[Federal Register Volume 65, Number 155 (Thursday, August 10, 2000)]
[Notices]
[Pages 49040-49041]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-20259]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43112; File No. SR-CBOE-00-28]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by Chicago Board Options 
Exchange, Inc. Relating to the Adoption of a New Marketing Fee

August 3, 2000.
    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 July 10, 2000, the Chicago Board Options Exchange, Inc. (``CBOE'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the CBOE. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE proposes to adopt a new marketing fee to be imposed on 
transactions of market makers (including Designated Primary Market 
Makers, or ``DPMs''), other than market-maker-to-market-maker 
transactions. The fee will be effective as of July 1, 2000, and will be 
imposed at the rate of $.40 per contract on all classes of equity 
options.
    The text of the proposed rule change is available at the Office of 
the Secretary, CBOE and at the Commission.

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

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

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

    The purpose of the proposed new marketing fee is to provide a 
source of revenue to the Exchange to be used for marketing purposes in 
light of changing competitive circumstances that have arisen, and may 
continue to arise, in particular classes of multiply traded equity 
options. These circumstances include the growing practice by some 
specialists on options exchanges of paying brokers for orders in 
multiply traded classes directed to these specialists. In light of this 
development and in order to be competitive in multiply traded options, 
the CBOE has determined to impose a new marketing fee on market makers' 
transactions (other than transactions between market makers) in 
designated classes of equity options.
    All of the funds generated by the new fee will be segregated 
according to the station where the classes of options subject to the 
fee are traded, and will be made available to the DPM at the station 
where the funds were collected. These funds in turn will be used by the 
DPM to attract orders in the classes of options traded at that station. 
This use of funds could include payments made by the DPMs to broker-
dealers for the orders they direct to the Exchange. The specific terms 
governing the orders that qualify for payment and the amount of any 
payment to be made will be determined by the DPMs in whatever manner 
they believe is most likely to be effective in attracting order flow to 
the Exchange in options traded at the DPMs' assigned stations.
    The DPMs will be obligated to account to the Exchange for the use 
they make of funds made available to them by the Exchange for this 
purpose, but all determinations concerning the amount the DPMs may pay 
for orders and the types and sizes of orders that qualify for payment 
will be made exclusively by the DPMs, and not by the Exchange. The 
Exchange may provide administrative support to the DPMs in such matters 
as keeping track of the number of qualified orders each firm directs 
the Exchange, and making the necessary debits and credits to the 
accounts of the DPMs and the firms to reflect the payments that are to 
be made.
    The new marketing fee will apply to all transactions of market 
makers (including DPMs), except for transactions solely between market 
makers. According to the CBOE, market-marker-to-market-maker trades 
will not be part of the program so as to avoid imposing added costs on 
what, for the most part, are hedging or rebalancing transactions of 
market makers entered into in support of their affirmative market maker 
obligations. Moreover, market-maker-to-market-maker transactions are 
not the kind of transaction that the marketing program is designed to 
attract in the first place. As an administrative matter, the marketing 
fee initially will be collected on all transactions of market makers, 
and will then be refunded to the extent it was collected on market-
maker-to-market-maker trades. The CBOE represents that any changes to 
the classes of options to which the marketing fee applies, to the rate 
or rates which the fee is assessed, or to the disposition by the 
Exchange of funds generated by the fee will be the subject of separate 
filings with the Commission

[[Page 49041]]

made pursuant to Section 19(b)(3)(A)(ii) of the Act.\3\
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    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
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    As described above, the proposed marketing fee will be imposed on 
all of the market makers (including the DPM) in the classes of options 
that are subject to the fee. The Exchange believes that, because these 
same persons will be able to participate in the order flow derived from 
the program, there will be a fair correlation between those members who 
pay the costs of the marketing program funded by the new fee and those 
who receive the benefits of the program.
    In connection with any program involving payment for order flow 
that may be funded by the Exchange's proposed marketing fee, the 
Exchange will issue appropriate regulatory or educational circulars to 
its members that emphasize the disclosure and best execution 
obligations of members who may accept such payment.
    The Exchange believes that the new marketing fee and the marketing 
programs it may fund, including any payment for order flow program, 
will serve to enhance the competitiveness of the Exchange and its 
members. Accordingly, the Exchange believes that the proposed rate 
change is consistent with and furthers the objectives of the Act, 
including specifically Section 6(b)(5) \4\ thereof, which requires the 
rules of exchanges to be designed to remove impediments to and perfect 
the mechanism of a free and open market and a national market system, 
and Section 11A(a)(1)(C) \5\ thereof, which reflects the finding of 
Congress that it is in the public interest and appropriate for the 
protection of investors and the maintenance of fair and orderly markets 
to assure fair competition among brokers and dealers and among exchange 
markets.
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    \4\ 15 U.S.C. 78f(b)(5).
    \5\ 15 U.S.C. 78k(a)(1)(C).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The CBOE 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

    Because the foregoing rule change establishes or changes a due, 
fee, or other charge imposed by the Exchange, it has become effective 
pursuant to section 19(b)(3)(A)(ii) of the Act \6\ and subparagraph 
(f)(2) of Rule 19b-1 thereunder.\7\ At any time within 60 days of the 
filing of the proposed rule change, the Commission may summarily 
abrogate such rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.
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    \6\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \7\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments

    The Commission, in the past, has raised serious concerns about 
payment for order flow and internalization.\8\ Payment for order flow 
is of concern because brokers who are paid to send their customers' 
orders to one exchange have a conflict of interest that may reduce 
their commitment to the duty they owe their customers to find the best 
execution available.\9\ While payment for order flow has been a common 
practice in the equities markets for some time, only recently has 
payment for order flow developed in the options markets. Despite these 
concerns, however, the CBOE's proposal involves the imposition of a fee 
and the Act gives exchanges wide latitude to establish, revise, and 
collect fees and other charges without prior Commission approval. The 
Commission invites interested persons to submit written data, views, 
and arguments concerning the foregoing, including whether the proposed 
rule is consistent with the Act. In particular, the Commission asks 
persons who submit comments whether the payment for order flow 
facilitated by the CBOE's proposal raises greater or different concerns 
than payment for order flow by specialists on other options exchanges. 
After receiving comments, and at any time within 60 days from the date 
the CBOE filed its proposal, the Commission can decide to require the 
CBOE to stop collecting the fee, refile the proposal, and await 
Commission approval before reinstituting the fee.
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    \8\ See Securities Exchange Act Release No. 42450 (February 23, 
2000), 65 FR 10577 (Feb. 28, 2000); Securities Exchange Act Release 
No. 34902 (October 27, 1994), 59 FR 55006 (Nov. 2, 1994). See also 
Securities Exchange Act Release No. 43084 (July 28, 2000).
    \9\ The CBOE has filed with the Commission a proposal to 
implement the ``CBOE Best Execution Assurance Program.'' See 
Securities Exchange Act Release No. 43113 (August 3, 2000), File No. 
SR-CBOE-00-32.
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    Persons making written submissions should file six copies thereof 
with the Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. 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 inspection and copying in the Commission's Public 
Reference Room. Copies of such filing will also be available for 
inspection and copying at the principal office of the CBOE. All 
submissions should refer to File No. SR-CBOE-00-28 and should be 
submitted August 31, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-20259 Filed 8-9-00; 8:45 am]
BILLING CODE 8010-01-M