[Federal Register Volume 69, Number 62 (Wednesday, March 31, 2004)]
[Notices]
[Pages 17017-17019]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-7146]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49467; File No. SR-Phlx-2004-17]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto by 
the Philadelphia Stock Exchange, Inc. Relating to Equity and Index 
Option Fees

March 24, 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 February 27, 2004, 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 Phlx. On March 23, 
2004, the Phlx filed an amendment to the proposed rule change.\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\ See letter from Cynthia Hoekstra, Counsel, Phlx, to Nancy J. 
Sanow, Assistant Director, Division of Market Regulation, 
Commission, dated March 22, 2004 (``Amendment No. 1''). In Amendment 
No. 1, the Phlx clarified that the election of the fixed monthly fee 
program applies to the program's entire six-month period; explained 
that the volume used to determine the fixed monthly fee is 
determined on a per specialist unit basis; explained that in the 
event that a new specialist unit acquires the QQQ options and elects 
to enter the fixed monthly fee program from March 1, 2004 through 
August 31, 2004, the Exchange will file a separate proposed rule 
change to set forth the applicable months for the calculation of the 
volume; and made some minor changes to clarify the text of the 
proposed rule change.
---------------------------------------------------------------------------

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: (1) extend its current specialist unit fixed monthly fee (``fixed 
monthly fee'') and related Nasdaq-100 Index Tracking Stock 
(``QQQ'')SM \4\ license fee for a six-

[[Page 17018]]

month period to those specialist units enrolled in the Exchange's fixed 
monthly fee program; \5\ (2) offer a new fixed monthly fee program for 
a six-month period to those specialist units who are not enrolled in 
the current specialist unit fixed monthly fee program; and (3) make 
minor amendments to the fixed monthly fee program, such as allowing for 
specialist units to opt out of the fixed monthly fee program during the 
six-month period. The text of the proposed rule change, as amended, is 
available at the Phlx and at the Commission.
---------------------------------------------------------------------------

    \4\ 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 the 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.
    \5\ See Securities Exchange Act Release No. 48459 (September 8, 
2003), 68 FR 54034 (September 15, 2003) (SR-Phlx-2003-61).
---------------------------------------------------------------------------

Current Fee Structure Regarding the Fixed Monthly Fee and QQQ License 
Fee

    Currently, the Exchange offers specialist units \6\ the opportunity 
to elect to pay a fixed monthly fee in lieu of paying fees currently in 
effect for equity option and index option transaction charges and 
equity option specialist deficit (shortfall) fee (``shortfall fee'') 
(collectively ``variable fees'').\7\ The fixed monthly fee program 
applies to specialist units who have been actively trading an equity 
option or index option book on the Phlx trading floor in their capacity 
as a specialist unit in at least one equity option or index option book 
for at least one year from September 1, 2002. In addition, a $0.10 
charge per contract side for specialist unit transactions in the QQQ 
equity options (``QQQ license fee'') is imposed if the specialist unit 
elects to pay the fixed monthly fee. This fee is in addition to the 
fixed monthly fee.\8\ The current fixed monthly fee and QQQ license fee 
were scheduled to be in effect through February 29, 2004. Phlx proposes 
to extend the current fixed monthly fee and related QQQ license fee for 
an additional six-month period until August 31, 2004.
---------------------------------------------------------------------------

    \6\ The Exchange uses the terms ``specialist'' and ``specialist 
unit'' interchangeably herein.
    \7\ The fixed monthly fee program does not affect additional 
charges, such as non-transaction and membership-related charges 
listed on Appendix A of the Exchange's schedule of dues, fees and 
charges. See Securities Exchange Act Release No. 48459 (September 8, 
2003), 68 FR 54034 (September 15, 2003) (SR-Phlx-2003-61).
    \8\ The $0.10 fee does not apply if the specialist unit elects 
to pay the current equity option and index option transaction 
charges, and the applicable shortfall fees.
---------------------------------------------------------------------------

Proposed New Fixed Monthly Fee

    In addition, the Phlx proposes to offer a new fixed monthly fee 
program to specialist units who are not enrolled in the current 
program, but who have been trading an equity option 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 nine months as of March 
1, 2004. These specialist units may elect to enter into the proposed 
fixed monthly fee program and pay the fixed monthly fee, in lieu of the 
variable fees, based on the calculation listed below:
    1. Compute the equity options and index options volume that each 
specialist unit transacted in October 2003, November 2003 and December 
2003 (``Volume'') provided it has been a Phlx specialist unit for at 
least nine months as of March 1, 2004;
    2. Multiply the Volume by the specialist transaction charges 
currently in effect (i.e., $0.21 per contract for equity options and 
$0.24 per contract for index options). The total of these transaction 
charges are added together to arrive at a total for the period (``Total 
Transaction Charges''); \9\
---------------------------------------------------------------------------

    \9\ This calculation is comparable to the current fixed monthly 
fee program except in the case of a specialist unit trading QQQ 
options. Currently for QQQ options, the May 2003 and June 2003 QQQ 
equity options volume is subtracted from the May 2003 and June 2003 
total equity and index option volumes; that figure is then 
multiplied by the current equity option transaction charge 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 are then followed, 
using the applicable months of May 2003 and June 2003. Then, all QQQ 
equity option transactions to which the specialist unit is a party 
incurs an additional $0.10 per contract, which is added to the 
specialist unit's fixed fees. This calculation is used due to the 
fact that the specialist unit currently trading the QQQ options has 
elected the fixed monthly fee program and therefore there are no 
changes to the QQQ options calculation at this time. In the unlikely 
event that a new specialist unit acquires the QQQ options from March 
1, 2004 through August 31, 2004 and elects to enter the fixed 
monthly fee program during this time period, the Exchange will file 
a separate proposed rule change to set forth the applicable volume 
statistics.
---------------------------------------------------------------------------

    3. For equity options, calculate for that month the shortfall fee 
at the current rate (currently 12%, with a monthly limit of $10,000 per 
option, if applicable) for the months of October 2003, November 2003 
and December 2003; \10\
---------------------------------------------------------------------------

    \10\ See Securities Exchange Act Release Nos. 48207 (July 22, 
2003), 68 FR 44558 (July 29, 2003) (notice of filing and immediate 
effectiveness of SR-Phlx-2003-47) and 48206 (July 22, 2003), 68 FR 
44555 (July 29, 2003) (notice of filing and immediate effectiveness 
of SR-Phlx-2003-45).
---------------------------------------------------------------------------

    4. Add the Total Transaction Charges with the shortfall fee 
calculation, if applicable, divide the total by three, and multiply the 
quotient by 1.062, which will produce the fixed monthly fee.
    For both the extension of the current fixed monthly fee and the 
proposed fixed monthly fee, a specialist unit or its successor 
organization may, by the 15th day of the billing month, select the 
fixed monthly fee applicable to that specialist unit for subsequent 
months.\11\ A specialist unit being charged the fixed monthly fee may 
return to the variable fee method, if it notifies the Exchange, in 
writing, thirty days prior to the beginning of the calendar month in 
which the specialist unit wishes to return to the variable fee 
method.\12\
---------------------------------------------------------------------------

    \11\ For example, if a specialist unit wishes to select the 
fixed monthly fee beginning April 1, 2004, it must notify the 
Exchange in writing by March 15, 2004. The fixed monthly fee will 
not be implemented retroactively. If the 15th of a month is not a 
business day, the specialist unit may select the fixed monthly fee 
program by the next business day. The requirement that a specialist 
unit elect the fixed rate by the 15th of the billing 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 March 1, 2004, specialists will have the opportunity to 
select the applicable fixed monthly fee until 9 a.m. on March 1, 
2004.
    \12\ The Exchange intends to distribute administrative 
procedures to the specialist units to follow in connection with 
choosing the fixed monthly fee or returning to the variable fee 
method.
---------------------------------------------------------------------------

    The other methodologies relating to the fixed monthly fee, such as 
acquiring an equity option or index option book already traded on the 
Exchange, obtaining a book as a result of a new Exchange listing or 
trading an equity option or index option book that does not have a 
complete two month volume, as outlined on the Exchange's fee schedule, 
will remain unchanged.\13\
---------------------------------------------------------------------------

    \13\ See Securities Exchange Act Release No. 48459 (September 8, 
2003), 68 FR 54034 (September 15, 2003) (SR-Phlx-2003-61). While the 
calculation methodology will remain the same, the applicable time 
periods (i.e., May and June 2003 or October, November, and December 
2003) will be used in the calculations.
---------------------------------------------------------------------------

    The Exchange also proposes to make minor amendments to its fee 
schedule to clarify existing language and to delete superfluous 
language.
    The current fixed monthly fee and related QQQ license fee and the 
proposed new fixed monthly fee as described in this proposal are 
scheduled to become effective for transactions settling on or after 
March 1, 2004 through August 31, 2004.

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

[[Page 17019]]

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 allow the current 
fixed monthly fee program and the related QQQ license fee to continue 
for an additional six-month period and allow additional specialist 
units the opportunity to elect the fixed monthly fee program. According 
to the Exchange, the fixed monthly fee program should create an 
incentive for specialist units to bring in more business, above the 
fixed monthly fee 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. The additional six-month 
period should also give the Exchange the opportunity to further 
evaluate the fixed monthly fee program. According to the Phlx, making 
minor amendments to its monthly fixed fee program and to its fee 
schedule to clarify existing language and delete superfluous language 
should minimize member confusion relating to the implementation of the 
fixed monthly fee.
2. Statutory Basis
    The Exchange believes that its proposal to amend its schedule of 
dues, fees and charges is consistent with Section 6(b) of the Act \14\ 
in general, and furthers the objectives of Section (6)(b)(4) of the Act 
\15\ in particular, in that it is an equitable allocation of reasonable 
dues, fees, and other charges among Exchange members. The Exchange 
continues to believe that the fixed monthly fee program offers a fee 
alternative that has attracted additional business to the Exchange and 
therefore believes that the program should be extended for an 
additional six-month period. The Exchange believes that offering the 
fixed monthly fee program to additional specialist units should 
similarly attract additional business. The Exchange has determined to 
use volumes from a more recent time period (October through December 
2003 as opposed to May through June 2003) to calculate the applicable 
fee for specialist units selecting the fixed monthly fee for the first 
time, in order to utilize a more current benchmark. The Exchange 
believes that it is reasonable and fair to apply to specialists not 
enrolled in the current fixed monthly fee program volumes from a more 
recent time period than for specialists previously subject to the 
program, because specialists previously subject to the program have 
known and relied upon the way the program operated in the original 
pilot to attract order flow and build their business model. The 
Exchange believes that if it were to change the time periods from which 
the volumes are calculated, particularly if the resulting fixed monthly 
fee is higher, it would change the specialist units' expectation and 
adversely affect their business decisions with a financial penalty for 
accomplishing the objectives of bringing new business to the Exchange. 
Therefore the Exchange believes that offering the fixed monthly fee 
program to additional specialist units, although with volume statistics 
attributable to a more recent time period, should give them the 
opportunity to enter the fixed monthly fee program based on more recent 
activity which, in turn, should reflect their current business 
objectives.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78f(b).
    \15\ 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 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 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, as amended, has become 
effective pursuant to Section 19(b)(3)(A)(ii) of the Act \16\ and Rule 
19b-4(f)(2)\17\ thereunder, because it changes a fee imposed by the 
Exchange. 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.\18\
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \17\ 17 CFR 240.19b-4(f)(2).
    \18\ For purposes of calculating the sixty-day abrogation 
period, the Commission considers the period to commence on March 23, 
2004, the date on which the Phlx filed Amendment No. 1.
---------------------------------------------------------------------------

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 may also be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-Phlx-2004-17. 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 
hardcopy or by e-mail but not by both methods. 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-2004-17 and should be 
submitted by April 21, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
---------------------------------------------------------------------------

    \19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-7146 Filed 3-30-04; 8:45 am]
BILLING CODE 8010-01-P