[Federal Register Volume 68, Number 7 (Friday, January 10, 2003)]
[Notices]
[Pages 1498-1500]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-457]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47120; File No. SR-Phlx-2002-83]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. Relating to the Extension of Its Pilot Program To 
Implement Its Existing Fee Schedule for Electronic Communication 
Networks

January 3, 2003.
    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 18, 2002, 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. 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 Phlx proposes to extend its two-year pilot program for an 
additional one-year period, in order to continue to impose a $2,500 
monthly fee for Electronic Communications Networks (``ECNs'') that are 
member organizations and send order flow to the Exchange's equity 
trading floor.\3\ The pilot program is due to expire on January 31, 
2003.\4\
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    \3\ As stated in the Phlx fee schedule, the term ECN 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 as principal, other than riskless 
principal.
    \4\ See Exchange Act Release No. 45456 (February 19, 2002), 67 
FR 8831 (February 26, 2002) (SR-Phlx-2002-08) (extending the initial 
ECN fee pilot program).
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    The text of the proposed rule change is available at the Office of 
the Secretary, the Phlx, and the Commission.

[[Page 1499]]

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 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to extend the Exchange's 
current ECN pilot program that imposes a $2,500 monthly fee for ECNs 
that are member organizations and send order flow to the Exchange's 
equity trading floor for an additional one-year period, until January 
31, 2004.\5\ According to the Exchange, the continuation of the $2,500 
fee is intended to attract equity order flow from ECNs to the Exchange 
by continuing to substitute a fixed monthly fee, in light of the 
potential for high volumes of order flow from ECNs.\6\
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    \5\ The $2,500 monthly fee applies regardless of the ECN's 
average daily Phlx equity volume.
    \6\ In order to recoup costs due pays pursuant to section 31(b) 
of the Act, the Exchange intends to continue to apply such fee to 
ECNs, as the current fee schedule reflects.
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    The monthly fee will continue to 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 
program. The $2,500 fee would continue to apply to ECN that are not 
acting as a Phlx specialist or floor broker.\7\
    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 operations.\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 were 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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    \7\ An ECN would continue to incur specialist or equity floor 
brokerage transaction fees if it acts as a Phlx specialist or floor 
broker.
    \8\ These include the Trading Post/Booth Fee, Trading Post w/
Kiosk Fee, Kiosk Construction Fee (when requested by specialist), 
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 Line Extensions, Wireless Telephone 
System, Tether Initial Connectivity Fee, Tether Monthly Service 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, Phlx CCH Guide Fee, 
Examinations Fee, Technology Fee, Review/Process Subordinated Loans 
Fee, Registered Representative Registration Fees, and Off-Floor Trader 
Initial Registration Fee, Annual Fee, and Remote Specialist fees
    Because the $2,500 fee is a flat 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 $.00 to $.0075 per share per transaction, 
with a $50 maximum fee per trade side, 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 (i.e., PACE). 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. The 
Phlx believes that additional order flow enhances liquidity, and 
improves 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 its proposal is consistent with section 
6(b) of the Act,\10\ in general, and section 6(b)(4) of the Act,\11\ in 
particular, because it provides for the equitable allocation of 
reasonable dues, fees and other charges among its members and other 
persons using its facilities. The Exchange notes the unique character 
of ECNs, and believes that 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 Exchange does not believe that the proposed rule change will 
impose any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments 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) of the Act \12\ and subparagraph (f)(2) 
of rule 19b-4\13\ thereunder. At any time within 60 days of the filing 
of 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).
    \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 is consistent with the Act.

[[Page 1500]]

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 at the Commission's Public 
Reference Room. Copies of such filing also will be available for 
inspection and copying at the principal office of the Phlx. All 
submissions should refer to File No. SR-Phlx-2002-83 and should be 
submitted by January 31, 2003.

    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. 03-457 Filed 1-9-03; 8:45 am]
BILLING CODE 8010-01-P