[Federal Register Volume 67, Number 144 (Friday, July 26, 2002)]
[Notices]
[Pages 48960-48962]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-18971]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46233; File No. SR-CHX-2002-19]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Stock Exchange, 
Inc. Relating to Membership Dues and Fees

July 19, 2002.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'')\1\ and Rule19b-4 thereunder,\2\ notice hereby is given that 
on June 28, 2002, the Chicago Stock Exchange, Inc. (``CHX'') filed with 
the Securities and Exchange Commission the proposed rule change as 
described in Items I, II and III below, which the CHX has prepared. 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 CHX proposes to amend its membership dues and fees schedule 
effective through July 31, 2002, to provide for continued assessment of 
a marketing fee in instances where transactions in a subject issue meet 
certain criteria, described below. The text of the proposed rule change 
is available at the CHX 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 CHX included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it had received regarding the proposed rule 
change. 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 Change

1. Purpose
    The proposed change to the CHX fee schedule would provide for 
continued assessment of a marketing fee, in an amount equal to $.01 per 
share,

[[Page 48961]]

applicable to transactions occurring on or before July 31, 2002. The 
marketing fee would apply only to ``Subject Transactions'' \3\ in 
``Subject Issues'' \4\ and would not be assessed if the specialist 
trading the Subject Issue elected to forego collection of the marketing 
fee.
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    \3\ ``Subject Transaction'' means (a) any trade with a customer, 
whether the contra party is a specialist or a market maker, where 
the order is delivered to the CHX via the MAX system or where 
compensation is paid to induce the routing of the order to the CHX; 
or (b) any trade between a specialist and a market maker in which 
the market maker is exercising rights under the market maker 
entitlement rules.
    \4\ ``Subject Issue'' means any issue which constitutes an 
exchange-traded fund and meets the following two criteria: (a) 
average daily share volume in the issue exceeds 150,000 shares each 
month during a consecutive two month period; and (b) market maker 
share participation in the same issue exceeds 5% for each month 
during the same two-month period.
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    The CHX currently assesses a marketing fee under a provision of the 
CHX fee schedule that is scheduled to expire by its terms on June 30, 
2002.\5\ Under the system currently in place, the CHX calculates, 
bills, and collects the marketing fee and gives the proceeds to the 
specialist firm trading the Subject Issue. The specialist firm then 
distributes the funds to order-sending firms in accordance with its 
payment-for-order flow arrangements relating to the Subject Issue (and 
possibly also to market makers who contribute to market share growth in 
certain instances).\6\ The remaining undistributed funds in excess of 
$1000 are refunded, on a quarterly basis, to the paying parties pro 
rata, in proportion to the fees they have paid.
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    \5\ See Securities Exchange Act Release No. 44646 (August 2, 
2001), 66 FR 41641 (August 8, 2001) (announcing immediate 
effectiveness of the new marketing fee provision to the CHX fee 
schedule through December 31, 2001; Securities Exchange Act Release 
No. 45282 (January 15, 2002), 67 FR 3517 (January 24, 2002) 
(extending program through June 30, 2002).
    \6\ See Securities Exchange Act Release No. 44646 (August 2, 
2001), 66 FR 41641 (August 8, 2001) (SR-CHX-2001-10) (describing 
potential arrangements between specialists and market makers). 
According to the CHX, no such arrangements are currently in place. 
Conversation between Kathleen M. Boege, Associate General Counsel, 
CHX, and Patrick M. Joyce, Special Counsel, Division of Market 
Regulation, Commission, on July 18, 2002.
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    The marketing fee provision proposed herein does not differ from 
the previous version except that it would extend application of the 
marketing fee through July 31, 2002. This additional month will give 
the CHX the opportunity to evaluate further whether the marketing fee 
should be continued.
    The CHX intends that the continued imposition of the marketing fee 
will allocate equitably the financial burden of seeking order flow for 
Subject Issues. According to the CHX, in the absence of the marketing 
fee the CHX specialist trading a Subject Issue is the sole bearer of 
the often substantial costs associated with attracting order flow to 
the CHX, as well as licensing fees that the licensor of the product 
imposes.\7\ CHX market makers participating in transactions in Subject 
Issues, conversely, do not currently share any of these costs. The 
proposed rule change would allow a specialist trading a Subject Issue 
to elect or decline imposition of the marketing fee depending on 
whether the specialist believes it is appropriate for a part of the 
financial burden of trading the Subject Issue to be allocated among 
those trading the Subject Issue. The CHX anticipates that the proposed 
rule change will continue to provide specialists trading Subject Issues 
with sufficient incentive to continue their efforts to attract 
additional order flow and increase market share.
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    \7\ The marketing fee, under the rule change proposed herein, 
will be assessed only against exchange-traded fund products, which 
virtually always have an associated licensing fee.
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2. Statutory Basis
    The CHX believes that the proposed rule change is consistent with 
section 6(b)(4) of the Act \8\ in that it provides for the equitable 
allocation of reasonable dues, fees and other charges among its 
members.
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    \8\ 15 U.S.C. 78f(b)(4).
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B. Self-Regulatory Organization's Statement of Burden on Competition

    The CHX believes that the proposed rule change will not 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 Regarding the 
Proposed Rule Change Received From Members, Participants or Others

    The CHX received one written comment from a member in advance of 
the CHX Finance Committee meeting on June 18, 2002. This letter from 
Steven Shapiro of SJS Securities, Inc., a CHX specialist firm, asserted 
that the number of CHX market makers trading in exchange-traded funds 
(``ETFs'') has dropped from 15-20 to 3-5 since the imposition of the 
marketing fee. According to the CHX, Mr. Shapiro further argued that 
the marketing fee ``has no value at this time'' and that the CHX needed 
to focus on initiatives that would help the CHX market maker program 
``thrive and prosper.''
    The CHX believes that this analysis mistakenly attributes the 
decline in CHX market maker activity to the imposition of the marketing 
fee. In fact, the CHX believes that this decline is attributable to 
other factors, including significant competition for ETF order flow 
from other national market participants and alternative trading systems 
(``ATSs''). Indeed, as has been highly publicized in recent weeks, one 
ATS has recently captured nearly a one-third market share in the Nasdaq 
100 ``QQQ'' product, a market share higher than that sustained by the 
QQQ listing market. Moreover, while the CHX acknowledges that 
imposition of the marketing fee does increase a market maker's cost of 
trading Subject Issues on the CHX, the CHX believes that the often 
significant costs associated with the Subject Issues, including 
increasingly hefty license fees, amply justify asking the CHX members 
who trade the Subject Issues to share the costs of attracting the order 
flow and trading these popular products on the CHX.
    The CHX believes that this rationale is also readily applicable in 
response to a letter that the Commission received from Alvin Boutte, 
Jr., a CHX member who formerly traded the QQQ as a market maker. Mr. 
Boutte submitted a comment letter with respect to the CHX's prior 
submission extending the marketing fee through June 30, 2002. The 
Commission received Mr. Boutte's comment letter after the expiration of 
the abrogation period for that filing. The CHX believes that it is 
necessary and helpful to address Mr. Boutte's comment letter in the 
context of the CHX's proposed further extension of the marketing fee.
    According to the CHX, Mr. Boutte contends that the additional 
expense borne by market makers that are subject to the marketing fee is 
an economic burden that cannot be sustained by smaller market 
participants and that, as a result, it is unfair. The CHX asserts that, 
contrary to Mr. Boutte's contentions, the marketing fee is not intended 
to hurt smaller market participants in any way. Rather, as set forth 
above, the CHX intends that the marketing fee would merely help shift 
some of the economic burden borne by specialists to other parties also 
trading exchange-traded fund products.
    The CHX believes that Mr. Boutte is mistaken about two other 
points. First, Mr. Boutte states that the CHX does not have a process 
in place to ensure that specialist firms distribute the funds to order-
sending firms in accordance with their payment for order flow 
arrangements relating to a particular security. The CHX believes, 
however, that it has taken steps to ensure that these funds are 
properly spent. The CHX notes that, in fact, the CHX

[[Page 48962]]

requires each specialist firm that receives marketing fees to certify, 
each month, that it is using the funds in accordance with payment for 
order flow arrangements in the issues for which the fee was collected. 
The CHX represents that, if it has reason to believe that a 
certification has been falsely given, it would review the specialist 
firm's books and, if the certification were found to be false, initiate 
appropriate disciplinary action against the firm.
    According to the CHX, Mr. Boutte also states that the specialist 
firms have the right to choose whether a fee is charged or not, giving 
the impression that the specialist firms have a great deal of power in 
determining the fee. The CHX asserts that, as described above, it has 
imposed the $.01/share marketing fee on all trades that meet the 
definition of a Subject Transaction in a Subject Issue; a specialist 
firm may choose to waive the fee in a particular issue altogether, or 
it may receive the fees that are collected. The CHX notes, however, 
that a firm cannot choose to have the fee assessed only to certain 
market makers, nor can it decide to decrease the amount of the fee, 
whether for some or all market makers in the issue.

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

    The foregoing rule change establishes or changes a due, fee, or 
other CHX charge and therefore has become effective pursuant to section 
19(B)(3)(A) of the Act \9\ and Rule 19b-4(f)(2) thereunder.\10\ At any 
time within 60 days of the filing of the rule change, the Commission 
may summarily abrogate the 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 
purpose of the Act.
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 19b-4(f)(2).
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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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington DC 20549. 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 at the 
Commission's Public Reference Room. Copies of the filing will also be 
available for inspection and copying at the principal office of the 
CHX. All submissions should refer to File No. SR-CHX-2002-19 and should 
be submitted by August 16, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-18971 Filed 7-25-02; 8:45 am]
BILLING CODE 8010-01-P