Federal Register, Volume 68 Issue 224 (Thursday, November 20, 2003)

[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.
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[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]]

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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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.
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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\ .
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\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