[Federal Register Volume 69, Number 192 (Tuesday, October 5, 2004)]
[Notices]
[Pages 59636-59640]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2489]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50471; File No. SR-PHLX-2004-60]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. Relating to its Equity Options Payment for Order Flow 
Program

September 29, 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 September 22, 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 Exchange. The Phlx 
has designated this proposal as one changing a fee imposed by the Phlx 
under Section 19(b)(3)(A)(ii) of the Act\3\ and Rule 19b-4(f)(2) 
thereunder,\4\ which renders the proposal effective upon filing with 
the Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
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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 schedule of dues, fees, and charges 
to revise its equity options payment for order flow program.

Equity Options Payment for Order Flow Program Prior to September 22, 
2004

    The Exchange recently amended its equity options payment for order 
flow program.\5\ Pursuant to that program, for trades settling on or 
after August 2, 2004, the Exchange assessed a payment for order flow 
fee as follows when Registered Options Traders (``ROTs'') traded 
against a customer order: (1) $1.00 per contract for options on the 
Nasdaq-100 Index Tracking StockSM traded under the symbol 
QQQ;\6\ and (2) $0.35 per contract for all other equity options. The 
ROT payment for order flow fee is not assessed on transactions between: 
(1) A specialist and a ROT; (2) a ROT and a ROT; (3) a ROT and a 
firm;\7\ and (4) a ROT and a broker-dealer.\8\ The ROT payment for 
order flow fee does not apply to index options or foreign currency 
options. Accordingly, the ROT payment for order flow fee applies, in 
effect, to equity option transactions between a ROT and a customer. In 
addition, a 500 contract cap per

[[Page 59637]]

individual cleared side of a transaction is imposed.\9\
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    \5\ See SR-Phlx-2004-50 and SR-Phlx-2004-56. See infra note 19 
for a discussion of the status of these filings.
    \6\ QQQ is currently the most actively-traded equity option. The 
Nasdaq-100[supreg], Nasdaq-100 Index[supreg], Nasdaq[supreg], The 
Nasdaq Stock Market[supreg], 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[supreg] 
(``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. 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.
    \7\ For the purposes of the equity options payment for order 
flow program, a firm is defined as a proprietary account of a member 
firm, and not the account of an individual member.
    \8\ For purposes of the equity options payment for order flow 
program, broker-dealer orders are orders, entered from other than 
the floor of the Exchange, for any account (i) in which the holder 
of beneficial interest is a member or non-member broker-dealer or 
(ii) in which the holder of beneficial interest is a person 
associated with or employed by a member or non-member broker-dealer. 
This includes orders for the account of an ROT entered from off-the-
floor.
    \9\ Under the Exchange's equity options payment for order flow 
program, a 500 contract cap per individual cleared side of a 
transaction is imposed. Thus, the applicable payment for order flow 
fee is imposed only on the first 500 contracts, per individual 
cleared side of a transaction. For example, if a transaction 
consists of 750 contracts by one 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 equally divided 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. See Securities Exchange Act Release Nos. 47958 (May 30, 
2003), 68 FR 34026 (June 6, 2003) (proposing SR-Phlx-2002-87); and 
48166 (July 11, 2003), 68 FR 42450 (July 17, 2003) (approving SR-
Phlx-2002-87). See also SR-Phlx-2004-50.
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    Specialist units\10\ elect to participate or not to participate in 
the program in all options in which they are acting as a specialist by 
notifying the Exchange in writing no later than five business days 
prior to the start of the month.\11\ If electing not to participate in 
the program, the specialist unit waives its right to any reimbursement 
of payment for order flow funds for the month(s) during which it 
elected to opt out of the program.\12\
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    \10\ The terms ``specialist'' and ``specialist unit'' are used 
interchangeably herein.
    \11\ A specialist unit must notify the Exchange in writing to 
either elect to participate or not to participate in the program. 
Once a specialist unit has either elected to participate or not to 
participate in the Exchange's equity options payment for order flow 
program in a particular month, it is not required to notify the 
Exchange in a subsequent month, as described above, if it does not 
intend to change its participation status. For example, if a 
specialist unit elected to participate in the program and provided 
the Exchange with the appropriate notice, that specialist unit would 
not be required to notify the Exchange in the subsequent month(s) if 
it intends to continue to participate in the program. However, if it 
elects not to participate (a change from its current status), it 
would need to notify the Exchange in accordance with the 
requirements stated above.
    \12\ For any month (or part of a month where an option is 
allocated mid-month) the specialist unit has elected to opt out of 
the program, no ROT payment for order flow fee will apply.
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    Specialist units may opt out entirely from the equity options 
payment for order flow program, as long as they notify the Exchange in 
writing by the 15th of the month.\13\ If a specialist unit opts out of 
the program by the 15th of the month, no payment for order flow charges 
will be incurred for either the specialist unit or ROTs for 
transactions in the affected options for that month.
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    \13\ If the 15th of the month is not a business day, the 
specialist unit may notify the Exchange of its desire to opt out of 
the program by the next business day.
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    If a specialist unit opts into the program, and does not request 
reimbursement of at least 50% of the total amount of payment for order 
flow funds collected from ROTs in the options for which that specialist 
unit is acting as the specialist, then that specialist unit will be 
required to pay payment for order flow fees for that month at the same 
rate as the ROTs.
    The Exchange bills the ROTs and collects the payment for order flow 
fees from the ROTs on a monthly basis.\14\ The collected funds will be 
used by each specialist unit to reimburse it for monies expended to 
attract options orders to the Phlx by making payments to order flow 
providers who provide order flow to the Exchange. Each specialist will 
establish the amounts that will be paid to order flow providers. 
Specialists receive their respective funds only after submitting an 
Exchange certification form identifying the amount of the requested 
funds.\15\ Because the specialists are not being charged the payment 
for order flow fee for their own transactions, they may not request 
reimbursement for order flow funds in connection with any transactions 
to which they were a party.\16\
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    \14\ Originally, in filing SR-Phlx-2004-50, the Exchange 
proposed that the collected payment for order flow fees be combined 
in one account to form a ``pool.'' If, after taking into account all 
requests for reimbursement in a given month, the amount in the pool 
would be insufficient to satisfy all such requests, then the 
reimbursement requests would be reduced on a proportionate basis 
among the requesting specialists for that month based on contracts 
executed by ROTs in the specialists' respective options. The amount 
by which the requests exceed the proportionate reimbursement may not 
be recovered in future months (and would not carry forward as claims 
against the pool). If there were any excess funds after monthly 
reimbursements, those funds would carry forward to be used for 
future requests. The Exchange subsequently proposed to amend this 
aspect of its equity options payment for order flow program. For the 
month of August 2004, the Exchange has proposed to require 
specialists to request reimbursement for payment for order flow 
funds on an option-by-option basis and that any excess payment for 
order flow funds collected but not reimbursed to specialists would 
be rebated back to the affected ROTs on an option-by-option basis. 
See SR-Phlx-2004-61.
    \15\ While all determinations concerning the amount that will be 
paid for orders and which order flow providers shall receive these 
payments will be made by the specialists, the specialists will 
provide to the Exchange on an Exchange form certain information, 
such as what firms they paid for order flow, the amount of the 
payment and the price paid per contract. The purpose of the form, in 
part, is to assist the Exchange in determining the effectiveness of 
the proposed fee and to account for and track the funds transferred 
to specialists, consistent with normal bookkeeping and auditing 
practices. In addition, certain administrative duties will be 
provided by the Exchange to assist the specialists.
    \16\ The amount a specialist may receive in reimbursement is 
limited to the percentage of ROT monthly volume to total specialist 
and ROT monthly volume in the equity options payment for order flow 
program.
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    The Exchange may audit a specialist's payments to payment-accepting 
firms to verify the use and accuracy of the payment for order flow 
funds remitted to the specialists based on their certification.\17\
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    \17\ See Exchange Rule 760.
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    The Exchange also continues to implement a quality of execution 
program.\18\
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    \18\ See, e.g., Securities Exchange Act Release No. 43436 
(October 11, 2000), 65 FR 63281 (October 23, 2000) (SR-Phlx-2000-
83).
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    The above referenced program was in effect for trades settling on 
or after August 2, 2004.\19\
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    \19\ See SR-Phlx-2004-50 and SR-Phlx-2004-56, originally filed 
with the Commission on July 29, 2004 (subsequently amended on August 
16, 2004) and August 16, 2004, respectively. These proposed rule 
changes were in effect until the Commission issued an abrogation 
order on September 22, 2004, which effectively rescinded the 
proposed rule changes as of the date of abrogation. See Securities 
Exchange Act Release No. 50420 (September 22, 2004). In addition, on 
August 31, 2004, the Exchange filed SR-Phlx-2004-58 with the 
Commission, which proposed to increase the payment for order flow 
fee of $0.35 per contract to $0.40 per contract for all equity 
options, other than options on the QQQ, to be effective for trades 
settling on or after September 1, 2004. On September 22, 2004, the 
Exchange withdrew SR-Phlx-2004-58 and filed with the Commission SR-
Phlx-2004-60 and SR-Phlx-2004-61, which are intended to address 
payment for order flow fees imposed on trades settling on or after 
September 1, 2004.
    In SR-Phlx-2004-50, the Phlx also made a technical update to a 
footnote on the first page of the Exchange's Summary of Equity 
Option Charges by deleting a page reference and inserting a 
reference to a section header in its place.
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Proposed Equity Options Payment for Order Flow Program Commencing 
September 22, 2004

    The Exchange proposes to charge a payment for order flow fee on 
transactions by Phlx ROTs of $1.00 per contract for options on the QQQ, 
currently the most actively traded equity option, and $0.40 per 
contract for the remaining top 150 equity options, other than the 
QQQ.\20\ The payment for

[[Page 59638]]

order flow fee will continue to apply to customer orders.\21\ In 
addition, the 500 contract cap per individual cleared side of a 
transaction will continue to be imposed.\22\
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    \20\ The top 150 options will be calculated based on the most 
actively traded equity options in terms of the total number of 
contracts that are traded nationally, based on volume statistics 
provided by the Options Clearing Corporation (``OCC'') and that are 
also traded on the Exchange. For example, if two of the most 
actively traded equity options, based on volume statistics provided 
by the OCC are not traded on the Exchange, then the next two most 
actively traded equity options that are traded on the Exchange will 
be selected. (For example, if the list of the top 150 options 
includes two options that are not traded on the Exchange, then the 
options ranked 151 and 152 will be included in the Exchange's top 
150, assuming those options are traded on the Exchange). The 
measuring periods for the top 150 options will be calculated every 
three months. For example, for trade months September, October and 
November, the measuring period to determine the top 150 options will 
be based on volume statistics from May, June and July. This cycle 
will continue every three months. Members will be notified of the 
top 150 options approximately two weeks before the beginning of a 
new three-month trading period. As discussed below, the payment for 
order flow fees are incurred only when the specialist elects to 
participate in the equity options payment for order flow program. 
The Exchange's fee schedule will reflect the fee of $1.00 for 
options on the QQQ and $0.40 for the remaining top 150 equity 
options, other than the QQQ. Any change to the rate at which the 
payment for order flow fee is assessed would be the subject of a 
separate proposed rule change filed with the Commission.
    \21\ Thus, consistent with current practice, the ROT payment for 
order flow fee is not assessed on transactions between: (1) A 
specialist and a ROT; (2) a ROT and a ROT; (3) a ROT and a firm; and 
(4) a ROT and a broker-dealer. The ROT payment for order flow fee 
does not apply to index options or foreign currency options. 
Accordingly, the ROT payment for order flow fees applies, in effect, 
to equity option transactions between a ROT and a customer.
    \22\ See supra note 9.
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    The payment for order flow fee will be billed and collected on a 
monthly basis. Because the specialists are not being charged the 
payment for order flow fee for their own transactions, they may not 
request reimbursement for order flow funds in connection with any 
transactions to which they were a party.\23\
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    \23\ The amount a specialist may receive in reimbursement is 
limited to the percentage of ROT monthly volume to total specialist 
and ROT monthly volume in the equity options payment for order flow 
program. For example, if a specialist unit has a payment for order 
flow arrangement with an order flow provider to pay that order flow 
provider $0.70 per contract for order flow routed to the Exchange 
and that order flow provider sends 90,000 customer contracts to the 
Exchange in one month for one option, then the specialist would be 
required, pursuant to its agreement with the order flow provider, to 
pay the order flow provider $63,000 for that month. Assuming that 
the 90,000 represents 30,000 specialist transactions, 20,000 ROT 
transactions and 40,000 transactions from firms, broker-dealers and 
other customers, the specialist may request reimbursement of up to 
40% (20,000/50,000) of the amount paid ($63,000 x 40%=$25,200). 
However, because the ROTs will have paid $8,000 into the payment for 
order flow fund for that month, the specialist may collect only 
$8,000 (20,000 contracts x $0.40 per contract) of its $25,200 
reimbursement request plus, if applicable, any excess funds for that 
particular option carried over from a prior month up to the 
specialist's $25,200 reimbursement request.
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    Specialists will request payment for order flow reimbursements on 
an option-by-option basis. The collected funds will be used by each 
specialist unit to reimburse it for monies expended to attract options 
orders to the Exchange by making payments to order flow providers who 
provide order flow to the Exchange. They will receive their respective 
funds only after submitting an Exchange certification form identifying 
the amount of the requested funds.\24\ Each specialist unit will 
establish the amounts that will be paid to order flow providers.
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    \24\ See supra note 15.
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    Any excess payment for order flow funds will be carried forward to 
the next month by option and may not be applied retroactively to past 
deficits, which may be incurred when the specialist requests more than 
the amount collected.\25\ Thus, excess funds will not be rebated to 
ROTs except in the limited situation discussed below, nor will deficits 
carry forward to subsequent months. ROTs may, however, receive a rebate 
of excess funds in a particular option for a particular month if the 
specialist unit does not request reimbursement by option of at least 
50% of the total amount of payment for order flow funds billed to and 
collected from ROTs for each option in which that specialist unit is 
acting as specialist, as more fully described below. The Exchange will 
periodically review its equity options payment for order flow program 
to determine whether a cap on the amount collected for each option 
should be imposed in the future.\26\
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    \25\ Specialists may not receive more than the payment for order 
flow amount billed and collected in a given month; however, the 
amounts specialists receive may include excesses, if any, for that 
option, carried forward from prior months, up to the payment for 
order flow amount billed and collected in such month. Telephone 
conversation between Cynthia K. Hoekstra, Counsel, Phlx, and David 
Liu, Attorney, Division of Market Regulation, Commission, on 
September 24, 2004.
    \26\ Any such cap would have to be filed with the Commission as 
a proposed rule change under Section 19(b)(1) of the Act. 26
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    Consistent with the Exchange's current equity options payment for 
order flow program, specialists units may opt out entirely from the 
program as long as they notify the Exchange in writing by the 15th of 
the month, or the next business day if the 15th of the month is not a 
business day. If a specialist unit opts out of the program by the 15th 
of the month, no payment for order flow charges will be incurred for 
either the specialist unit or ROTs for transactions in the affected 
options for that month.
    In addition to opting out entirely from the program, specialists 
may opt out of the program on an option-by-option basis if they notify 
the Exchange in writing no later than three business days after the end 
of the month (which is before the payment for order flow fee is 
billed). If a specialist unit opts out of an option at the end of the 
month then no payment for order flow fees will be assessed on the 
applicable ROT(s) for that option. If a specialist unit opts out of the 
program in a particular option more than two times in a six-month 
period, it will be precluded from entering into the equity options 
payment for order flow program for that option for the next three 
months.
    If a specialist unit opts into the program (and does not opt out of 
the program entirely by the 15th day of the month or by option by the 
third business day after the end of the month) and does not request 
reimbursement by option of at least 50% of the total amount of payment 
for order flow funds billed to and collected from ROTs for each option 
in which that specialist unit is acting as the specialist, then any 
excess payment for order flow funds remaining after the specialist has 
been reimbursed will be rebated, on a pro rata basis, to the affected 
ROTs for those particular options in which the 50% threshold was not 
met.\27\
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    \27\ For example, if a specialist unit requests $10,000 in 
reimbursement for one option and the total amount billed and 
collected from the ROTS was $30,000, then the specialist unit did 
not satisfy the 50% threshold, given the fact that it did not 
request reimbursement of at least $15,000. Therefore, the remaining 
amount of $20,000 will be rebated to the ROTs on a pro rata basis. 
If ROT A was assessed $15,000 in payment for order flow fees, he 
would receive a rebate of $10,000 ($15,000/$30,000 = 50% and 50% of 
$20,000 is $10,000). If ROT B was assessed $8,000 in payment for 
order flow fees, it would receive $5,333.33, which represents 26.67% 
($8,000/$30,000) of $20,000. If ROT C was assessed $7,000 in payment 
for order flow fees, it would receive $4,666.67, which represents 
23.33% ($7,000/$30,000) of $20,000.
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    Consistent with current practice, the Exchange may audit a 
specialist's payments to payment-accepting firms to verify the use and 
accuracy of the payment for order flow funds remitted to the 
specialists based on their certification.\28\
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    \28\ See Exchange Rule 760.
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    The Exchange will also continue to implement a quality of execution 
program.\29\ Other aspects of the Exchange's equity options payment for 
order flow program will remain unchanged.\30\
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    \29\ See, e.g., Securities Exchange Act Release No. 43436 
(October 11, 2000), 65 FR 63281 (October 23, 2000) (SR-Phlx-2000-
83).
    \30\ For example, specialists will elect to participate or not 
to participate in all options in which they are acting as a 
specialist by notifying the Exchange in writing no later than five 
business days prior to the start of the month. Once a specialist 
unit elects to participate or not to participate in the program, the 
specialist does not have to notify the Exchange in a subsequent 
month if it does not intend to change its participation status. (See 
supra note 11). Specialists will waive the right to reimbursement of 
payment for order flow funds for the month(s) during which it 
elected to opt out of the program.
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    The payment for order flow fees as set forth in this proposal would 
be in effect for trades settling on or after September 22, 2004.\31\
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    \31\ Because SR-Phlx-2004-50 has no legal effect as of the date 
of its abrogation, the Exchange's Summary of Equity Option Charges 
reflects changes that were proposed in SR-Phlx-2004-50. The Exchange 
has also filed a separate proposed rule change to implement the 
payment for order flow fee, as outlined in this proposal, to be in 
effect for trades settling on or after September 1, 2004 through 
September 21, 2004. See SR-Phlx-2004-61.

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[[Page 59639]]

    Below is the text of the proposed rule change. Proposed new 
language is in italics; deletions are in [brackets].

SUMMARY OF EQUITY OPTION CHARGES (p. 1/[3]3)

OPTION COMPARISON CHARGE (applicable to all trades--except specialist 
trades)
* * * * *
    + Subject to a maximum fee of $50,000, except for QQQ license fees 
of $0.10 per contract side--see [$50,000 ``Firm Related'' Equity Option 
and Index Option Cap.] $50,000 ``Firm Related'' Equity Option and Index 
Option Cap.
    [supcaret] Specialists may also elect to pay a fixed fee monthly 
charge, see Specialist Unit Fixed Monthly Fee described below.
    * ROTs are eligible for a $.08/contract side rebate and specialists 
who have not elected the fixed monthly fee are eligible for a $.07/
contract side rebate for trades occurring as part of a dividend spread 
strategy.
    [oplus] These fees are waived from May 1, 2004 until August 31, 
2004 for transactions in equity options that begin trading on the 
Exchange between January 1, 2004 and June 30, 2004.
    Footnotes 9-13--no change.

SUMMARY OF EQUITY OPTION CHARGES (p. 2/[3]3)

* * * * *

               [SUMMARY OF EQUITY OPTION CHARGES (p. 3/3)]
              [EQUITY OPTION PAYMENT FOR ORDER FLOW FEES*]
[Registered Option Trader (on-floor):
 ** +
    QQQ (NASDAQ-100 Index Tracking     $1.00 per contract.
     Stock\SM\).
    Remaining equity options subject   $0.35 per contract.
     to charge.
 
\*\ Assessed on transactions resulting from customer orders
\**\ Subject to a 500-contract cap, per individual cleared side of a
  transaction.
\+\ Only incurred when the specialist elects to participate in the
  payment for order flow program]


                SUMMARY OF EQUITY OPTION CHARGES (p. 3/3)
              EQUITY OPTION PAYMENT FOR ORDER FLOW FEES \*\
Registered Option Trader (on-
 floor)\**\ +
    QQQ (NASDAQ-100 Index Tracking     $1.00 per contract.
     Stock \SM\).
    Remaining Top 150 Equity Options.  $0.40 per contract.
 
\*\ Assessed on transactions resulting from customer orders, subject to
  a 500-contract cap, per individual cleared side of a transaction
\**\ Any excess payment for order flow funds will be carried forward to
  the next month by option and will not be rebated to ROTs. ROTs may,
  however, receive a rebate of any excess funds in a particular option
  for a particular month if the specialist unit does not request
  reimbursement by option of at least 50% of the total amount of payment
  for order flow funds billed and collected from ROTs for each option in
  which that specialist unit is acting as specialist.
+Only incurred when the specialist elects to participate in the payment
  for order flow program

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 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 Exchange represents that the purpose of the proposed rule 
change is to adopt a more competitive equity options payment for order 
flow program. Equity options payment for order flow programs are in 
place at each of the other options exchanges. The Exchanges states that 
the revenue generated by the $1.00 or $0.40 payment for order flow 
fees, as outlined in this proposal, is intended to be used by 
specialist units to compete for order flow in equity options listed for 
trading on the Exchange. The Exchange believes that, in today's 
competitive environment, changing its equity options payment for order 
flow program to compete more directly with other options exchanges is 
important and appropriate.
    The Phlx states that the purpose of imposing the 50% threshold is 
to encourage specialists to have payment for order flow arrangements in 
place before electing to participate in the Exchange's equity options 
payment for order flow program.
2. 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 \32\ 
in general, and furthers the objectives of Sections 6(b)(4) of the Act 
\33\ in particular, in that it is an equitable allocation of reasonable 
fees among Phlx members and that it is designed to enable the Exchange 
to compete with other markets in attracting customer order flow. 
Because the payment for order flow fees are collected only from member 
organizations respecting customer transactions, the Phlx believes that 
there is a direct and fair correlation between those members who fund 
the equity options payment for order flow fee program and those who 
receive the benefits of the program. The Exchange states that ROTs also 
potentially benefit from additional customer order flow. In addition, 
the Phlx believes that the proposed payment for order flow fees would 
serve to enhance the competitiveness of the Phlx and its members and 
that this proposal therefore is consistent with and furthers the 
objectives of the Act, including Section 6(b)(5) thereof,\34\ which 
requires the rules of exchanges to be designed to promote just and 
equitable principles of trade, and to remove impediments to and perfect 
the mechanism of a free and open market and a national market system. 
The Phlx believes that attracting more order flow to the Exchange 
should, in turn, result in increased liquidity,

[[Page 59640]]

tighter markets and more competition among exchange members.
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    \32\ 15 U.S.C. 78f(b).
    \33\ 15 U.S.C. 78f(b)(4).
    \34\ 15 U.S.C. 78f(b)(5).
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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.\35\
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    \35\ Previously, in connection with SR-Phlx-2004-50, the 
Exchange received one written comment letter dated August 10, 2004, 
which was forwarded to the Commission on August 20, 2004.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing proposed rule change has been designated as a fee 
change pursuant to Section 19(b)(3)(A)(ii) of the Act \36\ and Rule 
19b-4(f)(2) \37\ thereunder, because it establishes or changes a due, 
fee, or other charge imposed by the Exchange. Accordingly, the proposal 
will take effect upon filing with the Commission. At any time within 60 
days of the filing of such 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.
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    \36\ 15 U.S.C. 78s(b)(A)(ii).
    \37\ 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. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-PHLX-2004-60 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-PHLX-2004-60. 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, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 also will be available for inspection and copying at the 
principal office of the Phlx. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-PHLX-2004-60 and should be submitted on or before 
October 26, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E4-2489 Filed 10-4-04; 8:45 am]
BILLING CODE 8010-01-P