[Federal Register Volume 65, Number 214 (Friday, November 3, 2000)]
[Notices]
[Pages 66277-66278]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-28225]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43481; File Nos. SR-PHLX-00-88 and SR-PHLX-00-89]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Changes by the Philadelphia Stock 
Exchange, Inc. Relating to an Amendment to the Exchange's Payment for 
Order Flow Fee and a Rebate for Certain Fees Incurred

October 25, 2000.
    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 
the Philadelphia Stock Exchange, Inc. (``Phlx'' or the ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') 
proposed rule changes SR-PHLX-00-88 and SR-PHLX-00-89 on October 2, 
2000 and October 4, 2000, respectively, as described in Items I, II, 
and III below, which Items the Phlx has prepared. The Commission is 
publishing this notice to solicit comments on the proposed rule changes 
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 Changes

    In SR-PHLX-00-88, the Phlx proposes to amend its payment for order 
flow program \3\ that imposed a fee, effective August 1, 2000 of $1.00 
per contract on transactions by Phlx specialists and Registered Options 
Traders (``ROTs'') in the Top 120 Options \4\ traded on the Phlx. The 
effect of the amendment would be to exclude from the program, as of 
October 1, 2000, any transaction between a Phlx specialist or a Phlx 
ROT and a broker-dealer order.\5\ The proposed amendment is effective 
as of October 1, 2000.\6\
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    \3\ See Securities Exchange Act Release No. 43177 (Aug. 18, 
2000), 65 FR 51889 (Aug. 25, 2000).
    \4\ A Top 120 Option is defined as one of the 120 most actively 
traded equity options in terms of the total number of contracts that 
were traded on all U.S. options markets for the period January 1, 
2000 through June 30, 2000, based on volume information provided by 
The Options Clearing Corporation. The Phlx will determine the Top 
120 Options every six months, with the next measuring period 
commencing June 1, 2000 and ending on November 30, 2000. The 
proposed fee does not apply to index or currency options.
    \5\ According to the Phlx, a broker-dealer order is an order, 
entered from other than the floor of the exchange, for any account: 
(i) In which the holder of a beneficial interest is a member or non-
member broker-dealer; or (ii) in which the holder of beneficial 
interest is a person associated with or employed by a member or non-
member broker-dealer. This includes orders for the acount of an ROT 
entered from off the floor.
    \6\ The $1.00 fee is not eligible for the monthly credit of up 
to $1,000 to be applied against certain fees, dues, charges, and 
other amounts that certain members owe to the Exchange. See 
Securities Exchange Act Release No. 42791 (May 16, 2000), 65 FR 
33606 (May 24, 2000).
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    In SR-PHLX-00-89, the Phlx proposes to rebate the fees that the 
Phlx ROTs and Phlx specialists incurred during the period from August 
1, 2000 through September 30, 2000, when they engaged in a transaction 
with a broker-dealer order, and not with the order of a customer. The 
text of these proposed rule changes is available at the principal 
offices of the Phlx.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

    In its filings with the Commission, the Phlx included statements 
concerning the purpose of and basis for the proposed rule changes and 
discussed any comments it received on them. The text of these 
statements may be examined at the places specified in Item IV below. 
The Phlx 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 Changes

    The purpose of SR-PHLX-00-88 is to amend the Phlx's payment for 
order flow fee program such that, effective October 1, 2000, the Phlx 
would not assess the $1.00 per contract fee on transactions in which a 
Phlx specialist or Phlx ROT trades with a broker-dealer order. 
Moreover, in connection with SR-PHLX-00-89, the Phlx proposes to rebate 
the fees that Phlx specialists and ROTs incurred in executing such 
transactions with broker-dealers during the period from August 1, 2000 
through September 30, 2000.
    The purpose of the Phlx's payment for order flow program is to 
generate a source of revenue that specialists may use to attract order 
flow to the Phlx. The Phlx's payment for order flow program originally 
imposed a $1.00 fee on all transactions of specialists and ROTs in the 
Top 120 Options traded on the Phlx, other than ROT-to-ROT or 
specialist-to-ROT transactions.\7\ The Phlx believes that it was 
necessary for it to adopt this type of fee in order to maintain and 
enhance its competitive position.
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    \7\ See Securities Exchange Act Release No. 43177 (Aug. 18, 
2000), 65 FR 51889 (Aug. 25, 2000). The Phlx later filed a proposed 
rule change to amend its payment for order flow program in order to 
exclude from the program, as of September 1, 2000, any transactions 
between Phlx specialists or ROTs and Phlx member firms trading in 
their proprietary accounts. See SR-PHLX-00-86 (September 11, 2000). 
The Phlx also proposed to rebate the fees that were imposed upon 
specialists and ROTs for transactions of the type that would be 
excluded by virtue of SR-PHLX-00-86. See SR-PHLX-00-87 (September 
11, 2000).
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    Proposed rule change SR-PHLX-00-88 would now exempt from the fee 
all transactions between a specialist or an ROT and a broker-dealer 
order. The Phlx believes that it would not promote the goals of the 
payment for order flow program to collect the $1.00 fee from an ROT or 
a specialist that engages in a transaction with a broker-dealer order, 
and not the order of a customer. Therefore, any funds collected in 
connection with those trades would not be used to make payments to 
broker-dealers for their proprietary order flow, because those are not 
the kind of transactions that the fee is designed to attract. Indeed, 
because the primary

[[Page 66278]]

focus of the program, as amended, is to attract order flow from 
customers, the $1.00 fee will apply to transactions between specialists 
or ROTs and customers. In SR-PHLX-00-89, the Phlx proposes to rebate to 
specialists and ROTs any fees that were imposed on them with respect to 
such transactions with broker-dealers during the period from August 1, 
2000 through September 30, 2000.
    In sum, the Phlx's payment for order flow program, as amended, 
would impose the $1.00 fee on all transactions by specialists and ROTs 
in the Top 120 Options, with the exception of: (1) Transactions between 
ROTs, (2) transactions between a specialist and an ROT; (3) 
transactions between a specialist or ROT and a Phlx member firm acting 
for its proprietary account and not on behalf of a customer,\8\ (4) 
transactions between a specialist and a broker-dealer order; and (5) 
transactions between an ROT and a broker-dealer order. The Exchange 
envisions that the persons who pay the fees will also participate in 
the order flow derived from the amended program. The Exchange believes 
that the program, amended as proposed, will provide for the equitable 
allocation of reasonable fees among the Exchange's members because the 
specialists and ROTs who pay the fee should also receive the benefits 
of increased order flow.
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    \8\ See footnote 7, supra.
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    Moreover, the Exchange believes that the fee should promote just 
and equitable principles of trade, remove impediments to and perfect 
the mechanism of a free and open market, and protect investors and the 
public interest by attracting more order flow to the Exchange. In the 
Exchange's view, this should result in increased liquidity, tighter 
markets, and more competition among exchange members. Accordingly, the 
Exchange believes that its proposals are consistent with and further 
the objectives of the Act, including Sections 6(b)(4) \9\ and 6(b)(5) 
\10\ thereof.
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    \9\ 15 U.S.C. 78f(b)(5).
    \10\ 15 U.S.C. 78f(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule changes will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Changes Received From Members, Participants or Others

    The Phlx neither solicited nor received written comments with 
respect to the proposed rule changes.

III. Date of Effectiveness of the Proposed Rule Changes and Timing 
for Commission Action

    Because the Phlx has designated the foregoing proposed rule changes 
as fee changes pursuant to section 19(b)(3)(A) of the Act \11\ and Rule 
19b-4(f)(2) thereunder, \12\ the proposals have taken effect upon 
filing with the Commission. At any time within 60 days of the filing of 
the proposed rule changes, the Commission may summarily abrogate them 
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.
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments

    The Commission invites interested persons to submit written data, 
views, and arguments concerning the foregoing, including whether the 
proposed rules are consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609. Copies of the submissions, all subsequent amendments, 
all written statements with respect to the proposed rule changes that 
are filed with the Commission, and all written communications relating 
to the proposed rule changes 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 inspection 
and copying in the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal offices of the Phlx. All submissions should refer to File 
Nos. SR-PHLX-00-88 and SR-PHLX-00-89 and should be submitted by 
November 24, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-28225 Filed 11-2-00; 8:45 am]
BILLING CODE 8010-01-M