01-5542. 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 ...

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 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.

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.

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]

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.

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 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]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  17 CFR 240.19B-4.

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.

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.

7.  The Phlx will make pro-rata determinations for amounts from August 2000 to October 2000 on a month-by -month basis.

8.  17 CFR 200.30-3(a)(12).