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Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 by the Philadelphia Stock Exchange, Inc. Relating to Equity Option Transaction Charges For Broker-Dealers and Firms

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Start Preamble November 14, 2000.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), 15 U.S.C. 78s(b)(1), notice is hereby given that on November 3, 2000, the Philadelphia Stock Exchange, Inc. (“Phlx” or “Exchange”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) the amended proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange.[1] On October 4, 2000, the Phlx filed the original proposed rule change. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

The Phlx, pursuant to Rule 19b-4 of the Act, proposes to adopt a $.20 equity Start Printed Page 69985option transaction charge on off-floor members for broker-dealer transactions, as defined herein, including a related definition of “firm/proprietary” for the purpose of the Summary of Equity Option Charges that appears in the Exchange's schedule of dues, fees and charges.[2]

A copy of the text of the Summary of Equity Option Charges may be obtained from the Exchange or the Commission.

II. Self-Regulatory Organization's Statements of the Purpose of, and Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the Exchange 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 Exchange has prepared summaries, set forth in section 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

Currently, the Exchange imposes a transaction charge on equity options transactions executed on the Exchange. The charges vary depending on whether the transaction involves a firm, Registered Options Trader (“ROT”) or specialist. Previously, equity option transaction charges were also imposed on customer executions, but on August 31, 2000, the Exchange eliminated all equity option transaction charges for customer executions.[3] Other exchanges also eliminated similar customer equity option fees.[4]

To offset the elimination of the customer equity option transaction and comparison charges, the Exchange proposes to impose a fee on its members of $.20 per contract for all off-floor broker-dealer orders routed to the Exchange. This category would include ROTs who are trading from off-floor and broker-dealer routing orders through firm, customer or market maker accounts carried by a member clearing firm, but not firm/proprietary orders, as defined below. All other equity option transaction charges will remain unchanged. Thus, the purpose of the proposal is to offset the recently waived equity option customer charges.

For purposes of the equity option transaction charge, the term broker-dealer charge is defined as a charge that is applied to members for orders, entered from other than the floor of the Exchange, for any account (i) in which the holder of beneficial interest is a member of non-member broker-dealer or (ii) in which the holder of beneficial interest is a person associated with or employed by a member or non-member broker-dealer. This includes orders for the account of an ROT entered from off-floor. The Exchange believes the proposed fee is reasonable and equitable, as the next-highest equity option transaction charge is $.19 for ROTs ($.16 transaction charge + $.03 comparison charge) and $.18 per contract for specialists. Thus, the proposed $.20 fee is only slightly higher.

Because the proposed $.20 fee does not apply to firm orders, (which may otherwise be captured in the proposed broker-dealer definition), the Exchange proposes a corresponding change to the definition of firm for purposes of the firm/proprietary comparison and transaction charges that would now limit these fees to a certain category of firm trades—firm/proprietary trades. According to the proposal, a firm/proprietary transaction or comparison charge applies to members for orders for the proprietary account of any member or non-member broker-dealer that derives more than 35 percent of its annual, gross revenues from commissions and principal transactions with customers. Firms will be required to verify this amount to the Exchange by certifying that they have reached this threshold and by submitting a copy of their annual report, which was prepared in accordance with Generally Accepted Accounting Principles (“GAAP”). In the event that a firm has not been in business for one year, the most recent quarterly reports, prepared in accordance with GAAP, will be accepted. This definition applies to both the option comparison charge and the transaction charge, and would appear on the summary of equity option charges as a footnote. Currently, a definition of “firm” does not appear on the summary. In addition, the footnote text that reads “(Non-clearing firm members' proprietary transactions are eligible for the “firm” rate based upon submission of a Phlx rebate request form with supportive documentation within thirty (30) days of invoice date.)” will be deleted as it is no longer necessary now that the category of broker-dealer is specifically included in the option transaction charge.

2. Statutory Basis

The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Act in general and furthers the objectives of Section 6(b)(4) of the Act, in particular, by providing for the equitable allocation of reasonable dues, fees and other charges among members and other Exchange participants. The Exchange believes that the proposed increase in the Equity Option transaction charge for broker-dealers is not unreasonable, as stated above. In addition, the Exchange notes that members will be charged the same option transaction charge for trades on behalf of both member and non-member broker-dealers trading off the floor (including ROTs trading from off-floor) of the Exchange. The Exchange emphasizes that only members/member organizations are billed transaction fees, whether for their own trading or their customers.

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

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) of the Act and Rule 19b-4(f)(2) thereunder. Accordingly, the proposal will take effect upon filing of Amendment No. 1 with the Commission. At any time within 60 days of the filing of Amendment No. 1, 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.Start Printed Page 69986

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. 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 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 will also be available for inspection and copying at the principal office of the Phlx. All submissions should refer to File No. SR-Phlx-00-85 and should be submitted by December 12, 2000.

Start Signature

For the Commission by the Division of Market Regulation, pursuant to delegated authority.

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble


1.  See Amendment No. 1 dated November 2, 2000 from Cynthia K. Hoekstra, Philadelphia Stock Exchange to Madge M. Hamilton, Esq., Division of Market Regulation, SEC (“Amendment No. 1”). This release incorporates all changes made in Amendment No. 1.

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2.  Equity Option Charges are comprised of the Option Comparison charge, Option Transaction charge, Option Floor Brokerage Assessment and the Floor Brokerage Transaction Fee.

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3.  See Securities Exchange Act Release No. 43343 (SR-Phlx-00-80) (September 26, 2000), 65 FR 59243 (October 4, 2000).

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4.  See Securities Exchange Act Release No. 42676 (SR-AMEX-00-15) (April 13, 2000), 65 FR 21223 (April 20, 2000); Securities Exchange Act Release No. 42850 (SR-CBOE-00-06) (May 30, 2000), 65 FR 36187 (June 7, 2000); and Securities Exchange Act Release No. 43115 (SR-PCX-00-16) (August 3, 2000), 65 FR 49280 (August 11, 2000). See also Securities Exchange Act Release No. 43020 (SR-PCX-00-14) (July 10, 2000), 65 FR 44558 (July 18, 2000).

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[FR Doc. 00-29747 Filed 11-20-00; 8:45 am]