[Federal Register Volume 66, Number 45 (Wednesday, March 7, 2001)]
[Notices]
[Pages 13823-13825]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-5542]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44021; File No. SR-PHLX-01-14]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. Relating to a Rebate for Certain Fees Incurred in 
Connection with the Exchange's Payment for Order Flow Fee Program

    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 January

[[Page 13824]]

30, 2001 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 the Phlx has prepared. The Commission is 
publishing this notice to solicit comments on the proposed rule changes 
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 Changes

    The Phlx proposes to allow for a debate of specified funds in 
connection with its payment for order flow program.
    Effective August 1, 2000, the Phlx imposed a marketing fee of $1.00 
per contract \3\ on transactions by Phlx specialists and Registered 
Options Traders (ROTs) in the Top 120 Options on the Phlx.\4\ The 
specialists make all determinations concerning the amount that is paid 
for orders and which order flow providers receive the payments.
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    \3\ Currently, this fee is not applicable to the following 
transactions: (1) Specialist-to-ROT; (2) ROT-to-ROT; (3) specialist-
to-firm; (4) ROT-to-firm; (5) specialist-to-broker-dealer; and (6) 
ROT-to-broker-dealer. See Securities Exchange Act Release Nos. 41377 
(August 18, 2000), 65 FR 51889 (Aug. 25, 2000) (SR-Phlx-00-77); 
43480 (Oct. 25, 2000), 65 FR 66275 (Nov. 3, 2000) (SR-Phlx-00-87); 
and 43481 (Oct. 25, 2000), 65 FR 66277 (Nov. 3, 2000) (SR-Phlx-00-
88, SR-Phlx-00-89).
    \4\ A Top 120 Option is defined as one of the 120 most actively 
traded equity options, in terms of national trading volume, as 
reflected by the Options Clearing Corporation. The Top 120 Options 
are calculated every six months. The proposed fees does not apply to 
index or currency options.
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    Some Phlx specialist units have made payments to attract order flow 
and have requested reimbursement for those expenditures, but other 
specialist units have not participated in the payment for order flow 
program. As a consequence, some proceeds raised by the imposition of 
payment for order flow fees have remained unspent. Accordingly, the 
Phlx is instituting a payment for order flow rebate program to handle 
the unspent funds.
    Pursuant to the rebate program, any money that has been billed or 
collected with respect to particular option symbol but has not been 
spent will be credited or returned according to the following 
guidelines: (1) Within 10 days from the date monthly bills are due, 
specialists must submit their requests for reimbursement; (2) the 
Phlx's accounting department will process the reimbursement requests 
and determine the amount of unspent funds for each month; (3) any 
unspent refunds will be returned to specialists and ROTs on a pro rata 
basis, with rebates calculated as a percentage of the unspent funds to 
the payment for order flow invoiced amounts,\5\ (4) rebate checks will 
be given to specialists and ROTs approximately ten days after the 
reimbursement cutoff request date (20 days after monthly bills are 
due); and (5) credits will be calculated against any amounts that have 
been billed, but not collected. Late charges will continue to accrue on 
any amounts that remain outstanding, although based upon a lower 
``principal'' amount after the rebates have been calculated.\6\
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    \5\ For example, if a total invoiced amount for a Top 120 Option 
is $200,000 (composed of $120,000 received from the specialist; 
$25,000 received from ROT #1; and $55,000 received from ROT #2) and 
a specialist requests reimbursement in the amount of $75,000, there 
would be $125,000 in unspent funds. There would be a rebate of 62.5% 
($125,000/$200,000) distributed on a pro rata basis. Therefore, the 
specialist would receive $75,000; ROT #1 would receive $15,625; and 
ROT #2 would receive $34,375.
    \6\ Late charges are assessed pursuant to Phlx Rule 50. The Phlx 
does not waive late fees for past due amounts even if some portion 
of the fee is later rebated.
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    The Exchange intends to begin implementing this program by 
requesting that reimbursement requests for the months of August, 
September, and October be received by January 30, 2001, with rebates 
processed ten days thereafter.\7\ Reimbursement requests for the month 
of November should be received by February 15, 2001, with rebates 
processed ten days thereafter. Post-November reimbursement requests 
will be processed according to the guidelines stated above.
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    \7\ The Phlx will make pro-rata determinations for amounts from 
August 2000 to October 2000 on a month-by -month basis.
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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 self-regulatory organization 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 Phlx's payment for order flow program was designed to generate 
a source of funds that specialists may use to attract order flow in the 
Top 120 Options. The Phlx believed that it was necessary for it to 
adopt this type of fee in order to maintain and enhance its competitive 
position. The purpose of the proposed rule change is to provide a 
rebate to specialists and ROTs of specified funds in connection with 
the Phlx's payment for order flow program.
    Since the implementation of the payment for order flow fee on 
August 1, 2000, some funds have been billed or collected but not 
disbursed to order flow providers. Some order flow providers may 
maintain policies not to accept payment for order flow funds. The Phlx 
believes that holding unspent payment for order flow funds is 
inefficient and does not serve the best interests of the specialists 
and ROTs. The Phlx believes that returning the funds to the specialists 
and ROTs in a timely manner may allow them to use the funds in a more 
efficient manner, such as by increasing liquidity on the trading floor 
or investing the capital in their firms.
    The Phlx believes that its proposal is consistent with section 6(b) 
of the Act in general, and furthers the objectives of sections 6(b)(4) 
and 6(b)(5) in particular. The Phlx believes that, because the 
specialists and ROTs will receive a rebate of the funds that were 
billed or collected but remain unspent, the rebate program will enable 
an equitable allocation of reasonable fees among the Phlx's members. 
Moreover, the Phlx believes that the payment for order flow rebate 
program, as described above, 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 allowing a more efficient use of funds, which may result in 
increased liquidity, tighter markets, and more competition among 
Exchange members.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Phlx 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

    The Phlx did not solicit any written comments on the proposed rule 
change. The Phlx has received written comments addressed generally to 
its payment for order flow program. A letter from Merrill G. Davidoff 
of Berger & Montague, P.C., on behalf of the Independent Traders 
Association, Inc. and a letter from S.C. Hamilton stated that the 
payment for order flow program

[[Page 13825]]

is in violation of Phlx by-laws. Mr. Davidoff's letter also expressed 
concerns over the implementation of the program. A letter from Edward 
Frank of Gateway Partners LLC requested an amendment to the program to 
allow for rebates in certain situations. A letter from the Independent 
Traders Association, Inc., stated concerns about the payment for order 
flow program and how the Phlx is implementing the program. A handout 
that the Independent Traders Association, Inc., distributed to the 
Board of Governors at its regular board meeting on January 24, 2001, 
summarized its concerns and proposed changes to the program. Although a 
number of the letters have disagreed with the payment for order flow 
program, the Phlx believes that it was necessary to adopt the program 
to remain competitive. None of the letters addressed the terms of the 
rebate program that is the subject of this filing. All of the letters 
are available for inspection at the principal offices of the Phlx and 
at the Commission.

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

    The Phlx has designated the foregoing proposed rule change as a fee 
change pursuant to section 19(b)(3)(A) of the Act and Rule 19b-4(f)(2) 
thereunder. Accordingly, the proposal has become immediately effective 
upon filing with the Commission. At any time within 60 days of the 
filing of the proposed rule change, the Commission may summarily 
abrogate the 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.

IV. Solicitation of Comments

    The Commission invites interested persons 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, NW., Washington, 
DC 20549-0609. Copies of the submissions, 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 changes 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 
filings will also be available for inspection and copying at the 
principal offices of the Phlx. All submissions should refer to File 
Nos. SR-Phlx-01-14 and should be submitted by March 28, 2001.
    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-5542 Filed 3-6-01; 8:45 am]
BILLING CODE 8010-01-M