[Federal Register Volume 69, Number 210 (Monday, November 1, 2004)]
[Notices]
[Pages 63427-63428]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2961]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50591; File No. SR-Phlx-2004-62]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change To Waive the Options 
Specialist Shortfall Fee for One Specialist Unit That Did Not Have a 
Specialized Quote Feed in Place

October 26, 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 23, 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 Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to waive the options specialist shortfall fee 
(``shortfall fee'') for the period May 2004 through August 2004 for one 
specialist unit that did not have a specialized quote feed (``SQF'') in 
place that could price an option accurately for any option where the 
primary volume in the underlying security shifted to another market.\3\ 
There is no new proposed rule language.
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    \3\ An SQF is a specialized connection that bypasses the 
Exchange's Auto-Quote, which is the Exchange's electronic options 
pricing system that enables specilists to automatically monitor and 
instantly update quotations. Auto-Quote and SQFs (``Quoting 
Mechanisms'') incorporate pricing model data, which generate 
automatic pricing of option series based on a number of factors, 
including the value of the underlying stock.
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    Background: The Exchange currently imposes a shortfall fee of $.35 
per contract for specialists trading any top 120 Option if 12% of the 
total national monthly contract volume (``volume threshold'') for such 
Top 120 Option is not effected on the Phlx.\4\ The fee is limited to 
$10,000 per month per option provided that the total monthly market 
share effected on the Phlx in that Top 120 Option is equal to or 
greater than 50% of the volume threshold in effect.\5\ For any Top 120 
Option listed after February 1, 2004 and for any Top 120 Option 
acquired by a new specialist unit \6\ within the first 60 days of 
operations, the following thresholds apply: \7\
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    \4\ See Securities Exchange Act Release No. 48206 (July 22, 
2003), 68 FR 44555 (July 29, 2003)(SR-Phlx-2003-45).
    \5\ See Securities Exchange Act Release No. 48207 (July 22, 
2003), 68 FR 44558 (July 29, 2003)(SR-Phlx-2003-47).
    \6\ A new specialist unit is one that is approved to operate as 
a specialist unit by the Options Allocation, Evaluation, and 
Securities Committee on or after February 1, 2004 and is a 
specialist unit that is not currently affiliated with an existing 
options specialist unit as reported on the member organization's 
Form BD, which refers to direct and indirect owners, or as reported 
in connection with any other financial arrangement such as is 
required by Exchange Rule 783.
    \7\ The shortfall fee is not applicable to any option traded on 
Phlx XL, the Exchange's electronic trading platform, either on a 
variable or fixed fee basis. See Securities Exchange Act Release No. 
50332 (September 9, 2004), 69 FR 55858 (September 16, 2004)(SR-Phlx-
2004-49).
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    First full month of trading: 0% national market share.
    Second full month of trading: 3% national market share.
    Third full month of trading: 6% national market share.
    Fourth full month of trading: 9% national market share.
    Fifth full month of trading (and thereafter): 12% national market 
share.
    Proposal: The Exchange proposes to waive the shortfall fee for 
transactions settling on or after May 1, 2004 through August 31, 2004 
for one specialist unit that did not have an SQF in place that

[[Page 63428]]

could price an option accurately for any option where the primary 
volume in the underlying security shifted to another market. Generally, 
the most volume in an equity security occurs on the market where the 
security is listed, such that the listing market is known as the 
``primary market'' and Quoting Mechanisms use that market's process to 
price the overlying option, as described further below.

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. 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 Phlx filed the proposed rule change to correct an economic 
outcome caused when one particular specialist unit was unable to price 
an option accurately because of a unique situation where: (i) The key 
liquidity, the most volume and often the best market are other than on 
the market where the security is primarily listed; and (ii) the 
specialist unit's Quoting Mechanism is technologically tied to the 
price of the underlying security on its listed market. Specifically, 
the specialist unit was unable to secure technology changes to price 
the option using the ``new'' primary market quickly (as both the 
Exchange, respecting Auto-Quote, and outside vendors, respecting SQFs, 
could not make such extensive changes quickly and faced competing 
priorities); thus, the specialist unit has linked its failure to 
achieve the shortfall targets to these technology/pricing issues. 
Accordingly, this proposed rule change is limited in scope, and is 
intended to correct what the Exchange has determined is a limited, 
unfair outcome of its shortfall fee for this specific specialist unit.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\8\ and furthers the objectives of Section 
6(b)(4) of the Act \9\ in particular, in that it is an equitable 
allocation of reasonable dues, fees and other charges. The Exchange 
believes that the proposal is reasonable and equitable because it is 
intended to correct a situation where the operation of its shortfall 
fee was incompatible with the technology available to price options, 
which caused an unfair and unintended fee result.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 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 proposal 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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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 No. SR-Phlx-2004-62 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-2004-62. 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 Section, 450 Fifth 
Street, NW., Washington, DC 20549. 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 No. SR-Phlx-
2004-62 and should be submitted on or before November 22, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E4-2961 Filed 10-29-04; 8:45 am]
BILLING CODE 8010-01-P