Document ID: SEC-2006-0605-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Philadelphia Stock Exchange, Inc.
Posted Date: 2006-05-10T04:00Z

[Federal Register: May 10, 2006 (Volume 71, Number 90)]
[Notices]               
[Page 27301-27303]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10my06-114]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53754; File No. SR-Phlx-2006-25]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating to its Equity Options Payment for Order Flow Program

May 3, 2006.
    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 April 19, 2006, the Philadelphia Stock Exchange, Inc. (``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 Phlx 
has designated this proposal as one changing a fee imposed by the Phlx 
under Section 19(b)(3)(A)(ii) of the Act \3\ and Rule 19b-4(f)(2) 
thereunder,\4\ which renders the proposal effective upon filing with 
the Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to amend its equity options payment for order 
flow program to rebate, on a quarterly basis, any excess payment for 
order flow funds that were collected but not requested for rebate by a 
specialist or Directed Registered Options Trader (``ROT''). The 
Exchange would calculate after the end of each calendar quarter, any 
excess funds from the previous calendar quarter and would rebate, on a 
pro-rata basis, to the applicable specialists, Directed ROTs and ROTs 
who paid into that pool of funds. Rebated funds would be reflected as a 
credit on the members' invoices.
    The Phlx states that the proposal would remain in effect as part of 
the Exchange's payment for order flow pilot program that is currently 
scheduled to expire on May 27, 2006.\5\
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    \5\ The Exchange states that the current payment for order flow 
program is in effect as a pilot program that is scheduled to expire 
on May 27, 2006, the same date as the one-year pilot program in 
effect in connection with Directed Orders. See Securities Exchange 
Act Release No. 51759 (May 27, 2005), 70 FR 32860 (June 6, 2005) 
(SR-Phlx-2004-91).
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    Below is the text of the proposed rule change. Proposed additions 
are italicized.
SUMMARY OF EQUITY OPTION CHARGES (p. 3/6)
* * * * *
REAL-TIME RISK MANAGEMENT FEE
    $.0025 per contract for firms/members receiving information on a 
real-time basis.
EQUITY OPTION PAYMENT FOR ORDER FLOW FEES*
    (1) For trades resulting from either Directed or non-Directed 
Orders that are delivered electronically and executed on the Exchange: 
Assessed on ROTs, specialists and Directed ROTs on those trades when 
the specialist unit or Directed ROT elects to participate in the 
payment for order flow program.* * *
    (2) No payment for order flow fees will be assessed on trades that 
are not delivered electronically.
    QQQQ (NASDAQ-100 Index Tracking Stock SM)--$0.75 per 
contract.
    Remaining Equity Options, except FXI Options--$0.60 per contract.
    See Appendix A for additional fees.
    *Assessed on transactions resulting from customer orders. This 
proposal will be in effect for trades settling on or after October 1, 
2005 and will remain in effect as a pilot program that is scheduled to 
expire on May 27, 2006.
    * * * Any excess payment for order flow funds billed but not 
utilized by the specialist or Directed ROT will be carried forward 
unless the Directed ROT or specialist elects to have those funds 
rebated to the applicable ROT, Directed ROT or specialist on a pro rata 
basis, reflected as a credit on the monthly invoices. At the end of 
each calendar quarter, the Exchange will calculate the amount of excess 
funds from the previous quarter and subsequently rebate excess funds on 
a pro-rata basis to the applicable ROT, Directed ROT or specialist who 
paid into that pool of funds.
* * * * *

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 Phlx 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 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 Change

1. Purpose
    According to the Phlx, currently, the following payment for order 
flow rates are in effect at the Exchange: (1) Equity options other than 
QQQQ \6\ and FXI Options are assessed $0.60 per contract; (2) options 
on QQQQ are assessed $0.75 per contract; and (3) no payment for order 
flow fees are assessed on FXI Options.\7\ Trades resulting from either 
Directed or non-Directed Orders that are delivered electronically over 
AUTOM and that are executed on the Exchange, are assessed a payment for 
order flow fee, while non-electronically-delivered

[[Page 27302]]

orders (i.e., represented by a floor broker) are not assessed a payment 
for order flow fee.\8\
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    \6\ The Nasdaq-100[supreg], Nasdaq-100 Index[supreg], 
Nasdaq[supreg], The Nasdaq Stock Market[supreg], Nasdaq-100 
Shares\SM\, Nasdaq-100 Trust\SM\, Nasdaq-100 Index Tracking 
Stock\SM\, and QQQ\SM\ are trademarks or service marks of The Nasdaq 
Stock Market, Inc. (``Nasdaq'') and have been licensed for use for 
certain purposes by the Philadelphia Stock Exchange pursuant to a 
License Agreement with Nasdaq. The Nasdaq-100 Index[supreg] 
(``Index'') is determined, composed, and calculated by Nasdaq 
without regard to the Licensee, the Nasdaq-100 Trust\SM\, or the 
beneficial owners of Nasdaq-100 Shares\SM\. The Exchange states that 
Nasdaq has complete control and sole discretion in determining, 
comprising, or calculating the Index or in modifying in any way its 
method for determining, comprising, or calculating the Index in the 
future.
    \7\ Specialists and Directed ROTs who participate in the 
Exchange's payment for order flow program are assessed a payment for 
order flow fee, in addition to ROTs. See Securities Exchange Act 
Releases Nos. 52568 (October 6, 2005), 70 FR 60120 (October 14, 
2005) (SR-Phlx-2005-58) and 53078 (January 9, 2006), 71 FR 2289 
(January 13, 2006) (SR-Phlx-2005-88).
    \8\ The Exchange states that electronically-delivered orders do 
not include orders delivered through the Floor Broker Management 
System pursuant to Exchange Rule 1063.
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    The Exchange states that currently specialist units or Directed 
ROTs may request that any excess funds (funds collected but not 
requested by a specialist unit or Directed ROT) be rebated, on a pro-
rata basis, to the applicable members who paid into that pool of funds. 
If any excess funds are rebated, they would be reflected as a credit on 
the invoices.\9\ The amount a specialist unit or Directed ROT may 
request that the Exchange pay to Order Flow Providers is limited to the 
amount billed and collected for that month, plus any excess funds that 
were carried over from previous months.
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    \9\ The Exchange states that if a specialist unit or Directed 
ROT leaves the Exchange mid-month, any excess funds in that 
specialist unit or Directed ROT pool are rebated to the applicable 
Exchange members on a pro rata basis.
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    The Exchange proposes to amend its equity options payment for order 
flow program to rebate, on a quarterly basis, any excess payment for 
order flow funds. After the end of each calendar quarter, any excess 
funds from the previous calendar quarter would be calculated and 
subsequently rebated, on a pro-rata basis, to the applicable 
specialists, Directed ROTs and ROTs who paid into that pool of 
funds.\10\ The Exchange believes that this should allow for sufficient 
time to process any rebates. Consistent with current practice, rebated 
funds would be reflected as a credit on the invoices.\11\
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    \10\ For example, after the end of March (the last month of the 
quarter covering the period from January, February and March), any 
excess funds from October, November and December (the previous 
quarter) would be calculated.
    \11\ Based on the proposal, the Exchange intends to rebate, in 
the form of a credit, any excess funds on an invoice reflecting 
activity in the month following the end of a calendar quarter. For 
example, after the end of March (the last month of a quarter) any 
excess funds from the October, November and December (the previous 
quarter) would be calculated and then reflected as a credit on the 
invoices that cover activity for the month of April (``April 
invoices''). The April invoices would typically be issued in the 
beginning of May.
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    Specialists and Directed ROTs would be able to continue to request 
that any excess funds be rebated, on a monthly basis, to the 
specialists, Directed ROTs and ROTs who paid into that pool of funds. 
In addition, specialists and Directed ROTs may continue to request that 
the Exchange pay to order flow providers an amount limited to the 
amount billed and collected for that month, plus any excess funds 
carried over from previous months. However, pursuant to the proposal, 
excess funds from the previous quarter would no longer be available to 
the specialists and Directed ROTs once they have directed the Exchange 
to make payments to order flow providers for activity covering order 
flow received for the last month of each subsequent calendar 
quarter.\12 \
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    \12\ For example, after the specialists or Directed ROTs direct 
the Exchange to make payments to order flow providers at the end of 
March (last month of a quarter), any excess funds remaining from the 
previous quarter (October, November and December) would no longer be 
available to the specialists or Directed ROTs.
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    The Exchange states that the purpose of this proposal is to reduce 
the economic burden on members by rebating excess payment for order 
flow funds. In addition, the Exchange believes that while specialists 
and Directed ROTs may carry forward excess amounts that were not paid 
to order flow providers, there should be a reasonable time frame 
associated with such amounts that are carried forward.
    The proposal would remain in effect as part of the Exchange's 
payment for the order flow pilot program that is currently scheduled to 
expire on May 27, 2006.
    No other changes to the Exchange's payment for order flow program 
are being proposed at this time.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \13\ in general, and furthers the objectives of 
Sections 6(b)(4) of the Act \14\ in particular, in that it is an 
equitable allocation of reasonable dues, fees, and other charges among 
Exchange members.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(4).
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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 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 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 proposed rule change has been designated as a fee 
change pursuant to Section 19(b)(3)(A)(ii) of the Act \15\ and Rule 
19b-4(f)(2) \16\ thereunder, because it establishes or changes a due, 
fee, or other charge imposed by the Exchange. Accordingly, the proposal 
will take effect upon filing with the Commission. At any time within 60 
days of the filing of such proposed rule change the Commission may 
summarily abrogate 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.
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    \15\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \16\ 17 CFR 240.19b-4(f)(2).
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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

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-Phlx-2006-25 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2006-25. This file 
number should be included on the subject line if e-mail 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 inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the Phlx. All

[[Page 27303]]

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-2006-25 and should be 
submitted on or before May 31, 2006.
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    \17\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
Nancy M. Morris,
Secretary.
[FR Doc. E6-7094 Filed 5-9-06; 8:45 am]

BILLING CODE 8010-01-P