[Federal Register Volume 69, Number 27 (Tuesday, February 10, 2004)]
[Notices]
[Pages 6358-6360]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-2810]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49173; File No. SR-Phlx-2004-07]


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 Communications 
Networks

February 2, 2004.
    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 January 28, 2004, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``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 Exchange proposes to extend the Exchange's current pilot 
program for an additional one-year period (until January 31, 2005), 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 current 
pilot program is scheduled to expire on January 31, 2004.\4\ The $2,500 
fee would continue to apply to ECN trades where the ECN is not acting 
as a specialist or a floor broker, but rather an order flow provider. 
This fee is in lieu of the equity transaction value charge that would 
normally apply to (non-specialist) equity trades.
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    \3\ As stated on the Phlx fee schedule, ECNs 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; except that the term ECN shall not 
include: any system that crosses multiple orders at one or more 
specified times at a single price set by the ECN (by 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 that executes customer orders 
primarily against the account of such market maker as principal, 
other than riskless principal. See SEC Rule 11Ac1-1(a)(8). The 
Exchange is herein proposing minor changes to this definition, which 
appears on the fee schedule, to correct inconsistencies between the 
text of the SEC Rule 11Ac1-1(a)(8) and the text that appears on the 
Exchange's fee schedule.
    \4\ See Securities Exchange Act Release No. 47120 (January 3, 
2003), 68 FR 1498 (January 10, 2003) (Notice of Filing and Immediate 
Effectiveness of SR-Phlx-2002-83, extending the ECN fee pilot 
program until January 31, 2004). See also Securities Exchange Act 
Release Nos. 44155 (April 5, 2001), 66 FR 19274 (April 13, 2001) 
(Notice of Filing and Immediate Effectiveness of SR-Phlx-2001-09, 
adopting the ECN fee program on a pilot basis); and 45456 (February 
19, 2002), 67 FR 8831 (February 26, 2002) (Notice of Filing and 
Immediate Effectiveness of SR-Phlx-2002-08, extending the ECN fee 
pilot program until January 31, 2003).
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    The text of the proposed rule change is available at the Office of 
the Secretary, 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, 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
    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, 2005. 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.\5\
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    \5\ To recoup costs due from the Exchange to the Commission 
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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[[Page 6359]]

    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 
initial program. The $2,500 fee would continue to apply to ECNs that 
are not acting as a Phlx specialist or floor broker.\6\
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    \6\ An ECN would also continue to incur certain license fees and 
other fees as specified on the Exchange's schedule of dues, fees and 
charges. In addition, an ECN would continue to incur specialist or 
equity floor brokerage transaction fees if it acts as a Phlx 
specialist or floor broker.
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    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 could be subject to various floor-
related fees respecting its floor operation.\7\ In addition, an ECN's 
transactions as a floor broker would be subject to the equity 
transaction charge and its specialists would be subject to other 
charges. \8\ Even if the ECN was 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. 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.
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    \7\ According to the Exchange, 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.
    \8\ For example, certain license fees may apply to specialists, 
and the Equity Floor Brokerage Assessment and Equity Floor Brokerage 
Transaction Fee apply to floor brokerage activity.
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    An ECN would also continue to be subject to, if applicable, the 
following membership-related fees: Foreign Currency User Fees, 
Application Fee, Initiation Fee, Transfer Fee for Foreign Currency 
Options Participations, Phlx CCH Guide Fee, Examinations Fee, Review/
Process Subordinated Loans Fee, Registered Representative Registration 
fees, Trading Floor Personnel Registration Fee, Off-Floor Trader 
Initial Registration Fee and Annual Fee, and Remote Specialist fees.\9\
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    \9\ In a separate proposed rule change, the Exchange states that 
it amended its schedule of dues, fees, and charges to adopt permit 
fees in connection with the Exchange's recent demutualization and to 
make other related post-demutualization fee changes. Pursuant to 
that proposal, permit fees were adopted and certain fees were 
deleted from the Exchange's fee schedule. For example, fees that 
were deleted included membership dues, charges relating to Equity 
Trading Permits, Foreign Currency Options Participation fee, 
Technology Fee for Exchange members and for Foreign Currency Options 
Participants who do not hold legal title to a Phlx membership. 
References to the capital funding fee and monthly credit were also 
deleted and the Foreign Currency User Fee was increased. See 
Securities Exchange Act Release No. 49157 (January 30, 2004) (Notice 
of Filing and Immediate Effectiveness of SR-Phlx-2004-02). This 
proposal became effective for new members and participants upon the 
issuance of permits when the Exchange's demutualization became 
effective (January 20, 2004). Pre-demutualization membership-related 
fees will remain in effect for then current members, participants, 
and member and participant organizations for the month of January 
2004.
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    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 charge (that would otherwise apply to an ECN's 
equity trades) ranges, based on share volumes, 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 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. 
Additional order flow should enhance liquidity, and improve 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 the proposed rule change is consistent 
with Section 6(b) of the Act,\10\ in general, and furthers the 
objectives of Section 6(b)(4) of the Act,\11\ in particular, by 
providing for the equitable allocation of reasonable dues, fees and 
other charges among its members due to the unique character of ECNs, 
and because 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 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

    The foregoing rule change establishes or changes a due, fee, or 
charge imposed by the Exchange and, therefore, has become effective 
upon filing pursuant to Section 19(b)(3)(A)(ii) of the Act \12\ and 
Rule 19b-4(f)(2) thereunder.\13\ 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 purpose of 
the Act.
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    \12\ 15 U.S.C. 78(s)(b)(3)(A)(ii).
    \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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
Comments should be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-Phlx-2004-07. This file number should be included on the 
subject line if e-mail is used. To help the Commission process and 
review your comments more efficiently, comments should be sent in hard 
copy or by e-mail but not by both methods. Copies of the submission, 
all subsequent amendments, all written statements

[[Page 6360]]

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 will also be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-Phlx-2004-07 and 
should be submitted by March 2, 2004.

    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. 04-2810 Filed 2-9-04; 8:45 am]
BILLING CODE 8010-01-P