[Federal Register Volume 65, Number 166 (Friday, August 25, 2000)]
[Notices]
[Pages 51889-51891]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-21748]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43177; File No. SR-PHLX-00-77]


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

August 18, 2000.
    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 11, 2000, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
the ``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. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested parties.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

    The Phlx proposes to adopt a payment for order flow fee of a $1.00 
per contract to be imposed on transactions by Phlx specialists and 
Registered Options Traders (``ROTs'') in the Top 120 Options on the 
Phlx.\3\ It would not apply to ROT-to-ROT or specialist-to-ROT 
transactions. The proposed fee will be effective as of August 1, 
2000.\4\
---------------------------------------------------------------------------

    \3\ A Top 120 Option is defined as one of the 120 most actively 
traded equity options in terms of the total number of contracts that 
were traded on all U.S. options markets for the period January 1, 
2000 through June 30, 2000, based on volume information provided by 
The Options Clearing Corporation. The Phlx will determine the Top 
120 Options every six months, with the next measuring period 
commencing June 1, 2000 and ending on November 30, 2000. The 
proposed fee does not apply to index or currency options.
    \4\ This fee is not eligible for the monthly credit of up to 
$1,000 to be applied against certain fees, dues and charges and 
other amounts that certain members owe to the Exchange. See 
Securities Exchange Act Release No. 42791 (May 16, 2000); 65 FR 
33606 (May 24, 2000).

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

[[Page 51890]]

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

    The purpose of the proposed rule change is to generate a source of 
revenue to be used by specialists in Top 120 Options for payment for 
order flow in respect of such options. By way of background, the listed 
options market is undergoing fundamental changes as a result of 
numerous recent developments, including the multiple listing of options 
and impending intermarket linkage. The Exchange believes that it is 
necessary for it to adopt this type of fee in order to maintain and 
enhance the Exchange's competitive position--particularly in light of 
the fact that three of the four other options exchanges have either 
announced or implemented similar programs.
    The Exchange will collect the fee on a monthly basis and segregate 
the funds received from the specialists \5\ and ROTs by option. The 
specialists will be able to use the funds collected with respect to a 
particular option to make payments to broker-dealers for order flow in 
that option, thereby attracting options orders to the Phlx. The 
specialists for each option will have discretion in establishing the 
amounts that will be paid to order flow providers in respect of order 
flow for that option. The specialist will receive these funds after 
submitting an Exchange form identifying the amount of the requested 
funds.\6\
---------------------------------------------------------------------------

    \5\ The Exchange uses the terms ``specialist'' and ``specialist 
unit'' interchangeably herein; often, the specialist unit is 
actually the party that is billed for fees and sends the payment.
    \6\ The purpose of the form is to assist the Exchange in 
accurately accounting for and tracking funds transferred to 
specialists, consistent with normal bookkeeping and auditing 
practices. The specialists will make all determinations concerning 
those order flow providers who will receive payment and the amounts 
that they will be paid for orders.
---------------------------------------------------------------------------

    The specialists will make all determinations concerning which order 
flow providers will receive payments and the amounts that they will be 
paid for orders. In order to assist the Exchange in determining the 
effectiveness of the proposed fee, the specialists will account to the 
Exchange for the use they make of the funds collected. In addition, the 
Exchange will provide certain administrative duties to assist the 
specialists, such as performing any necessary accounting functions and 
keeping track of the number of qualified orders \7\ that firms direct 
to the Exchange.
---------------------------------------------------------------------------

    \7\ The term ``qualified orders'' refers to transactions by 
specialists and ROTs in the Top 120 options on the Phlx.
---------------------------------------------------------------------------

    The Exchange believes that ROT-to-ROT and specialists-to-ROT 
transactions should be excluded, because those are not the kind of 
transactions that the fee is designed to attract. Moreover, the 
Exchange does not wish to impose a fee on the hedging or rebalancing 
transactions in which ROTs engage in support of their affirmative 
market-making obligations.
    In connection with any program involving payment for order flow 
that may be funded by this proposed fee, the Exchange will issue 
appropriate circulars to its members that emphasize the disclosure and 
best execution obligations of members who accept such payment. Any 
changes to the class of options to which this proposed fee applies, to 
the rate or rates at which the fee is assessed, or to the disposition 
by the Exchange of funds generated by the fee will be the subject of 
separate filings with the Commission pursuant to Section 
19(b)(3)(A)(ii) of the Act.\8\
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78s(b)(3)(A)(ii).
---------------------------------------------------------------------------

    The proposed fee will be imposed on all transactions by specialists 
and ROTs in the Top 120 Options, other than ROT-to-ROT or specialists-
to-ROT transactions. The Exchange envisions that the persons who pay 
the fees will also participate in the order flow derived from the 
proposed plan. The Exchange believes that, because the specialists and 
ROTs who pay the proposed fee should also receive the benefits of 
increased order flow, the proposed plan will provide for the equitable 
allocation of reasonable fees among the Exchange's members. Moreover, 
the Exchange believes that the fee should promote just and equitable 
principles of trade, remove impediments to and perfect the mechanism of 
a free and open market, and protect investors and the public interest 
by attracting more order flow to the Exchange, which, in the Exchange's 
view, should result in increased liquidity, tighter markets, and more 
competition among exchange members. Accordingly, the Exchange believes 
that its proposal is consistent with and furthers the objectives of the 
Act, including Sections 6(b)(4) \9\ and 6(b)(5) \10\ thereof.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b)(5).
    \10\ 15 U.S.C. 78f(b)(6).
---------------------------------------------------------------------------

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 solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Because the Phlx has designated the foregoing proposed rule change 
as a fee change pursuant to Section 19(b)(3)(A)(ii) of the Act \11\ and 
Rule 19b-4(f)(2) thereunder,\12\ the proposal has taken effect 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.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \12\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    The Commission, in the past, has raised serious concerns about 
payment for order flow and internalization.\13\ Payment for order flow 
is of concern because brokers who are paid to send their customers' 
orders to one exchange have a conflict of interest that may reduce 
their commitment to the duty they owe their customers to find the best 
execution available. While payment for order flow has been a common 
practice in the equities markets for some time, only recently has 
payment for order flow developed in the options markets. Despite these 
concerns, however, the Phlx's proposal involves

[[Page 51891]]

the imposition of a fee and the Act gives exchanges wide latitude to 
establish, revise, and collect fees and other charges without prior 
Commission approval. The Commission invites interested persons to 
submit written data, views, and arguments concerning the foregoing, 
including whether the proposed rule is consistent with the Act. In 
particular, the Commission asks persons who submit comments whether the 
payment for order flow facilitated by the Phlx's proposal raises 
greater or different concerns than payments for order flow at other 
options exchanges. After receiving comments, and at any time within 60 
days from the date the Phlx filed its proposal, the Commission can 
decide to require the Phlx to stop collecting the fee, refile the 
proposal, and await Commission approval before reinstituting the fee.
---------------------------------------------------------------------------

    \13\ See Securities Exchange Act Release No. 43112 (Aug. 3, 
2000), 65 FR 49040 (Aug. 10, 2000); Securities Exchange Act Release 
No. 42450 (Feb. 23, 2000), 65 FR 10577 (Feb. 28, 2000); Securities 
Exchange Act Release No. 34902 (Oct. 27, 1994), 59 FR 55006 (Nov. 2, 
1994). See also Securities Exchange Act Release No. 43084 (July 28, 
2000).
---------------------------------------------------------------------------

    Persons making written submissions should file six copies there of 
with the Secretary, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, D.C. 20549-0609. 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 bewteen 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 
submissions should refer to File No. SR-PHLX-00-77 and should be 
submitted by September 15, 2000.


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-21748 Filed 8-24-00; 8:45 am]
BILLING CODE 8010-01-M