[Federal Register Volume 69, Number 12 (Tuesday, January 20, 2004)]
[Notices]
[Pages 2773-2775]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-1116]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49066; File No. SR-BSE-2003-17]


Self-Regulatory Organizations; Boston Stock Exchange, Inc.; Order 
Approving Proposed Rule Change Establishing Fees for the Boston Options 
Exchange Facility and Approving the Portion of the Proposed Rule Change 
Relating to Linkage Fees on a Pilot Basis Until January 31, 2004

January 13, 2004.

I. Introduction

    On November 14, 2003, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change that would establish fees for the Exchange's 
options trading facility, Boston Options Exchange (``BOX'').\3\ On 
November 20, 2003, the Exchange's rule proposal was published for 
comment in the Federal Register.\4\ No comment letters were received on 
the proposal. This order approves the proposed rule change and approves 
the portion of the proposed rule change relating to linkage fees on a 
pilot basis until January 31, 2004.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 49068 (January 13, 
2004).
    \4\ See Securities Exchange Act Release No. 48787 (November 14, 
2003), 68 FR 65477 (November 20, 2003).
---------------------------------------------------------------------------

II. Description of Proposal

    In conjunction with its proposal to operate a new options 
facility--BOX--the BSE proposes a fee schedule relating to the BOX 
market.

A. BOX Trading Fees

    The BSE proposes to establish trading fees related to the BOX 
market. The fees would apply to Public Customers,\5\ broker-dealers, 
and Market Makers.\6\
---------------------------------------------------------------------------

    \5\ A Public Customer is a person that is not a broker or dealer 
in securities. See BOX Rules, Chapter I, Sec. 1(a)(50).
    \6\ A Market Maker registered with the Exchange is vested with 
the rights and responsibilities specified in Chapter VI of the BOX 
Rules.
---------------------------------------------------------------------------

1. Per Contract Fees
    Executions of Public Customer orders would not be subject to a 
trading fee. Executions of orders for broker-dealer proprietary 
accounts and BOX Market Maker accounts would be charged a $0.20 per 
contract trade execution fee, or a $0.40 per contract fee for trades 
against an order that BOX's automatic trading system (``Trading Host'') 
filters to prevent trading through the NBBO, pursuant to the NBBO 
filter procedures set forth in Chapter V, Section 16(b) of the BOX 
Rules. The BSE proposes to assess the $0.40 per contract fee to Market 
Makers as an incentive for Market Makers to post competitive 
quotations, and to broker-dealers for the cost of providing a service 
that is not available to broker-dealers on other exchanges. In 
addition, executions on behalf of broker-dealer proprietary accounts 
and BOX Market Maker accounts would be charged any passed-through 
licensing fees for Exchange Traded Funds (``ETFs''), if applicable. At 
BOX's launch, the only applicable surcharge on ETFs would be a $0.10 
per contract fee for options on the Nasdaq 100 (``QQQ'').
2. Alternative Trading Fees: BOX Minimum Activity Charge
    The pricing model proposed for Market Makers includes a Minimum 
Activity Charge (``MAC'') for each class to which a Market Maker is 
appointed. The MAC would vary depending on the total trading volume 
across all options exchanges, as determined by the Options Clearing 
Corporation (``OCC'') clearing data,\7\ in a particular class, and 
would be equal to approximately $0.20 times the number of contracts 
equaling 1% of the total industry-wide volume. As noted above, the per 
contract trading fee for a Market Maker is $0.20 per contract. If the 
total per contract trading fees for a Market Maker in a given month do 
not exceed the total MAC for all classes for which that Market Maker 
holds appointments, that Market Maker would be charged the total MAC, 
rather than the trading fee. Thus, if a Market Maker's monthly trading 
activity is low, the MAC may be applicable. If, however, a Market 
Maker's total trading fees exceed the MAC, the Market Maker would pay 
the trading fees.
---------------------------------------------------------------------------

    \7\ 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). 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 a proposed rule change with the 
Commission regarding any changes to its fees, including the MAC, 
pursuant to section 19 of the Act. 15 U.S.C. 78s.
---------------------------------------------------------------------------

    The MAC would not be applied during the first three calendar months 
following BOX's launch. Subsequently, the MAC would be ``indexed'' to 
BOX's overall market share as determined by OCC clearing volumes. 
Specifically, 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 to each Market Maker as 
follows: (1) If BOX's market share were less than 5%, the MAC would be 
33.3% of the full MAC; and (2) if BOX's market share were between 5% 
and 10%, the MAC would be 66.7% of the full MAC.
3. Volume Discounts
    The Exchange would provide certain volume discounts if a Market 
Maker's average daily volume in a given month exceeds certain 
thresholds.

B. Other Fees

1. InterMarket Linkage
    The Exchange is proposing on a pilot basis, until January 31, 
2004,\8\ fees for trades executed via the InterMarket Linkage 
(``Linkage''). These Linkage fees include charges to Options 
Participants, such as a $0.40 per contract charge for a trade in the 
BOX market, that is

[[Page 2774]]

triggered by an away market's satisfaction request,\9\ as well as a 
$0.20 per contract 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 comparable 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 as any other BOX trade.
---------------------------------------------------------------------------

    \8\ If the BSE seeks to extend the pilot period for the 
effectiveness of these fees, the BSE would file a proposed rule 
change pursuant to Section 19(b) of the Act. 15 U.S.C. 78s(b).
    \9\ Consistent with the national market system 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.
---------------------------------------------------------------------------

2. Compliance Assessment if BSE Is the Designated Options Examining 
Authority
    The BSE also proposes to charge a monthly compliance assessment of 
$1,500 for firms for which the BSE assumes examination responsibilities 
under the inter-exchange allocation process of the Revised Options-
related Sales Practice 17d-2 Plan (``17d-2 Plan''),\10\ pursuant to 
Rule 17d-2 under the Act.\11\
---------------------------------------------------------------------------

    \10\ The BSE plans to join the 17d-2 Plan as a participant.
    \11\ 17 CFR 240.17d-2.
---------------------------------------------------------------------------

3. Technology and Other Fees
    The BSE would charge fees relating to BOX's Points of Presence 
(``PoP''), 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 recover 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 on its particular 
configuration, the determining factors would be the number of physical 
connections a BOX Participant has and the associated bandwidth.
    Additionally, BSE proposes fees relating to 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 for which BOX incurs 
fees from its service suppliers.
    BSE also proposes to charge a ``Cross Connect'' fee per physical 
connection, which varies by size from the smallest (T-1) to the largest 
(CAT 5).\12\
---------------------------------------------------------------------------

    \12\ These fees include one-time charges, not applicable for BOX 
participants connected prior to the BOX launch, and monthly fees, 
applicable only after the BOX launch.
---------------------------------------------------------------------------

4. Fees for Optional Services and Fees for Entities Other Than BOX 
Participants
    BSE proposes a fee for Common Message Switch (``CMS'') Order 
Routing Services offered as an alternative to the FIX protocol and 
proprietary gateways to the BOX Trading Host. The CMS Gateway is an 
optional service provided by BOX to those BOX Participants who use the 
CMS protocol for routing orders. CMS may be used only for agency 
activities (and not proprietary orders and market maker activities).
    BSE also proposes a fee for the use of its Back Office Trade 
Management Software (``TMS''), an optional software, which BOX 
Participants may subscribe to in order to manage their BOX trades prior 
to their transmission by BOX to OCC. TMS 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.
    Finally, BSE proposes a fee for testing and 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 connection is used by third party 
service providers 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 would be charged 
directly to the third party service provider, not the BOX Participant, 
and would not be charged to BOX Participants who connect their 
proprietary software systems to the BOX Trading Host.

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
\13\ and, in particular, the requirements of section 6(b)(4) of the 
Act.\14\ Section 6(b)(4) requires that the rules of the exchange 
provide for the equitable allocation of reasonable dues, fees, and 
other charges among its members and issuers and other persons using its 
facilities. The Commission finds that the proposal to establish fees 
for the BOX facility is consistent with section 6(b)(4) of the Act, in 
that the proposal is reasonably tailored to apportion fees to BOX 
Participants and third party service providers based on the services 
the BOX facility will provide to these users.
---------------------------------------------------------------------------

    \13\ The Commission has considered the proposed rule's impact on 
efficiency, competition and capital formation. 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

    The Commission believes that the base trading fees charged to the 
constituents of the BOX market are reasonable, particularly in light of 
the trading fees charged by other options exchanges. In addition, the 
per contract trading fees are the same for all broker-dealers and 
Market Makers. Moreover, the $0.40 per contract fee for the execution 
against the exposure of an order that BOX's Trading Host filters 
against the NBBO is reasonable as BSE represents that it would be 
levied against broker-dealers to recover the cost of providing a 
service, and against Market Makers as an incentive to post competitive 
quotations.
    The Commission believes that the proposed MAC that would be charged 
if a Market Maker's monthly trading activity were below a certain 
threshold is reasonable. The Commission notes that the BSE has based 
the MAC on its evaluation of data from the OCC and plans to review the 
MAC categories at least twice a year. Even if a BOX Market Maker were 
to trade a number of contracts less than that required to avoid paying 
the MAC, the per contract costs associated with trading on BOX would 
still be comparable to charges imposed by other exchanges.
    The Commission also finds that the other fees proposed by BOX are 
reasonable. The InterMarket Linkage fees proposed by BOX are generally 
consistent with those charged by the other options exchanges. The 
monthly compliance assessment for firms for which BSE assumes 
examination responsibilities is based on the regulatory services that 
BSE will provide and is consistent with the regulatory fees charged by 
other exchanges. Finally, the technology fees assessed by BOX are based 
on the BOX participants' usage of the services

[[Page 2775]]

provided, as well as on the costs for the physical installations of 
equipment.

IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the Act 
\15\ that the proposed rule change (File No. SR-BSE-2003-17) is hereby 
approved and the portion of the proposed rule change relating to 
linkage fees is approved on a pilot basis until January 31, 2004.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78s(b)(2).

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-1116 Filed 1-16-04; 8:45 am]
BILLING CODE 8010-01-P