[Federal Register Volume 68, Number 49 (Thursday, March 13, 2003)]
[Notices]
[Pages 12138-12140]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-6076]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47456; File No. SR-Phlx-2002-77]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Philadelphia Stock Exchange, 
Inc. To Adopt a Specialist Revenue Sharing Plan for Trades in the 
Nasdaq-100 Index Tracking Stock

March 6, 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 16, 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 Phlx. The Exchange 
amended the proposal on February 28, 2003.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On February 28, 2003, the Exchange filed a Form 19b-4, which 
replaced the original filing in its entirety (``Amendment No. 1''). 
In Amendment No. 1, the Exchange made technical corrections to the 
proposed rule text.
---------------------------------------------------------------------------

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

    The Phlx proposes to amend its schedule of dues, fees and charges 
to adopt a Specialist Revenue Sharing Plan for trades in the Nasdaq-100 
Index Tracking Stock (``QQQ'').SM \4\ Under this program, 
the Exchange is proposing to share with the QQQ specialist unit a 
portion of the revenues that the Exchange receives under the 
Consolidated Tape Association (``CTA'') Plan \5\ attributable to the 
QQQ (which is reportable on Tape B).\6\ The Exchange proposes to begin 
its program on November 1, 2002.
---------------------------------------------------------------------------

    \4\ The Nasdaq-100[reg], Nasdaq-100 Index[reg], Nasdaq[reg], The 
Nasdaq Stock Market[reg], Nasdaq-100 Shares SM, Nasdaq-
100 Trust SM, Nasdaq-100 Index Tracking Stock 
SM, and QQQ SM are trademarks or service marks 
of The Nasdaq Stock Market, Inc. (``Nasdaq'') and have been licensed 
for use for certain purposes by the Phlx pursuant to a License 
Agreement with Nasdaq. The Nasdaq-100 Index[reg] (the ``Index'') is 
determined, composed, and calculated by Nasdaq without regard to the 
Licensee, the Nasdaq-100 Trust SM, or the beneficial 
owners of Nasdaq-100 Shares SM. Nasdaq has complete 
control and sole discretion in determining, comprising, or 
calculating the Index or in modifying in any way its method for 
determining, comprising, or calculating the Index in the future.
    \5\ The CTA Plan is a national market system plan approved by 
the Commission pursuant to section 11A of the Act, (15 U.S.C. 78k-1, 
and Rule 11Aa3-2 thereunder, 17 CFR 240.11Aa3-2); CTA Plan: Second 
Restatement of Plan Submitted to the Securities and Exchange 
Commission Pursuant to Rule 11Aa3-1 under the Act, May 1974 as 
restated March 1980 and December 1995. The CTA Plan governs, among 
other things, the collection, consolidation and dissemination of 
transaction reports in certain securities and the distribution of 
the revenues derived therefrom among parties to the CTA Plan, which 
are known as the Plan Participants.
    \6\ This proposal applies only to QQQ and to no other Tape B 
security nor any Tape A security.
---------------------------------------------------------------------------

    The text of the proposed rule change is set forth below. Additions 
are in italics.

Specialist Revenue Sharing Program for Nasdaq-100 Index Tracking Stock 
(``QQQ'')

The Exchange will share a portion of net revenues that it receives for 
Tape B under the Consolidated Tape Association (``CTA'') Plan 
attributable to the Nasdaq-100 Index Trading Stock (``QQQ'') with the 
specialist unit for the QQQ. The Specialist Revenue Sharing Program 
operates as follows:
    [sbull] Revenues under the CTA Plan are distributed to Plan 
Participants on a quarterly basis. Each quarter, the Phlx will start 
its calculation with the quarterly revenues actually received for Tape 
B.
    [sbull] First, Phlx will determine the portion of such quarterly 
revenues attributable to the trading of QQQ for each calendar month in 
the quarter to which the revenue is attributed.
    [sbull] Then, Phlx will subtract the amount it owes Nasdaq under 
its license agreement for each such calendar month, to arrive at the 
``Monthly Residual QQQ Tape Revenue'' for that month.
    [sbull] The Monthly Residual QQQ Tape Revenue will be shared 
between Phlx and the QQQ specialist unit in the following order of 
priority, in each case to the extent that Monthly Residual QQQ Tape 
Revenues are available:
    (i) Phlx will receive the first $15,000 per month of the Monthly 
Residual QQQ Tape Revenue to cover, at a minimum, its estimated monthly 
costs for operating and regulating trading of the QQQ on the Exchange;
    (ii) the specialist unit will receive the next $15,000 per month; 
and

[[Page 12139]]

    (iii) Phlx and the specialist unit will share equally, subject to 
reasonable rounding, any remaining Monthly Residual QQQ Tape Revenue 
for that month.
    Phlx intends to perform this calculation monthly and then make 
distributions to the specialist unit quarterly, after it receives its 
Tape B distribution under the Plan for that quarter and following a 
reasonable processing period of ten business days.\I\
---------------------------------------------------------------------------

    \I\ Accordingly, this proposal is dependent upon the Exchange 
actually collecting its quarterly distribution of Tape B revenues. 
Any transaction or other fees that the QQQ specialist unit may owe 
to the Exchange are handled separately from this program, pursuant 
to the Exchange's fee schedules and billing practices.
---------------------------------------------------------------------------

    The program will apply to Tape B revenues in respect of QQQ trading 
on or after November 1, 2002.\II\
---------------------------------------------------------------------------

    \II\ For the first quarter of implementation, because the 
program will begin on November 1, 2002, the calculations will be 
based on the quarterly revenues received for the period November 1-
December 31, 2002 (excluding the month of October).
---------------------------------------------------------------------------

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 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 attract additional 
business in the QQQ equity product through a Specialist Revenue Sharing 
Program. The Specialist Revenue Sharing Program is intended to provide 
the specialist unit with incentives to grow its specialist activity in 
the QQQ by reducing its costs of doing business and providing it with 
additional funds to commit to trading to promote liquidity.
    The Specialist Revenue Sharing Program would operate as follows: 
Revenues under the CTA Plan are distributed to Plan Participants on a 
quarterly basis. Each quarter, the Phlx would start its calculation 
with the quarterly revenues actually received for Tape B in respect of 
a given, prior quarter; such quarterly revenues are usually received 45 
days after the end of a quarter. First, the Phlx would determine the 
portion of such quarterly revenues attributable to trading in the QQQ 
for each calendar month in that quarter.\7\ Then, the Phlx would 
subtract the amount it owes Nasdaq under its license agreement. The 
remainder (if any) respecting that calendar month (``Monthly Residual 
QQQ Tape Revenue'') would be shared between the Phlx and the QQQ 
specialist unit in the following order of priority, in each case to the 
extent that Monthly Residual QQQ Tape Revenues are available: (i) The 
Phlx would receive the first $15,000 per month of the Monthly Residual 
QQQ Tape Revenue to cover, at a minimum, its estimated costs for 
operating and regulating trading of the QQQ; \8\ (ii) the specialist 
unit would receive the next $15,000 per month; and (iii) the Phlx and 
the specialist unit would share equally, subject to reasonable 
rounding, any remaining Monthly Residual QQQ Tape Revenue for that 
month. The proposal would be applied separately to each month; trades 
from one month may not be transferred to or aggregated with trades from 
another month.
---------------------------------------------------------------------------

    \7\ The Phlx states that its total revenue Tape B distribution 
may be attributable to trades in securities other than QQQ.
    \8\ The Exchange will periodically reconsider whether this 
amount is appropriate, and may adjust this figure from time to time, 
pursuant to a proposed rule change.
---------------------------------------------------------------------------

    The Phlx intends to perform this calculation in respect of each 
monthly period and then make distributions to the specialist unit 
quarterly, after it receives its Tape B distribution under the Plan and 
following a reasonable processing period of ten business days.\9\ The 
program would apply to revenue in respect of QQQ trading on and after 
November 1, 2002.
---------------------------------------------------------------------------

    \9\ Accordingly, this proposal is dependent upon the Exchange 
actually collecting its quarterly distribution of Tape B revenues. 
Any transaction or other fees that the QQQ specialist unit may owe 
to the Exchange are handled separately from this program, pursuant 
to the Exchange's fee schedules and billing practices.
---------------------------------------------------------------------------

2. Statutory Basis
    The Phlx believes that the proposed rule change is consistent with 
the Act, including section 6(b)\10\ and section 11A of the Act,\11\ and 
will further the objectives of section 6(b)(5) of the Act \12\ by 
promoting just and equitable principles of trade, removing impediments 
to and perfecting the mechanism of a free and open market and a 
national market system and, in general, protecting investors and the 
public interest, by encouraging use of the Phlx for trading the QQQ. 
Similarly, the Phlx believes that the Specialist Revenue Sharing 
Program for QQQ is consistent with section 11A of the Act,\13\ because 
it is in the public interest and appropriate for the protection of 
investors and the maintenance of fair and orderly markets to assure: 
(i) Economically efficient execution of securities transactions; and 
(ii) fair competition among exchange markets and between exchange 
markets and markets other than exchange markets. It also furthers the 
objectives of section 6(b)(4) of the Act \14\ in that it is an 
equitable allocation of reasonable dues, fees, and other charges among 
Exchange members.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78f.
    \11\ 5 U.S.C. 78k-1.
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ 15 U.S.C. 78k-1.
    \14\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

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. The Phlx states that the 
proposal is designed to attract additional business to the Exchange in 
the QQQ by reducing the specialist unit's costs and providing it with 
additional funds to commit to trading, and, thus, should promote 
competition among market centers trading such securities.

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

    The Phlx has neither solicited nor received written comments with 
respect to the proposed rule change.

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 Phlx 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

    On July 2, 2002, the Commission issued an Order abrogating certain 
proposed rule changes relating to market data revenue sharing

[[Page 12140]]

programs.\15\ In that Order, the Commission expressed concern that the 
subject proposed rule changes raised ``serious questions as to whether 
they are consistent with the Act and with the protection of 
investors.'' Specifically, the Commission questioned the effect of 
market data rebates on the accuracy of market data, and on the 
regulatory functions of self-regulatory organizations.
---------------------------------------------------------------------------

    \15\ See Securities Exchange Act Release No. 46159 (July 2, 
2002), 67 FR 45775 (July 10, 2002) (File Nos. SR-NASD-2002-61, SR-
NASD-2002-68, SR-CSE-2002-06, and SR-PCX-2002-37) (Order of Summary 
Abrogation).
---------------------------------------------------------------------------

    The Commission now solicits comment on the Phlx proposed rule 
change, and in general, on (1) Market data fees; (2) the collection of 
market data fees; (3) the distribution of market data rebates; (4) the 
effect of market data revenue sharing programs on the accuracy of 
market data; and (5) the impact of market data revenue sharing programs 
on the regulatory functions of self-regulatory organizations.
    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-2002-77 and should be submitted by April 3, 2003.
---------------------------------------------------------------------------

    \16\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
Margaret H. McFarland.
Deputy Secretary.
[FR Doc. 03-6076 Filed 3-12-03; 8:45 am]
BILLING CODE 8010-01-P