[Federal Register Volume 70, Number 130 (Friday, July 8, 2005)]
[Notices]
[Pages 39542-39544]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3593]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51947; File No. SR-Phlx-2005-39]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to the Equity Option Specialist Deficit (Shortfall) Fee

June 30, 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 June 6, 2005, 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. The Exchange 
filed this proposal pursuant to 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 U.S.C. 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'') to no longer charge the equity 
option specialist the shortfall fee when one or more Streaming Quote 
Traders (``SQTs'') \5\ or Remote Streaming Quote Traders (``RSQTs'') 
\6\ trading on the Exchange's electronic options trading platform, Phlx 
XL \7\, have been designated to receive Directed Orders \8\ from Order 
Flow Providers \9\ for the same option in which that specialist unit is 
acting as the specialist.
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    \5\ An SQT is an Exchange Registered Options Trader (``ROT'') 
who has received permission from the Exchange to generate and submit 
option quotations electronically through an electronic interface 
with AUTOM via an Exchange approved proprietary electronic quoting 
device in eligible options to which such SQT is assigned. AUTOM is 
the Exchange's electronic order delivery, routing, execution and 
reporting system, which provides for the automatic entry and routing 
of equity option and index option orders to the Exchange trading 
floor. See Exchange Rules 1014(b)(ii) and 1080.
    \6\ An RSQT is an Exchange ROT that is a member or member 
organization of the Exchange with no physical trading floor presence 
who has received permission from the Exchange to generate and submit 
option quotations electronically through AUTOM in eligible options 
to which such RSQT has been assigned. An RSQT may only submit such 
quotations electronically from off the floor of the Exchange. An 
RSQT may only trade in a market making capacity in classes of 
options in which he is assigned. See Exchange Rule 1014(b)(ii)(B). 
See Securities Exchange Act Release Nos. 51126 (February 2, 2005), 
70 FR 6915 (February 9, 2005) (SR-Phlx-2004-90) and 51429 (March 24, 
2005) (SR-Phlx-2005-12).
    \7\ In July 2004, the Exchange began trading equity options on 
Phlx XL, followed by index options in December 2004. See Securities 
Exchange Act Release No. 50100 (July 27, 2004), 69 FR 46612 (August 
3, 2004), SR-Phlx-2003-59).
    \8\ The term ``Directed Order'' means any customer order to buy 
or sell which has been directed to a particular specialist, RSQT, or 
SQT by an Order Flow Provider (defined below in footnote 9). See 
Exchange Rule 1080(l). The provisions of Rule 1080(l) are in effect 
of a one-year pilot period to expire on May 27, 2006. See Securities 
Exchange Act Release No. 51759 (May 27, 2005) (SR-Phlx-2004-91).
    \9\ An ``Order Flow Provider'' is any member or member 
organization that submits, as agent, customer orders to the 
Exchange. See Exchange Rule 1080(l).
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    Currently, the Exchange charges equity options specialist units 
\10\ a shortfall fee of $0.35 per contract to be paid monthly in 
connection with transactions in any top 120 equity

[[Page 39543]]

option,\11\ including Streaming Quote Options traded on Phlx XL,\12\ in 
most cases,\13\ if at least 12 percent of the total national monthly 
contract volume in that option is not effected on the Exchange in that 
month.
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    \10\ The Exchange uses the terms ``specialist unit'' and 
``specialist'' interchangeably herein.
    \11\ A top 120 equity 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 specified 
month, based on volume reflected by The Options Clearing 
Corporation.
    \12\ See Securities Exchange Act Release No. 51096 (January 28, 
2005), 70 FR 6495 (February 7, 2005) (SR-Phlx-2004-96).
    \13\ 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).
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    A shortfall fee cap is applied to transactions in any of the top 
120 equity options pursuant to the following schedule: (1) If Phlx 
volume in any top 120 equity option, except options on Nasdaq-100 Index 
Tracking StockSM (traded under the symbol ``QQQQ''),\14\ is 
less than or equal to 50 percent of the current threshold volume 
(presently six percent), a cap of $10,000 will apply; (2) If Phlx 
volume in any top 120 equity option, except options on QQQQ, is greater 
than 50 percent of the current threshold volume (presently six percent) 
and less than 12 percent of the total national monthly contract volume, 
a cap of $5,000 will apply; (3) If Phlx volume in options on QQQQ is 
less than or equal to 50 percent of the current threshold volume 
(presently six percent), a cap of $20,000 will apply; and (4) If Phlx 
volume in options on QQQQ is greater than 50 percent of the current 
threshold volume (presently six percent) and less than 12 percent of 
the total national monthly contract volume, a cap of $10,000 will 
apply.
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    \14\ 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 Exchange 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 Trust SM, 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.
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    Any applicable cap will be pro rated in the month that the 
Exchange's system designates the option(s) to be directed to a specific 
SQT or RSQT.
    The amount of the shortfall fee and the applicable caps as 
described above, as well as all other aspects of the shortfall fee, 
will remain unchanged.\15\
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    \15\ 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 option 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 options 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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    This proposal is scheduled to apply to trades settling on or after 
June 6, 2005.
    The text of the proposed rule change is available on the Exchange's 
Web site (http://www.phlx.com), at the Phlx's Office of the Secretary, 
and at the Commission's Public Reference Room.

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 this proposal is to address the effect of 
the shortfall fee as it relates to options traded by SQTs or RSQTs. The 
Exchange believes that it would be unreasonable to impose a shortfall 
fee on specialists when SQTs or RSQTs will be competing for market 
share on a relatively equal basis, as the shortfall fee was designed, 
in part, to create an incentive for specialists to promote the options 
they have been allocated.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\16\ in general, and furthers the 
objectives of Section 6(b)(4) of the Act,\17\ in particular, in that it 
provides for the equitable allocation of reasonable dues, fees, and 
other charges among its members.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 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 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

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing proposed rule change has become immediately effective 
pursuant to Section 19(b)(3)(A)(ii) of the Act\18\ and subparagraph 
(f)(2) of Rule 19b-4 thereunder,\19\ in that it establishes or changes 
a due, fee or other charge imposed by the Exchange. 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\ U.S.C. 78s(b)(3)(A)(ii).
    \19\ 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-2005-39 on the subject line.

[[Page 39544]]

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-Phlx-2005-39. 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. 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-2005-39 and 
should be submitted on or before July 29, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
Margaret H. McFarland,
Deputy Secretary.
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    \20\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E5-3593 Filed 7-7-05; 8:45 am]
BILLING CODE 8010-01-P