Notice2022-04079
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Strategy Caps for Reversal and Conversion and Jelly Roll Strategies
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
February 28, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 87 Issue 39 (Monday, February 28, 2022)</title>
</head>
<body><pre>
[Federal Register Volume 87, Number 39 (Monday, February 28, 2022)]
[Notices]
[Pages 11108-11111]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-04079]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94293; File No. SR-Phlx-2022-07]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend Strategy
Caps for Reversal and Conversion and Jelly Roll Strategies
February 22, 2022.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on February 9, 2022, 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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
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)
(Excludes SPY).''
The Exchange originally filed the proposed pricing changes on
February 1, 2022 (SR-PHLX-2022-06). On February 9, 2022, the Exchange
withdrew that filing and submitted this filing.
The text of the proposed rule change is available on the Exchange's
website at <a href="https://listingcenter.nasdaq.com/rulebook/phlx/rules">https://listingcenter.nasdaq.com/rulebook/phlx/rules</a>, 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) (Excludes SPY).''
Specifically, Phlx proposes to amend the daily strategy
[[Page 11109]]
cap for reversal and conversion \4\ and jelly roll \5\ strategies.
---------------------------------------------------------------------------
\4\ 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.
\5\ 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.
---------------------------------------------------------------------------
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.\6\ Currently, the Exchange
offers the following strategy caps:
---------------------------------------------------------------------------
\6\ See Phlx's Pricing Schedule at Options 7, Section 4. A Floor
Qualified Contingent Cross Order is comprised of an originating
order to buy or sell at least 1,000 contracts that is identified as
being part of a qualified contingent trade coupled with a contra-
side order or orders totaling an equal number of contracts. The term
``qualified contingent trade'' shall have the same meaning set forth
in Options 3, Section 12(a)(3). See Options 8, Section 30(e).
----------------------------------------------------------------------------------------------------------------
Floor options transactions--multiply
listed options Strategy Qualification Daily/monthly cap
----------------------------------------------------------------------------------------------------------------
Lead Market Maker, Market Maker, dividend............... executed on the same $1,100 (daily).
Professional, Firm and Broker-Dealer. trading day in the
same class of options
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 executed on the same $1,000 (daily) if more
Professional, Firm and Broker-Dealer. conversion, merger, trading day for all than one class of
short stock interest, classes of options in options, $700 (daily)
jelly roll, and box the aggregate when if only in a single
spread strategies. such members are class of options.
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 $65,000 (monthly).
stock interest, a month when trading
reversal and in its own proprietary
conversion, jelly roll accounts.
and box spread
strategies (``Monthly
Strategy Cap'').
----------------------------------------------------------------------------------------------------------------
The Exchange offers strategy caps for various types of strategies,
including dividend,\7\ merger,\8\ short stock interest,\9\ reversal and
conversion, jelly roll, and box spread \10\ strategies. Of note, NDX,
NDXP, and XND Options Transactions are excluded from strategy cap
pricing.
---------------------------------------------------------------------------
\7\ 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.
\8\ 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.
\9\ 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.
\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.
---------------------------------------------------------------------------
Specifically, today, the Exchange offers a reversal and conversion,
merger, short stock interest, jelly roll and box spread strategy cap,
which is applicable to Lead Market Makers,\11\ Market Makers,\12\
Professionals,\13\ Firms \14\ and Broker-Dealers,\15\ of $1,000 (daily)
if more than one class of options, and $700 (daily) if only in a single
class of options.\16\ The aforementioned strategy cap applies to
reversal and conversion, merger, short stock interest, jelly roll and
box spread strategies 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.\17\
---------------------------------------------------------------------------
\11\ As provided in the Pricing Schedule within Options 7,
Section 1(c), ``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
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.''
\12\ As provided in the Pricing Schedule within Options 7,
Section 1(c), ``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.''
\13\ As provided in the Pricing Schedule within Options 7,
Section 1(c), ``The term ``Professional'' applies to transactions
for the accounts of Professionals, as defined in Options 1, Section
1(b)(45) 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).''
\14\ As provided in the Pricing Schedule within Options 7,
Section 1(c), ``The term ``Firm'' applies to any transaction that is
identified by a member or member organization for clearing in the
Firm range at OCC.''
\15\ As provided in the Pricing Schedule within Options 7,
Section 1(c), ``The term ``Broker-Dealer'' applies to any
transaction which is not subject to any of the other transaction
fees applicable within a particular category.''
\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.
\17\ If transacted on an agency basis, the daily cap applies per
beneficial account.
---------------------------------------------------------------------------
The Exchange is proposing to lower the daily strategy cap for Lead
Market Makers, Market Makers, Professionals, Firms and Broker-Dealers
who execute reversal and conversion and jelly roll strategies on the
same trading day. The Exchange proposes to cap reversal and conversion
and jelly roll strategies 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 at $200 daily. As is the case today, if
transacted on an agency
[[Page 11110]]
basis, the daily strategy cap would apply per beneficial account. The
Exchange would not amend the current strategy caps for merger, short
stock interest, and box spread strategies. The qualifications for the
reversal and conversion and jelly roll strategy cap remains the same.
Finally, the proposed daily strategy cap continues to apply to
executions for all classes of options.
The Exchange believes that its proposal will incentivize members to
transact a greater number of reversal and conversion and jelly roll
strategies because the strategy cap would be lowered from $1,000/$700
daily (depending on the class of options) to $200 daily.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\18\ in general, and furthers the objectives of
Sections 6(b)(4) and 6(b)(5) of the Act,\19\ 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.
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78f(b).
\19\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------
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.'' \20\
---------------------------------------------------------------------------
\20\ Securities Exchange Act Release No. 51808 (June 9, 2005),
70 FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting
Release'').
---------------------------------------------------------------------------
Likewise, in NetCoalition v. Securities and Exchange Commission
\21\ (``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.\22\ 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.'' \23\
---------------------------------------------------------------------------
\21\ NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010).
\22\ See NetCoalition, at 534-535.
\23\ Id. at 537.
---------------------------------------------------------------------------
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' . . ..'' \24\ 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.
---------------------------------------------------------------------------
\24\ 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)).
---------------------------------------------------------------------------
The Exchange's proposal to decrease the reversal and conversion and
jelly roll strategy cap applicable to Lead Market Makers, Market
Makers, Professionals, Firms and Broker-Dealers from $1,000/$700 daily
(depending on the class of options) to $200 daily, with the same
qualifications as today, is reasonable because it will incentivize Lead
Market Makers, Market Makers, Professionals, Firms and Broker-Dealers
to execute a greater number of reversal and conversion and jelly roll
strategies for the opportunity to qualify for the lower daily strategy
cap. Strategy fee caps defray brokerage costs associated with executing
strategy transactions.
Today, NYSE Arca, Inc. (``NYSE Arca'') and NYSE American LLC
(``NYSE American'') cap certain strategy fees as low as $200.\25\ The
Exchange believes that lowering the reversal and conversion and jelly
roll strategy cap from $1,000/$700 daily (depending on the class of
options) to $200 daily will allow the Exchange to more effectively
compete with other options exchanges who offer lower strategy caps for
these two particular strategies. The Exchange notes that reversal and
conversion and jelly roll strategies are popular strategies that may be
transacted by any Phlx member or member organization. To the extent
that the proposed change attracts more reversal and conversion and
jelly roll strategy executions to the Exchange, this increased (open
outcry) order flow would continue to make the Exchange a more
competitive venue for order execution. To the extent the proposed
change continues to attract greater volume and liquidity, the Exchange
believes the proposed change would improve the Exchange's overall
competitiveness and strengthen its market quality for all market
participants. In the backdrop of the competitive environment in which
the Exchange operates, the proposed rule change is a reasonable attempt
by the Exchange to effectively compete for strategy trades. Finally,
the Exchange cannot predict with certainty whether any, or how many,
Phlx members and member organizations would avail themselves of this
proposed fee change. The Exchange believes that Phlx members and member
organizations that execute reversal and conversion and jelly roll
strategies on the Exchange can achieve the proposed daily cap of $200
and that this proposal may encourage Phlx members and member
organizations to execute reversal and conversion and jelly roll
strategies on the Exchange.
---------------------------------------------------------------------------
\25\ NYSE Arca and NYSE American applies a strategy cap of $200
on transactions fees for qualifying strategies traded on the same
trading day for those ATP Holders that trade at least 25,000 monthly
billable contract sides in qualifying Strategy Executions. The
strategies include: (a) Reversals and conversions, (b) box spreads,
(c) short stock interest spreads, (d) merger spreads, and (e) jelly
rolls.
---------------------------------------------------------------------------
The Exchange's proposal to decrease the reversal and conversion and
jelly roll strategy cap applicable to Lead Market Makers, Market
Makers, Professionals, Firms and Broker-Dealers from $1,000/$700 daily
(depending on the class of options) to $200 daily, 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 and jelly
roll strategy cap provided those strategies are executed on the same
trading day for all classes of options in the aggregate when such
members are trading either in their own proprietary accounts or on an
agency basis. While Customers \26\ are not offered strategy caps,
Customers are not assessed Options Transaction Charges within Options
7, Section 4.
---------------------------------------------------------------------------
\26\ As provided in the Pricing Schedule within Options 7,
Section 1(c), ``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)).''
---------------------------------------------------------------------------
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
[[Page 11111]]
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.
Moreover, the proposal is designed to encourage Phlx members and
member organizations to execute reversal and conversion and jelly roll
strategies on the Exchange as a primary execution venue. To the extent
that the proposed change attracts more reversal and conversion and
jelly roll strategies to the Exchange, this increased order flow would
continue to make the Exchange a more competitive venue for order
execution.
Intra-Market Competition
The proposed amendments do not impose an undue burden on intra-
market competition.
The Exchange's proposal to decrease the reversal and conversion and
jelly roll strategy cap applicable to Lead Market Makers, Market
Makers, Professionals, Firms and Broker-Dealers from $1,000/$700 daily
(depending on the class of options) to $200 daily, 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 and jelly
roll strategy cap provided those strategies are executed on the same
trading day for all classes of options in the aggregate when such
members are trading either in their own proprietary accounts or on an
agency basis. While Customers are not offered strategy caps, Customers
are not assessed Options Transaction Charges within Options 7, Section
4.
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.\27\
---------------------------------------------------------------------------
\27\ 15 U.S.C. 78s(b)(3)(A)(ii).
---------------------------------------------------------------------------
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
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#fe8c8b929bd39d9193939b908a8dbe8d9b9dd0999188"><span class="__cf_email__" data-cfemail="3b494e575e16585456565e554f487b485e58155c544d">[email protected]</span></a>. Please include
File Number SR-Phlx-2022-07 on the subject line.
Paper Comments
<bullet> 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-2022-07. 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 (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
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-2022-07, and should be submitted on
or before March 21, 2022.
---------------------------------------------------------------------------
\28\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2022-04079 Filed 2-25-22; 8:45 am]
BILLING CODE 8011-01-P
</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>Indexed from Federal Register on February 28, 2022.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.