[Federal Register Volume 68, Number 224 (Thursday, November 20, 2003)]
[Notices]
[Pages 65477-65483]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-29095]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48787; File No. SR-BSE-2003-17]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Boston Stock Exchange, Inc. Establishing Fees for the 
Proposed Boston Options Exchange Facility

November 14, 2003
    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 November 14, 2003 the Boston Stock Exchange, Inc. (``BSE'' or 
``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 Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The BSE seeks to enact fees for the proposed Boston Options 
Exchange (``BOX'') facility. Proposed new language is italicized.
* * * * *

Fee Schedule

Sec. 1 Trading Fees for Public Customer Accounts

    None.

Sec. 2 Trading Fees Broker Dealer Proprietary Accounts

    a. $0.20 per contract traded;
    --or--
    b. $ 0.40 per contract traded against an order the Trading Host 
filters to prevent trading through the NBBO, pursuant to the procedures 
set forth in Chapter V, Section 16(b) of the BOX Rules.
    c. Plus, where applicable, any surcharge for options on ETFs that 
are passed through by BOX. The applicable surcharges are as follows:
    (1) $ 0.10 per contract for options on the ETF Nasdaq 100 
(``QQQs'').

Sec. 3 Market Maker Trading Fees

    a. Per contract trade execution fee:
    1. $ 0.20 per contract traded in assigned classes;
    --or--
    2. $ 0.20 per contract traded in unassigned classes;
    -or-
    3. $ 0.40 per contract traded against an order the Trading Host 
filters to prevent trading through the NBBO, pursuant to the procedures 
set forth in Chapter V, Section 16(b) of the BOX Rules.
    4. Plus, where applicable, any surcharge for options on ETFs that 
are passed through by BOX. For a list of applicable ETF surcharges, see 
Section 2(c), above.
    b. Minimum Activity Charge (``MAC'')
    The ``notional MAC'' per options class (see table below) is the 
building block for the determination of the BOX Market Maker's monthly 
total MAC which is payable at the end of each month if the per contract 
fee of $ 0.20 per contract traded, when multiplied by the Market 
Maker's actual trade executions for the month, does not result in a 
total trading fee payable to BOX at least equal to the monthly total 
MAC.
    The MAC is totaled across all classes assigned to a Market Maker so 
that volume for one class is fungible against other classes for that 
Market Maker. As a result, although the volume on a given class needed 
to reach an implicit cost of $0.20 a contract may not be achieved, this 
can be compensated by volume in excess of the MAC on another class.
    1. MAC ``Levels.''
    The table below provides the MAC for each of the six ``categories'' 
of options classes listed by BOX. The category for each class is 
determined by its total trading volume across all U.S. options 
exchanges as determined by OCC data. The classifications will be 
adjusted at least twice annually (in January and July, based on the 
average daily volume for the preceding six month period).

----------------------------------------------------------------------------------------------------------------
                                                                                          MAC per market marker
               Class category                      OCC average daily volume  (# of         per appointment per
                                                              contracts)                          month
----------------------------------------------------------------------------------------------------------------
A...........................................  <100,000.................................                  $15,000

[[Page 65478]]

 
B...........................................  50,000 to 99,999.........................                    3,000
C...........................................  25,000 to 49,999.........................                    2,000
D...........................................  10,000 to 24,999.........................                      750
E...........................................  5,000 to 9,999...........................                      250
F...........................................  Less than 5,000..........................                      100
----------------------------------------------------------------------------------------------------------------

    2. MAC ``Adjustments.''
    The MAC will not be applied during the first three calendar months 
following launch. Furthermore, the MAC will be ``indexed'' to BOX's 
overall market share as determined by OCC clearing volumes. At the 
beginning of each calendar month, BOX will calculate its market share 
for the previous month (market share equals total BOX traded volume 
divided by the total OCC cleared volume for the classes that BOX has 
listed). If BOX's overall market share is less than 10%, BOX will 
reduce the MAC applicable for each Market Maker according to the 
following table.

------------------------------------------------------------------------
             BOX market share                    MAC applicable rate
------------------------------------------------------------------------
0% to 4.99%...............................  33.3%
5% to 9.99%...............................  66.7%
10% and more..............................  full MAC
------------------------------------------------------------------------

    c. Volume discount on total volume traded across all assigned 
classes (calculated on monthly basis)
    BOX will provide volume discounts to Market Makers who are 
particularly active on BOX. The discount is applied only after a Market 
Maker meets the minimum level of activity necessary to avoid paying a 
MAC for assigned classes. This discount is calculated monthly for the 
previous calendar month's total trading volume across all the classes 
that the Market Maker holds an appointment as follows:

------------------------------------------------------------------------
Average daily volume as appointed Market Maker  (applicable      Per
            only if MAC thresholds are achieved)               contract
------------------------------------------------------------------------
For all contracts up to a volume of 25,000 contracts.......            0
For the contracts traded between 25,000 and 50,000 (First          $0.03
 Discount Threshold).......................................
For the contracts traded above a total of 50,000 (Second           $0.05
 Discount Threshold).......................................
------------------------------------------------------------------------

    Example: Suppose that, in a given month which had twenty (20) 
trading days, a BOX Market Maker executed 1.2 million contracts. Of 
this total, 1.1 million executions were in the 100 classes for which he 
holds a market maker appointment; the total trading fees due to BOX 
before discount is $220,000 ($.20 multiplied by 1.2 million contracts).
    The total volume across his appointments is an average daily volume 
(``ADV'') of 55,000 contracts per day. 25,000 of these contracts (the 
excess over the first ``threshold'' of 25,000 ADV up to the second 
threshold of 50,000 ADV) are subject to a discount of $0.03; an 
additional 5,000 of these contracts are subject to the second tier 
discount of $0.05.
    [sbull] First threshold discount: 25,000 x $0.03 x 20 days = 
$15,000
    [sbull] Second threshold discount: 5,000 x $0.05 x 20 days = $5,000
    [sbull] Total discount: $20,000
    [sbull] Net trading fees due to BOX for month: $200,000 ($220,000-
$20,000)
    [sbull] ``Implied'' trading fee per contract for Market Maker in 
assigned classes: $200,000/1,100,000 = $0.1818

Sec. 4 InterMarket Linkage

    The following fees are in effect on a Pilot basis, to expire on 
January 31, 2004.

a. Per contract, billed to BOX Participant

------------------------------------------------------------------------
 
------------------------------------------------------------------------
1. BOX trade triggered by an away market Satisfaction               $.40
 (``S'') request...........................................
------------------------------------------------------------
Billed to BOX Participant having executed the offending
 side of the trade subject to the S request.
2. Routing by BOX of PA and P orders, and S requests to             Free
 away market...............................................
------------------------------------------------------------------------

b. Per contract, billed to away market

1. S request received from away market and executed on BOX.         Free
------------------------------------------------------------
2. Inbound P and PA orders.................................         $.20
Same as if were BOX Participant............................
------------------------------------------------------------------------

Sec. 5 Technology Fees

a. Point of Presence (``PoP'') Connection Fee

    BOX's Points of Presence are the sites where BOX Participants 
connect to the BOX network for communication with the BOX Trading Host. 
Each of these PoPs is operated by a third party supplier under contract 
to BOX. The amount to be paid by each BOX Participant is variable based 
on his particular configuration, the determining factors being the 
number of physical connections a BOX Participant has and the bandwidth 
associated with each.
    [sbull] ``Installation'' and ``Hosting'' costs are related to the 
physical installation of equipment (generally routers though possibly 
other hardware) at the PoP site. BOX Participants will be required to 
pay this fee only if they have physical installations at the BOX PoP 
and for which BOX incurs fees from its own service suppliers
    [sbull] ``Cross Connect'' fees are per physical connection and vary 
by size from the smallest (T-1) to the largest (CAT 5)
    Setup (one time change, not applicable for BOX Participants 
connected prior to launch)

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Installation...................................................     $350
----------------------------------------------------------------
Cross connect per T-1..........................................     $250
Cross connect per T-3..........................................     $350
Cross connect per CAT 5........................................     $500
------------------------------------------------------------------------

    Monthly (applicable only after launch)

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Hosting........................................................     $200
----------------------------------------------------------------
Cross connect per T-1..........................................     $100
Cross connect per T-3..........................................     $200
Cross connect per CAT 5........................................     $250
------------------------------------------------------------------------

b. CMS Order Routing Service

    This service is optional for BOX Participants and is offered as an 
alternative to the FIX and proprietary gateways to the BOX Trading 
Host.
    The CMS Gateway is a service provided by BOX to those BOX 
Participants who use the CMS protocol for routing orders. CMS may only 
be used for agency activities (and not for proprietary orders and 
market maker activities).
    Monthly (applicable only after launch)

[[Page 65479]]



------------------------------------------------------------------------
 
------------------------------------------------------------------------
Per firm.......................................................     $250
------------------------------------------------------------------------

c. Back Office Trade Management Software (``TMS'')

TMS is optional software which BOX Participants may subscribe to in 
order to manage their BOX trades prior to their transmission by BOX to 
OCC.
    Monthly Per User Within the Same BOX Participant (applicable only 
after launch)

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Users 1 to 5...................................................     $300
Users 6 to 10..................................................     $250
Users 11 and up................................................     $200
------------------------------------------------------------------------

d. Testing/Support for Third Party Service Providers

    Third Party Service Providers, generally either Independent 
Software Vendors (``ISVs'') who provide ``front end'' trading software 
systems or service bureaus which provide and operate order routing 
systems for broker dealers, may connect to the BOX Trading Host test 
platform. This is necessary both to establish initial compatibility of 
their software as well as to maintain this connectivity as the BOX 
Trading Host implements upgrades and evolutions. This fee is charged 
directly to the Third Party Service Provider, not the Options 
Participant, and is not charged to BOX Participants who connect their 
proprietary software systems to the BOX Trading Host.
    One Time (not applicable for providers connected prior to launch)

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Connection setup.............................................    $10,000
Disconnection................................................       $500
------------------------------------------------------------------------

    Monthly (applicable only after launch)

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Maintenance Fee................................................     $500
------------------------------------------------------------------------

Sec. 6. Compliance Examination Assessment

    Monthly

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Firms for which BOX assumes examination responsibilities.......   $1,500
------------------------------------------------------------------------

* * * * *

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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    In conjunction with the anticipated launch of the proposed BOX, the 
BSE is proposing fees related to the BOX market. The fees would apply 
to the following three constituents in the BOX market:
    [sbull] Public Customers,\3\
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    \3\ A Public Customer is a person that is not a broker or dealer 
in securities.
---------------------------------------------------------------------------

    [sbull] broker-dealers, and
    [sbull] Market Makers.\4\
---------------------------------------------------------------------------

    \4\ A Market Maker is a firm or organization that is registered 
with the Exchange for the purpose of making markets in options 
contracts traded on the Exchange and that is vested with the rights 
and responsibilities specified in Chapter VI of the proposed BOX 
Rules.
---------------------------------------------------------------------------

    The BSE believes that the fees for each of these constituents, in 
combination with unfettered access to the BOX market for Market Makers 
and broker-dealers, would establish a low cost structure that would 
attract order flow to BOX and would promote competitive pricing.
a. Public Customers
    Orders on behalf of Public Customers would not be subject to a 
trading fee. Also, the BSE notes that in keeping with the Exchange's 
flat and open philosophy for BOX, BOX Options Participants \5\ who act 
as agents on behalf of Public Customers (i.e. Order Flow Providers 
(``OFP'')) \6\ would not have to pay seat, lease, or access fees. BSE 
believes some of this cost savings would be passed on to Public 
Customers in the form of price improvement. In fact, the BSE believes 
that the only cost to an Options Participant, acting solely as agent 
for orders on behalf of Public Customers, would be, in most cases, the 
Point of Presence Connection Fee.
b. Broker Dealer Proprietary Accounts
    As a base trading fee, executions on behalf of broker-dealer 
proprietary accounts would be charged a $0.20 per contract trade 
execution fee or a $0.40 fee for executions which result from the NBBO 
filter process. In addition to the base trading fee, executions on 
behalf of broker-dealer proprietary accounts would be charged any 
passed through licensing fees for Exchange-Traded funds (``ETF''), if 
applicable.\7\ These fees would be competitive with other electronic 
exchanges and would be significantly lower than the fees charged for 
orders executed through the auto-execution systems of the floor based 
exchanges.\8\ Additionally, unlike most options exchanges, there would 
be no Payment-for-Order-Flow or marketing surcharges.
---------------------------------------------------------------------------

    \5\ The term ``Options Participant'' or ``Participant'' means a 
firm, or organization that is registered with the Exchange for 
purposes of participating in options trading on BOX as an ``Order 
Flow Provider'' or ``Market Maker.''
    \6\ The terms ``Order Flow Provider'' or ``OFP'' mean those 
Options Participants representing as agent Customer Orders on BOX 
and those non-Market Maker Participants conducting proprietary 
trading.
    \7\ $0.10 per contract for options on Nasdaq 100 (``QQQ'') is 
the only surcharge on ETFs that would be applicable upon BOX's 
launch.
    \8\ For example, the International Securities Exchange (``ISE'') 
charges a non-public customer (a broker-dealer) a $0.12-$0.21 
(depending on ISE A.D.V.) per contract execution fee plus a $.03 
comparison fee. The Chicago Board Options Exchange (``CBOE'') 
charges a non-public customer for an equity option RAES execution a 
$0.30 RAES fee + $0.20 transaction fee + $0.05 trade match fee for a 
total fee of $0.55. BOX would charge a non-public customer a $.20 
per contract trading fee or a $0.40 per contract trading fee for 
executions resulting from the NBBO filter process, as set forth in 
Chapter V, Section 16(b) of the proposed BOX Rules. See Section 2 of 
the BOX Fee Schedule.
---------------------------------------------------------------------------

    As noted above, there would be a $0.40 per contract fee for the 
execution against the exposure of an order which BOX's automatic 
trading system (``Trading Host'') filters against trading through the 
national best bid or offer (``NBBO''), pursuant to the NBBO filter 
procedures set forth in Chapter V, Section 16(b) of the proposed BOX 
Rules. The Exchange would be levying this fee to broker-dealers for the 
costs of providing a service, the NBBO filter process, which would not 
be offered on any other options exchange. The BSE notes that the 
services provided by other options exchanges, such as ``step-up-and-
match'' capabilities (which the BSE believes fall short of BOX's NBBO 
filter process) are not available to broker-dealers.
c. Market Makers
    As a base trading fee, Market Makers would be charged a $0.20 per 
contract trade execution fee for both assigned and unassigned classes 
or $0.40 for executions which result from the NBBO filter process. In 
addition to the base trading fee, Market Makers would be charged any 
passed through licensing fees for ETF, if applicable. As discussed 
below, a Market Maker would be charged a higher fee if the Market Maker 
does not meet certain minimum trade volume thresholds. In addition, a 
Market Maker would receive a discount if other trade volume thresholds 
are exceeded.

[[Page 65480]]

    As stated in the previous paragraph, similar to the fee charged to 
broker-dealers, there is a $0.40 per contract fee for the execution 
against the exposure of an order which the Trading Host filters against 
trading through the NBBO, pursuant to the NBBO filter procedures set 
forth in Chapter V, Section 16(b) of the proposed BOX Rules. However, 
the motivation behind charging this fee to Market Makers is different 
than the motivation behind levying this fee to broker-dealers. The 
Exchange proposes to apply this fee to Market Makers so as to incent 
Market Makers to aggressively post quotations at the NBBO. That is, if 
a Market Maker establishes, or quotes at, the NBBO, the Market Maker 
would not be charged this fee as the NBBO filtering process would not 
be required. However, the BSE believes that this fee would not be of 
such a level so as to deter Market Makers from executing with orders 
exposed through the filtering process.
    The BSE represents that the BOX market model features very low 
barriers to entry for Market Makers. All other U.S. options exchanges 
have costly barriers to entry for market making firms in their expenses 
for the purchase or lease of seats or trading bins, which run, in some 
cases, to as much as $16,000,000. For example, on the ISE, a recent 
sale of a Series B-2 (CMM trading privileges) share was for $1.6 
million in Bin 5 on October 8, 2003, a bin covering only 60 of the 600 
options classes presently listed on the ISE. Purchase of all 10 bins at 
that price would equal $16,000,000. \9\ BOX has no such costly seat or 
bin purchase or lease requirements and has structured its fees so as to 
render Market Maker appointments accessible to qualified firms. In 
addition, efficiencies gained by Market Makers using the BOX technology 
would allow them to manage more classes with less resources, 
significantly reducing operating costs when compared to traditional 
floor based exchanges.
---------------------------------------------------------------------------

    \9\ BSE also notes that the last sale of a Primary Market Maker 
(``PMM'') membership on the ISE was $7.5 million on September 29, 
2003. BOX has no PMM equivalent and therefore lacks this significant 
entry cost.
---------------------------------------------------------------------------

i. Comparison of Market Maker Costs on BOX versus Floor-Based Exchange
    The BSE estimates that a member-firm of a floor based options 
exchange would need a minimum of fifteen individuals to act as Market 
Makers in order to be able to effectively manage the trading of 250 
classes. On BOX, the same result can be achieved with two to three 
traders acting in the capacity of Market Makers, thus accruing 
substantial cost savings in salaries, bonuses and other personnel 
related costs alone, which, under a conservative estimate, could be at 
least $1 million annually.
    Additionally, all of the existing floor based options exchanges 
have various facility and floor related fees (which, in the case of 
some of the floor-based exchanges, are set forth in several pages of 
detail in their schedules of miscellaneous fees). These types of fees 
simply do not exist on BOX. Because of the considerable franchise 
related and other fixed costs \10\ on the existing floor-based 
exchanges, it is difficult to make a meaningful item-by-item comparison 
with an all-electronic market structured like BOX. Nevertheless, the 
BSE believes that when all relevant costs are considered there is a 
strikingly higher overall trading cost to market makers for trading on 
one of the floor-based exchanges when compared to the cost of trading 
on BOX. While the per contract execution fees on BOX would be 
competitive with the existing exchanges, BOX Market Makers would not 
have to bear nearly the same level of fixed costs as do members of the 
existing exchanges.
---------------------------------------------------------------------------

    \10\ For instance, on the CBOE, in addition to the substantial 
up front cost of buying a seat (last sale on October 21, 2003 was 
$280,000), there are numerous one time and recurring facility 
charges such as booth fees, facilities fees, storage fees, access 
fees, in-crowd phone fees, maintenance fees, phonemail fees, coat 
room service fees, charges for lost or damaged jackets, badge fees, 
on-floor line fees, shelf rental fees, in-house pager fees, handset 
fees, satellite television fees, terminal rental fees, technology 
fees, paper ticket fees, and several others to which the BOX market 
has no counterpart.
---------------------------------------------------------------------------

ii. BOX Minimum Activity Charge (``MAC'')
    Another key feature of the BOX market model is an ``open'' policy 
regarding the number of Market Makers that are allowed to be appointed 
to any class after the first six months of trading, as compared to a 
``closed model'' of specialists, Designated Primary Market Makers 
(``DPMs''), and PMMs on the other options exchanges. This unique 
approach is not without costs to BOX however. The key factor driving 
BOX costs is the total number of Market Maker appointments,\11\ as 
BOX's hardware and telecommunication infrastructure must accommodate 
the heavy message traffic generated by Market Makers. Trade executions 
are expected to represent a small percentage of the overall BOX 
traffic, yet would account for the majority of BOX's revenue.
---------------------------------------------------------------------------

    \11\ The total number of Market Maker appointments refers to the 
number of registered Market Makers per class. For example, if there 
are 100 classes with an average of ten Market Makers per class, 
there are 1,000 appointments.
---------------------------------------------------------------------------

    The BSE believes that the low barriers to entry for the BOX market, 
coupled with the pent up demand for the ability to make markets in the 
U.S. options industry, as demonstrated by the number of market making 
applications for the proposed BOX market, would result in BOX having 
significantly more Market Makers per class than other markets.\12\ 
Accordingly, the BSE could experience a financial burden in relation to 
its proposed BOX facility if it attempted to accommodate this extra 
demand by adding capacity to the BOX trading engine without some 
guaranteed off-setting revenue. Therefore, the pricing model proposed 
for the Market Maker firms is comprised of a Minimum Activity Charge 
(MAC) and a volume discount. The base trading fee per contract executed 
for a Market Maker is $0.20. If a Market Maker's monthly trading 
activity is low, the MAC may be applicable. The actual MAC for a given 
options class would vary periodically with industry-wide trading 
volume, as determined by Options Clearing Corporation (``OCC'') 
clearing data (see MAC Level chart below). If the total trading fees 
for a Market Maker in a given month do not exceed the total MAC for the 
classes for which a Market Maker holds appointments, Market Makers 
would be charged the MAC, rather than the trading fee. In no case would 
the MAC be charged in addition to the trading fees. \13\
---------------------------------------------------------------------------

    \12\ The BSE has received 54 Market Maker applications. 32 
Market Makers are ready for the BOX launch and participated in the 
initial allocation of class appointments. Based on the appointments 
allocated, BOX would have an average of 14 Market Makers per class 
after the first six months of trading.
    \13\ For instance, if the total contracts traded in 25 classes 
in which a Market Maker holds appointments in a given month is 
75,000 which, at the base trading fee rate of $ 0.20 represent total 
trading fees of $15,000, but the total MAC for the 25 classes is 
$16,400, the Market Maker will be obligated to pay the MAC of 
$16,400 for the month, rather than the calculated rate of $15,000.
---------------------------------------------------------------------------

    Throughout the BOX development process, the BSE has strived to 
minimize the cost of entry to participants, while at the same time 
ensuring that BOX would recoup its operating costs. The MAC for each 
class was established to accomplish three objectives: (1) Recoup BOX's 
monthly operating costs; (2) provide one of the most cost competitive 
fee schedules in the U.S. options market; and (3) provide proper 
incentives for OFPs to send order flow to BOX.

[[Page 65481]]

iii. Determination of the MAC for a Given Options Class
    For purposes of determining the MAC for each options class listed 
by BOX, the options classes listed by BOX would be divided into six 
classes, based on the total trading volume of each class across all 
U.S. options exchanges as determined by OCC data. The classifications 
would be adjusted at least twice annually (in January and July, based 
on the average daily volume for the preceding six month period).

----------------------------------------------------------------------------------------------------------------
                                                                                           MAC per market maker
               Class category                  OCC average daily volume  ( of     per appointment per
                                                              contracts)                          month
----------------------------------------------------------------------------------------------------------------
A...........................................  100,000.......................                  $15,000
B...........................................  50,000 to 99,999.........................                    3,000
C...........................................  25,000 to 49,999.........................                    2,000
D...........................................  10,000 to 24,999.........................                      750
E...........................................  5,000 to 9,999...........................                      250
F...........................................  Less than 5,000..........................                      100
----------------------------------------------------------------------------------------------------------------

    The proposed MAC represents the OCC market share per Market Maker 
of approximately 1% with an implicit transaction fee per contract of 
$0.20. For example, for options on Nasdaq 100 shares (QQQ) (Class 
Category A because of its high daily trading volume), the execution 
volume required by each Market Maker that results in an effective rate 
of $0.20 per contract would be 3,750 contracts. This is equivalent to 
0.9% of OCC volume on this class. The MAC for QQQ would be $15,000 per 
month, which is equal to 3,750 contracts per day ($15,000/$0.20/20 
trading days).
    Although a Market Maker may not achieve enough trades to meet its 
MAC in a class in a given month, its implicit cost per contract would 
only increase by minimal amounts. For instance, if a Market Maker is 
assigned to all the currently proposed 250 classes, based on first and 
second quarter 2003 OCC volume, the monthly MAC for that Market Maker 
would be $104,400. To reach an effective cost of $0.20 per contract, 
this Market Maker would need to trade at least 522,000 contracts (and 
the Trading Fee, rather than the MAC, would apply). If the Market Maker 
traded only 400,000 contracts, his implicit cost per contract would be 
$0.26. The MAC is totaled across all classes assigned to a Market Maker 
so that volume for one class is fungible against other classes for that 
Market Maker. As a result, although the volume on a given class needed 
to reach an implicit cost of $0.20 a contract may not be achieved, this 
can be compensated for by volume in excess of the MAC on another class, 
as the following table exemplifies.
    In the example below, a Market Maker holds appointments on eleven 
options classes. The related MAC for each class is shown in the second 
column; the total of this column is the Market Maker's Total MAC for 
that month. The Market Maker's actual traded volume for each class for 
the month is provided in the third column. If the fees payable to BOX 
for his traded volume, at a rate of $0.20 per contract, do not total to 
at least the total MAC for a given month, he would instead be billed 
the Total MAC ($12,100).
    Since the Total MAC in the above table is greater than the Total 
Trading Fee calculated from actual volume for the month, the Market 
Maker must pay the Total MAC. This gives him an implied trading fee per 
contract of slightly more than $0.21 ($12,100 divided by 57,500) which 
is, of course, still very competitive with the other options exchanges, 
particularly when factoring in the substantial fixed costs of seat or 
bin memberships, either leased or owned that have no counterpart on 
BOX.
    In summary, the ``notional MAC'' per options class is the building 
block for the determination of each Market Maker's monthly MAC. At the 
end of each month, a Market Maker would be obligated to pay the Total 
MAC, instead of the Total Trading Fee, if the per contract trading fee 
of $0.20, when multiplied by the Market Maker's actual trade executions 
for the month, does not result in a Total Trading Fee payable to BOX at 
least equal to the MAC.
    The MAC would not be applied during the first three calendar months 
following launch. Furthermore, the MAC would be ``indexed'' to BOX's 
overall market share as determined by OCC clearing volumes. At the 
beginning of each calendar month, BOX would calculate its market share 
for the previous month (market share equals the total BOX traded volume 
divided by the total OCC cleared volume for the classes that BOX has 
listed). If BOX's overall market share is less than 10%, BOX would 
reduce the MAC applicable for each Market Maker according to the 
following table:

             Table A.--Sample Monthly MAC for a Market Maker
------------------------------------------------------------------------
                                                   Actual
         Appointed Class              MAC $        volume      Trading
                                                   traded       fee $
------------------------------------------------------------------------
A................................        3,000       15,000        3,000
B................................        2,000       12,000        2,400
C................................        2,000       10,000        2,000
D................................        2,000        7,000        1,400
E................................          750        2,000          400
F................................          750        2,000          400
G................................          750        2,500          500
H................................          250        1,500          300
I................................          250        1,000          200
J................................          250        2,500          500
K................................          100        2,000          400
                                  --------------
    Totals.......................       12,100       57,500       11,500
------------------------------------------------------------------------


[[Page 65482]]


------------------------------------------------------------------------
             BOX market share                    MAC applicable rate
------------------------------------------------------------------------
0% to 4.99%...............................  33.3%
5% to 9.99%...............................  66.7%
10% and more..............................  full MAC
------------------------------------------------------------------------

    The BSE has determined that a fixed dollar amount for the MAC, 
rather than a percentage of OCC volume for each class, is preferable 
for determining the MAC. With a fixed dollar amount, Market Makers 
would be better able to know in advance their costs and be able to 
adjust their operations, minimize other costs and react to ensure they 
meet their monthly fee objectives. A percentage calculation would not 
allow Market Makers to achieve this objective as the fee would be 
variable monthly and Market Makers would not be able to plan their 
activities accordingly. The Exchange believes that a fixed dollar 
amount is easier to manage and thus is more in line with the spirit of 
the MAC.
iv. Adjustment of MAC Categories
    The BSE would review the MAC categories at least twice per year in 
January and July. Although the MAC applicable to each category would 
remain constant, the category applicable to each class would be 
reviewed to reflect new OCC volume data for each class. The January 
review would be based on actual OCC volume for the last 6 months of the 
previous year, and the June review would be based on the first 6 months 
of current year. If exceptional events or news occur in a given class, 
the Exchange may review the MAC level for that class at anytime. The 
BSE would file with the Commission any changes to its fees pursuant to 
section 19 of the Act.\14\
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    \14\ 15 U.S.C. 78s.
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v. Volume Discounts
    The Exchange would also provide a volume discount if a Market 
Maker's average daily volume in a given month exceeds certain 
thresholds, including the minimum level of activity necessary to avoid 
paying a MAC for assigned classes. A Market Maker's activity will first 
be applied to meeting his MAC requirement. The volume discount will 
apply to any additional activity. The BSE believes that the volume 
levels are realistic and achievable, and that the discount levels are 
substantial so as to incent Market Makers to participate in the BOX 
market and provide customers with the beneficial effects of both low 
cost trading, as well as enhanced price improvement opportunities 
through BOX's unique Price Improvement Period. The Volume Discounts 
would be as follows:

------------------------------------------------------------------------
 Average daily volume as appointed Market Maker (applicable      Per
            only if MAC thresholds are achieved)               contract
------------------------------------------------------------------------
For all contracts up to a volume of 25,000 contracts.......            0
For the contracts traded between 25,000 and 50,000 (First          $0.03
 Discoubt Threshold).......................................
For the contracts traded above a total of 50,000 (Second            0.05
 Discount Threshold).......................................
------------------------------------------------------------------------

    As an example of how the Volume Discount would apply, suppose that, 
in a given month which had twenty (20) trading days, a Market Maker 
executed 1.2 million contracts. Of this total, 1.1 million executions 
were in the 100 classes for which he holds a market maker appointment; 
the total trading fees due to BOX before discount would be $220,000 
($0.20 multiplied by 1.1 million executions).
    The total volume across his appointments would be an average daily 
volume (``ADV'') of 55,000 contracts per day. 25,000 of these contracts 
(the excess over the first ``threshold'' of 25,000 ADV up to the second 
threshold of 50,000 ADV) would be subject to a discount of $0.03; an 
additional 5,000 of these contracts would be subject to the second tier 
discount of $0.05. The following discounts would apply:
    [sbull] First threshold discount: 25,000 x $0.03 x 20 days = 
$15,000
    [sbull] Second threshold discount: 5,000 x $0.05 x 20 days = $5,000
    [sbull] Total discount: $20,000
    [sbull] Net trading fees due to BOX for month: $200,000 ($220,000-
$20,000)
    [sbull] ``Implied'' trading fee per contract for Market Maker in 
assigned classes: $200,000/1,100,000 = $0.1818
    The Exchange believes that the total actual trading costs for 
Market Makers on the proposed BOX market, when compared to the actual 
total costs of trading on all of the existing options exchanges, pose 
very low barriers to access and entry into the U.S. options trading 
arena. The BSE strongly believes that lower total costs for Market 
Makers in combination with unfettered access (i.e., no purchase or 
lease requirements and open class appointments) and automated price 
time priority trading would create a competitive market on BOX in which 
Market Makers would have the proper incentives to pass on their cost 
savings in the form of better quotes, tighter spreads and price 
improvement to all market participants.
d. Other Fees
i. InterMarket Linkage
    The Exchange is also proposing various other fees, including fees 
for trades executed via the InterMarket Linkage (``Linkage''). These 
Linkage fees include charges to Options Participants, such as those for 
a trade in the BOX market which is triggered by an away market's 
satisfaction request,\15\ as well as a charge levied on away markets 
for inbound Principal (``P'') and Principal as Agent (``PA'') orders. 
This charge to an away market would not be in addition to any other per 
contract charges on BOX and is equivalent to the regular trading fee 
for Market Maker and broker-dealer accounts on BOX. The side of a BOX 
trade opposite an inbound P or PA order would be billed normally as any 
other BOX trade.\16\
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    \15\ Consistent with the plan governing the operation of the 
Linkage, no fees will be charged to the parties sending the 
Satisfaction request to BOX. Rather, the fee will be charged to the 
BOX Options Participant that was responsible for the trade-through 
that caused the Satisfaction request to be sent.
    \16\ See section 4 of the proposed BOX Fee Schedule.
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    As with all of the existing exchanges, the BSE is proposing that 
its fees related to the Linkage be approved on a pilot basis, until 
January 31, 2004. If, in concert with the other options exchanges, the 
BSE seeks to extend the pilot period for the effectiveness of these 
fees, such an extension would be the basis of a subsequent rule filing.
ii. Compliance Assessment if BSE is DOEA
    Also included in the proposed fee schedule for the BOX market is a 
monthly compliance assessment for firms for which the BSE assumes 
examination responsibilities under the inter exchange allocation 
process pursuant to Rule 17d-2 of the Act.\17\
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    \17\ See section 6 of the proposed BOX Fee Schedule.
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iii. Technology and Other Fees
    The proposed fee schedule also includes certain technology fees. 
These include fees for services such as installation and hosting fees 
for Point of Presence Connection. BOX's Points of Presence (``PoP'') 
are the sites where BOX Participants connect to the BOX network for 
communication with the BOX Trading Host. Each of these PoPs is operated 
by a third party supplier under contract to BOX. Through connection 
fees, BOX would recuperate the fees charged by each PoP contractor for 
the use of the facility by a BOX Participant. The amount to be paid by 
each BOX Participant is variable based

[[Page 65483]]

on his particular configuration, the determining factors being the 
number of physical connections a BOX Participant has and the bandwidth 
associated with each.\18\
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    \18\ See section 5(a) of the proposed BOX Fee Schedule.
---------------------------------------------------------------------------

    Additionally, there would be certain installation and hosting costs 
which are related to the physical installation of equipment (generally 
routers, though possibly other hardware) at the PoP site. BOX 
Participants would be required to pay this fee only if they have 
physical installations at the BOX PoP and for which BOX incurs fees 
from its own service suppliers.
    Finally, there is also a ``Cross Connect'' fee per physical 
connection which varies by size from the smallest (T-1) to the largest 
(CAT 5).\19\
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    \19\ See section 5(a) of the proposed BOX Fee Schedule.
---------------------------------------------------------------------------

    There also would be fees for optional services such as:
    CMS Order Routing Service Fee. This service is optional for BOX 
Participants and is offered as an alternative to the FIX and 
proprietary gateways to the BOX Trading Host. The CMS Gateway is a 
service provided by BOX to those BOX Participants who use the CMS 
protocol for routing orders. CMS may only be used for agency activities 
(and not proprietary orders and market maker activities). BOX has 
subcontracted with a software bureau for the operation of this gateway; 
the per firm, per month fee is to recuperate some of the costs BOX 
incurs in paying the software supplier to provide this service.\20\ 
Back Office Trade Management Software (``TMS'') Fee. TMS is optional 
software which BOX Participants may subscribe to in order to manage 
their BOX trades prior to their transmission by BOX to OCC. It is 
useful only to BOX Participants acting as agent for public customers or 
other broker-dealer accounts. If a firm is able to include all relevant 
clearing data on an order prior to sending it to BOX, this software is 
not required since the order entry formats of BOX messages allow the 
BOX Participant to achieve straight through processing.\21\ .
---------------------------------------------------------------------------

    \20\ See section 5(b) of the proposed BOX Fee Schedule.
    \21\ See section 5(c) of the proposed BOX Fee Schedule.
---------------------------------------------------------------------------

    Testing and Support for Third Party Providers Fee. Third Party 
Service Providers, generally either Independent Software Vendors 
(``ISVs'') who provide ``front end'' trading software systems or 
service bureaus which provide and operate order routing systems for 
broker dealers, may connect to the BOX Trading Host test platform. This 
is necessary both to establish initial compatibility of their software 
as well as to maintain this connectivity as the BOX Trading Host 
implements upgrades and evolutions. This fee is charged directly to the 
Third Party Service Provider, not the Options Participant, and is not 
charged to BOX Participants who connect their proprietary software 
systems to the BOX Trading Host.\22\
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    \22\ See section 5(d) of the proposed BOX Fee Schedule.
---------------------------------------------------------------------------

    None of the technology related fees would be billed prior to the 
launch of trading on BOX.
    In all instances, the Exchange has strived to structure its fees to 
eliminate complexity and hidden charges in its BOX fee schedule, and, 
to that end, is proposing a minimal number of fees at very competitive 
rates.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the requirements under section 6(b) of the Act,\23\ in general, 
and furthers the objective of section 6(b)(4) of the Act,\24\ in 
particular, in that it provides for the equitable allocation of 
reasonable dues, fees and other charges among its members.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78f(b).
    \24\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

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

    The Exchange did not solicit or receive written comments on the 
proposed rule change.

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 Exchange 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.

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 20549-0609. 
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 filings will also be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-BSE-2003-17 and 
should be submitted by December 11, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-29095 Filed 11-18-03; 9:31 am]
BILLING CODE 8010-01-P