Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change and Amendment No. 1 Thereto Relating to Its Marketing Fee Program, 71568-71571 [E5-6659]
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Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Notices
trade against the responses at the
highest price points. Fourth, the auction
will conclude early any time there is a
quote lock on the Exchange pursuant to
Rule 6.45A(d). Fifth, the auction will
conclude early any time a response
matches the Exchange’s disseminated
quote on the opposite side of the market
from the response.
Lastly, the Exchange seeks to adopt
provisions providing that a pattern or
practice of submitting unrelated orders
that cause an auction to conclude early
and disseminating information
regarding such orders to third parties
will be deemed conduct inconsistent
with just and equitable principles of
trade and a violation of CBOE Rule 4.1
and, potentially, other Exchange Rules.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with section
6(b) of the Act 3 in general and furthers
the objectives of section 6(b)(5) 4 in
particular in that by swiftly providing
potential price improvement over the
NBBO to qualifying inbound orders, it
should promote just and equitable
principles of trade, serve to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and
protect investors and the public interest.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change would 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
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 self-regulatory
organization consents, the Commission
will:
(A) By order approve such proposed
rule change, or
3 15
4 15
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
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.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–CBOE–2005–90 on the
subject line.
20:13 Nov 28, 2005
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–52818; File No. SR–CBOE–
2005–91]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change and Amendment No. 1
Thereto Relating to Its Marketing Fee
Program
November 22, 2005.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
• Send paper comments in triplicate
notice is hereby given that on November
to Jonathan G. Katz, Secretary,
2, 2005, the Chicago Board Options
Securities and Exchange Commission,
Exchange, Incorporated (‘‘CBOE’’ or
100 F Street, NE., Washington, DC
‘‘Exchange’’) filed with the Securities
20549–9303. All submissions should
refer to File Number SR-CBOE–2005–90. and Exchange Commission
This file number should be included on (‘‘Commission’’) the proposed rule
the subject line if e-mail is used. To help change as described in Items I, II, and
III below, which Items have been
the Commission process and review
prepared by the Exchange. On
your comments more efficiently, please
November 17, 2005, the CBOE
use only one method. The Commission
submitted Amendment No. 1 to the
will post all comments on the
proposed rule change.3 The CBOE has
Commission’s Internet Web site (https://
designated this proposal as one
www.sec.gov/rules/sro.shtml). Copies of
changing a fee imposed by the CBOE
the submission, all subsequent
under Section 19(b)(3)(A)(ii) of the Act 4
amendments, all written statements
and Rule 19b–4(f)(2) thereunder,5 which
with respect to the proposed rule
renders the proposal, as amended,
change that are filed with the
effective upon filing with the
Commission, and all written
Commission. The Commission is
communications relating to the
publishing this notice to solicit
proposed rule change between the
comments on the proposed rule change,
Commission and any person, other than as amended, from interested persons.
those that may be withheld from the
I. Self-Regulatory Organization’s
public in accordance with the
Statement of the Terms of Substance of
provisions of 5 U.S.C. 552, will be
the Proposed Rule Change
available for inspection and copying in
The CBOE proposes to amend its Fees
the Commission’s Public Reference
Schedule and its marketing fee program
Room. Copies of the filing also will be
in a number of respects, including to
available for inspection and copying at
the principal office of CBOE. All
5 17 CFR 200.30–3(a)(12).
comments received will be posted
1 15 U.S.C. 78s(b)(1).
without change; the Commission does
2 17 CFR 240.19b–4.
3 Partial Amendment No. 1 (‘‘Amendment No.
not edit personal identifying
1’’): (1) Amended the effective date of the proposal
information from submissions. You
from November 1, 2005 to November 2, 2005; (2)
should submit only information that
amended the purpose section of the filing to clarify
you wish to make available publicly. All that the Preferred Market-Maker Program is a pilot
submissions should refer to File
program set to expire on June 2, 2006; (3) amended
Number SR-CBOE–2005–90 and should the rule text to specify that the marketing fee
program will expire on June 2, 2006, the date the
be submitted on or before December 20, Preferred Market-Maker Program is set to expire;
2005.
and (4) made a technical correction to a footnote.
Paper Comments
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
VerDate Aug<31>2005
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.5
Jonathan G. Katz,
Secretary.
[FR Doc. E5–6656 Filed 11–28–05; 8:45 am]
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5 17
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U.S.C. 78s(b)(3)(A)(ii).
CFR 240.19b–4(f)(2).
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Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Notices
permit a ‘‘Preferred Market-Maker’’ to
direct the Exchange to disburse funds
generated by the marketing fee where an
order provider sends an order to the
Exchange designating a Preferred
Market-Maker. These changes to the
marketing fee program would be
effective November 2, 2005 and remain
in effect until June 2, 2006, which is the
date that CBOE’s pilot program
establishing its Preferred Market-Maker
program is scheduled to expire, unless
extended through a rule filing submitted
to and approved by the Commission.6
Below is the text of the proposed rule
change, as amended. Proposed new
language is in italic; proposed deletions
are in [brackets].7
CHICAGO BOARD OPTIONS
EXCHANGE, INC.
FEES SCHEDULE
[October 25] November 2, 2005
1. No Change.
2. MARKETING FEE (6)(16)—$.22
3.–4. No Change.
FOOTNOTES:
(1)–(5) No Change.
(6) The Marketing Fee will be
assessed only on transactions of MarketMakers, RMMs, e-DPMs, DPMs, and
LMMs at the rate of $.22 per contract on
all classes of equity options, options on
HOLDRs, options on SPDRs, and
options on DIA. The fee will not apply
to Market-Maker-to-Market-Maker
transactions. This fee shall not apply to
index options and options on ETFs
(other than options on SPDRs and
options on DIA). If less than 80% of the
marketing fee funds are paid out by the
DPM or LMM in a given month, then
[Should any surplus of the marketing
fees at the end of each month occur,] the
Exchange would [then] refund such
surplus at the end of the month[, if any,]
on a pro rata basis based upon
contributions made by the MarketMakers, RMMs, e-DPMs, DPMs and
LMMs. However, if 80% or more of the
accumulated funds in a given month are
paid out by the DPM or LMM, there will
not be a rebate for that month and the
funds will carry over and will be
included in the pool of funds to be used
by the DPM or LMM the following
month. At the end of each quarter, the
Exchange would then refund any
surplus, if any, on a pro rata basis based
upon contributions made by the MarketMakers, RMMs, DPMs, e-DPMs and
LMMs. CBOE’s marketing fee program
as described above will be in effect until
June 2, 2006.
*
*
*
*
*
6 See
Amendment No. 1, supra note 3.
7 Id.
VerDate Aug<31>2005
20:55 Nov 28, 2005
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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
CBOE included statements concerning
the purpose of and basis for the
proposed rule change, as amended, and
discussed any comments it received on
the proposed rule change, as amended.
The text of these statements may be
examined at the places specified in Item
IV below. The CBOE 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 Exchange states that on October
29, 2004, it amended its marketing fee
program.8 The current marketing fee is
assessed upon Designated Primary
Market-Makers (‘‘DPMs’’), Electronic
DPMs (‘‘e-DPMs’’), Remote MarketMakers (‘‘RMMs’’), Lead Market-Makers
(‘‘LMMs’’), and Market-Makers at a rate
of $0.22 for every contract they enter
into on the Exchange other than MarketMaker-to-Market-Maker transactions
(which includes all transactions
between any combination of DPMs, eDPMs, RMMs, LMMs, and MarketMakers). The marketing fee is assessed
in all equity option classes and options
on HOLDRs 9, options on SPDRs 10
and options on DIA.11 The Exchange
represents that the purpose of the
marketing fee program is to provide the
members of the Exchange with the
ability to compete for the opportunity to
trade with those orders that may
otherwise be routed to other exchanges.
The Exchange states that under the
current program, all funds generated by
the marketing fee are collected by the
Exchange and recorded according to the
DPM or LMM, as applicable, station and
class where the options subject to the
fee are traded. The money collected is
disbursed by the Exchange according to
the instructions of the DPM or LMM.
8 For a description of CBOE’s marketing fee
program, see Securities Exchange Act Release No.
50736 (November 24, 2004), 69 FR 69966
(December 1, 2004) (SR–CBOE–2004–68).
9 HOLDRs are trust-issued receipts that represent
an investor’s beneficial ownership of a specified
group of stocks. See Interpretation .07 to CBOE Rule
5.3.
10 See, Securities Exchange Act Release No. 51052
(January 18, 2005), 70 FR 3757 (January 26, 2005)
(SR–CBOE–2005–05).
11 See, Securities Exchange Act Release No. 52474
(September 20, 2005), 70 FR 56520 (September 27,
2005) (SR–CBOE–2005–72).
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Those funds are made available to the
DPM or LMM solely for those trading
crowds where the fee was assessed and
may only be used by that DPM or LMM
to attract orders in the classes of options
for which the fee was assessed.
CBOE recently obtained approval of a
rule filing adopting a Preferred MarketMaker program.12 Under that program,
order providers can send an order to the
Exchange designating any CBOE
Market-Maker (including any DPM, eDPM, LMM, RMM, and Market-Maker)
as a Preferred Market-Maker. If the
Preferred Market-Maker is quoting at the
NBBO at the time the order is received
on CBOE, the Preferred Market-Maker is
entitled to a participation entitlement of
50% when there is one Market-Maker
also quoting at the best bid/offer on the
Exchange and 40% when there are two
or more Market-Makers quoting at the
best bid/offer on the Exchange.
CBOE proposes to amend its
marketing fee program in a number of
respects in light of the recent adoption
of its Preferred Market-Maker program.
These changes to the marketing fee
program would be effective November 2,
2005 and expire on June 2, 2006, which
is the date that CBOE’s pilot program
establishing its Preferred Market-Maker
program is scheduled to expire, unless
extended through a rule filing submitted
to and approved by the Commission.13
In particular, CBOE proposes to amend
its marketing fee program to provide
that a Market-Maker would have access
to the marketing fee funds generated by
orders sent to the Exchange designating
that Market-Maker as a ‘‘Preferred
Market-Maker.’’
The following is a description of the
three-step process by which the entire
pool of funds generated by the
marketing fee would be apportioned
between the DPM or LMM, and
Preferred Market-Makers. First,
consistent with the current program,
each month all funds generated by the
marketing fee would be collected by the
Exchange and recorded according to the
DPM or LMM, as applicable, station and
class where the option classes subject to
the fee are traded. If a Market-Maker
(including any DPM, e-DPM, LMM, and
RMM) is designated as a Preferred
Market-Maker on an order from a
payment accepting firm (‘‘PAF’’), the
Market-Maker would be given access to
the marketing fee funds generated from
that order, even if the Preferred MarketMaker did not participate in the
12 See Securities Exchange Act Release No. 52506
(September 23, 2005), 70 FR 57340 (September 30,
2005) (SR–CBOE–2005–58).
13 See Amendment No. 1, supra note 3.
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Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Notices
execution of the order because the
Market-Maker was not quoting at the
NBBO at the time the order was
received on CBOE.14 The Exchange
believes that it is appropriate to give
Preferred Market-Makers access to all of
the funds generated by the marketing fee
for any order as to which they were
designated the Preferred Market-Maker
because the Preferred Market-Maker
negotiated with a PAF to send their
order flow to CBOE and to designate a
particular Market-Maker as the Preferred
Market-Maker. Second, the DPM or
LMM, as applicable, would be given
access to the marketing fee funds
generated from all other orders from
PAFs in its appointed classes in a
particular trading station. Third, the
marketing fee funds generated by orders
from non-PAFs, if any, would be
apportioned monthly among the DPM or
LMM, and Preferred Market-Makers on
a on a pro-rata basis, based on the
percentage of contracts traded by each
DPM or LMM and Preferred MarketMaker against orders from PAFs during
the month in the option classes located
at a particular trading station.
The following is an example of how
funds generated from CBOE’s marketing
fee program would be allocated to
Preferred Market-Makers, DPMs, and
LMMs pursuant to the preceding three
steps. As noted above, each month all
funds generated by the marketing fee are
collected by the Exchange and recorded
according to the DPM or LMM, as
applicable, station and class where the
option classes subject to the fee are
traded. Thus, assuming 45,455 contracts
traded in a particular month at Station
1 on the trading floor, $10,000 (45,455
contracts × $.22) would be generated as
a result of the marketing fee to be used
to attract order flow to CBOE.
Pursuant to Step 1, assuming the DPM
and two other Market-Makers were
designated as Preferred Market-Makers
for orders executed in option classes at
Station 1, they would be allocated the
following funds:
Contracts
DPM ..........
Funds Allocated
5,000
Contracts
Funds Allocated
Preferred
MarketMaker #2
3,500
Total
11,000
$770
($.22 * 3,500)
$2,420
($.22 * 11,000)
Pursuant to Step 2, the Exchange
would determine the amount of funds
generated from orders from PAFs that
were executed in option classes at
Station 1, and these funds would be
allocated to the DPM to attract order
flow to CBOE. Assuming orders from
PAFs representing 10,000 contracts
were executed with Market-Makers
(including the DPM or LMM, e-DPM(s),
and RMM(s)), at Station 1, $2,200
(10,000*$.22) in funds would be
generated and allocated to the DPM.
As a result of Steps 1 and 2 above, the
original pool of funds generated by the
marketing fee at Station ($10,000),
would have been depleted in Step 1 by
$2,420, and in Step 2 by $2,200.
Assuming remaining number of
contracts executed at Station 1, i.e.,
24,455 contracts, 15 were from orders
from non-PAFs, a total of $5,380 (24,455
* $.22) would be the remaining balance
of funds. Pursuant to Step 3, these funds
would be apportioned monthly among
the DPM (or LMM) and Preferred
Market-Makers on a pro-rata basis,
based on the percentage of contracts
traded by each DPM (or LMM) and
Preferred Market-Maker against orders
from PAFs. Assuming the DPM and the
two Preferred Market-Makers executed
the following percentage of contracts
from orders from PAFs at Station 1, they
would be allocated the following funds:
% of PAF
contracts
(percent)
Funds allocated
(percent)
DPM ..........
65
$3,497
(65 * $5,380)
Preferred
MarketMaker #1
15
807
(15 * $5,380)
Preferred
MarketMaker #2
20
1,076
(20 * $5,380)
$1,100
($.22 * 5,000)
The funds generated by the marketing
fee would continue to be collected by
2,500
$550 the Exchange and recorded according to
($.22 * 2,500) the applicable trading station and class
where the options subject to the fee are
14 For example, assume a Market-Maker is
traded. The money collected would be
designated as a Preferred Market-Maker on an order
disbursed by the Exchange according to
for 50 contracts which is executed on CBOE. Under
the instructions of the DPM, LMM or the
this first step, the Preferred Market-Maker would be
Preferred
MarketMaker #1
given access to a total of $11 (50 contracts × $.22),
whether or not the Preferred Market-Maker traded
with the order or not.
VerDate Aug<31>2005
20:13 Nov 28, 2005
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15 45,455 less 11,000 contracts (see Step 1) and
10,000 contracts (see Step 2).
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Preferred Market-Maker. These funds
shall only be used to attract order flow
to CBOE from PAF, and the funds made
available to the DPM or LMM may only
be used to attract orders in the option
classes located at the trading station
where the fee was assessed. Thus, a
member organization appointed as the
DPM at a particular trading station on
the trading floor cannot use the funds
from that trading station to attract order
flow to another trading station on the
trading floor where that member serves
as the DPM.
Additionally, the Exchange does not
intend to continue to require that the
funds collected from e-DPMs and RMMs
can only be used to attract order flow for
the classes in which the e-DPM or RMM
is appointed. The Exchange does not
believe such a restriction is necessary or
reasonable in light of manner in which
firms negotiate with PAFs to direct their
order flow to the Exchange. Specifically,
the Exchange notes that many DPMs or
LMMs negotiate with PAFs to route
their order flow to the Exchange for all
of the classes located at a particular
trading station, and not necessarily on a
class-by-class basis. Additionally, any
use of the marketing fees by the DPM
outside of an RMM’s or an e-DPM’s
appointment may still benefit the RMM
or e-DPM because e-DPMs and RMMs
are permitted under Exchange rules to
enter orders in option classes traded on
the Exchange that are not included
within their appointment. Therefore, the
Exchange believes that there is an
equitable allocation of use of the fees by
the DPM because the order flow from a
PAF can be accessed by an RMM or
eDPM, outside their appointments,
through ‘‘M’’ orders.
In the event a Preferred Market-Maker
does not disburse all of the funds
generated by the marketing fee in a
given month, then the funds the
Preferred Market-Maker does not
disburse would be made available to the
DPM or LMM, as applicable, for the
following month to attract orders in the
classes of options where the DPM or
LMM is appointed.
Finally, the Exchange proposes to
amend the program with respect to the
manner in which surplus funds are
refunded to Market-Makers, RMMs,
DPMs, e-DPMs, and LMMs. Currently,
the Exchange refunds any surplus at the
end of the month on a pro rata basis
based upon contributions made by the
Market-Makers, RMMs, DPMs, e-DPMs,
and LMMs. Going forward, if 80% or
more of the accumulated funds in a
given month are paid out by the DPM
or LMM, there would not be a rebate for
that month and the funds would carry
over and would be included in the pool
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of funds to be used by the DPM or LMM
in the following month. If less than 80%
of the funds is paid out, Market-Maker
rebates would continue to be made on
a monthly basis. At the end of each
quarter, the Exchange would then
refund any surplus, if any, on a pro rata
basis based upon contributions made by
the Market-Makers, RMMs, DPMs, eDPMs, and LMMs.
In the foregoing example, the DPM
and Preferred Market-Maker #1 and
Preferred Market-Maker #2 were
allocated the following amounts:
Total allocated
DPM ..................................
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change, as amended,
will impose any inappropriate burden
on competition not necessary or
appropriate in furtherance of the
purposes of the Act.
$6,797
($1,100 + 2,200
+ 3,497)
Preferred Market-Maker
#1 ..................................
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received from
1,357 Members, Participants, or Others
($550 + 807)
Preferred Market-Maker
#2 ..................................
1,846
($770 + 1076)
If the DPM only paid out a total of
$6,150 of the $6,797 allocated to it in a
given month (or 90% of its funds), then
$647 would carry over for the DPM to
use to attract order in the following
month. If Preferred Market-Maker #1
paid out a total of $1,200 of the $1,357
allocated to it in a given month, then
$157 would be made available to the
DPM (or LMM) for the following month
to attract orders in the classes of options
where the DPM (or LMM) is appointed.
If Preferred Market-Maker #2 paid out a
total of $1,846 allocated to it in a given
month, then none of Preferred MarketMaker #2’s funds would carry over to
the DPM (or LMM) for the following
month.
As in the current marketing fee
program, the Exchange would not be
involved in the determination of the
terms governing the orders that qualify
for payment with any PAF or the
amount of any such payment. The
Exchange would provide administrative
support for the program in such matters
as maintaining the funds, keeping track
of the number of qualified orders each
firm directs to the Exchange, and
making the necessary debits and credits
to the accounts of the traders and the
PAFs to reflect the payments that are
made. Exchange Market-Makers, RMMs,
DPMs, e-DPMs, and LMMs would have
no way of identifying prior to execution
whether a particular order is from a PAF
or a non-PAF.
2. Statutory Basis
The Exchange believes that its
proposal, as amended, is consistent with
VerDate Aug<31>2005
Section 6(b) of the Act16 in general, and
furthers the objectives of Section 6(b)(4)
of the Act17 in particular, in that it is an
equitable allocation of reasonable dues,
fees, and other charges among CBOE
members and other persons using its
facilities.
20:13 Nov 28, 2005
Jkt 208001
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,
as amended, has been designated as a
fee change pursuant to Section
19(b)(3)(A)(ii) of the Act 18 and Rule
19b–4(f)(2) 19 thereunder, because it
establishes or changes a due, fee, or
other charge imposed by the Exchange.
Accordingly, the proposal will took
effect upon filing with the Commission.
At any time within 60 days of the filing
of such proposed rule change, as
amended, 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.20
IV. Solicitation of Comments
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. Comments may be submitted by
any of the following methods:
16 15
U.S.C. 78f(b).
U.S.C. 78f(b)(4).
18 15 U.S.C. 78s(b)(3)(A)(ii).
19 17 CFR 240.19b–4(f)(2).
20 The effective date of the original proposed rule
change is November 2, 2005, the effective date of
Amendment No. 1 is November 17, 2005. For
purposes of calculating the 60-day period within
which the Commission may summarily abrogate the
proposal, the Commission considers the period to
commence on November 17, 2005, the date on
which the Exchange submitted Amendment No. 1.
17 15
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71571
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–CBOE–2005–91 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Jonathan G. Katz, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–9303.
All submissions should refer to File
Number SR–CBOE–2005–91. This file
number should be included on the
subject line if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). 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, as amended,
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 also will be
available for inspection and copying at
the principal office of the CBOE. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–CBOE–2005–91 and should
be submitted on or before December 20,
2005.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.21
Jonathan G. Katz,
Secretary.
[FR Doc. E5–6659 Filed 11–28–05; 8:45 am]
BILLING CODE 8010–01–P
21 17
E:\FR\FM\29NON1.SGM
CFR 200.30–3(a)(12).
29NON1
]]>Agencies
[Federal Register Volume 70, Number 228 (Tuesday, November 29, 2005)]
[Notices]
[Pages 71568-71571]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-6659]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-52818; File No. SR-CBOE-2005-91]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change and Amendment No. 1 Thereto Relating to Its
Marketing Fee Program
November 22, 2005.
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 November 2, 2005, the Chicago Board Options Exchange, Incorporated
(``CBOE'' 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 the
Exchange. On November 17, 2005, the CBOE submitted Amendment No. 1 to
the proposed rule change.\3\ The CBOE has designated this proposal as
one changing a fee imposed by the CBOE under Section 19(b)(3)(A)(ii) of
the Act \4\ and Rule 19b-4(f)(2) thereunder,\5\ which renders the
proposal, as amended, effective upon filing with the Commission. The
Commission is publishing this notice to solicit comments on the
proposed rule change, as amended, from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Partial Amendment No. 1 (``Amendment No. 1''): (1) Amended
the effective date of the proposal from November 1, 2005 to November
2, 2005; (2) amended the purpose section of the filing to clarify
that the Preferred Market-Maker Program is a pilot program set to
expire on June 2, 2006; (3) amended the rule text to specify that
the marketing fee program will expire on June 2, 2006, the date the
Preferred Market-Maker Program is set to expire; and (4) made a
technical correction to a footnote.
\4\ 15 U.S.C. 78s(b)(3)(A)(ii).
\5\ 17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The CBOE proposes to amend its Fees Schedule and its marketing fee
program in a number of respects, including to
[[Page 71569]]
permit a ``Preferred Market-Maker'' to direct the Exchange to disburse
funds generated by the marketing fee where an order provider sends an
order to the Exchange designating a Preferred Market-Maker. These
changes to the marketing fee program would be effective November 2,
2005 and remain in effect until June 2, 2006, which is the date that
CBOE's pilot program establishing its Preferred Market-Maker program is
scheduled to expire, unless extended through a rule filing submitted to
and approved by the Commission.\6\
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\6\ See Amendment No. 1, supra note 3.
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Below is the text of the proposed rule change, as amended. Proposed
new language is in italic; proposed deletions are in [brackets].\7\
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\7\ Id.
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CHICAGO BOARD OPTIONS EXCHANGE, INC.
FEES SCHEDULE
[October 25] November 2, 2005
1. No Change.
2. MARKETING FEE (6)(16)--$.22
3.-4. No Change.
FOOTNOTES:
(1)-(5) No Change.
(6) The Marketing Fee will be assessed only on transactions of
Market-Makers, RMMs, e-DPMs, DPMs, and LMMs at the rate of $.22 per
contract on all classes of equity options, options on HOLDRs, options
on SPDRs, and options on DIA. The fee will not apply to Market-Maker-
to-Market-Maker transactions. This fee shall not apply to index options
and options on ETFs (other than options on SPDRs and options on DIA).
If less than 80% of the marketing fee funds are paid out by the DPM or
LMM in a given month, then [Should any surplus of the marketing fees at
the end of each month occur,] the Exchange would [then] refund such
surplus at the end of the month[, if any,] on a pro rata basis based
upon contributions made by the Market-Makers, RMMs, e-DPMs, DPMs and
LMMs. However, if 80% or more of the accumulated funds in a given month
are paid out by the DPM or LMM, there will not be a rebate for that
month and the funds will carry over and will be included in the pool of
funds to be used by the DPM or LMM the following month. At the end of
each quarter, the Exchange would then refund any surplus, if any, on a
pro rata basis based upon contributions made by the Market-Makers,
RMMs, DPMs, e-DPMs and LMMs. CBOE's marketing fee program as described
above will be in effect until June 2, 2006.
* * * * *
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 CBOE included statements
concerning the purpose of and basis for the proposed rule change, as
amended, and discussed any comments it received on the proposed rule
change, as amended. The text of these statements may be examined at the
places specified in Item IV below. The CBOE 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 Exchange states that on October 29, 2004, it amended its
marketing fee program.\8\ The current marketing fee is assessed upon
Designated Primary Market-Makers (``DPMs''), Electronic DPMs (``e-
DPMs''), Remote Market-Makers (``RMMs''), Lead Market-Makers
(``LMMs''), and Market-Makers at a rate of $0.22 for every contract
they enter into on the Exchange other than Market-Maker-to-Market-Maker
transactions (which includes all transactions between any combination
of DPMs, e-DPMs, RMMs, LMMs, and Market-Makers). The marketing fee is
assessed in all equity option classes and options on
HOLDRs[reg] \9\, options on SPDRs[reg] \10\ and
options on DIA.\11\ The Exchange represents that the purpose of the
marketing fee program is to provide the members of the Exchange with
the ability to compete for the opportunity to trade with those orders
that may otherwise be routed to other exchanges.
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\8\ For a description of CBOE's marketing fee program, see
Securities Exchange Act Release No. 50736 (November 24, 2004), 69 FR
69966 (December 1, 2004) (SR-CBOE-2004-68).
\9\ HOLDRs are trust-issued receipts that represent an
investor's beneficial ownership of a specified group of stocks. See
Interpretation .07 to CBOE Rule 5.3.
\10\ See, Securities Exchange Act Release No. 51052 (January 18,
2005), 70 FR 3757 (January 26, 2005) (SR-CBOE-2005-05).
\11\ See, Securities Exchange Act Release No. 52474 (September
20, 2005), 70 FR 56520 (September 27, 2005) (SR-CBOE-2005-72).
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The Exchange states that under the current program, all funds
generated by the marketing fee are collected by the Exchange and
recorded according to the DPM or LMM, as applicable, station and class
where the options subject to the fee are traded. The money collected is
disbursed by the Exchange according to the instructions of the DPM or
LMM. Those funds are made available to the DPM or LMM solely for those
trading crowds where the fee was assessed and may only be used by that
DPM or LMM to attract orders in the classes of options for which the
fee was assessed.
CBOE recently obtained approval of a rule filing adopting a
Preferred Market-Maker program.\12\ Under that program, order providers
can send an order to the Exchange designating any CBOE Market-Maker
(including any DPM, e-DPM, LMM, RMM, and Market-Maker) as a Preferred
Market-Maker. If the Preferred Market-Maker is quoting at the NBBO at
the time the order is received on CBOE, the Preferred Market-Maker is
entitled to a participation entitlement of 50% when there is one
Market-Maker also quoting at the best bid/offer on the Exchange and 40%
when there are two or more Market-Makers quoting at the best bid/offer
on the Exchange.
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\12\ See Securities Exchange Act Release No. 52506 (September
23, 2005), 70 FR 57340 (September 30, 2005) (SR-CBOE-2005-58).
---------------------------------------------------------------------------
CBOE proposes to amend its marketing fee program in a number of
respects in light of the recent adoption of its Preferred Market-Maker
program. These changes to the marketing fee program would be effective
November 2, 2005 and expire on June 2, 2006, which is the date that
CBOE's pilot program establishing its Preferred Market-Maker program is
scheduled to expire, unless extended through a rule filing submitted to
and approved by the Commission.\13\ In particular, CBOE proposes to
amend its marketing fee program to provide that a Market-Maker would
have access to the marketing fee funds generated by orders sent to the
Exchange designating that Market-Maker as a ``Preferred Market-Maker.''
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\13\ See Amendment No. 1, supra note 3.
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The following is a description of the three-step process by which
the entire pool of funds generated by the marketing fee would be
apportioned between the DPM or LMM, and Preferred Market-Makers. First,
consistent with the current program, each month all funds generated by
the marketing fee would be collected by the Exchange and recorded
according to the DPM or LMM, as applicable, station and class where the
option classes subject to the fee are traded. If a Market-Maker
(including any DPM, e-DPM, LMM, and RMM) is designated as a Preferred
Market-Maker on an order from a payment accepting firm (``PAF''), the
Market-Maker would be given access to the marketing fee funds generated
from that order, even if the Preferred Market-Maker did not participate
in the
[[Page 71570]]
execution of the order because the Market-Maker was not quoting at the
NBBO at the time the order was received on CBOE.\14\ The Exchange
believes that it is appropriate to give Preferred Market-Makers access
to all of the funds generated by the marketing fee for any order as to
which they were designated the Preferred Market-Maker because the
Preferred Market-Maker negotiated with a PAF to send their order flow
to CBOE and to designate a particular Market-Maker as the Preferred
Market-Maker. Second, the DPM or LMM, as applicable, would be given
access to the marketing fee funds generated from all other orders from
PAFs in its appointed classes in a particular trading station. Third,
the marketing fee funds generated by orders from non-PAFs, if any,
would be apportioned monthly among the DPM or LMM, and Preferred
Market-Makers on a on a pro-rata basis, based on the percentage of
contracts traded by each DPM or LMM and Preferred Market-Maker against
orders from PAFs during the month in the option classes located at a
particular trading station.
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\14\ For example, assume a Market-Maker is designated as a
Preferred Market-Maker on an order for 50 contracts which is
executed on CBOE. Under this first step, the Preferred Market-Maker
would be given access to a total of $11 (50 contracts x $.22),
whether or not the Preferred Market-Maker traded with the order or
not.
---------------------------------------------------------------------------
The following is an example of how funds generated from CBOE's
marketing fee program would be allocated to Preferred Market-Makers,
DPMs, and LMMs pursuant to the preceding three steps. As noted above,
each month all funds generated by the marketing fee are collected by
the Exchange and recorded according to the DPM or LMM, as applicable,
station and class where the option classes subject to the fee are
traded. Thus, assuming 45,455 contracts traded in a particular month at
Station 1 on the trading floor, $10,000 (45,455 contracts x $.22) would
be generated as a result of the marketing fee to be used to attract
order flow to CBOE.
Pursuant to Step 1, assuming the DPM and two other Market-Makers
were designated as Preferred Market-Makers for orders executed in
option classes at Station 1, they would be allocated the following
funds:
------------------------------------------------------------------------
Contracts Funds Allocated
------------------------------------------------------------------------
DPM...................................... 5,000 $1,100
($.22 * 5,000)
Preferred Market-Maker 1........ 2,500 $550
($.22 * 2,500)
Preferred Market-Maker 2........ 3,500 $770
($.22 * 3,500)
Total.............................. 11,000 $2,420
($.22 * 11,000)
------------------------------------------------------------------------
Pursuant to Step 2, the Exchange would determine the amount of
funds generated from orders from PAFs that were executed in option
classes at Station 1, and these funds would be allocated to the DPM to
attract order flow to CBOE. Assuming orders from PAFs representing
10,000 contracts were executed with Market-Makers (including the DPM or
LMM, e-DPM(s), and RMM(s)), at Station 1, $2,200 (10,000*$.22) in funds
would be generated and allocated to the DPM.
As a result of Steps 1 and 2 above, the original pool of funds
generated by the marketing fee at Station ($10,000), would have been
depleted in Step 1 by $2,420, and in Step 2 by $2,200. Assuming
remaining number of contracts executed at Station 1, i.e., 24,455
contracts, \15\ were from orders from non-PAFs, a total of $5,380
(24,455 * $.22) would be the remaining balance of funds. Pursuant to
Step 3, these funds would be apportioned monthly among the DPM (or LMM)
and Preferred Market-Makers on a pro-rata basis, based on the
percentage of contracts traded by each DPM (or LMM) and Preferred
Market-Maker against orders from PAFs. Assuming the DPM and the two
Preferred Market-Makers executed the following percentage of contracts
from orders from PAFs at Station 1, they would be allocated the
following funds:
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\15\ 45,455 less 11,000 contracts (see Step 1) and 10,000
contracts (see Step 2).
------------------------------------------------------------------------
% of PAF
contracts Funds allocated
(percent) (percent)
------------------------------------------------------------------------
DPM...................................... 65 $3,497
(65 * $5,380)
Preferred Market-Maker 1........ 15 807
(15 * $5,380)
Preferred Market-Maker 2........ 20 1,076
(20 * $5,380)
------------------------------------------------------------------------
The funds generated by the marketing fee would continue to be
collected by the Exchange and recorded according to the applicable
trading station and class where the options subject to the fee are
traded. The money collected would be disbursed by the Exchange
according to the instructions of the DPM, LMM or the Preferred Market-
Maker. These funds shall only be used to attract order flow to CBOE
from PAF, and the funds made available to the DPM or LMM may only be
used to attract orders in the option classes located at the trading
station where the fee was assessed. Thus, a member organization
appointed as the DPM at a particular trading station on the trading
floor cannot use the funds from that trading station to attract order
flow to another trading station on the trading floor where that member
serves as the DPM.
Additionally, the Exchange does not intend to continue to require
that the funds collected from e-DPMs and RMMs can only be used to
attract order flow for the classes in which the e-DPM or RMM is
appointed. The Exchange does not believe such a restriction is
necessary or reasonable in light of manner in which firms negotiate
with PAFs to direct their order flow to the Exchange. Specifically, the
Exchange notes that many DPMs or LMMs negotiate with PAFs to route
their order flow to the Exchange for all of the classes located at a
particular trading station, and not necessarily on a class-by-class
basis. Additionally, any use of the marketing fees by the DPM outside
of an RMM's or an e-DPM's appointment may still benefit the RMM or e-
DPM because e-DPMs and RMMs are permitted under Exchange rules to enter
orders in option classes traded on the Exchange that are not included
within their appointment. Therefore, the Exchange believes that there
is an equitable allocation of use of the fees by the DPM because the
order flow from a PAF can be accessed by an RMM or eDPM, outside their
appointments, through ``M'' orders.
In the event a Preferred Market-Maker does not disburse all of the
funds generated by the marketing fee in a given month, then the funds
the Preferred Market-Maker does not disburse would be made available to
the DPM or LMM, as applicable, for the following month to attract
orders in the classes of options where the DPM or LMM is appointed.
Finally, the Exchange proposes to amend the program with respect to
the manner in which surplus funds are refunded to Market-Makers, RMMs,
DPMs, e-DPMs, and LMMs. Currently, the Exchange refunds any surplus at
the end of the month on a pro rata basis based upon contributions made
by the Market-Makers, RMMs, DPMs, e-DPMs, and LMMs. Going forward, if
80% or more of the accumulated funds in a given month are paid out by
the DPM or LMM, there would not be a rebate for that month and the
funds would carry over and would be included in the pool
[[Page 71571]]
of funds to be used by the DPM or LMM in the following month. If less
than 80% of the funds is paid out, Market-Maker rebates would continue
to be made on a monthly basis. At the end of each quarter, the Exchange
would then refund any surplus, if any, on a pro rata basis based upon
contributions made by the Market-Makers, RMMs, DPMs, e-DPMs, and LMMs.
In the foregoing example, the DPM and Preferred Market-Maker
1 and Preferred Market-Maker 2 were allocated the
following amounts:
------------------------------------------------------------------------
Total allocated
------------------------------------------------------------------------
DPM................................................... $6,797
($1,100 + 2,200
+ 3,497)
Preferred Market-Maker 1..................... 1,357
($550 + 807)
Preferred Market-Maker 2..................... 1,846
($770 + 1076)
------------------------------------------------------------------------
If the DPM only paid out a total of $6,150 of the $6,797 allocated
to it in a given month (or 90% of its funds), then $647 would carry
over for the DPM to use to attract order in the following month. If
Preferred Market-Maker 1 paid out a total of $1,200 of the
$1,357 allocated to it in a given month, then $157 would be made
available to the DPM (or LMM) for the following month to attract orders
in the classes of options where the DPM (or LMM) is appointed. If
Preferred Market-Maker 2 paid out a total of $1,846 allocated
to it in a given month, then none of Preferred Market-Maker
2's funds would carry over to the DPM (or LMM) for the
following month.
As in the current marketing fee program, the Exchange would not be
involved in the determination of the terms governing the orders that
qualify for payment with any PAF or the amount of any such payment. The
Exchange would provide administrative support for the program in such
matters as maintaining the funds, keeping track of the number of
qualified orders each firm directs to the Exchange, and making the
necessary debits and credits to the accounts of the traders and the
PAFs to reflect the payments that are made. Exchange Market-Makers,
RMMs, DPMs, e-DPMs, and LMMs would have no way of identifying prior to
execution whether a particular order is from a PAF or a non-PAF.
2. Statutory Basis
The Exchange believes that its proposal, as amended, is consistent
with Section 6(b) of the Act\16\ in general, and furthers the
objectives of Section 6(b)(4) of the Act\17\ in particular, in that it
is an equitable allocation of reasonable dues, fees, and other charges
among CBOE members and other persons using its facilities.
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\16\ 15 U.S.C. 78f(b).
\17\ 15 U.S.C. 78f(b)(4).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change, as
amended, will impose any inappropriate burden on competition 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 either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing proposed rule change, as amended, has been designated
as a fee change pursuant to Section 19(b)(3)(A)(ii) of the Act \18\ and
Rule 19b-4(f)(2) \19\ thereunder, because it establishes or changes a
due, fee, or other charge imposed by the Exchange. Accordingly, the
proposal will took effect upon filing with the Commission. At any time
within 60 days of the filing of such proposed rule change, as amended,
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.\20\
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\18\ 15 U.S.C. 78s(b)(3)(A)(ii).
\19\ 17 CFR 240.19b-4(f)(2).
\20\ The effective date of the original proposed rule change is
November 2, 2005, the effective date of Amendment No. 1 is November
17, 2005. For purposes of calculating the 60-day period within which
the Commission may summarily abrogate the proposal, the Commission
considers the period to commence on November 17, 2005, the date on
which the Exchange submitted Amendment No. 1.
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IV. Solicitation of Comments
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. Comments may be
submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-CBOE-2005-91 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-9303.
All submissions should refer to File Number SR-CBOE-2005-91. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (https://www.sec.gov/
rules/sro.shtml). 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, as amended, 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 also will be available for inspection and copying
at the principal office of the CBOE. All comments received will be
posted without change; the Commission does not edit personal
identifying information from submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CBOE-2005-91 and should be submitted on
or before December 20, 2005.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. E5-6659 Filed 11-28-05; 8:45 am]
BILLING CODE 8010-01-P
