[Federal Register Volume 67, Number 182 (Thursday, September 19, 2002)]
[Notices]
[Pages 59084-59086]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-23814]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46496; File No. SR-BSE-2002-10]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1 and 2 by the Boston Stock Exchange, Inc. To 
Eliminate Its Current Market Data Revenue Sharing Program and Establish 
Two New Market Data Revenue Sharing Programs

September 13, 2002.
    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 22, 2002, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. The BSE amended the proposed rule change on August 2, 
2002.\3\ On August 20, 2002, the BSE again amended the proposed rule 
change.\4\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See August 1, 2002 letter from John A. Boese, Assistant Vice 
President (``AVP''), Legal and Regulatory, BSE, to Nancy Sanow, 
Assistant Director, Division of Market Regulation (``Division''), 
SEC, and attachments (``Amendment No. 1''). Although Amendment No. 1 
makes no substantive changes to the original filing, Amendment No. 1 
completely replaces and supersedes the original filing, so as to 
ensure that the proposed rule change is in proper format.
    \4\ See August 19, 2002 letter from John A. Boese, AVP, Legal 
and Regulatory, BSE, to Nancy Sanow, Assistant Director, Division, 
SEC, and attachments (``Amendment No. 2''). Amendment No. 2 
completely replaces and supersedes Amendment No. 1 and the original 
proposed rule change.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The BSE seeks to amend its Transaction Fee Schedule to eliminate 
its current revenue sharing program and replace it with two new revenue 
sharing programs. The text of the proposed rule change is available at 
the BSE 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 Exchange 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 Exchange 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to amend the Exchange's 
Transaction Fee Schedule by eliminating the BSE's current revenue 
sharing program and replacing it with two new revenue sharing programs 
that would allow the Exchange to continue to provide quality markets to 
its customers at competitive prices. The Exchange believes that its 
current revenue sharing program, which shares a portion of all 
transaction related fees, is too broad in scope and difficult for its 
customers to understand. By implementing a more clearly defined 
comprehensive program, the Exchange seeks to narrow and simplify its 
Transaction Fee Schedule for its customers. The Exchange is seeking to 
implement these new programs on a pilot basis, for an initial period of 
six months.
    Under the Exchange's existing revenue sharing program, the amount 
of revenue to be shared is determined by the total amount of 
transaction related revenue (Value Charge fees, Trade Recording Fees, 
Specialist Transaction fees, Consolidated Tape revenue and Net ITS 
fees) the Exchange generates on a monthly basis. Once the Exchange 
generates $1,700,000 in monthly transaction revenue, 50% of the revenue 
above this amount is shared with those firms that have generated 
$50,000 in monthly-automated transaction revenue. The $50,000 cap is 
reviewed as necessary by the Executive Committee of the Board of 
Governors and adjusted as required to meet the costs of operating the 
trading floor. Each firm that reaches the $50,000 cap receives a pro-
rata share of the excess revenue based on the total number of Exchange 
automated executions executed by those firms that reach the cap. 
However, if the Exchange does not attain its monthly revenue goal, no 
revenue is shared for that month.
    The Exchange is seeking to replace the current revenue sharing 
program with a simpler, more comprehensive, two-part revenue sharing 
program. The first part of this program proposes to

[[Page 59085]]

share 50% of all monthly net Tape A (NYSE) revenues in excess of a 
threshold amount with those firms that generate a minimum of $50,000 in 
overall monthly automated BSE transaction fees.\5\ The threshold amount 
will be periodically reviewed by the Executive Committee of the Board 
of Governors and adjusted as required to meet the costs of operating 
the Exchange. In no case, however, will the threshold amount be less 
than $250,000.00, as the cost of operating the Exchange, given current 
and forecasted revenue, expenses and costs, will not be less than this 
amount.
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    \5\ The automated BSE transaction fees are generated based on 
executions that take place on the BSE. These charges vary on the 
size of the execution. For example, all BSE executions of market and 
marketable limit executions up to and including 2,500 shares are not 
charged a transaction fee. All other BSE executions up to and 
including 2,500 shares are charged $.020 per 100 shares, which is 
reduced to $.035 per 100 shares if the member firm generates at 
least $50,000 in automated BSE transaction fees. All other 
executions are charged on a ``sliding scale'' of $1,000 contract 
value, from $.01 per $1,000 contract value, up to $.16 per $1.000 
contract value, based on the dollar value of the executions 
generated by that firm per month.
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    Although Tape A revenues are received quarterly, for the purpose of 
this program, the net amount received each quarter will be divided in 
three (for each month of that quarter) and the determination of the 
credit will be calculated for each individual month in the quarter. 
Only those firms that are eligible in any particular month will receive 
their pro-rata portion of the credit based on the total number of 
Exchange executions executed by those firms that generate $50,000 in 
BSE automated transaction fees for that month. All credits will be 
calculated monthly but will be distributed quarterly.
    The application of the credit can be demonstrated by the following 
example:
    [sbull] Suppose the Exchange generates $1,500,000 in net Tape A 
revenues for the quarter and the monthly threshold amount the BSE must 
generate is $350,000.

--BSE Net Tape A revenues for the quarter--$1,500,000
--Less: Quarterly threshold (as determined by the executive committee, 
but not less than $250,000 per month). Therefore, the monthly threshold 
of $350,000 is multiplied by 3, for each month of the quarter, for a 
total of $1,050,000--($1,050,000)
--Subtotal (net revenue minus quarterly threshold)--$450,000
--Multiply the subtotal by 50% (percentage of revenue to be shared 
among qualifying firms)--$225,000
--Divide by 3, to reach the amount of revenue to be shared per month 
among qualifying firms ($225,000/3)--$ 75,000

    [sbull] Now assume that four retail firms each generate a minimum 
of $50,000 in automated BSE transaction fees (making them eligible to 
participate in the program) the first month of the quarter. The number 
of Exchange Tape A executions each qualifying firm executes for the 
month are as follows:


Firm A................................  50,000 trades.
Firm B................................  125,000 trades.
Firm C................................  75,000 trades.
Firm D................................  25,000 trades.
                                       ---------------------------------
    Total.............................  375,000 trades.
 

    [sbull] Each qualifying firm would now receive Tape A revenue 
sharing amounts equal to their percentage of the total trades:

--Firm A percentage (150,000 trades/375,000 total qualifying trades)--
40%
--Firm B percentage (125,000 trades/375,000 total qualifying trades)--
33%
--Firm C percentage (75,000 trades/375,000 total qualifying trades)--
20%
--Firm D percentage (25,000 trades/375,000 total qualifying trades)--7%

    [sbull] The dollar amount of Tape A revenues to be shared amongst 
each qualifying firm for the first month of the quarter is arrived at 
by multiplying each qualifying firm's percentage of qualifying trades 
times the revenue available to be shared for that month. In this 
example, the available monthly revenue to be shared is $75,000 (see 
above):

--Firm A (40% x $75,000)--$30,000
--Firm B (33% x $75,000)--$25,000
--Firm C (20% x $75,000)--$15,000
--Firm D (7% x $75,000)--$5,000

    [sbull] The same process would be followed for any subsequent 
months of the quarter in which there are firms which meet the 
qualifying threshold (i.e. $50,000 in automated BSE transaction fees 
for that month), although the percentages and amount of revenue to be 
shared among the qualifying firms would change as applicable.
    The second program proposes to share 50% of the net Tape B (AMEX) 
revenue per trade with those firms that route Tape B business to the 
Exchange. The amount eligible to be shared with customers will be based 
on the BSE's receipt of its distribution of quarterly Tape B revenue. 
There are no thresholds to meet, and the formula for revenue sharing is 
a simple 50% distribution of net Tape B revenues, as demonstrated by 
the following example:
    [sbull] Assume that the BSE receives $90,000 in Tape B revenue for 
the month of January, and executed a total of 25,000 Tape B trades for 
the month.

--BSE revenue in Tape B for the month--$90,000
--Less monthly licensing fees for various Tape B Products (e.g. QQQ, 
SPY, DIA, MDY)--($35,000)
--Total net monthly Tape B revenue--$55,000
--Total BSE Tape B trades for the month--25,000
--Net Tape B revenue per trade (total net monthly revenue divided by 
total Tape B trades for the month, or $55,000/25,000)--$2.20
--Multiply net revenue per trade by 50% (proposed Tape B revenue 
sharing) to reach the total amount of available credit per trade to be 
shared--$1.10
2. Statutory Basis
    The BSE believes that the proposed rule change is consistent with 
section 6(b)(5) of the Act,\6\ in that it is designed to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating securities 
transactions, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system and, in general, to 
protect investors and the public interest.
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    \6\ 15 U.S.C. 78f(b)(5).
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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 either solicited or received.

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

    Within 35 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 BSE consents, the Commission will:
    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

[[Page 59086]]

IV. Solicitation of Comments

    On July 2, 2002, the Commission issued an Order abrogating certain 
proposed rule changes relating to market data revenue sharing 
programs.\7\ In that Order, the Commission expressed concern that the 
subject proposed rule changes raised ``serious questions as to whether 
they are consistent with the Act and with the protection of 
investors.'' Specifically, the Commission questioned the effect of 
market data rebates on the accuracy of market data, and on the 
regulatory functions of self-regulatory organizations.
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    \7\ Securities Exchange Act Release No. 46159 (July 2, 2002), 67 
FR 45775 (July 10, 2002) (File Nos. SR-NASD-2002-61, SR-NASD-2002-
68, SR-CSE-2002-06, and SR-PCX-2002-37)(Order of Summary 
Abrogation).
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    The Commission now solicits comment on the BSE proposed rule 
change, and in general, on (1) market data fees; (2) the collection of 
market data fees; (3) the distribution of market data rebates; (4) the 
effect of market data revenue sharing programs on the accuracy of 
market data; and (5) the impact of market data revenue sharing programs 
on the regulatory functions of self-regulatory organizations.
    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 20549-0609. 
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 
BSE. All submissions should refer to file number SR-BSE-2002-10 and 
should be submitted by October 21, 2002.

    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-23814 Filed 9-18-02; 8:45 am]
BILLING CODE 8010-01-P