Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Fee Schedule To Implement a Clearing Submission Fee Credit for Institutional Brokers, 10013-10016 [2012-3899]

Download as PDF mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 77, No. 34 / Tuesday, February 21, 2012 / Notices circumstances detrimental to the maintenance of a fair and orderly market are present. Trading in Shares will be subject to trading halts caused by extraordinary market volatility pursuant to the Exchange’s ‘‘circuit breaker’’ rule or by the halt or suspension of trading of the Designated Contracts. The Exchange represents that the Exchange may halt trading during the day in which the interruption to the dissemination of the IIV, the Index or the value of the underlying futures contracts occurs. If the interruption to the dissemination of the IIV, the Index or the value of the underlying futures contracts persists past the trading day in which it occurred, the Exchange will halt trading no later than the beginning of the trading day following an interruption. In addition, if the Exchange becomes aware that the NAV with respect to the Shares is not disseminated to all market participants at the same time, it will halt trading in the Shares until such time as the NAV is available to all market participants. The proposed rule change is designed to promote just and equitable principles of trade and to protect investors and the public interest in that a large amount of information is publicly available regarding the Fund and the Shares, thereby promoting market transparency. The NAV for the Fund will be disseminated to all market participants at the same time. The IIV per Share will be widely disseminated by one or more major market data vendors at least every 15 seconds during the Core Trading Session and on the Managing Owner’s Web site. Trading in Shares of the Fund will be halted if the circuit breaker parameters in NYSE Arca Equities Rule 7.12 have been reached or because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable. Moreover, prior to the commencement of trading, the Exchange will inform its ETP Holders in an Information Bulletin of the special characteristics and risks associated with trading the Shares. The proposed rule change is designed to perfect the mechanism of a free and open market and, in general, to protect investors and the public interest in that it will facilitate the listing and trading of an additional type of exchange-traded product that will enhance competition among market participants, to the benefit of investors and the marketplace. As noted above, the Exchange has in place surveillance procedures relating to trading in the Shares and may obtain information via ISG from other exchanges that are members of ISG or with which the Exchange has entered into a comprehensive surveillance VerDate Mar<15>2010 17:29 Feb 17, 2012 Jkt 226001 sharing agreement. In addition, as noted above, investors will have ready access to information regarding the Fund’s holdings, IIV, and quotation and last sale information for the Shares. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were solicited or received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove the proposed rule change, or (B) Institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments 10013 Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Section, 100 F Street NE., Washington, DC 20549–1090, on official business days between 10 a.m. and 3 p.m. Copies of the filing will also be available for inspection and copying at the New York Stock Exchange’s principal office and on its Internet Web site at www.nyse.com. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR– NYSEArca–2012–10 and should be submitted on or before March 13, 2012. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.25 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2012–3858 Filed 2–17–12; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–66391; File No. SR–CHX– 2012–05] • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rulecomments@sec.gov. Please include File Number SR–NYSEArca–2012–10 on the subject line. Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Fee Schedule To Implement a Clearing Submission Fee Credit for Institutional Brokers Paper Comments February 14, 2012. • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NYSEArca–2012–10. This file number should be included on the subject line if email is used. To help the PO 00000 Frm 00126 Fmt 4703 Sfmt 4703 Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on February 2, 2012, the Chicago Stock Exchange, Inc. (‘‘CHX’’ or ‘‘Exchange’’) filed with 25 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\21FEN1.SGM 21FEN1 10014 Federal Register / Vol. 77, No. 34 / Tuesday, February 21, 2012 / Notices the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by CHX. CHX has filed the proposal pursuant to Section 19(b)(3)(A) of the Act 3 and Rule 19b– 4(f)(2) thereunder,4 which renders the proposal effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change CHX proposes to amend its Fee Schedule, effective February 16, 2012, to amend its Fee Schedule [sic] to implement a Clearing Submission Fee Credit for Institutional Brokers. The text of this proposed rule change is available on the Exchange’s Web site at (www.chx.com) and in the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the CHX included statements concerning the purpose of and basis for the proposed rule changes and discussed any comments it received regarding the proposal. The text of these statements may be examined at the places specified in Item IV below. The CHX has prepared summaries, set forth in sections A, B and C below, of the most significant aspects of such statements. mstockstill on DSK4VPTVN1PROD with NOTICES A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Changes 1. Purpose Through this filing, the Exchange proposes to amend its Schedule of Fees and Assessments (the ‘‘Fee Schedule’’), effective February 16, 2012, to create a Clearing Submission Fee Credit to be paid to Institutional Brokers and make other technical changes. In October 2011, the Exchange added Article 21, Rule 6 authorizing the submission by the Exchange of non-CHX trades entered through an Institutional Broker to a Qualified Clearing Agency for clearance and settlement.5 Among other things, the Exchange imposes a Trade 3 15 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(2). 5 See, Securities Exchange Act Release No. 65615 (Oct. 24, 2011), 76 FR 67239 (Oct. 31, 2011) (SR– CHX–2011–17). Currently, the National Securities Clearing Corporation (‘‘NSCC’’) is the Qualified Clearing Agency for such transactions. 4 17 VerDate Mar<15>2010 17:29 Feb 17, 2012 Jkt 226001 Processing Fee on the Clearing Participants named in these clearing submissions, pursuant to the provisions of Section E.7. of the Fee Schedule. In November 2011, the Exchange modified the definition of the Trade Processing Fee to be based upon non-CHX executed trades for which clearing information is entered by an Exchange-registered Institutional Broker into the Exchange’s systems and submitted to a Qualified Clearing Agency pursuant to Article 21, Rule 6(a).6 The Exchange now proposes to rename the Trade Processing Fee as the ‘‘Clearing Submission Fee’’ for purposes of clarity and institute a Clearing Submission Fee Credit to share the revenue generated by these fees and incentivize this activity by its Institutional Brokers.7 The Exchange previously had in place a Trade Processing Fee Credit beginning in August 2008 through April 2011, but repealed it pending the adoption of Article 21, Rule 6.8 With the implementation of that rule, the Exchange proposes to reinstate the credit formerly paid to Institutional Brokers regarding clearing submissions for non-CHX trades, albeit at a different rate than previously.9 The Exchange proposes to pay on a monthly basis a credit equal to 8% of the Clearing Submission Fees collected by the Exchange pursuant to Section E.7. of the Fee Schedule to the Institutional Broker which acted as the broker for the ultimate Clearing Participant to the clearing submission (known as the ‘‘Clearing Broker’’).10 The 6 See, Securities Exchange Act Release No. 65792 (Nov. 18, 2011), 76 FR 72739 (Nov. 25, 2011) (SR– CHX–2011–31). 7 The Exchange is also proposing to add text to Section E.3.a. of the Fee Schedule to emphasize that the fees imposed pursuant to that section are for trades executed in the Matching System and to distinguish that activity from transactions subject to Section E.7. of the Fee Schedule. 8 See, Securities Exchange Act Release No. 58362, 73 FR 49511 (SR–CHX–2008–13) (Aug. 14, 2008) (adopting a Trade Processing Fee Credit); Securities Exchange Act. Release No. 60259 (July 7, 2009), 74 FR 34062 (July 14, 2009) (SR–CHX–2009–08) (changes to calculation and allocation of Trade Processing Fee Credits paid to Institutional Brokers); Securities Exchange Act Release No. 64173 (April 4, 2011), 76 FR 19818 (April 8, 2011) (SR–CHX–2011–02) (repealing Trade Processing Fee Credit). 9 At the time it was repealed, the Trade Processing Fee Credit was set at the same rate as the current Transaction fee credit, i.e., 16% of the fee paid by the Clearing Participant to the Exchange in the transaction. 10 The broker representing the ultimate clearing participant is currently known as the ‘‘broker of credit.’’ Since both that broker and the ‘‘originating broker’’ (defined as the Institutional Broker that executes a trade) can receive a credit, the Exchange believes that it would be more accurate to use the term ‘‘Clearing Broker.’’ The Exchange also proposes to capitalize the terms ‘‘Transaction Fee Credit,’’ ‘‘Clearing Broker’’ and ‘‘Originating PO 00000 Frm 00127 Fmt 4703 Sfmt 4703 Exchange believes that payment of a Clearing Submission Fee Credit to the Clearing Broker based on activity handled by it will incent Institutional Brokers to utilize the Exchange’s systems and services in forwarding nonCHX trades to NSCC, rather than using alternative mechanisms such as correspondent clearing or Nasdaq’s Automated Confirmation Transaction (‘‘ACT’’) system. The Exchange proposes to provide a credit equal to 50% of the credit paid to Institutional Broker for transactions handled by it which are executed on the Exchange.11 The Exchange believes that payment of a credit for non-CHX trades at a lower rate than for CHX trades appears to strike an appropriate balance between incentivizing Institutional Brokers to execute trades on the CHX’s facilities and competing with other venues to make clearing submissions for trades executed by Institutional Brokers in the over-the-counter (‘‘OTC’’) marketplace.12 Only Institutional Brokers which are members of the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) will be eligible for the Clearing Submission Fee Credit. Since the trading activities involved in the relevant clearing submissions by definition occurred in a market center other than the Exchange (normally the OTC marketplace), the provisions of Exchange Act Section 15(b)(8) are implicated.13 Under Section 15(b)(8), a registered broker or dealer must be a member of a securities association registered under Section 15A of the Exchange Act, unless it effects transactions in securities solely on a national securities exchange of which it is a member. Currently, the only registered securities association is Broker’’ in the Fee Schedule to emphasize that those are defined terms. The Exchange notes that it is possible, although not required, for the same Institutional Broker to act as both the Originating Broker and Clearing Broker in any given transaction. 11 A Transaction Fee Credit of 16% of the Transaction Fees generated pursuant to Section E.3.a. is paid to Institutional Brokers for trades submitted through that firm and which were executed on the Exchange. [sic] Section F.2. of the Fee Schedule. Of that amount, 4% is paid to the Originating Broker and 12% is paid to the Clearing Broker. 12 The Exchange notes that it is uncertain as to whether the 8% level for the Clearing Submission Fee Credit will ultimately prove to be the correct amount in effectuating its purpose, which is to incent Institutional Brokers to enter clearing submissions for non-CHX trades through the Exchange’s system. At some point, the Exchange may seek to raise the 8% level of the Clearing Submission Fee Credit in order to attract business. If so, the Exchange would make the appropriate filing to modify its Fee Schedule as required by the rules of the Commission. 13 15 U.S.C. 78o(b)(8). E:\FR\FM\21FEN1.SGM 21FEN1 Federal Register / Vol. 77, No. 34 / Tuesday, February 21, 2012 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES FINRA. Since transactions giving rise to a Clearing Submission Fee Credit are normally executed in the OTC marketplace, the Exchange proposes to limit the payment of Clearing Submission Fee Credits to Institutional Brokers which are members of FINRA in order to avoid creating a violation of Section 15(b)(8) by the Institutional Brokers receiving such credits.14 The Exchange recognizes that the Commission has raised concerns about so-called payment for order flow programs in variety of scenarios. For example, the 2007 Report Concerning Examinations of Options Order Routing and Execution stated, ‘‘The Commission previously has expressed concern that payment for order flow and internalization in the markets contribute to an environment in which quote competition is not always rewarded, thereby discouraging the display of aggressively priced quotes and impeding investor’s ability to obtain better prices. [footnote omitted]’’ 15 The Exchange believes that the proposed Clearing Submission Fee Credit materially differs from other programs inasmuch as payment of the credit does not depend on the execution of a trade on the CHX’s facilities and therefore does not discourage aggressive quote competition. Rather, the credit is based on the receipt of a Clearing Submission Fee by the Exchange, which is assessed for the post-execution submission via the CHX’s systems to NSCC for clearance and settlement.16 As such, the Exchange does not believe that a payment of a credit for post-trade clearing submissions raises the same execution quality issues which underlie 14 Exchange Act Rule 15b9–1 provides a limited exemption if the broker-dealer carries no customer accounts and has annual gross income derived from purchases and sales of securities otherwise than on a national securities exchange of which it is a member in an amount no greater than $1,000. 17 CFR 240.15b9–1. Since broker-dealers can separately charge commissions, however, the Exchange will not ordinarily know whether a nonFINRA member has already received more than $1,000 compensation arising out of OTC transactions as commissions or some other means. The Exchange’s proposed restriction will preclude an Institutional Broker’s violation of these provisions by the receipt of Clearing Submission Fee Credits. 15 Report Concerning Examinations of Options Order Routing and Execution, U.S. Securities and Exchange Commission (Mar. 8, 2007), p.2. 16 See, Article 21, Rule 6 and Securities Exchange Act Release No. 65615, supra, note 3. Among other things, the Exchange permits the post-trade substitution of Clearing Participants on a non-CHX trade prior to making the clearing submission. This substitution process is particularly important in facilitating the execution of the equity component of stock-option or stock-futures orders. The Clearing Submission Fee is designed to compensate the Exchange for the costs of providing the systems used, and oversight of, such activities. VerDate Mar<15>2010 17:29 Feb 17, 2012 Jkt 226001 the Commission’s stated concerns about payment for order flow programs. Even taking the view that the Clearing Submission Fee Credit implicates market quality issues, the Exchange notes that a variety of other payment for order flow practices are prevalent in the securities industry. As the Commission has recognized, payment for order flow is not in itself unlawful.17 For example, many options exchanges have created payment for order flow programs which are reflected in their rules and fee schedules.18 It is also not uncommon for broker-dealers to ‘‘internalize’’ their order flow by trading as principal with their own clients. The Exchange’s goal in creating a Clearing Submission Fee Credit is to incent transaction providers to conduct business using the CHX’s systems and services, by which the Exchange can generate revenue. The implementation of a Clearing Submission Fee Credit should further this legitimate objective by encouraging Institutional Brokers to make clearing submissions for non-CHX trades using the Exchange’s systems. 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Act 19 in general, and furthers the objectives of Section 6(b)(4) of the Act 20 in particular, in that it provides for the equitable allocation of reasonable dues, fees and other charges among members and other persons using any facility or system which the Exchange operates or controls. The fundamental purpose of the Clearing Submission Fee Credit is to incent the entry of post-trade clearing submissions for non-CHX trades by Institutional Brokers through the Exchange’s systems, which generates revenue to the Exchange in the form of Clearing Submission Fees. The Exchange notes that most, if not all, other exchanges issue credits to their members in order to incent them to direct business to their facilities. For example, many exchanges offer a ‘‘provide’’ credit to members which provide liquidity by entering orders on the trading facilities of the 17 See, Securities Exchange Act Release No. 43833 (January 10, 2001), 66 FR 7822 (January 25, 2001) (SR–ISE–00–10) [sic] at p.7825, note 28 and accompanying text. 18 Id.; See, Securities Exchange Act Release No. 43112 (Aug. 3, 2000), 65 FR 49040 (Aug. 10, 2000) (SR–CBOE–00–28) [sic]; Securities Exchange Act Release No. 43177 (Aug. 18, 2000), 65 FR 51889 (Aug. 25, 2000) (SR–PHLX–00–77) [sic]; Securities Exchange Act Release No. 43228 (Aug. 30, 2000), 65 FR 54330 (Sept. 7, 2000) (SR–AMEX–00–38) [sic]; Securities Exchange Act Release No. 43290 (Sept. 13, 2000), 65 FR 57213 (Sept. 21, 2000) (SR– PCX–00–30) [sic]. 19 15 U.S.C. 78f. 20 15 U.S.C. 78f(b)(4). PO 00000 Frm 00128 Fmt 4703 Sfmt 4703 10015 exchange with which other orders can interact. Pursuant to Regulation NMS Rule 610 (the ‘‘Access Rule’’), the maximum rate an exchange can charge to execute against its protected quote is $0.003 per share for transactions in securities priced over $1 per share.21 In most cases, exchanges offer a provide credit which is less than the maximum charge, although transactions in certain securities, most often Tape B securities, may offer a provide credit which is slightly higher than the maximum rate. The CHX notes that the proposed Clearing Submission Fee Credit is to be set at 8% of the Clearing Submission Fee. That Fee is currently set at the Access Rule maximum rate of $0.003/ share (with a $100 cap per side) for securities priced over $1 per share, as specified in the Exchange’s Schedule of Fees and Assessment. Thus, even assuming that the Clearing Submission Fee did not reach the $100 cap, the effective rate of the Clearing Submission Fee Credit is $0.00024 per share, which is far below the provide credits offered by many other exchanges.22 Based upon these facts, the Exchange believes that the proposed Clearing Submission Fee Credit represents an equitable allocation of reasonable dues, fee, credits and other charges among its members and issuers and other persons using its facilities. The Exchange further believes that the proposed rule change is consistent with Section 6(b) of the Act 23 in general, and furthers the objectives of Section 6(b)(5) of the Act 24 in particular, in that it provides for fees and credits which are not designed to permit unfair discrimination between customers, issuers, brokers or dealers. The Exchange notes that other exchanges have authorized credit payment programs which are available only to certain subcategories of their members. For example, the New York Stock Exchange (‘‘NYSE’’) pays a series of credits to its Designated Market Makers (‘‘DMMs’’).25 The credits paid to DMMs can exceed the provide credits paid to non-DMMs (which is $0.0015/share) by a substantial percentage. For example, DMMs can receive a credit of $0.0035/ 21 17 CFR 242.610(c)(1). the value of the trade was sufficiently large to result in the application of the $100 maximum fee, the per share amount would necessarily decline. 23 15 U.S.C. 78f. 24 15 U.S.C. 78f(b)(5). 25 See, NYSE Price List 2012, Fees and Credits applicable to Designated Market Makers (‘‘DMMs’’), p.4, available on the NYSE’s public Web site. DMMs (f/k/a specialists) are a subcategory of NYSE members with special rights and obligations, particularly as they relate to the execution of orders on the NYSE’s facilities. 22 If E:\FR\FM\21FEN1.SGM 21FEN1 10016 Federal Register / Vol. 77, No. 34 / Tuesday, February 21, 2012 / Notices share (or more than twice as much as paid to ordinary members) when adding liquidity in shares of less active securities under certain specified circumstances.26 The payment by CHX of a much smaller Clearing Submission Fee Credit to its Institutional Brokers would appear to be well within the scope of this precedent. The Exchange also notes that the entry of clearing submissions pursuant to Article 21, Rule 6(a), which gives rise to the Clearing Submission Fee, is limited to Institutional Brokers. Since only Institutional Brokers can engage in the activity which results in Clearing Submission Fees, there would be no purpose served in offering a financial incentive which is based upon the generation of those fees to nonInstitutional Brokers. For these reasons, the Exchange believes that the proposed Clearing Submission Fee Credit represents a lawful payment which is distributed in a manner which is reasonable and not unfairly discriminatory. B. Self-Regulatory Organization’s Statement of Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The Exchange believes that payment of a Clearing Submission Fee Credit to the Clearing Broker based on activity handled by it will incent Institutional Brokers to utilize the Exchange’s systems and services in forwarding nonCHX trades to NSCC, rather than using alternative mechanisms such as correspondent clearing or Nasdaq’s ACT system. C. Self-Regulatory Organization’s Statement on Comments Regarding the Proposed Rule Changes Received From Members, Participants or Others No written comments were either solicited or received. mstockstill on DSK4VPTVN1PROD with NOTICES III. Date of Effectiveness of the Proposed Rule Changes and Timing for Commission Action The proposed rule change is to take effect pursuant to Section 19(b)(3)(A)(ii) of the Act 27 and subparagraph (f)(2) of Rule 19b–4 thereunder 28 because it establishes or changes a due, fee or other charge applicable to the Exchange’s members and non-members, 26 Id., p.5. U.S.C. 78s(b)(3)(A)(ii). 28 17 CFR 240.19b–4(f)(2). 27 15 VerDate Mar<15>2010 17:29 Feb 17, 2012 Jkt 226001 which renders the proposed rule change effective upon filing. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposal is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rulecomments@sec.gov. Please include File Number SR–CHX–2012–05 on the subject line. Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File No. SR–CHX–2012–05. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule changes between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing will also be available for inspection and copying at the principal office of the CHX. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that PO 00000 Frm 00129 Fmt 4703 Sfmt 4703 you wish to make available publicly. All submissions should refer to File No. SR–CHX–2012–05 and should be submitted on or before March 13, 2012. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.29 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2012–3899 Filed 2–17–12; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–66392; File No. SR–ISE– 2012–06] Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Fees for Certain Complex Orders Executed on the Exchange February 14, 2012. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ’’ Exchange Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on January 31, 2012, the International Securities Exchange, LLC (the ‘‘Exchange’’ or the ‘‘ISE’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The ISE is proposing to amend fees for certain complex orders executed on the Exchange. The text of the proposed rule change is available on the Exchange’s Web site (https:// www.ise.com), at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text 29 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\21FEN1.SGM 21FEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 77, Number 34 (Tuesday, February 21, 2012)]
[Notices]
[Pages 10013-10016]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-3899]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66391; File No. SR-CHX-2012-05]

Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Amend the Fee Schedule To Implement a Clearing Submission Fee Credit
for Institutional Brokers

February 14, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on February 2, 2012, the Chicago Stock Exchange, Inc. (``CHX'' or
``Exchange'') filed with

[[Page 10014]]

the Securities and Exchange Commission (the ``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by CHX. CHX has filed the proposal pursuant to
Section 19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(2) thereunder,\4\
which renders the proposal effective upon filing with the Commission.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------

\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

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

CHX proposes to amend its Fee Schedule, effective February 16,
2012, to amend its Fee Schedule [sic] to implement a Clearing
Submission Fee Credit for Institutional Brokers.
The text of this proposed rule change is available on the
Exchange's Web site at (www.chx.com) and in the Commission's Public
Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the CHX included statements
concerning the purpose of and basis for the proposed rule changes and
discussed any comments it received regarding the proposal. The text of
these statements may be examined at the places specified in Item IV
below. The CHX has prepared summaries, set forth in sections A, B and C
below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Changes

1. Purpose
Through this filing, the Exchange proposes to amend its Schedule of
Fees and Assessments (the ``Fee Schedule''), effective February 16,
2012, to create a Clearing Submission Fee Credit to be paid to
Institutional Brokers and make other technical changes. In October
2011, the Exchange added Article 21, Rule 6 authorizing the submission
by the Exchange of non-CHX trades entered through an Institutional
Broker to a Qualified Clearing Agency for clearance and settlement.\5\
Among other things, the Exchange imposes a Trade Processing Fee on the
Clearing Participants named in these clearing submissions, pursuant to
the provisions of Section E.7. of the Fee Schedule. In November 2011,
the Exchange modified the definition of the Trade Processing Fee to be
based upon non-CHX executed trades for which clearing information is
entered by an Exchange-registered Institutional Broker into the
Exchange's systems and submitted to a Qualified Clearing Agency
pursuant to Article 21, Rule 6(a).\6\ The Exchange now proposes to
rename the Trade Processing Fee as the ``Clearing Submission Fee'' for
purposes of clarity and institute a Clearing Submission Fee Credit to
share the revenue generated by these fees and incentivize this activity
by its Institutional Brokers.\7\ The Exchange previously had in place a
Trade Processing Fee Credit beginning in August 2008 through April
2011, but repealed it pending the adoption of Article 21, Rule 6.\8\
With the implementation of that rule, the Exchange proposes to
reinstate the credit formerly paid to Institutional Brokers regarding
clearing submissions for non-CHX trades, albeit at a different rate
than previously.\9\
---------------------------------------------------------------------------

\5\ See, Securities Exchange Act Release No. 65615 (Oct. 24,
2011), 76 FR 67239 (Oct. 31, 2011) (SR-CHX-2011-17). Currently, the
National Securities Clearing Corporation (``NSCC'') is the Qualified
Clearing Agency for such transactions.
\6\ See, Securities Exchange Act Release No. 65792 (Nov. 18,
2011), 76 FR 72739 (Nov. 25, 2011) (SR-CHX-2011-31).
\7\ The Exchange is also proposing to add text to Section E.3.a.
of the Fee Schedule to emphasize that the fees imposed pursuant to
that section are for trades executed in the Matching System and to
distinguish that activity from transactions subject to Section E.7.
of the Fee Schedule.
\8\ See, Securities Exchange Act Release No. 58362, 73 FR 49511
(SR-CHX-2008-13) (Aug. 14, 2008) (adopting a Trade Processing Fee
Credit); Securities Exchange Act. Release No. 60259 (July 7, 2009),
74 FR 34062 (July 14, 2009) (SR-CHX-2009-08) (changes to calculation
and allocation of Trade Processing Fee Credits paid to Institutional
Brokers); Securities Exchange Act Release No. 64173 (April 4, 2011),
76 FR 19818 (April 8, 2011) (SR-CHX-2011-02) (repealing Trade
Processing Fee Credit).
\9\ At the time it was repealed, the Trade Processing Fee Credit
was set at the same rate as the current Transaction fee credit,
i.e., 16% of the fee paid by the Clearing Participant to the
Exchange in the transaction.
---------------------------------------------------------------------------

The Exchange proposes to pay on a monthly basis a credit equal to
8% of the Clearing Submission Fees collected by the Exchange pursuant
to Section E.7. of the Fee Schedule to the Institutional Broker which
acted as the broker for the ultimate Clearing Participant to the
clearing submission (known as the ``Clearing Broker'').\10\ The
Exchange believes that payment of a Clearing Submission Fee Credit to
the Clearing Broker based on activity handled by it will incent
Institutional Brokers to utilize the Exchange's systems and services in
forwarding non-CHX trades to NSCC, rather than using alternative
mechanisms such as correspondent clearing or Nasdaq's Automated
Confirmation Transaction (``ACT'') system. The Exchange proposes to
provide a credit equal to 50% of the credit paid to Institutional
Broker for transactions handled by it which are executed on the
Exchange.\11\ The Exchange believes that payment of a credit for non-
CHX trades at a lower rate than for CHX trades appears to strike an
appropriate balance between incentivizing Institutional Brokers to
execute trades on the CHX's facilities and competing with other venues
to make clearing submissions for trades executed by Institutional
Brokers in the over-the-counter (``OTC'') marketplace.\12\
---------------------------------------------------------------------------

\10\ The broker representing the ultimate clearing participant
is currently known as the ``broker of credit.'' Since both that
broker and the ``originating broker'' (defined as the Institutional
Broker that executes a trade) can receive a credit, the Exchange
believes that it would be more accurate to use the term ``Clearing
Broker.'' The Exchange also proposes to capitalize the terms
``Transaction Fee Credit,'' ``Clearing Broker'' and ``Originating
Broker'' in the Fee Schedule to emphasize that those are defined
terms. The Exchange notes that it is possible, although not
required, for the same Institutional Broker to act as both the
Originating Broker and Clearing Broker in any given transaction.
\11\ A Transaction Fee Credit of 16% of the Transaction Fees
generated pursuant to Section E.3.a. is paid to Institutional
Brokers for trades submitted through that firm and which were
executed on the Exchange. [sic] Section F.2. of the Fee Schedule. Of
that amount, 4% is paid to the Originating Broker and 12% is paid to
the Clearing Broker.
\12\ The Exchange notes that it is uncertain as to whether the
8% level for the Clearing Submission Fee Credit will ultimately
prove to be the correct amount in effectuating its purpose, which is
to incent Institutional Brokers to enter clearing submissions for
non-CHX trades through the Exchange's system. At some point, the
Exchange may seek to raise the 8% level of the Clearing Submission
Fee Credit in order to attract business. If so, the Exchange would
make the appropriate filing to modify its Fee Schedule as required
by the rules of the Commission.
---------------------------------------------------------------------------

Only Institutional Brokers which are members of the Financial
Industry Regulatory Authority, Inc. (``FINRA'') will be eligible for
the Clearing Submission Fee Credit. Since the trading activities
involved in the relevant clearing submissions by definition occurred in
a market center other than the Exchange (normally the OTC marketplace),
the provisions of Exchange Act Section 15(b)(8) are implicated.\13\
Under Section 15(b)(8), a registered broker or dealer must be a member
of a securities association registered under Section 15A of the
Exchange Act, unless it effects transactions in securities solely on a
national securities exchange of which it is a member. Currently, the
only registered securities association is

[[Page 10015]]

FINRA. Since transactions giving rise to a Clearing Submission Fee
Credit are normally executed in the OTC marketplace, the Exchange
proposes to limit the payment of Clearing Submission Fee Credits to
Institutional Brokers which are members of FINRA in order to avoid
creating a violation of Section 15(b)(8) by the Institutional Brokers
receiving such credits.\14\
---------------------------------------------------------------------------

\13\ 15 U.S.C. 78o(b)(8).
\14\ Exchange Act Rule 15b9-1 provides a limited exemption if
the broker-dealer carries no customer accounts and has annual gross
income derived from purchases and sales of securities otherwise than
on a national securities exchange of which it is a member in an
amount no greater than $1,000. 17 CFR 240.15b9-1. Since broker-
dealers can separately charge commissions, however, the Exchange
will not ordinarily know whether a non-FINRA member has already
received more than $1,000 compensation arising out of OTC
transactions as commissions or some other means. The Exchange's
proposed restriction will preclude an Institutional Broker's
violation of these provisions by the receipt of Clearing Submission
Fee Credits.
---------------------------------------------------------------------------

The Exchange recognizes that the Commission has raised concerns
about so-called payment for order flow programs in variety of
scenarios. For example, the 2007 Report Concerning Examinations of
Options Order Routing and Execution stated, ``The Commission previously
has expressed concern that payment for order flow and internalization
in the markets contribute to an environment in which quote competition
is not always rewarded, thereby discouraging the display of
aggressively priced quotes and impeding investor's ability to obtain
better prices. [footnote omitted]'' \15\ The Exchange believes that the
proposed Clearing Submission Fee Credit materially differs from other
programs inasmuch as payment of the credit does not depend on the
execution of a trade on the CHX's facilities and therefore does not
discourage aggressive quote competition. Rather, the credit is based on
the receipt of a Clearing Submission Fee by the Exchange, which is
assessed for the post-execution submission via the CHX's systems to
NSCC for clearance and settlement.\16\ As such, the Exchange does not
believe that a payment of a credit for post-trade clearing submissions
raises the same execution quality issues which underlie the
Commission's stated concerns about payment for order flow programs.
---------------------------------------------------------------------------

\15\ Report Concerning Examinations of Options Order Routing and
Execution, U.S. Securities and Exchange Commission (Mar. 8, 2007),
p.2.
\16\ See, Article 21, Rule 6 and Securities Exchange Act Release
No. 65615, supra, note 3. Among other things, the Exchange permits
the post-trade substitution of Clearing Participants on a non-CHX
trade prior to making the clearing submission. This substitution
process is particularly important in facilitating the execution of
the equity component of stock-option or stock-futures orders. The
Clearing Submission Fee is designed to compensate the Exchange for
the costs of providing the systems used, and oversight of, such
activities.
---------------------------------------------------------------------------

Even taking the view that the Clearing Submission Fee Credit
implicates market quality issues, the Exchange notes that a variety of
other payment for order flow practices are prevalent in the securities
industry. As the Commission has recognized, payment for order flow is
not in itself unlawful.\17\ For example, many options exchanges have
created payment for order flow programs which are reflected in their
rules and fee schedules.\18\ It is also not uncommon for broker-dealers
to ``internalize'' their order flow by trading as principal with their
own clients. The Exchange's goal in creating a Clearing Submission Fee
Credit is to incent transaction providers to conduct business using the
CHX's systems and services, by which the Exchange can generate revenue.
The implementation of a Clearing Submission Fee Credit should further
this legitimate objective by encouraging Institutional Brokers to make
clearing submissions for non-CHX trades using the Exchange's systems.
---------------------------------------------------------------------------

\17\ See, Securities Exchange Act Release No. 43833 (January 10,
2001), 66 FR 7822 (January 25, 2001) (SR-ISE-00-10) [sic] at p.7825,
note 28 and accompanying text.
\18\ Id.; See, Securities Exchange Act Release No. 43112 (Aug.
3, 2000), 65 FR 49040 (Aug. 10, 2000) (SR-CBOE-00-28) [sic];
Securities Exchange Act Release No. 43177 (Aug. 18, 2000), 65 FR
51889 (Aug. 25, 2000) (SR-PHLX-00-77) [sic]; Securities Exchange Act
Release No. 43228 (Aug. 30, 2000), 65 FR 54330 (Sept. 7, 2000) (SR-
AMEX-00-38) [sic]; Securities Exchange Act Release No. 43290 (Sept.
13, 2000), 65 FR 57213 (Sept. 21, 2000) (SR-PCX-00-30) [sic].
---------------------------------------------------------------------------

2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act \19\ in general, and furthers the
objectives of Section 6(b)(4) of the Act \20\ in particular, in that it
provides for the equitable allocation of reasonable dues, fees and
other charges among members and other persons using any facility or
system which the Exchange operates or controls. The fundamental purpose
of the Clearing Submission Fee Credit is to incent the entry of post-
trade clearing submissions for non-CHX trades by Institutional Brokers
through the Exchange's systems, which generates revenue to the Exchange
in the form of Clearing Submission Fees. The Exchange notes that most,
if not all, other exchanges issue credits to their members in order to
incent them to direct business to their facilities. For example, many
exchanges offer a ``provide'' credit to members which provide liquidity
by entering orders on the trading facilities of the exchange with which
other orders can interact. Pursuant to Regulation NMS Rule 610 (the
``Access Rule''), the maximum rate an exchange can charge to execute
against its protected quote is $0.003 per share for transactions in
securities priced over $1 per share.\21\ In most cases, exchanges offer
a provide credit which is less than the maximum charge, although
transactions in certain securities, most often Tape B securities, may
offer a provide credit which is slightly higher than the maximum rate.
The CHX notes that the proposed Clearing Submission Fee Credit is to be
set at 8% of the Clearing Submission Fee. That Fee is currently set at
the Access Rule maximum rate of $0.003/share (with a $100 cap per side)
for securities priced over $1 per share, as specified in the Exchange's
Schedule of Fees and Assessment. Thus, even assuming that the Clearing
Submission Fee did not reach the $100 cap, the effective rate of the
Clearing Submission Fee Credit is $0.00024 per share, which is far
below the provide credits offered by many other exchanges.\22\ Based
upon these facts, the Exchange believes that the proposed Clearing
Submission Fee Credit represents an equitable allocation of reasonable
dues, fee, credits and other charges among its members and issuers and
other persons using its facilities.
---------------------------------------------------------------------------

\19\ 15 U.S.C. 78f.
\20\ 15 U.S.C. 78f(b)(4).
\21\ 17 CFR 242.610(c)(1).
\22\ If the value of the trade was sufficiently large to result
in the application of the $100 maximum fee, the per share amount
would necessarily decline.
---------------------------------------------------------------------------

The Exchange further believes that the proposed rule change is
consistent with Section 6(b) of the Act \23\ in general, and furthers
the objectives of Section 6(b)(5) of the Act \24\ in particular, in
that it provides for fees and credits which are not designed to permit
unfair discrimination between customers, issuers, brokers or dealers.
The Exchange notes that other exchanges have authorized credit payment
programs which are available only to certain subcategories of their
members. For example, the New York Stock Exchange (``NYSE'') pays a
series of credits to its Designated Market Makers (``DMMs'').\25\ The
credits paid to DMMs can exceed the provide credits paid to non-DMMs
(which is $0.0015/share) by a substantial percentage. For example, DMMs
can receive a credit of $0.0035/

[[Page 10016]]

share (or more than twice as much as paid to ordinary members) when
adding liquidity in shares of less active securities under certain
specified circumstances.\26\ The payment by CHX of a much smaller
Clearing Submission Fee Credit to its Institutional Brokers would
appear to be well within the scope of this precedent. The Exchange also
notes that the entry of clearing submissions pursuant to Article 21,
Rule 6(a), which gives rise to the Clearing Submission Fee, is limited
to Institutional Brokers. Since only Institutional Brokers can engage
in the activity which results in Clearing Submission Fees, there would
be no purpose served in offering a financial incentive which is based
upon the generation of those fees to non-Institutional Brokers. For
these reasons, the Exchange believes that the proposed Clearing
Submission Fee Credit represents a lawful payment which is distributed
in a manner which is reasonable and not unfairly discriminatory.
---------------------------------------------------------------------------

\23\ 15 U.S.C. 78f.
\24\ 15 U.S.C. 78f(b)(5).
\25\ See, NYSE Price List 2012, Fees and Credits applicable to
Designated Market Makers (``DMMs''), p.4, available on the NYSE's
public Web site. DMMs (f/k/a specialists) are a subcategory of NYSE
members with special rights and obligations, particularly as they
relate to the execution of orders on the NYSE's facilities.
\26\ Id., p.5.
---------------------------------------------------------------------------

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

The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange believes that
payment of a Clearing Submission Fee Credit to the Clearing Broker
based on activity handled by it will incent Institutional Brokers to
utilize the Exchange's systems and services in forwarding non-CHX
trades to NSCC, rather than using alternative mechanisms such as
correspondent clearing or Nasdaq's ACT system.

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

No written comments were either solicited or received.

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

The proposed rule change is to take effect pursuant to Section
19(b)(3)(A)(ii) of the Act \27\ and subparagraph (f)(2) of Rule 19b-4
thereunder \28\ because it establishes or changes a due, fee or other
charge applicable to the Exchange's members and non-members, which
renders the proposed rule change effective upon filing.
---------------------------------------------------------------------------

\27\ 15 U.S.C. 78s(b)(3)(A)(ii).
\28\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposal is
consistent with the Act. Comments may be submitted by any of the
following methods:

Electronic Comments

Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-CHX-2012-05 on the subject line.

Paper Comments

Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.

All submissions should refer to File No. SR-CHX-2012-05. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule changes between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room on official business
days between the hours of 10 a.m. and 3 p.m. Copies of such filing will
also be available for inspection and copying at the principal office of
the CHX. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File No. SR-CHX-
2012-05 and should be submitted on or before March 13, 2012.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\29\
---------------------------------------------------------------------------

\29\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-3899 Filed 2-17-12; 8:45 am]
BILLING CODE 8011-01-P

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.