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Notice

Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto by the Philadelphia Stock Exchange, Inc. To Adopt a Specialist Revenue Sharing Plan for Trades in the Nasdaq-100 Index Tracking Stock

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Start Preamble March 6, 2003.

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 16, 2002, 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 Phlx. The Exchange amended the proposal on February 28, 2003.[3] The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons.

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

The Phlx proposes to amend its schedule of dues, fees and charges to adopt a Specialist Revenue Sharing Plan for trades in the Nasdaq-100 Index Tracking Stock (“QQQ”).SM[4] Under this program, the Exchange is proposing to share with the QQQ specialist unit a portion of the revenues that the Exchange receives under the Consolidated Tape Association (“CTA”) Plan [5] attributable to the QQQ (which is reportable on Tape B).[6] The Exchange proposes to begin its program on November 1, 2002.

The text of the proposed rule change is set forth below. Additions are in italics.

Specialist Revenue Sharing Program for Nasdaq-100 Index Tracking Stock (“QQQ”)

The Exchange will share a portion of net revenues that it receives for Tape B under the Consolidated Tape Association (“CTA”) Plan attributable to the Nasdaq-100 Index Trading Stock (“QQQ”) with the specialist unit for the QQQ. The Specialist Revenue Sharing Program operates as follows:

  • Revenues under the CTA Plan are distributed to Plan Participants on a quarterly basis. Each quarter, the Phlx will start its calculation with the quarterly revenues actually received for Tape B.
  • First, Phlx will determine the portion of such quarterly revenues attributable to the trading of QQQ for each calendar month in the quarter to which the revenue is attributed.
  • Then, Phlx will subtract the amount it owes Nasdaq under its license agreement for each such calendar month, to arrive at the “Monthly Residual QQQ Tape Revenue” for that month.
  • The Monthly Residual QQQ Tape Revenue will be shared between Phlx and the QQQ specialist unit in the following order of priority, in each case to the extent that Monthly Residual QQQ Tape Revenues are available:

(i) Phlx will receive the first $15,000 per month of the Monthly Residual QQQ Tape Revenue to cover, at a minimum, its estimated monthly costs for operating and regulating trading of the QQQ on the Exchange;

(ii) the specialist unit will receive the next $15,000 per month; and Start Printed Page 12139

(iii) Phlx and the specialist unit will share equally, subject to reasonable rounding, any remaining Monthly Residual QQQ Tape Revenue for that month.

Phlx intends to perform this calculation monthly and then make distributions to the specialist unit quarterly, after it receives its Tape B distribution under the Plan for that quarter and following a reasonable processing period of ten business days.[I]

The program will apply to Tape B revenues in respect of QQQ trading on or after November 1, 2002.[II]

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 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 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 purpose of the proposed rule change is to attract additional business in the QQQ equity product through a Specialist Revenue Sharing Program. The Specialist Revenue Sharing Program is intended to provide the specialist unit with incentives to grow its specialist activity in the QQQ by reducing its costs of doing business and providing it with additional funds to commit to trading to promote liquidity.

The Specialist Revenue Sharing Program would operate as follows: Revenues under the CTA Plan are distributed to Plan Participants on a quarterly basis. Each quarter, the Phlx would start its calculation with the quarterly revenues actually received for Tape B in respect of a given, prior quarter; such quarterly revenues are usually received 45 days after the end of a quarter. First, the Phlx would determine the portion of such quarterly revenues attributable to trading in the QQQ for each calendar month in that quarter.[7] Then, the Phlx would subtract the amount it owes Nasdaq under its license agreement. The remainder (if any) respecting that calendar month (“Monthly Residual QQQ Tape Revenue”) would be shared between the Phlx and the QQQ specialist unit in the following order of priority, in each case to the extent that Monthly Residual QQQ Tape Revenues are available: (i) The Phlx would receive the first $15,000 per month of the Monthly Residual QQQ Tape Revenue to cover, at a minimum, its estimated costs for operating and regulating trading of the QQQ; [8] (ii) the specialist unit would receive the next $15,000 per month; and (iii) the Phlx and the specialist unit would share equally, subject to reasonable rounding, any remaining Monthly Residual QQQ Tape Revenue for that month. The proposal would be applied separately to each month; trades from one month may not be transferred to or aggregated with trades from another month.

The Phlx intends to perform this calculation in respect of each monthly period and then make distributions to the specialist unit quarterly, after it receives its Tape B distribution under the Plan and following a reasonable processing period of ten business days.[9] The program would apply to revenue in respect of QQQ trading on and after November 1, 2002.

2. Statutory Basis

The Phlx believes that the proposed rule change is consistent with the Act, including section 6(b)[10] and section 11A of the Act,[11] and will further the objectives of section 6(b)(5) of the Act [12] by promoting just and equitable principles of trade, removing impediments to and perfecting the mechanism of a free and open market and a national market system and, in general, protecting investors and the public interest, by encouraging use of the Phlx for trading the QQQ. Similarly, the Phlx believes that the Specialist Revenue Sharing Program for QQQ is consistent with section 11A of the Act,[13] because it is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure: (i) Economically efficient execution of securities transactions; and (ii) fair competition among exchange markets and between exchange markets and markets other than exchange markets. It also furthers the objectives of section 6(b)(4) of the Act [14] in that it is an equitable allocation of reasonable dues, fees, and other charges 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. The Phlx states that the proposal is designed to attract additional business to the Exchange in the QQQ by reducing the specialist unit's costs and providing it with additional funds to commit to trading, and, thus, should promote competition among market centers trading such securities.

C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others

The Phlx has neither solicited nor received written comments with respect to the proposed rule change.

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

Within 35 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the Phlx consents, the Commission will:

(A) By order approve such proposed rule change, or,

(B) Institute proceedings to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

On July 2, 2002, the Commission issued an Order abrogating certain proposed rule changes relating to market data revenue sharing Start Printed Page 12140programs.[15] In that Order, the Commission expressed concern that the subject proposed rule changes raised “serious questions as to whether they are consistent with the Act and with the protection of investors.” Specifically, the Commission questioned the effect of market data rebates on the accuracy of market data, and on the regulatory functions of self-regulatory organizations.

The Commission now solicits comment on the Phlx proposed rule change, and in general, on (1) Market data fees; (2) the collection of market data fees; (3) the distribution of market data rebates; (4) the effect of market data revenue sharing programs on the accuracy of market data; and (5) the impact of market data revenue sharing programs on the regulatory functions of self-regulatory organizations.

Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change, as amended, 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-2002-77 and should be submitted by April 3, 2003.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.16

Margaret H. McFarland.

Deputy Secretary.

End Signature End Preamble

Footnotes

3.  On February 28, 2003, the Exchange filed a Form 19b-4, which replaced the original filing in its entirety (“Amendment No. 1”). In Amendment No. 1, the Exchange made technical corrections to the proposed rule text.

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4.  The Nasdaq-100®, Nasdaq-100 Index®, Nasdaq®, The Nasdaq Stock Market®, 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 Phlx pursuant to a License Agreement with Nasdaq. The Nasdaq-100 Index® (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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5.  The CTA Plan is a national market system plan approved by the Commission pursuant to section 11A of the Act, (15 U.S.C. 78k-1, and Rule 11Aa3-2 thereunder, 17 CFR 240.11Aa3-2); CTA Plan: Second Restatement of Plan Submitted to the Securities and Exchange Commission Pursuant to Rule 11Aa3-1 under the Act, May 1974 as restated March 1980 and December 1995. The CTA Plan governs, among other things, the collection, consolidation and dissemination of transaction reports in certain securities and the distribution of the revenues derived therefrom among parties to the CTA Plan, which are known as the Plan Participants.

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6.  This proposal applies only to QQQ and to no other Tape B security nor any Tape A security.

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I.  Accordingly, this proposal is dependent upon the Exchange actually collecting its quarterly distribution of Tape B revenues. Any transaction or other fees that the QQQ specialist unit may owe to the Exchange are handled separately from this program, pursuant to the Exchange's fee schedules and billing practices.

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II.  For the first quarter of implementation, because the program will begin on November 1, 2002, the calculations will be based on the quarterly revenues received for the period November 1-December 31, 2002 (excluding the month of October).

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7.  The Phlx states that its total revenue Tape B distribution may be attributable to trades in securities other than QQQ.

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8.  The Exchange will periodically reconsider whether this amount is appropriate, and may adjust this figure from time to time, pursuant to a proposed rule change.

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9.  Accordingly, this proposal is dependent upon the Exchange actually collecting its quarterly distribution of Tape B revenues. Any transaction or other fees that the QQQ specialist unit may owe to the Exchange are handled separately from this program, pursuant to the Exchange's fee schedules and billing practices.

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15.  See Securities Exchange Act Release No. 46159 (July 2, 2002), 67 FR 45775 (July 10, 2002) (File Nos. SR-NASD-2002-61, SR-NASD-2002-68, SR-CSE-2002-06, and SR-PCX-2002-37) (Order of Summary Abrogation).

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[FR Doc. 03-6076 Filed 3-12-03; 8:45 am]

BILLING CODE 8010-01-P