[Federal Register Volume 71, Number 163 (Wednesday, August 23, 2006)]
[Notices]
[Pages 49493-49495]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-13931]
[[Page 49493]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54328; File No. SR-BSE-2006-10]
Self-Regulatory Organizations; Boston Stock Exchange, Inc.;
Notice of Filing and Order Granting Accelerated Approval of a Proposed
Rule Change, as Modified by Amendment No. 2 Thereto, To Establish a Fee
Per Contract Traded for Improvement Orders Submitted Into a Price
Improvement Period by a Public Customer That Are Not Submitted as
Customer PIP Orders
August 16, 2006.
On March 6, 2006, the Boston Stock Exchange, Inc. (``BSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend the Fee Schedule of the Boston Options
Exchange (``BOX'') in the manner described below. The proposed rule
change was published for comment in the Federal Register on May 15,
2006.\3\ The Commission received one comment letter concerning the
proposal.\4\ On June 29, 2006, the Exchange filed Amendment No. 1 to
the proposed rule change.\5\ On August 14, 2006, the Exchange filed
Amendment No. 2 to the proposed rule change.\6\ This order publishes
notice of and grants accelerated approval of the proposed rule change,
as modified by Amendment No. 2, on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 53774 (May 9, 2006),
71 FR 28058 (``Notice'').
\4\ Letter to Nancy Morris, Secretary, Commission, from Adam C.
Cooper, Senior Managing Director & General Counsel, Citadel
Investment Group, LLC (``Citadel''), dated June 9, 2006 (``Citadel
Letter'').
\5\ In Amendment No. 1, which superseded and replaced the
original filing, the Exchange modified its proposal by lowering the
proposed BOX fee from $.20 per contract traded to $.15 per contract
traded. The Exchange also clarified its reasons for imposing the new
fee.
\6\ In Amendment No. 2, which supersedes and replaces Amendment
No. 1 (and the original filing), the Exchange proposes to modify the
proposed rule text and clarifies its reasons for imposing the new
fee.
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I. Description of the Proposal
Currently, there are two ways Public Customer Orders \7\ can be
submitted into a Price Improvement Period (``PIP'') auction as an
Improvement Order.\8\ The first method is the Customer PIP Order
(``CPO''), which is an order provided by a Public Customer to her/his
BOX Order Flow Provider (``OFP'') that contains a standard limit order
price in the standard minimum trading increment--the Book Reference
Price \9\--and a limit order placed in a penny increment, the CPO PIP
Reference Price.\10\ Through a CPO, a Public Customer may participate
passively in a PIP auction (should one occur while her/his limit order
is at the top of the BOX book) by virtue of the previously submitted
instructions given to the OFP, i.e., the CPO PIP Reference Price.
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\7\ The term ``Public Customer Order'' is defined as ``an order
for the account of a Public Customer. See BOX Rules, Chapter I,
Section 1(a)(51). ``Public Customer'' is defined as ``a person that
is not a broker or dealer in securities.'' See BOX Rules Chapter I,
Section 1(a)(50).
\8\ The term ``Improvement Orders'' is defined in the BOX Rules
Chapter V, Section 18(e)(i).
\9\ The term ``Book Reference Price'' is defined in BOX Rules
Chapter V, Section 18(g)(i).
\10\ The term ``CPO PIP Reference Price'' is defined in BOX
Rules Chapter V, Section 18(g)(i).
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Alternatively, a Public Customer may submit an Improvement Order
into a PIP auction through an OFP with any instructions that the OFP is
willing to accept.\11\ These non-CPO Improvement Orders do not have a
Book Reference Price and are not exposed on the BOX Book; OFPs submit
them on behalf of Public Customers in response to a PIP Broadcast \12\
and PIP auction updates.
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\11\ See BOX Rules Chapter V, Section 18(e)(i).
\12\ The PIP broadcast is disseminated once a PIP is initiated
and is distributed solely to BOX Options Participants. The
broadcasting of this message advises the Options Participants: (1)
That a Primary Improvement Order, as that term is defined in the BOX
Rules Chapter V, Section 18(e), has been processed; (2) of
information concerning series, size, price and side of market; and
(3) when the PIP will conclude (``PIP Broadcast'').
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Originally, the Exchange proposed to amend the BOX Fee Schedule to
establish a fee of $.20 per contract traded for Improvement Orders
submitted into a PIP by a Public Customer that are not submitted as
CPOs.
In its letter, which was submitted in response to the original
proposed rule change, Citadel urges the Commission to disapprove the
proposed rule change because the proposed $.20 per contract traded fee
is inconsistent with three provisions of the Act. Citadel argues that
the original proposed rule change was inconsistent with Section 6(b)(4)
of the Act \13\ because it would effect an inequitable allocation of
reasonable fees among members and persons using the BOX facilities.
Specifically, Citadel stated that the proposed $.20 per contract fee
was inequitable because Public Customers would not be afforded a volume
discount similar to the one offered to BOX Market Makers \14\ who,
according to Citadel, enjoy other benefits and privileges that are
unavailable to Public Customers.
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\13\ 15 U.S.C. 78(b)(4).
\14\ BOX Market Makers may receive a volume discount of up to
$.05 per cotract based upon total volume traded across all assigned
classes. See Section 3.c. of the Fee Schedule.
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Citadel also argues that the proposed rule change is inconsistent
with Section 6(b)(5) of the Act \15\ in that it would discriminate
unfairly between Public Customers with access to sophisticated
technology and trading techniques (``Options Professionals'') and all
other Public Customers (``Investors'') by imposing a fee upon Options
Professionals and not Investors.
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\15\ 15 U.S.C. 78f(b)(5).
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Further, Citadel argues that the fee, as originally proposed, would
be inconsistent with Section 6(b)(8) of the Act \16\ in that it would
harm competition. Specifically, Citadel asserts that the proposed rule
change would discourage Public Customers from sending non-CPO
Improvement Orders to the BOX, which would result in fewer Improvement
Orders competing to improve orders submitted to the PIP. Additionally,
Citadel predicts that this diminished competition would make it easier
for Market Makers to step ahead of Public Customer limit orders posted
on the book, which would encourage BOX Participants to internalize more
of their order flow, and thereby diminish price discovery and
transparency and increase the costs of options investors.
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\16\ 15 U.S.C. 78f(b)(8).
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In response to the Citadel Letter, the Exchange proposes to modify
its proposal in Amendment No. 2. In Amendment No. 2, the Exchange
proposes to reduce the trading fee applicable to each Improvement Order
for a Public Customer not submitted as CPOs from $.20 to $.15. Further,
the Exchange proposes to clarify that, under the proposed Fee Schedule
as amended, no trading fee would be charged for Public Customer
Improvement Orders submitted as CPOs or for Public Customer Orders
traded on BOX including marketable orders, which interact with a PIP
already underway.
II. Discussion
After careful consideration of the Citadel Letter and the proposed
rule change, as amended in response to the Citadel Letter, the
Commission finds that the proposal, as amended, is consistent with the
requirements of Section 6(b) of the Act \17\ in general and Section
6(b)(4) of the Act \18\ in particular, in that it is designed to
provide for the equitable allocation of
[[Page 49494]]
reasonable dues, fees, and other charges among its members and issuers
and other persons using its facilities.
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\17\ 15 U.S.C. 78f(b).
\18\ 15 U.S.C. 78f(b)(4).
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To justify this new trading fee on non-CPO Improvement Orders by
Public Customers, the Exchange states that these types of orders, like
the Improvement Orders of Market Makers and OFPs, are closely monitored
for manipulative activity because they are submitted by sophisticated
parties, with advanced technology, directly in response to PIP data
updates. In contrast, the Exchange characterizes CPOs as more
``passive'' orders, because they contain preset PIP auction
instructions, which pose less of a manipulation risk and therefore draw
less regulatory scrutiny. The Exchange states, therefore, that CPOs are
less costly to surveil than non-CPO Improvement Orders.
In addition, the Exchange states that the high volume of non-CPO
Improvement Orders justifies the imposition of the proposed fee. The
Exchange states that CPOs, as a result of their passive nature,
generate fewer new Improvement Orders than non-CPO Improvement Orders,
which are generated by sophisticated trading systems capable of
generating many new Improvement Orders during a PIP. Increased
Improvement Order traffic requires additional capacity on the BOX
trading host, and investment in this additional capacity taxes the
Exchange's resources. In light of the increased costs associated with
non-CPO Improvement Orders,\19\ the proposed fee provides for an
equitable allocation of reasonable dues, fees, and other charges among
its members and issuers and other persons using its facilities.
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\19\ As discussed below, broker-dealers and Market Makers pay
comparable trading fees. See Sections 2 and 3 of the Fee Schedule.
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As mentioned above, in Amendment No. 2, the Exchange proposes to
decrease the amount of the proposed fee. Currently, Market Maker and
broker-dealer accounts are charged $0.20 per executed contract for
Improvement Orders traded in a PIP. As Citadel points out, however,
some Market Makers receive volume discounts of up to $0.05 per
contract. In response to the Citadel Letter, the Exchange modified its
proposal to reduce the proposed trading fee applicable to non-CPO
Improvement Orders for Public Customer accounts from $.20 to $.15 per
executed contract.\20\ As a result, under the amended proposal, the BOX
will impose upon Public Customers participating in the PIP through the
use of non-CPO Improvement Orders the same transaction fee as a Market
Maker receiving the highest volume discount.
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\20\ See Amendment No. 2.
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The Commission also finds that the proposed rule change is
consistent with Section 6(b)(5) of the Act.\21\ Section 6(b)(5) of the
Act prohibits only ``unfair discrimination,'' not discrimination
simpliciter.\22\ On its face, the proposed fee discriminates between
different means of participating in the PIP auction.\23\ However, a CPO
and non-CPO Improvement Order impact the BOX differently. A non-CPO
Improvement Order, which interacts in the PIP on a dynamic basis, taxes
the Exchange's systems capacity and regulatory personnel to a greater
degree than do passive CPO participants. In addition, the Book
Reference Price associated with a CPO adds liquidity to the displayed
BOX Book, which provides value to the BOX because it attracts
additional orders. A non-CPO Improvement Order does not provide such
liquidity. The Commission believes these differences are a reasonable
basis for the Exchange to charge different fees. Discrimination on the
basis of the disparate costs to the Exchange of administering the PIP
auction is not unfair, particularly given the benefit (i.e., liquidity)
provided to the Exchange by CPOs.
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\21\ 15 U.S.C. 78s(b)(5).
\22\ See Timpinaro v. SEC, 2 F.3d 453, 456 (DC Cir. 1993).
\23\ The proposed fee would not apply to CPOs submitted by
sophisticated Public Customers.
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Finally, the Commission finds that the proposed rule change is
consistent with Section 6(b)(8) of the Act,\24\ which requires that the
rules of the Exchange not impose any burden on competition not
necessary or appropriate in furtherance of the purposes of the Act. A
$0.15 fee per executed contract, or $0.0015 for each share underlying
an option contract, will increase costs to Public Customers submitting
non-CPO Improvement Orders by only a de minimus amount. Market Makers
are charged comparable fees for participating in PIPs. Accordingly, the
Commission does not believe this fee will discourage the submission of
non-CPO Improvement Orders or impose a burden on competition.
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\24\ 15 U.S.C. 78s(b)(8).
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The Commission finds good cause for approving Amendment No. 2 to
the proposed rule change prior to the 30th day after the amendment is
published for comment in the Federal Register pursuant to Section
19(b)(2) of the Act.\25\ The proposed rule change, in its original
form, was published for comment \26\ and, as mentioned above, the
Commission received only one comment letter. Amendment No. 2 modifies
the substance of the original proposal only by decreasing the amount of
the proposed transaction fee from $.20 per contract traded to $.15 per
executed contract.\27\ This reduction to the proposed fee, which the
Exchange offered in response to the Citadel Letter, does not raise any
additional regulatory issues.
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\25\ 15 U.S.C. 78s(b)(2).
\26\ See Notice, supra at note 3.
\27\ In Amendment No. 2, the Exchange also revised the proposed
rule text to make explicit that ``[t]here are no trading fees for
any other Public Customer Orders which may be executed including
CPOs and Public Customer orders on the Book.'' This new language is
consistent with the Exchange's description of the proposed rule
change in the original filing: ``All other Public Customer Orders
traded on BOX, including marketable orders, which interact with a
PIP already underway, will continue to be free.''
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III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment No. 2 to the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File No. SR-BSE-2006-10 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-BSE-2006-10. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commissions Internet Web site (http://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
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available for inspection and copying in the Commission's Public
Reference Room. Copies of such filing also will be available for
inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-BSE-2006-10 and should be
submitted on or before September 13, 2006.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\28\ that the proposed rule change (SR-BSE-2006-10), as amended, is
hereby approved on an accelerated basis.
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\28\ Id.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\29\
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\29\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-13931 Filed 8-22-06; 8:45 am]
BILLING CODE 8010-01-P