[Federal Register Volume 67, Number 153 (Thursday, August 8, 2002)]
[Notices]
[Pages 51612-51614]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-20032]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46297; File No. SR-CHX-2002-25]


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

August 1, 2002.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'')\1\ and Rule 19b4 thereunder,\2\ notice hereby is given that 
on July 30, 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 December 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 51613]]

applicable to transactions occurring on or before December 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, by its terms, expires on July 31, 2002.\5\ Under 
the system currently in place, the CHX calculates, bills, and collects 
the marketing fee and remits 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 Nos. 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); 45282 (January 15, 2002), 67 FR 
3517 (January 24, 2002) (extending program through June 30, 2002); 
and 46233 (July 19, 2002), 67 FR 48960 (July 26, 2002) (extending 
program through July 31, 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 31, 2002.
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    The CHX notes that the proposed marketing fee provision does not 
differ from the previous versions, except that it would extend 
application of the marketing fee through December 31, 2002. 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 the 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. Currently, the 
marketing fee is assessed only against the Nasdaq-100 Index 
exchange-traded fund, commonly known as ``QQQ.''
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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 July 23, 2002. This letter from 
John P. Finnegan of Susquehanna Investment Group, a CHX market maker in 
the Nasdaq 100 Index (or QQQ), noted that since imposition of the 
Marketing Fee the number of CHX market makers trading in exchange-
traded funds (``ETFs'') has dropped from fifteen market makers to three 
market makers. Mr. Finnegan requested that the CHX reduce the amount of 
the marketing fee significantly, to enable the CHX to ``be competitive 
with other marketplaces.''
    The CHX believes that this analysis mistakenly attributes the 
decline in CHX market maker activity to the imposition of the marketing 
fee. The CHX believes that the decline is attributable to other 
factors, including significant competition for ETF order flow from 
other national market participants and alternative trading systems. 
According to the CHX, one alternative trading system has recently 
captured nearly a one-third market share in the QQQ product, a market 
share higher than that sustained by the QQQ listing market. Moreover, 
although 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.

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 
purposes 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

[[Page 51614]]

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-2002-25 and should be 
submitted by August 29, 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. 02-20032 Filed 8-7-02; 8:45 am]
BILLING CODE 8010-01-P