Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by Philadelphia Stock Exchange, Inc. Relating to a Payment for Order Flow Fee

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) and Rule 19b-4 thereunder, notice is hereby given that on August 11, 2000, 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 have been prepared by the Phlx. The Commission is publishing this notice to solicit comments on the proposed rule change from interested parties.

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

The Phlx proposes to adopt a payment for order flow fee of a $1.00 per contract to be imposed on transactions by Phlx specialists and Registered Options Traders (“ROTs”) in the Top 120 Options on the Phlx. It would not apply to ROT-to-ROT or specialist-to-ROT transactions. The proposed fee will be effective as of August 1, 2000.

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

The purpose of the proposed rule change is to generate a source of revenue to be used by specialists in Top 120 Options for payment for order flow in respect of such options. By way of background, the listed options market is undergoing fundamental changes as a result of numerous recent developments, including the multiple listing of options and impending intermarket linkage. The Exchange believes that it is necessary for it to adopt this type of fee in order to maintain and enhance the Exchange's competitive position—particularly in light of the fact that three of the four other options exchanges have either announced or implemented similar programs.

The Exchange will collect the fee on a monthly basis and segregate the funds received from the specialists and ROTs by option. The specialists will be able to use the funds collected with respect to a particular option to make payments to broker-dealers for order flow in that option, thereby attracting options orders to the Phlx. The specialists for each option will have discretion in establishing the amounts that will be paid to order flow providers in respect of order flow for that option. The specialist will receive these funds after submitting an Exchange form identifying the amount of the requested funds.

The specialists will make all determinations concerning which order flow providers will receive payments and the amounts that they will be paid for orders. In order to assist the Exchange in determining the effectiveness of the proposed fee, the specialists will account to the Exchange for the use they make of the funds collected. In addition, the Exchange will provide certain administrative duties to assist the specialists, such as performing any necessary accounting functions and keeping track of the number of qualified orders that firms direct to the Exchange.

The Exchange believes that ROT-to-ROT and specialists-to-ROT transactions should be excluded, because those are not the kind of transactions that the fee is designed to attract. Moreover, the Exchange does not wish to impose a fee on the hedging or rebalancing transactions in which ROTs engage in support of their affirmative market-making obligations.

In connection with any program involving payment for order flow that may be funded by this proposed fee, the Exchange will issue appropriate circulars to its members that emphasize the disclosure and best execution obligations of members who accept such payment. Any changes to the class of options to which this proposed fee applies, to the rate or rates at which the fee is assessed, or to the disposition by the Exchange of funds generated by the fee will be the subject of separate filings with the Commission pursuant to Section 19(b)(3)(A)(ii) of the Act.

The proposed fee will be imposed on all transactions by specialists and ROTs in the Top 120 Options, other than ROT-to-ROT or specialists-to-ROT transactions. The Exchange envisions that the persons who pay the fees will also participate in the order flow derived from the proposed plan. The Exchange believes that, because the specialists and ROTs who pay the proposed fee should also receive the benefits of increased order flow, the proposed plan will provide for the equitable allocation of reasonable fees among the Exchange's members. Moreover, the Exchange believes that the fee 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 attracting more order flow to the Exchange, which, in the Exchange's view, should result in increased liquidity, tighter markets, and more competition among exchange members. Accordingly, the Exchange believes that its proposal is consistent with and furthers the objectives of the Act, including Sections 6(b)(4) and 6(b)(5) thereof.

B. Self-Regulatory Organization's Statement on Burden on Competition

The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.

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

No written comments were solicited or received with respect to the proposed rule change.

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

Because the Phlx has designated the foregoing proposed rule change as a fee change pursuant to Section 19(b)(3)(A)(ii) of the Act and Rule 19b-4(f)(2) thereunder, the proposal has taken effect upon filing with the Commission. At any time within 60 days of the filing of the 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.

IV. Solicitation of Comments

The Commission, in the past, has raised serious concerns about payment for order flow and internalization. Payment for order flow is of concern because brokers who are paid to send their customers' orders to one exchange have a conflict of interest that may reduce their commitment to the duty they owe their customers to find the best execution available. While payment for order flow has been a common practice in the equities markets for some time, only recently has payment for order flow developed in the options markets. Despite these concerns, however, the Phlx's proposal involves the imposition of a fee and the Act gives exchanges wide latitude to establish, revise, and collect fees and other charges without prior Commission approval. The Commission invites interested persons to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule is consistent with the Act. In particular, the Commission asks persons who submit comments whether the payment for order flow facilitated by the Phlx's proposal raises greater or different concerns than payments for order flow at other options exchanges. After receiving comments, and at any time within 60 days from the date the Phlx filed its proposal, the Commission can decide to require the Phlx to stop collecting the fee, refile the proposal, and await Commission approval before reinstituting the fee.

Persons making written submissions should file six copies there of with the Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 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 bewteen 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-00-77 and should be submitted by September 15, 2000.