[Federal Register Volume 68, Number 108 (Thursday, June 5, 2003)]
[Notices]
[Pages 33749-33751]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-14171]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47948; File No. SR-CBOE-2003-19]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Inc. To Reinstate the Imposition of a Marketing Fee

    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 May 13, 2003, the Chicago Board Options Exchange, Inc. (``CBOE'') 
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 CBOE has designated this 
proposal as one establishing or changing a due, fee, or other charge 
imposed by the CBOE under section 19(b)(3)(A)(ii) of the Act,\3\ which 
renders the proposal effective upon filing with the Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change


    The CBOE proposes to reinstate a marketing fee, which it previously 
had suspended effective October 1, 2001, to be imposed on certain 
transactions of market-makers, including Designated Primary Market 
Makers (``DPMs''), for the purpose of attracting order flow to the 
CBOE. The fee will be imposed at a rate of $.40 per contract on market-
maker transactions, including those of DPMs, in all classes of options 
in which a DPM has been appointed. The marketing fee will be effective 
as of June 1, 2003. The text of the proposed rule change is available 
at the CBOE and at the Commission.

[[Page 33750]]

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 its proposal and discussed any 
comments it had received regarding the proposal. 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.

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

1. Purpose
    Effective August 1, 2001, the CBOE suspended its $.40 per contract 
marketing fee that was used by the appropriate DPM to attract order 
flow to the CBOE.\4\ The CBOE previously had established its marketing 
fee effective as of July 1, 2000.\5\ At the time the CBOE suspended the 
assessment of the marketing fee, it expressly noted that it reserved 
the right to reinstate the marketing fee at a future date if it deemed 
appropriate, and that it might establish a pre-contract fee different 
from the former $.40 per contract marketing fee. At the time the CBOE 
suspended its marketing fee, both the American Stock Exchange and the 
Philadelphia Stock Exchange also suspended their marketing fee 
programs. Two other options exchanges (the Pacific Exchange and the 
International Securities Exchange) continued to impose a marketing fee 
program for the purpose of attracting order flow to those exchanges. 
The Philadelphia Stock Exchange has since reinstated its marketing fee 
program. The CBOE believes that these programs operate to the 
competitive disadvantage of the CBOE.
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    \4\ See Exchange Act Release No. 44717 (August 16, 2001), 66 FR 
44655 (August 24, 2001), (SR-CBOE-2001-43).
    \5\ See Exchange Act Release No. 43112 (August 3, 2000), 65 FR 
49040 (August 10, 2000), (SR-CBOE-00-28).
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    The CBOE states that it has determined to reinstate its marketing 
fee program in a modified form, effective June 1, 2003. The fee will be 
imposed at a rate of $.40 per contract on market-maker transactions, 
including those of DPMs, in all classes of options in which a DPM has 
been appointed as described below. According to the CBOE, this program, 
like the CBOE's prior marketing fee program, provides for the equitable 
allocation of a reasonable fee among the CBOE members and is designed 
to enable the CBOE to compete with other markets in attracting options 
order flow in multiply traded options from firms that include payment 
as a factor in their order routing decisions in designated classes of 
options. However, the CBOE has slightly modified its marketing fee 
program with the goal of imposing the fee only with respect to those 
market-maker transactions involving customer orders from firms that 
accept payment for their orders. Accordingly, the marketing fee will be 
assessed only on market-maker transactions involving customers of firms 
that accept payment pursuant to agreements with DPMs.
    The CBOE states that it will not have any role with respect to the 
negotiations between DPMs and payment accepting firms. Rather, the CBOE 
proposes to pass through to market-makers and DPMs the fee to be 
collected. In those classes for which a DPM has advised the CBOE that 
it has negotiated with a payment accepting firm to pay for that firm's 
order flow, the CBOE will provide administrative support for the 
program. Specifically, the CBOE asserts that it will keep track of the 
number of qualified orders each payment accepting firm directs to the 
CBOE, and make the necessary debits and credits to the accounts of the 
DPMs, market-makers, and the payment accepting firms to reflect the 
payments that are to be made. The CBOE represents that all of the funds 
generated by the fee will be used only to pay the firms for the order 
flow sent to the CBOE.
    The CBOE believes that $.40 per contract is an equitable allocation 
of a reasonable fee among CBOE members. The CBOE states that it has 
designed this program to enable it to compete with other markets in 
attracting options order flow in multiply traded options. If a DPM 
advises the CBOE that it has negotiated a lower amount, the CBOE will 
refund to market-makers and DPMs the excess fee collected.
    The CBOE states that the marketing fee will be assessed only on 
transactions of market-makers (including DPMs) resulting from orders 
for 200 contracts or less from customers of payment accepting firms. In 
the CBOE's view, because the marketing fee will be passed through only 
to those market-makers' transactions resulting from orders from 
customers of a payment accepting firm that the DPM has independently 
negotiated with to pay for that firm's order flow, there will be a 
direct and fair correlation between those members who pay the costs of 
the marketing program funded by the fee and those who receive the 
benefits of the program.
    The CBOE represents that after the marketing fee has been in effect 
for three months, the members of a particular trading crowd may 
determine not to participate in this marketing fee program pursuant to 
the procedures that the CBOE is proposing in a new Interpretation .12 
to CBOE Rule 8.7. These procedures are described in a separate proposed 
rule change, SR-CBOE-2003-20, that the CBOE has filed with the 
Commission.\6\ The CBOE is proposing to institute these procedures as a 
pilot program, which is to expire one year after the Commission 
approval.
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    \6\ Contemporaneous with the filing of this proposed rule 
change, CBOE filed SR-CBOE-2003-20, which sets forth the procedures 
by which a trading crowd may manifest its intention that it does not 
want to participate in the CBOE's marketing fee program. The CBOE 
has requested accelerated approval of this proposed rule change as a 
pilot program.
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    According to the CBOE, it is important to note that although 
market-maker transactions resulting from customer orders from firms 
that do not accept payment for their orders are not subject to the fee, 
CBOE market-makers will have no way of identifying prior to execution 
whether a particular order is from a payment-accepting firm, or from a 
firm that does not accept payment for their order flow.
    In connection with any program involving payment for order flow 
that may be funded by the CBOE's proposed marketing fee, the CBOE 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.
2. Statutory Basis
    The CBOE believes that because this marketing fee will serve to 
enhance the competitiveness of the CBOE and its members, this proposal 
is consistent with and furthers the objectives of the Act, including 
specifically section 6(b)(5) thereof,\7\ 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) thereof,\8\ 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. 
The CBOE also believes that the proposed rule change

[[Page 33751]]

is consistent with section 6(b) of the Act,\9\ and furthers the 
objectives of section 6(b)(4) of the Act \10\ in particular, in that it 
is designed to provide for the equitable allocation of reasonable dues, 
fees, and other charges among CBOE members.
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    \7\ 15 U.S.C. 78f(b)(5).
    \8\ 15 U.S.C. 78k-1.
    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(4).
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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

    The CBOE neither solicited nor received written comments 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 CBOE, it has become effective 
pursuant to section 19(b)(3)(A) of the Act \11\ and subparagraph (f) of 
Rule 19b-4 thereunder.\12\ At any time within 60 days after the filing 
of the proposed 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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    \11\ 15 U.S.C. 78s(3)(a).
    \12\ 17 CFR 240.19b-4.
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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 proposal 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 CBOE. All 
submissions should refer to file number SR-CBOE-2003-19 and should be 
submitted by June 26, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-14171 Filed 6-4-03; 8:45 am]
BILLING CODE 8010-01-M