March 9, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 
and Rule 19b-4 thereunder,
notice is hereby given that, on March 1, 2012, NASDAQ OMX PHLX LLC (“Phlx” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The Exchange proposes to amend Section I of the Exchange's Fee Schedule titled “Rebates and Fees for Adding and Removing Liquidity in Select Symbols,” by amending the transaction fees and rebates for Complex Orders and proposing a new rebate.
The Exchange has designated these changes to be operative on March 1, 2012.
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 Statutory Basis for, the Proposed Rule Change
The proposed rule change will increase certain Complex Order 
rebates, create a new rebate and also increase certain fees. The proposed changes will enable the Exchange to continue to reward market participants that add liquidity to the Exchange and allow the Exchange to compete more effectively respecting Complex Orders. The Complex Order fees and rebates being amended appear in Section I of the Exchange's Fee Schedule, entitled “Rebates and Fees for Adding and Removing Liquidity in Select Symbols.” 
The Exchange proposes to: (1) Amend the Customer Rebate for Adding Liquidity, (2) create a new Rebate for Removing Liquidity, (3) amend the Fee for Removing Liquidity for all participants that are assessed such a fee, and (4) create a volume tier for certain market participants that transact significant volumes of Complex Orders on the Exchange. Currently, the Exchange's Complex Order fees and rebates are as follows:
| ||Customer||Directed participant||Market maker||Firm||Broker-dealer||Professional|
|Rebate for Adding Liquidity||$0.30||$0.00||$0.00||$0.00||$0.00||$0.00|
|Fee for Adding Liquidity||0.00||0.10||0.10||0.20||0.20||0.20|
|Fee for Removing Liquidity||0.00||0.30||0.32||0.35||0.35||0.35|
First, the Exchange is amending the Customer Complex Order Rebate for Adding Liquidity. Specifically, the Exchange proposes to increase the Customer Complex Order Rebate to Add Liquidity from $0.30 per contract to $0.32 per contract to further incentivize market participants to route Customer Complex Orders to the Exchange.
Second, the Exchange proposes to create a new Customer Complex Order rebate to attract additional Customer Complex Orders to the Exchange. The new rebate, entitled “Rebate for Removing Liquidity,” will pay a rebate of $0.06 per contract for each contract of liquidity removed by an order designated as a Customer Complex Order. The Exchange currently pays no rebate and assesses no fee for removing Customer Complex Order liquidity. The Exchange will pay no rebate for other market participants removing Complex Order liquidity. This is similar to the existing Complex Order Rebate for Adding Liquidity where the Exchange offers a rebate only with respect to Customer Complex Orders. The Exchange believes that increasing the Customer Complex Order Rebate for Adding Liquidity and creating a new Customer Rebate for Removing Liquidity will incentivize market participants to transact Customer Complex Orders on the Exchange.
Third, the Exchange proposes to increase the Complex Order Fees for Removing Liquidity for the Directed Participant,
Firm, Broker-Dealer and Professional
categories. The fee for Directed Participant transactions would increase from $0.30 to $0.32 per contract; the fee for Market Makers would increase from $0.32 to $0.37 per contract; the fee for Firms would increase from $0.35 to $0.38 per contract; the fee for Broker-Dealers would increase from $0.35 to $0.38 per contract; and the fee for Professionals would increase from $0.35 to $0.38 per contract. As a result, the new Complex Order Fees for Removing Liquidity would be as follows:
|Customer||Directed participant||Market maker||Firm||Broker-dealer||Professional|
|Fee for removing liquidity||$0.00||$0.32||$0.37||$0.38||$0.38||$0.38|
Finally, the Exchange will provide a new volume incentive to Market Makers. The Exchange has four categories of market makers: Specialists,
The Exchange proposes to offer a volume incentive to Market Makers that execute more than 25,000 contracts per day in a month of Complex Orders, either adding or removing liquidity, in Select Symbols. Market Makers that meet the aforementioned volume criteria will receive a $0.01 per contract reduction of both the Directed Participant and Market Maker Complex Order Fees for Removing Liquidity, as applicable, on all of their transactions for the month. For example, assume Market Maker ABCD executes 30,000 contracts per day of Complex Orders, including 5,000 contracts of Complex Orders that would be assessed the Directed Participant fee and 5,000 contracts per day of Complex Orders that would be assessed the Market Maker fee. In that case, Market Maker ABCD's Directed Participant Complex Orders transactions in the month would be assessed a Directed Participant Fee for Removing Liquidity of $0.31 per contract instead of the new $0.32 per contract, and Market Maker ACBD's Market Maker Complex Orders would be assessed a Market Maker Fee of $0.36 per contract instead of the new $0.37 per contract. For the purposes of the $0.01 reduction in the aforementioned fees, the Exchange also proposes to aggregate the trading activity of Market Makers where there is at least 75% common ownership between member organizations.
The Exchange is not proposing any amendments to Parts A or C of Section I of the Fee Schedule.
2. Statutory Basis
The Exchange believes that its proposal to amend its Fee Schedule is consistent with Section 6(b) of the Act 
in general, and furthers the objectives of Section 6(b)(4) of the Act 
in particular, in that it is an equitable allocation of reasonable fees and other charges among Exchange members and other persons using its facilities. The Exchange also believes that it is an equitable allocation of reasonable rebates among Exchange members and other persons using its facilities.
Customer Complex Orders are becoming an increasingly important segment of options trading. The Exchange believes that it is reasonable to increase the current Customer Complex Order Rebate for Adding Liquidity to $0.32 per contract and create a new Customer Complex Order Rebate for Removing Liquidity of $0.06 per contract, because the Exchange seeks to incentivize market participants to direct and transact a greater number of Customer Complex Orders at the Exchange. Creating these incentives and attracting Customer Complex Orders to the Exchange, in turn, benefits all market participants through increased liquidity at the Exchange. A higher percentage of Customer Complex Orders leads to increased Complex Order auctions and better opportunities for price improvement.
The Exchange also believes it is reasonable, equitable and not unfairly discriminatory to only offer rebates to Customers and not other market participants. Customer Complex Order flow brings unique benefits to the marketplace in terms of liquidity and order interaction. It is an important Exchange function to provide an opportunity to all market participants to trade against Customer Complex Orders. The Exchange believes that it is equitable and not unfairly discriminatory to increase the current Customer Complex Order Rebate for Adding Liquidity to $0.32 per contract and create a new Customer Complex Order Rebate for Removing Liquidity of $0.06 per contract, because the Exchange will uniformly pay these rebates to all Customer orders from any member organization.
Fee for Removing Liquidity
The Exchange believes that it is reasonable to increase the Complex Order Fees for Removing Liquidity for Directed Participants, Market Makers, Firms, Broker-Dealers and Professionals so that the Exchange can offer increased rebates to Customers. As previously noted, the Exchange is proposing to increase the Customer Complex Order Rebate for Adding Liquidity and offer a new Customer Complex Order Rebate for Removing Liquidity.
The Exchange believes that it is equitable and not unfairly discriminatory to increase the Complex Order Fees for Removing Liquidity for Directed Participants, Market Makers, Firms, Broker-Dealers and Professionals because, the Exchange is increasing these fees for all market participants, except Customers who are not assessed a fee, to position itself to offer greater Customer Complex Order rebates. The Exchange is consistently assessing lower Complex Order Fees for Removing Liquidity to Directed Participants and Market Makers as compared to Firms, Broker-Dealers and Professionals, because of the requisite quoting obligations applicable to Market Makers. Market Makers 
have burdensome quoting obligations to the market which do not apply to Firms, Professionals and Broker-Dealers. Also, Market Makers that receive Directed Orders 
have higher quoting obligations compared to other Market Makers and therefore are assessed a lower fee when they transact with a Customer order that was directed to them for execution as compared to Market Makers. Firms, Broker-Dealers and Professionals are being assessed the same $0.38 per contract fees. Customers are not assessed a Fee for Removing Liquidity, as is the case on competing exchanges.
With respect to the proposed Complex Order Fees for Removing Liquidity for Directed Participant transactions as compared to Market Maker transactions, the Exchange provides a deeper analysis below and its basis for proposing a $0.32 per contract Complex Order Directed Participant Fee for Removing Liquidity and a $0.37 per contract Complex Order Market Maker Fee for Removing Liquidity. In summary, the Exchange's Fees for Removing Liquidity, for both Single contra-side and Complex Order transactions, for the Directed Participant categories are two cents lower than the Fees for Removing Liquidity for the Market Maker categories.
As explained above, Market Makers that receive Directed Orders have higher quoting obligations as compared to other Market Makers and therefore are assessed a lower fee. The fee differentials today reflect the additional obligation of a Market Maker that accepts directed orders when compared to a Market Maker that does not accept directed orders for both Single contra-side and Complex Order transactions. The Exchange is now proposing to increase the differential between the Directed Participant and Market Maker transaction fees from $0.02 per contract to $0.05 per contract for Complex Order transactions to also reflect the increased costs that are incurred by such Market Makers that enter into order flow arrangements at a cost and without the benefit of a guaranteed allocation. Market Makers that accept Directed Orders transacting Single contra-side orders today are entitled to a guaranteed allocation which is why the Exchange is distinguishing between these types of orders in assessing fees between the Market Maker and Directed Participant categories. The Exchange will discuss below its rationale for why the proposal is reasonable, equitable and not unfairly discriminatory. The Exchange believes that in order to attract Customer Complex Orders in an intensely competitive environment it must continue to adjust its fees and rebates, which benefits all market participants for the good of investors.
The Directed Participants and Market Makers Categories
Specialists, ROTs, SQTs and RSQTs are Market Makers. Such Market Makers may also be categorized as Directed Participants when such Market Makers execute against a Customer order directed to that Market Maker for execution by an Order Flow Provider (“OFP”).
For example, Market Maker A is assessed the Directed Participant category fee for trading against a Customer order directed to it for execution by an OFP. Market Maker A is not assessed the Directed Participant category fee for executing a Customer order directed to different Market Maker, but rather is assessed the Market Maker category fee.
It is important to note that a Market Maker, at the time of the trade, is unaware of the identity of the contra-party to the trade. In other words, it is only sometime after the trade occurs that the Market Maker learns whether the Market Maker or Directed Participant fees will be assessed on a particular transaction.
The proposed amendments to the Fees for Removing Liquidity apply only to Complex Orders.
Market Makers receive no allocation guarantee when a Customer Complex Order is directed to them by an OFP and the order is executed.
Also, only Customer Complex Order flow which is directed to a Market Maker by an OFP and is executed by that particular Market Maker is eligible for the Directed Participant fees for Complex Orders.
When a Market Maker executes against a Customer Complex Order the Market Maker may do so by responding to an auction,
executing against an order on the Complex Order Book (“CBOOK”), or sweeping a resting Customer Complex Order.
The Customer Complex Order may also be executed against existing quote and or limit orders on the limit order book for the individual components of the Complex Order.
In each of these cases, the order will trade based on the best price or prices available pursuant to Exchange Rules.
Therefore, in order to enjoy the benefits of trading against a directed Complex Customer order by receiving a lower transaction fee (the Directed Participant Complex Order Fee for Removing Liquidity), the transaction must: (i) Occur at the best price; and (ii) be directed, by an OFP, to the particular Market Maker that executed the order.
Currently, on the Exchange, an average of 14.5% of Customer Complex directed orders trade with the Market Maker to which they are directed.
All market participants may compete equally for Customer Complex Order executions, even if that Customer Complex Order is directed to a specific Market Maker. All Market Makers have the ability to incentivize an OFP to direct or preference an order if they desire to enter into, for example, a payment for order flow arrangement with an OFP. A Market Maker that pays for such Customer Complex Order flow cannot control whether it executes an order directed to it, because that Market Maker must compete equally against other market participants and as previously stated must be at the best price. While all market participants enjoy the benefits of the liquidity that such order flow brings to the market, not all market participants incur the additional expense of paying an OFP for such order flow. The Exchange believes that this additional expense should be considered in assessing fees to Market Makers that attract directed order flow to the Exchange for the benefit of all market participants.
A Market Maker that executes a Customer Complex Order on a non-directed basis pays a fee of $0.32 per contract today (Market Maker Complex Order Fee for Removing Liquidity). A Market Maker that executes a Customer Complex Order on a directed basis pays a fee of $0.30 per contract today (Directed Participant Complex Order Fee for Removing Liquidity) plus the additional cost associated with the order flow. The Exchange believes that the Customer Complex Order rebates may partially compensate Market Makers for payments they owe to the OFP for the Customer order flow.
The Exchange believes it is reasonable, equitable and not unfairly discriminatory to raise the Market Maker Complex Order Fee for Removing Liquidity from $0.32 to $0.37 per contract and raise the Directed Participant Complex Order Fee for Removing Liquidity from $0.30 to $0.32 per contract. Generally, a Market Maker will be assessed the Market Maker Fee for Removing Liquidity in Complex Orders when the Market Maker is not executing a Customer order intended for that Market Maker. Moreover, in a given month the effective Complex Order Fee for Removing Liquidity for a Market Maker that also has executions subject to the Directed Participant rate is approximately $0.02 below the Market Maker Complex Order Fee for Removing Liquidity.
The Exchange bases its belief that the proposed fees are reasonable, in part, on an analysis of the level of price improvement currently received by Customer Complex Orders trading in an auction process. Based on an analysis of the week of October 10, 2011, Customer Complex Orders received price improvement 29% of the time and the average level of price improvement was $0.059 per option or $5.90 per contract for options receiving price improvement. Market Makers compete in offering price improvement in auctions. The significant difference in magnitude between the proposed $0.03 per contract increased fee differential (between Market Makers and Directed Participants) and the extent of price improvement supports the Exchange's belief that the proposed fee is reasonable and will have a negligible impact on Directed and non-Directed Market Makers.
New Volume Discount
The Exchange is further incentivizing Market Makers by providing an opportunity to lower the Market Maker and Directed Participant Complex Order Fees for Removing Liquidity, as applicable, when a Market Maker executes more than 25,000 Complex Order contracts (either adding or removing liquidity) per day in a month. The Exchange proposes to reduce, by $0.01 per contract, the Market Maker and Directed Participant Complex Order Fees for Removing Liquidity, as applicable on all of their transactions for the month (“Added Incentive”). The Exchange believes that the Added Incentive will encourage all Market Makers to transact additional order flow at the Exchange because of the fee reduction. All Market Maker Complex Order contracts will be counted toward the 25,000 contracts per day in a month. The Exchange also believes that this Added Incentive to Market Makers that pay for directed orders will encourage those Market Makers to continue to pay for such orders and provide liquidity to the market even without a guaranteed allocation in Complex Orders, because the Added Incentive would benefit Market Makers whether directed or not, but, in the instance the Market Maker is assessed a Directed Participant fee, the benefit is greater. The Exchange believes that its proposal to allow Market Makers to aggregate trading activity where there is at least 75% common ownership between member organizations is reasonable, because this would allow member organizations to also obtain the Added Incentive by combining transaction fees where the common ownership is met. The Exchange currently permits such aggregation in the calculation of the Monthly Market Maker Cap.
The Exchange believes that permitting member organizations with at least 75% common ownership to aggregate fees to obtain the Added Incentive is equitable and not unfairly discriminatory because the ability to aggregate would apply uniformly to all member organizations that are at least 75% commonly owned, but chose to operate under separate entities.
The Exchange desires to continue to encourage Market Makers to enter into order flow arrangements by assessing a lower Directed Participant Fee for Removing Liquidity, as compared to the Market Maker Fee for Removing Liquidity. The Exchange believes that offering a Directed Participant fee that is a lower Fee for Removing Liquidity than the Market Maker Fee to Remove Liquidity offsets costs incurred by these Market Markers that pay for order flow and assume the risk of possibly being assessed the same Fee for Removing Liquidity as a Market Maker who did not enter into similar arrangements. Today, options exchanges aggressively compete for Complex order flow. In January 2012, based on data from the Options Price Reporting Authority (“OPRA”), the average daily equity options complex order transactions on the various option exchanges totaled 117,539. The combined total for the last six months of 2011 was 593,286. With respect to market share, the six options exchanges handling complex orders had market share in complex orders ranging from 2.4% to 40.1% in January 2012.
The benefit that a Market Maker brings to the Exchange when it pays for order flow is not an insignificant one and this benefit should not go unrewarded. Market Makers who pay for order flow must still compete for that order flow with other Exchange participants in order to reap benefits. This competition provides the Exchange greater execution quality, which also benefits all participants.
The Exchange believes that the proposed Market Maker and Directed Participant Complex Order Fees for Removing Liquidity and the Added Incentive are reasonable, equitable and not unfairly discriminatory because: (i) Market Makers are not entitled to guaranteed allocations for directed Complex Orders; 
(ii) all Market Makers have an equal opportunity to incentivize an OFP to direct an order to it for execution on the Exchange; (iii) only Customer orders that are directed by an OFP and executed by the intended Market Maker receive the Complex Order Directed Participant fee; 
(iv) the proposed Directed Participant and Market Maker Complex Order fees are less than the fees assessed to Firms, Professionals and Broker-Dealers because of obligations carried by those Market Makers which do not burden other participants; (v) Market Makers are unaware of the identity of the contra-party at the time of the trade and are also required to execute at the best price, pursuant to Exchange Rules, against an order intended for them by an OFP in order to be assessed the Directed Participant Complex Order Fee for Removing Liquidity (the only benefit) which does not happen more than 80% of the time; (vi) order flow arrangements benefit all market participants equally through added liquidity; and (vii) the Added Incentive will further encourage Market Makers to respond more aggressively in the COLA, with respect to Customer orders, and sweep resting orders in CBOOK thereby improving execution quality of Customer Complex Orders.
The Exchange operates in a highly competitive market, comprised of nine exchanges, in which market participants can easily and readily direct order flow to competing venues if they deem fee levels at a particular venue to be excessive or rebates offered to be insufficient. Accordingly, the fees that are assessed by the Exchange and the rebates it pays for options overlying the various Select Symbols in Complex Orders must remain competitive with fees and rebates charged/paid by other venues and therefore must continue to be reasonable and equitably allocated to those members that opt to direct orders to the Exchange rather than competing venues.
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.
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.
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.
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:
- 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-2012-27. 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 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, 100 F Street NE., Washington, DC 20549, 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-2012-27 and should be submitted on or before April 5, 2012.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Kevin M. O'Neill,
[FR Doc. 2012-6229 Filed 3-14-12; 8:45 am]
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