[Federal Register Volume 65, Number 184 (Thursday, September 21, 2000)]
[Notices]
[Pages 57213-57215]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-24271]


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SECURITIES AND EXCHANGE COMMISSION

(Release No. 34-43290; File No. SR-PCX-00-30)


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto by 
the Pacific Exchange, Inc. Relating to a New Fee on Market Makers' 
Transactions in Designated Equity Option Issues

September 13, 2000.
    Pursuant to section 19(b)(1) of the Securities and Exchange Act of 
1934 (``Act'')\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on August 18, 2000, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items, I, II and III below, which Items have been prepared by the 
Exchange. On September 11, 2000, the PCX submitted Amendment No. 1 to 
the proposed rule change. 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 PCX proposes to adopt a new fee to be imposed on transactions 
of market makers (including Lead Market Makers) at the rate and for the 
use described below. The text of the proposed rule change is available 
at the principal offices of the PCX.

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 Exchange 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.

[[Page 57214]]

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 new fee is to provide a source of 
revenue to the Exchange to be used in response to changing competitive 
circumstances that have arisen and may continue to arise in particular 
multiply traded equity options issues. These circumstances include the 
growing practice by some traders on options exchanges of paying brokers 
for orders in multiply traded issues directed to them. In light of this 
development and in order to be competitive in multiply traded options, 
the PCX has determined to impose a new fee on market makers' 
transactions in designated equity option issues.
    All of the funds generated by the new fee will be segregated based 
upon the trading post where the options subject to the fee are traded. 
The funds will be made available to the Lead Market Maker (``LMM'') at 
the trading post where the funds were collected, for the LMM's use in 
attracting orders in the options traded at that post. This use of funds 
could include payments from the LMMs to broker-dealers for the orders 
that the broker-dealers direct to the Exchange. The specific terms 
governing the orders that qualify for payment and the amount of any 
payments to be made will be determined by the LMMs in whatever manner 
they believe is most likely to be effective in attracting order flow to 
the Exchange in options traded at the LMMs' assigned posts.
    LMMs 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 LMMs may pay 
for orders and the types and sizes of orders that qualify for payment 
will be made exclusively by the LMMs and not by the Exchange. The 
Exchange may provide administrative support to the LMMs in such matters 
as keeping track of the number of qualified orders each firm directs to 
the Exchange, and making the necessary debits and credits to the 
accounts of the LMMs and the firms to reflect the payments that are to 
be made.
    The amount of the new fee will be set initially at $0.40 per market 
maker contract for all equity option issues and will be effective as of 
July 31, 2000. Market maker to market maker trades and trades between a 
market maker and an LMM will not be part of the program, although fees 
will be collected for these trades and then rebated. Any changes to the 
option issues to which the fee applies, to the rate or rates at which 
the fee is assessed, or to the Exchange's disposition of funds 
generated by the fee will be the subject of separate filings with the 
Commission made pursuant to Section 19(b)(3)(A)(ii) of the Act.\3\
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    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
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    As described above, the proposed fee will be imposed on all 
Exchange market makers (including LMMs) in the options that are subject 
to the fee. The PCX believes that, because these same persons will be 
able to participate in the order flow derived from the program, there 
will be a fair correlation between those members who pay the costs of 
the program funded by the new fee and those who receive the benefits of 
the program.
    In accordance with this program involving payment for order flow 
that may be funded by the Exchange's proposed fee, the Exchange intends 
to provide PCX order flow providers with objective data on the 
executions of their option orders so that they can assess the quality 
of executions they receive on the PCX.\4\
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    \4\ The PCX has filed with the Commission a rule change 
proposal, File No. SR-PCX-00-31, regarding the furnishing of Pacific 
Exchange Customer Execution (``PACEX'') Reports to the Exchange's 
order flow providers.
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2. Statutory Basis
    The PCX believes that the new fee and the program it will fund will 
serve to enhance the competitiveness of the Exchange and its members. 
Accordingly, the PCX believes that this proposal is consistent with and 
furthers the objectives of the Act, including Section 6(b)(5) 
thereof,\5\ which requires the rules of exchanges to be designed to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and Section 11A(a)(1)(C) 
thereof,\6\ which reflects the finding of Congress that it is in the 
public interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure fair competition 
among brokers and dealers and among exchange markets.
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    \5\ 15 U.S.C. 78f(b)(5).
    \6\ 15 U.S.C. 788k-1(a)(1)(C).
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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 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

    Written comments on the proposed rule change were neither solicited 
nor received.

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 \7\ and Rule 19b-4(f)(2) 
thereunder.\8\ 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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    \7\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \8\ 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. \9\ 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 PCX'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 PCX's proposal raises greater or

[[Page 57215]]

different concerns than payment for order flow at other options 
exchanges. After receiving comments, and at any time within 60 days 
from the date the PCX filed its proposal, the Commission can decide to 
require the PCX to stop collecting the fee, refile the proposal, and 
await Commission approval before reinstituting the fee.
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    \9\ See Securities Exchange Act Release No. 43228 (Aug. 30, 
2000), 65 FR 54330 (Sept. 7, 2000); Securities Exchange Act Release 
No. 43177 (Aug. 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, NW, Washington, DC 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 PCX. All 
submissions should refer to File No. SR-PCX-00-30 and should be 
submitted by October 12, 2000.

    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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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-24271 Filed 9-20-00; 8:45 am]
BILLING CODE 8010-01-M