[Federal Register Volume 68, Number 109 (Friday, June 6, 2003)]
[Notices]
[Pages 34026-34027]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-14255]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47958; File No. SR-Phlx-2002-87]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc. and Amendment No. 1 
Thereto Relating to the Imposition of a 500 Contract Cap on Payment for 
Order Flow Fees

May 30, 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 26, 2002, the Philadelphia Stock Exchange, Inc. 
(``Phlx'') filed with the Securities and Exchange Commission the 
proposed rule change as described in Items I, II, and III, below, which 
the Phlx has prepared. The Phlx submitted Amendment No. 1 to the 
proposed rule change on May 29, 2003. 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 amend its options payment for order flow 
program by imposing a 500 contract cap per individual cleared side of a 
transaction. Specifically, the applicable payment for order flow fee 
would not apply to any contracts over 500, per individual cleared side 
of a transaction. For example, if a transaction consists of 750 
contracts by one Registered Options Trader (``ROT''), the applicable 
payment for order flow fee would be applied to, and capped at, 500 
contracts for that transaction. Also, if a transaction consists of 600 
contracts, but is divided equally among three ROTs, the 500 contract 
cap would not apply to any such ROT and each ROT would be assessed the 
applicable payment for order flow fee on 200 contracts, as the payment 
for order flow fee is assessed on a per ROT, per transaction basis.\3\ 
The Phlx is proposing to implement the 500 contract cap for trades 
settling on or after June 2, 2003.\4\
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    \3\ Currently, specialists may request reimbursement for payment 
for order flow funds in connection with any transactions to which 
they were not a party, based on the percentage of ROT monthly volume 
to total specialist and ROT monthly volume. The 500 contract cap 
would be imposed in connection with calculating the amount of the 
payment for order flow fee, and not for determining the percentage 
of ROT monthly volume to total specialist and ROT monthly volume.
    \4\ The proposed rule change specifies that the Phlx's fee 
schedule, entitled ``Exchange's ROT Equity Option Payment for Order 
Flow Charges,'' are subject to a 500 contract cap, by individual 
cleared side of a transaction. The Phlx's original rule change 
proposal included a fee schedule that was current as of December 
2002 but has been superseded by more recent schedules. The Phlx 
submitted Amendment No. 1 to the proposed rule change to indicate 
the current fee schedule and to propose that the cap be implemented 
for trades settling on or after June 2, 2003. See letter from Cindy 
Hoekstra, Counsel, Philadelphia Stock Exchange, to Patrick Joyce, 
Senior Counsel, Commission, dated May 29, 2003.
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    The text of the proposed rule change is available at the Phlx and 
at the Commission.

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 had 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

    The Phlx recently filed a rule change with the Commission to 
reinstate its payment for order flow program.\5\ Under

[[Page 34027]]

the program, Phlx ROTs are assessed a payment for order flow fee, per 
contract, per options issue, as set forth in the Phlx's ROT Equity 
Option Payment for Order Flow Charges Schedule, subject to certain 
exceptions.\6\
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    \5\ See Securities Exchange Act Release No. 47090 (December 23, 
2002), 68 FR 141 (January 2, 2003) (SR-Phlx-2002-75). The rule 
change proposal, which originally included the 500-contract cap that 
is the subject of the current proposal, became effective immediately 
upon filing with the Commission in November 2002. In December 2002, 
the Phlx amended the filing to remove the 500-contract cap. 
Accordingly, the 500 contract cap was in effect for only those 
trades executed on or after November 18 that settled through 
December 31, 2002.
    \6\ The payment for order flow fee does not apply to 
transactions between: (1) A ROT and a specialist; (2) a ROT and a 
ROT; (3) a ROT and a firm; and (4) a ROT and a broker-dealer. Also, 
the payment for order flow fee does not apply to index or foreign 
currency options.
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1. Purpose
    The purpose of the proposed rule change is to establish a 500 
contract cap, which the Phlx believes is reasonable and equitable 
because capping each trade with a 500 contract cap should provide 
sufficient payment for order flow funds for the specialists while 
lessening the economic burden on ROTs.\7\ In the Phlx's view, the 
imposition of a cap should provide increased liquidity and encourage 
competition in markets where ROTs may otherwise not be able to compete. 
Moreover, the Phlx believes that the absence of a cap would cause ROTs 
to incur expenses that may impair their ability to participate in a 
larger share of the market.
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    \7\ According to the Phlx, the imposition of a monetary cap has 
been implemented by other exchanges in connection with payment for 
order flow programs. See, e.g., Securities Exchange Act Release Nos. 
45240 (January 7, 2002), 67 FR 1531 (January 11, 2002) (SR-PCX-2001-
53) (implementing a ceiling on marketing charges of $200 per trade); 
46976 (December 9, 2002), 67 FR 77116 (December 16, 2002) (SR-ISE-
2002-26) (lowering the cap on each payment for order flow fund from 
$650,000 to $550,000).
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2. Statutory Basis
    The Phlx believes that its proposal to amend its schedule of dues, 
fees and charges is consistent with section 6(b) of the Act \8\ and 
furthers the objectives of sections 6(b)(4) and 6(b)(5) of the Act.\9\ 
The Phlx believes that the proposed rule change would serve as an 
equitable allocation of reasonable fees among Phlx members because the 
500 contract cap per individual cleared side of a transaction imposed 
in connection with the payment for order flow fee should lessen the 
economic burden on ROTs. Moreover, the Phlx believes that the 500 
contract cap should attract more order flow to the Phlx, which should 
result in increased liquidity, tighter markets, and more competition 
among exchange members, thereby promoting just and equitable principles 
of trade, removing impediments to and perfect the mechanism of a free 
and open market, and protecting investors and the public interest 
consistent with section 6(b)(5) of the Act.\10\
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(4) and 78f(b)(5).
    \10\ 15 U.S.C. 78f(b)(5).
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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.

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

    The Phlx did not solicit or receive written comments concerning the 
proposal.

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

    Within 35 days of the date 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 self-
regulatory organization 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 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-2002-87 and 
should be submitted by June 27, 2003.
    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-14255 Filed 6-5-03; 8:45 am]
BILLING CODE 8010-01-P