[Federal Register Volume 69, Number 230 (Wednesday, December 1, 2004)]
[Notices]
[Pages 69976-69978]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3410]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50722; File No. SR-Phlx-2004-72]


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

November 23, 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 November 1, 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 revise its equity options payment for order 
flow program that is scheduled to be in effect beginning with trades 
settling on or after November 1, 2004 (``November Program''),\5\ to 
credit Registered Options Traders (``ROTs'') for payment for order flow 
fees assessed for trades settling November 1, 2004, through November 
12, 2004, in options ranked greater than the top 150 options.\6\ The 
Exchange states that ROTs would not be assessed payment for order flow 
fees for the specified time period in those options, because the 
Exchange proposes to charge the fee and then credit the same amount. If 
a specialist unit who has elected to participate in the November 
Program requests reimbursement for payment for order flow funds 
expended in connection with any options ranked greater than the top 150 
options, the Exchange itself would fund and distribute for this time 
period to the requesting specialist units the amount that otherwise 
should have been collected from ROTs.
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    \5\ See SR-Phlx-2004-68 (October 29, 2004).
    \6\ The top 150 options are 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.)
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Background

    Pursuant to the November Program, the Exchange will assess a 
payment for order flow fee of $0.40 on all equity options, except: (1) 
Options on the iShares FTSE/Xinhua China 25 Index Fund (``FXI 
Options''),\7\ an exchange-traded fund, which will not be assessed an 
equity options payment for order flow fee; and (2) options on the 
Nasdaq-100 Index Tracking StockSM traded under the symbol 
QQQ,\8\ which will continue to be assessed $1.00 per contract. In 
addition, pursuant to the November Program, any excess payment for 
order flow funds billed but not requested to be used for reimbursement 
by the options specialist unit \9\ will be rebated to the ROTs, which 
will appear as a credit on the same payment for order flow invoice that 
reflects the payment for order flow fees to be assessed for that 
month.\10\
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    \7\ On October 19, 2004, the Exchange began listing FXI Options, 
a product that is an equity option, but which is assessed fees 
pursuant to the Exchange's Summary of Index Option and FXI Options 
Charges. See SR-Phlx-2004-67.
    \8\ QQQ is currently the most actively-traded equity option. 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]; (``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.
    \9\ The Exchange uses the terms ``specialist'' and ``specialist 
unit'' interchangeably herein.
    \10\ The payment for order flow fee is 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 in connection with any transactions to which 
they were a party. See SR-Phlx-2004-68 for additional information 
regarding the Exchange's November Program.
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Proposal

    The Exchange proposes to amend the November Program in one 
respect--to credit ROTs for payment for order flow fees assessed for 
trades settling November 1, 2004 through November 12, 2004 in options 
ranked greater than the top 150 options.\11\ The Exchange states that 
this change is intended to allow ROTs additional time to close out 
existing positions in options ranked greater than the top 150 options 
in the event that a ROT no longer wishes to trade an option that 
becomes subject to the payment for order flow fee under the November 
Program. The Exchange believes that, going forward, some ROTs may wish 
to trade in a trading crowd where the specialist unit has elected not 
to participate in the Exchange's payment for order flow program. 
Nevertheless, a ROT may have an existing position in that option (for 
instance, own or be short calls or puts), and the Exchange has 
determined that it would be appropriate in such cases to provide 
additional time for ROTs to close those positions before the November 
Program takes full effect.
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    \11\ The Exchange will note on its fee schedule that ROTs will 
be billed and credited payment for order flow fees (on the same 
invoice) for the period November 1, 2004 through November 12, 2004 
for transactions in equity options ranked greater than the top 150 
options and in which the specialist unit has elected to participate 
in the Exchange's November Program. The Exchange will delete the 
reference to this ``credit'' from its fee schedule after the 
specified time period has expired pursuant to this proposed rule 
change.
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    If a specialist unit who has elected to participate in the November 
Program \12\

[[Page 69977]]

requests reimbursement for payment for order flow funds expended in 
connection with any options ranked greater than 150 respecting this 
time period, the Exchange would fund and distribute that requested 
amount to the specialist unit.\13\ In effect, the Exchange would be 
satisfying the specialists' reimbursement request by paying from its 
funds the amount, or portion thereof, that should have been billed to 
and collected from ROTs.
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    \12\ Specialist units 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. 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. Payment for order 
flow charges will apply to ROTs as long as the specialist unit for 
that option has elected to participate in the Exchange's payment for 
order flow program. Once a specialist unit has either elected to 
participate or not to participate in the Exchange's payment for 
order flow program in a particular month, it is not required to 
notify the Exchange in a subsequent month if it does not intend to 
change its participation status. See Securities Exchange Act Release 
Nos. 50471 (September 29, 2004), 69 FR 59636 (October 5, 2004) (SR-
Phlx-2004-60) and 50572 (October 20, 2004), 69 FR 62735 (October 27, 
2004) (SR-Phlx-2004-61) and SR-Phlx-2004-68.
    \13\ If a specialist unit elects 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.
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    This proposal only applies to equity options ranked greater than 
the top 150 options that are subject to the November Program (i.e., 
only where a specialist unit has elected to participate in the November 
Program). Thus, payment for order flow fees would continue to be 
assessed, and not credited to ROTs, on options ranked 1 through 150 
pursuant to the November Program.
    Specialists request payment for order flow reimbursements on an 
option-by-option basis. The collected funds are 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. The Phlx states that specialists receive 
their respective funds only after submitting an Exchange certification 
form identifying the amount of the requested funds.\14\ Each specialist 
unit establishes the amounts that would be paid to order flow 
providers. Although the Exchange would, in effect, be paying the amount 
of payment for order flow funds that should have been collected from 
ROTs to the requesting specialist units, the Exchange states that it 
does so only to preserve the balance between allowing more time for 
ROTs to close positions while recognizing that specialist units may 
have relied on receiving these funds when making their equity options 
payment for order flow arrangements.
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    \14\ While all determinations concerning the amount that will be 
paid for orders and which order flow providers shall receive these 
payments are made by the specialists, the specialists will provide 
to the Exchange on an Exchange form certain information, including 
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.
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    The Phlx states that the issue of using Exchange fees to fund order 
flow payments to options order flow providers has been a topic of great 
concern at the Exchange. From the onset, the Exchange states that it 
has been, and continues to be, a vocal opponent to any payment for 
order flow programs. The Exchange, however, believes that, in this 
limited situation, paying for order flow is necessary in order to 
maintain its commitment to the specialist units who may have relied on 
its intention to implement a broader program, which was to become 
effective for trades settling on or after November 1, 2004.
    Below is the text of the proposed rule change. Proposed new 
language is in italics.
* * * * *

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 Stock \SM\)--$1.00 per contract
Remaining Equity Options, except FXI 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 billed but not 
reimbursed to specialists will be returned to the applicable ROTs 
(reflected as a credit on the monthly invoices) and distributed on a 
pro rata basis.
    *** ROTs will be billed and credited payment for order flow fees 
(on the same invoice) for the period November 1, 2004 through November 
12, 2004 for transactions in equity options ranked greater than 150 and 
in which the specialist unit has elected to participate in the 
Exchange's November Program.
    + 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 Phlx states that the purpose of the proposed rule change is to 
maintain a more competitive equity options payment for order flow 
program. Payment for order flow programs are in place at each of the 
other options exchanges in varying amounts and covering various 
options. According to the Phlx, 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, maintaining a 
payment for order flow program is necessary to continue to compete more 
directly with other options exchanges.
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 \15\ 
in general, and furthers the objectives of section 6(b)(4) of the Act 
\16\ 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. The 
Phlx believes that the proposed payment for order flow fees would serve 
to maintain 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,\17\ which requires the 
rules of exchanges to be designed to promote just and equitable 
principles of trade, remove impediments to and perfect the mechanism of 
a free and open market and a national market system. Attracting more 
order flow to the Exchange, should, in turn, result in increased 
liquidity, tighter markets and more competition among Exchange members.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(4).
    \17\ 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.

[[Page 69978]]

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 proposed rule change has been designated as a fee 
change pursuant to section 19(b)(3)(A)(ii) of the Act \18\ and Rule 
19b-4(f)(2) \19\ 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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    \18\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \19\ 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-2004-72 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-2004-72. 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-2004-72 and should be submitted on or before 
December 22, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E4-3410 Filed 11-30-04; 8:45 am]
BILLING CODE 8010-01-P