[Federal Register Volume 68, Number 178 (Monday, September 15, 2003)]
[Notices]
[Pages 54034-54037]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-23416]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48459; File No. SR-Phlx-2003-61]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. Relating to Equity and Index Option Fees

September 8, 2003.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and rule 19b-4\2\ thereunder, notice is hereby given that 
on August 29, 2003, the Philadelphia Stock Exchange, Inc. (``Exchange'' 
or ``Phlx'') 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 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

    Phlx proposes to amend its schedule of dues, fees, and charges to 
adopt the following equity option and index option fees: (1) A cap of 
$50,000 per member organization on all ``firm-related'' equity option 
and index option comparison and transaction charges combined; (2) a 
license fee of $0.10 per contract side for Firm/Proprietary and Firm/
Proprietary Facilitation transactions in the Nasdaq-100 Index Tracking 
Stock (``QQQ'')SM\3\ equity

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options to be imposed after the $50,000 firm-related equity and index 
option comparison and transaction cap is reached; (3) a specialist unit 
fixed monthly fee (``fixed monthly fee'') in lieu of paying the rate 
currently in effect for equity and index option transaction charges and 
equity option specialist deficit (shortfall) fee (``Shortfall Fee''); 
and (4) a charge of $0.10 per contract side for specialist unit 
transactions in the QQQ equity options, if the specialist unit elects 
to pay a fixed monthly fee.
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    \3\ The Nasdaq-100[reg], Nasdaq-100 
Index[reg], Nasdaq[reg], The Nasdaq Stock 
Market[reg], Nasdaq-100 SharesSM, Nasdaq-100 
TrustSM, Nasdaq-100 Index Tracking StockSM, 
and QQQSM 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 TrustSM, or the beneficial 
owners of Nasdaq-100 SharesSM. According to Phlx, 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.
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A. $50,000 ``Firm-Related'' Equity Option and Index Option Cap

    The Exchange is proposing to adopt a cap of $50,000 per member 
organization \4\ on all ``firm-related'' equity option and index option 
comparison and transaction charges combined. Specifically, ``firm-
related'' charges include equity option firm/proprietary comparison 
charges, equity option firm/proprietary transaction charges, equity 
option firm/proprietary facilitation transaction charges, index option 
firm (proprietary and customer executions) comparison charges, and 
index option firm transaction charges. Therefore, under this proposal, 
such firm-related charges for equity option and index options, in the 
aggregate for one billing month, would not exceed $50,000 per month per 
member organization.
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    \4\ This proposal applies to member organizations for orders for 
the proprietary account of any member or non-member broker-dealer 
that derives more than 35% of its annual, gross revenues from 
commissions and principal transactions with customers. Member 
organizations will be required to verify this amount to the Exchange 
by certifying that they have reached this threshold by submitting a 
copy of their annual report, which was prepared in accordance with 
Generally Accepted Accounting Principles (``GAAP''). In the event 
that a member organization has not been in business for one year, 
the most recent quarterly reports, prepared in accordance with GAAP, 
will be accepted. See Securities Exchange Act Release No. 43558 
(November 14, 2000), 65 FR 69984 (November 21, 2000). As part of 
this proposal, this footnote will be included on the Phlx Summary of 
Equity Option and Index Option fee schedules.
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B. QQQ Equity Option License Fee of $0.10 Per Contract Side for Equity 
Option Firm/Proprietary and Firm/Proprietary Facilitation Transactions

    The Exchange is proposing to adopt a license fee of $0.10 per 
contract side for equity option Firm/Proprietary and Firm/Proprietary 
Facilitation transactions in QQQ equity options to be imposed after the 
$50,000 firm-related equity option and index option comparison and 
transaction cap, as described above, is reached. Therefore, when a 
member organization exceeds the $50,000 cap (comprised of firm-related 
equity option and index option comparison and transaction charges 
combined), the firm will be charged $50,000 plus the QQQ license fee of 
$0.10 per contract side for any QQQ trades (if any) over those trades 
that were included in reaching the $50,000 level. The $0.10 license fee 
for firm/proprietary and firm/proprietary facilitation transactions is 
in addition to the proposed $50,000 cap, if the cap is reached, on 
``firm-related'' equity option and index option comparison and 
transaction charges.\5\
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    \5\ See Exhibit 3 to the Phlx's Form 19b-4, which provides 
examples of how the QQQ license fee will be calculated. Exhibit 3 to 
the Form 19b-4 is available for review at the Phlx and the 
Commission.
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C. Specialist Unit Fixed Monthly Fee

    Currently, Phlx equity option specialists are charged equity option 
transaction charges and specialist deficit fees, while index option 
specialists are charged index option transaction charges.\6\ Phlx 
specialist units that have been active \7\ on the Phlx for at least one 
year from September 1, 2002, may now elect to continue paying the 
above-referenced charges or, in lieu of these charges, to pay a fixed 
monthly fee as more fully described below. The fixed monthly fee for 
each specialist unit will be calculated by:
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    \6\ This proposal does not affect or alter the charges listed on 
Appendix A of the Exchange's Schedule of Dues, Fees, and Charges. 
Specialist units will continue to be charged applicable non 
transactional-related fees and membership-related fees that appear 
on Appendix A of the Exchange's schedule of dues, fees and charges. 
Non transactional-related fees include floor-related fees, such as 
trading post/booth, controller space, floor facility, and shelf 
space fees, as well as communication charges such as direct wire to 
the floor, telephone system and execution services/communication 
charges. Specialist units will also continue to be charged 
applicable membership-related fees, such as membership dues, 
application fees, and initiation, transfer, examinations, and 
technology fees.
    \7\ In order to be eligible for the fixed monthly fee, the 
specialist unit must have been trading an equity or index option 
book on the Phlx trading floor in their capacity as a specialist 
unit with Phlx equity option or index option transactions in at 
least one equity option or index option book, for at least one year 
from September 1, 2002.

    1. Computing the equity options and index options volume that 
each unit transacted in May 2003 and June 2003 (``Volume''), 
provided it has been a Phlx specialist unit for a one-year period 
(from September 1, 2002);
    2. Multiplying the Volume by the specialist transaction charges 
that are currently in effect, (i.e., $0.21 per contract for equity 
options and $0.24 per contract for index options). The total of the 
equity and index option transaction charges are added together to 
arrive at the total for the period (``Total Transaction 
Charges'');\8\
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    \8\ In the case of the specialist unit trading QQQ options, the 
calculation is slightly different. The May 2003 and June 2003 QQQ 
equity options volume will be subtracted from the May 2003 and June 
2003 total equity and index option volumes; that figure will then be 
multiplied by the current equity option charge ($0.21 per equity 
option contract) and then added to the product of $0.11 multiplied 
by the May 2003 and June 2003 QQQ equity options volume (the $0.10 
license fee owed to Nasdaq subtracted from the $0.21 charge). Steps 
3 and 4 above are then followed. Then, all QQQ equity option 
transactions to which the specialist unit is a party will incur an 
additional $0.10 per contract, which will be added to the specialist 
unit's fixed fees. See Exhibit 3 to Phlx's Form 19b-4, which is 
available for review at the Phlx and the Commission.
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    3. For equity options, calculating for that month the Shortfall Fee 
at the current rate (currently 12%, with a monthly limit of $10,000, if 
applicable) for the months of May 2003 and June 2003; \9\ and
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    \9\ See Securities Exchange Act Release Nos. 48207 (July 22, 
2003), 68 FR 44558 (July 29, 2003) (notice of filing and immediate 
effectiveness of File No. SR-Phlx-2003-47) and 48206 (July 22, 
2003), 68 FR 44555 (July 29, 2003) (notice of filing and immediate 
effectiveness of File No. SR-Phlx-2003-45).
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    4. Adding the Total Transaction Charges with the Shortfall Fee 
calculation, if applicable, dividing the total by two, and multiplying 
the quotient by 1.062, which will produce the fixed monthly fee.
    For a specialist unit that has selected the fixed monthly fee and 
acquires, after September 1, 2003, an equity or index option book 
already traded on the Exchange, a similar methodology described to 
calculate the fixed monthly fee is applied to that specialist unit's 
book. In this case, the same 2 months volume (May 2003 and June 2003) 
will be multiplied by the applicable specialist transaction fee of 
$0.21 or $0.24 applicable to the acquired options book. If applicable, 
any shortfall fee will be recalculated as described in step 3 above, 
with the totals for May 2003 and June 2003 added together. These 
aggregate totals will then be divided by two and the result then 
multiplied by 1.062 to arrive at the fixed monthly fee for that options 
book. That fee is then added to the acquiring specialist unit's fixed 
monthly fee for all other equity and index options.
    For a specialist unit who has selected the fixed monthly fee and 
who obtains a book after September 1, 2003 as a result of a new 
Exchange listing, the methodology used to calculate the fixed fee for 
the newly listed Exchange equity or index option books will be the 
average of the two-previous months' national volume multiplied by 12% 
with that product multiplied by 21%,

[[Page 54036]]

which is then multiplied by the specialist unit's current transaction 
charge of $0.21.\10\
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    \10\ The 12% represents the Exchange's shortfall target, the 21% 
represents the average contract sides to which specialists are a 
party, and the $0.21 represents the current specialist equity option 
transaction charge.
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    In both cases, for requests after September 1, 2003, if the equity 
or index option book does not have a complete two months' volume, the 
then-current transaction charge is used until that option book trades 
for two full calendar months nationally, after which the above-
methodology is applied.
    A specialist unit may, by the 15th day of the current billing 
month, select the fixed monthly fee for the following month,\11\ 
provided the specialist unit has been an active Phlx equity or index 
specialist unit for one year from September 1, 2002.\12\ In the case 
where a specialist unit has operated for less than one year, that unit 
is eligible for the fixed monthly fee on the first business day of the 
next full calendar month following its one-year anniversary.\13\
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    \11\ For example, if a specialist unit wishes to select the 
fixed monthly fee beginning on October 1, 2003, it must notify the 
Exchange by September 15, 2003. The fixed monthly fee will not be 
implemented retroactively. If the 15th of a month is not a business 
day, then the specialist unit may select the fixed monthly fee 
method by the next business day. The Exchange intends to distribute 
to the specialist units administrative procedures to follow in 
connection with choosing the fixed monthly fee methodology. The 
requirement that a specialist unit elect the fixed rate by the 15th 
of the month will be waived for the first month. Therefore, due to 
the fact that this proposal is scheduled to become effective for 
transactions settling on or after September 1, 2003, specialists 
will have the opportunity to select the fixed monthly fee until 9:00 
a.m. on September 2, 2003.
    \12\ Specialist units must elect to participate in the monthly 
fixed fee program. Therefore, if no election is made, the specialist 
unit would continue to pay the rate currently in effect for equity 
and index option transaction charges and equity option specialist 
deficit (shortfall) fee.
    \13\ For example, if the one-year anniversary is on October 4, 
the specialist unit is eligible to select the fixed monthly fee by 
October 15 and the fixed monthly fee will then be in effect 
beginning November 1.
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    The fixed monthly fee will be in effect through February 29, 2004. 
If a specialist unit elects the fixed monthly fee, it must remain in 
the fixed monthly fee program through February 29, 2004.\14\
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    \14\ See Exhibit 3 to Phlx's Form 19b-4, which is available for 
review at the Phlx and the Commission.
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D. QQQ Equity Option License Fee of $0.10 Per Contract Side for Equity 
Option When the Specialist Unit Elects a Fixed Monthly Rate

    A charge of $0.10 per contract side for all specialist unit 
transactions in the QQQ equity options is proposed if the specialist 
unit elects to pay a fixed monthly fee.\15\ This fee is in addition to 
the fixed monthly fee.
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    \15\ As previously discussed, under this proposal, specialist 
units may elect to pay a fixed monthly fee in lieu of specialist 
equity and index option transaction charges and equity option 
shortfall fees. Therefore, this $0.10 fee would be in addition to 
the fixed monthly fee, but does not apply if specialist units elect 
to pay the current equity option and index option transaction 
charges, and equity option specialist deficit (shortfall) fees.
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    The above-referenced proposals are scheduled to become effective 
for transactions settling on or after September 1, 2003. In connection 
with the specialist fixed monthly fee proposal and the related QQQ 
license fee proposal, the proposals will be in effect through February 
29, 2004.\16\
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    \16\ Therefore, for transactions settling on or after March 1, 
2004, the fixed monthly fee and the charge of $0.10 per contract 
side to specialists for transactions in the QQQ equity options when 
the specialist unit elects to pay the fixed monthly fee will no 
longer be available and will be removed from the Phlx fee schedule 
unless a separate proposed rule change is filed to the contrary. The 
$50,000 ``firm-related'' equity option and index option cap and the 
related QQQ license fee charge of $0.10 per contract side for equity 
option firm/proprietary and firm/proprietary facilitation 
transactions that is imposed after the $50,000 firm equity and index 
option comparison and transaction cap is reached, will remain in 
effect.
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    The text of the proposed rule change is available at the Phlx and 
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, 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. 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
    In general, the purpose of the proposed rule change is to promote 
equity option and index option business on the Phlx. Specifically, in 
connection with the $50,000 ``firm-related'' cap, the Exchange believes 
this proposal offers an incentive for firms to transact more volume on 
the Phlx floor. An increase in firm orders should provide more trading 
opportunities for floor members, thereby increasing revenue potential 
to the membership, in addition to increasing revenue to the Exchange. 
In connection with the firm-related equity option and index option cap, 
the purpose of including the footnote related to equity option and 
index option ``firm'' transactions is to clarify to whom the firm-
related charges apply.\17\
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    \17\ See note 4 infra.
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    The purpose of the QQQ license fee is to adopt a fee for trading in 
the QQQ options to defray licensing costs associated with the trading 
of this product. Also, in connection with the specialist fixed fee, 
this proposal offers the opportunity for a specialist unit to choose a 
fixed monthly fee in lieu of paying the rate currently in effect for 
equity and index option transaction charges and the equity option 
Shortfall Fee. The Exchange staff has noted that some specialist units 
prefer knowing the exact cost of their equity and index option 
transactions; thus, allowing them to budget accordingly, and adjust 
their business models and strategies to meet these fixed costs. In 
addition, the fixed fee should create an incentive to bring in more 
business, above the fixed amount, which would be free of additional 
transaction charges assessed on specialist units. Additional order flow 
may generate transaction fees on the contra side that, in turn, may 
generate additional revenue for the Exchange.
2. Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act,\18\ in general, and with Section 6(b)(4) of 
the Act,\19\ in particular, in that it is designed to provide for the 
equitable allocation of reasonable dues, fees, and other charges among 
its members.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(4).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    The foregoing proposed rule change has become effective pursuant to

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Section 19(b)(3)(A)(ii) of the Act \20\ and subparagraph (f)(2) of Rule 
19b-4 \21\ thereunder, because it establishes or changes a due, fee, or 
other charge.
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    \20\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \21\ 17 CFR 240.19b-4(f)(2).
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    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.\22\
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    \22\ See 15 U.S.C. 78s(b)(3)(C).
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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. Copies of such filing will also be 
available for inspection and copying at the principal office of Phlx. 
All submissions should refer to File No. SR-Phlx-2003-61 and should be 
submitted by October 6, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-23416 Filed 9-12-03; 8:45 am]
BILLING CODE 8010-01-P