[Federal Register Volume 66, Number 45 (Wednesday, March 7, 2001)]
[Notices]
[Pages 13823-13825]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-5542]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-44021; File No. SR-PHLX-01-14]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the Philadelphia Stock
Exchange, Inc. Relating to a Rebate for Certain Fees Incurred in
Connection with the Exchange's Payment for Order Flow Fee Program
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 January
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30, 2001 the Philadelphia Stock Exchange, Inc. ( ``Phlx'' or the
``Exchange'' ) filed with the Securities and Exchange Commission (
``Commission'' ) the proposed rule change as described in Items I, II,
and III below, which Items the Phlx has prepared. The Commission is
publishing this notice to solicit comments on the proposed rule changes
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 Changes
The Phlx proposes to allow for a debate of specified funds in
connection with its payment for order flow program.
Effective August 1, 2000, the Phlx imposed a marketing fee of $1.00
per contract \3\ on transactions by Phlx specialists and Registered
Options Traders (ROTs) in the Top 120 Options on the Phlx.\4\ The
specialists make all determinations concerning the amount that is paid
for orders and which order flow providers receive the payments.
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\3\ Currently, this fee is not applicable to the following
transactions: (1) Specialist-to-ROT; (2) ROT-to-ROT; (3) specialist-
to-firm; (4) ROT-to-firm; (5) specialist-to-broker-dealer; and (6)
ROT-to-broker-dealer. See Securities Exchange Act Release Nos. 41377
(August 18, 2000), 65 FR 51889 (Aug. 25, 2000) (SR-Phlx-00-77);
43480 (Oct. 25, 2000), 65 FR 66275 (Nov. 3, 2000) (SR-Phlx-00-87);
and 43481 (Oct. 25, 2000), 65 FR 66277 (Nov. 3, 2000) (SR-Phlx-00-
88, SR-Phlx-00-89).
\4\ A Top 120 Option is defined as one of the 120 most actively
traded equity options, in terms of national trading volume, as
reflected by the Options Clearing Corporation. The Top 120 Options
are calculated every six months. The proposed fees does not apply to
index or currency options.
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Some Phlx specialist units have made payments to attract order flow
and have requested reimbursement for those expenditures, but other
specialist units have not participated in the payment for order flow
program. As a consequence, some proceeds raised by the imposition of
payment for order flow fees have remained unspent. Accordingly, the
Phlx is instituting a payment for order flow rebate program to handle
the unspent funds.
Pursuant to the rebate program, any money that has been billed or
collected with respect to particular option symbol but has not been
spent will be credited or returned according to the following
guidelines: (1) Within 10 days from the date monthly bills are due,
specialists must submit their requests for reimbursement; (2) the
Phlx's accounting department will process the reimbursement requests
and determine the amount of unspent funds for each month; (3) any
unspent refunds will be returned to specialists and ROTs on a pro rata
basis, with rebates calculated as a percentage of the unspent funds to
the payment for order flow invoiced amounts,\5\ (4) rebate checks will
be given to specialists and ROTs approximately ten days after the
reimbursement cutoff request date (20 days after monthly bills are
due); and (5) credits will be calculated against any amounts that have
been billed, but not collected. Late charges will continue to accrue on
any amounts that remain outstanding, although based upon a lower
``principal'' amount after the rebates have been calculated.\6\
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\5\ For example, if a total invoiced amount for a Top 120 Option
is $200,000 (composed of $120,000 received from the specialist;
$25,000 received from ROT #1; and $55,000 received from ROT #2) and
a specialist requests reimbursement in the amount of $75,000, there
would be $125,000 in unspent funds. There would be a rebate of 62.5%
($125,000/$200,000) distributed on a pro rata basis. Therefore, the
specialist would receive $75,000; ROT #1 would receive $15,625; and
ROT #2 would receive $34,375.
\6\ Late charges are assessed pursuant to Phlx Rule 50. The Phlx
does not waive late fees for past due amounts even if some portion
of the fee is later rebated.
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The Exchange intends to begin implementing this program by
requesting that reimbursement requests for the months of August,
September, and October be received by January 30, 2001, with rebates
processed ten days thereafter.\7\ Reimbursement requests for the month
of November should be received by February 15, 2001, with rebates
processed ten days thereafter. Post-November reimbursement requests
will be processed according to the guidelines stated above.
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\7\ The Phlx will make pro-rata determinations for amounts from
August 2000 to October 2000 on a month-by -month basis.
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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 self-regulatory organization 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
The Phlx's payment for order flow program was designed to generate
a source of funds that specialists may use to attract order flow in the
Top 120 Options. The Phlx believed that it was necessary for it to
adopt this type of fee in order to maintain and enhance its competitive
position. The purpose of the proposed rule change is to provide a
rebate to specialists and ROTs of specified funds in connection with
the Phlx's payment for order flow program.
Since the implementation of the payment for order flow fee on
August 1, 2000, some funds have been billed or collected but not
disbursed to order flow providers. Some order flow providers may
maintain policies not to accept payment for order flow funds. The Phlx
believes that holding unspent payment for order flow funds is
inefficient and does not serve the best interests of the specialists
and ROTs. The Phlx believes that returning the funds to the specialists
and ROTs in a timely manner may allow them to use the funds in a more
efficient manner, such as by increasing liquidity on the trading floor
or investing the capital in their firms.
The Phlx believes that its proposal is consistent with section 6(b)
of the Act in general, and furthers the objectives of sections 6(b)(4)
and 6(b)(5) in particular. The Phlx believes that, because the
specialists and ROTs will receive a rebate of the funds that were
billed or collected but remain unspent, the rebate program will enable
an equitable allocation of reasonable fees among the Phlx's members.
Moreover, the Phlx believes that the payment for order flow rebate
program, as described above, should promote just and equitable
principles of trade, remove impediments to and perfect the mechanism of
a free and open market, and protect investors and the public interest
by allowing a more efficient use of funds, which may result in
increased liquidity, tighter markets, and more competition among
Exchange members.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Phlx 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
The Phlx did not solicit any written comments on the proposed rule
change. The Phlx has received written comments addressed generally to
its payment for order flow program. A letter from Merrill G. Davidoff
of Berger & Montague, P.C., on behalf of the Independent Traders
Association, Inc. and a letter from S.C. Hamilton stated that the
payment for order flow program
[[Page 13825]]
is in violation of Phlx by-laws. Mr. Davidoff's letter also expressed
concerns over the implementation of the program. A letter from Edward
Frank of Gateway Partners LLC requested an amendment to the program to
allow for rebates in certain situations. A letter from the Independent
Traders Association, Inc., stated concerns about the payment for order
flow program and how the Phlx is implementing the program. A handout
that the Independent Traders Association, Inc., distributed to the
Board of Governors at its regular board meeting on January 24, 2001,
summarized its concerns and proposed changes to the program. Although a
number of the letters have disagreed with the payment for order flow
program, the Phlx believes that it was necessary to adopt the program
to remain competitive. None of the letters addressed the terms of the
rebate program that is the subject of this filing. All of the letters
are available for inspection at the principal offices of the Phlx and
at the Commission.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
The Phlx has designated the foregoing proposed rule change as a fee
change pursuant to section 19(b)(3)(A) of the Act and Rule 19b-4(f)(2)
thereunder. Accordingly, the proposal has become immediately effective
upon filing with the Commission. At any time within 60 days of the
filing of the proposed rule change, the Commission may summarily
abrogate the 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.
IV. Solicitation of Comments
The Commission invites interested persons to submit written data,
views, and arguments concerning the foregoing, including whether the
proposed rule change is consistent with the Act. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
DC 20549-0609. Copies of the submissions, 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 changes 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
filings will also be available for inspection and copying at the
principal offices of the Phlx. All submissions should refer to File
Nos. SR-Phlx-01-14 and should be submitted by March 28, 2001.
For the Commission, by the Division of Market Regulation, pursuant
to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-5542 Filed 3-6-01; 8:45 am]
BILLING CODE 8010-01-M