Document ID: SEC-2006-0178-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Philadelphia Stock Exchange, Inc.
Posted Date: 2006-02-10T05:00Z

[Federal Register: February 10, 2006 (Volume 71, Number 28)]
[Notices]               
[Page 7106-7108]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10fe06-133]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53228; File No. SR-Phlx-2005-91]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
and Amendment No. 1 Thereto To Amend the Equity Option Specialist 
Deficit (Shortfall) Fee

February 6, 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 December 29, 2005, 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 Phlx. On February 
1, 2006, the Phlx filed Amendment No. 1 to the proposed rule change.\3\ 
The Phlx filed the proposal pursuant to Section 19(b)(3)(A)(ii) of the 
Act \4\ and Rule 19b-4(f)(2) thereunder,\5\ which renders the proposal 
effective upon filing with the Commission. The Commission is publishing 
this notice to solicit comments on the proposed rule change, as 
amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange made additional changes to 
the proposed rule text to clarify the assessment of the shortfall 
fee and the application of the shortfall credit.
    \4\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \5\ 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 Specialist Deficit (Shortfall) Fee 
(``shortfall fee'') in two ways: (1) Eliminate the DROT Exemption (as 
defined herein), so that a specialist \6\ will be assessed a shortfall 
fee, subject to the maximum caps currently in effect,\7\ even when one 
or more Streaming Quote Traders (``SQTs'') \8\ or Remote Streaming 
Quote Traders (``RSQTs'') \9\ trading on the Exchange's electronic 
options trading platform, Phlx XL,\10\ have been designated to receive 
Directed Orders \11\ from Order Flow Providers \12\ for the same top 
120 equity option\13\ in which that specialist unit is acting as the 
specialist; and (2) establish a shortfall credit of $0.35 per contract 
in any top 120 equity option for each specialist unit whose trading 
volume for such equity option effected on the Exchange in one month 
exceeds 15% of the total national monthly contract volume for such 
equity option in that same month, up to the total amount of the 
shortfall fee, if any, that is incurred in connection with the trading 
of other top 120 equity options that has not met the volume threshold, 
which is currently set at 12% of the total national monthly contract 
volume.
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    \6\ The Exchange uses the terms ``specialist'' and ``specialist 
unit'' interchangeably herein.
    \7\ Certain shortfall fee caps apply to transactions in any of 
the top 120 equity options pursuant to the following: (1) If Phlx 
volume in any top 120 equity option, except options on Nasdaq-100 
Index Tracking StockSM (traded under the symbol 
``QQQQ''), is less than or equal to 50 percent of the current 
threshold volume (presently 6 percent), a cap of $10,000 will apply; 
(2) If Phlx volume in any top 120 equity option, except options on 
QQQQ, is greater than 50 percent of the current threshold volume 
(presently 6 percent) and less than 12 percent of the total national 
monthly contract volume, a cap of $5,000 will apply; (3) If Phlx 
volume in options on QQQQ is less than or equal to 50 percent of the 
current threshold volume (presently 6 percent), a cap of $20,000 
will apply; and (4) If Phlx volume in options on QQQQ is greater 
than 50 percent of the current threshold volume (presently 6 
percent) and less than 12 percent of the total national monthly 
contract volume, a cap of $10,000 will apply. The Nasdaq-
100[supreg], Nasdaq-100 Index[supreg], Nasdaq[supreg], The Nasdaq 
Stock Market[supreg], Nasdaq-100 SharesSM, Nasdaq-100 
Trust SM, Nasdaq-100 Index Tracking StockSM, 
and QQQSM are trademarks or service marks of The Nasdaq 
Stock Market, Inc. (``Nasdaq'') and have been licensed for use for 
certain purposes by the Phlx pursuant to a License Agreement with 
Nasdaq. The Nasdaq-100 Index[supreg] (the ``Index'') is determined, 
composed, and calculated by Nasdaq without regard to the Licensee, 
the Nasdaq-100 TrustSM, or the beneficial owners of 
Nasdaq-100 SharesSM. 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.
    \8\ An SQT is an Exchange Registered Options Trader (``ROT'') 
who has received permission from the Exchange to generate and submit 
option quotations electronically through an electronic interface 
with AUTOM via an Exchange approved proprietary electronic quoting 
device in eligible options to which such SQT is assigned. See Phlx 
Rule 1014(b)(ii)(A). AUTOM is the Exchange's electronic order 
delivery, routing, execution and reporting system, which provides 
for the automatic entry and routing of equity option and index 
option orders to the Exchange trading floor. See Phlx Rule 1080(a).
    \9\ An RSQT is a ROT that is a member or member organization of 
the Exchange with no physical trading floor presence who has 
received permission from the Exchange to generate and submit option 
quotations electronically through AUTOM in eligible options to which 
such RSQT has been assigned. An RSQT may only submit such quotations 
electronically from off the floor of the Exchange. An RSQT may only 
trade in a market making capacity in classes of options in which he 
is assigned. See Phlx Rule 1014(b)(ii)(B). See generally Securities 
Exchange Act Release Nos. 51126 (February 2, 2005), 70 FR 6915 
(February 9, 2005) (SR-Phlx-2004-90) and 51428 (March 24, 2005), 70 
FR 16325 (March 30, 2005) (SR-Phlx-2005-12).
    \10\ In July 2004, the Exchange began trading equity options on 
Phlx XL, followed by index options in December 2004. See Securities 
Exchange Act Release No. 50100 (July 27, 2004), 69 FR 46612 (August 
3, 2004) (SR-Phlx-2003-59).
    \11\ The term ``Directed Order'' means any customer order to buy 
or sell which has been directed to a particular specialist, RSQT, or 
SQT by an Order Flow Provider (as defined herein). See Phlx Rule 
1080(l)(i)(A). The provisions of Phlx Rule 1080(l) are in effect for 
a one-year pilot period to expire on May 27, 2006. See Securities 
Exchange Act Release No. 51759 (May 27, 2005), 70 FR 32860 (June 6, 
2005) (SR-Phlx-2004-91).
    \12\ The term ``Order Flow Provider'' means any member or member 
organization that submits, as agent, customer orders to the 
Exchange. See Phlx Rule 1080(l)(i)(B).
    \13\ The Exchange defines a top 120 equity option as one of the 
120 most actively traded equity options in terms of the total number 
of contracts in that option that were traded nationally for a 
specified month, based on volume reflected by The Options Clearing 
Corporation.
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    The Exchange also proposes to make a minor, technical change to the 
shortfall fee section in its Summary of Equity Option Charges by 
inserting the word ``equity'' in the phrase ``top 120 options'' to 
clarify the type of options to which the Exchange is referring in the 
shortfall fee section. In addition, the Exchange proposes to clarify 
that the reference to ``transition period'' in the first paragraph of 
the shortfall fee

[[Page 7107]]

section refers to the transition period set forth for any top 120 
equity option listed after February 1, 2004 and for any top 120 equity 
option acquired by a new specialist unit within the first 60 days of 
operations and which is described at the end of the shortfall fee 
section. The Exchange considers these changes to be minor, technical 
changes because they are consistent with current Exchange practice and 
should help to clarify the assessment of the shortfall fee.
    The proposed rule change is scheduled to become effective for 
transactions settling on or after January 2, 2006. The text of the 
proposed rule change is available on the Phlx's Internet Web site 
(http://www.phlx.com), at the Phlx's Office of the Secretary, 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 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
    The Exchange currently charges specialist units a shortfall fee of 
$0.35 per contract, to be paid monthly in connection with transactions 
in any top 120 equity option, in most cases, if at least 12% of the 
total national monthly contract volume in that equity option is not 
effected by that specialist unit on the Exchange in that month.\14\ 
Effective for trades settling on or after June 6, 2005, the Exchange 
amended its shortfall fee to no longer charge the shortfall fee when 
one or more SQTs or RSQTs trading on Phlx XL have been designated to 
receive Directed Orders from Order Flow Providers (``Directed Order 
Flow Program'') for the same option in which that specialist unit is 
acting as the specialist (collectively, the ``DROT Exemption'').\15\ At 
that time, the Exchange believed that it would not be reasonable to 
impose a shortfall fee on specialists when SQTs and RSQTs would be 
competing for market share with respect to the same equity options on a 
relatively equal basis, as the shortfall fee was designed, in part, to 
create an incentive for specialists to promote the equity options they 
have been allocated. Thus, given that the Directed Order Flow Program 
was a new program, the Exchange believed it was important to see how 
such program would affect the specialists' market share, as well as how 
the Directed Order Flow Program might influence order routing decisions 
by Order Flow Providers.
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    \14\ An exception to the 12% volume threshold amount relates to 
a transition period for newly listed top 120 equity options or for 
any top 120 equity option (including those equity options listed on 
the Exchange before February 1, 2004) acquired by a new specialist 
unit. These transition periods are not affected by the current 
proposal. See Securities Exchange Act Release No. 49324 (February 
26, 2004), 69 FR 10089 (March 3, 2004) (SR-Phlx-2004-08).
    \15\ See Securities Exchange Act Release No. 51947 (June 30, 
2005), 70 FR 39542 (July 8, 2005) (SR-Phlx-2005-39).
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    However, the specialists' market share in certain top 120 equity 
options currently remains well below the targeted shortfall fee volume 
threshold of 12% of the total national monthly contract volume effected 
on the Exchange. Although the Exchange recognizes that the specialists 
are competing for market share with the SQTs and RSQTs, it believes 
that obtaining 12% market share, which would include SQT and RSQT 
volume, is not unreasonable and wants to encourage specialists to 
compete in garnering greater market share. Thus, the purpose of this 
proposal is to encourage equity option specialist units to increase 
their respective market shares and create an incentive, by way of a 
credit, for such specialists to trade on the Exchange in any top 120 
equity option in excess of 15% of the total national monthly contract 
volume for such top 120 equity option in one month.
    Under the proposal, when a specialist unit's trading volume in any 
top 120 equity option effected on the Exchange in one month exceeds 15% 
of the total national contract volume for such top 120 equity option in 
that same month, a shortfall credit of $0.35 per contract would be 
applied to such specialist unit's invoice, the dollar amount of which 
would (i) directly correspond to the number of contracts of such top 
120 equity option in excess of 15% of the total national contract 
volume for such top 120 equity option, and (ii) offset any shortfall 
fee charged to such specialist unit with respect to any other top 120 
equity option traded in that same month. However, the amount of any 
shortfall credit may not (a) exceed the total amount of any shortfall 
fee charged to such specialist unit with respect to any other top 120 
equity option traded in that same month, and (b) be applied against any 
other Exchange charges on the invoice(s) of such specialist unit or 
subsidiary of such specialist unit. Finally, any excess shortfall 
credit would not be carried over to subsequent months. Should the total 
amount of the shortfall credit exceed the total amount of the shortfall 
fee due, no shortfall fee would be due to the Exchange.\16\
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    \16\ For example, if the total national monthly contract volume 
was 8,000,000 contracts for one equity option, and the Exchange's 
market share in that option was 18% or 1,440,000 contracts, the 
specialist unit would receive a credit based on the number of 
contracts in excess of the 15% threshold, up to the total amount of 
the shortfall fee that was incurred in connection with the trading 
of other top 120 equity options that did not meet the current 12% 
volume threshold. In this example, the amount of 1,200,000 contracts 
represents 15% of the total national monthly contract volume of 
8,000,000. Thus, a shortfall credit of $84,000 (derived from the 
product of the difference between 1,200,000 contracts and 1,440,000 
contracts and $0.35) would be applied against any other shortfall 
fees incurred by that specialist unit in that month. If the amount 
of the shortfall fees totaled less than the amount of the shortfall 
credit (e.g., the shortfall fees totaled $25,000 and the shortfall 
credit was $84,000), no shortfall fee would be due the Exchange that 
month. The excess credit of $59,000 would not carry over to 
subsequent months.
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    According to the Exchange, the purpose of making the minor, 
technical changes to the proposed text of the shortfall fee, including 
the addition of the caption ``Transition Period,'' is to more clearly 
describe current Exchange practice, which should, in turn, help to 
avoid confusion regarding the implementation of the shortfall fee.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the requirements of Section 6(b) of the Act,\17\ in general, and 
furthers the objectives of Section 6(b)(4) of the Act,\18\ in 
particular, because it is designed to provide for the equitable 
allocation of reasonable dues, fees, and other charges among members of 
the Exchange. All specialist units competing in the top 120 equity 
options would be assessed the same shortfall fee and would be given the 
same shortfall fee credit.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 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.

[[Page 7108]]

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

    The Phlx has neither solicited nor received written comments on 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 \19\ and Rule 
19b-4(f)(2) \20\ thereunder. Accordingly, the proposed rule change is 
effective upon filing with the Commission. At any time within 60 days 
of the filing of the 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.\21\
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    \19\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \20\ 17 CFR 19b-4(f)(2).
    \21\ The effective date of the original proposed rule change is 
December 29, 2005, and the effective date of Amendment No. 1 is 
February 1, 2006. For purposes of calculating the 60-day period 
within which the Commission may summarily abrogate the proposed rule 
change under Section 19(b)(3)(C) of the Act, the Commission 
considers such period to commence on February 1, 2006, the date on 
which the Exchange filed Amendment No. 1. See 15 U.S.C. 
78s(b)(3)(C).
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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, as amended, 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 No. SR-Phlx-2005-91 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090. All submissions should refer to 
File No. SR-Phlx-2005-91. 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 will also be available for 
inspection and copying at the principal office of the Phlx. 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 No. SR-Phlx-2005-91 and should be 
submitted on or before March 3, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\
Jill M. Peterson,
Assistant Secretary.
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    \22\ 17 CFR 200.30-3(a)(12).
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 [FR Doc. E6-1835 Filed 2-9-06; 8:45 am]

BILLING CODE 8010-01-P