[Federal Register Volume 65, Number 168 (Tuesday, August 29, 2000)]
[Notices]
[Pages 52465-52467]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-22014]


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SECURITIES AND EXCHANGE COMMISSION

[Docket No. 34-43201; File No. SR-Phlx-00-7]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc., Relating to an Options Specialist Shortfall Fee

August 23, 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 July 24, 2000, 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 
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.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to adopt a new transaction fee--an options 
specialist ``shortfall fee''--of $.35 per contract, to be paid by the 
specialist trading any Top 120 Option if at least 10 percent of the 
total national monthly contract volume (``total volume'') for such Top 
120 Option is not effected on the Phlx in that month.
    A Top 120 Option is defined by the proposal 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 
(``OCC'')--and which was listed on the Phlx after January 1, 1997.\3\
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    \3\ The Phlx intends to divide by two the total volume amount 
reported by OCC, which reflects both sides of an executed 
transaction, thus avoiding one trade being counted twice for 
purposes of determining overall volume.
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    At the end of each trading month, the total number of contracts 
executed on

[[Page 52466]]

the Phlx (``the Phlx volume'') in a particular top 120 Option will be 
subtracted from the amount that represents 10 percent of the total 
volume for that option (``10% total volume'') to determine the number 
of contracts that represent the ``shortfall'' for that Top 120 Option 
for purposes of calculating this fee.
    Specifically, the following calculation would be made:

10% total volume-Phlx volume=shortfall volume.

    If the shortfall volume is a number of contracts greater than zero, 
the shortfall volume will be multiplied by $.35 per contract to 
determine the options specialist shortfall fee for that month for that 
Top 120 Option.\4\
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    \4\ If the result of the first equation (10% total volume minus 
Phlx volume) was negative, meaning the Phlx volume exceeded 10% 
total volume for a Top 120 Option, then there would be no shortfall 
to which the options specialist shortfall fee would apply. Under the 
proposal, any excess volume (over the 10% total volume target) could 
not be carried over to another month, nor could any excess volume in 
one option be assigned to another option. Also, the proposed fee 
would not affect the Exchange's fee schedule applicable to volume 
actually transacted on the Phlx. Therefore, the Phlx fee schedule 
applicable to volume actually transacted on the Phlx. Therefore, the 
phlx fee schedule would continue to apply to all equity options 
transactions not covered by this options specialist shortfall fee.
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    In sum, if the Phlx fails to garner 10 percent of the total volume 
for a particular month for a Top 120 Option, the specialist unit for 
that Top 120 Option would be required to pay the Exchange the options 
specialist shortfall fee for each contract that falls below 10 percent 
up to the amount that would represent 10 percent of the total volume 
for that option, excluding the amount of that unit's actual Phlx 
volume.
    Recognizing that there may be a transition period necessary to 
build the requisite volume, the proposed fee will be applied to newly 
listed options \5\ and implemented in stages, such that a specialist 
unit would become subject to the options specialist shortfall fee using 
a volume threshold of 10 percent, as described above, in the third full 
calendar month of trading an option. However, the requisite volume 
threshold shall be three percent for the first full calendar month and 
six percent for the second full calendar month of trading.\6\
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    \5\ Any Top 120 option listed on the Phlx after June 2000 will 
be considered newly listed for the purposes of this proposal. 
Telephone conversation between Edith Hallahan, Deputy General 
Counsel, Phlx, and Nancy J. Sanow, Assistant Director, and Ira L. 
Brandriss, Attorney, Division of Market Regulation (``Division''), 
the Commission, on August 18, 2000.
    \6\ For example, if a specialist unit begins trading an option 
on June 15, the options specialist shortfall fee would first apply 
in July. Specifically, the unit would be subject to the options 
specialist shortfall fee of $.35 per contract for the month of July 
for any shortfall under three percent of the total volume for that 
option for the month of July. For the month of August, the 
specialist unit would be subject to the fee for any shortfall under 
six percent of the total volume for that option for the month of 
August. Thereafter, the specialist unit would be subject to the 
options specialist shortfall fee if Phlx did not reach 10 percent of 
the total volume for that option in a specified month.
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    The total volume for purposes of the 10 percent threshold is based 
on the current month's volume.\7\ However, the determination of whether 
an equity option is considered a Top 120 Option for purposes of the fee 
is based on a different time period. The Top 120 Options for August 
will be based on May's volume. Thereafter, the Exchange will continue 
the three-month differentiation, so that September's Top 120 Options 
will be based on June's volume, October's Top 120 Options will be based 
on July's volume and so forth. The proposed fee will be effective 
August 1, 2000.
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    \7\ For example, for the month of August, the option specialist 
shortfall fee would apply to 10 percent of total August volume minus 
the Phlx August volume.
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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 Exchange 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 amend Phlx's schedule 
of dues, fees and charges to impose a fee for any deficiency between 
what the Phlx actually traded and 10 percent of the total volume for 
each respective month. The proposed fee is intended to provide the Phlx 
with the approximate revenue it would have received had a Top 120 
Option traded at least 10 percent of the total volume in a given month 
on the Phlx. The Phlx represents that the options specialist shortfall 
fee generally parallels the amount that the Exchange would have 
received if an equity option contract were traded on the Phlx with a 
specialist/market maker.\8\
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    \8\ The $.35 is intended to represent the following amounts that 
may be generated by a trade on the Phlx with a specialist/market 
maker: a $.19 specialist/market maker transaction fee, $.06 from 
Options Price Reporting Authority, $.04 options comparison fee, $.04 
from floor brokerage fees and $.02 from firm/customer/broker-dealer 
fees, all of which could have been collected by the Exchange per 
contract traded by the crowd. Transactions not involving a 
specialist/market maker would generate less revenue. The above 
listing of fees commonly charged in a specialist/market maker 
transaction does not represent the fees generated by every such 
transaction, but has been utilized by the Phlx on a general basis to 
calculate what it believes to be an appropriate shortfall fee. 
Telephone conversation between Edith Hallahan, Deputy General 
Counsel, the Phlx, and Ira L. Brandriss, Attorney, the Division, the 
Commission, on August 4, 2000.
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    Pursuant to Phlx rules, options are allocated to applicant 
specialists based on certain factors. Eligible specialists submit 
written applications that include the specialist unit's experience and 
capitalization, a demonstration of the unit's ability to trade the 
particular option, and any other reasons why the unit believes it 
should be assigned or allocated the security.\9\ Once an option is 
allocated to a specialist unit, certain performance reviews may be 
conducted.\10\ A Top 120 Option is unique and may require specific 
qualifications (as determined by the Allocation, Evaluation and 
Securities Committee) and strategic efforts. The Phlx states that 
through its Executive Committee, it recently instructed the Allocation, 
Evaluation and Securities Committee, pursuant to Phlx Rule 511, to 
follow certain policies in connection with the allocation and 
reallocation of securities.\11\
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    \9\ See Phlx Rules 505 and 506.
    \10\ See Phlx Rules 511 and 515.
    \11\ Some of the relevant factors considered in the allocation 
and reallocation of securities include reviewing the specialist 
unit's marketing plan, capital, staffing, prior performance in Top 
120 Options, quality of executions, history of engaging fast market 
conditions, and available space and equipment.
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    Moreover, the Phlx believes that the options traded by the 
specialist unit, and the transactions related thereto, may be 
especially valuable to that specialist unit and the Exchange due to 
their potential profitability. Therefore, the Exchange believes that 
the specialist should compete for order flow in the national market, 
because that specialist unit is the key party responsible for marketing 
and receiving order flow in that particular option. The Phlx believes 
that a specialist's willingness to apply to be or continue to be a 
specialist in a Top 120 option, in light of the shortfall fee, is an 
important tangible demonstration of commitment to making the efforts 
required to achieve at least a 10 percent national volume level at the 
Phlx.

[[Page 52467]]

    The Exchange believes that it is necessary to continue to attract 
order flow to the Exchange in order to remain competitive. The proposed 
fee should encourage specialists to vigorously compete for order flow, 
which not only enhances the specialist's role, but also provides 
additional revenue to the Exchange. Moreover, the Exchange expects that 
specialists' efforts to maintain at least 10 percent of the total 
volume should contribute to deeper, more liquid markets and tighter 
spreads. Thus, competition should be enhanced, and important auction 
market principles preserved.
2. Statutory Basis
    For the above reasons, 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) \13\ and 6(b)(5) \14\ in particular. 
The Exchange believes that the proposed fee is equitable because the 
amount charged is generally the same amount that would have been 
charged had a contract been traded. The fee is intended by the Phlx to 
promote just and equitable principles of trade and protect investors 
and the public interest by attracting more order flow to the Exchange, 
which the Exchange believes should result in increased liquidity and 
tighter markets.
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    \12\ 15 U.S.C. 78f(b).
    \13\ Section 6(b)(4) requires that the rules of an exchange 
provide for the equitable allocation of reasonable dues, fees, and 
other charges among its members and issuers and other persons using 
its facilities. 15 U.S.C. 78f(b)(4).
    \14\ Section 6(b)(5) requires that the rules of an exchange, 
among other things, promote just and equitable principles of trade 
and protect investors and the public interest. 15 U.S.C. 78f(b)(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 inappropriate burden on competition.

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.

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

    The foregoing rule change, which establishes or changes a due, fee, 
or other charge applicable to members of the Exchange, has become 
effective pursuant to section 19(b)(3)(A) \15\ of the Act and 
subparagraph (f)(2) of Rule 19b-4 thereunder. At any time within 60 
days of the filing of the 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).
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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. Persons making written submissions 
should file six copies thereof 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 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 submissions should refer to File No. SR-Phlx-00-71 and should 
be submitted by September 19, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
Margaret H. McFarland,
Deputy Secretary.
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    \16\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 00-22014 Filed 8-28-00; 8:45 am]
BILLING CODE 8010-01-M