Self-Regulatory Organizations; Boston Stock Exchange, Inc.; Notice of Filing and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 2 Thereto, To Establish a Fee Per Contract Traded for Improvement Orders Submitted Into a Price Improvement Period by a Public Customer That Are Not Submitted as Customer PIP Orders, 49493-49495 [E6-13931]

Download as PDF Federal Register / Vol. 71, No. 163 / Wednesday, August 23, 2006 / Notices SECURITIES AND EXCHANGE COMMISSION [Release No. 34–54328; File No. SR–BSE– 2006–10] Self-Regulatory Organizations; Boston Stock Exchange, Inc.; Notice of Filing and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 2 Thereto, To Establish a Fee Per Contract Traded for Improvement Orders Submitted Into a Price Improvement Period by a Public Customer That Are Not Submitted as Customer PIP Orders August 16, 2006. On March 6, 2006, the Boston Stock Exchange, Inc. (‘‘BSE’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to amend the Fee Schedule of the Boston Options Exchange (‘‘BOX’’) in the manner described below. The proposed rule change was published for comment in the Federal Register on May 15, 2006.3 The Commission received one comment letter concerning the proposal.4 On June 29, 2006, the Exchange filed Amendment No. 1 to the proposed rule change.5 On August 14, 2006, the Exchange filed Amendment No. 2 to the proposed rule change.6 This order publishes notice of and grants accelerated approval of the proposed rule change, as modified by Amendment No. 2, on an accelerated basis. I. Description of the Proposal Currently, there are two ways Public Customer Orders 7 can be submitted into a Price Improvement Period (‘‘PIP’’) 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 53774 (May 9, 2006), 71 FR 28058 (‘‘Notice’’). 4 Letter to Nancy Morris, Secretary, Commission, from Adam C. Cooper, Senior Managing Director & General Counsel, Citadel Investment Group, LLC (‘‘Citadel’’), dated June 9, 2006 (‘‘Citadel Letter’’). 5 In Amendment No. 1, which superseded and replaced the original filing, the Exchange modified its proposal by lowering the proposed BOX fee from $.20 per contract traded to $.15 per contract traded. The Exchange also clarified its reasons for imposing the new fee. 6 In Amendment No. 2, which supersedes and replaces Amendment No. 1 (and the original filing), the Exchange proposes to modify the proposed rule text and clarifies its reasons for imposing the new fee. 7 The term ‘‘Public Customer Order’’ is defined as ‘‘an order for the account of a Public Customer. See BOX Rules, Chapter I, Section 1(a)(51). ‘‘Public Customer’’ is defined as ‘‘a person that is not a broker or dealer in securities.’’ See BOX Rules Chapter I, Section 1(a)(50). sroberts on PROD1PC70 with NOTICES 2 17 VerDate Aug<31>2005 16:04 Aug 22, 2006 Jkt 208001 auction as an Improvement Order.8 The first method is the Customer PIP Order (‘‘CPO’’), which is an order provided by a Public Customer to her/his BOX Order Flow Provider (‘‘OFP’’) that contains a standard limit order price in the standard minimum trading increment— the Book Reference Price 9—and a limit order placed in a penny increment, the CPO PIP Reference Price.10 Through a CPO, a Public Customer may participate passively in a PIP auction (should one occur while her/his limit order is at the top of the BOX book) by virtue of the previously submitted instructions given to the OFP, i.e., the CPO PIP Reference Price. Alternatively, a Public Customer may submit an Improvement Order into a PIP auction through an OFP with any instructions that the OFP is willing to accept.11 These non-CPO Improvement Orders do not have a Book Reference Price and are not exposed on the BOX Book; OFPs submit them on behalf of Public Customers in response to a PIP Broadcast 12 and PIP auction updates. Originally, the Exchange proposed to amend the BOX Fee Schedule to establish a fee of $.20 per contract traded for Improvement Orders submitted into a PIP by a Public Customer that are not submitted as CPOs. In its letter, which was submitted in response to the original proposed rule change, Citadel urges the Commission to disapprove the proposed rule change because the proposed $.20 per contract traded fee is inconsistent with three provisions of the Act. Citadel argues that the original proposed rule change was inconsistent with Section 6(b)(4) of the Act 13 because it would effect an inequitable allocation of reasonable fees among members and persons using the BOX facilities. Specifically, Citadel stated that the proposed $.20 per contract fee was inequitable because Public Customers would not be afforded a volume discount similar to the one offered to BOX Market Makers 14 who, 8 The term ‘‘Improvement Orders’’ is defined in the BOX Rules Chapter V, Section 18(e)(i). 9 The term ‘‘Book Reference Price’’ is defined in BOX Rules Chapter V, Section 18(g)(i). 10 The term ‘‘CPO PIP Reference Price’’ is defined in BOX Rules Chapter V, Section 18(g)(i). 11 See BOX Rules Chapter V, Section 18(e)(i). 12 The PIP broadcast is disseminated once a PIP is initiated and is distributed solely to BOX Options Participants. The broadcasting of this message advises the Options Participants: (1) That a Primary Improvement Order, as that term is defined in the BOX Rules Chapter V, Section 18(e), has been processed; (2) of information concerning series, size, price and side of market; and (3) when the PIP will conclude (‘‘PIP Broadcast’’). 13 15 U.S.C. 78(b)(4). 14 BOX Market Makers may receive a volume discount of up to $.05 per cotract based upon total PO 00000 Frm 00083 Fmt 4703 Sfmt 4703 49493 according to Citadel, enjoy other benefits and privileges that are unavailable to Public Customers. Citadel also argues that the proposed rule change is inconsistent with Section 6(b)(5) of the Act 15 in that it would discriminate unfairly between Public Customers with access to sophisticated technology and trading techniques (‘‘Options Professionals’’) and all other Public Customers (‘‘Investors’’) by imposing a fee upon Options Professionals and not Investors. Further, Citadel argues that the fee, as originally proposed, would be inconsistent with Section 6(b)(8) of the Act 16 in that it would harm competition. Specifically, Citadel asserts that the proposed rule change would discourage Public Customers from sending non-CPO Improvement Orders to the BOX, which would result in fewer Improvement Orders competing to improve orders submitted to the PIP. Additionally, Citadel predicts that this diminished competition would make it easier for Market Makers to step ahead of Public Customer limit orders posted on the book, which would encourage BOX Participants to internalize more of their order flow, and thereby diminish price discovery and transparency and increase the costs of options investors. In response to the Citadel Letter, the Exchange proposes to modify its proposal in Amendment No. 2. In Amendment No. 2, the Exchange proposes to reduce the trading fee applicable to each Improvement Order for a Public Customer not submitted as CPOs from $.20 to $.15. Further, the Exchange proposes to clarify that, under the proposed Fee Schedule as amended, no trading fee would be charged for Public Customer Improvement Orders submitted as CPOs or for Public Customer Orders traded on BOX including marketable orders, which interact with a PIP already underway. II. Discussion After careful consideration of the Citadel Letter and the proposed rule change, as amended in response to the Citadel Letter, the Commission finds that the proposal, as amended, is consistent with the requirements of Section 6(b) of the Act 17 in general and Section 6(b)(4) of the Act 18 in particular, in that it is designed to provide for the equitable allocation of volume traded across all assigned classes. See Section 3.c. of the Fee Schedule. 15 15 U.S.C. 78f(b)(5). 16 15 U.S.C. 78f(b)(8). 17 15 U.S.C. 78f(b). 18 15 U.S.C. 78f(b)(4). E:\FR\FM\23AUN1.SGM 23AUN1 sroberts on PROD1PC70 with NOTICES 49494 Federal Register / Vol. 71, No. 163 / Wednesday, August 23, 2006 / Notices reasonable dues, fees, and other charges among its members and issuers and other persons using its facilities. To justify this new trading fee on nonCPO Improvement Orders by Public Customers, the Exchange states that these types of orders, like the Improvement Orders of Market Makers and OFPs, are closely monitored for manipulative activity because they are submitted by sophisticated parties, with advanced technology, directly in response to PIP data updates. In contrast, the Exchange characterizes CPOs as more ‘‘passive’’ orders, because they contain preset PIP auction instructions, which pose less of a manipulation risk and therefore draw less regulatory scrutiny. The Exchange states, therefore, that CPOs are less costly to surveil than non-CPO Improvement Orders. In addition, the Exchange states that the high volume of non-CPO Improvement Orders justifies the imposition of the proposed fee. The Exchange states that CPOs, as a result of their passive nature, generate fewer new Improvement Orders than non-CPO Improvement Orders, which are generated by sophisticated trading systems capable of generating many new Improvement Orders during a PIP. Increased Improvement Order traffic requires additional capacity on the BOX trading host, and investment in this additional capacity taxes the Exchange’s resources. In light of the increased costs associated with non-CPO Improvement Orders,19 the proposed fee provides for an equitable allocation of reasonable dues, fees, and other charges among its members and issuers and other persons using its facilities. As mentioned above, in Amendment No. 2, the Exchange proposes to decrease the amount of the proposed fee. Currently, Market Maker and broker-dealer accounts are charged $0.20 per executed contract for Improvement Orders traded in a PIP. As Citadel points out, however, some Market Makers receive volume discounts of up to $0.05 per contract. In response to the Citadel Letter, the Exchange modified its proposal to reduce the proposed trading fee applicable to non-CPO Improvement Orders for Public Customer accounts from $.20 to $.15 per executed contract.20 As a result, under the amended proposal, the BOX will impose upon Public Customers participating in the PIP through the use of non-CPO 19 As discussed below, broker-dealers and Market Makers pay comparable trading fees. See Sections 2 and 3 of the Fee Schedule. 20 See Amendment No. 2. VerDate Aug<31>2005 16:04 Aug 22, 2006 Jkt 208001 Improvement Orders the same transaction fee as a Market Maker receiving the highest volume discount. The Commission also finds that the proposed rule change is consistent with Section 6(b)(5) of the Act.21 Section 6(b)(5) of the Act prohibits only ‘‘unfair discrimination,’’ not discrimination simpliciter.22 On its face, the proposed fee discriminates between different means of participating in the PIP auction.23 However, a CPO and nonCPO Improvement Order impact the BOX differently. A non-CPO Improvement Order, which interacts in the PIP on a dynamic basis, taxes the Exchange’s systems capacity and regulatory personnel to a greater degree than do passive CPO participants. In addition, the Book Reference Price associated with a CPO adds liquidity to the displayed BOX Book, which provides value to the BOX because it attracts additional orders. A non-CPO Improvement Order does not provide such liquidity. The Commission believes these differences are a reasonable basis for the Exchange to charge different fees. Discrimination on the basis of the disparate costs to the Exchange of administering the PIP auction is not unfair, particularly given the benefit (i.e., liquidity) provided to the Exchange by CPOs. Finally, the Commission finds that the proposed rule change is consistent with Section 6(b)(8) of the Act,24 which requires that the rules of the Exchange not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. A $0.15 fee per executed contract, or $0.0015 for each share underlying an option contract, will increase costs to Public Customers submitting non-CPO Improvement Orders by only a de minimus amount. Market Makers are charged comparable fees for participating in PIPs. Accordingly, the Commission does not believe this fee will discourage the submission of nonCPO Improvement Orders or impose a burden on competition. The Commission finds good cause for approving Amendment No. 2 to the proposed rule change prior to the 30th day after the amendment is published for comment in the Federal Register pursuant to Section 19(b)(2) of the Act.25 The proposed rule change, in its original form, was published for 21 15 U.S.C. 78s(b)(5). Timpinaro v. SEC, 2 F.3d 453, 456 (DC Cir. 22 See 1993). 23 The proposed fee would not apply to CPOs submitted by sophisticated Public Customers. 24 15 U.S.C. 78s(b)(8). 25 15 U.S.C. 78s(b)(2). PO 00000 Frm 00084 Fmt 4703 Sfmt 4703 comment 26 and, as mentioned above, the Commission received only one comment letter. Amendment No. 2 modifies the substance of the original proposal only by decreasing the amount of the proposed transaction fee from $.20 per contract traded to $.15 per executed contract.27 This reduction to the proposed fee, which the Exchange offered in response to the Citadel Letter, does not raise any additional regulatory issues. III. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning whether Amendment No. 2 to 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 No. SR–BSE–2006–10 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–BSE–2006–10. 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 Commissions 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 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 26 See Notice, supra at note 3. Amendment No. 2, the Exchange also revised the proposed rule text to make explicit that ‘‘[t]here are no trading fees for any other Public Customer Orders which may be executed including CPOs and Public Customer orders on the Book.’’ This new language is consistent with the Exchange’s description of the proposed rule change in the original filing: ‘‘All other Public Customer Orders traded on BOX, including marketable orders, which interact with a PIP already underway, will continue to be free.’’ 27 In E:\FR\FM\23AUN1.SGM 23AUN1 Federal Register / Vol. 71, No. 163 / Wednesday, August 23, 2006 / Notices 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 Exchange. 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–BSE–2006–10 and should be submitted on or before September 13, 2006. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,28 that the proposed rule change (SR–BSE–2006– 10), as amended, is hereby approved on an accelerated basis. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.29 Nancy M. Morris, Secretary. [FR Doc. E6–13931 Filed 8–22–06; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–54323; File No. SR–CHX– 2006–27] Self-Regulatory Organization; Chicago Stock Exchange, Inc.; Notice of Filing of Proposed Rule Change Relating to Retroactive Application of Participant Fees and Credits August 16, 2006. sroberts on PROD1PC70 with NOTICES 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 August 10, 2006, the Chicago Stock Exchange, Inc. (‘‘CHX’’ 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 CHX. 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 CHX proposes to make effective, retroactive to February 9, 2005, the trading permit fee due to the Exchange 28 Id. CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 16:04 Aug 22, 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 CHX included statements concerning the purpose of, and basis for, the proposed rule changes and discussed any comments it received regarding the proposal. The text of these statements may be examined at the places specified in Item IV below. The CHX 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 Changes 1. Purpose The Exchange proposes to make effective, retroactive to February 9, 2005, a change to the Fee Schedule relating to the trading permit fee due to the Exchange if a CHX participant’s trading permit is cancelled intra-year. This change to the Fee Schedule originally became effective on October 24, 2005,3 and provided that for trading permits cancelled intra-year, the CHX participant shall pay the Exchange the lesser of $2,000 or the remaining balance of the annual trading permit fee. The Exchange believed that it was appropriate to amend the Fee Schedule to provide for some fee relief for CHX participants whose trading permits are cancelled intra-year. However, the Exchange also believed that it was necessary for the Exchange to have an adequate basis on which to budget and project annual revenues. Accordingly, the Exchange instituted the Fee Schedule change that it now seeks to make retroactive. The Exchange believed that it had requested retroactive application of the Fee Schedule change at the same time that the change was originally filed with the Commission.4 It now appears that retroactive application was not requested at that juncture. The Exchange has, however, been reserving funds to be refunded to CHX participants once retroactive application of the Fee Schedule change is approved. The Exchange believes that its participants are entitled to such refunds on account of intra-year trading permit termination. Accordingly, the Exchange 3 See Securities Exchange Act Release No. 52815 (November 21, 2005), 70 FR 71572 (November 29, 2005) (SR–CHX–2005–31). 4 Id. 29 17 VerDate Aug<31>2005 if a CHX participant’s trading permit is cancelled intra-year. Jkt 208001 PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 49495 proposes retroactive application of the Fee Schedule change, dating back to February 9, 2005.5 2. Statutory Basis The CHX believes the proposal is consistent with the requirements of the Act and the rules and regulations thereunder that are applicable to a national securities exchange and with the requirements of Section 6(b) of the Act.6 The CHX believes the proposal is consistent with Section 6(b)(4) of the Act 7 in particular in that it provides for an equitable allocation of reasonable fees and other charges among the Exchange’s participants. B. Self-Regulatory Organization’s Statement of Burden on Competition The Exchange does not believe that the proposed rule changes will impose any burden on competition. C. Self-Regulatory Organization’s Statement on Comments Regarding the Proposed Rule Changes 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 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 (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 proposal 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 5 February 9, 2005 was the date of the Exchange’s demutualization, and, correspondingly, the date upon which the Fee Schedule provision relating to trading permit fees first became effective. 6 15 U.S.C. 78f(b). 7 15 U.S.C. 78f(b)(4). E:\FR\FM\23AUN1.SGM 23AUN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 71, Number 163 (Wednesday, August 23, 2006)]
[Notices]
[Pages 49493-49495]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-13931]



[[Page 49493]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54328; File No. SR-BSE-2006-10]


Self-Regulatory Organizations; Boston Stock Exchange, Inc.; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change, as Modified by Amendment No. 2 Thereto, To Establish a Fee 
Per Contract Traded for Improvement Orders Submitted Into a Price 
Improvement Period by a Public Customer That Are Not Submitted as 
Customer PIP Orders

August 16, 2006.
    On March 6, 2006, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend the Fee Schedule of the Boston Options 
Exchange (``BOX'') in the manner described below. The proposed rule 
change was published for comment in the Federal Register on May 15, 
2006.\3\ The Commission received one comment letter concerning the 
proposal.\4\ On June 29, 2006, the Exchange filed Amendment No. 1 to 
the proposed rule change.\5\ On August 14, 2006, the Exchange filed 
Amendment No. 2 to the proposed rule change.\6\ This order publishes 
notice of and grants accelerated approval of the proposed rule change, 
as modified by Amendment No. 2, on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 53774 (May 9, 2006), 
71 FR 28058 (``Notice'').
    \4\ Letter to Nancy Morris, Secretary, Commission, from Adam C. 
Cooper, Senior Managing Director & General Counsel, Citadel 
Investment Group, LLC (``Citadel''), dated June 9, 2006 (``Citadel 
Letter'').
    \5\ In Amendment No. 1, which superseded and replaced the 
original filing, the Exchange modified its proposal by lowering the 
proposed BOX fee from $.20 per contract traded to $.15 per contract 
traded. The Exchange also clarified its reasons for imposing the new 
fee.
    \6\ In Amendment No. 2, which supersedes and replaces Amendment 
No. 1 (and the original filing), the Exchange proposes to modify the 
proposed rule text and clarifies its reasons for imposing the new 
fee.
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 I. Description of the Proposal

    Currently, there are two ways Public Customer Orders \7\ can be 
submitted into a Price Improvement Period (``PIP'') auction as an 
Improvement Order.\8\ The first method is the Customer PIP Order 
(``CPO''), which is an order provided by a Public Customer to her/his 
BOX Order Flow Provider (``OFP'') that contains a standard limit order 
price in the standard minimum trading increment--the Book Reference 
Price \9\--and a limit order placed in a penny increment, the CPO PIP 
Reference Price.\10\ Through a CPO, a Public Customer may participate 
passively in a PIP auction (should one occur while her/his limit order 
is at the top of the BOX book) by virtue of the previously submitted 
instructions given to the OFP, i.e., the CPO PIP Reference Price.
---------------------------------------------------------------------------

    \7\ The term ``Public Customer Order'' is defined as ``an order 
for the account of a Public Customer. See BOX Rules, Chapter I, 
Section 1(a)(51). ``Public Customer'' is defined as ``a person that 
is not a broker or dealer in securities.'' See BOX Rules Chapter I, 
Section 1(a)(50).
    \8\ The term ``Improvement Orders'' is defined in the BOX Rules 
Chapter V, Section 18(e)(i).
    \9\ The term ``Book Reference Price'' is defined in BOX Rules 
Chapter V, Section 18(g)(i).
    \10\ The term ``CPO PIP Reference Price'' is defined in BOX 
Rules Chapter V, Section 18(g)(i).
---------------------------------------------------------------------------

    Alternatively, a Public Customer may submit an Improvement Order 
into a PIP auction through an OFP with any instructions that the OFP is 
willing to accept.\11\ These non-CPO Improvement Orders do not have a 
Book Reference Price and are not exposed on the BOX Book; OFPs submit 
them on behalf of Public Customers in response to a PIP Broadcast \12\ 
and PIP auction updates.
---------------------------------------------------------------------------

    \11\ See BOX Rules Chapter V, Section 18(e)(i).
    \12\ The PIP broadcast is disseminated once a PIP is initiated 
and is distributed solely to BOX Options Participants. The 
broadcasting of this message advises the Options Participants: (1) 
That a Primary Improvement Order, as that term is defined in the BOX 
Rules Chapter V, Section 18(e), has been processed; (2) of 
information concerning series, size, price and side of market; and 
(3) when the PIP will conclude (``PIP Broadcast'').
---------------------------------------------------------------------------

    Originally, the Exchange proposed to amend the BOX Fee Schedule to 
establish a fee of $.20 per contract traded for Improvement Orders 
submitted into a PIP by a Public Customer that are not submitted as 
CPOs.
    In its letter, which was submitted in response to the original 
proposed rule change, Citadel urges the Commission to disapprove the 
proposed rule change because the proposed $.20 per contract traded fee 
is inconsistent with three provisions of the Act. Citadel argues that 
the original proposed rule change was inconsistent with Section 6(b)(4) 
of the Act \13\ because it would effect an inequitable allocation of 
reasonable fees among members and persons using the BOX facilities. 
Specifically, Citadel stated that the proposed $.20 per contract fee 
was inequitable because Public Customers would not be afforded a volume 
discount similar to the one offered to BOX Market Makers \14\ who, 
according to Citadel, enjoy other benefits and privileges that are 
unavailable to Public Customers.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78(b)(4).
    \14\ BOX Market Makers may receive a volume discount of up to 
$.05 per cotract based upon total volume traded across all assigned 
classes. See Section 3.c. of the Fee Schedule.
---------------------------------------------------------------------------

    Citadel also argues that the proposed rule change is inconsistent 
with Section 6(b)(5) of the Act \15\ in that it would discriminate 
unfairly between Public Customers with access to sophisticated 
technology and trading techniques (``Options Professionals'') and all 
other Public Customers (``Investors'') by imposing a fee upon Options 
Professionals and not Investors.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Further, Citadel argues that the fee, as originally proposed, would 
be inconsistent with Section 6(b)(8) of the Act \16\ in that it would 
harm competition. Specifically, Citadel asserts that the proposed rule 
change would discourage Public Customers from sending non-CPO 
Improvement Orders to the BOX, which would result in fewer Improvement 
Orders competing to improve orders submitted to the PIP. Additionally, 
Citadel predicts that this diminished competition would make it easier 
for Market Makers to step ahead of Public Customer limit orders posted 
on the book, which would encourage BOX Participants to internalize more 
of their order flow, and thereby diminish price discovery and 
transparency and increase the costs of options investors.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

    In response to the Citadel Letter, the Exchange proposes to modify 
its proposal in Amendment No. 2. In Amendment No. 2, the Exchange 
proposes to reduce the trading fee applicable to each Improvement Order 
for a Public Customer not submitted as CPOs from $.20 to $.15. Further, 
the Exchange proposes to clarify that, under the proposed Fee Schedule 
as amended, no trading fee would be charged for Public Customer 
Improvement Orders submitted as CPOs or for Public Customer Orders 
traded on BOX including marketable orders, which interact with a PIP 
already underway.

 II. Discussion

    After careful consideration of the Citadel Letter and the proposed 
rule change, as amended in response to the Citadel Letter, the 
Commission finds that the proposal, as amended, is consistent with the 
requirements of Section 6(b) of the Act \17\ in general and Section 
6(b)(4) of the Act \18\ in particular, in that it is designed to 
provide for the equitable allocation of

[[Page 49494]]

reasonable dues, fees, and other charges among its members and issuers 
and other persons using its facilities.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

    To justify this new trading fee on non-CPO Improvement Orders by 
Public Customers, the Exchange states that these types of orders, like 
the Improvement Orders of Market Makers and OFPs, are closely monitored 
for manipulative activity because they are submitted by sophisticated 
parties, with advanced technology, directly in response to PIP data 
updates. In contrast, the Exchange characterizes CPOs as more 
``passive'' orders, because they contain preset PIP auction 
instructions, which pose less of a manipulation risk and therefore draw 
less regulatory scrutiny. The Exchange states, therefore, that CPOs are 
less costly to surveil than non-CPO Improvement Orders.
    In addition, the Exchange states that the high volume of non-CPO 
Improvement Orders justifies the imposition of the proposed fee. The 
Exchange states that CPOs, as a result of their passive nature, 
generate fewer new Improvement Orders than non-CPO Improvement Orders, 
which are generated by sophisticated trading systems capable of 
generating many new Improvement Orders during a PIP. Increased 
Improvement Order traffic requires additional capacity on the BOX 
trading host, and investment in this additional capacity taxes the 
Exchange's resources. In light of the increased costs associated with 
non-CPO Improvement Orders,\19\ the proposed fee provides for an 
equitable allocation of reasonable dues, fees, and other charges among 
its members and issuers and other persons using its facilities.
---------------------------------------------------------------------------

    \19\ As discussed below, broker-dealers and Market Makers pay 
comparable trading fees. See Sections 2 and 3 of the Fee Schedule.
---------------------------------------------------------------------------

    As mentioned above, in Amendment No. 2, the Exchange proposes to 
decrease the amount of the proposed fee. Currently, Market Maker and 
broker-dealer accounts are charged $0.20 per executed contract for 
Improvement Orders traded in a PIP. As Citadel points out, however, 
some Market Makers receive volume discounts of up to $0.05 per 
contract. In response to the Citadel Letter, the Exchange modified its 
proposal to reduce the proposed trading fee applicable to non-CPO 
Improvement Orders for Public Customer accounts from $.20 to $.15 per 
executed contract.\20\ As a result, under the amended proposal, the BOX 
will impose upon Public Customers participating in the PIP through the 
use of non-CPO Improvement Orders the same transaction fee as a Market 
Maker receiving the highest volume discount.
---------------------------------------------------------------------------

    \20\ See Amendment No. 2.
---------------------------------------------------------------------------

    The Commission also finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act.\21\ Section 6(b)(5) of the 
Act prohibits only ``unfair discrimination,'' not discrimination 
simpliciter.\22\ On its face, the proposed fee discriminates between 
different means of participating in the PIP auction.\23\ However, a CPO 
and non-CPO Improvement Order impact the BOX differently. A non-CPO 
Improvement Order, which interacts in the PIP on a dynamic basis, taxes 
the Exchange's systems capacity and regulatory personnel to a greater 
degree than do passive CPO participants. In addition, the Book 
Reference Price associated with a CPO adds liquidity to the displayed 
BOX Book, which provides value to the BOX because it attracts 
additional orders. A non-CPO Improvement Order does not provide such 
liquidity. The Commission believes these differences are a reasonable 
basis for the Exchange to charge different fees. Discrimination on the 
basis of the disparate costs to the Exchange of administering the PIP 
auction is not unfair, particularly given the benefit (i.e., liquidity) 
provided to the Exchange by CPOs.
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    \21\ 15 U.S.C. 78s(b)(5).
    \22\ See Timpinaro v. SEC, 2 F.3d 453, 456 (DC Cir. 1993).
    \23\ The proposed fee would not apply to CPOs submitted by 
sophisticated Public Customers.
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    Finally, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(8) of the Act,\24\ which requires that the 
rules of the Exchange not impose any burden on competition not 
necessary or appropriate in furtherance of the purposes of the Act. A 
$0.15 fee per executed contract, or $0.0015 for each share underlying 
an option contract, will increase costs to Public Customers submitting 
non-CPO Improvement Orders by only a de minimus amount. Market Makers 
are charged comparable fees for participating in PIPs. Accordingly, the 
Commission does not believe this fee will discourage the submission of 
non-CPO Improvement Orders or impose a burden on competition.
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    \24\ 15 U.S.C. 78s(b)(8).
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    The Commission finds good cause for approving Amendment No. 2 to 
the proposed rule change prior to the 30th day after the amendment is 
published for comment in the Federal Register pursuant to Section 
19(b)(2) of the Act.\25\ The proposed rule change, in its original 
form, was published for comment \26\ and, as mentioned above, the 
Commission received only one comment letter. Amendment No. 2 modifies 
the substance of the original proposal only by decreasing the amount of 
the proposed transaction fee from $.20 per contract traded to $.15 per 
executed contract.\27\ This reduction to the proposed fee, which the 
Exchange offered in response to the Citadel Letter, does not raise any 
additional regulatory issues.
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    \25\ 15 U.S.C. 78s(b)(2).
    \26\ See Notice, supra at note 3.
    \27\ In Amendment No. 2, the Exchange also revised the proposed 
rule text to make explicit that ``[t]here are no trading fees for 
any other Public Customer Orders which may be executed including 
CPOs and Public Customer orders on the Book.'' This new language is 
consistent with the Exchange's description of the proposed rule 
change in the original filing: ``All other Public Customer Orders 
traded on BOX, including marketable orders, which interact with a 
PIP already underway, will continue to be free.''
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 III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning whether Amendment No. 2 to 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 rule-comments@sec.gov. Please include 
File No. SR-BSE-2006-10 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-BSE-2006-10. 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 Commissions 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 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

[[Page 49495]]

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 Exchange. 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-BSE-2006-10 and should be 
submitted on or before September 13, 2006.

 IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\28\ that the proposed rule change (SR-BSE-2006-10), as amended, is 
hereby approved on an accelerated basis.
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    \28\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-13931 Filed 8-22-06; 8:45 am]
BILLING CODE 8010-01-P

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