Document ID: SEC-2008-0214-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Philadelphia Stock Exchange, Inc.
Posted Date: 2008-02-07T05:00Z

[Federal Register: February 7, 2008 (Volume 73, Number 26)]
[Notices]               
[Page 7352-7354]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07fe08-109]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57253; File No. SR-Phlx-2008-08]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating to an Options Floor Broker Subsidy Program

February 1, 2008.
    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 January 29, 2008, 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 substantially prepared by the 
Exchange. Phlx has designated this proposal as one establishing or 
changing a due, fee, or other charge imposed by 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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to: (1) Adopt a tiered per contract floor broker 
options subsidy payable to member organizations with Exchange 
registered floor brokers for eligible contracts (as defined below) that 
are entered into the Exchange's Floor Broker Management System 
(''FBMS'') \5\ and subsequently executed on the Exchange,\6\ subject to 
two threshold volume requirements; and (2) delete the current floor 
brokerage assessment that is set forth on the Exchange's fee schedule 
in several places, specifically the Summary of Equity Option and RUT 
and RMN Charges, the Summary of Index Option Charges, the Summary of 
U.S. Dollar-Settled Foreign Currency Option Charges, and the Summary of 
Physical Delivery Currency Option Charges.
---------------------------------------------------------------------------

    \5\ The Exchange states that FBMS is designed to enable floor 
brokers and/or their employees to enter, route, and report 
transactions stemming from options orders received on the Exchange. 
FBMS also is designed to establish an electronic audit trail for 
options orders represented and executed by floor brokers on the 
Exchange. See Exchange Rule 1080, commentary .06.
    \6\ Thus, outbound Linkage transactions, which are therefore not 
executed on the Exchange, are excluded from threshold calculations 
and subsidy payments, as further described below.
---------------------------------------------------------------------------

    Although changes to the fee schedule pursuant to this proposal are 
effective upon filing, the Exchange intends to implement the subsidy 
and delete the floor brokerage assessment beginning with transactions 
settling on or after February 1, 2008.
    The text of the proposed rule change is available at the Exchange, 
the Commission's Public Reference Room, and http://www.phlx.com.

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

[[Page 7353]]

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. 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
    The details of the tiered per contract floor broker subsidy program 
are set forth below.
Threshold Calculations
    To qualify for the per contract subsidy, a member organization with 
Exchange registered floor brokers must have: (1) More than an average 
of 75,000 executed contracts per day in the applicable month; and (2) 
at least 40,000 executed contracts or more per day for at least eight 
trading days during that same month.\7\ Only the floor broker volume 
from orders entered into FBMS and subsequently executed would be 
counted. The 75,000 contract and 40,000 contract thresholds, as 
described above, would be calculated per member organization floor 
brokerage unit.
---------------------------------------------------------------------------

    \7\ For purposes of calculating the 75,000 and 40,000 
thresholds, customer-to-customer transactions, customer-to-non-
customer transactions, and non-customer-to-non-customer transactions 
would be included. Currently, the Exchange states that it does not 
charge an options comparison or transaction charge for customer 
transactions as set forth on the Exchange's Summary of Equity Option 
and RUT and RMN Charges. The Exchange, however, does charge for 
certain customer transactions as set forth on the Exchange's Summary 
of Index Option Charges and the Summary of U.S. Dollar-Settled 
Foreign Currency Option Charges. The Exchange believes that allowing 
customer transactions to be included in the threshold calculations 
should help to encourage floor brokers to send more order flow to 
the Exchange.
---------------------------------------------------------------------------

    In the event that two or more member organizations with Exchange 
registered floor brokers each entered one side of a transaction into 
FBMS, then the executed contracts would be divided among each 
qualifying member organization that participates in that 
transaction.\8\
---------------------------------------------------------------------------

    \8\ Set forth below are several examples to illustrate the 
threshold volume calculations: (1) If one floor broker enters both 
sides of a transaction for 1,000 contracts, that floor broker would 
get 1,000 contracts credited towards its threshold volume; (2) in a 
1,000 contract trade where each side was entered by a different 
member organization with Exchange registered floor brokers, each 
such member organization would receive 500 contracts credited 
towards their respective threshold volumes; (3) if one floor broker 
enters an order for 900 contracts to sell and three separate floor 
brokers enter the contra side to each buy 300 contracts, the floor 
broker that entered the 900 contracts to sell would receive 450 
contracts towards its threshold calculation and each floor broker on 
the contra side would receive 150 contracts credited towards their 
respective threshold calculations; and (4) if a floor broker enters 
an order to sell 900 contracts and two separate floor brokers each 
enter orders to buy 300 contracts and a registered options trader 
(``ROT'') bought the remaining 300 contracts, the floor broker that 
entered the 900 contracts would get 600 contracts towards its 
threshold (150 from each floor broker and 300 from the ROT (the 
entering floor broker that executed against the ROT receives credit 
for both sides of the transaction with the ROT (i.e., 300 contracts) 
because the subsidy is only available to floor brokers and, 
therefore, the ROT is not eligible to receive credit towards the 
subsidy)), and the two separate floor brokers would get 150 each to 
add up to the total 900 contracts.
---------------------------------------------------------------------------

Eligible Contracts
    To be eligible for the per contract subsidy, an order must be 
entered through the Exchange's FBMS and subsequently executed on the 
Exchange.\9\
---------------------------------------------------------------------------

    \9\ Therefore, orders entered through FBMS, but executed away 
through Linkage would not count towards the 75,000 contract or the 
40,000 contract thresholds. However, if an inbound Linkage order is 
received and is executed against an order that was entered through 
FBMS, the order that was entered through FBMS would count towards 
the threshold amount and per contract subsidy, if applicable, for 
the member organization that entered that order because that 
transaction was executed on the Exchange.
---------------------------------------------------------------------------

    As previously stated, customer-to-customer transactions would count 
towards reaching the 75,000 contract and 40,000 contract thresholds, 
but a per contract subsidy would not be paid on any customer-to-
customer transactions.\10\
---------------------------------------------------------------------------

    \10\ Customer transactions are identified by the letter ``c'' in 
the Exchange's trading systems. For purposes of this proposal, 
customer transactions would exclude those orders entered into FMBS 
that represent an order other than a customer order, such as 
``firm,'' ``customer yield'' (which are broker-dealer orders), 
``market maker'' (which is an on-floor market maker), or ``off-floor 
market maker.''
---------------------------------------------------------------------------

    Dividend, merger and short stock interest strategies would be 
excluded from all threshold volume calculations, and no per contract 
subsidy would be paid on these transactions.\11\
---------------------------------------------------------------------------

    \11\ The Exchange notes that each strategy is coded in such a 
way so that the Exchange's trading system is able to discern these 
different types of trading strategies. For a definition of these 
strategies, see Securities Exchange Act Release No. 55358 (February 
27, 2007), 72 FR 9828 (March 5, 2007) (SR-Phlx-2007-14).

                                Per Contract Average Daily Volume Subsidy Payment
----------------------------------------------------------------------------------------------------------------
             Tier I                     Tier II            Tier III             Tier IV             Tier V
----------------------------------------------------------------------------------------------------------------
75,001 to 100,000...............  100,001 to 200,000  200,001 to 300,000  300,001 to 400,000  400,001 and
                                                                                               greater.
$0.01 per contract..............  $0.04 per contract  $0.05 per contract  $0.06 per contract  $0.07 per
                                                                                               contract.
----------------------------------------------------------------------------------------------------------------

    The per contract subsidy would be paid based on the average daily 
contract volume for that month, which are customer-to-non-customer 
transactions \12\ and are in excess of 75,000 contracts.\13\ Payments 
would be made at the stated rate for each tier for those contracts that 
fall within that tier. These contracts may include customer-to-customer 
transactions for the purposes of reaching a tier, but as stated above, 
a per contract subsidy would not be paid on these executions. 
Therefore, if a member organization has 1,444,000 eligible contracts in 
a month with 19 trading days, that member organization would receive a 
per contract subsidy because it met the 75,000 contract threshold 
(1,444,000 eligible contracts/19 days = 76,000, the average daily 
contract volume). Therefore, the member organization with Exchange 
registered floor brokers would receive $0.01 per contract on 1,000 non-
customer-to-customer contracts

[[Page 7354]]

multiplied by 19 trading days, resulting in a subsidy of $190.\14\
---------------------------------------------------------------------------

    \12\ For purposes of this proposal, ``customer-to-non-customer'' 
transactions refers to customer-to-non-customer transactions, as 
well as non-customer-to-non-customer transactions.
    \13\ Based on the amount of customer-to-customer contracts, a 
member organization could enter Tier II or a higher tier due to the 
amount of customer-to-customer contract volume. For example, 
assuming the threshold requirements have been met and the average 
daily customer-to-customer transactions are 105,000 contracts, if a 
member organization has 2,200,000 eligible contracts in a month with 
20 trading days (110,000 average daily contract volume, with 5,000 
contracts representing customer-to-non-customer contracts), that 
member organization would receive no subsidy for Tier I ($0.01 per 
contract), as there were no customer-to-non-customer contracts 
considered when calculating Tier 1. Of the remaining 10,000 
contracts, the member organization would receive $0.04 per contract 
multiplied by 20 trading days on the 5,000 customer-to-non-customer 
contracts. Thus, that member organization would receive a subsidy 
for that month totaling $4,000.
    \14\ This example assumes that the threshold requirements have 
been met and the average daily customer-to-customer transactions are 
less than 75,001 contracts, which means that the subsidy will be 
paid starting with contract 75,001. To illustrate a subsidy covering 
two tiers, (again assuming the threshold requirements have been met 
(2,200,000 eligible contracts/20 days = 110,000, the average daily 
contract volume) and the average daily customer-to-customer 
transactions are less than 75,001 contracts), if a member 
organization has 2,200,000 eligible contracts in a month with 20 
trading days, that member organization would receive $0.01 per 
contract on 25,000 customer-to-non-customer contracts multiplied by 
20 trading days, with the remaining 10,000 contracts receiving $0.04 
per contract multiplied by 20 trading days. Thus, that member 
organization would receive a subsidy for that month totaling 
$13,000. To further illustrate the impact of customer-to-customer 
volume, assuming the threshold requirements have been met and the 
average daily customer-to-customer transactions are 85,000 
contracts, if a member organization has 2,200,000 eligible contracts 
in a month with 20 trading days, that member organization would 
receive $0.01 per contract on 15,000 customer-to-non-customer 
contracts multiplied by 20 trading days, with the remaining 10,000 
contracts receiving $0.04 per contract multiplied by 20 trading 
days. Thus, that member organization would receive a subsidy for 
that month totaling $11,000.
---------------------------------------------------------------------------

    When computing the threshold amounts, the Exchange intends to first 
count all customer-to-customer transactions and then all other 
customer-to-non-customer transactions.\15\
---------------------------------------------------------------------------

    \15\ The exchange believes that this method of calculation 
should therefore help member organizations with Exchange registered 
floor brokers to maximize the subsidy that is paid to them because 
customer-to-customer transactions will help the member organization 
reach the threshold requirements and then qualifying transactions 
after the threshold requirements are met will be paid the applicable 
per contract subsidy. See footnotes 13 and 14 above for specific 
examples.
---------------------------------------------------------------------------

    The Exchange also proposes to eliminate the floor brokerage 
assessment that is set forth on the Exchange's fee schedule in several 
places, specifically the Summary of Equity Option and RUT and RMN 
Charges, the Summary of Index Option Charges, the Summary of U.S. 
Dollar-Settled Foreign Currency Option Charges, and the Summary of 
Physical Delivery Currency Option Charges.
    The Exchange states that purpose of providing for a subsidy and 
deleting the floor brokerage assessment is to attract additional floor 
brokerage business to the Exchange, which should, in turn, attract more 
consistent liquidity as the Exchange's market share increases. The 
purpose of deleting the floor brokerage assessment on the Summary of 
Physical Delivery Currency Option Charges is to delete a fee that is 
deemed no longer necessary by the Exchange at this time.\16\
---------------------------------------------------------------------------

    \16\ To clarify, the floor broker subsidy set forth in this 
proposal does not apply to the physical delivery currency options, 
as those options are not entered into FBMS.
---------------------------------------------------------------------------

    The Exchange represents that this proposal should not adversely 
affect its commitment of resources to its regulatory oversight program.

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 solicited or received with respect to the 
proposed rule change.

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 \17\ and Rule 
19b-4(f)(2) \18\ 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.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \18\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

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-2008-08 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-2008-08. 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, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such 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-2008-08 and should be 
submitted on or before February 28, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
---------------------------------------------------------------------------

    \19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-2245 Filed 2-6-08; 8:45 am]

BILLING CODE 8011-01-P