[Federal Register Volume 65, Number 174 (Thursday, September 7, 2000)]
[Notices]
[Pages 54330-54332]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-22865]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43228; File No. SR-AMEX-00-38]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1, Amendment 
No. 2, and Amendment No. 3 Thereto by American Stock Exchange LLC 
Relating to Fees on Equity Option Transactions of Specialist and 
Registered Option Traders

August 30, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 54331]]

(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 20, 2000, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Amex. The Amex submitted Amendments No. 
1, 2, and 3 to the proposed rule change on August 17, 24, and 28, 2000, 
respectively. 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.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Amex proposes to establish a marketing fee for equity option 
transactions of specialists and registered options traders. The text of 
the proposed rule change is available at the principal office of the 
Amex.

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 Amex 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 Amex 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 Amex proposes to establish a new equity option marketing fee on 
the transactions of specialists and registered options traders, 
designed to compete for order flow in equity options traded on the 
Exchange. The revenue that these marketing fees generate will be used 
to compete for order flow in equity options listed for trading on the 
Exchange. Through the program, the Exchange will collect a fee of $0.40 
on every equity option contract that specialists and registered options 
traders execute on the Exchange. The Exchange will collect fees on all 
equity option transactions except for those options overlying Nasdaq-
100 index shares. In addition, trades between registered options 
traders and trades between specialists and registered options traders 
will not be subject to the program.
    The Exchange will collect the fees and then allocate the funds to 
all of the Exchange's specialists. The Exchange will allocate the funds 
among the specialists on a pro rata basis, in amounts proportional to 
each specialist's share of the overall volume of the options traded on 
the Exchange. Each specialist will use the funds to attract orders in 
the classes of options that the specialist trades. These funds may be 
used by Exchange specialists to pay broker-dealers for orders they 
direct to, and that are executed on, the Exchange. The specific terms 
governing the orders that qualify for payment and the amount of any 
payment to be made will be determined by the specialists in whatever 
manner they believe is most likely to be effective in attracting order 
flow to the Exchange in options traded by the specialists. The 
specialists will be obligated to account to the Exchange for the use 
they make of the funds that the Exchange makes available to them for 
this purpose, but all determinations concerning the amount the 
specialists may pay for orders and the types and sizes of orders that 
qualify for payment will be made exclusively by the specialists, and 
not by the Exchange.
    The Amex will assess the new fee monthly, beginning as of July 1, 
2000. The funds that the new fee generates will be segregated according 
to the station where the classes of options subject to the fee are 
traded, and will be made available to the specialist at the station 
where the funds were collected for the specialist's use in attracting 
orders in the classes of options traded at that station. Members who 
pay the new fees will also be able to participate in the order flow 
derived from the program. Accordingly, the Exchange believes that there 
will be a fair correlation between the costs that the members will pay 
for the marketing program and the benefits that they will receive from 
it.
    The Exchange may provide administrative support to the specialists 
in such matters as keeping track of the number of qualified orders each 
firm directs to the Exchange, and making debits and credits to the 
accounts of the specialists and the firms to reflect the payments that 
are to be made. If the amount of the payment to be received by the 
order flow provider exceeds any fees owed to the Exchange, such amounts 
may be paid directly by the Exchange to the member order flow provider 
pursuant to payment parameters that the specialist establishes.
    The Exchange believes that this proposal may raise issues similar 
to those raised by the payment-for-order-flow proposals that the Boston 
Stock Exchange,\3\ the Chicago Stock Exchange,\4\ the Cincinnati Stock 
Exchange,\5\ the National Association of Securities Dealers, Inc., \6\ 
and the Chicago Board Options Exchange, Inc.\7\ have submitted. 
Accordingly, the Exchange anticipates issuing a circular to members 
discussing the disclosure and best execution obligations of members who 
receive payments under the program.
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    \3\ Securities Exchange Act Release No. 40591 (Oct. 22, 1998), 
63 FR 58078 (Oct. 29, 1998).
    \4\ Securities Exchange Act Release No. 38237 (Feb. 4, 1997), 62 
FR 6592 (Feb. 12, 1997).
    \5\ Securities Exchange Act Release No. 39395 (Dec. 3, 1997), 62 
FR 65113 (Dec. 10, 1997).
    \6\ Securities Exchange Act Release No. 41174 (Mar. 16, 1999), 
64 FR 14035 (Mar. 23, 1999).
    \7\ Securities Exchange Act Release No. 43112 (Aug. 3, 2000), 65 
FR 49040 (Aug. 10, 2000).
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    The Exchange believes that the implementation of the program is 
necessary to promote the Exchange's competitiveness within the 
exchange-traded equity options marketplace. Any changes to this 
proposal, including those affecting the size of the fee or the 
inclusion or exclusion of any class of option in the program, will be 
subject to a separate filing with the Commission pursuant to Section 
19(b)(3)(A)(ii) of the Act.\8\
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    \8\ 15 U.S.C. 78s(b)(3)(A)(ii).
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\9\ and in particular furthers the 
objectives of Section 6(b)(4) of the Act,\10\ 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.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(4).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change will not impose 
any 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 with respect to the 
proposed rule change.

[[Page 54332]]

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

    Because the foregoing rule change establishes or changes a due, 
fee, or other charge imposed by the Exchange, it has become effective 
pursuant to Section 19(b)(3)(A)(ii) of the Act \11\ and Rule 19b-
4(f)(2) thereunder.\12\ At any time within 60 days of the filing of 
this proposed rule change, the Commission may summarily abrogate this 
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 the furtherance of the purposes the Act.
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    \11\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \12\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments

    The Commission has frequently 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 Amex's proposal involves 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 Amex's proposal raises greater or different concerns than payment 
for order flow at other option exchanges. After receiving comments, and 
at any time within 60 days from the date the Amex filed its proposal, 
the Commission can decide to require the Amex to stop collecting the 
fee, refile the proposal, and await Commission approval before 
reinstituting the fee.
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    \13\ See Securities Exchange Act Release No. 43177 (August 18, 
2000), 65 FR 51889 (Aug. 25, 2000); 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).
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    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 Amex. All 
submissions should refer to File No. SR-AMEX-00-38 and should be 
submitted by September 28, 2000.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-22865 Filed 9-6-00; 8:45 am]
BILLING CODE 8010-01-M