Document ID: SEC-2007-1192-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Philadelphia Stock Exchange, Inc.
Posted Date: 2007-08-24T04:00Z

[Federal Register: August 24, 2007 (Volume 72, Number 164)]
[Notices]               
[Page 48720-48722]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24au07-135]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56274; File No. SR-Phlx-2007-54]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
and Amendments No. 1 and 2 Thereto Relating to Market Access Providers

 August 16, 2007.
    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 August 6, 2007, 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 
Phlx. The Phlx filed Amendments No. 1 and 2 to the proposed rule change 
on August 14, 2007 and August 16, 2007, respectively. The Phlx filed 
the proposed rule change pursuant to Section 19(b)(3)(A) 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, as 
amended, 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).
    \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 schedule of fees to institute a new 
subsidy program (the ``Subsidy''), which would be available to 
qualifying Phlx member organizations that offer to customers automated 
order routing systems and electronic market access to U.S. options 
markets (``Market Access Providers'' or ``MAPs'') and which would 
provide such qualified Market Access Providers incentives to route 
additional option orders to the Phlx and to offer to their customers 
certain services that are intended to promote the business of the Phlx.
    The Subsidy would be applicable to any Exchange member organization 
that qualifies as a MAP who elects to participate by submitting any 
application(s) and/or form(s) required by the Exchange and complying 
with other conditions enumerated below. The Subsidy would apply to any 
MAP that has elected to participate for the calendar month that 
commences following the satisfaction by such MAP of all conditions of 
participation, and for each calendar month thereafter, provided that 
such conditions continue to be satisfied.

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 purpose of the proposed rule change is to provide incentives to 
Exchange member organizations and their customers.
    For a MAP to be eligible for the Subsidy, a MAP (an ``Eligible 
MAP'') would be required to:
    (1) Submit any required Exchange applications and/or forms for 
Exchange approval to participate as an Eligible MAP;
    (2) Provide to its customers systems that enable the electronic 
routing of equity option orders to all of the U.S. options exchanges, 
including the Phlx;
    (3) Provide to its customers current consolidated market data from 
the U.S. options exchanges;
    (4) Interface with the Phlx's API to access the Exchange's 
electronic options trading platform, Phlx XL; \5\
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    \5\ See Securities Exchange Act Release No. 50100 (July 27, 
2004), 69 FR 46612 (August 3, 2004) (SR-Phlx-2003-59).
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    (5) Offer to its customers a customized interface and routing 
functionality (including sweep function described below) such that:
    (A) The Phlx will be the default destination for all equity option 
orders (whether marketable or not), provided that in the case of 
marketable orders, the Phlx is at the national best bid or offer 
(``NBBO'') on the appropriate side of the market (i.e., the contra-side 
of the order that is routed to the Phlx), regardless of size or time, 
up to the Phlx's disseminated size; and
    (B) The MAP's option order routing functionality incorporates a 
feature that causes equity option orders at a specified price to be 
routed simultaneously to multiple exchanges with a single click (a 
``sweep function''), which is configured to route all such orders (or, 
if such orders are for a size larger than the size disseminated by the 
Phlx on the opposite side of the market, at least the portion of the 
order that corresponds to the Phlx's disseminated size) to the Phlx as 
the default destination for execution for a size up to the full size 
quoted on the Phlx, provided that, in the case of marketable orders, 
the Phlx disseminated price on the appropriate side of the market is at 
the NBBO;
    (6) Configure its own option order routing functionality such that 
it is configured as described in sub-

[[Page 48721]]

paragraphs 5(A) and (B) above, with respect to all equity option orders 
as to which the MAP has discretion as to routing (``MAP Routing 
Orders'');
    (7) Ensure that the customized functionality described in sub-
paragraphs (5) and (6) above permits users submitting equity option 
orders through such system(s) to manually override the Phlx as the 
default destination on an order-by-order basis; and
    (8) Enter into and maintain an agreement with the Exchange to 
function as an Eligible MAP and be in compliance with all terms 
thereof.

The Agreement

    In the agreement referred to in sub-paragraph (8) above, Eligible 
MAPs will undertake to offer to their customers the customized 
interface described in sub-paragraph (5) above. In addition, Eligible 
MAPs will also undertake to provide support for such customized 
interface for those customers that receive the service described in 
sub-paragraph (5) above. Nothing in the agreement would obligate a 
MAP's customer to exclusively use an Eligible MAP's order routing 
system.
    Furthermore, nothing in the agreement would relieve Eligible MAPs 
from complying with their best execution obligations. Specifically, the 
Eligible MAP would need to, on a regular and at least a quarterly 
basis, conduct best execution evaluations. If, based upon its regular 
best execution analysis, the Eligible MAP determines that the routing 
of MAP Routing Orders to the Phlx using the feature described in sub-
paragraph (6) above would, with respect to particular options, be 
inconsistent with the highest quality of execution standards, then the 
Eligible MAP may disable and suspend the features described in sub-
paragraphs (5) and (6) above with respect to such options and for such 
period the Eligible MAP determines such inconsistency exists.
    Eligible MAPs will covenant to refrain from entering into 
arrangements with other exchanges or execution venues where such 
exchange or execution venue will have the same routing position as, or 
priority over, the Phlx as the default destination for option orders 
described in sub-paragraphs (5) and (6) above, unless the Phlx 
otherwise consents. Such covenant will terminate on the date which is 
the last calendar day of the year that is one year from the date of the 
agreement; provided that the Phlx may, by giving written notice to the 
Eligible MAP, elect to extend such covenant for additional one-year 
terms, in which case the per contract fee (as described in the first 
paragraph under ``Calculation of the Subsidy'' below) during any 
extension period for that Eligible MAP shall be $0.01 per contract 
greater than the Subsidy Rate (as defined below) then in effect at the 
date of renewal, so long as such covenant remains in effect. 
Notwithstanding the termination of the covenant as described above, the 
agreement shall otherwise remain in effect.

Calculation of the Subsidy

    The Subsidy, payable to Eligible MAPs monthly, would be an amount 
per contract (the ``Subsidy Rate'') of $0.10 for each Eligible Contract 
(as defined below) in the immediately preceding calendar month above 
the particular Eligible MAP's Baseline Order Flow (as defined below).
     ``Eligible Contracts'' means contracts that result from 
the execution on the Phlx of: (1) Equity option orders (other than 
crosses) sent electronically to an Eligible MAP (and routed to the Phlx 
electronically by the Eligible MAP) by its customers; and (2) MAP 
Routing Orders (other than crosses) sent electronically by the Eligible 
MAP.
     ``Baseline Order Flow'' for an Eligible MAP means the 
higher of: (1) 500,000 contracts; or (2) the average contracts per 
month, calculated for the 3-month period immediately preceding the 
Eligible MAP entering into the agreement with the Phlx as described in 
sub-paragraph (8) above, that resulted from the execution on the Phlx 
of equity option orders (other than crosses) routed to the Phlx 
electronically by such Eligible MAP.

The Volume Bonus

    The Exchange will pay each Eligible MAP $50,000 per month (the 
``Volume Bonus'') for each month in which the Eligible Contracts of 
such Eligible MAP in the immediately preceding calendar month exceed 
the higher of: (1) 1,500,000; or (2) three times the Baseline Order 
Flow of such Eligible MAP. The Volume Bonus shall be in addition to the 
amount for any Subsidy that is payable.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \6\ in general, and furthers the objectives of Sections 
6(b)(4) and 6(b)(5) of the Act \7\ in particular, in that it is 
designed to provide for the equitable allocation of reasonable dues, 
fees, and other charges among its members and issuers and other persons 
using its facilities, as well as to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open national market system, and, in general, to protect 
investors and the public interest, by establishing a Subsidy that 
encourages the routing of equity options business to the Exchange.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(4) and (5).
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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 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 proposed rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act \8\ and Rule 19b-4(f)(2) \9\ thereunder, 
because it involves a member due, fee, or other charge. 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.
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    \8\ 15 U.S.C. 78(s)(b)(3)(A)(ii).
    \9\ 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-2007-54 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.

[[Page 48722]]

All submissions should refer to File Number SR-Phlx-2007-54. 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 the 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-2007-54 and should be 
submitted on or before September 14, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-16755 Filed 8-23-07; 8:45 am]

BILLING CODE 8010-01-P