Notice2025-14857
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the Methodology for Its Options Regulatory Fee (ORF) as of January 2, 2026
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
August 6, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 149 (Wednesday, August 6, 2025)</title>
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[Federal Register Volume 90, Number 149 (Wednesday, August 6, 2025)]
[Notices]
[Pages 37918-37924]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-14857]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-103620; File No. SR-Phlx-2025-30]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend the
Methodology for Its Options Regulatory Fee (ORF) as of January 2, 2026
August 1, 2025.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on July 25, 2025, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed with
the Securities and Exchange Commission (``Commission'') the proposed
rule change as described in Items I and II 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 6D, Options Regulatory Fee. Specifically, Phlx proposes to
amend its current ORF methodology of collection.
While the changes proposed herein are effective upon filing, the
Exchange has designated the proposed rule change to be operative on
January 2, 2026.
The text of the proposed rule change is available on the Exchange's
website at <a href="https://listingcenter.nasdaq.com/rulebook/phlx/rulefilings">https://listingcenter.nasdaq.com/rulebook/phlx/rulefilings</a>
and at the principal office of the Exchange.
[[Page 37919]]
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 current methodology of assessment and
collection of the Options Regulatory Fee or ``ORF'' to assess ORF only
for options transactions that occur on Phlx that are cleared in the
Customer \3\ range at The Options Clearing Corporation (``OCC''). With
this proposal Phlx would not assess ORF for transactions that occur on
other exchanges. Below is a more detailed description of the proposal.
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\3\ Currently, the ORF is assessed by Phlx and collected via the
OCC from Customers, Professional Customers, and Broker-Dealers that
are not affiliated with a clearing member. These market participants
clear in the ``C'' range at OCC. ORF will continue to be assessed
and collected from these market participants under the new
methodology. On Phlx, a ``Customer'' means a person or entity that
is not a broker or dealer in securities and is not a Professional as
defined within Options 1, Section (b)(45); and a ``Broker-Dealer''
applies to any transaction which is not subject to any of the other
transaction fees applicable within a particular category.
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Background on Current ORF
Today, Phlx assesses its ORF for each Customer option transaction
that is either: (1) executed by a member organization \4\ on Phlx; or
(2) cleared by a Phlx member organization at OCC in the Customer range,
even if the transaction was executed by a non-member organization of
Phlx, regardless of the exchange on which the transaction occurs.\5\ If
the OCC clearing member is a Phlx member organization, ORF is assessed
and collected on all ultimately cleared Customer contracts (after
adjustment for CMTA \6\); and (2) if the OCC clearing member is not a
Phlx member organization, ORF is collected only on the cleared Customer
contracts executed at Phlx, taking into account any CMTA instructions
which may result in collecting the ORF from a non-member
organization.\7\ The Phlx ORF as of August 1, 2025 is $0.0024 per
contract side.\8\
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\4\ The term ``member organization'' means a corporation,
partnership (general or limited), limited liability partnership,
limited liability company, business trust or similar organization,
transacting business as a broker or a dealer in securities and which
has the status of a member organization by virtue of (i) admission
to membership given to it by the Membership Department pursuant to
the provisions of General 3, Sections 5 and 10 or the By-Laws or
(ii) the transitional rules adopted by the Exchange pursuant to
Section 6-4 of the By-Laws. References herein to officer or partner,
when used in the context of a member organization, shall include any
person holding a similar position in any organization other than a
corporation or partnership that has the status of a member
organization. See General 1, Section 1(17).
\5\ The Exchange uses reports from OCC when assessing and
collecting the ORF. Market participants must record the appropriate
account origin code on all orders at the time of entry of the order.
The Exchange represents that it has surveillances in place to verify
that members mark orders with the correct account origin code.
\6\ CMTA or Clearing member organization Trade Assignment is a
form of ``give-up'' whereby the position will be assigned to a
specific clearing firm at OCC.
\7\ By way of example, if Broker A, an Phlx member organization,
routes a Customer order to CBOE and the transaction executes on CBOE
and clears in Broker A's OCC Clearing account, ORF will be collected
by Phlx from Broker A's clearing account at OCC via direct debit.
While this transaction was executed on a market other than Phlx, it
was cleared by an Phlx member organization in the member's OCC
clearing account in the Customer range, therefore there is a
regulatory nexus between Phlx and the transaction. If Broker A was
not an Phlx member organization, then no ORF should be assessed and
collected because there is no nexus; the transaction did not execute
on Phlx nor was it cleared by an Phlx member organization.
\8\ Phlx decreased its ORF from $0.0034 to $0.0024 per contract
side effective August 1, 2025. See Securities Exchange Act Release
No. 103395 (July 7, 2025), 90 FR 30715 (July 10, 2025) (SR-Phlx-
2025-26) (Notice of Filing and Immediate Effectiveness of a Proposed
Rule Change To Lower the Options Regulatory Fee (ORF)).
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Today, in the case where a member organization both executes a
transaction and clears the transaction, the ORF will be assessed to and
collected from that member organization. Today, in the case where a
member organization executes a transaction and a different member
organization clears the transaction, the ORF will be assessed to and
collected from the member organization who clears the transaction and
not the member organization who executes the transaction. Today, in the
case where a non-member executes a transaction at an away market and a
member organization clears the transaction, the ORF will be assessed to
and collected from the member organization who clears the transaction.
Today, in the case where a member organization executes a transaction
on Phlx and a non-member clears the transaction, the ORF will be
assessed to the member organization that executed the transaction on
Phlx and collected from the non-member who cleared the transaction.
Today, in the case where a member organization executes a transaction
at an away market and a non-member ultimately clears the transaction,
the ORF will not be assessed to the member organization who executed
the transaction or collected from the non-member who cleared the
transaction because the Exchange does not have access to the data to
make absolutely certain that ORF should apply. Further, the data does
not allow the Exchange to identify the member organization executing
the trade at an away market.
ORF Revenue and Monitoring of ORF
Today, the Exchange monitors the amount of revenue collected from
the ORF (``ORF Regulatory Revenue'') to ensure that it, in combination
with other regulatory fees and fines, does not exceed Options
Regulatory Costs.\9\ In determining whether an expense is considered an
Options Regulatory Cost, the Exchange reviews all costs and makes
determinations if there is a nexus between the expense and a regulatory
function. The Exchange notes that fines collected by the Exchange in
connection with a disciplinary matter offset Options Regulatory Cost.
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\9\ The regulatory costs for options comprise a subset of the
Exchange's regulatory budget that is specifically related to options
regulatory expenses and encompasses the cost to regulate all member
organizations' options activity (``Options Regulatory Cost'').
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ORF Regulatory Revenue, when combined with all of the Exchange's
other regulatory fees and fines, is designed to recover the Options
Regulatory Costs to the Exchange of the supervision and regulation of
member Customer options business including performing routine
surveillances, investigations, examinations, financial monitoring, and
policy, rulemaking, interpretive, and enforcement activities. Options
Regulatory Costs include direct regulatory expenses and certain
indirect expenses in support of the regulatory function. The direct
expenses include in-house and third-party service provider costs to
support the day-to-day regulatory work such as surveillance,
investigations, and examinations. The indirect expenses are only those
expenses that are in support of the regulatory functions, such areas
include Office of the General Counsel, technology, finance, and
internal audit. Indirect expenses will not exceed 35% of the total
Options Regulatory Costs, in which case direct expenses could be
[[Page 37920]]
65% or more of total Options Regulatory Costs.\10\
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\10\ Direct and indirect expenses are based on the Exchange's
2025 Regulatory Budget.
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Proposal for January 2, 2026
Phlx has been reviewing its methodologies for the assessment and
collection of ORF. As a result of this review, Phlx proposes to modify
its current ORF to continue to assess ORF for options transactions
cleared by OCC in the Customer range, however ORF would be assessed to
each Phlx member organization for executions that occur on Phlx.
Specifically, the ORF would continue to be collected by OCC on behalf
of Phlx from Phlx member organizations and non-member organizations for
all Customer transactions executed on Phlx. ORF would be assessed and
collected on all ultimately cleared Customer contracts, taking into
account adjustments for CMTA that were provided to Phlx the same day as
the trade.\11\
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\11\ Adjustments to CMTA that occur at OCC would not be taken
into account.
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Further, the Exchange would bill ORF according to the clearing
instructions provided on the execution. More specifically, Phlx
proposes to assess ORF based on the clearing instruction provided on
the execution on trade date and would not take into consideration CMTA
changes or transfers that occur at OCC.\12\ As a result of this
proposed rule change, if a member organization executes a Customer
transaction on Phlx and is the clearing member on record on the
transaction on Phlx, the ORF will be assessed to that member
organization. With this proposal, in the case where a member
organization executes a Customer transaction on Phlx and a different
member organization is the clearing member on record on the transaction
on Phlx, the ORF will be assessed to and collected from the member
organization who is the clearing member on record on the transaction
and not the member organization who executes the transaction.
Additionally, in the case where a member organization executes a
Customer transaction on Phlx and a non-member organization is the
clearing member on record on the transaction on Phlx, the ORF will be
assessed to the non-member organization who is the clearing member on
record on the transaction and not the member organization who executes
the transaction. With this proposal, in the case where a member
organization executes a Customer transaction on a non-Phlx exchange,
Phlx will not assess an ORF, regardless of how the transaction is
cleared. As is the case today, OCC will collect ORF from OCC clearing
members on behalf of Phlx based on Phlx's instructions.
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\12\ Adjustments that were made the same day as the trade on
Phlx will be taken into account.
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With this proposal, the Phlx ORF as of August 1, 2025 of $0.0024
per contract side would be increased to $0.0150 per contract side.\13\
With this proposal, the Exchange will endeavor to ensure that ORF
Regulatory Revenue generated from ORF will not exceed 82% of Options
Regulatory Cost. Phlx will continue to ensure that ORF Regulatory
Revenue does not exceed Options Regulatory Cost. As is the case today,
the Exchange will notify member organizations via an Options Trader
Alert of any change in the amount of the fee at least 30 calendar days
prior to the effective date of the change. In this case, the Exchange
will notify member organizations via an Options Trader Alert of these
changes at least 30 calendar days prior to January 2, 2026.
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\13\ Phlx currently assesses an ORF of $0.0034 per contract side
until August 1, 2025. See <a href="https://www.nasdaqtrader.com/MicroNews.aspx?id=OTA2025-27">https://www.nasdaqtrader.com/MicroNews.aspx?id=OTA2025-27</a>.
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The Exchange utilized historical and current data from its
affiliated options exchanges to create a new regression model that
would tie expenses attributable to regulation to a respective
source.\14\ To that end, the Exchange plotted Customer volumes from
each exchange \15\ against Options Regulatory Cost from each exchange
for the Time Period. Specifically, the Exchange utilized standard
charting functionality to create a linear regression. The charting
functionality yields a ``slope'' of the line, representing the marginal
cost of regulation, as well as an ``intercept,'' representing the fixed
cost of regulation.\16\ The Exchange considered using non-linear
models, but concluded that the best R-2 (``R-Squared'') \17\ results
came from a standard y = Mx +B format for regulatory expense. The R-
Squared for the charting method ranged from 70% to 90% historically. As
noted, the plots below represent the Time Period. The X-axis reflects
Customer volumes by exchange, by quarter and the Y-axis reflects
regulatory expense by exchange.
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\14\ This model seeks to relate Options Regulatory Cost to
historical volumes on each Nasdaq affiliated exchange by market
participant. In creating this model, the Exchange did not rely on
data from a single SRO as it had in the past.
\15\ The Exchange utilized data from all Nasdaq affiliated
options exchanges to create this model from data obtained from Q3
2024 to Q2 2025 (``Time Period'').
\16\ The Exchange utilized data from Time Period to calculate
the slope and intercept.
\17\ R-Squared is a statistical measure that indicates how much
of the variation of a dependent variable is explained by an
independent variable in a regression model. The formula for
calculating R-squared is: R2=1-Unexplained Variation/Total
Variation.
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[[Page 37921]]
[GRAPHIC] [TIFF OMITTED] TN06AU25.000
The results of this modelling indicated a high correlation and
intercept for the baseline cost of regulating the options market as a
whole. Specifically, the regression model indicated that (1) the
marginal cost of regulation is measurable, and significantly
attributable to Customer activity; and (2) the fixed cost of setting up
a regulatory regime should arguably be dispersed across the industry so
that all options exchanges have substantially similar revenue streams
to satisfy the ``intercept'' element of cost. When seeking to offset
the ``set-up'' cost of regulation, the Exchange attempted several
levels of attribution.\18\ This led the Exchange to utilize a model
with a two-factor regression on a quarterly basis (Q3 2024 to Q2 2025)
of volumes relative to the pool of expense data for the six Nasdaq
affiliated options exchanges. Once again, standard spreadsheet
functionality (including the Data Analysis Packet) was used to
determine the mathematics for this model.\19\
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\18\ Of note, through analysis of the results of this regression
model, there was no positive correlation that could be established
between Customer away volume and regulatory expense. The most
successful attribution was related to industry wide Firm and Broker-
Dealer Transaction volume which accounted for approximately 3-4% of
the regulatory expense both on-exchange and away.
\19\ The Exchange notes that various exchanges negotiate their
respective contracts independently with FINRA creating some
variability. Additionally, an exchange with a floor component would
create some variability, such as Phlx which has a floor.
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Utilizing the new regression model, and assumptions in the
proposal, the model demonstrates that Customer volumes are directly
attributable to marginal cost. Applying the regression coefficient
values historically, the Exchange established a ``normalization'' by
per options exchange. The primary driver of this need for
``normalization'' are negotiated regulatory contracts that were
negotiated at different points in time, yielding differences in per
contract regulatory costs by exchange. Normalization is therefore the
average of a given exchange's historical period (Q3 2024 to Q2 2025)
ratio of regulatory expense to revenue when using the regressed values
(for Customer ORF) that yields an effective rate by exchange. The
``normalization'' was then multiplied to a ``targeted collection rate''
of approximately 82% to arrive at ORF rates for Customer. Of note, when
comparing the ORF rates generated from this method, historically, there
appears to be a very tight relationship between the estimated modeled
collection and actual expense and the regulatory expenses for that same
period.
One other important aspect of this modeling is the input of Options
Regulatory Costs. The Exchange notes that in defining Options
Regulatory Costs it accounts for the nexus between the expense and
options regulation. By way of example, the Exchange excludes certain
indirect expenses such as payroll expenses, accounts receivable,
accounts payable, marketing, executive level expenses and corporate
systems.
The Exchange will continue to monitor ORF Regulatory Revenue to
ensure that it, in combination with other regulatory fees and fines,
does not exceed Options Regulatory Costs. In determining whether an
expense is considered an Options Regulatory Cost, the Exchange will
continue to review all costs and makes determinations if there is a
nexus between the expense and a regulatory function. The Exchange notes
that fines collected by the Exchange in connection with a disciplinary
matter will continue to offset Options Regulatory Cost.
As is the case today, ORF Regulatory Revenue is designed to recover
a material portion of the Options Regulatory Costs to the Exchange for
the supervision and regulation of member organizations' transactions,
including performing routine surveillances, investigations,
examinations, financial monitoring, and policy, rulemaking,
interpretive, and enforcement activities. As discussed above, Options
Regulatory Costs include direct regulatory expenses \20\ and certain
indirect expenses in support of the regulatory function.\21\
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\20\ The direct expenses include in-house and third-party
service provider costs to support the day-to-day regulatory work
such as surveillances, investigations, and examinations.
\21\ The indirect expenses include support from such areas as
Office of the General Counsel, technology, finance, and internal
audit.
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Finally, the Exchange notes that this proposal will sunset on
February 1, 2026, at which point the Exchange would revert back to the
ORF methodology and rate of $0.0024 per contract side.\22\
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\22\ The Exchange proposes to reconsider the sunset date in 2026
and determine whether to proceed with the proposed ORF structure at
that time.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\23\ Specifically, the
Exchange believes the proposed rule change is consistent with Section
6(b)(4)
[[Page 37922]]
of the Act \24\, which provides that Exchange rules may provide for the
equitable allocation of reasonable dues, fees, and other charges among
its members, and other persons using its facilities. Additionally, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \25\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\23\ 15 U.S.C. 78f(b).
\24\ 15 U.S.C. 78f(b)(4).
\25\ 15 U.S.C. 78f(b)(5).
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The Exchange believes the proposed ORF to be assessed on January 2,
2026, is reasonable, equitable and not unfairly discriminatory for
various reasons. First, the Exchange believes that continuing to assess
only Customers an ORF is reasonable because Customer transactions
account for a material portion of Phlx's Options Regulatory Cost.\26\ A
large portion of the Options Regulatory Cost relates to Customer
allocation because obtaining Customer information may be more time
intensive. For example, non-Customer market participants are subject to
various regulatory and reporting requirements which provides the
Exchange certain data with respect to these market participants. In
contrast, Customer information is known by member organizations of the
Exchange and is not readily available to Phlx.\27\ The Exchange may
have to take additional steps to understand the facts surrounding
particular trades involving a Customer which may require requesting
such information from a broker-dealer. Further, Customers require more
Exchange regulatory services based on the amount of options business
they conduct. For example, there are Options Regulatory Costs
associated with main office and branch office examinations (e.g., staff
expenses), as well as investigations into Customer complaints and the
terminations of registered persons. As a result, the Options Regulatory
Costs associated with administering the Customer component of the
Exchange's overall regulatory program are materially higher than the
Options Regulatory Costs associated with administering the non-Customer
component when coupled with the amount of volume attributed to such
Customer transactions. Utilizing the new regression model, and
assumptions in the proposal, it appears that Phlx's Customer regulation
occurs to a large extent on Exchange. Utilizing the new regression
model, and assumptions in the proposal, the Exchange does not believe
that significant Options Regulatory Costs result from activity
attributed to Customers that may occur across options markets. To that
end, with this proposal, the amount of Options Regulatory Cost
allocated to on-exchange Customer transactions is significant. Also,
with respect to Customer transactions, options volume continues to
surpass volume from other options participants. Additionally, there are
rules in the Exchange's Rulebook that deal exclusively with Customer
transactions, such as rules involving doing business with a Customer,
which would not apply to Firm and Broker-Dealer Transactions.\28\ For
these reasons, regulating Customer trading activity is ``much more
labor-intensive'' and therefore, more costly.
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\26\ The Exchange notes that the regulatory costs relating to
monitoring member organizations with respect to Customer trading
activity are generally higher than the regulatory costs associated
with member organizations that do not engage in customer trading
activity, which tends to be more automated and less labor-intensive.
By contrast, regulating member organizations that engage in Customer
trading activity is generally more labor intensive and requires a
greater expenditure of human and technical resources as the Exchange
needs to review not only the trading activity on behalf of
Customers, but also the member organization's relationship with its
Customers via more labor-intensive exam-based programs. As a result,
the costs associated with administering the Customer component of
the Exchange's overall regulatory program are materially higher than
the costs associated with administering the non-Customer component
of the regulatory program.
\27\ The Know Your Customer or ``KYC'' provision is the
obligation of the broker-dealer.
\28\ See Phlx Options 10 Rules.
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Second, while the Exchange acknowledges that there is a cost to
regulate Market Makers, unlike other market participants, Market Makers
have various regulatory requirements with respect to quoting as
provided for in Options 2, Section 4. Specifically, Market Makers have
certain quoting requirements with respect to their assigned options
series as provided in Options 2, Section 5. Lead Market Makers are
obligated to quote in the Opening Process and intra-day.\29\
Additionally, Market Makers may enter quotes in the Opening Process to
open an option series and they are required to quote intra-day.\30\
Further, unlike other market participants, Lead Market Makers and
Market Makers have obligations to compete with other Market Makers to
improve the market in all series of options classes to which the Market
Maker is appointed and to update market quotations in response to
changed market conditions in all series of options classes to which the
Market Maker is appointed.\31\ Also, Lead Market Makers and Market
Makers incur other costs imposed by the Exchange related to their
quoting obligations in addition to other fees paid by other market
participants. Market Makers are subject to a number of fees, unlike
other market participants. Market Makers pay Streaming Quote Trader
Fees,\32\ Remote Market Maker Organization (RMO) Fee,\33\ and Remote
Lead Market Maker Fee \34\ in addition to other fees paid by other
market participants. These liquidity providers are critical market
participants in that they are the only market participants that are
required to provide liquidity to Phlx and are necessary for opening the
market. Excluding Market Maker transactions from ORF allows these
market participants to manage their costs and consequently their
business model more effectively thus enabling them to better allocate
resources to other technologies that are necessary to manage risk and
capacity to ensure that these market participants continue to compete
effectively on Phlx in providing tight displayed quotes which in turn
benefits markets generally and market participants specifically.
Finally, the Exchange notes that Market Makers may transact orders in
addition to submitting quotes on the Exchange. This proposal would
except orders submitted by Market Makers, in addition to quotes, for
purposes of ORF. Market Makers utilize orders in their assigned options
series to sweep the order book. The Exchange believes the quantity of
orders utilized by Market Makers in their assigned series is de
minimis. In their unassigned options series, Market Makers utilize
orders to hedge their risk or respond to auctions. The Exchange notes
that the number of orders submitted by Market Makers in their
unassigned options series are far below the cap \35\ and therefore de
minimis.
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\29\ See Phlx Options 3, Section 8 and Options 2, Section 5.
\30\ Id.
\31\ See Phlx Options 2, Section 5(a)(3) and (5).
\32\ See Phlx Options 7, Section 8, B.
\33\ See Phlx Options 7, Section 8, C.
\34\ See Phlx Options 7, Section 8, D.
\35\ See Phlx Options 2, Section 6. The total number of
contracts executed during a quarter by a Market Maker in options
classes to which it is not appointed may not exceed twenty-five
percent (25%) of the total number of contracts traded. In the
Exchange's experience, Market Maker's are generally below the 25%
cap.
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Additionally, while the Exchange acknowledges that there is a cost
to regulate Firm and Broker-Dealer transactions, the Exchange notes
that these market participants do not entail significant volume when
compared to Customer transactions. The Exchange notes that Firm and
Broker-Dealer market participants are more
[[Page 37923]]
sophisticated. There are not the same protections in place for Firm and
Broker-Dealer Transactions as compared to Customer transactions. The
regulation of Firm and Broker-Dealer transactions is less resource
intensive than the regulation of Customer transactions and accounts for
a small percentage of Options Regulatory Costs.
Third, assessing ORF on Customer executions that occur on Phlx is
reasonable, equitable and not unfairly discriminatory because it will
avoid overlapping ORFs that would otherwise be assessed by Phlx and
other options exchanges that also assess an ORF. With this proposal,
Customers executions that occur on other exchanges would no longer be
subject to an Phlx ORF. Further, the Exchange believes that collecting
82% of Options Regulatory Cost is appropriate and correlates to the
degree of regulatory responsibility and Options Regulatory Cost borne
by the Exchange with respect to Customer transactions. The Exchange's
proposal continues to ensure that Options Regulatory Revenue, in
combination with other regulatory fees and fines, does not exceed
Options Regulatory Costs. Fines collected by the Exchange in connection
with a disciplinary matter will continue to offset Options Regulatory
Cost. Capping ORF collected at 82% of Options Regulatory Cost,
commencing January 2, 2026, is reasonable, equitable and not unfairly
discriminatory as the Options Regulatory Revenue collected will offset
the corresponding Options Regulatory Cost associated with on-exchange
Customer transactions. The Exchange will review the ORF Regulatory
Revenue and would amend the ORF if it finds that its ORF Regulatory
Revenue exceeds its projections.\36\
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\36\ Phlx would submit a rule change to the Commission to amend
ORF rates.
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The proposed sunset date of February 1, 2026 is reasonable,
equitable and not unfairly discriminatory. If all options exchanges
have adopted a similar ORF model, the Exchange notes that it would not
sunset the proposal on February 1, 2026. The Exchange proposes to
reconsider the sunset date in early 2026 and determine whether to
proceed with the proposed ORF structure at that time.
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 intra-market competition not necessary or
appropriate in furtherance of the purposes of the Act. The proposed
changes to ORF do not impose an undue burden on inter-market
competition because ORF is a regulatory fee that supports regulation in
furtherance of the purposes of the Act. The Exchange notes, however,
the proposed change is not designed to address any competitive issues.
The Exchange is obligated to ensure that the amount of ORF Regulatory
Revenue, in combination with its other regulatory fees and fines, does
not exceed ORF Regulatory Cost.
Continuing to assess ORF only on Customer executions that occur on
Phlx does not impose an undue burden on intra-market competition.
Customer transactions account for a large portion of the Exchange's
surveillance expense. With respect to Customer transactions, options
volume continues to surpass volume from other options participants.
Additionally, there are rules in the Exchange's Rulebook that deal
exclusively with Customer transactions, such as rules involving doing
business with a Customer, which would not apply to Non-Customer
transactions.\37\ For these reasons, regulating Customer trading
activity is ``much more labor-intensive'' and therefore, more costly.
Further, the Exchange believes that a large portion of the Options
Regulatory Cost relates to Customer allocation because obtaining
Customer information may be more time intensive. For example, non-
Customer market participants are subject to various regulatory and
reporting requirements which provides the Exchange certain data with
respect to these market participants. In contrast, Customer information
is known by member organizations of the Exchange and is not readily
available to Phlx.\38\ The Exchange may have to take additional steps
to understand the facts surrounding particular trades involving a
Customer which may require requesting such information from a broker-
dealer. Further, Customers require more Exchange regulatory services
based on the amount of options business they conduct. For example,
there are Options Regulatory Costs associated with main office and
branch office examinations (e.g., staff expenses), as well as
investigations into Customer complaints and the terminations of
registered persons. As a result, the Options Regulatory Costs
associated with administering the Customer component of the Exchange's
overall regulatory program are materially higher than the Options
Regulatory Costs associated with administering the non-Customer
component when coupled with the amount of volume attributed to such
Customer transactions. Not attributing significant Options Regulatory
Costs to Customers for activity that may occur across options markets
does not impose an undue burden on intra-market competition because the
data in the regression model demonstrates that Phlx's Customer
regulation occurs to a large extent on Exchange.
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\37\ See Phlx Options 10 Rules.
\38\ The Know Your Customer or ``KYC'' provision is the
obligation of the broker-dealer.
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The Exchange believes that not assessing ORF on Market Makers does
not impose an undue burden on intra-market competition because these
liquidity providers are critical market participants in that they are
the only market participants that are required to provide liquidity to
Phlx and are necessary for opening the market. Excluding Market Maker
transactions from ORF does not impose an intra-market burden on
competition, rather it allows these market participants to manage their
costs and consequently their business model more effectively thus
enabling them to better allocate resources to other technologies that
are necessary to manage risk and capacity to ensure that these market
participants continue to compete effectively on Phlx in providing tight
displayed quotes which in turn benefits markets generally and market
participants specifically. Unlike other market participants, Market
Makers have various regulatory requirements with respect to quoting as
provided for in Options 2, Section 4. Specifically, Market Makers have
certain quoting requirements with respect to their assigned options
series as provided in Options 2, Section 5. Lead Market Makers are
obligated to quote in the Opening Process and intra-day.\39\
Additionally, Market Makers may enter quotes in the Opening Process to
open an option series and they are required to quote intra-day.\40\
Further, unlike other market participants, Lead Market Makers and
Market Makers have obligations to compete with other Market Makers to
improve the market in all series of options classes to which the Market
Maker is appointed and to update market quotations in response to
changed market conditions in all series of options classes to which the
Market Maker is appointed.\41\ Also, Lead Market Makers and Market
Makers incur other costs imposed by the Exchange related to their
quoting obligations in addition to other fees paid by other market
participants. Market Makers are subject to a number of fees, unlike
other market
[[Page 37924]]
participants. Market Makers pay Streaming Quote Trader Fees,\42\ Remote
Market Maker Organization (RMO) Fee,\43\ and Remote Lead Market Maker
Fee \44\ in addition to other fees paid by other market participants.
These liquidity providers are critical market participants in that they
are the only market participants that are required to provide liquidity
to Phlx and are necessary for opening the market. Finally, the Exchange
notes that Market Makers may transact orders on the Exchange in
addition to submitting quotes. The Exchange's proposal to except orders
submitted by Market Makers, in addition to quotes, for purposes of ORF
does not impose an undue burden on intra-market competition because
Market Makers utilize orders in their assigned options series to sweep
the order book. Further, the Exchange believes the quantity of orders
utilized by Market Makers in their assigned series is de minimis. In
their unassigned options series, Market Makers utilize orders to hedge
their risk or respond to auctions. The Exchange notes that the number
of orders submitted by Market Makers in their unassigned options series
are far below the cap \45\ and therefore de minimis.
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\39\ See Phlx Options 3, Section 8 and Options 2, Section 5.
\40\ Id.
\41\ See Phlx Options 2, Section 5(a)(3) and (5).
\42\ See Phlx Options 7, Section 8, B.
\43\ See Phlx Options 7, Section 8, C.
\44\ See Phlx Options 7, Section 8, D.
\45\ See Phlx Options 2, Section 6(b). The total number of
contracts executed by a Market Maker in options in which it is not
registered as a Market Maker shall not exceed 25 percent of the
total number of all contracts executed by the Market Maker in any
calendar quarter.
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The Exchange believes that not assessing ORF on Firm and Broker-
Dealer market participants does not impose an undue burden on intra-
market competition because the regulation of Firm and Broker-Dealer
transactions is less resource intensive than the regulation of Customer
transactions. The volume generated from Firm and Broker-Dealer
transactions does not entail significant volume when compared to
Customer transactions. Therefore, excluding Firm and Broker-Dealer
transactions from ORF does not impose an undue burden on intra-market
competition as Customer transactions account for a material portion of
Phlx's Options Regulatory Cost.\46\
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\46\ The Exchange notes that the regulatory costs relating to
monitoring member organizations with respect to customer trading
activity are generally higher than the regulatory costs associated
with member organizations that do not engage in customer trading
activity, which tends to be more automated and less labor-intensive.
By contrast, regulating member organizations that engage in customer
trading activity is generally more labor intensive and requires a
greater expenditure of human and technical resources as the Exchange
needs to review not only the trading activity on behalf of
customers, but also the member organization's relationship with its
customers via more labor-intensive exam-based programs. As a result,
the costs associated with administering the customer component of
the Exchange's overall regulatory program are materially higher than
the costs associated with administering the non-customer component
of the regulatory program.
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The Exchange's proposal to assess ORF only on Customer executions
that occur on Phlx does not impose an intra-market burden on
competition because the amount of activity surveilled across exchanges
is small when compared to the overall number of Exchange rules that are
surveilled by Phlx for on-Exchange activity. Limiting the amount of ORF
assessed to activity that occurs on Phlx avoids overlapping ORFs that
would otherwise be assessed by Phlx and other options exchanges that
also assess an ORF. Further, capping ORF collected at 82% of Options
Regulatory Cost commencing January 2, 2026, does not impose an intra-
market burden on competition as this collection accounts for the
collection only on Customer executions. The Exchange will review the
ORF Regulatory Revenue and would amend the ORF if it finds that its ORF
Regulatory Revenue exceeds its projections.\47\
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\47\ Phlx would submit a rule change to the Commission to amend
ORF rates.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \48\ and paragraph (f)(2) of Rule 19b-4 \49\
thereunder.
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\48\ 15 U.S.C. 78s(b)(3)(A).
\49\ 17 CFR 240.19b-4(f)(2).
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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 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 will institute proceedings to
determine whether the proposed rule change 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="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#592b2c353c743a3634343c372d2a192a3c3a773e362f"><span class="__cf_email__" data-cfemail="c0b2b5aca5eda3afadada5aeb4b380b3a5a3eea7afb6">[email protected]</span></a>. Please include
file number SR-Phlx-2025-30 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-2025-30. 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="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>). Copies of the filing will be available for inspection and
copying at the principal office of the Exchange. Do not include
personal identifiable information in submissions; you should submit
only information that you wish to make available publicly. We may
redact in part or withhold entirely from publication submitted material
that is obscene or subject to copyright protection. All submissions
should refer to file number SR-Phlx-2025-30 and should be submitted on
or before August 27, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\50\
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\50\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2025-14857 Filed 8-5-25; 8:45 am]
BILLING CODE 8011-01-P
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