[Federal Register Volume 67, Number 18 (Monday, January 28, 2002)]
[Notices]
[Pages 3927-3929]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-1955]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45322; File No. SR-Phlx-2001-115]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 thereto by the Philadelphia Stock Exchange, 
Inc. Relating to the Volume Thresholds for the Options Specialist 
Shortfall Fee and Corresponding Shortfall Credit

January 22, 2002.
    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 December 20, 2001, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. On 
January 15, 2002, the Exchange filed Amendment No. 1 to the proposed 
rule change.\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Cynthia K. Hoekstra, Counsel, Phlx, to Kelly 
Riley, Senior Special Counsel, Division of Market Regulation, 
Commission, dated January 14, 2002 (``Amendment No. 1''). In 
Amendment No. 1, the Exchange clarified the statutory basis of the 
proposed rule change to include Section 6(b)(4) of the Act. In 
addition, the Exchange requested that, rather than being filed 
pursuant to Section 19(b)(3)(A)(ii) of the Act, under which it was 
originally filed, that the proposed rule change now be filed 
pursuant to Section 19(b)(2) of the Act. Finally, the Exchange 
requested that the proposed fee be approved as of January 2, 2002 
and that the proposed rule change be approved on an accelerated 
basis in order to permit the Exchange to invoice its January fees in 
a timely manner by the middle of February.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend its schedule of dues, fees and 
charges to increase the requisite volume thresholds associated with the 
options specialist 10 percent deficit fee (``shortfall fee'') \4\ and 
corresponding options specialist 10 percent shortfall credit 
(``shortfall credit'').\5\ The Exchange also proposes to amend the 
definition of a Top 120 Option, clarify who is eligible to receive the 
shortfall credit and make other minor, technical amendments to its fee 
schedule. The Exchange intends to implement the proposed volume 
thresholds retroactively for transactions settling on or after January 
2, 2002.\6\
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 43201 (August 23, 
2000), 65 FR 52465 (August 29, 2000) (SR-Phlx-00-71).
    \5\ See Securities Exchange Act Release No. 44892 (October 1, 
2001), 66 FR 51487 (October 9, 2001) (SR-Phlx-2001-83).
    \6\ See Amendment No. 1, supra note 3. The Exchange states that 
the shortfall fee will continue to be eligible for the monthly 
credit of up to $1,000 to be applied against certain fees, dues and 
charges and other amounts owed to the Exchange by certain members. 
See Securities Exchange Act Release No. 44292 (May 11, 2001), 66 FR 
27715 (May 18, 2001) (SR-Phlx-2001-49).
---------------------------------------------------------------------------

    The text of the proposed rule change appears below. New text is in 
italics; deletions are in brackets.

Summary of Equity Option Charges (P. 1/2)

SPECIALIST [10%] DEFICIT (Shortfall) FEE I
    $.35 per contract for specialists trading any Top 120 Option if [at 
least 10% of] the following total national monthly contract volume for 
such Top 120 Option is not effected on the PHLX: 11 percent for the 
period January through March 2002; 12 percent for the period April 
through June 2002; 13 percent for the period July through September 
2002; and 14 percent for the period October through December 2002.

Summary of Equity Option Charges (P. 2/2)

[OPTIONS] SPECIALIST [10%] DEFICIT (Shortfall) FEE CREDIT
    A credit of $.35 per contract may be earned by options specialists 
for all contracts traded in excess of the [10%] following volume 
thresholds in eligible issues for the monthly periods commencing 
September 1, 2001. These credits may be applied against previously 
imposed ``shortfall fees'' for the preceding six months for issues that 
in the month the deficit occurred, the equity option traded in excess 
of 10 million contracts per month: 11 percent for the period January 
through March 2002; 12 percent for the period April through June 2002; 
13 percent for the period July through September 2002; and 14 percent 
for the period October through December 2002.
* * * * *
    I denotes fee eligible for monthly credit of up to $1,000.

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.

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

(1) Purpose
    According to the Exchange, the purpose of the proposed rule change 
is to increase the volume thresholds related to the options specialist 
shortfall fee and corresponding shortfall credit in order to encourage 
specialists to compete for order flow in the national market. The 
options traded by the specialist unit, and the transactions related 
thereto, may be especially valuable to that specialist unit and the 
Exchange due to their potential profitability. Therefore, the Exchange 
believes that the specialist should compete for order flow in the 
national market, because that specialist unit is the key party 
responsible for marketing and receiving order flow in that particular 
option.
    Currently, the Exchange imposes a fee of $0.35 per contract to be 
paid by the specialist trading any Top 120 Option if at least 10 
percent of the total national monthly contract volume (``total 
volume'') for such Top 120 Option is not effected on the Exchange in 
that

[[Page 3928]]

month.\7\ In addition, a corresponding shortfall credit of $0.35 per 
contract may be earned toward previously imposed shortfall fees for 
each contract traded in excess of the 10 percent volume threshold 
during a subsequent monthly time period. Thus, the Exchange states that 
options specialists may apply this credit when trading in their issues 
falls below the 10 percent volume threshold in one month, and exceeds 
the threshold in a subsequent month. Such a credit may be applied 
against shortfall fees imposed within the preceding six months for the 
same option, provided that, in the month the deficit occurred, the 
option traded in excess of 10 million contracts nationwide that 
month.\8\
---------------------------------------------------------------------------

    \7\ The Exchange states that at present a Top 120 Option is 
defined as one of the 120 most actively traded equity options in 
terms of the total number of contracts in that option that were 
traded nationally for a specified month based on volume reflected by 
The Options Clearing Corporation (``OCC'') and which was listed on 
the Exchange after January 1, 1997.
    \8\ The Exchange states that nationwide trading figures are 
based on the national monthly contract volume reflected by the OCC.
---------------------------------------------------------------------------

    The proposed fee amendments would increase the requisite volume 
thresholds by 1 percent per quarter over each quarter of 2002. Thus, 
the minimum trading volume requirements for total volume in the Top 120 
Options would be in excess of: 11 percent for the period January 
through March 2002; 12 percent for the period April through June 2002; 
13 percent for the period July through September 2002; and 14 percent 
for the period October through December 2002. The related shortfall 
credit will also be amended to correspond with the volume thresholds 
described above. Therefore, in order to qualify for the shortfall 
credit, specialists/specialist units must have total volume in the Top 
120 Options (that otherwise qualify based on the 10 million contract 
volume requirement) in excess of: 11 percent for the period January 
through March 2002; 12 percent for the period April through June 2002; 
13 percent for the period July through September 2002; and 14 percent 
for the period October through December 2002.
    The Exchange also proposes to amend the definition of a Top 120 
Option to include the top 120 most actively traded equity options in 
terms of the total numbers of contracts in that option that were traded 
nationally for a specified month based on volume reflected by OCC.\9\
---------------------------------------------------------------------------

    \9\ The Exchange states that previously, options listed on the 
Phlx before January 1, 1997 were excluded from the calculation of 
the Top 120 Options. The Phlx intends to continue to divide by two 
the total volume reported by OCC, which reflects both sides of an 
executed transaction, thus avoiding one trade being counted twice 
for purposes of determining overall volume. See Securities Exchange 
Act Release No. 43201 (August 23, 2000), 65 FR 52465 (August 29, 
2000) (SR-Phlx-00-71).
---------------------------------------------------------------------------

    Currently, the rate of $0.35 per contract is paid to the Exchange 
if the requisite volume for such Top 120 Option is not effected on the 
Phlx in that month and a shortfall credit of $0.35 may be earned 
against previously imposed shortfall fees, as discussed above. These 
rates will remain unchanged.
    In order to avoid one specialist unit trying to claim the credit 
for volume deficits created by another specialist unit, the Exchange 
also proposes to clarify that the shortfall credit is available only to 
the same specialist unit or one associated with or related to that 
specialist unit to capture, for example, affiliates, subsidiaries and 
corporate mergers.
    The Exchange states that other procedures relating to the 
specialist shortfall fee and shortfall credit remain unchanged.\10\ 
Finally, the Exchange proposes to make other minor, technical 
amendments to the headings of the shortfall fee and credit to make them 
more consistent.
---------------------------------------------------------------------------

    \10\ The Exchange states that, for example, the previously 
imposed transition period for newly listed options would remain in 
effect. Therefore, the requisite volume threshold of three percent 
for the first full calendar month and six percent for the second 
full calendar month of trading will remain unchanged. The Exchange 
fee schedule continues to apply to all equity options transactions 
not covered by this options specialist shortfall fee. Also, the 
three-month differentiation to determine whether an equity option is 
considered a Top 120 Option will remain in effect, i.e., September's 
Top 120 Options are based on June's volume. See Securities Exchange 
Act Release No. 43201 (August 23, 2000), 65 FR 52465 (August 29, 
2000) (SR-Phlx-00-71). Any excess volume (over the total volume 
target) may not be carried over to a future month.
---------------------------------------------------------------------------

    The Exchange believes that this proposal is necessary to continue 
to attract order flow to the Exchange in order to remain competitive. 
According to the Exchange, the proposed fee should encourage 
specialists to vigorously compete for order flow, which not only 
enhances the specialists' role, but also provides additional revenue to 
the Exchange. Moreover, the Exchange expects that specialists' efforts 
to maintain the requisite volume thresholds as outlined above should 
contribute to deeper, more liquid markets and tighter spreads. Thus, 
the Exchange believes that competition should be enhanced, and 
important auction market principles preserved.
    In conclusion, the Exchange proposes to implement the proposed 
volume thresholds retroactively for transactions settling on or after 
January 2, 2002. To that end, the Exchange has requested accelerated 
approval so that the proposed rule change may become effective as of 
January 2, 2002. The Exchange stated that approval of the proposed rule 
change on an accelerated basis would ensure that all of the applicable 
fees for January 2002 are integrated into the Exchange's routine 
billing cycle thus avoiding potential member confusion.
(2) Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\11\ in general, and furthers the 
objectives of Sections 6(b)(4) \12\ and 6(b)(5) \13\ of the Act, in 
particular, because it provides for the equitable allocation of 
reasonable dues, fees, and other charges among its members and it is 
intended to promote just and equitable principles of trade and protect 
investors and the public interest by attracting more order flow to the 
Exchange, which should result in increased liquidity and tighter 
markets.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(4).
    \13\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    The Exchange 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

    No written comments were either solicited or received.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which the Exchange consents, the Commission will:
    A. By order approve such proposed rule change; or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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

[[Page 3929]]

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 Exchange. All 
submissions should refer to File No. SR-Phlx-2001-115 and should be 
submitted by February 12, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 02-1955 Filed 1-25-02; 8:45 am]
BILLING CODE 8010-01-P