clear that the Exchange will
regulate an intentional misuse of this Rule (e.g., sending orders to a
Clearing Member's OCC account without the Clearing Member's consent),
and that such behavior would be a violation of Exchange rules.
    Finally, the Exchange proposes to amend Rule 1052, which addresses
the financial responsibility of Exchange options transactions clearing
through Clearing Members, to clarify that this Rule will apply to all
Clearing Members, regardless of whether or not they elect to Opt In
pursuant to proposed Rule 1037. Specifically, the Exchange proposes to
add that Rule 1052 will apply to all Clearing Members who either (i)
have Restricted OCC Numbers with Authorized Member Organizations
pursuant to Rule 1037, or (ii) have non-Restricted OCC Numbers.
Implementation
    The Exchange proposes to implement the proposed rule change no
later than by the end of Q1 2019. The Exchange will announce the
implementation date to its member organizations in an Options Trader
Alert.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\14\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\15\ in particular, in that it is designed to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general to
protect investors and the public interest.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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    Particularly, as discussed above, several clearing firms affiliated
with SIFMA have recently expressed concerns relating to the current
give up process, which permits member organizations to identify any
Clearing Member as a designated give up for purposes of clearing
particular transactions, and have identified the current give up
process (i.e., a process that lacks authorization) as a significant
source of risk for clearing firms.
    The Exchange believes that the proposed changes to Rule 1037 help
alleviate this risk by enabling Clearing Members to `Opt In' to
restrict one or more of its OCC clearing numbers (i.e., Restricted OCC
Numbers), and to specify which Authorized Member Organizations may Give
Up those Restricted OCC Numbers. As described above, all other member
organizations would be required to receive written authorization from
the Clearing Member before they can Give Up that Clearing Member's
Restricted OCC Number. The Exchange believes that this authorization
provides proper safeguards and protections for Clearing Members as it
provides controls for Clearing Members to restrict access to their OCC
clearing numbers, allowing access only to those Authorized Member
Organizations upon their request. The Exchange also believes that its
proposed Clearing Member Restriction Form allows the Exchange to
receive in a uniform fashion, written and transparent authorization
from Clearing Members, which ensures seamless administration of the
Rule.
    The Exchange believes that the proposed Opt In process strikes the
right balance between the various views and interests across the
industry. For example, although the proposed rule would require member
organizations (other than Authorized Member Organizations) to seek
authorization from Clearing Members in order to have the ability to
give them up, each member organization will still have the ability to
Give Up a Restricted OCC Number that is subject to a Letter of
Guarantee without obtaining any further authorization if that member
organization is party to that arrangement. The Exchange also notes that
to the extent the executing member organization has a clearing
arrangement with a Clearing Member (i.e., through a Letter of
Guarantee), a trade can be assigned to the executing member
organization's guarantor.\16\ Accordingly, the Exchange believes that
the proposed rule change is reasonable and continues to provide
certainty that a Clearing Member would be responsible for a trade,
which protects investors and the public interest. Finally, the Exchange
believes that adopting paragraph (e) of Rule 1037 will make clear that
an intentional misuse of this Rule (e.g., sending orders to a Clearing
Member's OCC account without the Clearing Member's consent) will be a
violation of the Exchange's rules, and that such behavior would subject
a member organization to disciplinary action.
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    \16\ See Rule 1046 (providing that a member organization
conducting an options business must be a Clearing Member or have a
clearing arrangement with a Clearing Member).
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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. The Exchange does not believe
that the proposed rule change will impose an unnecessary burden on
intramarket competition because it would apply equally to all similarly
situated Members. The Exchange also notes that, should the proposed
changes make Phlx more attractive for trading, market participants
trading on other exchanges can always elect to become Members on Phlx
to take advantage of the trading opportunities.
    Furthermore, the proposed rule change does not address any
competitive issues and ultimately, the target of the Exchange's
proposal is to reduce risk for Clearing Members under the current give
up model. Clearing firms make financial decisions based on risk and
reward, and while it is generally in their beneficial interest to clear
transactions for market participants in order to generate profit, it is
the Exchange's understanding from SIFMA and clearing firms that the
current process can create significant risk when the clearing firm can
be given up on any market participant's transaction, even where there
is no prior customer relationship or authorization for that designated
transaction.
    In the absence of a mechanism that governs a market participant's
use of a Clearing Member's services, the Exchange's proposal may
indirectly facilitate the ability of a Clearing Member to manage their
existing customer relationships while continuing to allow market
participant choice in broker execution services. While Clearing Members
may compete with executing brokers for order flow, the Exchange does
not believe this proposal

imposes an undue burden on competition. Rather, the Exchange believes
that the proposed rule change balances the need for Clearing Members to
manage risks and allows them to address outlier behavior from executing
brokers while still allowing freedom of choice to select an executing
broker.

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

    Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission shall: (a) By order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be 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-2018-72 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-2018-72. 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 we 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 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-2018-72 and should be submitted on
or before December 17, 2018.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-25601 Filed 11-23-18; 8:45 am]
 BILLING CODE 8011-01-P