[Federal Register Volume 70, Number 24 (Monday, February 7, 2005)]
[Notices]
[Pages 6495-6497]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-476]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51096; File No. SR-Phlx-2004-96]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
and Amendments No. 1 and No. 2 Thereto Relating to its Equity Option 
Specialist Deficit (Shortfall) Fee

January 28, 2005.
    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 December 30, 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 and 
II below, which Items have been prepared by the Exchange. The Phlx 
submitted Amendments No.1 and No. 2 to the proposal on January 25, 
2005, and January 28, 2005, respectively.\3\ The proposed rule change, 
as amended, has been filed by the Phlx as establishing or changing a 
due, fee, or other charge, pursuant to Section 19(b)(3)(A)(ii) of the 
Act \4\ and Rule 19b-4(f)(2) \5\ thereunder, 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\ Amendments No. 1 and No. 2 made clarifying changes to the 
tiered threshold schedule applicable during the transition period, 
described at infra note 8, and other minor technical changes.
    \4\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \5\ 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 Equity Option Specialist Deficit 
(Shortfall) Fee (``shortfall fee'') in two ways: (1) To include 
Streaming Quote Options traded on Phlx XL, the Exchange's electronic 
trading platform for options, in the shortfall fee calculation, which 
have thus far been exempt from the shortfall fee; and (2) to amend the 
amount of the shortfall fee cap and revise how it is applied per option 
for the top 120 options, including Streaming Quote Options traded on 
Phlx XL.
    Currently, specialists \6\ are required to reach a total national 
monthly contract volume of at least 12 percent in any top 120 
option,\7\ in most cases,\8\ in order not to be charged a monthly 
shortfall fee of $0.35 per contract by the Phlx.\8\ However, the 
shortfall fee is currently not applicable to top 120 Streaming Quote 
Options traded on Phlx XL.\10\ At this time, the Exchange proposes to 
charge equity options specialist units the shortfall fee of $0.35 per 
contract currently in effect to be paid monthly in connection with 
transactions in any top 120 Streaming Quote Option traded on Phlx XL if 
at least 12 percent of the total

[[Page 6496]]

national monthly contract volume in that option is not effected on the 
Exchange in that month.
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    \6\ The Exchange uses the terms ``specialist unit'' and 
``specialist'' interchangeably herein.
    \7\ A top 120 option is defined as one of the 120 most actively 
traded equity options in terms of the total number of contracts in 
that option that were traded nationally for a specified month, based 
on volume reflected by The Options Clearing Corporation.
    \8\ An exception to the 12 percent volume threshold amount 
relates to a transition period for newly listed top 120 options or 
for any top 120 option (including those equity options listed on the 
Exchange before February 1, 2004) acquired by a new specialist unit. 
During the transition period, the shortfall fee is imposed in stages 
such that the requisite volume threshold is zero percent for the 
first full calendar month of trading, three percent for the second 
full calendar month of trading, six percent for the third full 
calendar month of trading, nine percent for the fourth full calendar 
month of trading and 12 percent for the fifth full calendar month of 
trading (and thereafter). See Securities Exchange Act Release No. 
49324 (February 26, 2004), 69 FR 10089 (March 3, 2004) (SR-Phlx-
2004-08).
    \9\ See Securities Exchange Act Release No. 48206 (July 22, 
2003), 68 FR 44555 (July 29, 2003) (SR-Phlx-2003-45).
    \10\ See Securities Exchange Act Release No. 50332 (September 9, 
2004), 69 FR 55858 (September 16, 2004) (SR-Phlx-2004-49).
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    The Exchange also proposes to amend the amount of the shortfall fee 
cap and its application. The shortfall fee cap will be applicable to 
all top 120 options pursuant to the following schedule: \11\
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    \11\ Currently, the Exchange imposes a limit of $10,000 to the 
specialists on the amount of the shortfall fee per option, per month 
for any top 120 option, excluding options traded on Phlx XL, 
provided that the market share effected on the Phlx for that top 120 
option is equal to or greater than 50 percent of the applicable 
national monthly contract volume threshold in effect. The volume 
threshold is 12 percent in most cases. Therefore, for each month, if 
a specialist unit trades an amount equal to or greater than 6 
percent of the total national market share, the shortfall fee is 
imposed, but is currently limited to $10,000 per option, per month. 
See Securities Exchange Act Release No. 49324 (February 26, 2004), 
69 FR 10089 (March 3, 2004) (SR-Phlx-2004-08). Pursuant to this 
proposal, the amount of the cap and how it is applied per option 
will change.
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     If Phlx volume in any top 120 equity option, except 
options on Nasdaq-100 Index Tracking Stock \SM\ (traded under the 
symbol ``QQQQ''),\12\ is less than or equal to 50 percent of the 
current threshold volume (presently 6 percent), a cap of $10,000 will 
apply.
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    \12\ The Nasdaq-100[reg], Nasdaq-100 Index[reg], Nasdaq[reg], 
The Nasdaq Stock Market[reg], Nasdaq-100 Shares\SM\, Nasdaq-100 
Trust\SM\, Nasdaq-100 Index Tracking Stock\SM\, and QQQ\SM\ are 
trademarks or service marks of The Nasdaq Stock Market, Inc. 
(``Nasdaq'') and have been licensed for use for certain purposes by 
the Philadelphia Stock Exchange 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 Trust\SM\, or the beneficial owners of Nasdaq-100 
Shares\SM\. 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.
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     If Phlx volume in any top 120 equity option, except 
options on QQQQ, is greater than 50 percent of the current threshold 
volume (presently 6 percent) and less than 12 percent of the total 
national monthly contract volume, a cap of $5,000 will apply.
     If Phlx volume in options on QQQQ is less than or equal to 
50 percent of the current threshold volume (presently 6 percent), a cap 
of $20,000 will apply.
     If Phlx volume in options on QQQQ is greater than 50 
percent of the current threshold volume (presently 6 percent) and less 
than 12 percent of the total national monthly contract volume, a cap of 
$10,000 will apply.
    All other aspects of the shortfall fee will remain unchanged.\13\ 
The proposal is scheduled to be effective for trades settling on or 
after January 3, 2005.
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    \13\ For example, the total volume calculation for purposes of 
determining the requisite threshold will continue to be based on the 
current month's volume and the three-month differentiation to 
determine whether an equity option is considered a top 120 option 
will also remain in effect, i.e. December's top 120 options are 
based on September's volume. In addition, the $10,000 cap applied in 
connection with the tiered threshold schedule for any newly listed 
top 120 option and any top 120 option acquired by a new specialist 
unit, not affiliated with an existing Phlx options specialist unit, 
will remain unchanged. See Securities Exchange Act Release No. 49324 
(February 26, 2004), 69 FR 10089 (March 3, 2004) (SR-Phlx-2004-08).
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    The text of the proposed rule change is available on the Phlx's Web 
site (http://www.phlx.com), at the Phlx's Office of the Secretary, and 
at 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 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 shortfall fee is designed to create an incentive for options 
specialists to promote the options for which they are the designated 
specialists. The purpose of applying the shortfall fee to Streaming 
Quote Options is to encourage specialist units trading in the top 120 
options to garner a certain percentage of market share. In addition, 
the Exchange believes that amending the shortfall fee cap should 
encourage specialists to continue to compete for market share in the 
top 120 options, while reducing the economic burden on specialists who 
are competing for order flow in the national market in the top 120 
options. The Exchange believes that it is appropriate to establish 
higher shortfall fee caps for options on QQQQ because the volume in 
that option far exceeds the volume in any other option.
2. Statutory Basis
    The Exchange believes that its proposal to amend its schedule of 
fees 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 fees 
among Exchange members.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 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, as 
amended, 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 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, as amended, 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\
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    \16\ 15 U.S.C. 78(s)(b)(3)(A)(ii).
    \17\ 17 17 CFR 240.19b-4(f)(2).
    \18\ See 15 U.S.C. 78s(b)(3)(C). For purposes of calculation the 
60-day abrogation period, the Commission considers the period to 
commence on January 28, 2005, the date the Phlx filed Amendment No. 
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-2004-96 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-2004-96. This 
file

[[Page 6497]]

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 the 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-2004-96 and should be submitted on or before February 28, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E5-476 Filed 2-4-05; 8:45 am]
BILLING CODE 8010-01-P