[Federal Register Volume 66, Number 189 (Friday, September 28, 2001)]
[Notices]
[Pages 49728-49730]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-24330]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44830; File No. SR-PCX-2001-37]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Pacific Exchange, Inc. 
Relating to Changes in Marketing Fees

September 21, 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 August 30, 2001, the Pacific Exchange, Inc. (``PCX'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II and III below, which Items the PCX 
has prepared. 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 PCX proposes to change the amount of the marketing fee that it 
currently imposes on options transactions. A copy of the proposed new 
schedule of fees is available at the PCX and at the Commission. The PCX 
also proposes to rebate excess marketing fees on a monthly rather than 
a quarterly basis.

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 PCX included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it had received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The PCX has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of the statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The PCX currently collects a marketing fee of $0.40 per market 
maker contract in equity options traded on the PCX.\3\ Trades between 
market makers, including trades between market makers and Lead Market 
Makers (``LMMs'') are not subject to the marketing fee.
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    \3\ See Securities Exchange Act Release No. 43290 (September 13, 
2000), 65 FR 57213 (September 21, 2000) (order approving SR-PCX-00-
30).
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    The PCX segregates the funds by trading post and makes the funds 
available to LMMs for their use in attracting orders in the options 
traded at the posts. The LMMs are obligated to account to the PCX for 
the use that they make of the funds. The LMMs, and not the PCX, make 
all determinations concerning the amount that they may pay for orders, 
as well as the types, sizes, and other factors relating to orders that 
qualify for payment. The PCX provides administrative support to the 
LMMs, keeping track of the number of qualified orders each firm directs 
to the PCX and making the necessary debits and credits to the accounts 
of the LMMs and member firms.
    The PCX periodically rebates to PCX market makers the marketing 
fees that the LMMs have not paid to order flow

[[Page 49729]]

providers.\4\ The amount refunded to each market maker is based on the 
percentage of the total marketing fees that the market maker paid at 
each trading post during the rebate period. Currently, the PCX rebates 
excess marketing fees to PCX market makers on a quarterly basis.
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    \4\ See Securities Exchange Act Release No. 44071 (March 13, 
2001), 66 FR 15939 (March 21, 2001) (SR-PCX-01-08).
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    The PCX is proposing to eliminate its current fee of $0.40 per 
contract and to replace it with new fees, per option issue, as set 
forth in the PCX's Schedule of Rates. Only the amount of the fee is 
being changed. The PCX intends to collect the marketing fees set forth 
in the Schedule of Rates beginning with the September trade month and 
continuing until further notice.
    The PCX is also proposing to change its method of rebating excess 
marketing fees to market makers. Specifically, the PCX intends to 
rebate the fees on a monthly, rather than quarterly, basis.\5\
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    \5\ Under the current quarterly rebate program, the PCX would 
issue a rebate for the quarterly period that includes the July, 
August, and September trade months. During the transition to monthly 
rebates, the PCX anticipates that it would rebate the excess funds 
that were collected for the July and August trade months, and 
thereafter begin administering the rebates on a monthly basis.
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2. Basis
    The PCX believes that the proposed rule change is consistent with 
Section 6(b) of the Act.\6\ The PCX believes that the proposal has been 
designed to provide for the equitable allocation of dues, fees and 
other charges among its members and other persons using its facilities, 
and therefore furthers the objectives of Section 6(b)(4) of the Act.\7\ 
The PCX also believes that its proposed change with respect to the 
rebating of excess marketing fees has been designed to facilitate 
transactions in securities and to promote just and equitable principles 
of trade, thereby furthering the objectives of Section 6(b)(5) of the 
Act.\8\
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(4).
    \8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The PCX 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

    The PCX received eleven written comment letters and e-mails on the 
proposal.\9\ Generally, these commenters maintained that the proposal 
should not be adopted because it would impair the quality of the PCX's 
markets by reducing depth and liquidity;\10\ would raise antitrust 
concerns;\11\ would adversely impact options prices;\12\ would be 
difficult to detect or prevent an LMM's misuse of funds;\13\ would 
constitute an improper delegation of authority to private parties;\14\ 
would subject the PCX to litigation;\15\ and, generally, would be 
unfair.\16\
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    \9\ These included the following: letter from Karim Tahawi (and 
other PCX market makers) to the PCX Board of Governors, dated July 
23, 2001 (``Tahawi letter''); letter from David B. Bayless, Morrison 
& Foerster LLP, to the PCX Board of Governors, dated July 23, 2001 
(``Bayless letter''); letter from Joel Greenberg, Susquehanna 
International Group, to Thomas E. Connaghan, PCX, dated August 9, 
2001 (``Greenberg letter''); letter from Paul Liang, PCX Lessors 
Association, to the PCX Board of Governors (undated) (``Liang 
letter''); letter from the Pacific Exchange Market Maker Association 
to the PCX Board of Governors, dated August 14, 2001 (``PEMMA 
letter''); e-mail from Richard Cabanes, PCX market maker, to Stephen 
Edman, PCX, dated August 14, 2001 (``Cabanes e-mail''); e-mail from 
Jamison Strofs, PCX market maker, to Stephen Edman, PCX, dated 
August 15, 2001 (``Strofs e-mail''); e-mail from Mark Cormier, PCX 
market maker, to the PCX Rates and Charges Committee, dated August 
15, 2001 (``Cormier e-mail''); e-mail from Mark Cormier, Pacific 
Research and Trading (``PRT''), to the PCX Rates and Charges 
Committee, dated August 15, 2001 (``PRT e-mail''); letter from Mark 
Cormier, PCX market maker, to the PCX Board of Governors (undated) 
(``Cormier letter''); e-mail from Ronald Chin to Mike King, PCX, 
dated August 22, 2001 (``Chin e-mail'').
    \10\ Tahawi letter; Bayless letter; Liang letter; Carbanes 
letter; Strofs letter; Cormier e-mail; PRT e-mail; Cormier letter.
    \11\ Tahawi letter; Bayless letter; Greenberg letter; PEMMA 
letter; PRT letter; Cormier letter.
    \12\ Bayless letter; Liang letter.
    \13\ Bayless letter; PEMMA letter.
    \14\ Greenberg letter; PEMMA letter.
    \15\ Chin e-mail.
    \16\ Bayless letter.
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    The PCX believes that the vast majority of these concerns were 
addressed and resolved in the Commission's order approving the proposal 
of the International Securities Exchange (``ISE'') concerning payment 
for order flow.\17\ The PCX believes that the PCX's fee change 
proposal, like the ISE's proposal, is ``a reasonable competitive 
response * * * to the adoption of similar payment-for-order-flow 
programs on other exchanges.'' \18\ The PCX contends that, because its 
proposal involves marketing fees that are set on a per issue basis, in 
amounts ranging from $0 to $1.00 per contract, it is substantially 
similar to the program of the Philadelphia Stock Exchange (``Phlx'') 
whereby the Phlx imposes a $1.00 fee in certain issues (i.e., the ``Top 
120 Options on the Phlx'') and $0 in others.\19\
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    \17\ See Securities Exchange Act Release No. 43833 (January 10, 
2001), 66 FR 7822 (January 25, 2001) (``ISE Release'').
    \18\ Id.
    \19\ See Securities Exchange Act Release No. 43177 (August 18, 
2001), 65 FR 54330 (August 25, 2000).
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    The PCX believes that its proposed rule change is reasonable and 
equitable because, like the ISE's payment for order flow program, its 
fee has been ``designed to enable the Exchange to compete with other 
markets in attracting options business.'' \20\ In this regard, the PCX 
asserts that it needs greater flexibility in its marketing fee 
structure in order to compete effectively with the other options 
exchanges.\21\ According to the PCX, while payment for order flow fees 
may be unaffordable to some market makers, the Commission has found 
that ``the determination to impose them is a business decision 
legitimately made by the Exchange in assessing the costs that must be 
assumed if it is to remain competitive as a market center.'' \22\ The 
PCX also noted that, under its proposal, no distinctions are made among 
PCX members with respect to the amounts that they must pay.
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    \20\ ISE Release, supra.
    \21\ The PCX added that, in the ISE Release, the Commission 
stated that ``the U.S. options markets are in the midst of profound 
and dynamic structural change, resulting from the intense 
competition for options order flow.'' ISE Release, supra.
    \22\ Id.
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    The PCX also noted its disagreement with the contention of certain 
commenters \23\ that the proposal would involve an improper delegation 
of authority from the PCX to private parties. The PCX asserted that, 
although it considered suggestions and other input from the PCX 
membership on the proposed rate schedule, it also considered objective 
data \24\ and ultimately made the final determination itself as to the 
specific fees to be charged per issue by virtue of this rule filing. 
With regard to the antitrust concerns raised by some of the commenters, 
the PCX noted that it has consulted with its legal counsel on antitrust 
issues and concluded that the proposal is consistent with the antitrust 
laws.
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    \23\ Greenberg letter; PEMMA letter.
    \24\ According to the PCX, this data included trading volume per 
issue, PCX market share per issue, disposition of previous marketing 
fees collected, relative size of each trading crowd, and other such 
information.
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    As to the PCX's ability to detect and prevent an LMM's possible 
misuse of funds, the PCX cited to the Commission's order approving the 
ISE's payment for order flow program, in which the Commission stated 
that it ``expects [that] the ISE, in fulfillment of its self-regulatory 
function, will be alert to any inappropriate expenditure of such funds, 
in the service of particular members, or for use of these funds to

[[Page 49730]]

encourage trades on other exchanges.'' \25\
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    \25\ ISE Release, supra.
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    Finally, in support of its position, the PCX included the following 
quote from the Commission's order approving the ISE's payment for order 
flow proposal:

    Payment for order flow assumes many different forms and guises--
as numerous as the many different kinds of incentives granted to 
order flow providers to induce them to send their business to them. 
Without more, this form of payment or incentive--however 
objectionable to some--cannot be said to be in itself inconsistent 
with the Act while other forms are accepted as consistent with the 
Act. In this context, the ISE proposal cannot be said to constitute 
an undue burden on competition.\26\
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    \26\ Id. (footnotes omitted).

    In the light of all of the foregoing, the PCX believes that is 
proposal is consistent with the Act, the rules thereunder, and the 
Commission's order approving the ISE's payment for order flow plan.\27\
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    \27\ Id.
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III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Because the PCX has designated the foregoing as a fee change 
pursuant to Section 19(b)(3)(A) of the Act \28\ and Rule 19b-4(f)(2) 
thereunder,\29\ the proposal has become effective immediately upon 
filing with the Commission. At any time within 60 days after 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.
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    \28\ 15 U.S.C. 78s(b)(3)(A).
    \29\ 17 CFR 240.19b-4(f).
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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, 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, 450 Fifth Street, NW., Washington, 
DC 20549. 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-2001-37 and should be submitted by October 19, 
2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-24330 Filed 9-27-01; 8:45 am]
BILLING CODE 8010-01-M