[Federal Register Volume 66, Number 72 (Friday, April 13, 2001)]
[Notices]
[Pages 19274-19276]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-9115]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 44155; File No. SR-Phlx-01-09]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. Adopting a Monthly Fee for Electronic Communication 
Networks

April 5, 2001.
    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 31, 2001, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III, below, which Items have been prepared by the 
Phlx. The Phlx amended the proposed rule change on March 30, 2001.\3\ 
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.
    \3\ The Phlx submitted a new Form 19b-4, which replaces and 
supersedes the original filing in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Phlx proposes to adopt a $2,500 monthly fee, on a one year 
pilot basis,\4\ for electronic communications networks (``ECNs'') \5\ 
that are member organizations and send order flow to the Exchange's 
equity trading floor. The proposed fee would apply to ECN trades where 
the ECN is not acting as a specialist or a floor broker, but rather an 
order flow provider. The proposed fee is in lieu of the equity 
transaction value charge that would normally apply to. The Phlx fee 
schedule is available at the Commission and at the Phlx.
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    \4\ Thereafter, the Exchange may file to extend the fee, 
possibly only for ECNs that have achieved a certain average daily 
Phlx equity volume.
    \5\ ECNs shall mean any electronic system that widely 
disseminates to third parties orders entered therein by an Exchange 
market maker or over-the-counter (``OTC'') market maker, and permits 
such orders to be executed against in whole or in part. The term ECN 
shall not include: Any system that crosses multiple orders at one or 
more specified times at a specified price set by the ECN, algorithm, 
or by any derivative pricing mechanism and does not allow orders to 
be crossed or executed against directly by participants outside of 
such times; or, any system operated by or on behalf of an OTC 
market-maker or exchange market-maker that executes customer orders 
primarily against the account of such market maker as principal, 
other than riskless principal. See SEC Rule 11Ac1-1(a)(5).
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II. Self-Regulatory Organization's Statements Regarding 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The proposed fee is intended to attract equity order flow from ECNs 
to the Exchange by substituting a fixed

[[Page 19275]]

monthly fee, in light of the potential for high volumes of order flow 
from ECNs.\6\ During the pilot program, the monthly fee would apply to 
ECN order flow to the Exchange's equity trading floor, including from 
ECNs that either became members or began sending order flow after the 
commencement of the pilot period. The proposed fee only would apply to 
trades where the ECN was not acting as a Phlx specialist or floor 
broker.\7\
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    \6\ To recoup costs due from the Exchange to the Commission 
pursuant to Section 31(b) of the Act, the Exchange proposes to 
continue to apply such fee to ECNs, as the current fee schedule 
reflects. This fee consists of one three-hundreth of 1 percent of 
the aggregate dollar amount of the sales of securities transacted on 
a national securities exchange, as reflected in the Exchange's fee 
schedule.
    \7\ An ECN would incur specialist or floor brokerage transaction 
fees if it acts as a Phlx specialist or floor broker.
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    Currently, no ECN operates from the Exchange's equity trading floor 
as a floor broker or specialist unit. If, however, an ECN did operate 
from the equity trading floor, it would be subject to various floor-
related fees respecting its floor operation.\8\ In addition, an ECN's 
transactions as a floor broker would be subject to the equity 
transaction value charge, and its specialist trades would be subject to 
other charges.\9\ Even if the ECN was acting as a floor broker or 
specialist with respect to some trades, those trades for which it was 
not acting as a floor broker or specialist, but rather an ECN, would be 
subject only to the flat monthly fee and not other transaction charges.
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    \8\ These include the Trading Post/Booth Fee, Controller Space 
Fee, Floor Facility Fee, Shelf Space on Equity Option Trading Floor 
Fee, Computer Equipment Services, Repairs or Replacements Fee, and 
Computer Relocation Requests Fee. Certain communications fees could 
also apply, such as the Direct Wire to the Floor Fee, Telephone 
System Fee, Execution Services/Communication Charge, Stock Execution 
Machine Registration Fee (Equity Floor), Equity, Option, or FCO 
Transmission Charge, FCO Pricing Tape, Option Report Service Fee, 
Quotron Equipment Fee, Instinet, Reuters Equipment Pass-Through Fee 
and the Option Mailgram Service Fee.
    \9\ The PACE Specialist Charge is a fee imposed on specialist 
transactions only and the Equity Floor Brokerage Assessment and 
Equity Floor Brokerage Transaction Fee apply to floor brokerage 
activity.
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    An ECN that only operates as a specialist or floor broker would not 
have to pay the monthly fee, because it would, instead, be paying the 
normal transaction charges applicable to floor brokers and specialists.
    An ECN would also continue to be subject to, if applicable, the 
following membership-related fees: Membership dues or Foreign Currency 
User Fees, Foreign Currency Option Participation Fee, Capital Funding 
Fee, Application Fee, Initiation Fee, Transfer Fee, Examinations Fee, 
Technology Fee, Review/Process Subordinated Loans Fee, Registered 
Representative Registration Fee, and Off-Floor Trader Initial 
Registration Fee and Annual Fee.
    Because the proposed fee is a flat $2,500 monthly fee as opposed to 
a per-transaction fee, it is intended to encourage ECN volume. 
Currently, the equity transaction value charge (that would otherwise 
apply to an ECN's equity trades) ranges from $.015 to $.14 per $1,000 
of transaction value, with a maximum per trade side of $50, and various 
other applicable discounts. Thus, many variables determine whether the 
proposed monthly $2,500 fee is generally more favorable than the equity 
transaction value charge, depending upon the number of trades, size of 
the trade, and type. As a general matter, the Exchange believes that 
$2,500 would be more favorable to the ECN because it is a fixed amount.
    The Exchange believes that the monthly ECN fee provides competitive 
fees with appropriate incentives, thus providing a reasonable method to 
attract large order flow providers such as ECNs to the Exchange. 
Additional order flow should enhance liquidity, and improve the 
Exchange's competitive position in equity trading. The Exchange 
believes that structuring this fee for ECNs is appropriate, as ECNs are 
unique in their role as order flow providers to the Exchange. 
Specifically, ECNs operate a unique electronic agency business, similar 
to a securities exchange, as opposed to directly executing orders for 
their own customers as principal or agent.
2. Statutory Basis
    The Exchange believes that the proposed changes to the Phlx fee 
schedule are consistent with section 6(b) of the Act,\10\ in general, 
and with section 6(b)(4),\11\ in particular, in that they provide for 
the equitable allocation of reasonable dues, fees and other charges, 
due to the unique character of ECNs, and because the fixed monthly fee 
is a reasonable method of attracting a new form of order flow to the 
Exchange.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(4).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Phlx does not believe that the proposed rule change, as 
amended, 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 either solicited or received.

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

    The Exchange has designated the proposed rule change as a fee 
change pursuant to section 19(b)(3)(A)(ii) of the Act \12\ and Rule 
19b-4(f)(2) thereunder.\13\ Accordingly, the proposal will take effect 
upon filing with the Commission. At any time within 60 days of the 
filing of Amendment No. 1 to 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.
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    \12\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \13\ 17 CFR 240.19b-4(f)(2).
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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, as amended, 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 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-01-09 and should be submitted by May 4, 2001.


[[Page 19276]]


    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. 01-9115 Filed 4-12-01; 8:45 am]
BILLING CODE 8010-01-M