Proposed Amendments to Rule 610 of Regulation NMS, 20738-20763 [2010-9016]
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Federal Register / Vol. 75, No. 75 / Tuesday, April 20, 2010 / Proposed Rules
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Part 242
[Release No. 34–61902; File No. S7–09–10]
RIN 3235–AK62
Proposed Amendments to Rule 610 of
Regulation NMS
AGENCY: Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Proposed rule.
The Commission is
publishing for comment proposed
amendments to Rule 610 under the
Securities Exchange Act of 1934
(‘‘Exchange Act’’) relating to access to
quotations in listed options as well as
fees for such access. The proposed rule
would prohibit an exchange from
imposing unfairly discriminatory terms
that inhibit efficient access to quotations
in a listed option on its exchange and
establish a limit on access fees that an
exchange would be permitted to charge
for access to its best bid and offer for
listed options on its exchange.
DATES: Comments should be received on
or before June 21, 2010.
ADDRESSES: Comments may be
submitted by any of the following
methods:
SUMMARY:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/proposed.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
No. S7–09–10 on the subject line; or
• Use the Federal eRulemaking Portal
(https://www.regulations.gov). Follow the
instructions for submitting comments.
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Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street, NE.,
Washington, DC 20549–1090.
All submissions should refer to File No.
S7–09–10. This file number should be
included on the subject line if e-mail is
used. To help us 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/proposed.shtml).
Comments are also available for Web
site viewing and printing in the
Commission’s Public Reference Room,
100 F Street, NE., Washington, DC
20549, on official business days
between the hours of 10:00 a.m. and
3:00 p.m. All comments received will be
posted without change; we do not edit
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personal identifying information from
submissions. You should submit only
information that you wish to make
available publicly.
FOR FURTHER INFORMATION CONTACT:
Jennifer Colihan, Special Counsel, at
(202) 551–5642; Edward Cho, Special
Counsel, at (202) 551–5508; or Brian
O’Neill, Special Counsel, at (202) 551–
5643, Division of Trading and Markets
(‘‘Division’’), Commission, 100 F Street,
NE., Washington, DC 20549–6628.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
II. Proposed Amendments to Rule 610(a)
III. Access Fees
IV. Technical Amendments to Rule 610
V. Request for Comments
VI. Paperwork Reduction Act
VII. Consideration of Costs and Benefits
VIII. Consideration of Burden on Competition
and Promotion of Efficiency,
Competition, and Capital Formation
IX. Consideration of Impact on the Economy
X. Regulatory Flexibility Act Certification
XI. Statutory Authority
I. Introduction
The Commission is proposing to
strengthen the national market system
for listed options by: (1) Prohibiting the
imposition of unfairly discriminatory
terms by a national securities exchange
that inhibit efficient access to quotations
in a listed option on its exchange; and
(2) establishing a limit on the amount a
national securities exchange would be
permitted to charge to access the best
bid or offer for listed options on its
exchange. These proposed amendments
would make the requirements for access
to the listed options exchanges
comparable to the requirements for
access to markets that trade NMS
stocks.1 Further, they would address
concerns expressed by certain market
participants regarding access to options
exchanges.2
A. Background
In 1975, Congress determined that the
‘‘linking of all markets’’ through
communications and data processing
facilities would ‘‘foster efficiency;
enhance competition; increase the
information available to brokers,
dealers, and investors; facilitate the
offsetting of investors’ orders; and
contribute to the best execution of
investors’ orders.’’3 As such, Congress
directed the Commission, through the
enactment of Section 11A of the
Exchange Act, to facilitate the
1 See
17 CFR 242.610.
infra Section I.B and notes 34–40 and
accompanying text.
3 See Section 11A(a)(1)(D) of the Exchange Act, 15
U.S.C. 78k–1(a)(1)(D).
2 See
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establishment of a national market
system (‘‘NMS’’) to link together the
multiple individual markets that trade
securities. Congress intended the
Commission to take advantage of
opportunities created by new data
processing and communications
technologies to preserve and strengthen
the securities markets.
As previously recognized by the
Commission, for the NMS to fulfill its
statutory objectives, fair and efficient
access to each of the individual markets
that participate in the NMS is essential.4
One of the statutory NMS objectives, for
example, is to assure the practicability
of brokers executing investors’ orders in
the best market.5 Another is to assure
the efficient execution of securities
transactions.6 Neither of these objectives
can be achieved if brokers cannot fairly
and efficiently route orders to execute
against the best quotations, wherever
such quotations are displayed in the
NMS.7
The Commission believes that
intermarket price protection is essential
in a marketplace such as that for listed
options where multiple exchanges trade
the same securities.8 For this reason, the
Commission in 1999 ordered the
exchanges to jointly develop an NMS
linkage plan for listed options.9 The first
such NMS plan, which began operation
in 2002 (‘‘2002 Linkage Plan’’), included
a requirement that its participant
exchanges avoid trading through 10
better priced quotations displayed on
other options exchanges and
disseminated pursuant to the Options
Price Reporting Authority Plan (‘‘OPRA
Plan’’), as well as a mechanism by which
4 See Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496 (June 29, 2005) (‘‘NMS
Adopting Release’’) at 37538.
5 See Section 11A(a)(1)(C)(iv) of the Exchange
Act, 15 U.S.C. 78k–1(a)(1)(C)(iv).
6 See Section 11A(a)(1)(C)(i) of the Exchange Act,
15 U.S.C. 78k–1(a)(1)(C)(i).
7 See NMS Adopting Release, supra note 4, at
37548.
8 Eight exchanges currently offer options trading
facilities and another exchange is anticipated to
begin operations shortly. See Securities Exchange
Act Release No. 61152 (December 10, 2009), 74 FR
66699 (December 16, 2009) (order approving C2
Options Exchange’s application for registration as a
national securities exchange).
9 See Securities Exchange Act Release No. 42029
(October 19, 1999), 64 FR 57674 (October 26, 1999).
10 A ‘‘trade-through’’ was defined as a transaction
in an options series at a price that is inferior to the
NBBO, but shall not include a transaction that
occurs at a price that is one minimum quoting
increment inferior to the NBBO provided a Linkage
Order is contemporaneously sent to each
Participant disseminating the NBBO for the full size
of the Participant’s bid (offer) that represents the
NBBO. See Section 2(29) of the 2002 Linkage Plan.
‘‘NBBO’’ was defined as the national best bid and
offer in an options series calculated by a
Participant. See Section 2(18) of the 2002 Linkage
Plan.
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participating exchanges could seek
satisfaction if an order was traded
through.11 In August 2009, the options
exchanges implemented a new NMS
plan (‘‘Plan’’),12 approved by the
Commission, which specifically
requires that each participating
exchange establish, maintain, and
enforce written policies and procedures
that are reasonably designed to prevent
trading through better priced quotations
displayed on other options exchanges
and disseminated pursuant to the OPRA
Plan (‘‘trade-throughs’’).13 Rule 608(c) of
Regulation NMS requires the options
exchanges to comply with the terms of
the Plan and to enforce compliance with
the Plan by their members and persons
associated with their members, absent
reasonable justification or excuse.14
Further, each exchange adopted rules to
implement the Plan that prohibit
members from effecting trade-throughs,
subject to certain enumerated
exceptions.15 The approach to tradethroughs under the Plan is similar to
that taken by the Commission under
Rule 611 of Regulation NMS, which
requires that a trading center establish,
maintain, and enforce written policies
and procedures that are reasonably
designed to prevent the execution of
trades at prices inferior to protected
quotations in NMS stocks displayed by
other trading centers, subject to
applicable exceptions.16
11 See Securities Exchange Act Release No. 43086
(July 28, 2000), 65 FR 48023 (August 4, 2000) (order
approving 2002 Linkage Plan). The OPRA Plan is
a national market system plan approved by the
Commission pursuant to Section 11A of the
Exchange Act and Rule 608 thereunder. See
Securities Exchange Act Release No. 17638 (March
18, 1981), 22 S.E.C. Docket 484 (March 31, 1981).
12 This new Plan was designed, in part, to apply
the Regulation NMS price-protection provisions to
the options exchanges. See letter from Michael J.
Simon, International Securities Exchange LLC
(‘‘ISE’’), to Nancy M. Morris, Secretary, Commission,
dated September 12, 2007, at 2–3.
13 See Securities Exchange Act Release No. 60405
(July 30, 2009), 74 FR 39362 (August 6, 2009) (‘‘Plan
Approval Order’’) and Section 5(a) of the Plan. A
‘‘trade-through’’ is defined in this new Plan as a
transaction in an option series, either as principal
or agent, at a price that is inferior to the best bid
or offer in an option series that is displayed by an
exchange, and is disseminated pursuant to the
OPRA Plan. See Sections 2(1), 2(6), 2(14), 2(17), and
2(21) of the Plan.
14 See 17 CFR 242.608(c).
15 See, e.g., ISE Rule 1901, NYSE Arca, Inc.
(‘‘NYSE Arca’’) Rule 6.94, and NASDAQ OMX
PHLX, Inc. (‘‘Nasdaq OMX Phlx’’) Rule 1084. Prior
to the adoption of the new Plan, the options
exchanges had in place rules addressing tradethroughs as required under the 2002 Linkage Plan.
The exchanges revised these rules following the
adoption of the new Plan to reflect the tradethrough requirements in the new Plan.
16 17 CFR 242.611(a). To be protected, a quotation
must be immediately and automatically accessible.
See 17 CFR 242.600(b)(58) (defining the term
‘‘protected quotation’’ as any protected bid or
protected offer); see also 17 CFR 242.600(b)(57).
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To satisfy the requirements of the
trade-through provisions of the Plan and
the exchanges’ rules 17 (collectively
referred to as ‘‘Trade-Through Rules’’),
an options exchange with a best bid or
best offer that is inferior to another
exchange’s best quotation may choose to
handle a pending incoming marketable
order by: (1) Cancelling the order; (2)
routing the order to another exchange
displaying a better price; 18 or (3)
providing an opportunity for its
members, on their own behalf or on
behalf of other market participants, to
‘‘step up’’ and trade with the order at a
price at least equal to the better
displayed price on an away exchange.19
In addition, broker-dealers have a
duty of best execution.20 A brokerThe term ‘‘protected bid’’ or ‘‘protected offer’’ means
a quotation in an NMS stock that is displayed by
an automated trading center, is disseminated
pursuant to an effective national market system
plan, and is an automated quotation that is the best
bid or best offer of a national securities exchange,
the best bid or best offer of The Nasdaq Stock
Market, Inc., or the best bid or best offer of a
national securities association other than the best
bid or best offer of The Nasdaq Stock Market, Inc.
17 See Section 5(a) of the Plan; see also, e.g., ISE
Rule 1901, NYSE Arca Rule 6.94 and Nasdaq OMX
Phlx Rule 1084.
18 To implement the choice of routing to another
exchange to access a better-priced quotation, the
options exchanges currently use private routing
arrangements that provide for indirect access to
quotations displayed by a particular options
exchange through the members of that exchange.
The Commission has stated its belief that the use
of private linkages for routing will allow the
exchanges to take advantage of new technology that
allows for efficient routing and executions, and will
give the exchanges greater flexibility for order
handling. See Plan Approval Order, supra note 13,
at 39364. The options exchanges complied with the
requirements of the prior linkage plan by utilizing
a stand alone system (‘‘centralized hub’’) to send and
receive specific order types. The centralized hub
was a centralized data communications network
that electronically linked the options exchanges to
one another. The Options Clearing Corporation
(‘‘OCC’’) operated the centralized hub. See id.
19 The Commission separately has proposed
changes to Rule 602 of Regulation NMS that may
affect these electronic ‘‘step-up’’ mechanisms, if
adopted. See Securities Exchange Act Release No.
60684 (September 18, 2009), 74 FR 48632, 48633
(September 23, 2009) (File No. S7–21–09) (‘‘Flash
Order Proposal’’). See infra notes 72–75 and
accompanying text.
20 A broker-dealer has a legal duty to seek to
obtain best execution of customer orders. See, e.g.,
Newton v. Merrill, Lynch, Pierce, Fenner & Smith,
Inc., 135 F.3d 266, 269–70, 274 (3d Cir.), cert.
denied, 525 U.S. 811 (1998); Certain Market Making
Activities on Nasdaq, Securities Exchange Act
Release No. 40900 (Jan. 11, 1999) (settled case)
(citing Sinclair v. SEC, 444 F.2d 399 (2d Cir. 1971);
Arleen Hughes, 27 SEC 629, 636 (1948), aff’d sub
nom. Hughes v. SEC, 174 F.2d 969 (D.C. Cir. 1949)).
See also Order Execution Obligations, Securities
Exchange Act Release No. 37619A (Sept. 6, 1996),
61 FR 48290 (Sept. 12, 1996) (‘‘Order Handling
Rules Release’’). A broker-dealer’s duty of best
execution derives from common law agency
principles and fiduciary obligations, and is
incorporated in SRO rules and, through judicial and
Commission decisions, the antifraud provisions of
the federal securities laws. See Order Handling
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dealer must carry out a regular and
rigorous review of the quality of the
options markets to evaluate its best
execution policies, including the
determination as to which options
market it routes customer order flow.21
The protection against trade-throughs
undergirds the broker-dealer’s duty of
best execution by helping ensure that
customer orders are not executed at
prices inferior to the best quotations, but
does not supplant or diminish the
broker-dealer’s responsibility for
achieving best execution, including its
duty to evaluate the execution quality of
markets to which it routes customer
orders.22
These regulatory obligations mean
that broker-dealers responsible for
routing customer orders, as well as
customers making their own orderrouting decisions, must have fair and
efficient access to the best displayed
quotations to achieve best execution of
those orders, and the exchanges
themselves must have the ability to
execute orders against the displayed
quotations of other exchanges.23
Moreover, the benefits of intermarket
price protection could be compromised
if exchanges were able to charge
substantial fees for accessing their
quotations.24
Further, the Exchange Act authorizes
the Commission to adopt rules assuring
the fairness and usefulness of quotation
information.25 The wider the disparity
in the level of fees among the different
exchanges, the less useful and accurate
are the displayed prices. For example, if
two options exchanges displayed
quotations to sell an option for $10.00
per contract, one exchange offer could
Rules Release, 61 FR at 48322. See also Newton,
135 F.3d at 270. The duty of best execution requires
broker-dealers to execute customers’ trades at the
most favorable terms reasonably available under the
circumstances, i.e., at the best reasonably available
price. Newton, 135 F.3d at 270. Newton also noted
certain factors relevant to best execution—order
size, trading characteristics of the security, speed of
execution, clearing costs, and the cost and difficulty
of executing an order in a particular market. Id. at
270 n.2 (citing Payment for Order Flow, Exchange
Act Release No. 33026 (Oct. 6, 1993), 58 FR 52934,
52937–38 (Oct. 13, 1993) (Proposed Rules)). See In
re E.F. Hutton & Co., Securities Exchange Act
Release No. 25887 (July 6, 1988). See also Securities
Exchange Act Release No. 34902 (October 27, 1994),
59 FR 55006, 55008–55009 (November 2, 1994)
(‘‘Approval of Payment for Order Flow Final
Rules’’). See also NMS Adopting Release, supra note
4, at 37537 (discussing the duty of best execution).
21 See Securities Exchange Act Release No. 49175
(February 3, 2004), 69 FR 6124, 6128 (February 9,
2004) (‘‘Options Concept Release’’). See also NMS
Adopting Release, supra note 4, at 37538.
22 See NMS Adopting Release, supra note 4, at
37538.
23 See id. at 37539.
24 See id. at 37544.
25 See Section 11A(c)(1)(B) of the Exchange Act,
15 U.S.C. 78k–1(c)(1)(B).
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be accessible for a total price of $10.00
per contract plus a $0.50 per contract
access fee, while the second exchange
might not charge any such access fee.
What appeared in the consolidated data
stream to be identical quotations would
in fact not be identical in terms of allin costs. The Commission recognizes
that there may be different ways to
achieve the objective of fair and useful
quotations. One approach is to limit the
extent to which the all-in price for those
who access quotations can vary from the
displayed price by limiting fees for
accessing those quotations, as proposed
here in Rule 610(c)(2).26
An access fee limit also creates more
transparency in the cost of accessing
quoted prices. Currently, there are so
many different fees across options
exchanges, across different categories of
options participants, and across
different product types, that it is not
easy to estimate the total cost of
executing against a quotation for a
particular transaction. An access fee cap
would provide clearer information on
the maximum cost for accessing quoted
prices. The Commission recognizes,
however, that although a cap on access
fees would promote the fairness and
usefulness of displayed quotations and
transparency in the cost of assessing
quoted prices, there may be other fees
assessed that would not be included in
the proposed cap on access fees.
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B. Overview of Current Options Market
Structure
In the listed options market, all orders
are currently executed on registered
national securities exchanges. Options
exchanges have, to date, adopted one of
two general business models. An
exchange using the first model—referred
to as the ‘‘Make or Take’’ model—incents
market participants to quote
aggressively by providing a rebate to an
order or quotation displayed on its
exchange when such order or quotation
is executed. This rebate is funded
through the fee charged to the order that
executed against the displayed order or
quotation. The difference between the
fee charged for accessing the order or
quotation and the rebate is revenue to
the exchange.
NYSE Arca was the first options
exchange to implement the Make or
Take transaction fee model.27 The
26 See NMS Adopting Release, supra note 4, at
37545 (stating that for quotations to be fair and
useful there must be some limit on the extent to
which the true price for those who access
quotations can vary from the displayed price).
27 See Securities Exchange Act Release No. 55223
(February 1, 2007), 72 FR 6306 (February 9, 2007)
(SR–NYSEArca–2007–07). The NASDAQ Options
Market LLC (‘‘NOM’’) also uses a ‘‘Make or Take’’ fee
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introduction of the Make or Take model
followed the reduction of the quoting
increment in certain options in 2007.28
As of February 1, 2010, market
participants could represent trading
interest in penny increments in options
series in 211 specified classes. These
classes represent approximately 69.5
percent of trading volume. By August 2,
2010, 361 classes will be included in the
Minimum Quoting Increment Pilot
Program, representing approximately
88.1 percent of trading volume during
February 2010.29
On an exchange with a ‘‘Make or
Take’’ fee model, broker-dealers
representing customer orders must pay
a ‘‘Take’’ fee to access a displayed
quotation on that exchange. In contrast,
on an exchange without that fee model,
broker-dealers generally are not assessed
a similar fee when a customer order is
executed. This distinction brought
attention to the issue of whether, and to
what extent, access fees impact fair and
efficient access to displayed quotations
in listed options.
Exchanges using the second model—
referred to as the ‘‘Broker Payment’’
model—generally charge no or low fees
for the execution of customers’ orders.30
model for certain options classes. See The NASDAQ
Options Market: Execution and Routing Fees
(available at https://www.nasdaqtrader.com/content/
ProductsServices/PriceList/
nasdaq_options_pricing.pdf) (current as of
December 1, 2009).
28 On January 26, 2007, the then-existing six
options exchanges implemented a pilot program to
quote certain options series in thirteen classes in
one-cent increments (‘‘Minimum Quoting Increment
Pilot Program’’). The NASDAQ Stock Market LLC
(‘‘Nasdaq’’) became a participant in the Minimum
Quoting Increment Pilot Program on March 31,
2008, when it commenced trading on NOM, and
BATS Exchange, Inc. (‘‘BATS’’) became a participant
in the Minimum Quoting Increment Pilot Program
on February 26, 2010 when it commenced trading
on BATS Options Exchange Market. Since 2007, the
Minimum Quoting Increment Pilot Program has
been extended and expanded several times. See,
e.g., Securities Exchange Act Release Nos. 56276
(August 17, 2007), 72 FR 47096 (August 22, 2007)
(SR–CBOE–2007–98); 56567 (September 27, 2007),
72 FR 56396 (October 3, 2007) (SR–Amex–2007–
96); 57579 (March 28, 2008), 73 FR 18587 (April 4,
2008) (SR–Nasdaq–2008–026); 60711 (September
23, 2009), 74 FR 49419 (September 28, 2009) (SR–
NYSEArca–2009–44); and 61061 (November 24,
2009), 74 FR 62857 (December 1, 2009) (SR–
NYSEArca–2004–44).
29 The source of the data is OptionsMetrics, LLC
(‘‘OptionsMetrics’’). The data used for the estimates
corresponds to February 2010. By August 2010, the
Minimum Quoting Increment Pilot Program will
incorporate 150 additional classes. Those classes
will be incorporated according to volume levels on
the month before the expansion. For the current
approximation, Commission staff projected which
classes would be added by August 2010 using
volume data corresponding to February 2010.
30 Exchanges that use the ‘‘Broker Payment’’
model also generally give priority to customer
orders at the best price over other orders or
quotations at that price. After customer orders are
executed, the rules of ‘‘Broker Payment’’ options
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However, these exchanges often charge
other types of fees on a per-transaction
basis. For example, most options
exchanges charge a surcharge or
‘‘royalty’’ fee for executions in certain
index option classes.31 Many exchanges
also charge a payment for order flow or
‘‘marketing’’ fee to market makers that
trade with customer orders on the
exchange.32 The exchange then makes
the proceeds from such fees available to
exchanges dictate how the remainder of an
incoming order is allocated against resting noncustomer orders or quotations. ISE, for example,
requires that priority be given to public customer
orders, and provides for pro-rata allocation among
non-customer orders and quotations. See Securities
Exchange Act Release No. 42455 (February 24,
2000), 65 FR 11388, 11395 (March 2, 2000) (order
approving the registration of the International
Securities Exchange LLC as a national securities
exchange (‘‘ISE Exchange Approval’’)). Exchanges
that use a ‘‘Broker Payment’’ model do not give
priority to orders from certain customers who are
‘‘professional’’ customers under exchange rules. See
Securities Exchange Act Release Nos. 59287
(January 23, 2009), 74 FR 5694 (January 30, 2009)
(SR–ISE–2006–26); 61198 (December 17, 2009), 74
FR 68880 (December 29, 2009) (SR–CBOE–2009–
078); and 61802 (March 3, 2010) (SR–Phlx–2010–
05). ‘‘Professional’’ customers are treated on ISE, the
Chicago Board Options Exchange, Incorporated
(‘‘CBOE’’), and Nasdaq OMX Phlx in the same
manner as a broker-dealer for purposes of specified
order execution rules, including priority rules.
Under these exchange rules, ‘‘Professional’’
customers participate in ISE’s, CBOE’s, and Nasdaq
OMX Phlx’s allocation processes on equal terms
with broker-dealers, i.e., they do not receive priority
over broker-dealers in the allocation of orders on
the exchange. Several exchanges have, however,
begun to charge transaction fees to certain
customers identified in exchange rules as
‘‘professionals.’’ See Securities Exchange Act
Release Nos. 59287 and 61198.
31 See BOX Fee Schedule, at 1 (available at
https://www.bostonoptions.com/pdf/BOX_Fee_
Schedule.pdf) (current as of January 2010); CBOE
Fee Schedule, at 1 (available at
https://www.cboe.com/publish/feeschedule/
CBOEFeeSchedule.pdf) (current as of February 2,
2010); ISE Fee Schedule, at 6 (available at https://
www.ise.com/assets//documents//Options
Exchange//legal/fee/fee_schedule.pdf) (current as of
January 8, 2010); NYSE Amex Fee Schedule, at 3
(available at https://www.nyse.com/pdfs/NYSE_
Amex_Options_Fee_Schedule01.04.10.pdf) (current
as of January 4, 2010); NYSE Arca Fee Schedule,
at 6 (available at https://www.nyse.com/pdfs/NYSE_
Arca_Options_Fee_Schedule1-08-2010.pdf) (current
as of January 8, 2010); and Nasdaq OMX Phlx Fee
Schedule, at 5 (available at https://www.nasdaqomx
trader.com/content/marketregulation/membership/
phlx/feesched.pdf) (current as of February 24,
2010).
32 See CBOE Fee Schedule, at 2 (available at
https://www.cboe.com/publish/feeschedule/
CBOEFeeSchedule.pdf) (current as of February 2,
2010); ISE Fee Schedule, at 6 (available at https://
www.ise.com/assets//documents//Options
Exchange//legal/fee/fee_schedule.pdf) (current as of
January 8, 2010); NYSE Amex Fee Schedule, at 3
(available at https://www.nyse.com/pdfs/NYSE_
Amex_Options_Fee_Schedule01.04.10.pdf) (current
as of January 4, 2010); NYSE Arca Fee Schedule,
at 6 (available at https://www.nyse.com/pdfs/NYSE_
Arca_Options_Fee_Schedule1-08-2010.pdf) (current
as of January 8, 2010); and Nasdaq OMX Phlx Fee
Schedule, at 6 (available at https://www.nasdaqomx
trader.com/content/marketregulation/membership/
phlx/feesched.pdf) (current as of February 24,
2010).
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the proceeds from such fees available to
collectively fund payment for order flow
to brokers directing order flow to the
exchange.33
In July 2008 the Commission received
a Petition for Rulemaking to Address
Excessive Access Fees in the Options
Markets from Citadel Investment Group,
L.L.C. (‘‘Citadel Petition’’).34 In the
Citadel Petition, Citadel petitions the
Commission to engage in rulemaking to
limit the ‘‘Take’’ fees that options
exchanges may charge non-members to
obtain access to quotations to $0.20 per
contract. NYSE Arca also filed a
proposal in July 2008 to raise its ‘‘Take’’
fee for certain classes. Specifically,
NYSE Arca submitted a proposed rule
change for immediate effectiveness that
raised its ‘‘Take’’ fee charged to members
for certain designated Minimum
Quoting Increment Pilot Program issues
from $0.45 per contract to $0.55 per
contract, and raised the corresponding
credit in those same issues from $0.30
per contract to $0.40 per contract for
market makers, and from $0.25 per
contract to $0.35 per contract for
electronically executed broker-dealer
and customer orders.35 The Commission
requested comment on the issue of
access fees when it published NYSE
Arca’s proposal for comment.36
The Commission has received several
comment letters in response to its
request for comment on the NYSE Arca
proposed rule change and to the Citadel
Petition, which discuss the issue of
access fees and imposing a cap on such
fees.37 The Commission also received
33 See, e.g., Nasdaq OMX Phlx Fee Schedule, at
6, 15 (available at https://
www.nasdaqomxtrader.com/content/
marketregulation/membership/phlx/feesched.pdf)
(current as of February 24, 2010). See also infra note
109 and accompanying text.
34 See letter from John C. Nagel, Managing
Director & Deputy General Counsel, Citadel, to
Nancy M. Morris, Secretary, Commission, dated
July 15, 2008 (available at https://www.sec.gov/rules/
petitions/2008/petn4-562.pdf).
35 These Pilot issues included: AAPL, CSCO, DIA,
MSFT, IWM, QQQQ, RIMM, XLF, SPY, YHOO. See
Securities Exchange Act Release No. 58295 (August
4, 2008), 73 FR 46681 (August 11, 2008) (SR–
NYSEArca–2008–75).
36 Concurrently, NYSE Arca filed a proposed rule
change to increase the fee charged to orders
received through the then-existing options linkage
in certain Minimum Quoting Increment Pilot
Program issues from $0.45 to $0.55 per contract. See
SR–NYSEArca–2008–76. The Commission has not
published this proposed rule change for notice and
comment. Pending Commission action on SR–
NYSEArca–2008–76, NYSE Arca has stated that it
will not implement its fee changes included in SR–
NYSEArca–2008–75.
37 Letters received in response to SR–NYSEArca–
2008–75: See letters from John C. Nagel, Managing
Director and Deputy General Counsel, Citadel, to
Nancy M. Morris, Secretary, Commission, dated
July 23, 2008 (‘‘Citadel Letter’’); Stephen Schuler
and Daniel Tierney, Managing Members, Global
Electronic Trading Company to Florence E.
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several comment letters in response to
a proposal to amend Rule 602 of
Regulation NMS to effectively ban
marketable ‘‘flash orders’’ in NMS
securities that discuss the issue of
access fees in listed options.38
Commenters on the Flash Order
Proposal expressed concern that
eliminating flash orders on the options
exchanges would increase direct costs
associated with executing customers’
listed options orders.39 The absence of
a limit on fees that an options exchange
Harmon, Acting Secretary, Commission, dated
September 2, 2008 (‘‘GETCO Letter’’); Christopher
Nagy, Managing Director, Order Routing Sales and
Strategy, TD Ameritrade, Inc. to Florence E.
Harmon, Acting Secretary, Commission, dated
September 9, 2008 (‘‘TD Ameritrade Letter’’); and
Robert R. Bellick, Managing Director, Wolverine to
Nancy M. Morris, Secretary, Commission, dated
September 10, 2008 (‘‘Wolverine Letter’’) (available
at https://www.sec.gov/comments/sr-nysearca-200875/nysearca200875.shtml).
Letter received in response to the Citadel Petition:
See letter from Lawrence Leibowitz, Group
Executive Vice President and Head of Global
Execution and Technology, NYSE Euronext, to
Florence E. Harmon, Acting Secretary, Commission,
dated September 3, 2008 (‘‘NYSE Euronext Letter’’)
(available at https://www.sec.gov/comments/4-562/4562.shtml).
Letters received in response to both the Citadel
Petition and SR–NYSEArca–2008–75: See letters
from David M. Battan, Executive Vice President,
Interactive Brokers Group LLC, to Florence Harmon,
Acting Secretary, Commission, dated September 8,
2008 (‘‘IB Letter’’); and William Easley, Vice
Chairman, Boston Options Exchange (‘‘BOX’’) to
Florence E. Harmon, Acting Secretary, Commission,
dated September 11, 2008 (‘‘BOX Letter’’) (available
at https://www.sec.gov/comments/sr-nysearca-200875/nysearca200875.shtml).
Letters received in response to SR–NYSEArca–
2009-44, which proposed to expand the number of
classes eligible to participate in the Minimum
Quoting Increment Pilot: See letters from
Christopher Nagy, Managing Director, Order
Routing Strategy, TD Ameritrade, Inc. to Elizabeth
M. Murphy, Secretary, Commission, dated June 17,
2009 (‘‘TD Ameritrade Letter II’’) and December 1,
2009 (‘‘TD Ameritrade Letter III’’) (available at
https://www.sec.gov/comments/sr-nysearca-2009-44/
nysearca200944.shtml).
38 See Flash Order Proposal, supra note 19. A
‘‘flash order’’ generally is any order qualifying for
the ‘‘immediate execution or withdrawal’’ exception
from Rule 602. For more detail about the basic
features that define flash orders, see the Flash Order
Proposal. Flash orders allow options exchanges that
charge no or low fees to execute customer orders
to ‘‘step up’’ and match better displayed quotations
on other exchanges.
39 See, e.g., letters from Christopher Nagy,
Managing Director, Order Routing Strategy, TD
Ameritrade, Inc., to Elizabeth M. Murphy,
Secretary, Commission, dated November 23, 2009
(‘‘Ameritrade Flash Letter’’); letter from John C.
Nagel, Managing Director and Deputy General
Counsel, Citadel, to Elizabeth M. Murphy,
Secretary, Commission, dated November 20, 2009
(‘‘Citadel Letter II’’); Peter Bottini, EVP Trading and
Customer Service, and Hillary Victor, Associate
General Counsel, optionsXpress, to Elizabeth M.
Murphy, Secretary, Commission, dated November
25, 2009 (‘‘optionsXpress Flash Letter’’); Thomas F.
Price, Managing Director, Securities Industry
Financial Association, to Elizabeth M. Murphy,
Secretary, Commission, dated December 1, 2009
(‘‘SIFMA Flash Letter’’) (available at https://
www.sec.gov/comments/s7-21-09/s72109.shtml).
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20741
can charge for accessing its quotation
was one reason commenters said that
banning flash orders would be more
detrimental to listed options customers
than to cash equity customers.40 These
concerns about the absence of a limit on
access fees on the listed options
exchanges echo the comments received
in response to the Citadel Petition and
NYSE Arca’s proposal. These comments
were considered in developing this
proposal and are discussed below.
II. Proposed Amendments to Rule
610(a)
Access to displayed quotations,
particularly the best quotations of an
exchange or association, is vital for the
smooth functioning of intermarket
trading.41 Brokers responsible for
routing their customers’ orders, as well
as investors that make their own orderrouting decisions, must have fair and
efficient access to the best displayed
quotations of all options exchanges to
achieve best execution of those orders.
In addition, options exchanges
themselves must have the ability to
route orders for execution against the
displayed quotations of other
exchanges. Indeed, the concept of
intermarket protection against tradethroughs is premised on the ability of
options exchanges to trade with, rather
than trade through, the quotations
displayed by other options exchanges.42
Currently, Rule 610(a) furthers the
goal of fair and efficient access to
quotations primarily by prohibiting a
national securities exchange or national
securities association from imposing
unfairly discriminatory terms that
prevent or inhibit any person from
obtaining efficient access through a
member of the national securities
exchange or national securities
association to any quotations in an NMS
stock 43 displayed by the exchange or
association.44 This anti-discrimination
standard is designed to support indirect
access by persons to quotations in NMS
stocks through members, and is
40 See SIFMA Flash Letter, supra note 39, at 5.
See also Citadel Letter II, infra note 39, at 1–2;
Ameritrade Flash Letter, supra note 39, at 3; and
optionsXpress Flash Letter, supra note 39, at 6.
41 See NMS Adopting Release, supra note 4, at
37539. Currently, no national securities association
quotes or trades listed options.
42 See id.
43 See Rule 600(b)(47), 17 CFR 242.610(b)(47)
(defining NMS stock as any NMS security other
than an option). See also Rule 600(b)(46), 17 CFR
242.610(b)(46) (defining NMS security as any
security or class of securities for which transaction
reports are collected, processed, and made available
pursuant to an effective transaction reporting plan,
or an effective national market system plan for
reporting transactions in listed options).
44 See Rule 610(a), 17 CFR 242.610(a). See also
NMS Adopting Release, supra note 4, at 37539.
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premised on fair and efficient access of
exchange or association members
themselves to the quotations in NMS
stocks.45
The Commission is proposing to
amend Rule 610(a) to extend this
prohibition to NMS securities,46 which
include listed options as well as NMS
stocks. The proposal to extend the antidiscrimination standard in Rule 610(a)
to the trading of listed options is
designed to support indirect access by
persons to quotations in listed options
through members. Like current Rule
610(a), the proposed amendment is
premised on the need for fair and
efficient access of members themselves
to the quotations of the exchange in
listed options.
Market participants can either become
members of an exchange to obtain direct
access to its options quotations, or they
can obtain indirect access by
‘‘piggybacking’’ on the direct access of
members. Access to exchanges currently
is addressed by several provisions of the
Exchange Act.47 In particular, Section
6(b)(5) of the Exchange Act requires in
part that the rules of an exchange not be
designed to permit unfair
discrimination between customers,
issuers, brokers, or dealers.48 The
proposed amendments to Rule 610(a)
would build on this existing access
structure, including the prohibition in
Section 6(b)(5) against unfair
discrimination, by specifically
prohibiting unfair discrimination that
prevents or inhibits non-members from
‘‘piggybacking’’ on the access of
members. The ability to fairly and
efficiently obtain indirect access
through a member is necessary to assure
that non-members can readily access
45 See NMS Adopting Release, supra note 4, at
37502.
46 See supra note 43 (defining NMS security).
47 Section 6(b)(4) of the Exchange Act requires the
rules of an exchange to provide for the equitable
allocation of reasonable dues, fees, and other
charges among its members and other persons using
its facilities, while Section 6(b)(5) of the Exchange
Act requires in part that its rules not be designed
to permit unfair discrimination between customers,
brokers, or dealers. Section 6(b)(5) also requires an
exchange to have rules designed to remove
impediments to, and perfect the mechanism of, a
free and open market and a national market system.
In addition, Section 6(b)(1) of the Exchange Act
requires that an exchange must have the capacity
to be able to carry out the purposes of the Exchange
Act. See 15 U.S.C. 78f(b)(4); 15 U.S.C. 78f(b)(5); 15
U.S.C. 78f(b)(1). Section 11A(a)(1)(C) of the
Exchange Act provides that two of the objectives of
a national market system are to assure the
economically efficient execution of securities
transactions and the practicability of brokers
executing investors’ orders in the best market. See
15 U.S.C. 78k–1(a)(1)(C).
48 The requirements of Section 6(b)(5) of the
Exchange Act apply to any rule of an exchange, and
as such are not limited to access through members
of an exchange to the quotations of that exchange.
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quotations in options to meet the
requirements of the Trade-Through
Rules and to fulfill the non-members’
duty of best execution.49
The Commission does not believe
that, if it were to prohibit exchanges
from imposing unfairly discriminatory
terms on non-members who obtain
indirect access to quotations in options
through members, it would require
exchanges to provide non-members with
free access to such quotations. Members
who provide piggyback access to nonmembers would be providing a useful
service and presumably would charge a
fee for such service. The fee would be
subject to competitive forces and likely
would reflect the costs of membership,
plus some element of profit to the
members. As a result, non-members that
frequently make use of indirect access
are likely to contribute indirectly to
cover the costs of membership in the
market. In addition, the unfair
discrimination standard of Rule 610(a)
as proposed to be amended would apply
only to access to quotations in NMS
securities, including options. All other
services would be subject to the more
general fair access provisions applicable
to national securities exchanges, as well
as the statutory provisions that govern
their respective rules.50
On the other hand, any attempt by an
options exchange to charge differential
fees based solely on the non-member
status of a person obtaining indirect
access to its quotations would violate
Rule 610(a) as proposed to be
amended.51 As noted above, fair and
efficient access to quotations is essential
to the functioning of the NMS.52 For
example, if an exchange charges
discriminatory fees to non-members to
access its quotations, this practice
would interfere with the functioning of
the private linkage approach and detract
from its usefulness to exchanges in
meeting their required responsibilities
under the Trade-Through Rules. Fair
and efficient access to the best
quotations is also necessary for brokers
to achieve best execution of orders.53
Accordingly, the Commission is
49 See
50 See
supra notes 4–22 and accompanying text.
NMS Adopting Release, supra note 4, at
37540.
51 Id. For example, the Commission preliminarily
believes an exchange that charges a non-member
broker-dealer that is registered as an options market
maker on another exchange a higher fee than the
fee charged to both member and non-member
broker-dealers that also are not market makers on
that exchange for obtaining access to its quotations
would violate Rule 610(a), as proposed to be
amended.
52 See supra notes 4–7 and accompanying text.
53 See NMS Adopting Release, supra note 4, at
37539. See also supra notes 20–22 and
accompanying text.
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proposing to amend Rule 610(a) to
establish baseline intermarket access
rules for options markets to promote
indirect access to such markets by a
non-member through a member.
The prohibition on imposing unfairly
discriminatory terms in Rule 610(a)
currently applies to terms that prevent
or inhibit efficient access to quotations.
The term ‘‘quotation’’ is defined in Rule
600(a)(62) of Regulation NMS as a bid
or offer, and ‘‘bid’’ or ‘‘offer’’ is defined
in Rule 600(b)(8) of Regulation NMS as
the bid price or the offer price
communicated by a member of a
national securities exchange or national
securities association to any broker or
dealer or to any customer.54 Rule 610(a),
therefore, applies to the entire depth of
book of displayed orders in NMS stocks,
including reserve size 55 and displayed
size at each price.56 The Commission’s
proposal to extend Rule 610(a) to all
NMS securities so that listed options
markets are covered by the Rule would
apply in the same manner.57 Thus,
options markets would be prohibited
from imposing unfairly discriminatory
terms that prevent or inhibit efficient
access to the entire depth of book of
displayed orders.
III. Access Fees
A. Proposed Rule 610(c)(2)
Generally, the Commission believes
that market forces and the dynamics of
competition should determine the level
of exchange fees whenever possible.58
As discussed below, however, the
Commission is concerned that because
of the requirements for intermarket
price protection, competitive forces, by
themselves, are not, and will not be,
enough to prevent fees from being
charged that interfere with fair and
54 See 17 CFR 242.600(b)(62) and 17 CFR
242.600(b)(8).
55 ‘‘Reserve size’’ generally means an undisplayed
portion of an order. Once the displayed size of an
order is executed against, the reserve size is used
to refresh the market participant’s displayed size.
See, e.g., NYSE Arca Rule 6.62(d)(3) and ISE Rule
2104(n).
56 See NMS Adopting Release, supra note 4, at
37548.
57 The Commission notes that, although fees are
the most likely way in which an exchange could
discriminate against non-members for access to its
quote, the Commission’s proposal would more
broadly prohibit any unfairly discriminatory terms.
58 See Securities Exchange Act Release Nos.
59039 (December 2, 2008), 73 FR 74770, 74781–82
(December 9, 2008) (‘‘NYSE Arca Data Order’’)
(stating in part that ‘‘[t]he Exchange Act and its
legislative history strongly support the
Commission’s reliance on competition, whenever
possible, in meeting its regulatory responsibilities
for overseeing the SROs and the national market
system. Indeed, competition among multiple
markets and market participants trading the same
products is the hallmark of the national market
system.’’).
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efficient access to an option exchange’s
displayed prices.59 Accordingly, the
Commission is proposing to impose a
limit on the amount of fees that an
exchange can impose (or permit to be
imposed) for the execution of an order
against the exchange’s best bid and
offer. This proposal also responds to
market participants’ concerns regarding
access fees,60 as discussed below.61
Each of the options exchanges
currently charges market participants
fees when incoming orders access their
displayed quotations. Although these
fees may have different names (e.g., a
‘‘Take’’ fee versus a transaction fee), and
may vary in amount based on the type
of account from which the order is sent,
these fees all have one thing in
common—they are fees triggered by the
execution of an incoming order against
an order or quotation on that exchange.
In particular, on exchanges that use
the ‘‘Broker Payment’’ fee model,62
although orders executed on behalf of
customer accounts may not be charged
any transaction fees, orders executed on
behalf of non-customer accounts are
charged transaction fees.63 In some
cases, these fees may be substantial. For
example, for options classes not
included in the Minimum Quoting
Increment Pilot Program, one exchange
charges $0.50 per contract for
electronically executed orders for the
account of a broker dealer or firm,64
while another exchange charges $0.45
59 See NMS Adopting Release, supra note 4, at
37545 (concluding that imposing a fee limitation
was necessary to support the integrity of the price
protection requirement established to prevent tradethroughs: ‘‘[T]he adopted fee limitation is designed
to preclude individual trading centers from raising
their fees substantially in an attempt to take
improper advantage of strengthened protection
against trade-throughs and the adoption of a private
linkage regime. In particular, the fee limitation is
necessary to address ‘‘outlier’’ trading centers that
otherwise might charge high fees to other market
participants required to access their quotations by
the Order Protection Rule.’’).
60 These concerns, as noted above, have been
raised by a petition for rulemaking to limit the
‘‘Take’’ fees that options exchanges may charge nonmembers to access quotations and comment letters
in response to this petition and NYSE Arca’s
proposal to raise its ‘‘Take’’ fee. See Citadel Petition,
supra note 34; see also supra note 37.
61 See infra notes 70 and 79 and accompanying
text.
62 See supra notes 30–33 and accompanying text.
63 A customer generally is understood to be a
person that is not a broker-dealer. See, e.g., ISE Rule
100(a)(38) (defining the term ‘‘public customer’’).
However, as noted above, some exchanges have
begun to charge transaction fees to certain
customers identified in exchange rules as
‘‘professionals.’’ See supra note 30.
64 See NYSE Arca Fee Schedule (available at
https://www.nyse.com/pdfs/
NYSE_Arca_Options_Fee_Schedule1-08-2010.pdf)
(current as of January 8, 2010).
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per contract for electronically executed
broker-dealer orders.65
In addition, on exchanges that use the
‘‘Make or Take’’ fee model,66 an
exchange charges ‘‘Take’’ fees to
members that execute orders against
that exchange’s quotations. These
exchanges then pass a substantial
portion of that fee back as a rebate to the
member that supplied the accessed
liquidity (i.e., market maker quotations
or non-marketable limit orders). The
‘‘Take’’ fees charged by these exchanges
also can be substantial. For example, for
options classes in the Minimum
Quoting Increment Pilot Program, one
exchange charges $0.45 per contract
when an order for the account of a noncustomer (and $0.35 per contract when
an order for the account of a customer)
trades against liquidity on the
exchange’s book. The exchange then
rebates $0.25 per contract to the member
(or members) that represented the order
(or orders) on its book that provided the
liquidity to the incoming order.67
Another exchange charges a $0.45 percontract ‘‘Take’’ fee when an order in a
Minimum Quoting Increment Pilot
Program options class trades with
liquidity on the exchange’s book. This
exchange then rebates $0.30 per contract
to an exchange market maker that
provided the liquidity to the incoming
order and $0.25 per contract to the
member that represented a broker-dealer
or customer order that provided
liquidity to the incoming order.68
The Commission believes that the
benefits of intermarket price protection
and more efficient linkages could be
compromised if options exchanges
charge substantial fees for accessing
their best bids and offers. For this
reason, the Commission preliminarily
believes that a fee limitation is
necessary to support the integrity of the
price protection requirement under the
Trade-Through Rules.69 The
Commission’s views are informed by
commenters that argue that a limit on
65 See CBOE Fee Schedule (available at https://
www.cboe.com/publish/feeschedule/
CBOEFeeSchedule.pdf) (current as of February 2,
2010).
66 See supra note 27 and accompanying text.
67 See Section 1 of Nasdaq Rule 7050 and The
NASDAQ Options Market: Execution and Routing
Fees (available at https://www.nasdaqtrader.com/
content/ProductsServices/PriceList/
nasdaq_options_pricing.pdf) (current as of January
4, 2010).
68 See ‘‘Transaction Costs’’ Section of the NYSE
Arca Fee Schedule (available at https://
www.nyse.com/pdfs/
NYSE_Arca_Options_Fee_Schedule1-08-2010.pdf)
(current as of January 8, 2010). See also supra notes
35 and 36 and accompanying text.
69 See supra notes 13 and 17–19 and
accompanying text for a definition of ‘‘TradeThrough Rules.’’
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fees for accessing quotations would
support the integrity of the rules
limiting trade-throughs because a fee
limitation would prohibit individual
exchanges from raising their fees
substantially in an attempt to take
improper advantage of protection
against trade-throughs. In particular,
commenters contend that, in the
absence of a fee limit, some exchanges
may take advantage of the requirement
to protect displayed quotations by
charging exorbitant fees to those
required to access the exchange’s
quotations, which could compromise
the fairness and efficiency of the NMS
for trading standardized options.70
Although the exchange charging the
highest fees likely would be the last
exchange to which orders would be
routed, prices could not move to the
next level until someone routed an
order to take out the displayed price at
such a high fee exchange. Thus, while
exchanges would have significant
incentives to compete to be near the top
in order-routing priority, arguably there
would be little incentive to avoid being
the least-preferred exchange if fees were
not limited.71
The proposed fee limitation is
designed to preclude this business
practice by limiting individual
exchanges from having fee structures
that take improper advantage of the
required protection against tradethroughs and undermine the overall
benefits of the new private routing
regime. It also would preclude an
options exchange from charging
excessively high fees selectively to
competitors.
70 See Citadel Petition, supra note 34, at 4
(arguing that ‘‘Taker’’ fees are sustained by virtue of
the regulatory obligations prohibiting tradethroughs, in that when an exchange is quoting alone
at the NBBO, market participants cannot avoid the
Taker fees imposed by such exchange, irrespective
of how high such fees may be); Citadel Letter II,
supra note 37, at 6 (arguing that if the Commission
were to ban or limit the use of step-up mechanisms
in the options markets, the need for an access fee
cap would become essential); TD Ameritrade Letter,
supra note 37, at 1 (arguing that Make or Take fees
have the potential to create incentives for
participants to post liquidity and lock markets to
capture the rebate and that other options exchanges
would have to increase their fees and rebates in
order to defend their market share). See also
Wolverine Letter, supra note 37, at 6 (asserting that,
while a cap implemented as proposed by Citadel
would reduce Take fees charged to non-members
who may be forced to access ‘‘outlier’’ markets due
to trade through obligations, members would still
be forced to pay unrestricted fees); GETCO Letter,
supra note 37, at 3 (stating that if the Commission
does decide to place caps on access fees charged by
exchanges that use the ‘‘Make or Take’’ fee model,
it should also cap all-in access fees for traditional
exchanges, i.e., those that use the ‘‘Broker Payment’’
fee model, regardless of the type of market
participant accessing the exchange’s quotation).
71 See NMS Adopting Release, supra note 4, at
37545.
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The Commission notes that several
exchanges have rules that allow—and
encourage—their members to
electronically ‘‘step up’’ and match a
better-priced bid or offer available on
another exchange—a ‘‘flash’’
functionality—rather than send orders
to other exchanges for execution.72
These exchanges stated that they
implemented this ‘‘flash’’ functionality
because of the high costs associated
with routing an order to away exchanges
to be executed, particularly one with a
Make or Take fee model.73
The Commission separately has
proposed changes to Rule 602 of
Regulation NMS that may affect these
electronic ‘‘step-up’’ mechanisms, if
adopted.74 There are structural
differences between the listed options
exchanges and the cash equity markets
that commenters identified as making
the use of ‘‘flash’’ orders on the options
exchanges serve a different purpose. In
particular, commenters stated that
eliminating the ability of market
participants on the options exchanges to
‘‘step up’’ to better prices on other
exchanges through the use of ‘‘flash’’
orders could impose significant costs on
retail options customers whose orders
would be routed to other options
exchanges because, in part, of the
absence of any limits on the fees options
exchanges may charge to access their
quotations.75
The Commission also believes that for
quotations to be fair and useful, there
72 See, e.g., ISE Rule 803, Supplementary Material
.02 and Securities Exchange Act Release Nos. 57551
(March 25, 2008), 73 FR 16917 (March 31, 2008)
(SR–ISE–2008–28) and 58038 (June 26, 2008), 73 FR
38261 (July 3, 2008) (SR–ISE–2008–50). See also
ISE Fee Schedule, supra note 32, at 3–4 (as an
inducement to step-up and avoid routing to away
markets, ISE waives the transaction fee for members
when they execute against a public customer order
that is exposed pursuant to ISE Rule 803, i.e., ISE’s
step-up mechanism) (current as of January 8, 2010).
73 See, e.g., letters from William J. Brodsky,
Chairman and Chief Executive Officer, CBOE, to
Elizabeth M. Murphy, Secretary, Commission, dated
November 18, 2009, at 2 (comment to Flash Order
Proposal) (‘‘CBOE Flash Letter’’); Michael J. Simon,
Secretary, ISE, to Elizabeth Murphy, Secretary,
Commission, dated November 23, 2009 at 5
(comment to Flash Order Proposal) (‘‘ISE Flash
Letter’’); Tony McCormick, CEO, BOX, to Elizabeth
M. Murphy, Secretary, Commission, dated
November 23, 2009, at 3 (comment to Flash Order
Proposal). See also Securities Exchange Act Release
Nos. 57551 (March 25, 2008), 73 FR at 16917
(March 31, 2008) (SR–ISE–2008–28) and 57937
(June 6, 2008), 73 FR 33865 (June 13, 2008) (SR–
CBOE–2008–58) (relating to electronic exposure on
HAL).
74 See Flash Order Proposal, supra note 19.
75 See SIFMA Flash Letter, supra note 39, at 5;
Ameritrade Flash Letter, supra note 39, at 3;
optionsXpress Flash Letter, supra note 39, at 6; and
Citadel Letter II, supra note 39, at 6 (arguing that
if the Commission were to ban or limit the use of
step-up mechanisms in the options markets, the
need for an access fee cap would become essential).
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must be some limit on the extent to
which the all-in price for those who
access quotations can vary from the
displayed price.76 The wider the
disparity in the level of fees among the
different exchanges, the less useful and
accurate are the displayed prices. For
example, if two options exchanges
displayed quotations to sell an option
for $10.00 per contract, one exchange
offer could be accessible for a total price
of $10.00 per contract plus a $0.50 per
contract access fee, while the second
exchange might not charge any such
access fee. What appeared in the
consolidated data stream to be identical
quotations in terms of all-in costs would
in fact not be identical. Access fees tend
to be highest when exchanges use them
to fund substantial rebates to liquidity
providers, rather than merely to
compensate for agency services.77 These
concerns were also expressed by several
commenters who argue that for
quotations to be fair and useful, there
must be some limit to the extent to
which the displayed price can vary from
the ‘‘all-in’’ price 78 of a quotation.79 If
exchanges were allowed to charge
exorbitant fees and pass most of them
through as rebates, the published
quotations of such exchanges would not
reliably indicate the all-in price actually
available.
Section 11A(c)(1)(B) of the Exchange
Act authorizes the Commission to adopt
rules assuring the fairness and
usefulness of quotation information. For
quotations to be fair and useful, there
must be some limit on the extent to
which the all-in price for those who
access quotations can vary from the
displayed price. An access fee limit also
76 See NMS Adopting Release, supra note 4, at
37545.
77 Id. at 37544.
78 The term ‘‘all-in’’ price is intended to capture
the total costs for executing a trade. See infra note
90 and accompanying text.
79 See BOX Letter, supra note 37, at 5–6 (stating
its agreement with Citadel and the Commission that
‘‘[f]or quotations to be fair and useful, there must
be some limit on the extent to which the true prices
for those who access quotations can vary from the
displayed price’’); Citadel Petition, supra note 34, at
3–5 (arguing that markets employing a Make or
Take fee model are charging excessive fees to obtain
access to their quotations and, as a result, are
causing distortions in such quotations, which
should otherwise reliably represent the true prices
actually available to investors.); NYSE Euronext
Letter, supra note 37, at 3 (stating generally that
they are in favor of rules that ensure the
reasonableness of fees, similar to rate caps that were
enacted in the equities markets in Regulation NMS);
TD Ameritrade Letter, supra note 37, at 1–2; and
Wolverine Letter, supra note 37, at 6 (asserting that
unrestricted fees that members would have to pay
would result in executions at prices materially
different from the displayed quotations and, as a
consequence, run contrary to the purposes behind
the trade-through rules and the principles of best
execution).
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creates more transparency in the cost of
accessing quoted prices. Currently, there
are so many different fees across options
exchanges, across different categories of
options participants, and across
different product types, that it is not
easy to estimate the total cost of
executing against a quotation for a
particular transaction. An access fee cap
would provide clearer information on
the maximum cost for accessing quoted
prices. Consequently, the proposed fee
limitation would further the statutory
purposes of the Exchange Act by
precluding the distortional effects of
access fees.
The Commission preliminarily
believes that to fully support the
integrity of the price protection
requirement in the Trade-Through Rules
and to achieve the goals that an
exchange’s displayed quotations be fair
and useful and reliably represent the allin prices that are actually available to
investors, the proposed fee limitation
should apply to any fee, no matter what
it is called,80 charged to any person 81
for the execution of an incoming order
against an options exchange’s best bid
and offer. As discussed above, the
Commission believes that the benefits of
intermarket price protection and more
efficient linkages could be compromised
if options exchanges charge substantial
fees for accessing their best bids and
offers. The proposed fee limitation is
designed to preclude individual
exchanges from having fee structures
that take improper advantage of the
required protection against tradethroughs and undermine the overall
benefits of the new private routing
regime. It also would preclude an
options exchange from charging
excessively high fees selectively to
competitors. In this regard, the
Commission preliminarily believes that
limiting the proposed fee cap to apply
to only one type of fee charged (for
instance, only to ‘‘Take’’ fees), or
limiting the proposed fee cap to fees
charged only to certain persons (for
example, only to non-members) by an
options exchange for execution against
80 See NYSE Euronext Letter, supra note 37, at 3
(stating that access fees should be addressed not as
one model versus the other, but as a fee to access
the market independent of the market structure that
marketplace employs).
81 See Wolverine Letter, supra note 37, at 6
(asserting that, while a proposed fee cap would
reduce Take fees charged to non-members forced to
access ‘‘outlier’’ markets at the NBBO due to tradethrough obligations, members would still be forced
to pay unrestricted fees) and GETCO Letter, supra
note 37, at 3 (stating that if the Commission does
decide to place caps on access fees charged by
exchanges using the ‘‘Make or Take’’ fee model, it
should also cap all-in access fees for traditional
exchanges, regardless of the type of market
participant accessing the exchange’s quotation).
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the exchange’s best bid and offer would
not fully achieve these objectives
because it would not cover all fees that
could be charged for access to the
exchange’s best quotation.
The Commission has received
comments that the Make or Take fee
structure exerts competitive pressure on
the ‘‘traditional’’ fee structure where
market makers pay brokers for order
flow, and that imposing a cap on Take
fees would limit the ability of exchanges
that employ a Make or Take model to
compete effectively with other
exchanges that employ a Broker
Payment model, to the detriment of
investors.82 The Commission supports
the development of competing market
models, as long as they are consistent
with the requirements of the Exchange
Act. An exchange could not, however,
engage in conduct that is otherwise
inconsistent with the requirements of
the Exchange Act,83 even if doing so
would help that exchange to compete.
As discussed above, the Commission
preliminarily believes that the benefits
of intermarket price protection and
more efficient linkages could be
compromised if options exchanges
charge substantial fees for accessing
their best bids and offers, and that a fee
limitation is necessary to support the
integrity of the price protection
requirement under the Trade-Through
Rules, but it requests comment on this
issue.84 The Commission also believes
that for quotations to be fair and useful,
there must be some limit on the extent
to which the all-in price for those who
access quotations can vary from the
displayed price.85 The Commission
preliminarily believes that adopting an
access fee limit of $0.30 per contract for
option exchanges, regardless of their
particular market structure, would not
compromise the competitive viability of
exchanges employing a Make or Take
fee structure because it preliminarily
believes that the proposed level of fee
cap would provide those exchanges
with sufficient flexibility to structure
their fees and rebates to support their
market model.86 Although the
82 See BOX Letter, supra note 37, at 2–3; IB Letter,
supra note 37, at 2–3; and GETCO Letter, supra note
37, at 3.
83 See 15 U.S.C. 78f(b) and 15 U.S.C. 78s(g).
84 See supra note 69 and accompanying text.
85 See supra note 76 and accompanying text. See
also NMS Adopting Release, supra note 4, at 37545.
86 See infra Section VIII.A.2 (discussing the
impacts of the proposed amendments to Rules
610(a) and (c) on competition). See also infra notes
89 and 172 and accompanying text (noting that the
experience of the markets trading NMS stocks in
recent years suggests that a fee cap of $0.30 per 100
shares did not prevent markets using a Make or
Take fee model from competing effectively in a
market where some participants engage in payment
for order flow).
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Commission preliminarily believes that
the proposed fee limit would continue
to allow for competition among the
options exchanges, it requests comment
on this issue and comment on other
ways to achieve the Commission’s
objectives.87
The Commission preliminarily
believes that a limitation on access fees
of $0.30 per contract (equal to $0.003
per share) would be a fair and
appropriate solution. In the
Commission’s preliminary view,
limiting access fees to $0.30 per contract
would promote intermarket access,
standardization of quotations, and the
Commission’s goals for an effective and
efficient linkage between and among the
options exchanges. The proposed fee
limitation would place all options
exchanges on a level playing field in
terms of the fees they can charge for the
execution of incoming options orders
against their best bid and offer. Some
exchanges might choose to charge lower
fees, thereby increasing their ranking in
the preferences of order routers; others
might charge the full $0.30 per-contract
fee and rebate a substantial portion to
liquidity providers. The Commission
preliminarily believes that competition
would ultimately determine which
strategy is most successful.
The Commission recognizes, however,
that even though it is not proposing to
prohibit an exchange from employing
any particular market model, the
proposed fee limitation may impact
different market models in different
ways. An exchange with a Make or Take
fee model that currently charges a Take
fee in excess of the proposed fee cap
would take in less revenue per contract
from a reduced Take fee, while an
exchange with a Broker Payment fee
model that charges a transaction fee in
excess of the proposed fee cap would
take in less revenue per contract from a
reduced transaction fee. These reduced
fees for accessing an exchange’s best bid
or offer, standing alone, might have an
impact on the manner in which brokerdealers and other market participants,
including the exchanges, route order
flow. The exchange with the Make or
Take fee model, however, might choose
to recoup some of that revenue by
reducing its Make rebate, which may
have an impact on the quoting behavior
of market participants that provide
liquidity on that exchange. An exchange
with a Broker Payment model might
choose to recoup some of the revenue by
amending other fees charged to its
87 See infra Sections V (Request for Comment)
and VIII.A.2 (discussing the impacts of the
proposed amendments to Rules 610(a) and (c) on
competition).
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20745
members, which might impact the order
routing or other behavior of those
members (and the members’ customers),
depending upon the type of fee change.
Accordingly, although the Commission
preliminarily believes that the proposed
fee limit would allow for vigorous
competition among the options
exchanges, it requests comment on the
impact of the proposed fee limit on the
different exchanges’ and market
participants’ behavior.88
The Commission is proposing to set a
flat fee cap of $0.30 per contract (the
equivalent of $0.003 per share). The
Commission is not proposing to
establish a cap for low-priced options
based on a percentage of the options’
price, similar to the existing fee cap of
0.3 percent of the quotation price per
share for NMS stocks. The
Commission’s proposal is based on its
preliminary view that the $0.30 percontract level is consistent with the
maximum fee limit for NMS stocks
under Rule 610(c). The experience of
the markets trading NMS stocks in
recent years suggests that a fee cap of
$0.30 per 100 shares did not prevent
markets using a Make or Take fee model
from competing effectively in a market
where some participants engage in
payment for order flow.89 In addition,
this access fee cap level would help
ensure that the ‘‘all-in’’ fee 90 would be
below the $1 minimum quoting
increment 91 so that the quotations
displayed in the NBBO indicate the best
prices. For example, having a $0.30
cap 92 would help ensure that an offer of
$2 is not inferior to an offer of $2.01
once access and other per-contract fees
were added to the price. Stated another
way, the Commission preliminarily
believes that setting the proposed fee
cap at $0.30 per contract would allow
options exchanges flexibility to generate
revenues from access fees while still
providing the exchange the ability to
continue to charge other fees, such as
‘‘licensing’’ fees charged by exchanges
for executions in certain index
88 See infra Sections V (Request for Comment)
and VIII.A.2 (discussing the impacts of the
proposed amendments to Rules 610(a) and (c) on
competition).
89 See infra note 172 and accompanying text.
90 The ‘‘all in’’ fee for transactions in options
contracts may include multiple charges such as
‘‘Take’’ fees or transaction fees, routing fees, and
licensing fees. See supra note 78.
91 Since every options quotation represents a cost
equal to 100 times its price, a penny increment—
the smallest possible increment for certain
options—equals $1.00 in option cost.
92 A $0.30 per-contract access fee is equal to a fee
of $0.003 per underlying share.
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options 93 or routing fees,94 without
exceeding the $1 minimum increment.
The Commission preliminarily
believes that a flat $0.30 per-contract fee
cap for all options would strike the
appropriate balance between imposing a
cap to carry out the objectives discussed
above and providing options exchanges
flexibility to compete with one
another.95 The Commission
preliminarily does not believe that a cap
for low-priced options should be based
on a percentage of the quotation price as
it is for low-priced NMS stocks. The
Commission preliminarily believes that
differences in the markets for NMS
stocks and listed options merit this
distinction. First, if an NMS stock is
trading at a very low price, the access
fee can become significant as a
percentage of the total economic
exposure. This result is less likely for
listed options, given the leverage
implicit in an option contract. For
example, if an NMS stock is trading for
$0.01 per share, so that an order for 100
shares represents $1 worth of stock, an
access fee of $0.30 for 100 shares would
represent thirty percent of the total
economic position. On the other hand,
an NMS stock priced at $10 per share
could have a short-term out-of-themoney option priced at $0.01. If the
Delta 96 of this option is 0.05, then one
option contract would cost $1 but
would give the investor exposure
equivalent to an investment of $50 of
the stock. An access fee of $0.30 per
contract for the option would represent
93 These ‘‘licensing’’ fees generally do not exceed
$0.22 per contract. See, e.g., CBOE Fee Schedule
(available at https://www.cboe.com/publish/
feeschedule/CBOEFeeSchedule.pdf) (current as of
February 2, 2010); and NYSE Arca Fee Schedule
(available at https://www.nyse.com/pdfs/
NYSE_Arca_Options_Fee_Schedule1-08-2010.pdf)
(current as of January 8, 2010).
94 Fees charged by options exchanges for routing
orders to execute on other exchanges range from
$0.00 to $0.95 per contract. See NYSE Arca Fee
Schedule (available at https://www.nyse.com/pdfs/
NYSE_Arca_Options_Fee_Schedule1-08-2010.pdf)
(current as of January 8, 2010); and CBOE Fee
Schedule (available at https://www.cboe.com/
publish/feeschedule/CBOEFeeSchedule.pdf)
(current as of March 16, 2010) (CBOE charges a
$0.50 per contract fee for routing non-customer
orders in addition to the customary CBOE execution
charge, which for electronic orders for brokerdealers is $0.45 per contract).
95 See infra Section VII.B.2 (discussing generally
the costs and benefits of the proposal) and notes
179–183 and accompanying text (discussing the
costs with respect to options exchanges that would
need to amend their rules to comply with the access
fee limitation as a result of proposed Rule
610(c)(2)).
96 Delta is measured as the change in the option
price divided by the change in the underlying asset
price. See Guy Cohen, Options Made Easy (2d ed.,
Upper Saddle River: FT Prentice Hall 2005).
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only six-tenths of one percent of the
economic position.97
Second, the restriction on subpenny
quoting in NMS stocks does not apply
to stocks priced below $1.98 Thus, for
certain low-priced NMS stocks, an
access fee of $0.003 per share could be
larger than the minimum quoting
increment, making it possible for an
order to be routed to an exchange
quoting a better price but ending up
with an inferior all-in price after the
access fee. For NMS stocks, the
percentage fee cap for stocks priced
below $1 helps to mitigate this concern.
Because listed options are not currently
quoted in subpenny increments, these
concerns are not present, and, therefore,
the Commission preliminarily believes
it is unnecessary to establish a cap
based on a percentage of the options’
price for low-priced options. Further, if
the Commission were to propose a
percent-based fee cap for low-priced
options, the access fee cap would be, in
some cases, less than the amount of the
‘‘licensing’’ fees charged by exchanges
for executions in certain index options.
Finally, a significant percentage of
options contract trading volume is in
lower priced options.99 Thus, the
Commission estimates that imposing a
flat $0.30 per-contract cap, and not
including a percentage fee cap for lowpriced options similar to the existing fee
cap of 0.3 percent of the quotation price
per share for NMS stocks, would result
in less potential revenue loss for options
exchanges from the impact of the
proposed fee cap and, therefore,
possibly reduce the need for the options
exchange to impose other fees on market
participants.100
B. Terms of Proposed Rule 610(c)(2)
Under proposed Rule 610(c)(2), a
national securities exchange would be
prohibited from imposing, or permitting
to be imposed, any fee or fees that
97 A $0.30 per-contract access fee would be a
more significant percentage of the option price as
the option price decreases. For example, for an
option priced at $0.01, a $0.30 per-contract access
fee would be 30% of the total option price ($0.01
× 100 = $1 per contract, and $0.30 is 30% of $1).
The Commission preliminarily believes, however,
that a flat cap of $0.30, rather than a cap based on
a percentage of the option price for low-priced
options, strikes the appropriate balance, for the
reasons discussed in this section. The Commission,
however, requests comment on the issue. See infra
Section V (Request for Comment).
98 See Rule 612 of Regulation NMS, 17 CFR
242.612.
99 Approximately 76% of the contract volume is
in options priced at $3 or below, and approximately
48% of the contract volume is in options priced at
$1 or below (these estimates are based on December
2009 volume data from OptionsMetrics).
100 See infra notes 179–187 and accompanying
text for a discussion of the estimated costs of the
proposed fee cap on options exchanges.
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exceeds or accumulates to more than
$0.30 per contract for the execution of
an order against any quotation in an
option series that is the best bid or best
offer of such national securities
exchange. Thus, when triggered, the
proposed fee limitation would apply to
any order execution at the displayed
price of the best bid or offer and would
therefore encompass executions of
orders against both the displayed size
and any reserve size at the price of those
quotations. Further, proposed Rule
610(c)(2) would apply to any fee based
on the execution of an incoming order
against an exchange’s best bid or offer,
such as a ‘‘Take’’ fee or other
‘‘transaction’’ fee charged by the
exchange when an incoming order
executes against the best bid or offer of
the exchange. The Commission
preliminarily believes that the proposed
fee limitation would apply to other
types of fees charged by an exchange to
a member who represents an incoming
order that trades against the exchange’s
best bid or offer.
For example, the proposed fee
limitation would apply to fees charged
by various exchanges for the execution
of orders in certain options on indexes
(called ‘‘licensing’’ or ‘‘index surcharge’’
or ‘‘royalty’’ fees) when the fee is
charged for the execution of an
incoming order against the exchange’s
best bid or offer. The proposed fee
limitation also would apply to options
regulatory fees (‘‘ORF’’), such as those
that have been adopted by several
exchanges.101 For those exchanges that
have adopted an ORF, the fee is charged
on a per-contract basis and is assessed
on each member for all options
transactions executed or cleared by the
member in a customer account. Because
an ORF would constitute a fee for
accessing the best bid or offer of an
options exchange when such fee is
assessed on a customer order that trades
with the exchange’s best bid or offer, the
ORF would be covered by the proposed
amendments to Rule 610(c)(2). So long
as the fees are based on the execution
of orders against the best bid or offer of
the exchange, the proposed restriction
in Rule 610(c)(2) would apply.
Conversely, fees not triggered by the
execution of orders against such
quotations (e.g., certain periodic fees
101 See Securities Exchange Act Release Nos.
58817 (October 20, 2008), 73 FR 63744 (October 27,
2008) (SR–CBOE–2008–105); 61133 (December 9,
2009), 74 FR 66715 (December 16, 2009) (SR–Phlx–
2009–100); 61154 (December 11, 2009), 74 FR
67278 (December 18, 2009) (SR–ISE–2009–105);
and 61388 (January 20, 2010), 75 FR 4431 (January
27, 2010) (SR–BX–2010–001).
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such as monthly or annual fees) would
not be included.
The proposed fee limitation in Rule
610(c)(2) would apply to any fee
charged directly by an options
exchange. It would also limit any fee
charged by a market participant, such as
a market maker, that displays a
quotation through the exchange’s
facilities. The Commission, however,
understands that market participants in
the options markets currently do not
charge access fees. Nothing in proposed
Rule 610(c)(2) would preclude an
options exchange from taking action to
limit fees beyond what would be
required under the proposed rule, and
such exchange would have flexibility in
establishing its respective fee schedule
to comply with proposed Rule 610(c)(2).
The proposed access fee limitation in
Rule 610(c)(2) would apply only to
quotations that market participants are
required to access to comply with the
Trade-Through Rules; it would not
apply to depth of book quotations. By
proposing to apply the fee cap only to
the best bid or offer of an options
exchange, the limitation is designed to
have minimal impact on competition
and individual business models while
furthering the objectives of the
Exchange Act by preserving the fairness
and usefulness of quotations, and by
providing support for the proper
functioning of the Trade-Through Rules,
as discussed above.102
Further, as the Commission noted in
adopting current Rule 610(c), a market
participant could intend to interact only
with a quotation subject to the access
fee cap in Rule 610(c) but in fact execute
against a quotation not subject to the
cap. For example, at the time a market
participant routes an order to an
exchange, it could be attempting to
execute only against that exchange’s
best bid or offer, which would be
subject to the proposed fee cap. By the
time the order arrives at the exchange,
the incoming order may, if a better
priced bid or offer has been displayed
at the exchange for a size smaller than
the size of the incoming order, execute
partially against the new best bid or
offer and partially against the quotation
that was previously the exchange’s best
bid or offer. If the exchange were to
charge a fee higher than the access fee
cap to the market participant accessing
the previous best bid or offer, the
Commission believes that such charge
could undermine the purpose of the
proposed access fee cap as discussed
above. Therefore, the Commission
believes that to meet the requirements of
102 See NMS Adopting Release, supra note 4, at
37546.
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proposed Rule 610(c)(2), an exchange
would have to ensure that it never
charges a fee in excess of the cap when
a market participant tries to access only
the exchange’s best bid or offer.103
The operation of this limitation would
be based on quotations as they are
displayed in the consolidated quotation
stream. Thus, the exchange would be
responsible for ensuring that any time
lag between prices in its internal
systems and its quotations in the
consolidated quotation system do not
cause fees to be charged that would
violate the limitation of proposed Rule
610(c)(2). Compliance with this
requirement obviously would not be a
problem for exchanges that do not
charge any fees in excess of the
proposed cap. If an exchange were to
choose to charge higher fees for access
to its depth of book quotations,104 the
Commission does not believe the
exchange could comply with the
proposed Rule 610(c)(2) unless it
provided a functionality that enables
market participants to assure that they
will never inadvertently be charged a
fee in excess of the cap. For example,
such an exchange could provide a ‘‘topof-book only’’ or ‘‘limited-fee only’’ order
functionality. By using this
functionality, market participants
themselves could assure that they were
never required to pay a fee in excess of
the levels proposed in Rule 610(c)(2).105
Further, for similar reasons, the
proposed access fee limitation in Rule
610(c)(2) would apply to an exchange’s
non-displayed quotations in listed
options that are priced better than the
exchange’s displayed best bid or offer.
Specifically, if an exchange had an
order type that allowed an order to be
entered at a price that is not displayed
but is available for execution, the
proposed fee limitation would apply to
an execution against that non-displayed
price.106
103 This is consistent with the approach in
Regulation NMS. Id.
104 The Commission is not aware of any options
exchange that charges differential fees for accessing
depth-of-book quotations, but requests comment on
the issue.
105 The existing access fee cap for NMS stocks
operates in this same manner. See id.
106 See, e.g., Chapter VI, Sections 6 and 7 of the
NOM Rules governing NOM’s price improving
order type. ‘‘Price Improving Orders’’ are defined
under the NOM Rules as orders to buy or sell an
option at a specified price at an increment smaller
than the minimum price variation in the security.
Price Improving Orders may be entered in
increments as small as one cent, and those Price
Improving Orders that are available for display
must be displayed at the minimum price variation
in that security and rounded up for sell orders and
rounded down for buy orders. See Chapter VI,
Section 1(e)(6) of the NOM Rules (defining Price
Improving Orders).
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C. Payment for Order Flow
In a traditional payment for order
flow arrangement in the options market,
a specialist or market maker offers cash
and non-cash inducements to brokers
that direct orders to the specialist or
market maker. The specialist or market
maker is willing to pay firms for this
order flow because it knows that it will
be able to trade with a portion of such
orders due to specialist and market
maker guarantees provided by the
exchanges.107 In addition, some
exchanges have adopted fees on market
makers to facilitate their members’
payment for order flow.108 Typically,
the exchange charges each market maker
a fee for trading with customer orders
on the exchange. The exchange then
pools the proceeds from such fees and
allows specialists and/or market makers
to use such funds to pay for order
flow.109
Several commenters argue that, if the
Commission were to limit ‘‘Take’’ fees, it
also should limit fees associated with
payment for order flow arrangements.110
107 See,
e.g., CBOE Rule 8.13 and ISE Rule 713.
e.g., Securities Exchange Release Nos.
48053 (June 17, 2003), 68 FR 37880 (June 25, 2003)
(SR–Amex–2003–50) (immediately effective
proposed rule change to reinstate marketing fee to
raise revenue for Amex specialists to compete for
order flow); 47948 (May 30, 2003), 68 FR 33749
(June 5, 2003) (SR–CBOE–2003–19) (immediately
effective proposed rule change to reinstate
marketing fee to compete for order flow); 47090
(December 23, 2002), 68 FR 141 (January 2, 2003)
(SR–Phlx–2002–75) (immediately effective
proposed rule change to reinstate marketing fee to
compete for order flow); 43833 (January 10, 2001),
66 FR 7822 (January 25, 2001) (SR–ISE–00–10)
(order approving ISE’s payment for order flow
program); 43290 (September 13, 2000), 65 FR 57213
(September 21, 2000) (SR–PCX–00–30)
(immediately effective proposed rule change to
adopt a payment for order flow fee); 43228 (August
30, 2000), 65 FR 54330 (September 7, 2000) (SR–
Amex–00–38) (immediately effective proposed rule
change to establish new marketing fee to raise
revenue for Amex specialists to compete for order
flow); 43177 (August 18, 2000), 65 FR 51889
(August 25, 2000) (SR–Phlx–00–77) (immediately
effective proposed rule change to adopt a payment
for order flow fee); and 43112 (August 3, 2000), 65
FR 49040 (August 10, 2000) (SR–CBOE–00–28)
(immediately effective proposed rule change to
establish new CBOE marketing fee to raise revenue
that could be used by CBOE market makers to pay
for order flow).
109 For example, NYSE Amex LLC (‘‘NYSE
Amex’’) imposes a $0.65 per-contract marketing fee
for non-Minimum Quoting Increment Pilot Program
classes and a $0.25 per-contract marketing fee for
Minimum Quoting Increment Pilot Program classes
where a market maker trades against an incoming
electronic customer order. See NYSE Amex Options
Fee Schedule (available at https://www.nyse.com/
pdfs/NYSE_Amex_Options_Fee_
Schedule01.04.10.pdf) (current as of January 4,
2010).
110 See BOX Letter, supra note 37, at 2 (stating its
belief that, if the Commission does decide to enact
fee caps, a cap on Take fees is acceptable only to
the extent that other options exchanges are willing
to accept a comparable limit on payments and fees
108 See,
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This view is premised on the notion set
forth by several commenters that
payment for order flow fees affect
quoted prices, and thus executions
received by investors, because market
makers that have to pay for order flow
will reflect that cost in their quoted
prices.111 In this regard, one commenter
petitioned the Commission to impose a
cap at the same level on private
payment for order flow arrangements
between market makers and agency
brokerage firms as any cap it imposes on
‘‘Take’’ fees.112 Another commenter
argues that fees relating to ‘‘accessing’’
quotations can be characterized broadly
to include exchange fees used to fund
members’ payment for order flow.113
The Commission agrees with
commenters that payment for order flow
fees, among other costs, affect quoted
prices. However, the Commission is not
proposing to specifically limit payment
for order flow, nor the exchange fees
imposed on market makers to fund
members’ payment for order flow.
Instead, the Commission is proposing to
limit the amount of fees that an
exchange can impose, or permit to be
imposed, for access to the best bid and
offer of the exchange. The Commission
preliminarily does not believe that an
exchange payment for order flow fee on
members is an access fee, i.e., it is not
a fee imposed for executing against an
exchange’s quotation. The basis for the
proposal, as discussed at length
above,114 is to (1) provide for fair and
efficient access to displayed quotations
to support the integrity of the price
protection requirement contained in the
Trade-Through Rules, and (2) further
the objective that quotations be fair and
useful by limiting the extent to which
the all-in price can vary from the
displayed price.
The Commission preliminarily
believes these objectives can be
achieved without limiting payment for
order flow fees. Payment for order flow
is when a market maker offers cash and
non-cash inducements to brokers that
direct orders to the market maker. In
addition, some exchanges impose a fee
on market makers to facilitate their
associated with exchange payment for order flow)
and Wolverine Letter, supra note 37, at 7 (stating
that any cap on make-take fees should be made in
conjunction with a commensurate cap on payment
for order flow fees).
111 See BOX Letter, supra note 37, at 4; GETCO
Letter, supra note 37, at 3–6; IB Letter, supra note
37, at 2–3 and 6–7; and Wolverine Letter, supra
note 37, at 4.
112 See IB Letter, supra note 37, at 1 and 6.
113 See Wolverine Letter, supra note 37, at 3.
114 See supra notes 58–100 and accompanying
text.
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members’ payment for order flow.115
Payment for order flow fees are not fees
imposed by an exchange on incoming
orders for executing against an
exchange’s quotations. Therefore, the
Commission preliminarily does not
believe that payment for order flow fees
directly impact the ability of a market
participant to access an exchange’s best
priced displayed quotations, and
therefore does not believe that limiting
payment for order flow fees is necessary
to achieve the objectives of the proposed
fee cap—to provide for fair and efficient
access to displayed quotations and that
displayed quotations be fair and useful.
However, if a market maker is charged
a payment for order flow fee by an
exchange when the market maker is
accessing the best bid or offer of the
exchange, then the proposed fee
limitation would apply to that fee
because it would be a fee for the
execution of an order against the best
bid or offer of the exchange. A payment
for order flow fee would be a fee for
accessing an exchange’s best bid or offer
if, for example, a market maker’s quote
traded against a resting customer limit
order that is the best bid or offer of the
exchange. Similarly, a payment for
order flow fee would be a fee for
accessing an exchange’s best bid or offer
if a market maker sent an order in a
class to which it is not appointed as a
market maker, and that order trades
against a customer order resting on the
exchange’s limit order book that is the
best bid or offer of the exchange. In sum,
if the rules of the exchange provide that
the market maker would pay a payment
for order flow fee for executing against
the resting customer order that is the
best bid or best offer of the exchange,
that fee would be covered by proposed
Rule 610(c)(2).
On several occasions, the Commission
has recognized that the anticipation of
payment for order flow raises a potential
conflict of interest for brokers handling
customer orders, and that reliance by
market centers on the strategy of simply
paying money to attract orders may
present a threat to aggressive quotation
competition.116 At the same time, the
Commission has stated that payment for
order flow is not necessarily
inconsistent with a broker’s duty of best
execution, so long as appropriate
measures are taken to ensure that that
duty is, in fact, met.117 The Commission
115 See
supra notes 107–109 and accompanying
text.
116 See, e.g., Options Concept Release, supra note
21, at 6128–6130.
117 See Securities Exchange Act Release No.
43833 (January 10, 2001), 66 FR 7822 (January 25,
2001) (SR–ISE–00–10) (citing to Securities
Exchange Act Release No. 42450 (February 23,
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further acknowledges the broader
concern that payment for order flow
may result in less aggressive
competition for order flow on the basis
of price,118 such as through displaying
aggressively-priced quotations or
offering opportunities for price
improvement. However, the
Commission has stated that singling out
and banning only one particular form of
such payment—for example, payment
made possible by an exchange through
the collection of fees from its market
makers—would scarcely address the
issue on the larger scale.119
Further, as noted above, the
Commission believes that market forces
and the dynamics of competition should
determine exchange fees, to the extent
practicable.120 Payment for order flow
fees generally are charged by exchanges
to market makers when they execute
against a customer order. If a market
maker does not want to pay this fee, the
market maker is free to give up its
appointment as a market maker on that
exchange and become a liquidity
provider on another exchange with a
more attractive fee structure. For
instance, an exchange may set a fee to
collect funds for members’ payment for
order flow at such a level that a market
maker may determine it can no longer
effectively compete for order flow based
on its quotations, which must
incorporate the costs of all fees.121 The
market maker may then make the
determination to become a liquidity
provider on another exchange where it
is able to compete more effectively
based on the price of its quotations.
Similarly, an exchange may determine
to charge any market participant a fee
for providing liquidity on its
exchange.122 If a market participant did
not want to pay this fee, it could choose
to send its non-marketable limit order to
another options exchange with a more
2000), 65 FR 10577 (February 28, 2000)); see also
Options Concept Release, supra note 21, at 6128–
6129.
118 See Securities Exchange Act Release No.
43833, supra note 117, at 7825.
119 Id.
120 See supra note 58.
121 This would assume that the amount of the
payment for order flow fee impacts the price at
which the market maker is willing to quote.
122 See, e.g., BOX Fee Schedule, Section 7
(available at https://www.bostonoptions.com/pdf/
BOX_Fee_Schedule.pdf) (current as of January
2010) (imposing a $0.55 fee for adding liquidity in
Non-Penny Classes, a $0.15 fee for adding liquidity
in Penny Pilot Classes except SPY, QQQQ, and
IWM, and a $0.05 fee for adding liquidity in SPY,
QQQQ, and IWM). In its filing imposing this fee,
BOX stated that the changes proposed are in
response to various ‘‘Payment for Order Flow’’
programs currently in operation on other options
exchanges. See Securities Exchange Act Release No.
60934 (November 4, 2009), 74 FR 58358 (November
12, 2009).
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attractive fee structure. The Commission
therefore preliminarily believes that
competition among the various options
exchanges, and the different market
models, will act to restrict payment for
order flow and other fees for providing
liquidity.123
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IV. Technical Amendments to Rule 610
The Commission is proposing to
amend Rule 610(c) to reflect that Nasdaq
is now registered as a national securities
exchange under Section 6(a) of the
Exchange Act.124 The current rule’s
prohibition on a trading center
imposing, or permitting to be imposed,
fees in excess of the stated limits applies
to the execution of an order against a
protected quotation of the trading center
or against any other quotation of the
trading center that is ‘‘the best bid or
best offer of a national securities
exchange, the best bid or best offer of
The Nasdaq Stock Market, Inc., or the
best bid or best offer of a national
securities association other than the best
bid or best offer of The Nasdaq Stock
Market, Inc. in an NMS stock.’’ Given
Nasdaq’s current status as a registered
national securities exchange, there no
longer is a need to separately reference
Nasdaq’s best bid or best offer.
Therefore, the Commission is proposing
to amend Rule 610(c)(1) to simplify the
relevant language to refer only to any
other quotation of the trading center that
is the best bid or best offer of a national
securities exchange or the best bid or
best offer of a national securities
association in an NMS stock.125
The Commission also is proposing to
make technical changes to Rule 610(c)
to reflect the addition of proposed Rule
610(c)(2) that would apply to listed
options.
123 The Commission also notes that the exchanges
generally lowered the level of payment for order
flow fees charged to their market makers in classes
included in the Minimum Quoting Increment Pilot
Program. See Securities Exchange Act Release Nos.
Securities Exchange Act Release Nos. 55328
(February 21, 2007), 72 FR 9050 (February 28, 2007)
(SR–Amex–2007–16); 55265 (February 9, 2007), 72
FR 7697 (February 16, 2007) (SR–CBOE–2007–11);
55271 (February 12, 2007), 72 FR 7699 (February
16, 2007) (SR–ISE–2007–08); 55223 (February 1,
2007) 72 FR 6306 (February 9, 2007) (SRNYSEArca–2007–07); and 55290 (February 13,
2007), 72 FR 8051 (February 22, 2007) (SR–Phlx–
2007–05). As noted above, currently approximately
69.5 percent of trading volume is in classes
included in the Minimum Quoting Increment Pilot
Program where trading interest can be represented
in the quote in one-cent increments, and by August
2, 2010, 363 classes will be included in the
Minimum Quoting Increment Pilot Program,
representing approximately 88.1 percent of trading
volume during February 2010. See supra note 29
and accompanying text.
124 See 15 U.S.C. 78f(a); see also Securities
Exchange Act Release No. 53128 (January 13, 2006),
71 FR 3550 (January 23, 2006).
125 See proposed Rule 610(c)(1).
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V. Request for Comments
The Commission requests the views of
commenters on all aspects of this
proposal, including whether the
proposal is consistent with the
provisions of the Exchange Act. In
particular, the Commission requests
comment on the following:
1. Rule 610(a) currently prohibits the
imposition of unfairly discriminatory
terms that prevent or inhibit any person
from obtaining efficient access through
a member of the exchange to quotations
in NMS stocks. The Commission
requests comment on its proposal to
extend this prohibition to include
access to quotations of listed options.
The Commission further requests
comment on whether the Commission’s
rules also should prohibit unfairly
discriminatory terms for other services
offered by exchanges. For example,
should the Commission rule be
expanded to cover exchange transaction
fees generally, even those transaction
fees that are not based on accessing the
exchange’s quotations?
2. Rule 610(a) as proposed to be
amended would prohibit an exchange
from charging higher ‘‘Take’’ fees in
certain options classes to non-directed
customers than to directed customers.
Do commenters agree that such a fee
differential should be prohibited by the
proposed amendments to Rule 610(a)?
3. As discussed above, the
Commission is proposing to limit fees
charged for accessing the best bid and
offer in a listed option, as proposed in
Rule 610(c)(2), to support fair and
efficient access to an exchange’s
quotations, and to provide greater
transparency in the quoted price. To
what extent is this action necessary to
achieve these objectives? To what extent
do competitive forces in the options
markets currently act, or will continue
to act, to keep fees such as access fees
at a level that does not impede fair and
efficient access to an exchange’s
quotations, or impede the transparency
of the quoted price? Does the existence
of flash functionality at some of the
exchanges that trade listed options have
an impact on the level at which options
exchanges set access fees? 126
4. The markets for trading NMS stocks
are similar in certain ways to the
markets for trading listed options, and
in other ways are different. The
Commission requests comment on
126 The Commission separately has proposed
changes to Rule 602 of Regulation NMS that, if
adopted, would affect flash functionality in the
listed options markets, raising concerns about
access to order information and incentives for
market participants to display their trading interest
publicly. See Flash Order Proposal, supra note 19,
and supra notes 72–75 and accompanying text.
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20749
whether, and how, those similarities
and differences should impact a
decision to apply an access fee cap, as
proposed, in the options markets. For
example, both NMS stocks and listed
options can be traded on multiple
markets, and broker-dealers that trade
NMS stock and listed options have a
duty of best execution with respect to
each. Likewise, both markets have
prohibitions on trading-through. How, if
at all, do these similarities support, or
not, the proposed fee cap for accessing
an options exchange’s best bid and
offer?
Unlike NMS stocks, listed options are
only traded on exchanges, and not in
the over-the-counter (‘‘OTC’’) market. It
can be argued that one result of the lack
of OTC trading in listed options is that
more ‘‘good’’ order flow (that is, order
flow relatively uninformed about future
prices) reaches the options exchanges
than the exchanges that trade NMS
stocks.127 It can be further argued that
because quotations must be available for
execution to all incoming order flow—
both informed and uninformed—the
quotations must be wider than the
prices that could be offered exclusively
to uninformed order flow.128 In
addition, it is argued that investors in
listed options depend upon the liquidity
supplied by professional liquidity
providers to a greater extent than in the
market for NMS stocks.129 Further, some
market participants state that liquidity
providers price options differently than
liquidity providers price NMS stocks,
pursuant to pricing models or
algorithms rather than based on the
inherent value of the issuer.130 Do
commenters agree with these
statements? How, if at all, do these
differences mitigate for or against
applying the proposed fee cap for
accessing an options exchange’s best bid
and offer? Do these differences impact
the incentives for liquidity providers to
quote aggressively, or the
competitiveness of an options
exchange’s fees, differently than a
127 See ISE Flash Letter, supra note 73, Appendix
B at 2.
128 See Letter from Larry Harris, Professor of
Finance and Business Economics, USC Marshall
School of Business, dated December 4, 2009
(‘‘Harris Letter’’) at 4. Prices that could be offered
exclusively to uninformed order flow could
incorporate tighter spreads because the market
maker does not need to protect itself from adverse
selection by informed traders by building in a wider
spread.
129 See CBOE Flash Letter, supra note 73, at 1 and
10; ISE Flash Letter, supra note 73, at 9. See also
Letter from Peter Bottini, EVP Trading and
Customer Service, and Hillary Victor, Associate
General Counsel, optionsXpress, Inc.
(‘‘optionsXpress’’) dated November 25, 2009
(‘‘optionsXpress Letter’’) at 3.
130 See ISE Flash Letter, supra note 73, at 7–8.
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market participant or market trading
NMS stocks?
5. The Commission requests comment
on the different sources of revenue
available to options exchanges, and any
differences between those sources
available to options exchanges and
exchanges that trade NMS stocks. For
example, exchanges that have in place
rules for listing NMS stocks have the
ability to charge listing fees to issuers
for listing on their market. Does the
amount of revenue received from market
data differ significantly for options
exchanges versus exchanges that trade
NMS stocks? How, if at all, should any
differences in sources of revenue for
options exchanges versus exchanges
that trade NMS stocks mitigate for or
against applying the proposed fee cap
for accessing an options exchange’s best
bid and offer? How, if at all, should any
differences in sources of revenue for
options exchanges versus exchanges
that trade NMS stocks impact a
determination as to the level of an
access fee cap to be imposed?
6. If commenters do not believe that
the Commission should limit fees
charged for accessing the best bid and
offer in a listed option, as proposed in
Rule 610(c)(2), do commenters believe
that the Commission should take any
action with respect to fees charged, or
permitted to be charged, by an options
exchange for executing against the
exchange’s best bid or offer in a listed
option? If not, please explain why not.
If so, please explain why, and what
alternative action the Commission
should take. For example, would
commenters support action by the
Commission to cap all fees for executing
an options order, including access fees,
routing fees, and any other per contract
fee, at the minimum pricing variation
for the option? Would this alternative
achieve the objectives of the proposed
fee cap, as discussed above in Section
III? Would this alternative approach
provide more or less flexibility to
exchanges than an access fee cap as
proposed in Rule 610(c)(2)?
7. The Commission is proposing a flat
fee cap of $0.30 per contract. As
discussed above, the Commission’s
proposal is based on several factors.
First, the $0.30 per-contract level is
consistent with the maximum fee limit
for NMS stocks under Rule 610(c).
Experience of the markets trading NMS
stocks in recent years suggests that a fee
cap of $0.30 per 100 shares did not
prevent markets using a Make or Take
fee model from competing effectively in
a market where some participants
engage in payment for order flow.131 In
131 See
infra note 172 and accompanying text.
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addition, this access fee cap level would
help ensure that the ‘‘all-in’’ fee would
be below the $1 minimum quoting
increment. Further, the Commission
preliminarily believes that setting the
proposed fee cap at $0.30 per contract
would allow options exchanges
flexibility to generate revenues from
access fees while still providing the
exchange the ability to continue to
charge other fees, such as ‘‘licensing’’
fees charged by exchanges for
executions in certain index options or
routing fees, without exceeding the $1
minimum increment. The Commission
requests comment on this analysis. If
commenters agree with this approach
and threshold, please explain why; if
commenters do not agree, please explain
why not.
8. If a commenter believes that a fee
cap for accessing the best priced
quotation in listed options is necessary
and appropriate, the Commission
requests comment as to what level such
a cap should be set, and what
considerations should be part of any
analysis as to the level of a fee cap. One
commenter states that while 30% of the
minimum quoting increment is a
reasonable access fee cap for the equity
markets, which allow internalization as
a defense to excessive access fees, a
lower cap is needed in the options
markets because internalization is not
permitted, and suggests a cap of $0.20
per contract.132 Other commenters argue
that any fee cap should not be lower
than $0.99 per contract (for options
quoted in one-cent increments) because
a customer is still better off paying a
$0.99 per contract fee to execute against
a price that is better by $1.00 per
contract.133 The Commission requests
commenters’ views on each of these
alternative levels, and the reasoning
supporting them.
9. One of the bases for the proposed
access fee cap is to support the
requirements of the Trade-Through
Rules and the duty of best execution. It
could be argued that because investors
will not be worse off accessing a price
that is better by $1 per contract as long
as the fee to access that quotation is not
more than $0.99 per contract,134 any fee
cap should not be lower than $0.99 per
contract to support the operation of the
Trade-Through Rules. Do commenters
agree with this view? Should the fact
Citadel Petition, supra note 34, at 10.
BOX Letter, supra note 37, at 5 (stating in
part that if the Commission were to impose a fee
limit that it should be $0.01 per contract less than
the standard trading increment of the class); and IB
Letter, supra note 37, at 4–5 (opposing any fee cap
less than $0.99 per contract for a contract quoted
in pennies).
134 Id.
that there is no guarantee that an order
sent to another exchange to access a
better displayed price will actually
obtain an execution on the away
exchange impact the level at which an
access fee is capped? Should there be
the possibility for more than a one-cent
per contract advantage (which is what
would result with an access fee of $0.99
per contract) to require market
participants to attempt to access
quotations in listed options on other
exchanges that are better priced by $1
per contract? What percent of the time
do orders sent to another exchange to
access a better displayed price actually
obtain an execution on the away
exchange? What other considerations, if
any, should the Commission take into
account when determining the level of
any fee cap imposed for access to an
exchange’s best bid or offer in a listed
option?
10. As discussed above in Question 4,
the markets for trading NMS stocks are
similar in certain ways to the markets
for trading listed options, and in other
ways are different. The Commission
requests comment on whether, and how,
those similarities and differences should
impact the level at which an access fee
cap should be set for access to an
options exchange’s best bid and offer.
Should any limit on access fees that can
be imposed by the options exchanges be
different than or the same as the existing
limit on access fees in the market for
NMS stocks? If different, please explain
whether an access fee limit in the
options exchanges should be higher or
lower than the limit for NMS stocks,
and the basis for the difference. If the
same, please explain why, with
specificity.
11. As discussed above, the
Commission has proposed a flat access
fee cap of $0.30 per contract, and not
proposed a percentage fee limit for lowpriced options, similar to the 0.3
percent of the price per share limit for
NMS stocks priced under $1.135 The
Commission preliminarily believes that
differences in the markets for NMS
stocks and listed options merit this
distinction. Specifically, when an NMS
stock is trading at a very low price, the
access fee can become significant as a
percentage of the total economic
exposure. This result is less likely for
listed options, given the leverage
implicit in an option contract.136 In
132 See
133 See
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135 See
supra notes 96–100 and accompanying
text.
136 For example, if an NMS stock is trading for
$0.01 per share, so that an order for 100 shares
represents $1 worth of stock, an access fee of $0.30
for 100 shares would represent thirty percent of the
total economic position. On the other hand, an
NMS stock priced at $10 per share could have a
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addition, the restriction on subpenny
quoting in NMS stocks does not apply
to stocks priced below $1. Thus, for
certain low-priced NMS stocks, an
access fee of $0.003 per share could be
larger than the minimum quoting
increment, making it possible for an
order to be routed to an exchange
quoting a better price but ending up
with an inferior all-in price after the
access fee. For NMS stocks, the
percentage fee cap for stocks priced
below $1 helps to mitigate this concern.
Because listed options are not currently
quoted in subpenny increments, these
concerns are not present, and, therefore,
the Commission preliminarily believes
it is unnecessary to establish a cap
based on a percentage of the options’
price for low-priced options.137
The Commission requests comment
on its analysis, and whether the
proposed access fee limit should have a
percentage fee limit for low-priced
options, similar to the 0.3 percent of the
price per share for NMS stocks priced
under $1, and on its reasoning for not
proposing such a percent-based limit for
low-priced options. If commenters
believe that the proposed access fee cap
should be different for low-priced
options, please explain with specificity
why, and what the breakpoint should
be, and why.
12. As discussed above, one of the
bases for the proposed fee cap is to
ensure the fairness and usefulness of
displayed quotations, and to enhance
transparency of displayed quotations.
The Commission requests comment as
to whether there is a need to promote
transparency of the displayed
quotations in listed options beyond the
status quo.
13. If commenters believe that, to
support the transparency of displayed
quotations, there should be a limit as to
how far away from the quoted price the
amount that the investor would pay (for
a buy) or receive (for a sell) inclusive of
access fees should be, what factors
should go into determining the
allowable deviation? For example,
should access fees be limited to one
increment less than the minimum
short-term out-of-the-money option priced at $0.01.
If the Delta of this option is 0.05, then one option
contract would cost $1 but would give the investor
exposure equivalent to an investment of $50 of the
stock. An access fee of $0.30 per contract for the
option would only represent six-tenths of one
percent of the economic position.
137 Commission staff also estimates that imposing
a flat $0.30 per-contract cap, and not including a
percentage fee cap for low-priced options similar to
the existing fee cap of 0.3 percent of the quotation
price per share for NMS stocks, would result in less
potential revenue loss for options exchanges from
the impact of the proposed fee cap. See supra notes
99–100 and accompanying text.
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quoting increment (for example, $0.99
per contract in an option that has a onecent minimum increment), such that the
investor would always get a better
execution price net of access fees when
the quoted price is better by one
minimum quoting increment? Should
the access fees be limited to less than
half of the minimum quoting increment
(for example, $0.50 per contract in an
option that has a one-cent minimum
increment), so that the net price to
investors inclusive of access fees is
closer to the displayed price than the
next worse price? Should the allowable
access fees be some other amount?
14. The Commission requests
comment on whether there are
alternative methods other than the
proposed access fee cap to achieve the
objective of greater transparency in
displayed quotations of listed options.
15. The Commission requests
comment on the types of fees that
should be covered by an access fee
limitation. For example, the
Commission believes that proposed
Rule 610(c)(2) would apply to fees
charged for the execution of options on
certain indexes (so-called ‘‘licensing
fees,’’ ‘‘royalty fees,’’ or ‘‘index surcharge
fees’’). Please state why it would be
appropriate or not appropriate to apply
the proposed fee limitation to licensing
fees. What would be the impact on these
fees if the proposed fee limitation did
apply? What would be the impact on
market quality if the proposed fee
limitation applied to licensing fees?
16. The Commission requests
comment on its preliminary view of the
applicability of the proposal to an
ORF.138 The Commission also requests
comment on any potential impact of the
proposal on an ORF.
17. As proposed, the fee limitation in
Rule 610(c)(2) would apply to fees
charged for executions of orders in all
listed options, including those that are
listed and traded only on one options
exchange (‘‘non-multiply listed
options’’). Do commenters agree that
Rule 610(c)(2) should apply to trades in
such options? Or should any fee cap
apply only to multiply listed options?
Or should the proposed fee limitation in
Rule 610(c)(2) be set at a different level
for non-multiply listed options? If
commenters believe the proposed fee
limitation in Rule 610(c)(2) should not
apply to fees charged for executions of
orders in non-multiply listed options,
please explain why and how ‘‘nonmultiply listed options’’ should be
defined.
18. As proposed, the fee limitation in
Rule 610(c)(2) would apply to fees
138 See
PO 00000
supra note 101 and accompanying text.
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20751
charged for the execution of orders in
FLEX options and to the execution of
complex orders.139 Do commenters
agree that Rule 610(c)(2) should apply to
such transactions? If so, should the
proposed fee limitation in Rule 610(c)(2)
be set at a different level for orders in
FLEX options or complex orders? If
commenters believe the proposed fee
limitation in Rule 610(c)(2) should not
apply to fees charged for the execution
of orders in FLEX options or to the
execution of complex orders, please
explain why.
19. What would be the impact of the
proposed access fee cap in Rule 610(c)
on market quality? In particular, the
Commission encourages submission of
any data that quantifies potential
benefits or harm.
20. Do commenters believe that
limiting access fees as proposed in Rule
610(c) would have a disparate effect on
one type of market model over another?
If not, why not? If so, how? And if so,
how would the disparate effect impact
the ability of exchanges with different
market models to compete with each
other? The Commission further requests
comment as to whether, and if so how,
the quoting, order routing or other
behavior of market participants would
change if the proposed fee cap were in
place.
For example, as discussed above,
several commenters express concern
with limiting Take fees without also
limiting payment for order flow fees.140
They argue that market participants on
Make or Take exchange quote more
aggressively because of the Make rebates
paid for providing liquidity that are
funded by the Take fees charged to
liquidity takers.141 Exchanges with
Make or Take fee models thus provide
direct competition based on aggressive
quoting to exchanges with payment for
139 A complex order is any order involving the
simultaneous purchase and/or sale of two or more
different options series in the same underlying
security, for the same account, in a ratio that is
equal to or greater than one-to-three (.333) and less
than or equal to three-to-one (3.00) and for the
purpose of executing a particular investment
strategy. See, e.g., ISE Rule 722. See also, e.g., CBOE
Rule 6.53C (describing a complex order generally as
any of the following orders for the same account,
including Spread Orders, Straddle Orders, Strangle
Orders, Combination Orders, Ratio Orders, Butterfly
Spread Orders, Box/Roll Spread Orders, Collar
Orders and Risk Reversals, Conversions and
Reversals, and Stock-Option Orders). A flex option
is a customized option contract that provides the
ability to customize key contract terms, like
exercise price, exercise styles and expiration dates.
See, e.g., https://www.cboe.com/Institutional/
FLEX.aspx; CBOE Rule 24A.4.
140 See supra note 82 and accompanying text.
141 See BOX Letter, supra note 37, at 3; IB Letter,
supra note 37, at 2–3. See also ISE Flash Letter,
supra note 73, at 8; and Harris Letter, supra note
128, at 2.
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order flow models because a market
maker on a payment for order flow
exchange must match the better prices
on the Make or Take exchange, or route
to the Make or Take exchange and pay
the Take fee.142 Limiting the amount of
a Take fee a Make or Take exchange can
charge will directly impact the amount
of a Make rebate the exchange can pay
to liquidity providers, which in turn
will impact a liquidity provider’s
incentive to quote aggressively, thus
limiting the Make or Take exchange’s
ability to compete with an exchange
with a payment for order flow fee model
through aggressive quoting.143
The Commission requests comment
on whether commenters agree with this
view. Do commenters agree that
liquidity providers on Make or Take
exchanges quote more aggressively than
liquidity providers on other exchanges
once their displayed quotations are
adjusted to account for the effect of
access fees on the ‘‘all in’’ cost to the
investor? If so, are liquidity rebates the
only reason that liquidity providers on
Make or Take exchanges are willing to
quote aggressively? For example, does
the absence of order flow captured by
payments to routing brokers or the
absence of guaranteed allocations for
liquidity providers also contribute
significantly to aggressive quoting by
liquidity providers on Make or Take
exchanges?
Do commenters believe that limiting
Take fees, which are a type of access fee,
would result in reduced Make rebates
paid for supplying liquidity? If so, what
are commenters views as to how much
Make rebates would be reduced in
reaction to reduced Take fees? What
would be the impact, if any, of reduced
Make rebates on market participant
incentives to aggressively quote on
exchanges employing a Make or Take
fee model? To the extent that
commenters believe that limiting Take
fees would result in reduced Make
rebates paid for supplying liquidity, and
that reduced Make rebates would
adversely impact market participant
incentives to aggressively quote on
exchanges employing a Make or Take
fee model, what impact would this have
on those market participants supplying
liquidity? Or on investors taking
liquidity?
The Commission requests comment as
to the impact of the proposed fee cap on
the ability of an exchange with a Make
or Take fee model to compete with
exchanges with a payment for order
flow model. For example, to the extent
142 See IB Letter, supra note 37, at 3; GETCO
Letter, supra note 37, at 6–7.
143 See id.
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that commenters believe that limiting
Take fees would result in reduced Make
rebates paid for supplying liquidity, and
that reduced Make rebates would
adversely impact market participant
incentives to aggressively quote on
exchanges employing a Make or Take
fee model, do commenters believe that
a $0.30 per contract access fee cap, as
proposed, would allow Make or Take
exchanges to pay a large enough rebate
to continue to incent market
participants to quote aggressively, and
thus compete more aggressively on price
with payment for order flow exchanges?
21. The Commission notes the
distinction between ‘‘aggressive’’
quotations and ‘‘matching’’ quotations.
Aggressive quotations are price leaders
and help narrow the NBBO spread (by
either improving the NBBO or
remaining alone at the NBBO). Matching
quotations follow prices set elsewhere
and add size to the NBBO, but do not
narrow the spread. To what extent do
liquidity providers on payment for order
flow options exchanges quote
aggressively rather than merely
matching the NBBO set elsewhere?
Would applying an access fee cap, as
proposed, lead market participants on
one or both types of options exchange
to quote more aggressively and thereby
narrow NBBO spreads for listed
options? Or would applying an access
fee cap lead market participants on one
or both types of options exchanges to
quote less aggressively? Does your
answer change depending on whether
the Commission adopts a ban on flash
functionality in the options markets? 144
22. As noted above, the Commission
recognizes that even though it is not
proposing to prohibit an exchange from
employing any particular market model,
the proposed fee limitation may impact
different market models in different
ways. An exchange with either a Make
or Take fee model that charges a Take
fee in excess of the proposed fee cap, or
an exchange with a Broker Payment fee
model that charges a transaction fee in
excess of the proposed fee cap, would
take in less revenue per contract from a
reduced Take or transaction fee, as
applicable. These reduced fees for
accessing an exchange’s best bid or
offer, standing alone, might have an
impact on the manner in which brokerdealers and other market participants,
including the exchanges, route order
flow. The exchange with the Make or
Take fee model, however, might choose
to recoup some of that revenue by
reducing its Make rebate, which may
have an impact on the quoting behavior
of market participants that provide
144 See
PO 00000
supra notes 19 and 72–75.
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liquidity on that exchange. An exchange
with a Broker Payment model might
choose to recoup some of the revenue by
amending other fees charged to its
members, which might impact the order
routing or other behavior of those
members (and the members’ customers),
depending upon the type of fee change.
The Commission requests comment
on how the exchanges might reallocate
their sources of revenue, if at all, in
response to the access fee limit in
proposed Rule 610(c)(2). What changes,
if any, to fees other than access fees
imposed by, or rebates paid by,
exchanges would the options exchanges
make in response to being required to
limit access fees as proposed? Would
any potential disparate impact from
these fees changes across exchange fee
models lead to harm to investors? If so,
please explain. How, if at all, would
potential changes to fees other than
access fees imposed on members by
exchanges impact the behavior of
particular categories of market
participants, such as retail investors,
market makers, and broker-dealers?
23. As noted above in Question 20,
several commenters express concern
with limiting Take fees without also
limiting payment for order flow fees.
They argue that limiting the amount of
a Take fee a Make or Take exchange can
charge will directly impact the amount
of a Make rebate the exchange can pay
to liquidity providers, which in turn
will impact a liquidity provider’s
incentive to quote aggressively, thus
limiting the Make or Take exchange’s
ability to compete with an exchange
with a payment for order flow fee model
through aggressive quoting.145 The
Commission notes that the percent of
overall contract volume for trading in
equity options for the month of
February 2010 for each exchange that
primarily employs a Make or Take fee
model ranges from 2.83 percent to 15.36
percent, and that the aggregate market
share of these exchanges was 18.19
percent.146 Exchanges that primarily
employ a Broker Payment Model had an
aggregate market share of overall
contract volume for trading in equity
options for the month of February 2010
of 81.81 percent.147 The Commission
requests comment as to the reasons why
145 See
supra notes 140–143 and accompanying
text.
146 See https://www.theocc.com/webapps/
exchange-volume. The data is for the month of
February 2010 and includes market share for NOM
and NYSE Arca, but does not include BATS, which
began trading options on February 26, 2010.
147 This data also is from OCC’s public website
and is for the month of February 2010. See https://
www.theocc.com/webapps/exchange-volume. This
data covers percent volume for BOX, CBOE, ISE,
NYSE Amex, and Nasdaq OMX Phlx.
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commenters believe that the Make or
Take fee model has not resulted in
greater market share to date, given the
arguments that the payment of a Make
rebate acts as a direct incentive to quote
more aggressively. For instance, how
does the existence of flash functionality
on other exchanges impact the ability of
Make or Take exchanges to compete on
quoted price?
24. The proposed fee limitation in
Rule 610(c)(2) would prohibit an
exchange from imposing, or permitting
to be imposed by market participants,
any fee or fees that exceed or
accumulate to more than the proposed
limit. The Commission requests
comment on whether it is necessary in
the listed options exchanges to include
a prohibition, as proposed, on an
exchange permitting other market
participants to impose fees that exceed
the limit. The Commission does not
believe that market makers in listed
options currently impose fees for the
execution of orders against their quotes
on an exchange, but requests comment
on whether they do. Do commenters
think it likely that market makers would
in the future impose such fees?
25. In this proposal, the Commission
has not proposed to limit payment for
order flow fees. As stated above, an
exchange payment for order flow fee on
members is not an access fee, i.e., it is
not a fee imposed for executing against
an exchange’s quotation.148 The
Commission therefore preliminarily
does not believe that it is necessary or
appropriate to prohibit payment for
order flow fees to achieve its stated
objectives in proposing to cap access
fees—to ensure fair and efficient access
to displayed quotation and to enhance
transparency of quoted prices. Several
commenters, however, argue that
payment for order flow fees also impact
the displayed (quoted) prices, and thus
the prices received by investors when
their orders are executed, because
market makers that are charged the
payment for order flow fees adjust the
price at which they are willing to quote
to take into account the amount of the
payment for order flow fee. In this
regard, one commenter petitioned the
Commission to impose a cap at the same
level on private payment for order flow
arrangements between market makers
and agency brokerage firms as any cap
148 As noted above, if a market maker is charged
a payment for order flow fee by an exchange when
the market maker is accessing the best bid or offer
of the exchange, then the proposed fee limitation
would apply to that fee because it would be a fee
for the execution of an order against the best bid
or offer of the exchange. See supra Section III.C
(discussing payment for order flow fees).
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it imposes on ‘‘Take’’ fees.149 Another
commenter argues that fees relating to
‘‘accessing’’ quotations can be
characterized broadly to include
exchange fees used to fund members’
payment for order flow.150 Do
commenters agree with these
statements? If so, do commenters
believe that the Commission should
limit payment for order flow fees as an
‘‘access fee’’? The Commission further
requests comment on its preliminary
determination not to limit payment for
order flow fees, and the basis for that
determination.
26. As noted above, the Commission
has previously acknowledged a concern
that payment for order flow may result
in less aggressive competition for order
flow on the basis of price.151 To what
extent, if any, does payment for order
flow in the options markets affect a
specialist’s or market maker’s incentive
to quote aggressively? To what extent
does payment for order flow in the
options markets affect the opportunities
for non-professional customers to
receive better prices than displayed
quotations in price improvement
mechanisms? If commenters believe that
payment for order flow diminishes a
specialist’s or market maker’s incentives
to quote aggressively, what impact, if
any, do commenters believe that
diminished incentive has on the quality
of displayed quotations? How, if at all,
would limiting or prohibiting payment
for order flow fees impact brokerdealer’s ability to obtain best execution
of their customer’s orders?
27. On several occasions, the
Commission has recognized that the
anticipation of payment for order flow
raises a potential conflict of interest for
brokers handling customer orders, and
that reliance by market centers on the
strategy of simply paying money to
attract orders may present a threat to
aggressive quotation competition. At the
same time, the Commission has stated
that payment for order flow is not
necessarily inconsistent with a broker’s
duty of best execution, so long as
appropriate measures are taken to
ensure that that duty is, in fact, met.152
Do customer orders that are routed
pursuant to payment for order flow
arrangements receive less favorable
executions than orders not subject to
such arrangements?
28. Some may argue that specialists
and market makers in the options
markets establish the prices and sizes of
149 See
IB Letter, supra note 37, at 1 and 6–7.
Wolverine Letter, supra note 37, at 3.
151 See supra note 116 and accompanying text.
152 See supra notes 117–118 and accompanying
text.
150 See
PO 00000
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20753
their quotations based in part on the
assumption that their counterparties
will be other professional traders, which
involves more risk than trading with
uninformed non-professional traders.153
The desirability of trading with
uninformed order flow due to the lower
risks of trading with non-professionals
should translate into those orders, on
average, receiving better prices than the
specialist’s or market maker’s
quotation.154 Under this argument,
specialists and market makers may use
payment for order flow as an indirect
way to provide a better execution to
uninformed or non-professional orders.
Do commenters agree with these
statements?
29. The Commission requests
comment on what, if any, impact the
proposed limitation on access fees may
have on payment for order flow fees.
30. The Commission requests
comment on whether the proposed
access fee limitation should apply only
to the best bid and offer of each
exchange, or whether the limitation also
should apply to ‘‘depth of book’’
quotations.
31. Some commenters stated that
Make or Take pricing leads to more
locked and crossed markets,155 while
others dispute that.156 The Commission
requests commenters’ views on this
issue. Please provide data that support
your view. Could any increase in the
incidence of locked and crossed markets
be caused or influenced by other factors,
such as more efficient and faster
quotation updating and trading, or the
expansion of the Minimum Quoting
Increment Pilot Program? How, if at all,
does the recently implemented Plan 157
help alleviate the frequency of locked
and crossed markets? How, if at all,
would the proposed limitation on access
fees affect the frequency of locked/
crossed markets?
32. The Commission requests
comment on what the impact of
imposing a limit on access fees, if any,
would be if the Commission were to ban
flash orders on the options
exchanges.158
33. The Commission requests
comment on whether there are
alternative methods other than the
153 See Options Concept Release, supra note 21,
at 6131. See also supra note 128.
154 See Options Concept Release, supra note 21,
at 6131.
155 See Citadel Petition, supra note 34, at 5, and
Ameritrade Letter, supra note 37, at 11.
156 See BOX Letter, supra note 37, at 3; IB Letter,
supra note 37, at 6; NYSE Euronext Letter, supra
note 37, at 3–4; and GETCO Letter, supra note 37,
at 7.
157 See supra note 13.
158 See Flash Order Proposal, supra note 19.
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proposed access fee cap to achieve the
objectives of the proposal—to provide
for fair and efficient access to displayed
quotations and that displayed
quotations be fair and useful. For
example, could additional disclosure of
fees charged by exchanges for
executions against their quotations in
listed options achieve the same
objectives by fostering further
competition based on transparent
pricing? Why or why not? Please
address current disclosure by options
exchanges of their fees, and why that
disclosure is or is not sufficient.
34. The Commission requests
comment on whether, if it were to adopt
the proposed access provisions, a phasein period would be necessary to allow
exchanges and market participants to
adapt. If so, what aspect or aspects of
the proposal should be phased in, and
what would be the appropriate phase-in
period?
The Commission recognizes that
intermarket access presents a number of
complex problems to which there may
be many possible solutions. Interested
persons may wish to propose and
discuss specific, alternative approaches
to intermarket access that the
Commission should consider for future
rulemaking as it seeks to accomplish its
goal of strengthening the NMS.
Commenters may also wish to discuss
whether there are any reasons why the
Commission should consider an
alternative approach.
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VI. Paperwork Reduction Act
The Commission preliminarily does
not believe that the proposed
amendments to Rule 610(a) pertaining
to quotations in a listed option and the
proposed access fee limitation in Rule
610(c)(2) contain any ‘‘collection of
information’’ requirements as defined by
the Paperwork Reduction Act of 1995,
as amended (‘‘PRA’’).159 The proposed
amendment to Rule 610(a) would
expand the rule to apply to listed
options, in addition to NMS stocks, and
would prohibit each national securities
exchange or national securities
association from imposing unfairly
discriminatory terms that prevent or
inhibit any person from obtaining
efficient access through a member of
such exchange or association to any
quotation in an NMS security. The
Commission preliminarily does not
believe that the prohibition in Rule
610(a), as proposed to be amended to
apply to listed options, would require
any new or additional collection of
information, as such term is defined in
159 44
U.S.C. 3501, et seq.
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the PRA, but the Commission
encourages comments on this point.160
In addition, proposed Rule 610(c)(2)
would prohibit a national securities
exchange from imposing, or permitting
to be imposed, any fee or fees for the
execution of an order against a
quotation that is the best bid or best
offer of such exchange in a listed option
that exceeds or accumulates to more
than $0.30 per contract. The
Commission preliminarily does not
believe that the access fee limitation in
proposed Rule 610(c)(2) would require
any new or additional collection of
information, as such term is defined in
the PRA, but the Commission
encourages comments on this
determination.161
With respect to a proposed rule
change that an options exchange may be
required to file pursuant to Section
19(b) of the Exchange Act and Rule 19b–
4 thereunder to bring its rules into
compliance with the proposed
amendment to Rule 610(a) and proposed
Rule 610(c)(2),162 the burden of filing
such proposed rule change would
160 See 44 U.S.C. 3502(3) (defining the term
‘‘collection of information’’ to include, generally, the
obtaining, causing to be obtained, soliciting, or
requiring the disclosure to third parties or the
public, of facts or opinions by or for an agency,
regardless of form or format, calling for either: (i)
Answers to identical questions posed to, or
identical reporting or recordkeeping requirements
imposed on, ten or more persons, other than
agencies, instrumentalities, or employees of the
United States; or (ii) answers to questions posed to
agencies, instrumentalities, or employees of the
United States which are to be used for general
statistical purposes).
The Commission notes that the requirement
under the proposed amendment to Rule 610(a) is
substantially similar to current Rule 610(a) of
Regulation NMS. See 17 CFR 242.610(a). The
Commission requested comment on its preliminary
view that Rule 610 of Regulation NMS pertaining
to access to quotations in an NMS stock did not
contain a collection of information requirement as
defined by the PRA. See Securities Exchange Act
Release No. 49325 (February 26, 2004), 69 FR
11126, 11160–61 (March 9, 2004) (File No. S7–10–
04) (‘‘Regulation NMS Proposing Release’’). The
Commission notes that no comments were received
that addressed whether Rule 610(a) contained a
collection of information requirement. See
Securities Exchange Act Release No. 50870
(December 16, 2004), 69 FR 77424, 77476
(December 27, 2004) (‘‘Regulation NMS Reproposing
Release’’).
161 The Commission notes that proposed Rule
610(c)(2) is substantially similar to current Rule
610(c) of Regulation NMS. See 17 CFR 242.610(c).
The Commission requested comment on its
preliminary view that Rule 610 of Regulation NMS
pertaining to a limit on access fees did not contain
a collection of information requirement as defined
by the PRA. See Regulation NMS Proposing
Release, supra, note 160, at 11160–61. The
Commission notes that no comments were received
that addressed whether the proposed access fee cap
under Rule 610 contained a collection of
information requirement. See Regulation NMS
Reproposing Release, supra note 160, at 37577
n.746.
162 See infra Section VII.B.
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already be included under the collection
of information requirements contained
in Rule 19b–4 under the Exchange
Act.163
VII. Consideration of Costs and Benefits
The proposed amendments to Rule
610 of Regulation NMS would set forth
new standards governing means of
access to quotations in listed options.
The proposal would prohibit an
exchange or association from imposing
unfairly discriminatory terms that
would prevent or inhibit the efficient
access of any person through members
of such exchange or association to any
quotations in an NMS security,
including in a listed option, displayed
through its SRO trading facility. In
addition, to ensure the fairness and
accuracy of displayed quotations in
listed options, proposed Rule 610(c)(2)
would establish an outer limit on the
cost of accessing the best bid and best
offer on each exchange in a listed option
of no more than $ 0.30 per contract.
A. Benefits
The Commission preliminarily
believes that the proposed amendments
to Rule 610 of Regulation NMS would
help achieve the statutory objectives for
the NMS by promoting fair and efficient
access to each individual options
exchange.
1. Proposed Amendment to Rule 610(a)
The access provision of Rule 610(a),
as proposed to be amended, is designed
to strengthen the ability of all market
participants that are not members of an
options exchange to fairly and
efficiently route orders to execute
against quotations in a listed option,
wherever such quotations are displayed
in the NMS, by prohibiting an exchange
from unfairly discriminating against any
person trying to obtain access through a
member to that exchange’s quotations.
The Commission believes that fair and
efficient access to the best displayed
quotations of all options exchanges is
critical to achieving best execution of
those orders.164 The Commission further
believes that such fair and efficient
163 See Securities Exchange Act Release No.
50486 (October 5, 2004), 69 FR 60287, 60293
(October 8, 2004) (File No. S7–18–04) (describing
the collection of information requirements
contained in Rule 19b–4 under the Exchange Act).
The Commission has submitted revisions to the
current collection of information titled ‘‘Rule 19b–
4 Filings with Respect to Proposed Rule Changes by
Self-Regulatory Organizations’’ (OMB Control No.
3235–0045). According to the last submitted
revision concluded as of August 5, 2008, the current
collection of information estimates 1279 total
annual Rule 19b–4 filings with respect to proposed
rule changes by self-regulatory organizations.
164 See NMS Adopting Release, supra note 4, at
37539.
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access to the best displayed quotations
of options exchanges is critical for
compliance with the requirements of the
Trade-Through Rules. Specifically,
options exchanges themselves must
have the ability to route orders for
execution against the displayed
quotations of other exchanges. Indeed,
the concept of intermarket protection
against trade-throughs is premised on
the ability of options exchanges to route
orders to execute against, rather than
trade through, the quotations displayed
by other options exchanges.165
Thus, the Commission preliminarily
believes that the proposed amendment
to Rule 610(a) would benefit investors
by furthering the ability of brokers on
behalf of their customers, and of
investors themselves, to achieve best
execution of their orders in listed
options. The Commission also
preliminarily believes that the proposed
amendment to Rule 610(a) would
contribute to the smooth functioning of
intermarket trading by furthering the
ability of options exchanges and market
participants, including investors, to
fairly and efficiently access the
quotations of each options exchange.166
The proposed amendment to Rule
610(a) also would help to clarify when
certain terms set by exchanges would be
unfairly discriminatory, including terms
in current exchange rules. For example,
an exchange could not charge a higher
per-contract access fee to a non-member
broker-dealer that is a registered options
market maker on another exchange
(‘‘non-member market maker’’) acting for
its own account than to a member or
non-member broker-dealer acting for its
own account that is not registered as a
market maker on another exchange. In
this example, neither broker-dealer is
registered as, nor is acting in the
capacity of, a market maker on that
exchange.167 The Commission
preliminarily believes that this type of
distinction could unfairly discriminate
against non-member market makers and
prevent or inhibit such non-member
market makers from obtaining efficient
access through a member to that
exchange’s quotations. Similarly, an
exchange could not charge differing fees
for accessing liquidity depending on
whether the order is for the account of
a ‘‘directed’’ customer. The Commission
preliminarily believes that such a
distinction could unfairly discriminate
against non-directed customer orders
and prevent or inhibit such nondirected customers from obtaining
efficient access through a member to
165 Id.
166 Id.
167 See
supra note 51 and accompanying text.
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that exchange’s quotations in certain
listed options.
2. Proposed Rule 610(c)(2)
The access fee limitation of proposed
Rule 610(c)(2) would address the
potential distortions caused by
substantial, disparate fees. When a
displayed quotation does not include
the amount of any fee or fees charged by
an exchange for executing against that
quotation, persons attempting to
execute, or evaluating whether they
want to execute, against that quotation
cannot readily ascertain the all-in price
for the trade. The larger the nondisplayed fee(s), the less accurate would
be the displayed price in comparison to
the all-in price for the trade. This
concern is compounded when
competing exchanges charge differing
fees, as the same displayed price on two
or more options exchanges may reflect
different all-in prices for executing
against the same-priced quotations.
Thus, the wider the disparity in the
level of access fees among different
options exchanges, the less useful and
accurate may be the quoted prices at
reflecting the full cost of a trade. As a
result of the proposed fee limitation,
quoted prices should in many cases
more closely reflect the total cost of a
trade because the highest potential
access fee that could be charged by any
exchange would be $0.30 per contract.
This limitation, in turn, should enhance
the usefulness of quotation information.
An access fee limit also makes the
cost of accessing quoted prices more
transparent. Currently, the eight options
exchanges charge so many different fees
to different categories of options
participants and for different products
that it is not easy to estimate that total
cost of a particular transaction. An
access fee cap would limit the scope of
differences and therefore would result
in quoted prices providing clearer
information on the total cost for
executing against quoted prices.
Consequently, the proposed fee
limitation would further the statutory
purposes of the Exchange Act by
reducing the tendency of access fees to
distort quoted prices. In addition, by
applying equally to all types of options
exchanges, the proposed fee limitation
would promote NMS objectives and
further the goals of Section 11A of the
Exchange Act relating to equal
regulation of markets and brokerdealers.168
168 See Section 11A(c)(1)(F) of the Exchange Act,
15 U.S.C. 78k–1(c)(1)(F) (providing objective to
assure equal regulation of all markets for qualified
securities and all exchange members, brokers, and
dealers effecting transactions in such securities).
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The proposed fee limitation also
would benefit the markets and market
participants by addressing options
exchanges that otherwise might charge
high fees to market participants required
to access their quotations under the
Trade-Through Rules. The requirements
under the Trade-Through Rules and the
use of private linkages could provide an
exchange the opportunity to take
advantage of intermarket price
protection by acting essentially as a toll
booth between price levels. Even though
the exchange charging the highest fees
likely would be the last exchange to
which orders would be routed, orders
could not be executed against the nextbest price level until someone routed an
order to take out the displayed price at
such high fee exchange. While
exchanges would have significant
incentives to compete to be near the top
in order-routing priority, arguably there
would be little incentive to avoid being
the least-preferred exchange if fees were
not limited. Such a business model
could detract from the usefulness of
quotation information and impede
market efficiency and competition.169
The Commission preliminarily
believes that the proposed access fee
cap would limit the viability of this
business model. Consequently, another
benefit of the proposal would be to
place all options exchanges on a level
playing field with respect to the
maximum amount of access fees they
can charge, and, ultimately, the rebates
they can pay to liquidity providers, by
establishing a clear limit on the fees
they can charge. Some options
exchanges might choose to charge lower
fees, thereby increasing their ranking in
the preferences of order routers. Others
might charge $0.30 per contract and
rebate a substantial proportion to
liquidity providers.170 The Commission
preliminarily believes that competition
will determine which strategy is most
successful. Proposed Rule 610(c)(2) also
would preclude an options exchange
from charging high fees selectively to
competitors.
The Commission also preliminarily
believes that the proposed access fee
169 See NMS Adopting Release, supra note 4, at
37584 (concluding that, with respect to NMS stocks,
an outlier business model would detract from the
usefulness of quotation information and impede
market efficiency and competition and that a fee
cap would limit such a business model). See also
supra notes 69–71 and accompanying text.
170 The Commission notes that nothing in
proposed Rule 610(c)(2) would preclude an options
exchange from taking action to limit fees beyond
what is required by the proposed Rule, and such
options exchanges would have flexibility in
establishing their fee schedules to comply with
proposed Rule 610(c)(2), consistent with existing
requirements of the Exchange Act and the rules and
regulations thereunder.
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limitation would further the purposes of
Section 11A(c)(1)(B) of the Exchange
Act, which authorizes the Commission
to adopt rules assuring the fairness and
usefulness of quotation information. As
discussed above, if options exchanges
are allowed to charge high fees and pass
most of them through as rebates, the
published quotations of such exchanges
may not reliably indicate the all-in price
that is actually available to investors.
For quotations to be fair and useful,
there must be some limit on the extent
to which the all-in price for those who
access quotations can vary from the
displayed price. Consequently, the
Commission preliminarily believes that
the proposed access fee limitation
would further the statutory purposes of
the NMS by limiting the distortive
effects of high fees. Moreover, the
Commission preliminarily believes that
the proposed fee limitation would
further the statutory purpose of enabling
broker-dealers to route orders in a
manner consistent with the operation of
the NMS.171 Under the Trade-Through
Rules, one exchange cannot trade
through another exchange displaying
the best-priced quotations. The
purposes of the Trade-Through Rules
would be thwarted if market
participants were allowed to charge
high fees that distort quoted prices in a
listed option.
In proposing amendments to Rule
610, the Commission seeks to help
ensure that transactions in listed
options can be executed efficiently at
any market center for reasonable
execution fees. By enabling fair access
and transparent pricing among the
different market places within a unified
national market, the Commission
preliminarily believes that the proposal
would foster efficiency, enhance
competition, and contribute to the best
execution of orders in listed options.
Finally, the Commission notes that
the current access fee limitation in Rule
610(c) has applied to the trading of NMS
stocks for several years and believes that
such limitation has not caused any
apparent harm to competition among
markets or market participants trading
NMS stocks. For example, when
recently requesting comment on various
aspects of equity market structure, the
Commission noted how trading volume
for NMS stocks is spread out among the
registered exchanges, ECNs, dark pools,
and broker-dealers that execute trades
171 Section 11A(c)(1)(E) of the Exchange Act, 15
U.S.C. 78k–1(c)(1)(E), authorizes the Commission to
adopt rules assuring that broker-dealers transmit
orders for securities in a manner consistent with the
establishment and operation of a national market
system.
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internally.172 The Commission notes
that, currently, the options exchanges
are competitive.173 As such, the
Commission preliminarily believes that
an access fee limitation applied to the
trading of listed options would not harm
competition among exchanges or market
participants trading listed options.
The Commission also preliminarily
believes that the proposed access
provisions would help to assure
investors that their orders are executed
at the best prices and are not subject to
large, non-transparent fees by limiting
the difference between the all-in price of
an investor executing its order and the
displayed quotation, regardless of the
exchange on which the execution takes
place.
B. Costs
1. Proposed Amendment to Rule 610(a)
If the proposed amendment to Rule
610(a) were adopted, it could impose
costs associated with modifications to
an options exchange’s rules to comply
with such proposed Rule’s specific antidiscriminatory standard for access to an
exchange’s quotations through a
member. The Commission notes,
however, that each exchange registered
as a national securities exchange is
currently subject to similar restrictions
in Section 6 of the Exchange Act,
including the requirements in Section
6(b)(5) that the rules of a national
securities exchanges be designed,
among other things, not to permit unfair
discrimination between customers,
issuers, brokers, or dealers.174
Accordingly, the Commission
preliminarily believes that it would be
unlikely for the options exchanges to
need to amend their rules to comply
with Rule 610(a), as proposed to be
amended. To the extent that any
amendments are necessary, the
Commission preliminarily expects such
amendments would be minimal. The
Commission, therefore, preliminarily
believes that any costs incurred as a
result of the requirement under the
proposed amendment to Rule 610(a) by
172 See Securities Exchange Act Release No.
61358 (January 14, 2010), 75 FR 3594, 3598 (January
21, 2010) (S7–02–10).
173 See infra Section VIII.A.1 (discussing market
share data for January 2010 among the eight options
exchanges).
174 Section 6(b)(5) of the Exchange Act also
requires in part that the rules of a national
securities exchanges be designed to: (1) Promote
just and equitable principles of trade; (2) remove
impediments to and perfect the mechanism of a free
and open market and a national market system; and
(3) protect investors and the public interest. See 15
U.S.C. 78f(b)(5). See also supra note 47 and
accompanying text. No national securities
association currently trades listed options.
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an options exchange would not be
significant.
More specifically, an options
exchange that would need to amend its
rules to comply with the proposed
amendment to Rule 610(a) so as not to
unfairly discriminate would be required
to file a proposed rule change on Form
19b–4 with the Commission.175 The
Commission further notes that the
proposed rule change filing format is
not new to the options exchanges, as
multiple filings are made annually by
such exchanges.176 The Commission
estimates that an average rule change
requires approximately 34 hours for an
exchange to complete at an average
hourly cost of $305.177 The Commission
estimates that the aggregate cost of one
proposed rule change for each options
exchange, which assumes that every
options exchange would have to amend
its rules to eliminate any unfairly
discriminatory terms not consistent
with the proposed amendments to Rule
610(a), would total approximately
$82,960 ($305 times 34 times 8).
Therefore, the Commission
preliminarily believes that the costs
incurred by an options exchange to
make such a filing as a result of the
proposed amendment to Rule 610(a)
would not be substantial.178
2. Proposed Rule 610(c)(2)
The Commission preliminarily does
not believe that the fee limitation of
175 See 15 U.S.C. 78s(b) (requiring each SRO to
file with the Commission, in accordance with such
rules as the Commission may prescribe, copies of
any proposed rule or any proposed change in,
addition to, or deletion from the rules of such SRO,
accompanied by a concise general statement of the
basis and purpose of such proposed rule change).
See also 17 CFR 240.19b–4(a) (generally requiring
that filings with respect to proposed rule changes
by an SRO be made on Form 19b–4, 17 CFR
249.819).
176 The Commission notes that, for its 2009 fiscal
year (October 1, 2008 to September 30, 2009), the
seven options exchanges (NYSE Amex, BOX, CBOE,
ISE, NOM, NYSE Arca, and Nasdaq OMX Phlx)
filed approximately 444 proposed rule changes in
the aggregate pursuant to Section 19(b) and Rule
19b–4 thereunder.
177 The $305 per-hour figure for an attorney is
from SIFMA’s Management & Professional Earnings
in the Securities Industry 2008, modified by
Commission staff to account for an 1800-hour workyear and multiplied by 5.35 to account for bonuses,
firm size, employee benefits, and overhead. See
Securities Exchange Act Release No. 59748 (April
10, 2009), 74 FR 18042, 18093 (April 20, 2009) (S7–
08–09) (noting the Commission’s modification to
the $305 per hour figure for an attorney).
178 The Commission also notes that each options
exchange should already have in place policies and
procedures to ensure that terms of access to its
market are consistent with the federal securities
laws and the rules thereunder. See supra note 174
and accompanying text. The Commission
preliminarily believes that such options exchange’s
existing policies and procedures should not change
as a result of the proposed amendments to Rule 610,
and, therefore, should not incur any new costs,
including administrative costs, in this regard.
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proposed Rule 610(c)(2) would impose
significant new costs on the options
exchanges or market participants. The
Commission preliminarily believes that
the proposed fee limitation would be
relatively easy to administer given that
it would impose a single accumulated
access fee limitation for all options. For
options exchanges that currently charge
and collect fees and that would
continue to do so, the costs of imposing
and collecting fees are already incurred.
The fee limitation would not require an
options exchange that does not
currently charge fees to begin charging
fees. Thus, the Commission
preliminarily believes that the proposed
fee limitation should not impose
significant new administrative costs.
The Commission recognizes that the
fee limitations of proposed Rule
610(c)(2) would affect options
exchanges that currently impose access
fees in excess of the proposed limits. As
a result of the access fee limitations of
proposed Rule 610(c)(2), such options
exchanges would be required to modify
their respective rules to ensure
compliance with the proposed Rule’s
fee cap. The Commission preliminarily
believes, however, that the potential
administrative costs associated with any
necessary changes to the rules of an
options exchange that may be needed to
account for the proposed access fee
limitation would not be substantial. The
Commission notes that an options
exchange that would need to amend its
rules and fee schedule to comply with
the access fee limitation as a result of
proposed Rule 610(c)(2) would be
required to file a proposed rule change
on Form 19b–4 with the Commission.179
The Commission further notes that the
proposed rule change filing format and
the process to change a due, fee, or other
charge applicable only to members is
not new to the options exchanges, as
multiple fee filings are made annually
by such exchanges.180 As stated above,
the Commission estimates that an
average rule change requires
179 See
supra note 175.
exchange generally would be able to
amend its fees imposed on its members by filing a
proposed rule change pursuant to Section
19(b)(3)(A) of the Exchange Act of Rule 19b–4(f)(2)
thereunder. See 15 U.S.C. 78s(b)(3)(A) and 17 CFR
240.19b–4(f)(2) (permitting proposed rule changes
that establish or change a due, fee, or other charge
applicable only to members to take effect upon
filing with the Commission). The Commission notes
that, for its 2009 fiscal year, the seven options
exchanges filed approximately 120 proposed rule
changes in the aggregate pursuant to Section
19(b)(3)(A) of the Exchange Act and Rule 19b–
4(f)(2) thereunder. See supra note 176 (noting the
approximate total of all proposed rule changes filed
by the options exchanges pursuant to Section 19(b)
and Rule 19b–4 thereunder during the same time
period).
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180 An
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approximately 34 hours for an exchange
to complete at an average hourly cost of
$305.181 The Commission estimates that
the aggregate cost for all options
exchanges of one proposed rule change
for each exchange would total
approximately $82,960.182 Therefore,
the Commission preliminarily believes
that the costs incurred by an options
exchange to make such a filing as a
result of proposed Rule 610(c)(2) would
not be substantial.183
The Commission also recognizes that,
as a result of the proposed access fee
limitation, certain options exchanges
that currently charge access fees that
exceed, or accumulate to more than,
$0.30 per contract would be required to
reduce their access fees, and that this
action could result in a reduction in
revenue from transaction fees for those
exchanges.
The Commission preliminarily
estimates that the imposition of an
access fee cap, as proposed, could
reduce option exchanges’ annual
transaction fee revenues by about $74
million under a flat $0.30 access fee
cap.184 The estimated revenue losses per
exchange are set forth in Table 3 of the
Appendix. Commission staff estimates
the proportion of fee losses to total fees
for December 2009 and applies that
proportion to the annual transaction fee
181 See
supra note 177.
Commission notes that if an exchange
were required to submit a proposed rule change to
address a rule or fee that was not consistent with
the anti-discriminatory standard proposed in Rule
610(a), as well as a fee that exceeds the proposed
fee cap, the exchange could choose to submit one
rule filing that would make changes necessary to
comply with proposed Rules 610(a) and 610(c)(2) to
reduce costs.
183 The Commission also notes that each options
exchange should already have in place policies and
procedures to ensure that all of the fees it charges,
including access fees, are consistent with the
federal securities laws and the rules thereunder.
The Commission preliminarily believes that, while
an options exchange may be required to amend its
fee schedule to account for the proposed access fee
limitation, such options exchange’s existing
policies and procedures should not change as a
result of the proposed amendments to Rule 610, and
therefore, should not incur any new costs,
including administrative costs, in this regard.
184 For this estimate, Commission staff used
December 2009 option trading data from OCC and
OptionMetrics. The Commission staff estimates that
if the Commission were to impose a fee cap of 0.3
percent of the price of the option for options priced
below $1—similar to the existing cap for NMS
stocks—the potential reduction in revenue for the
options exchanges would be $177 million.
The Commission has not included BATS in these
revenue impact calculations. As noted below, BATS
recently started trading options on February 26,
2010. See infra note 197. Further, BATS’ only
transaction fee for listed options is $0.30 per
contract for removing liquidity (and a $0.20 percontract rebate for providing liquidity). See BATS
Fee Schedule (available at https://batstrading.com/
resources/regulation/rule_book/
BATS_Ex_Fee_Schedule.pdf) (current as of
February 26, 2010).
182 The
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revenue for each exchange. The
Commission staff utilized OCC data that
contains aggregate two-sided volume
data by account type (customer, firm or
market maker). In order to estimate the
impact on each option exchange’s
revenues,185 Commission staff makes a
number of assumptions:
• Commission staff assumes that the
options exchanges that impose fees in
excess of the proposed access fee cap
would not adjust their rebates or other
fees to offset any shortfalls on revenues
imposed by the access fee cap.
• Commission staff looked at a range
of fees that each options exchange
charges for accessing the best bid or
offer in listed options on the exchange,
based on its published fee schedule.186
The fee ranges include any fee that is
charged for execution of an order
against an exchange’s best bid or offer.
Thus, they include ‘‘Take’’ fees,
transaction fees, index ‘‘licensing’’ fees,
certain payment for order flow fees, and
ORF. The fee ranges exclude fees
charged for transactions in FLEX
options, credit default options, and the
fee that ISE charges for transactions by
broker-dealers registered as market
makers on other exchanges. Commission
staff has excluded these specific
transaction fees from these calculations
because it preliminarily believes that
the volume of transactions and the
corresponding assessed transaction fees
are not significant, but requests
comment on whether such fees should
be included in the cost impact
calculation. Any available volume
discounts also are not taken into
account because such discounts are
variable and if applied would reduce
the cost estimates. Tables 1 and 2 of the
Appendix show the fee ranges used in
estimating the revenue impact.
• To estimate the impact on each
option exchange’s revenues, the
Commission staff generally assumes the
maximum possible fee for electronically
transmitted orders grouped by account
type, whether or not the class is
included in the Minimum Quoting
Increment Pilot Program, and option
type. This assumption would lead,
conservatively, to higher estimates of
185 See infra note 187 and accompanying text for
an estimate of the impact of the proposed access fee
cap on transaction fee revenues using an
assumption that the options exchanges that have a
Make or Take fee model reduce their ‘‘Make’’ fees
to compensate for a reduction in ‘‘Take’’ fees.
186 The fees used are as of January 2010, except
that they do not include fees or credits imposed by
Nasdaq OMX Phlx in SR–Phlx–2009–116, SR–Phlx–
2010–14, and SR–Phlx–2009–104, which filings
were abrogated by the Commission on February 19,
2010. See Securities Exchange Act Release No.
61547 (February 19, 2010), 75 FR 8762 (February
25, 2010).
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revenue losses. Further, because fee
levels for equity options tend to be
different than fee levels for index
options, and because the fee levels for
classes included in the Minimum
Quoting Increment Pilot Program
sometimes are different than the fee
levels for classes not included in that
Pilot Program, Commission staff
estimates fees separately for each.
• Commission staff assumes that
access fees only apply to ‘‘Takers’’ of
liquidity at a particular exchange. Staff
further assumes that customers always
‘‘take’’ liquidity, market makers always
‘‘make’’ liquidity, and firms make up the
difference. Based on December 2009
data, Commission staff estimates that
average firm volume by option class is
about 52% on the ‘‘take’’ side and 48%
on the ‘‘make’’ side.
• The OCC classifies cleared trades
based on OCC membership rather than
exchange membership. Therefore,
Commission staff assumes that the OCC
‘‘firm’’ classification applies to both
member and non-member firms at a
particular exchange. If a particular
exchange charges different levels of fees
for member and non-member firms,
Commission staff conservatively
assumes the maximum fee applies to all
trades classified as ‘‘firm’’ accounts.
As noted above, this cost estimate
assumes that the exchanges do not make
any changes to their other fees in
response to the proposed access fee cap.
Options exchanges may, however,
respond to access fee limits by
restructuring their fee schedules to
mitigate the effect of the proposed fee
cap. For example, the impact of
imposing a fee limitation in a Make or
Take fee model may be mitigated if
exchanges using such fee model reduce
the rebates to reflect the reduced ‘‘Take’’
fees. In such a case, the net impact on
exchange revenue would be less than
the amount by which an exchange is
required to reduce its ‘‘Take’’ fee because
the exchange would pay a smaller rebate
to members providing liquidity. In
addition, certain options exchanges may
simply be able to re-calibrate existing
fee structures to offset potential revenue
losses, while other exchanges may
decide to charge additional fees to make
up for potential revenue losses.
Options exchanges have the ability,
consistent with the requirements of the
Exchange Act, to levy fees on their
members. Currently, exchanges charge
their members various types of fees for
membership, transacting on the
exchange, and for other services
provided by the exchange, including
connectivity fees, regulatory fees, and
other fees. The Commission
preliminarily believes that exchanges
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are likely to amend their fees that would
not be impacted by the access fee
limitation to make up for the reduction
in access fee revenue, thus keeping the
overall level of fees paid by members,
and the amount of revenue received by
the exchange, relatively constant.
Further, the Commission preliminarily
believes that exchanges that provide
rebates to liquidity providers based on
the amount of fees the exchanges charge
for accessing liquidity may reduce such
rebates commensurate with any
reduction in the fees charged for
accessing liquidity. In this event, the
amount of revenue received by the
exchange—the difference between the
‘‘Take’’ fee and the ‘‘Make’’ rebate—
would remain constant. If exchanges
with ‘‘Make or Take’’ models reduce
their ‘‘Make’’ fees to compensate for a
reduction in ‘‘Take’’ fees due to the
proposed access fee cap, the
Commission estimates that the
imposition of an access fee cap as
proposed could reduce option
exchanges’ transaction fee revenues by
about $55 million under a flat $0.30
access fee cap.187
The Commission also preliminarily
believes that the overall cost to members
of exchanges from the proposal to limit
access fees would be minimal. As noted
above, exchange members pay various
types of fees to their exchanges,
including transaction fees, regulatory
fees, and other fees. Some of these fees
are charged for activity by the members’
customers or other non-member market
participants that comes through
members. Exchange members today can
choose to pass through these fees to
their customers, or not, subject to
competition among members for this
order flow. As outlined above, the
Commission preliminarily believes that
the overall revenue to the exchanges—
and thus the overall fees charged by
exchanges to members—would remain
constant, although the levels of fees
within individual fee categories may
change. Thus, the impact of fee changes
on individual members and market
participants may vary, depending upon
each participant’s business structure
and trading strategies, and depending
upon what portion of the fees each
member chooses to ‘‘pass through’’ to its
customers.
C. Request for Comment
The Commission requests general
comment on the costs and benefits of
the proposed amendments to Rules
610(a) and (c) of Regulation NMS
187 For this estimate, Commission staff used
December 2009 option trading data from OCC and
OptionMetrics. See infra Table 3 in the Appendix.
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discussed above, as well as any costs
and benefits not already described
which could result from them. The
Commission also requests data to
quantify any potential costs or benefits.
The Commission specifically requests
comment on the cost estimates made,
and the assumptions underlying those
cost estimates as outlined, in Section
VII.B.2. For example, do commenters
believe that options exchanges that
currently impose fees in excess of the
fee cap proposed in Rule 610(c)(2)
would or would not adjust their rebates
or other fees to offset the impact of a fee
cap? If commenters believe that options
exchanges would adjust their rebates or
other fees to offset the impact of a fee
cap, what specific types of changes
would exchanges make? Further,
depending upon the specific change to
rebates or fees that commenters believe
exchanges would make in response to
the proposed fee cap, how do
commenters believe that such change(s)
would impact the quoting, order
routing, or other behavior of particular
categories of market participants, such
as retail investors, market makers, and
broker-dealers?
Do commenters believe that it is
appropriate generally to consider the
maximum fee charged for electronically
transmitted orders in calculating the
impact on an options exchange’s
revenue of the proposed access fee cap?
If so, please explain why. If not, please
provide detail as to what assumptions
should underlie such a calculation.
Further, do commenters agree that it is
reasonable to exclude specific fees
charged for the execution of orders in
FLEX options or credit default options,
and the fee that ISE charges for
transactions by broker-dealers registered
as market makers on other exchange, as
well as volume discounts, when
determining the maximum fee charged
by options exchanges? Do commenters
agree with the assumption that
customers always ‘‘take’’ liquidity,
market makers always ‘‘make’’ liquidity,
and firms make up the difference? If not,
please provide detail as to what
assumptions should be made and any
supporting information, or describe
another approach for estimating the
costs of this proposal.
VIII. Consideration of Burden on
Competition and Promotion of
Efficiency, Competition, and Capital
Formation
Section 3(f) of the Exchange Act
requires the Commission, whenever it
engages in rulemaking and is required to
consider or determine whether an action
is necessary or appropriate in the public
interest, to consider, in addition to the
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protection of investors, whether the
action would promote efficiency,
competition, and capital formation.188
In addition, Section 23(a)(2) of the
Exchange Act requires the Commission,
when adopting rules under the
Exchange Act, to consider the impact
such rules would have on
competition.189 Section 23(a)(2)
prohibits the Commission from adopting
any rule that would impose a burden on
competition not necessary or
appropriate in furtherance of the
purposes of the Exchange Act.190
A. Competition
The Commission begins its
consideration of potential competitive
impacts with observations of the current
structure of the option markets and
broker-dealers, mindful of the statutory
requirements regarding competition.
Based on the Commission’s experience
in regulating the options markets and
broker-dealers, including reviewing
information provided by them in their
registrations and filings with the
Commission and approving such
registration applications, the
Commission discusses below the basic
framework of the markets they
comprise.
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1. Market Structure for Options Markets
In order to consider whether the
proposed rules promote competition,
staff of the Commission’s Division of
Risk, Strategy, and Financial Innovation
evaluated the competitive structure of
the exchange-listed options trading
industry in the United States. In
particular, Commission staff considered
the nature of competition between
liquidity providers within exchanges
and competition between exchanges to
attract order flow. Within the options
exchanges, multiple market makers,
proprietary trading firms, and customers
submitting limit orders compete to
provide liquidity to incoming market or
marketable limit orders. Options
exchanges compete for order flow
through their quotations and, in some
cases, through exchange-sponsored
payment for order flow.
In the late 1990s, the Commission
took actions in response to concerns
that the options industry was not fully
competitive. Competition in the listed
options market is significantly more
rigorous today that it has been in the
past, as a result of several developments
since 1999. These include the move to
188 15
189 15
U.S.C. 78c(f).
U.S.C. 78w(a)(2).
190 Id.
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multiple listing,191 the advent of
electronic exchanges,192 the extension
of the Commission’s Quote Rule to
options,193 the injunction against
trading outside of the national best bid
and offer,194 the adoption of market
structures on the floor-based exchanges
that permit individual market maker
quotations to be reflected in the
exchange’s quotation,195 and the
Minimum Quoting Increment Pilot
Program,196 among other developments.
Among the relevant considerations in
assessing the degree of competition in
an industry are the number of
competitors and concentration of market
share. Listed options in the United
States are currently traded on eight
national securities exchanges, owned by
six entities. These eight exchanges are
CBOE, ISE, NYSE Arca, NYSE Amex,
Nasdaq OMX Phlx, NOM, BOX, and
BATS. Based on market share data for
January 2010 obtained from the OCC,197
the exchange with the highest market
share of option volume was CBOE, with
29.58%, followed by ISE at 22.86%. The
two exchanges owned by NYSE
Euronext together had a market share of
25.82% (NYSE Arca had 13.94% and
NYSE Amex had 11.88%). The two
exchanges owned by The NASDAQ
OMX Group, Inc. together had a market
share of 19.76% (Nasdaq OMX Phlx had
17.17% and NOM had 2.59%). The BOX
had a market share of 1.98%.
Another key factor determining the
competitiveness of an industry is the
extent to which there are significant
191 See Securities Exchange Act Release No.
26870 (May 26, 1989), 54 FR 23963 (June 5, 1989)
(S7–25–87).
192 See ISE Exchange Approval, supra note 30, 65
FR at 11395; Securities Exchange Act Release Nos.
49068 (January 13, 2004), 69 FR 2775 (January 20,
2004) (approving options trading rules for BOX)
(‘‘BOX Approval Order’’); 54238 (July 28, 2006), 71
FR 44758 (August 7, 2006) (approving NYSE Arca’s
OX, a fully automated trading system for
standardized equity options intended to replace
NYSE Arca’s options trading platform, PCX Plus);
57478 (March 12, 2008), 73 FR 14521 (March 18,
2008) (approving options trading rules for NOM)
(‘‘NOM Approval Order’’); and 61419 (January 26,
2010), 75 FR 5157 (February 1, 2010) (approving
BATS Exchange proposal to operate as an options
exchange) (‘‘BATS Approval Order’’).
193 See Securities Exchange Act Release No.
43591 (November 17, 2000), 65 FR 75439
(December 1, 2000).
194 See supra notes 8–16 and accompanying text.
195 See, e.g., Securities Exchange Act Release No.
47959 (May 30, 2003), 68 FR 34441, 34442 (June 9,
2003) (SR–CBOE–2002–05) (adopting, among other
things, amendments to incorporate firm quote
requirements in CBOE’s rules).
196 See supra notes 28–29 and accompanying text.
197 Although the Commission approved BATS
Exchange’s proposal to operate as an options
exchange in January 2010 (see BATS Approval
Order, supra note 192), BATS Exchange did not
commence options trading operations until
February 26, 2010. As a result, there is no market
share data for BATS for purposes of this discussion.
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20759
barriers to entry. In the Commission’s
assessment, barriers to entry in
providing trading platforms in the
options market are higher than they are
in the equities market because equities
may be traded off exchange while
options may not. Thus, new entrants in
the options market face the regulatory
costs associated with establishing a
national securities exchange. These
costs are not large enough to prevent
entry, as evidenced by the fact that four
new option exchanges have entered the
industry since 2000,198 and another is
anticipated to begin operations soon.199
However, it is possible that the
economic barriers to entry to the options
trading industry may be more
significant for participants who do not
already have the infrastructure required
to operate registered exchanges. With
the sole exception of the ISE, every new
entrant in the options market since 1973
has been created by participants who
were already operating securities
exchanges.
Broker-dealers are required to register
with the Commission and be a member
of at least one SRO. The broker-dealer
industry, including market makers, is a
competitive industry, with most trading
activity concentrated among several
dozen larger participants and with
thousands of smaller participants
competing for niche or regional
segments of the market.
There are approximately 5,178
registered broker-dealers, of which
approximately 890 are small brokerdealers.200 Larger broker-dealers often
enjoy economies of scale over smaller
broker-dealers and compete with each
other to service the smaller brokerdealers, who are both their competitors
and customers. The reasonably low
barriers to entry for broker-dealers are
evidenced, for example, by the fact that
the average number of new brokerdealers entering the market each year
between 2001 and 2008 was 389.201
198 See ISE Exchange Approval, supra note 30;
BOX Approval Order, supra note 192; NOM
Approval Order, supra note 192; and BATS
Approval Order, supra note 192.
199 See supra note 8 (referring to the order
approving C2 Options Exchange’s application for
registration as a national securities exchange).
200 These numbers are based on a review of 2007
and 2008 FOCUS Report filings reflecting registered
broker-dealers, and discussions with SRO staff. The
number does not include broker-dealers that are
delinquent on FOCUS Report filings.
201 This number is based on a review of FOCUS
Report filings reflecting registered broker-dealers
from 2001 through 2008. The number does not
include broker-dealers that are delinquent on
FOCUS Report filings. New registered brokerdealers for each year during the period from 2001
through 2008 were identified by comparing the
unique registration number of each broker-dealer
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Federal Register / Vol. 75, No. 75 / Tuesday, April 20, 2010 / Proposed Rules
2. Discussion of Impacts of Proposed
Amendments to Rules 610(a) and 610(c)
on Competition
The Commission believes that the
estimated costs associated with
implementing and complying with the
proposed amendments to Rules 610(a)
and 610(c) are not so large as to raise
significant barriers to entry, or
otherwise significantly alter the
competitive landscape of the listed
options market. Given the reasonably
high level of competition for order flow
in option markets and among brokerdealers, the Commission believes that
this industry would remain competitive,
despite the potential costs associated
with implementing and complying with
the proposed amendments to Rules
610(a) and 610(c), even if those costs
influence to some degree the
profitability of individual option
markets or entry and exit of brokerdealers at the margin.
Trading fees typically constitute the
largest component of revenues for
option exchanges. For example,
transaction fees accounted for
approximately 80.8% of total revenues
for the CBOE in 2008. Thus, a change
in the fee structure that significantly
reduces total fees could potentially have
an important impact on industry profits
and thus on the ability of smaller
exchanges, including potential new
entrants, to meet their fixed costs.
However, the Commission believes that
the proposed access fee limitations
would have a limited, if any, negative
impact on the profitability of individual
option markets because option markets
would be able to adjust their fee
structures to accommodate the access
fee cap. Therefore, the Commission
preliminarily believes that limiting
access fees to $0.30 per contract would
not lead to a large reduction in total
revenues, and would not put an undue
burden on smaller exchanges or new
entrants that would result in a decrease
in competition in the industry.
The Commission recognizes that a
limit on access fees that applies to
exchanges utilizing a ‘‘Make or Take’’
market model effectively limits the size
of the liquidity rebate that such
exchanges can offer, inasmuch as the
economic viability of the ‘‘Make or
Take’’ model generally requires that the
rebate be smaller than the access fee.
The Commission also recognizes that
effectively limiting the size of the
liquidity rebate in this way may limit
the ability of exchanges utilizing the
‘‘Make or Take’’ model to attract
filed for the relevant year to the registration
numbers filed for each year between 1995 and the
relevant year.
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liquidity. However, the Commission
preliminarily believes that the proposal
would not unduly burden ‘‘Make or
Take’’ fee models. In the ‘‘Make or Take’’
fee model, the market earns the
differential between the ‘‘make’’ credit
and the ‘‘take’’ fee. The proposal allows
for access fees of up to $0.30 per
contract and thus can accommodate a
$0.30 per-contract differential in ‘‘make’’
credits and ‘‘take’’ fees. The largest
differential charged by ‘‘Make or Take’’
model option markets currently is $0.20
per contract, sufficiently within the
$0.30 per-contract access fee limit of the
proposal. In addition, the Commission
observes that the ‘‘Make or Take’’ market
model has become the dominant
structure in the equity market despite
the cap of $0.003 per share, suggesting
that a similar cap in the option market
would not prevent the ‘‘Make or Take’’
model from succeeding in the option
market. The Commission requests
comment on this preliminary view.202
Further, the proposed rules apply
uniformly to exchanges with different
markets and fee structures, thereby
facilitating the ability of option markets
to compete in a level regulatory
environment. A fee limitation is
necessary to preclude individual
markets from having fee structures that
take improper advantage of the
protection against trade-throughs in the
Trade-Through Rules. Precluding option
markets from taking improper advantage
of trade-through protection and making
sure that all option markets compete
under the same regulatory landscape
should strengthen the ability of option
markets to compete fairly for business.
The Commission believes that the
proposed access fee limitations may
have benefits that enhance quote
competition among markets. The
proposed access fee provisions are
intended to bolster transparency in the
options markets by improving the
integrity of the quotations and
preventing large, non-transparent fees
from being charged on orders that are
being sent to a particular market in
order to comply with the trade through
provisions of the Trade-Through Rules.
Since quotation information would be
more informative under the proposed
access fee limitations, the Commission
expects that the proposed amendments
would likely encourage quote
competition. Moreover, the Commission
preliminarily believes that, by
prohibiting a national securities
exchange or national securities
association from imposing unfairly
discriminatory terms that would prevent
or inhibit the efficient access of any
202 See
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Frm 00024
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person through members or nonmember subscribers, the proposed rule
would promote competition to offer the
best displayed quotation among
exchanges that trade listed options.
The Commission also believes that the
proposal would have a minimal effect
on the competitiveness of the brokerdealer industry. Since the proposal
seeks to limit access fees, the proposal
may result in a reduction in fees paid by
broker-dealers to options exchanges. On
the other hand, it is possible that
options exchanges could increase
broker-dealer fees, including market
maker fees, to offset any revenue losses
from an access fee limit. However, since
transaction fee costs are typically a
small part of the total expenses for a
broker-dealer, the Commission
preliminarily believes that any increase
in transaction fee costs for brokerdealers would have a minimal, if any,
effect on the competitiveness of the
broker-dealer industry. The Commission
seeks comment, however, on the level of
options exchange-levied fees on brokerdealers and whether an increase in these
fees would inhibit the competitiveness
of the broker-dealer industry.
In summary, the Commission
preliminarily believes that the proposal
would not result in an undue burden on
the competitiveness of any option
markets and, as a result, would not
result in any decrease in competition
among option markets. Moreover, the
Commission preliminarily believes that
the proposal would promote quote
competition in options. The
Commission also preliminarily believes
that the proposal would not result in an
undue burden on the competitiveness of
the broker dealer industry.
B. Capital Formation
A purpose of the proposed
amendments to Rules 610(a) and 610(c)
is to strengthen transparency and quote
competition in the option markets
regulated by the Commission which
should help make investors more
willing to invest, resulting in the
promotion of capital formation. Long
holdings of equity are integral to capital
formation. Fair and robust option
markets, in which long holders can
hedge risk through the option markets,
support the public offerings of the
underlying equities by which issuers
raise capital and, as a result, investors
who provided private capital realize
profits and manage risk. Therefore, the
Commission preliminarily believes that
the proposed amendments to Rules
610(a) and 610(c) would increase
transparency and quote competition,
thereby enhancing investment, and thus
capital formation.
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Federal Register / Vol. 75, No. 75 / Tuesday, April 20, 2010 / Proposed Rules
C. Efficiency
The access provision of Rule 610(a),
as proposed to be amended, is designed
to strengthen the ability of all market
participants that are not members of an
options exchange to fairly and
efficiently route orders to execute
against quotations in a listed option,
wherever such quotations are displayed
in the NMS, by prohibiting an exchange
from unfairly discriminating against any
person trying to obtain access through a
member to that exchange’s quotations.
Fair and efficient access to the best
displayed quotations of all options
exchanges is necessary to achieving best
execution of those orders.203 Further,
fair and efficient access to the best
displayed quotations of options
exchanges is necessary for compliance
with the requirements of the TradeThrough Rules. Specifically, options
exchanges themselves must have the
ability to route orders for execution
against the displayed quotations of other
exchanges. Indeed, the concept of
intermarket protection against tradethroughs is premised on the ability of
options exchanges to route orders to
execute against, rather than trade
through, the quotations displayed by
other options exchanges.204 In this way,
fair and efficient indirect access would,
through the enhancement of the ability
to achieve best execution and the
support of compliance with the TradeThrough Rules, increase the efficiency
of executions across option markets.
The proposed access fee limit would
apply equally to all national securities
exchanges, thereby promoting the NMS
objective of equal regulation of markets.
A fee limitation is necessary to preclude
individual markets from having fee
structures that take improper advantage
of the protection against trade-throughs
in the Trade-Through Rules. Precluding
option markets from taking improper
advantage of trade-through protection
and making sure that all option markets
compete under the same regulatory
landscape should strengthen the ability
of option markets to compete on a more
level playing field, thereby promoting
efficiency of execution across option
markets by reducing costs.
The Commission solicits comments
on these matters with respect to the
proposed amendments to Rules 610(a)
and (c). Would the proposed
amendments have an adverse effect on
competition that is neither necessary
nor appropriate in furtherance of the
purposes of the Exchange Act? Would
the proposed amendments, if adopted,
203 See NMS Adopting Release, supra note 4, at
37539.
204 Id.
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promote efficiency, competition, and
capital formation? Commenters are
requested to provide empirical data and
other factual support for their views if
possible.
IX. Consideration of Impact on the
Economy
For purposes of the Small Business
Regulatory Enforcement Fairness Act of
1996, or ‘‘SBREFA,’’ 205 the Commission
must advise the Office of Management
and Budget as to whether the proposed
regulation constitutes a ‘‘major’’ rule.
Under SBREFA, a rule is considered
‘‘major’’ where, if adopted, it results or
is likely to result in: (1) An annual effect
on the economy of $100 million or more
(either in the form of an increase or a
decrease); (2) a major increase in costs
or prices for consumers or individual
industries; or (3) significant adverse
effect on competition, investment or
innovation. If a rule is ‘‘major,’’ its
effectiveness will generally be delayed
for 60 days pending Congressional
review.
The Commission requests comment
on the potential impact of the proposed
amendments to Rule 610 on the
economy on an annual basis, on the
costs or prices for consumers or
individual industries, and on
competition, investment or innovation.
Commenters are requested to provide
empirical data and other factual support
for their view to the extent possible.
X. Regulatory Flexibility Act
Certification
The Regulatory Flexibility Act
(‘‘RFA’’) 206 requires Federal agencies, in
promulgating rules, to consider the
impact of those rules on small entities.
Section 603(a) 207 of the Administrative
Procedure Act,208 as amended by the
RFA, generally requires the Commission
to undertake a regulatory flexibility
analysis of all proposed rules, or
proposed rule amendments, to
determine the impact of such
rulemaking on ‘‘small entities.’’ 209
Section 605(b) of the RFA specifically
states that this requirement shall not
apply to any proposed rule or proposed
205 Pub. L. No. 104–121, Title II, 110 Stat. 857
(1996) (codified in various sections of 5 U.S.C., 15
U.S.C. and as a note to 5 U.S.C. 601).
206 5 U.S.C. 601 et seq.
207 5 U.S.C. 603(a).
208 5 U.S.C. 551 et seq.
209 Although Section 601(b) of the RFA defines
the term ‘‘small entity,’’ the statute permits agencies
to formulate their own definitions. The Commission
has adopted definitions for the term small entity for
the purposes of Commission rulemaking in
accordance with the RFA. Those definitions, as
relevant to this proposed rulemaking, are set forth
in Rule 0–10, 17 CFR 240.0–10. See Securities
Exchange Act Release No. 18452 (January 28, 1982),
47 FR 5215 (February 4, 1982) (File No. S7–879).
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20761
rule amendment, which if adopted,
would not ‘‘have a significant economic
impact on a substantial number of small
entities.’’ 210
The proposed amendment to Rule
610(a) of Regulation NMS would
prohibit a national securities exchange
or national securities association from
imposing unfairly discriminatory terms
that would prevent or inhibit any
person from obtaining efficient access
through a member of such exchange or
association to the quotations in a listed
option. In addition, proposed Rule
610(c)(2) would prohibit a national
securities exchange from imposing, or
permitting to be imposed, any fee or fees
for the execution of an order against any
quotation that is the best bid or best
offer of such exchange in a listed option
that exceeds or accumulates to more
than $0.30 per contract. As such, only
national securities exchanges registered
with the Commission under Section 6 of
the Exchange Act and national
securities associations registered with
the Commission under Section 15A of
the Exchange Act would be subject to
the proposed amendments to Rules
610(a) and (c). None of the national
securities exchanges registered under
Section 6 of the Exchange Act or
national securities associations
registered with the Commission under
Section 15A of the Exchange Act that
would be subject to the proposed
amendments are ‘‘small entities’’ for
purposes of the RFA.211 Accordingly,
the Commission preliminarily does not
believe that the proposed amendments
to Rule 610 would have a significant
economic impact on a substantial
number of small entities.
The Commission invites commenters
to address whether the proposed rules
would have a significant economic
impact on a substantial number of small
entities, and, if so, what would be the
nature of any impact on small entities.
The Commission requests that
commenters provide empirical data to
support the extent of such impact.
210 See
5 U.S.C. 605(b).
17 CFR 240.0–10(e). Paragraph (e) of Rule
0–10 states that the term ‘‘small business,’’ when
referring to an exchange, means any exchange that
has been exempted from the reporting requirements
of Rule 601 of Regulation NMS, 17 CFR 242.601,
and is not affiliated with any person (other than a
natural person) that is not a small business or small
organization as defined in Rule 0–10. Under this
standard, none of the exchanges subject to the
proposed amendments to Rule 610 is a ‘‘small
entity’’ for the purposes of the RFA. The Financial
Industry Regulatory Authority or ‘‘FINRA’’ (f/k/a the
National Association of Securities Dealers or
‘‘NASD’’) is not a small entity as defined by 13 CFR
121.201.
211 See
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Federal Register / Vol. 75, No. 75 / Tuesday, April 20, 2010 / Proposed Rules
XI. Statutory Authority
Pursuant to the Exchange Act and
particularly, Sections 2, 3(b), 5, 6, 11A,
15, 15A, 17(a) and (b), 19, and 23(a)
thereof, 15 U.S.C. 78b, 78c(b), 78e, 78f,
78k–1, 78o, 78o–3, 78q(a) and (b), 78s,
and 78w(a), the Commission proposes to
amend Rule 610 of Regulation NMS, as
set forth below.
Text of Proposed Rule
List of Subjects in 17 CFR Part 242
Brokers, Reporting and recordkeeping
requirements, Securities.
In accordance with the foregoing,
Title 17, Chapter II, of the Code of
Federal Regulations is proposed to be
amended as follows.
PART 242—REGULATIONS M, SHO,
ATS, AC, AND NMS AND CUSTOMER
MARGIN REQUIREMENTS FOR
SECURITY FUTURES
1. The authority citation for part 242
continues to read as follows:
Authority: 15 U.S.C. 77g, 77q(a), 77s(a),
78b, 78c, 78g(c)(2), 78i(a), 78j, 78k–1(c), 78l,
78m, 78n, 78o(b), 78o(c), 78o(g), 78q(a),
78q(b), 78q(h), 78w(a), 78dd–1, 78mm, 80a–
23, 80a–29, and 80a–37.
2. Amend § 242.610 by revising
paragraphs (a) and (c) to read as follows:
§ 242.610
Access to quotations.
(a) Quotations of an SRO trading
facility. A national securities exchange
or national securities association shall
not impose unfairly discriminatory
terms that prevent or inhibit any person
from obtaining efficient access through
a member of the national securities
exchange or national securities
association to the quotations in an NMS
security displayed through its SRO
trading facility.
*
*
*
*
*
(c) Fees for access to quotations. (1) A
trading center shall not impose, nor
permit to be imposed, any fee or fees for
the execution of an order against a
protected quotation of the trading center
or against any other quotation of the
trading center that is the best bid or best
offer of a national securities exchange or
the best bid or best offer of a national
securities association in an NMS stock
that exceed or accumulate to more than
the following limits:
(i) If the price of a protected quotation
or other quotation is $1.00 or more, the
fee or fees cannot exceed or accumulate
to more than $0.003 per share; or
(ii) If the price of a protected
quotation or other quotation is less than
$1.00, the fee or fees cannot exceed or
accumulate to more than 0.3% of the
quotation price per share.
(2) A national securities exchange
shall not impose, nor permit to be
imposed, any fee or fees for the
execution of an order against a
quotation that is the best bid or best
offer of such exchange in a listed option
that exceed or accumulate to more than
$0.30 per contract.
*
*
*
*
*
By the Commission.
Dated: April 14, 2010.
Elizabeth M. Murphy,
Secretary.
Note: The following appendix will not
appear in the Code of Federal Regulations.
Appendix
TABLE 1—RANGE OF CHARGES FOR ACCESSING QUOTATIONS*
Equity options
Index options
Exchange
Classes included in
minimum quoting increment
pilot
Classes not included in
minimum quoting increment
pilot
Classes included in
minimum quoting increment
pilot
NYSE Amex ..........
NYSE Arca ............
BOX ......................
CBOE ....................
ISE ........................
NOM ......................
Nasdaq OMX Phlx
$0.00 to $0.42 ......................
$0.45 ....................................
¥$0.147 to $0.10 ................
$0.004 to $0.45 ....................
$0.0035 to $0.43 ..................
$0.35 to $0.45 ......................
$0.0035 to $0.56 ..................
$0.00 to $0.82 ......................
$0.00 to $0.81 ......................
¥$0.547 to ¥$0.30 .............
$0.004 to $0.85 ....................
$0.0035 to $0.83 ..................
¥$0.20 to $0.45 ..................
$0.0035 to $1.01 ..................
$0.00 to $0.64 ......................
$0.45 to $0.67 ......................
¥$0.147 to $0.32 ................
$0.004 to $0.60 ....................
$0.0035 to $0.65 ..................
$0.35 to $0.45 ......................
$0.30 to $0.45 ......................
Classes not included in
minimum quoting
increment pilot
$0.00 to $1.04.
$0.00 to $1.03.
¥$0.547 to ¥$0.08.
$0.004 to $1.00.
$0.0035 to $1.05.
¥$0.20 to $0.45.
$0.30 to $0.45.
* As noted above, the Commission has not included BATS in its revenue impact calculations. See supra note 184.
TABLE 2—RANGE OF CHARGES FOR PROVIDING SIDE
Equity options
Index options
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Exchange
Classes included in
minimum quoting increment
pilot
Classes not included in
minimum quoting increment
pilot
Classes included in
minimum quoting increment
pilot
NYSE Amex ..........
NYSE Arca ............
BOX ......................
CBOE ....................
ISE ........................
NOM ......................
Nasdaq OMX Phlx
$0.00 to $0.42 ......................
¥$0.30 to ¥$0.25 ...............
$0.053 to $0.40 ....................
$0.004 to $0.45 ....................
$0.0035 to $0.43 ..................
¥$0.25 .................................
$0.0035 to $0.56 ..................
$0.00 to $0.82 ......................
$0.00 to $0.81 ......................
$0.553 to $0.80 ....................
$0.004 to $0.85 ....................
$0.0035 to $0.83 ..................
$0.00 to $0.30 ......................
$0.0035 to $1.01 ..................
$0.00 to $0.64 ......................
¥$0.25 to $¥0.08 ...............
$0.053 to $0.62 ....................
$0.004 to $0.60 ....................
$0.0035 to $0.65 ..................
¥$0.25 .................................
$0.30 to $0.45 ......................
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Classes not included in
minimum quoting
increment
pilot
$0.00 to $1.04.
$0.00 to $1.03.
$0.553 to $1.02.
$0.004 to $1.00.
$0.0035 to $1.05.
$0.00 to $0.30.
$0.30 to $0.45.
Federal Register / Vol. 75, No. 75 / Tuesday, April 20, 2010 / Proposed Rules
20763
TABLE 3—ESTIMATES OF POTENTIAL REVENUE IMPACT ON OPTIONS EXCHANGES
Annual transaction
fee revenues 1
($Millions)
$0.30 cap estimated % of revenues impacted
NYSE Amex ...........................................
NYSE Arca .............................................
BOX 2 .....................................................
CBOE .....................................................
ISE .........................................................
NOM .......................................................
Nasdaq OMX Phlx .................................
66.5
114.8
4.0
314.5
264.9
38.3
180.4
0.2
26.0
0.0
7.6
0.1
11.0
8.9
Total ................................................
983.4
7.6
Exchange
$0.30 Cap estimated % of revenues impacted assuming make rebate reductions
$0.30 Cap estimated revenue
loss
($Millions)
assuming make
rebate reductions
0.1
29.8
0
23.9
0.3
4.2
16.1
0.2
12.5
0.0
7.6
0.1
0.0
8.9
0.1
14.4
0.0
23.9
0.3
0.0
16.1
74.4
5.6
54.7
$0.30 cap estimated revenue
loss
($Millions)
1 The transaction fee revenue amounts are based on either an exchange’s 2008 Annual Report, an exchange’s 2009 unaudited financial results from information circulars, or annualized from the exchange’s latest 2009 10–Q.
2 Financial data on annual transaction fees are not available for BOX. Therefore, Commission staff annualized its December 2009 fee revenue
estimate.
[FR Doc. 2010–9016 Filed 4–19–10; 8:45 am]
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20APP2
Agencies
[Federal Register Volume 75, Number 75 (Tuesday, April 20, 2010)]
[Proposed Rules]
[Pages 20738-20763]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-9016]
[[Page 20737]]
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Part IV
Securities and Exchange Commission
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17 CFR Part 242
Proposed Amendments to Rule 610 of Regulation NMS; Proposed Rule
Federal Register / Vol. 75 , No. 75 / Tuesday, April 20, 2010 /
Proposed Rules
[[Page 20738]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 242
[Release No. 34-61902; File No. S7-09-10]
RIN 3235-AK62
Proposed Amendments to Rule 610 of Regulation NMS
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The Commission is publishing for comment proposed amendments
to Rule 610 under the Securities Exchange Act of 1934 (``Exchange
Act'') relating to access to quotations in listed options as well as
fees for such access. The proposed rule would prohibit an exchange from
imposing unfairly discriminatory terms that inhibit efficient access to
quotations in a listed option on its exchange and establish a limit on
access fees that an exchange would be permitted to charge for access to
its best bid and offer for listed options on its exchange.
DATES: Comments should be received on or before June 21, 2010.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/proposed.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File No. S7-09-10 on the subject line; or
Use the Federal eRulemaking Portal (https://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.
All submissions should refer to File No. S7-09-10. This file number
should be included on the subject line if e-mail is used. To help us
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/proposed.shtml). Comments
are also available for Web site viewing and printing in the
Commission's Public Reference Room, 100 F Street, NE., Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. All comments received will be posted without change; we do
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT: Jennifer Colihan, Special Counsel, at
(202) 551-5642; Edward Cho, Special Counsel, at (202) 551-5508; or
Brian O'Neill, Special Counsel, at (202) 551-5643, Division of Trading
and Markets (``Division''), Commission, 100 F Street, NE., Washington,
DC 20549-6628.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
II. Proposed Amendments to Rule 610(a)
III. Access Fees
IV. Technical Amendments to Rule 610
V. Request for Comments
VI. Paperwork Reduction Act
VII. Consideration of Costs and Benefits
VIII. Consideration of Burden on Competition and Promotion of
Efficiency, Competition, and Capital Formation
IX. Consideration of Impact on the Economy
X. Regulatory Flexibility Act Certification
XI. Statutory Authority
I. Introduction
The Commission is proposing to strengthen the national market
system for listed options by: (1) Prohibiting the imposition of
unfairly discriminatory terms by a national securities exchange that
inhibit efficient access to quotations in a listed option on its
exchange; and (2) establishing a limit on the amount a national
securities exchange would be permitted to charge to access the best bid
or offer for listed options on its exchange. These proposed amendments
would make the requirements for access to the listed options exchanges
comparable to the requirements for access to markets that trade NMS
stocks.\1\ Further, they would address concerns expressed by certain
market participants regarding access to options exchanges.\2\
---------------------------------------------------------------------------
\1\ See 17 CFR 242.610.
\2\ See infra Section I.B and notes 34-40 and accompanying text.
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A. Background
In 1975, Congress determined that the ``linking of all markets''
through communications and data processing facilities would ``foster
efficiency; enhance competition; increase the information available to
brokers, dealers, and investors; facilitate the offsetting of
investors' orders; and contribute to the best execution of investors'
orders.''\3\ As such, Congress directed the Commission, through the
enactment of Section 11A of the Exchange Act, to facilitate the
establishment of a national market system (``NMS'') to link together
the multiple individual markets that trade securities. Congress
intended the Commission to take advantage of opportunities created by
new data processing and communications technologies to preserve and
strengthen the securities markets.
---------------------------------------------------------------------------
\3\ See Section 11A(a)(1)(D) of the Exchange Act, 15 U.S.C. 78k-
1(a)(1)(D).
---------------------------------------------------------------------------
As previously recognized by the Commission, for the NMS to fulfill
its statutory objectives, fair and efficient access to each of the
individual markets that participate in the NMS is essential.\4\ One of
the statutory NMS objectives, for example, is to assure the
practicability of brokers executing investors' orders in the best
market.\5\ Another is to assure the efficient execution of securities
transactions.\6\ Neither of these objectives can be achieved if brokers
cannot fairly and efficiently route orders to execute against the best
quotations, wherever such quotations are displayed in the NMS.\7\
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\4\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496 (June 29, 2005) (``NMS Adopting Release'') at
37538.
\5\ See Section 11A(a)(1)(C)(iv) of the Exchange Act, 15 U.S.C.
78k-1(a)(1)(C)(iv).
\6\ See Section 11A(a)(1)(C)(i) of the Exchange Act, 15 U.S.C.
78k-1(a)(1)(C)(i).
\7\ See NMS Adopting Release, supra note 4, at 37548.
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The Commission believes that intermarket price protection is
essential in a marketplace such as that for listed options where
multiple exchanges trade the same securities.\8\ For this reason, the
Commission in 1999 ordered the exchanges to jointly develop an NMS
linkage plan for listed options.\9\ The first such NMS plan, which
began operation in 2002 (``2002 Linkage Plan''), included a requirement
that its participant exchanges avoid trading through \10\ better priced
quotations displayed on other options exchanges and disseminated
pursuant to the Options Price Reporting Authority Plan (``OPRA Plan''),
as well as a mechanism by which
[[Page 20739]]
participating exchanges could seek satisfaction if an order was traded
through.\11\ In August 2009, the options exchanges implemented a new
NMS plan (``Plan''),\12\ approved by the Commission, which specifically
requires that each participating exchange establish, maintain, and
enforce written policies and procedures that are reasonably designed to
prevent trading through better priced quotations displayed on other
options exchanges and disseminated pursuant to the OPRA Plan (``trade-
throughs'').\13\ Rule 608(c) of Regulation NMS requires the options
exchanges to comply with the terms of the Plan and to enforce
compliance with the Plan by their members and persons associated with
their members, absent reasonable justification or excuse.\14\ Further,
each exchange adopted rules to implement the Plan that prohibit members
from effecting trade-throughs, subject to certain enumerated
exceptions.\15\ The approach to trade-throughs under the Plan is
similar to that taken by the Commission under Rule 611 of Regulation
NMS, which requires that a trading center establish, maintain, and
enforce written policies and procedures that are reasonably designed to
prevent the execution of trades at prices inferior to protected
quotations in NMS stocks displayed by other trading centers, subject to
applicable exceptions.\16\
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\8\ Eight exchanges currently offer options trading facilities
and another exchange is anticipated to begin operations shortly. See
Securities Exchange Act Release No. 61152 (December 10, 2009), 74 FR
66699 (December 16, 2009) (order approving C2 Options Exchange's
application for registration as a national securities exchange).
\9\ See Securities Exchange Act Release No. 42029 (October 19,
1999), 64 FR 57674 (October 26, 1999).
\10\ A ``trade-through'' was defined as a transaction in an
options series at a price that is inferior to the NBBO, but shall
not include a transaction that occurs at a price that is one minimum
quoting increment inferior to the NBBO provided a Linkage Order is
contemporaneously sent to each Participant disseminating the NBBO
for the full size of the Participant's bid (offer) that represents
the NBBO. See Section 2(29) of the 2002 Linkage Plan. ``NBBO'' was
defined as the national best bid and offer in an options series
calculated by a Participant. See Section 2(18) of the 2002 Linkage
Plan.
\11\ See Securities Exchange Act Release No. 43086 (July 28,
2000), 65 FR 48023 (August 4, 2000) (order approving 2002 Linkage
Plan). The OPRA Plan is a national market system plan approved by
the Commission pursuant to Section 11A of the Exchange Act and Rule
608 thereunder. See Securities Exchange Act Release No. 17638 (March
18, 1981), 22 S.E.C. Docket 484 (March 31, 1981).
\12\ This new Plan was designed, in part, to apply the
Regulation NMS price-protection provisions to the options exchanges.
See letter from Michael J. Simon, International Securities Exchange
LLC (``ISE''), to Nancy M. Morris, Secretary, Commission, dated
September 12, 2007, at 2-3.
\13\ See Securities Exchange Act Release No. 60405 (July 30,
2009), 74 FR 39362 (August 6, 2009) (``Plan Approval Order'') and
Section 5(a) of the Plan. A ``trade-through'' is defined in this new
Plan as a transaction in an option series, either as principal or
agent, at a price that is inferior to the best bid or offer in an
option series that is displayed by an exchange, and is disseminated
pursuant to the OPRA Plan. See Sections 2(1), 2(6), 2(14), 2(17),
and 2(21) of the Plan.
\14\ See 17 CFR 242.608(c).
\15\ See, e.g., ISE Rule 1901, NYSE Arca, Inc. (``NYSE Arca'')
Rule 6.94, and NASDAQ OMX PHLX, Inc. (``Nasdaq OMX Phlx'') Rule
1084. Prior to the adoption of the new Plan, the options exchanges
had in place rules addressing trade-throughs as required under the
2002 Linkage Plan. The exchanges revised these rules following the
adoption of the new Plan to reflect the trade-through requirements
in the new Plan.
\16\ 17 CFR 242.611(a). To be protected, a quotation must be
immediately and automatically accessible. See 17 CFR 242.600(b)(58)
(defining the term ``protected quotation'' as any protected bid or
protected offer); see also 17 CFR 242.600(b)(57). The term
``protected bid'' or ``protected offer'' means a quotation in an NMS
stock that is displayed by an automated trading center, is
disseminated pursuant to an effective national market system plan,
and is an automated quotation that is the best bid or best offer of
a national securities exchange, the best bid or best offer of The
Nasdaq Stock Market, Inc., or the best bid or best offer of a
national securities association other than the best bid or best
offer of The Nasdaq Stock Market, Inc.
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To satisfy the requirements of the trade-through provisions of the
Plan and the exchanges' rules \17\ (collectively referred to as
``Trade-Through Rules''), an options exchange with a best bid or best
offer that is inferior to another exchange's best quotation may choose
to handle a pending incoming marketable order by: (1) Cancelling the
order; (2) routing the order to another exchange displaying a better
price; \18\ or (3) providing an opportunity for its members, on their
own behalf or on behalf of other market participants, to ``step up''
and trade with the order at a price at least equal to the better
displayed price on an away exchange.\19\
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\17\ See Section 5(a) of the Plan; see also, e.g., ISE Rule
1901, NYSE Arca Rule 6.94 and Nasdaq OMX Phlx Rule 1084.
\18\ To implement the choice of routing to another exchange to
access a better-priced quotation, the options exchanges currently
use private routing arrangements that provide for indirect access to
quotations displayed by a particular options exchange through the
members of that exchange. The Commission has stated its belief that
the use of private linkages for routing will allow the exchanges to
take advantage of new technology that allows for efficient routing
and executions, and will give the exchanges greater flexibility for
order handling. See Plan Approval Order, supra note 13, at 39364.
The options exchanges complied with the requirements of the prior
linkage plan by utilizing a stand alone system (``centralized hub'')
to send and receive specific order types. The centralized hub was a
centralized data communications network that electronically linked
the options exchanges to one another. The Options Clearing
Corporation (``OCC'') operated the centralized hub. See id.
\19\ The Commission separately has proposed changes to Rule 602
of Regulation NMS that may affect these electronic ``step-up''
mechanisms, if adopted. See Securities Exchange Act Release No.
60684 (September 18, 2009), 74 FR 48632, 48633 (September 23, 2009)
(File No. S7-21-09) (``Flash Order Proposal''). See infra notes 72-
75 and accompanying text.
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In addition, broker-dealers have a duty of best execution.\20\ A
broker-dealer must carry out a regular and rigorous review of the
quality of the options markets to evaluate its best execution policies,
including the determination as to which options market it routes
customer order flow.\21\ The protection against trade-throughs
undergirds the broker-dealer's duty of best execution by helping ensure
that customer orders are not executed at prices inferior to the best
quotations, but does not supplant or diminish the broker-dealer's
responsibility for achieving best execution, including its duty to
evaluate the execution quality of markets to which it routes customer
orders.\22\
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\20\ A broker-dealer has a legal duty to seek to obtain best
execution of customer orders. See, e.g., Newton v. Merrill, Lynch,
Pierce, Fenner & Smith, Inc., 135 F.3d 266, 269-70, 274 (3d Cir.),
cert. denied, 525 U.S. 811 (1998); Certain Market Making Activities
on Nasdaq, Securities Exchange Act Release No. 40900 (Jan. 11, 1999)
(settled case) (citing Sinclair v. SEC, 444 F.2d 399 (2d Cir. 1971);
Arleen Hughes, 27 SEC 629, 636 (1948), aff'd sub nom. Hughes v. SEC,
174 F.2d 969 (D.C. Cir. 1949)). See also Order Execution
Obligations, Securities Exchange Act Release No. 37619A (Sept. 6,
1996), 61 FR 48290 (Sept. 12, 1996) (``Order Handling Rules
Release''). A broker-dealer's duty of best execution derives from
common law agency principles and fiduciary obligations, and is
incorporated in SRO rules and, through judicial and Commission
decisions, the antifraud provisions of the federal securities laws.
See Order Handling Rules Release, 61 FR at 48322. See also Newton,
135 F.3d at 270. The duty of best execution requires broker-dealers
to execute customers' trades at the most favorable terms reasonably
available under the circumstances, i.e., at the best reasonably
available price. Newton, 135 F.3d at 270. Newton also noted certain
factors relevant to best execution--order size, trading
characteristics of the security, speed of execution, clearing costs,
and the cost and difficulty of executing an order in a particular
market. Id. at 270 n.2 (citing Payment for Order Flow, Exchange Act
Release No. 33026 (Oct. 6, 1993), 58 FR 52934, 52937-38 (Oct. 13,
1993) (Proposed Rules)). See In re E.F. Hutton & Co., Securities
Exchange Act Release No. 25887 (July 6, 1988). See also Securities
Exchange Act Release No. 34902 (October 27, 1994), 59 FR 55006,
55008-55009 (November 2, 1994) (``Approval of Payment for Order Flow
Final Rules''). See also NMS Adopting Release, supra note 4, at
37537 (discussing the duty of best execution).
\21\ See Securities Exchange Act Release No. 49175 (February 3,
2004), 69 FR 6124, 6128 (February 9, 2004) (``Options Concept
Release''). See also NMS Adopting Release, supra note 4, at 37538.
\22\ See NMS Adopting Release, supra note 4, at 37538.
---------------------------------------------------------------------------
These regulatory obligations mean that broker-dealers responsible
for routing customer orders, as well as customers making their own
order-routing decisions, must have fair and efficient access to the
best displayed quotations to achieve best execution of those orders,
and the exchanges themselves must have the ability to execute orders
against the displayed quotations of other exchanges.\23\ Moreover, the
benefits of intermarket price protection could be compromised if
exchanges were able to charge substantial fees for accessing their
quotations.\24\
---------------------------------------------------------------------------
\23\ See id. at 37539.
\24\ See id. at 37544.
---------------------------------------------------------------------------
Further, the Exchange Act authorizes the Commission to adopt rules
assuring the fairness and usefulness of quotation information.\25\ The
wider the disparity in the level of fees among the different exchanges,
the less useful and accurate are the displayed prices. For example, if
two options exchanges displayed quotations to sell an option for $10.00
per contract, one exchange offer could
[[Page 20740]]
be accessible for a total price of $10.00 per contract plus a $0.50 per
contract access fee, while the second exchange might not charge any
such access fee. What appeared in the consolidated data stream to be
identical quotations would in fact not be identical in terms of all-in
costs. The Commission recognizes that there may be different ways to
achieve the objective of fair and useful quotations. One approach is to
limit the extent to which the all-in price for those who access
quotations can vary from the displayed price by limiting fees for
accessing those quotations, as proposed here in Rule 610(c)(2).\26\
---------------------------------------------------------------------------
\25\ See Section 11A(c)(1)(B) of the Exchange Act, 15 U.S.C.
78k-1(c)(1)(B).
\26\ See NMS Adopting Release, supra note 4, at 37545 (stating
that for quotations to be fair and useful there must be some limit
on the extent to which the true price for those who access
quotations can vary from the displayed price).
---------------------------------------------------------------------------
An access fee limit also creates more transparency in the cost of
accessing quoted prices. Currently, there are so many different fees
across options exchanges, across different categories of options
participants, and across different product types, that it is not easy
to estimate the total cost of executing against a quotation for a
particular transaction. An access fee cap would provide clearer
information on the maximum cost for accessing quoted prices. The
Commission recognizes, however, that although a cap on access fees
would promote the fairness and usefulness of displayed quotations and
transparency in the cost of assessing quoted prices, there may be other
fees assessed that would not be included in the proposed cap on access
fees.
B. Overview of Current Options Market Structure
In the listed options market, all orders are currently executed on
registered national securities exchanges. Options exchanges have, to
date, adopted one of two general business models. An exchange using the
first model--referred to as the ``Make or Take'' model--incents market
participants to quote aggressively by providing a rebate to an order or
quotation displayed on its exchange when such order or quotation is
executed. This rebate is funded through the fee charged to the order
that executed against the displayed order or quotation. The difference
between the fee charged for accessing the order or quotation and the
rebate is revenue to the exchange.
NYSE Arca was the first options exchange to implement the Make or
Take transaction fee model.\27\ The introduction of the Make or Take
model followed the reduction of the quoting increment in certain
options in 2007.\28\ As of February 1, 2010, market participants could
represent trading interest in penny increments in options series in 211
specified classes. These classes represent approximately 69.5 percent
of trading volume. By August 2, 2010, 361 classes will be included in
the Minimum Quoting Increment Pilot Program, representing approximately
88.1 percent of trading volume during February 2010.\29\
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\27\ See Securities Exchange Act Release No. 55223 (February 1,
2007), 72 FR 6306 (February 9, 2007) (SR-NYSEArca-2007-07). The
NASDAQ Options Market LLC (``NOM'') also uses a ``Make or Take'' fee
model for certain options classes. See The NASDAQ Options Market:
Execution and Routing Fees (available at https://www.nasdaqtrader.com/content/ProductsServices/PriceList/nasdaq_options_pricing.pdf) (current as of December 1, 2009).
\28\ On January 26, 2007, the then-existing six options
exchanges implemented a pilot program to quote certain options
series in thirteen classes in one-cent increments (``Minimum Quoting
Increment Pilot Program''). The NASDAQ Stock Market LLC (``Nasdaq'')
became a participant in the Minimum Quoting Increment Pilot Program
on March 31, 2008, when it commenced trading on NOM, and BATS
Exchange, Inc. (``BATS'') became a participant in the Minimum
Quoting Increment Pilot Program on February 26, 2010 when it
commenced trading on BATS Options Exchange Market. Since 2007, the
Minimum Quoting Increment Pilot Program has been extended and
expanded several times. See, e.g., Securities Exchange Act Release
Nos. 56276 (August 17, 2007), 72 FR 47096 (August 22, 2007) (SR-
CBOE-2007-98); 56567 (September 27, 2007), 72 FR 56396 (October 3,
2007) (SR-Amex-2007-96); 57579 (March 28, 2008), 73 FR 18587 (April
4, 2008) (SR-Nasdaq-2008-026); 60711 (September 23, 2009), 74 FR
49419 (September 28, 2009) (SR-NYSEArca-2009-44); and 61061
(November 24, 2009), 74 FR 62857 (December 1, 2009) (SR-NYSEArca-
2004-44).
\29\ The source of the data is OptionsMetrics, LLC
(``OptionsMetrics''). The data used for the estimates corresponds to
February 2010. By August 2010, the Minimum Quoting Increment Pilot
Program will incorporate 150 additional classes. Those classes will
be incorporated according to volume levels on the month before the
expansion. For the current approximation, Commission staff projected
which classes would be added by August 2010 using volume data
corresponding to February 2010.
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On an exchange with a ``Make or Take'' fee model, broker-dealers
representing customer orders must pay a ``Take'' fee to access a
displayed quotation on that exchange. In contrast, on an exchange
without that fee model, broker-dealers generally are not assessed a
similar fee when a customer order is executed. This distinction brought
attention to the issue of whether, and to what extent, access fees
impact fair and efficient access to displayed quotations in listed
options.
Exchanges using the second model--referred to as the ``Broker
Payment'' model--generally charge no or low fees for the execution of
customers' orders.\30\ However, these exchanges often charge other
types of fees on a per-transaction basis. For example, most options
exchanges charge a surcharge or ``royalty'' fee for executions in
certain index option classes.\31\ Many exchanges also charge a payment
for order flow or ``marketing'' fee to market makers that trade with
customer orders on the exchange.\32\ The exchange then makes
[[Page 20741]]
the proceeds from such fees available to collectively fund payment for
order flow to brokers directing order flow to the exchange.\33\
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\30\ Exchanges that use the ``Broker Payment'' model also
generally give priority to customer orders at the best price over
other orders or quotations at that price. After customer orders are
executed, the rules of ``Broker Payment'' options exchanges dictate
how the remainder of an incoming order is allocated against resting
non-customer orders or quotations. ISE, for example, requires that
priority be given to public customer orders, and provides for pro-
rata allocation among non-customer orders and quotations. See
Securities Exchange Act Release No. 42455 (February 24, 2000), 65 FR
11388, 11395 (March 2, 2000) (order approving the registration of
the International Securities Exchange LLC as a national securities
exchange (``ISE Exchange Approval'')). Exchanges that use a ``Broker
Payment'' model do not give priority to orders from certain
customers who are ``professional'' customers under exchange rules.
See Securities Exchange Act Release Nos. 59287 (January 23, 2009),
74 FR 5694 (January 30, 2009) (SR-ISE-2006-26); 61198 (December 17,
2009), 74 FR 68880 (December 29, 2009) (SR-CBOE-2009-078); and 61802
(March 3, 2010) (SR-Phlx-2010-05). ``Professional'' customers are
treated on ISE, the Chicago Board Options Exchange, Incorporated
(``CBOE''), and Nasdaq OMX Phlx in the same manner as a broker-
dealer for purposes of specified order execution rules, including
priority rules. Under these exchange rules, ``Professional''
customers participate in ISE's, CBOE's, and Nasdaq OMX Phlx's
allocation processes on equal terms with broker-dealers, i.e., they
do not receive priority over broker-dealers in the allocation of
orders on the exchange. Several exchanges have, however, begun to
charge transaction fees to certain customers identified in exchange
rules as ``professionals.'' See Securities Exchange Act Release Nos.
59287 and 61198.
\31\ See BOX Fee Schedule, at 1 (available at https://www.bostonoptions.com/pdf/BOX_Fee_Schedule.pdf) (current as of
January 2010); CBOE Fee Schedule, at 1 (available at https://www.cboe.com/publish/feeschedule/CBOEFeeSchedule.pdf) (current as of
February 2, 2010); ISE Fee Schedule, at 6 (available at https://www.ise.com/assets//documents//OptionsExchange//legal/fee/fee_schedule.pdf) (current as of January 8, 2010); NYSE Amex Fee
Schedule, at 3 (available at https://www.nyse.com/pdfs/NYSE_Amex_Options_Fee_Schedule01.04.10.pdf) (current as of January 4, 2010);
NYSE Arca Fee Schedule, at 6 (available at https://www.nyse.com/pdfs/NYSE_Arca_Options_Fee_Schedule1-08-2010.pdf) (current as of
January 8, 2010); and Nasdaq OMX Phlx Fee Schedule, at 5 (available
at https://www.nasdaqomxtrader.com/content/marketregulation/membership/phlx/feesched.pdf) (current as of February 24, 2010).
\32\ See CBOE Fee Schedule, at 2 (available at https://www.cboe.com/publish/feeschedule/CBOEFeeSchedule.pdf) (current as of
February 2, 2010); ISE Fee Schedule, at 6 (available at https://www.ise.com/assets//documents//OptionsExchange//legal/fee/fee_schedule.pdf) (current as of January 8, 2010); NYSE Amex Fee
Schedule, at 3 (available at https://www.nyse.com/pdfs/NYSE_Amex_Options_Fee_Schedule01.04.10.pdf) (current as of January 4, 2010);
NYSE Arca Fee Schedule, at 6 (available at https://www.nyse.com/pdfs/NYSE_Arca_Options_Fee_Schedule1-08-2010.pdf) (current as of
January 8, 2010); and Nasdaq OMX Phlx Fee Schedule, at 6 (available
at https://www.nasdaqomxtrader.com/content/marketregulation/membership/phlx/feesched.pdf) (current as of February 24, 2010).
\33\ See, e.g., Nasdaq OMX Phlx Fee Schedule, at 6, 15
(available at https://www.nasdaqomxtrader.com/content/marketregulation/membership/phlx/feesched.pdf) (current as of
February 24, 2010). See also infra note 109 and accompanying text.
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In July 2008 the Commission received a Petition for Rulemaking to
Address Excessive Access Fees in the Options Markets from Citadel
Investment Group, L.L.C. (``Citadel Petition'').\34\ In the Citadel
Petition, Citadel petitions the Commission to engage in rulemaking to
limit the ``Take'' fees that options exchanges may charge non-members
to obtain access to quotations to $0.20 per contract. NYSE Arca also
filed a proposal in July 2008 to raise its ``Take'' fee for certain
classes. Specifically, NYSE Arca submitted a proposed rule change for
immediate effectiveness that raised its ``Take'' fee charged to members
for certain designated Minimum Quoting Increment Pilot Program issues
from $0.45 per contract to $0.55 per contract, and raised the
corresponding credit in those same issues from $0.30 per contract to
$0.40 per contract for market makers, and from $0.25 per contract to
$0.35 per contract for electronically executed broker-dealer and
customer orders.\35\ The Commission requested comment on the issue of
access fees when it published NYSE Arca's proposal for comment.\36\
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\34\ See letter from John C. Nagel, Managing Director & Deputy
General Counsel, Citadel, to Nancy M. Morris, Secretary, Commission,
dated July 15, 2008 (available at https://www.sec.gov/rules/petitions/2008/petn4-562.pdf).
\35\ These Pilot issues included: AAPL, CSCO, DIA, MSFT, IWM,
QQQQ, RIMM, XLF, SPY, YHOO. See Securities Exchange Act Release No.
58295 (August 4, 2008), 73 FR 46681 (August 11, 2008) (SR-NYSEArca-
2008-75).
\36\ Concurrently, NYSE Arca filed a proposed rule change to
increase the fee charged to orders received through the then-
existing options linkage in certain Minimum Quoting Increment Pilot
Program issues from $0.45 to $0.55 per contract. See SR-NYSEArca-
2008-76. The Commission has not published this proposed rule change
for notice and comment. Pending Commission action on SR-NYSEArca-
2008-76, NYSE Arca has stated that it will not implement its fee
changes included in SR-NYSEArca-2008-75.
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The Commission has received several comment letters in response to
its request for comment on the NYSE Arca proposed rule change and to
the Citadel Petition, which discuss the issue of access fees and
imposing a cap on such fees.\37\ The Commission also received several
comment letters in response to a proposal to amend Rule 602 of
Regulation NMS to effectively ban marketable ``flash orders'' in NMS
securities that discuss the issue of access fees in listed options.\38\
Commenters on the Flash Order Proposal expressed concern that
eliminating flash orders on the options exchanges would increase direct
costs associated with executing customers' listed options orders.\39\
The absence of a limit on fees that an options exchange can charge for
accessing its quotation was one reason commenters said that banning
flash orders would be more detrimental to listed options customers than
to cash equity customers.\40\ These concerns about the absence of a
limit on access fees on the listed options exchanges echo the comments
received in response to the Citadel Petition and NYSE Arca's proposal.
These comments were considered in developing this proposal and are
discussed below.
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\37\ Letters received in response to SR-NYSEArca-2008-75: See
letters from John C. Nagel, Managing Director and Deputy General
Counsel, Citadel, to Nancy M. Morris, Secretary, Commission, dated
July 23, 2008 (``Citadel Letter''); Stephen Schuler and Daniel
Tierney, Managing Members, Global Electronic Trading Company to
Florence E. Harmon, Acting Secretary, Commission, dated September 2,
2008 (``GETCO Letter''); Christopher Nagy, Managing Director, Order
Routing Sales and Strategy, TD Ameritrade, Inc. to Florence E.
Harmon, Acting Secretary, Commission, dated September 9, 2008 (``TD
Ameritrade Letter''); and Robert R. Bellick, Managing Director,
Wolverine to Nancy M. Morris, Secretary, Commission, dated September
10, 2008 (``Wolverine Letter'') (available at https://www.sec.gov/comments/sr-nysearca-2008-75/nysearca200875.shtml).
Letter received in response to the Citadel Petition: See letter
from Lawrence Leibowitz, Group Executive Vice President and Head of
Global Execution and Technology, NYSE Euronext, to Florence E.
Harmon, Acting Secretary, Commission, dated September 3, 2008
(``NYSE Euronext Letter'') (available at https://www.sec.gov/comments/4-562/4-562.shtml).
Letters received in response to both the Citadel Petition and
SR-NYSEArca-2008-75: See letters from David M. Battan, Executive
Vice President, Interactive Brokers Group LLC, to Florence Harmon,
Acting Secretary, Commission, dated September 8, 2008 (``IB
Letter''); and William Easley, Vice Chairman, Boston Options
Exchange (``BOX'') to Florence E. Harmon, Acting Secretary,
Commission, dated September 11, 2008 (``BOX Letter'') (available at
https://www.sec.gov/comments/sr-nysearca-2008-75/nysearca200875.shtml).
Letters received in response to SR-NYSEArca-2009-44, which
proposed to expand the number of classes eligible to participate in
the Minimum Quoting Increment Pilot: See letters from Christopher
Nagy, Managing Director, Order Routing Strategy, TD Ameritrade, Inc.
to Elizabeth M. Murphy, Secretary, Commission, dated June 17, 2009
(``TD Ameritrade Letter II'') and December 1, 2009 (``TD Ameritrade
Letter III'') (available at https://www.sec.gov/comments/sr-nysearca-2009-44/nysearca200944.shtml).
\38\ See Flash Order Proposal, supra note 19. A ``flash order''
generally is any order qualifying for the ``immediate execution or
withdrawal'' exception from Rule 602. For more detail about the
basic features that define flash orders, see the Flash Order
Proposal. Flash orders allow options exchanges that charge no or low
fees to execute customer orders to ``step up'' and match better
displayed quotations on other exchanges.
\39\ See, e.g., letters from Christopher Nagy, Managing
Director, Order Routing Strategy, TD Ameritrade, Inc., to Elizabeth
M. Murphy, Secretary, Commission, dated November 23, 2009
(``Ameritrade Flash Letter''); letter from John C. Nagel, Managing
Director and Deputy General Counsel, Citadel, to Elizabeth M.
Murphy, Secretary, Commission, dated November 20, 2009 (``Citadel
Letter II''); Peter Bottini, EVP Trading and Customer Service, and
Hillary Victor, Associate General Counsel, optionsXpress, to
Elizabeth M. Murphy, Secretary, Commission, dated November 25, 2009
(``optionsXpress Flash Letter''); Thomas F. Price, Managing
Director, Securities Industry Financial Association, to Elizabeth M.
Murphy, Secretary, Commission, dated December 1, 2009 (``SIFMA Flash
Letter'') (available at https://www.sec.gov/comments/s7-21-09/s72109.shtml).
\40\ See SIFMA Flash Letter, supra note 39, at 5. See also
Citadel Letter II, infra note 39, at 1-2; Ameritrade Flash Letter,
supra note 39, at 3; and optionsXpress Flash Letter, supra note 39,
at 6.
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II. Proposed Amendments to Rule 610(a)
Access to displayed quotations, particularly the best quotations of
an exchange or association, is vital for the smooth functioning of
intermarket trading.\41\ Brokers responsible for routing their
customers' orders, as well as investors that make their own order-
routing decisions, must have fair and efficient access to the best
displayed quotations of all options exchanges to achieve best execution
of those orders. In addition, options exchanges themselves must have
the ability to route orders for execution against the displayed
quotations of other exchanges. Indeed, the concept of intermarket
protection against trade-throughs is premised on the ability of options
exchanges to trade with, rather than trade through, the quotations
displayed by other options exchanges.\42\
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\41\ See NMS Adopting Release, supra note 4, at 37539.
Currently, no national securities association quotes or trades
listed options.
\42\ See id.
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Currently, Rule 610(a) furthers the goal of fair and efficient
access to quotations primarily by prohibiting a national securities
exchange or national securities association from imposing unfairly
discriminatory terms that prevent or inhibit any person from obtaining
efficient access through a member of the national securities exchange
or national securities association to any quotations in an NMS stock
\43\ displayed by the exchange or association.\44\ This anti-
discrimination standard is designed to support indirect access by
persons to quotations in NMS stocks through members, and is
[[Page 20742]]
premised on fair and efficient access of exchange or association
members themselves to the quotations in NMS stocks.\45\
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\43\ See Rule 600(b)(47), 17 CFR 242.610(b)(47) (defining NMS
stock as any NMS security other than an option). See also Rule
600(b)(46), 17 CFR 242.610(b)(46) (defining NMS security as any
security or class of securities for which transaction reports are
collected, processed, and made available pursuant to an effective
transaction reporting plan, or an effective national market system
plan for reporting transactions in listed options).
\44\ See Rule 610(a), 17 CFR 242.610(a). See also NMS Adopting
Release, supra note 4, at 37539.
\45\ See NMS Adopting Release, supra note 4, at 37502.
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The Commission is proposing to amend Rule 610(a) to extend this
prohibition to NMS securities,\46\ which include listed options as well
as NMS stocks. The proposal to extend the anti-discrimination standard
in Rule 610(a) to the trading of listed options is designed to support
indirect access by persons to quotations in listed options through
members. Like current Rule 610(a), the proposed amendment is premised
on the need for fair and efficient access of members themselves to the
quotations of the exchange in listed options.
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\46\ See supra note 43 (defining NMS security).
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Market participants can either become members of an exchange to
obtain direct access to its options quotations, or they can obtain
indirect access by ``piggybacking'' on the direct access of members.
Access to exchanges currently is addressed by several provisions of the
Exchange Act.\47\ In particular, Section 6(b)(5) of the Exchange Act
requires in part that the rules of an exchange not be designed to
permit unfair discrimination between customers, issuers, brokers, or
dealers.\48\ The proposed amendments to Rule 610(a) would build on this
existing access structure, including the prohibition in Section 6(b)(5)
against unfair discrimination, by specifically prohibiting unfair
discrimination that prevents or inhibits non-members from
``piggybacking'' on the access of members. The ability to fairly and
efficiently obtain indirect access through a member is necessary to
assure that non-members can readily access quotations in options to
meet the requirements of the Trade-Through Rules and to fulfill the
non-members' duty of best execution.\49\
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\47\ Section 6(b)(4) of the Exchange Act requires the rules of
an exchange to provide for the equitable allocation of reasonable
dues, fees, and other charges among its members and other persons
using its facilities, while Section 6(b)(5) of the Exchange Act
requires in part that its rules not be designed to permit unfair
discrimination between customers, brokers, or dealers. Section
6(b)(5) also requires an exchange to have rules designed to remove
impediments to, and perfect the mechanism of, a free and open market
and a national market system. In addition, Section 6(b)(1) of the
Exchange Act requires that an exchange must have the capacity to be
able to carry out the purposes of the Exchange Act. See 15 U.S.C.
78f(b)(4); 15 U.S.C. 78f(b)(5); 15 U.S.C. 78f(b)(1). Section
11A(a)(1)(C) of the Exchange Act provides that two of the objectives
of a national market system are to assure the economically efficient
execution of securities transactions and the practicability of
brokers executing investors' orders in the best market. See 15
U.S.C. 78k-1(a)(1)(C).
\48\ The requirements of Section 6(b)(5) of the Exchange Act
apply to any rule of an exchange, and as such are not limited to
access through members of an exchange to the quotations of that
exchange.
\49\ See supra notes 4-22 and accompanying text.
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The Commission does not believe that, if it were to prohibit
exchanges from imposing unfairly discriminatory terms on non-members
who obtain indirect access to quotations in options through members, it
would require exchanges to provide non-members with free access to such
quotations. Members who provide piggyback access to non-members would
be providing a useful service and presumably would charge a fee for
such service. The fee would be subject to competitive forces and likely
would reflect the costs of membership, plus some element of profit to
the members. As a result, non-members that frequently make use of
indirect access are likely to contribute indirectly to cover the costs
of membership in the market. In addition, the unfair discrimination
standard of Rule 610(a) as proposed to be amended would apply only to
access to quotations in NMS securities, including options. All other
services would be subject to the more general fair access provisions
applicable to national securities exchanges, as well as the statutory
provisions that govern their respective rules.\50\
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\50\ See NMS Adopting Release, supra note 4, at 37540.
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On the other hand, any attempt by an options exchange to charge
differential fees based solely on the non-member status of a person
obtaining indirect access to its quotations would violate Rule 610(a)
as proposed to be amended.\51\ As noted above, fair and efficient
access to quotations is essential to the functioning of the NMS.\52\
For example, if an exchange charges discriminatory fees to non-members
to access its quotations, this practice would interfere with the
functioning of the private linkage approach and detract from its
usefulness to exchanges in meeting their required responsibilities
under the Trade-Through Rules. Fair and efficient access to the best
quotations is also necessary for brokers to achieve best execution of
orders.\53\ Accordingly, the Commission is proposing to amend Rule
610(a) to establish baseline intermarket access rules for options
markets to promote indirect access to such markets by a non-member
through a member.
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\51\ Id. For example, the Commission preliminarily believes an
exchange that charges a non-member broker-dealer that is registered
as an options market maker on another exchange a higher fee than the
fee charged to both member and non-member broker-dealers that also
are not market makers on that exchange for obtaining access to its
quotations would violate Rule 610(a), as proposed to be amended.
\52\ See supra notes 4-7 and accompanying text.
\53\ See NMS Adopting Release, supra note 4, at 37539. See also
supra notes 20-22 and accompanying text.
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The prohibition on imposing unfairly discriminatory terms in Rule
610(a) currently applies to terms that prevent or inhibit efficient
access to quotations. The term ``quotation'' is defined in Rule
600(a)(62) of Regulation NMS as a bid or offer, and ``bid'' or
``offer'' is defined in Rule 600(b)(8) of Regulation NMS as the bid
price or the offer price communicated by a member of a national
securities exchange or national securities association to any broker or
dealer or to any customer.\54\ Rule 610(a), therefore, applies to the
entire depth of book of displayed orders in NMS stocks, including
reserve size \55\ and displayed size at each price.\56\ The
Commission's proposal to extend Rule 610(a) to all NMS securities so
that listed options markets are covered by the Rule would apply in the
same manner.\57\ Thus, options markets would be prohibited from
imposing unfairly discriminatory terms that prevent or inhibit
efficient access to the entire depth of book of displayed orders.
---------------------------------------------------------------------------
\54\ See 17 CFR 242.600(b)(62) and 17 CFR 242.600(b)(8).
\55\ ``Reserve size'' generally means an undisplayed portion of
an order. Once the displayed size of an order is executed against,
the reserve size is used to refresh the market participant's
displayed size. See, e.g., NYSE Arca Rule 6.62(d)(3) and ISE Rule
2104(n).
\56\ See NMS Adopting Release, supra note 4, at 37548.
\57\ The Commission notes that, although fees are the most
likely way in which an exchange could discriminate against non-
members for access to its quote, the Commission's proposal would
more broadly prohibit any unfairly discriminatory terms.
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III. Access Fees
A. Proposed Rule 610(c)(2)
Generally, the Commission believes that market forces and the
dynamics of competition should determine the level of exchange fees
whenever possible.\58\ As discussed below, however, the Commission is
concerned that because of the requirements for intermarket price
protection, competitive forces, by themselves, are not, and will not
be, enough to prevent fees from being charged that interfere with fair
and
[[Page 20743]]
efficient access to an option exchange's displayed prices.\59\
Accordingly, the Commission is proposing to impose a limit on the
amount of fees that an exchange can impose (or permit to be imposed)
for the execution of an order against the exchange's best bid and
offer. This proposal also responds to market participants' concerns
regarding access fees,\60\ as discussed below.\61\
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\58\ See Securities Exchange Act Release Nos. 59039 (December 2,
2008), 73 FR 74770, 74781-82 (December 9, 2008) (``NYSE Arca Data
Order'') (stating in part that ``[t]he Exchange Act and its
legislative history strongly support the Commission's reliance on
competition, whenever possible, in meeting its regulatory
responsibilities for overseeing the SROs and the national market
system. Indeed, competition among multiple markets and market
participants trading the same products is the hallmark of the
national market system.'').
\59\ See NMS Adopting Release, supra note 4, at 37545
(concluding that imposing a fee limitation was necessary to support
the integrity of the price protection requirement established to
prevent trade-throughs: ``[T]he adopted fee limitation is designed
to preclude individual trading centers from raising their fees
substantially in an attempt to take improper advantage of
strengthened protection against trade-throughs and the adoption of a
private linkage regime. In particular, the fee limitation is
necessary to address ``outlier'' trading centers that otherwise
might charge high fees to other market participants required to
access their quotations by the Order Protection Rule.'').
\60\ These concerns, as noted above, have been raised by a
petition for rulemaking to limit the ``Take'' fees that options
exchanges may charge non-members to access quotations and comment
letters in response to this petition and NYSE Arca's proposal to
raise its ``Take'' fee. See Citadel Petition, supra note 34; see
also supra note 37.
\61\ See infra notes 70 and 79 and accompanying text.
---------------------------------------------------------------------------
Each of the options exchanges currently charges market participants
fees when incoming orders access their displayed quotations. Although
these fees may have different names (e.g., a ``Take'' fee versus a
transaction fee), and may vary in amount based on the type of account
from which the order is sent, these fees all have one thing in common--
they are fees triggered by the execution of an incoming order against
an order or quotation on that exchange.
In particular, on exchanges that use the ``Broker Payment'' fee
model,\62\ although orders executed on behalf of customer accounts may
not be charged any transaction fees, orders executed on behalf of non-
customer accounts are charged transaction fees.\63\ In some cases,
these fees may be substantial. For example, for options classes not
included in the Minimum Quoting Increment Pilot Program, one exchange
charges $0.50 per contract for electronically executed orders for the
account of a broker dealer or firm,\64\ while another exchange charges
$0.45 per contract for electronically executed broker-dealer
orders.\65\
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\62\ See supra notes 30-33 and accompanying text.
\63\ A customer generally is understood to be a person that is
not a broker-dealer. See, e.g., ISE Rule 100(a)(38) (defining the
term ``public customer''). However, as noted above, some exchanges
have begun to charge transaction fees to certain customers
identified in exchange rules as ``professionals.'' See supra note
30.
\64\ See NYSE Arca Fee Schedule (available at https://www.nyse.com/pdfs/NYSE_Arca_Options_Fee_Schedule1-08-2010.pdf)
(current as of January 8, 2010).
\65\ See CBOE Fee Schedule (available at https://www.cboe.com/publish/feeschedule/CBOEFeeSchedule.pdf) (current as of February 2,
2010).
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In addition, on exchanges that use the ``Make or Take'' fee
model,\66\ an exchange charges ``Take'' fees to members that execute
orders against that exchange's quotations. These exchanges then pass a
substantial portion of that fee back as a rebate to the member that
supplied the accessed liquidity (i.e., market maker quotations or non-
marketable limit orders). The ``Take'' fees charged by these exchanges
also can be substantial. For example, for options classes in the
Minimum Quoting Increment Pilot Program, one exchange charges $0.45 per
contract when an order for the account of a non-customer (and $0.35 per
contract when an order for the account of a customer) trades against
liquidity on the exchange's book. The exchange then rebates $0.25 per
contract to the member (or members) that represented the order (or
orders) on its book that provided the liquidity to the incoming
order.\67\ Another exchange charges a $0.45 per-contract ``Take'' fee
when an order in a Minimum Quoting Increment Pilot Program options
class trades with liquidity on the exchange's book. This exchange then
rebates $0.30 per contract to an exchange market maker that provided
the liquidity to the incoming order and $0.25 per contract to the
member that represented a broker-dealer or customer order that provided
liquidity to the incoming order.\68\
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\66\ See supra note 27 and accompanying text.
\67\ See Section 1 of Nasdaq Rule 7050 and The NASDAQ Options
Market: Execution and Routing Fees (available at https://www.nasdaqtrader.com/content/ProductsServices/PriceList/nasdaq_options_pricing.pdf) (current as of January 4, 2010).
\68\ See ``Transaction Costs'' Section of the NYSE Arca Fee
Schedule (available at https://www.nyse.com/pdfs/NYSE_Arca_Options_Fee_Schedule1-08-2010.pdf) (current as of January 8,
2010). See also supra notes 35 and 36 and accompanying text.
---------------------------------------------------------------------------
The Commission believes that the benefits of intermarket price
protection and more efficient linkages could be compromised if options
exchanges charge substantial fees for accessing their best bids and
offers. For this reason, the Commission preliminarily believes that a
fee limitation is necessary to support the integrity of the price
protection requirement under the Trade-Through Rules.\69\ The
Commission's views are informed by commenters that argue that a limit
on fees for accessing quotations would support the integrity of the
rules limiting trade-throughs because a fee limitation would prohibit
individual exchanges from raising their fees substantially in an
attempt to take improper advantage of protection against trade-
throughs. In particular, commenters contend that, in the absence of a
fee limit, some exchanges may take advantage of the requirement to
protect displayed quotations by charging exorbitant fees to those
required to access the exchange's quotations, which could compromise
the fairness and efficiency of the NMS for trading standardized
options.\70\ Although the exchange charging the highest fees likely
would be the last exchange to which orders would be routed, prices
could not move to the next level until someone routed an order to take
out the displayed price at such a high fee exchange. Thus, while
exchanges would have significant incentives to compete to be near the
top in order-routing priority, arguably there would be little incentive
to avoid being the least-preferred exchange if fees were not
limited.\71\
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\69\ See supra notes 13 and 17-19 and accompanying text for a
definition of ``Trade-Through Rules.''
\70\ See Citadel Petition, supra note 34, at 4 (arguing that
``Taker'' fees are sustained by virtue of the regulatory obligations
prohibiting trade-throughs, in that when an exchange is quoting
alone at the NBBO, market participants cannot avoid the Taker fees
imposed by such exchange, irrespective of how high such fees may
be); Citadel Letter II, supra note 37, at 6 (arguing that if the
Commission were to ban or limit the use of step-up mechanisms in the
options markets, the need for an access fee cap would become
essential); TD Ameritrade Letter, supra note 37, at 1 (arguing that
Make or Take fees have the potential to create incentives for
participants to post liquidity and lock markets to capture the
rebate and that other options exchanges would have to increase their
fees and rebates in order to defend their market share). See also
Wolverine Letter, supra note 37, at 6 (asserting that, while a cap
implemented as proposed by Citadel would reduce Take fees charged to
non-members who may be forced to access ``outlier'' markets due to
trade through obligations, members would still be forced to pay
unrestricted fees); GETCO Letter, supra note 37, at 3 (stating that
if the Commission does decide to place caps on access fees charged
by exchanges that use the ``Make or Take'' fee model, it should also
cap all-in access fees for traditional exchanges, i.e., those that
use the ``Broker Payment'' fee model, regardless of the type of
market participant accessing the exchange's quotation).
\71\ See NMS Adopting Release, supra note 4, at 37545.
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The proposed fee limitation is designed to preclude this business
practice by limiting individual exchanges from having fee structures
that take improper advantage of the required protection against trade-
throughs and undermine the overall benefits of the new private routing
regime. It also would preclude an options exchange from charging
excessively high fees selectively to competitors.
[[Page 20744]]
The Commission notes that several exchanges have rules that allow--
and encourage--their members to electronically ``step up'' and match a
better-priced bid or offer available on another exchange--a ``flash''
functionality--rather than send orders to other exchanges for
execution.\72\ These exchanges stated that they implemented this
``flash'' functionality because of the high costs associated with
routing an order to away exchanges to be executed, particularly one
with a Make or Take fee model.\73\
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\72\ See, e.g., ISE Rule 803, Supplementary Material .02 and
Securities Exchange Act Release Nos. 57551 (March 25, 2008), 73 FR
16917 (March 31, 2008) (SR-ISE-2008-28) and 58038 (June 26, 2008),
73 FR 38261 (July 3, 2008) (SR-ISE-2008-50). See also ISE Fee
Schedule, supra note 32, at 3-4 (as an inducement to step-up and
avoid routing to away markets, ISE waives the transaction fee for
members when they execute against a public customer order that is
exposed pursuant to ISE Rule 803, i.e., ISE's step-up mechanism)
(current as of January 8, 2010).
\73\ See, e.g., letters from William J. Brodsky, Chairman and
Chief Executive Officer, CBOE, to Elizabeth M. Murphy, Secretary,
Commission, dated November 18, 2009, at 2 (comment to Flash Order
Proposal) (``CBOE Flash Letter''); Michael J. Simon, Secretary, ISE,
to Elizabeth Murphy, Secretary, Commission, dated November 23, 2009
at 5 (comment to Flash Order Proposal) (``ISE Flash Letter''); Tony
McCormick, CEO, BOX, to Elizabeth M. Murphy, Secretary, Commission,
dated November 23, 2009, at 3 (comment to Flash Order Proposal). See
also Securities Exchange Act Release Nos. 57551 (March 25, 2008), 73
FR at 16917 (March 31, 2008) (SR-ISE-2008-28) and 57937 (June 6,
2008), 73 FR 33865 (June 13, 2008) (SR-CBOE-2008-58) (relating to
electronic exposure on HAL).
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The Commission separately has proposed changes to Rule 602 of
Regulation NMS that may affect these electronic ``step-up'' mechanisms,
if adopted.\74\ There are structural differences between the listed
options exchanges and the cash equity markets that commenters
identified as making the use of ``flash'' orders on the options
exchanges serve a different purpose. In particular, commenters stated
that eliminating the ability of market participants on the options
exchanges to ``step up'' to better prices on other exchanges through
the use of ``flash'' orders could impose significant costs on retail
options customers whose orders would be routed to other options
exchanges because, in part, of the absence of any limits on the fees
options exchanges may charge to access their quotations.\75\
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\74\ See Flash Order Proposal, supra note 19.
\75\ See SIFMA Flash Letter, supra note 39, at 5; Ameritrade
Flash Letter, supra note 39, at 3; optionsXpress Flash Letter, supra
note 39, at 6; and Citadel Letter II, supra note 39, at 6 (arguing
that if the Commission were to ban or limit the use of step-up
mechanisms in the options markets, the need for an access fee cap
would become essential).
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The Commission also believes that for quotations to be fair and
useful, there must be some limit on the extent to which the all-in
price for those who access quotations can vary from the displayed
price.\76\ The wider the disparity in the level of fees among the
different exchanges, the less useful and accurate are the displayed
prices. For example, if two options exchanges displayed quotations to
sell an option for $10.00 per contract, one exchange offer could be
accessible for a total price of $10.00 per contract plus a $0.50 per
contract access fee, while the second exchange might not charge any
such access fee. What appeared in the consolidated data stream to be
identical quotations in terms of all-in costs would in fact not be
identical. Access fees tend to be highest when exchanges use them to
fund substantial rebates to liquidity providers, rather than merely to
compensate for agency services.\77\ These concerns were also expressed
by several commenters who argue that for quotations to be fair and
useful, there must be some limit to the extent to which the displayed
price can vary from the ``all-in'' price \78\ of a quotation.\79\ If
exchanges were allowed to charge exorbitant fees and pass most of them
through as rebates, the published quotations of such exchanges would
not reliably indicate the all-in price actually available.
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