Nasdaq PHLX LLC, a self-regulatory organization operating an options exchange, filed a proposed rule change with the Securities and Exchange Commission on December 16, 2025, to amend its pricing for Specialized Quote Feed ports, known as SQF ports. These ports are used by market makers to submit quotes and orders. The proposal introduces tiered discounts on the monthly SQF port fee of $1,185, based on a market maker's prior-month trading volume as a percentage of total national volume. Effective January 1, 2026, this change seeks to incentivize increased participation and liquidity on the exchange. It follows a prior filing that standardized the base fee and reflects ongoing efforts to remain competitive in the options market. The SEC has published the notice for public comment, highlighting the proposal's potential to enhance market efficiency without imposing undue burdens.
Background and Purpose of the Proposal
The SQF interface allows lead market makers, streaming quote traders, and remote streaming quote traders to connect and manage quotes, orders, and auction responses on PHLX. As defined in the filing, SQF ports facilitate essential functions such as quote messages, execution notifications, and risk protection triggers. PHLX market makers, who must provide continuous two-sided quotes in assigned series, rely on these ports to meet regulatory obligations under exchange rules.
This proposal builds on a recent adjustment in SR-Phlx-2025-40, which set the SQF port fee at $1,185 per port per month starting January 2026, mirroring fees on affiliated exchange Nasdaq ISE. The new filing withdraws an earlier version and refines the structure by adding volume-based incentives. PHLX states the purpose is to 'attract a greater amount of order flow' and 'encourage Market Makers to transact additional order flow,' benefiting all participants through improved liquidity and price discovery. Non-penny symbol volume receives five times the weight in calculations to promote activity in less liquid symbols, excluding index options as they are typically not multiply listed.
Key Details of the Tiered Discount Structure
The discounts apply to market makers achieving thresholds of total national volume, calculated using the prior month's data. Total national volume is defined as market maker volume in multiply listed options across all U.S. exchanges, reported via The Options Clearing Corporation. A market maker's share is determined by combining its penny symbol volume with non-penny symbol volume multiplied by five, then dividing by the national total.
The tiers are as follows:
- Tier 1: Less than 0.10% - 0% discount.
- Tier 2: 0.10% to less than 0.25% - 10% discount.
- Tier 3: 0.25% to less than 0.40% - 30% discount.
- Tier 4: 0.40% or greater - 50% discount.
For example, a market maker executing 3,000,000 contracts in penny symbols and 200,000 in non-penny symbols, against a national total of 1,000,000,000, would qualify for Tier 4: (200,000 × 5 + 3,000,000) / 1,000,000,000 = 0.40%. This structure, PHLX notes, is 'substantially similar' to credits offered by Cboe Exchange for its BOE Bulk Ports, which provide up to 40% credits based on performance tiers.
PHLX also proposes technical amendments, reinstating a cap of 250 SQF ports per market maker per month, which was inadvertently omitted in the prior filing, and removing references to 'active ports' to align with the updated fee model.
Statutory Basis and Competitive Considerations
PHLX asserts the proposal complies with Section 6(b) of the Securities Exchange Act of 1934, promoting equitable fee allocation and preventing unfair discrimination. It emphasizes that market forces, as recognized in Regulation NMS and court precedents like NetCoalition v. SEC, should guide pricing. The filing argues the discounts are reasonable as they lower costs for high-volume market makers, who provide liquidity benefiting all users, while remaining accessible since 'all Market Makers are capable of quoting tighter or in a greater amount of options classes' to qualify.
The proposal applies uniformly to market makers, who bear unique obligations such as daily quoting requirements under PHLX Options 2, Sections 4 and 5. It does not extend to other participants, as only market makers use SQF ports for quoting. PHLX contends this does not burden competition, noting the options market's competitiveness where participants can shift to other venues if fees are unappealing.
Implications and Perspectives
From a short-term perspective, the discounts could immediately boost market maker activity on PHLX, potentially increasing order flow and tightening spreads. Long-term, this may enhance the exchange's market share, but it raises questions about fee equity across participant types. Supporters, including PHLX, view it as a pro-competitive measure that aligns incentives with liquidity provision, echoing industry trends like Cboe's model.
Critics might argue it favors larger market makers, potentially disadvantaging smaller ones unable to meet thresholds, though PHLX counters that qualifications are based on capability rather than size. No comments were received on the filing, but the SEC's notice invites input, which could influence approval.
In summary, this proposal represents a targeted adjustment to PHLX's fee structure, grounded in statutory requirements and market dynamics. Potential next steps include SEC review and possible suspension within 60 days if public interest concerns arise. Ongoing debates may center on balancing incentives with fair access, while challenges could emerge if trading volumes shift unpredictably or if similar proposals proliferate across exchanges.
