Document ID: SEC-2006-1486-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Philadelphia Stock Exchange, Inc.
Posted Date: 2006-11-20T05:00Z

[Federal Register: November 20, 2006 (Volume 71, Number 223)]
[Notices]               
[Page 67188-67190]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20no06-106]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54746; File No. SR-Phlx-2006-71]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating To Clarifying Its Payment for Order Flow Program as It Relates 
to Order Flow Providers

November 14, 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 November 7, 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 clarify, in connection with the Exchange's 
payment for order flow program,\5\ who may receive payment for order 
flow funds that are assessed by the Exchange on members and member 
organizations \6\ and are disbursed, as described in detail below, 
based on the instructions of the specialist units \7\ and Directed 
ROTs.\8\
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    \5\ The Exchange's payment for order flow program is currently 
in effect until May 27, 2007. See Securities Exchange Act Release 
No. 53841 (May 19, 2006), 71 FR 30461 (May 26, 2006) (SR-Phlx-2006-
33).
    \6\ The Exchange states that, specifically, the payment for 
order flow fee is assessed on specialists/specialist units and 
Directed Registered Options Traders (``Directed ROTs'') who 
participate in the Exchange's payment for order flow program, and 
Registered Options Traders (``ROTs'').
    \7\ The Exchange states that it uses the terms ``specialist'' 
and ``specialist unit'' interchangeably herein.
    \8\ The Exchange states that Directed ROTs are either Streaming 
Quote Traders (``SQTs'') or Remote Streaming Quote Traders 
(``RSQTs'') that receive Directed Orders. An SQT is an Exchange 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. 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 Exchange Rules 1014(b)(ii) and 1080). An RSQT is an 
Exchange 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 Exchange Rule 1014(b)(ii)(B). See 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). The Exchange states 
that 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 (defined below). The provisions of 
Phlx Rule 1080(l) are in effect for a one-year pilot period to 
expire on May 27, 2007. See Securities Exchange Act Release No. 
53870 (May 25, 2006), 71 FR 31251 (June 1, 2006) (SR-Phlx-2006-27).
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    The Exchange states that under its current payment for order flow 
program, any available payment for order flow funds are disbursed by 
the Exchange according to the instructions of the specialist units and 
Directed ROTs. A specialist unit or Directed ROT must certify to the 
Exchange that payment for order flow funds directed by either of them 
to be paid to Order Flow Providers reflect payment arrangements entered 
into by the specialist unit or Directed ROT and the Order Flow 
Provider. The term ``Order Flow Provider'' is defined as any member or 
member organization that submits, as agent, customer orders to the 
Exchange.\9\
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    \9\ See Exchange Rule 1080(l).
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    The Exchange states that in addition to the Order Flow Providers 
defined above, there are additional order flow providers who are not 
members or member organizations of the Exchange who also route orders 
to the Exchange, but do so through a member or member organization. In 
these situations, the Exchange proposes to clarify that the specialist 
unit or Directed ROT may instruct the Exchange to direct payment to 
these order flow providers, in the same way that is done for Order Flow 
Providers, if they have entered into payment arrangements with a 
specialist unit or Directed ROT to send order flow to the Exchange. 
Thus, specialist units and Directed ROTs may instruct the Exchange to 
direct payment for order flow funds to order flow providers who are 
members, non-members, member organizations, or non-member 
organizations, provided, the requirements relating to certification, as 
described above, have been met. The Exchange notes that such order flow 
providers may arrange for the member organizations through which they 
route orders (referred to as ``Order Flow Providers'' in this proposal) 
to receive their payment for order flow payments and forward those 
funds to such non-member order flow provider. Although order flow 
providers may do this, many have chosen to receive payments directly, 
such that this proposal seeks to codify that practice.
    It is the Exchange's understanding that the arrangement to disburse 
payment for order flow funds to non-member payment for order flow 
providers, in the same way that it is

[[Page 67189]]

done for Order Flow Providers (who are members or member organizations 
of the Exchange), is not unacceptable to the Order Flow Providers. To 
codify this practice, the Exchange intends to amend its certification 
form to require that the specialists and Directed ROTs that request 
payment for order flow funds certify, if applicable, that payments sent 
directly to a non-member payment for order flow provider is not 
unacceptable to the Order Flow Provider through whom the orders are 
routed.
    In addition, consistent with current practice, Directed ROTs and 
specialists who request that payments be made to order floor providers 
would be required to make, keep current, and preserve all books and 
records relating to payment for order flow arrangements.\10\
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    \10\ See Exchange Rule 760, Maintenance, Retention and 
Furnishing of Books, Records, and Other Information.
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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)

* * * * *
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.

------------------------------------------------------------------------
                                                           Per contract
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QQQQ (NASDAQ-100 Index Tracking Stock SM)...............           $0.75
Remaining Equity Options................................            0.70
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    See Appendix A for additional fees.
    *Assessed on transactions resulting from customer orders and are 
available to be disbursed by the Exchange according to the instructions 
of the specialist units/specialists or Directed ROTs to order flow 
providers who are members or member organizations, who submit, as 
agent, customer orders to the Exchange or non-members or non-member 
organizations who submit, as agent, customer orders to the Exchange 
through a member or member organization who is acting as agent for 
those 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, 2007.
    * * * 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
    The Exchange states that the purpose of amending the definition of 
Order Flow Providers \11\ as set forth in the Exchange's payment for 
order flow program is to clarify that the available payment for order 
flow funds that are disbursed by the Exchange according to instructions 
of the specialist units and Directed ROTs to Order Flow Providers, may 
include order flow providers that are not members or member 
organizations of the Exchange. Consistent with the Exchange's current 
payment for order flow program, the Exchange would not be involved in 
the determination of the terms governing the orders that qualify for 
payment or the amount of any payment. The Exchange states that it would 
merely be providing administrative support for the payment for order 
flow program by making the payment for order flow payments on behalf 
of, and at the direction of, the specialist units or Directed ROTs.
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    \11\ See Exchange Rule 1080(l).
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    Currently, the term ``Order Flow Provider'' is defined in Exchange 
Rule 1080(l) as any member or member organization that submits, as 
agent, customer orders to the Exchange. The Exchange represents that it 
is not seeking to change the definition as set forth in Exchange Rule 
1080(l). As described above, the Exchange merely intends to clarify 
that in addition to the defined term of Order Flow Provider, order flow 
providers may include non-members or non-member organizations that 
submit, as agent, customer orders to the Exchange through a member or 
member organization. The Exchange is not changing any other aspect of 
its payment for order flow program pursuant to this filing. The 
Exchange states that the payment for order flow fee would continue to 
be assessed on Exchange members, specifically specialists and Directed 
ROTs who participate in the Exchange's payment for order flow program, 
in addition to ROTs.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \12\ in general, and furthers the objectives of 
Sections 6(b)(4) and 6(b)(5) of the Act \13\ in particular, in that it 
is an equitable allocation of reasonable dues, fees, and other charges 
among Exchange members or other persons using the Exchange's facilities 
\14\ and is designed to promote just and equitable principles of trade, 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general to protect 
investors and the public interest, by acknowledging that not all order 
flow providers are members of Phlx, but nonetheless otherwise qualify 
to have payment for order flow funds, which are assessed on Exchange 
members and member organizations, directed to them at the direction of 
the specialist unit or Directed ROT.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(4)-(5).
    \14\ As stated above, the Exchange notes that the payment for 
order flow fee is only assessed on Exchange members or member 
organizations. However, a specialist unit or Directed ROT may 
instruct the Exchange to direct the funds collected from this fee to 
an order flow provider (a non-member/member organization of the 
Exchange).
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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

[[Page 67190]]

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-2006-71 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-2006-71. 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 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-2006-71 and should be submitted on or before 
December 11, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-19548 Filed 11-17-06; 8:45 am]

BILLING CODE 8011-01-P