[Federal Register Volume 69, Number 48 (Thursday, March 11, 2004)]
[Notices]
[Pages 11681-11686]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-5549]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49357; File No. SR-CHX-2004-09]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change and Amendment No. 1 Thereto by 
the Chicago Stock Exchange, Inc. Relating to Membership Dues and Fees

March 3, 2004.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice hereby is given that 
on January 30, 2004, the Chicago Stock Exchange, Inc. (``CHX'' 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. On March 
2, 2004, the Exchange filed Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Ellen Neely, Senior Vice President & General 
Counsel, CHX, to Nancy J. Sanow, Assistant Director, Division of 
Market Regulation (``Division''), Commission, dated March 1, 2004 
(``Amendment No. 1''). Amendment No. 1 replaces the proposed rule 
change in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its membership dues and fees 
schedule (the

[[Page 11682]]

``Fee Schedule''), effective February 1, 2004, to: (1) Reduce the fixed 
fees for specialists trading both listed and Nasdaq/NM securities; (2) 
reduce the fixed fee paid by dedicated odd-lot dealers and establish a 
credit for odd-lot dealers that send round-lot orders to the Exchange 
for execution; (3) eliminate the charges currently re-billed to the 
Exchange's floor brokers for NYFIX connectivity; (4) confirm the 
elimination of the Exchange's marketing fee and establish an increase 
in the transaction fees charged to CHX market makers; (5) increase, 
from $10,000 to $12,500, the monthly maximum transaction fee charge for 
MAX orders sent to CHX specialists; (6) increase, from $1,000 per year 
to $3,000 per year, the current MAX access charge; (7) extend the 
existing processing fee to both listed and OTC securities; and (8) make 
non-substantive changes to the organization of the text.
    Below is the text of the proposed rule change. Proposed new 
language is italicized; proposed deletions are in [brackets].
* * * * *

                        MEMBERSHIP DUES AND FEES
 
 
 
A. Membership Dues and Transfer
 Fees
    No change to text.
B. Self-Regulatory Organization Fee  $100 per member and member
 [\1\]                                organization per month. This fee
                                      shall not be applicable to
                                      memberships to which a nominee has
                                      not been assigned and which are
                                      not otherwise being used.
C. Registration Fees
    No change to text.
D. Specialist Assignment Fees
    No change to text.
E. Specialist Fixed Fees
    Except in the case of Exemption Eligible Securities (as defined
     above in Section D), which shall be exempt from assessment of fixed
     fees, specialists will be assigned a fixed fee per assigned stock
     on a monthly basis, to be calculated as follows:
    Fixed Fee Per Dual Trading       $[500,000] 450,000 x Percent of
     System Security =                Fixed Costs Per Tier x (CTA Trade
                                      Volume Per Security/CTA Trade
                                      Volume Per Tier). (Effective
                                      February 1, 2004 [August 1,
                                      2002]).
    Fixed Fee For Specialist Firms   The monthly fixed fee charged each
     Trading Nasdaq/NMS securities    member firm for the month of
     =                                December 2003, less each firm's
                                      pro rata share of $39,750. A
                                      specialist firm's pro rata share
                                      shall be based on the firm's
                                      percentage participation in the
                                      total fixed fees charged in
                                      December 2003. (Effective February
                                      1, 2004).
                                     The monthly fixed fee will be
                                      further reduced to $0, in each
                                      month of 2004, if the Exchange's
                                      overall share volume in Nasdaq/NM
                                      Securities meets the following
                                      targets:
                                     1st Quarter: 40 million average
                                      daily shares;
                                     2nd Quarter: 50 million average
                                      daily shares;
                                     3rd Quarter: 65 million average
                                      daily shares;
                                     4th Quarter: 80 million average
                                      daily shares.
                                     [The lowest monthly fixed fee
                                      charged each member firm for the
                                      period from January through June
                                      2002, less the market data rebate
                                      earned by the firm in June, 2002.]
                                     [Each specialist firm shall be
                                      charged a Fixed Fee Charge equal
                                      to that specialist firm's pro rata
                                      share of an additional $10,000
                                      monthly fee. A specialist firm's
                                      pro rata share shall be based on
                                      the firm's percentage
                                      participation in the total market
                                      data rebates paid to specialist
                                      firms trading Nasdaq/NMS
                                      Securities in June 2002.]
    Fixed Fee Per Dedicated Odd-Lot  $200,000 [$250,000]/year, billed on
     Dealer                           a monthly basis (Effective
                                      February 1, 2004 [January 1,
                                      2001])
 
                             * * * * * * *
F. Transaction and Order Processing Fees
    1. SEC Transaction Fees          No change to text.
    2. NASD Fees on Cleared          No change to text.
     Transactions
    3. Order Processing Fees         No change to text.
    4. Transaction Fees
        a. No change to text.
        b. No change to text.
        c. No change to text.
        d. Executions by market      $.0050 per share (up to a maximum
         makers [Reserved for         of $100 per side), subject to the
         future use.]                 fee reduction described in (i),
                                      below and the fee cap described in
                                      (j) below. (Effective February 1,
                                      2004)

[[Page 11683]]

 
        e. In Nasdaq/NM securities,  $.0025 per share (up to a maximum
         agency executions executed   of $100 per side), subject to the
         through a floor broker       fee reduction described in (i),
         [and market maker            below and the fee cap described in
         executions].                 (j) below.
        f. In Dual Trading System    $.0035 per share (up to a maximum
         issues, agency executions    of $100 per side), subject to the
         executed through a floor     fee reduction described in (i),
         broker [and market maker     below and. the fee cap described
         executions].                 in (j) below.
        g. No change to text.
        h. The monthly maximum for transaction fees for orders sent via
         MAX, except agency orders executed through floor brokers, is
         [$10,000] $12,500 or, if less, $.40 per 100 average monthly
         gross round lot shares. (Effective February 1, 2004)
        i. Effective August 1, 2003, the per-share fees described in
         (d), (e) and (f) above will be reduced on shares traded above a
         total monthly charge of $150,000 (within each section) as
         follows:
 
                             * * * * * * *
        j. The transaction fees set forth in Sections F.4(d), (e) and
         (f) shall be subject to the following monthly maximums:
 
                              * * * * * * *
        k. No change to text.
    5. Floor Broker as Principal     No change to text.
     Fees
    [6. Marketing Fees]
        [(a) A marketing fee of $.01 per share shall be assessed for
         each Subject Transaction in a Subject Issue occurring on or
         before December 31, 2003; provided, however, that a specialist
         who trades a Subject Issue may elect to decline imposition of
         the marketing fee.]
        [``Subject Issue'' shall mean any issue which constitutes an
         exchange-traded fund and meets the following two criteria: (a)
         Average daily share volume in the issue exceeds 150,000 shares
         each month during a consecutive two month period; and (b)
         market maker share participation in the same issue exceeds 1%
         for each month during the same two-month period.]
        [``Subject Transaction'' shall mean (a) any trade with a
         customer, whether the contra party is a specialist or a market
         maker, where the order is delivered to the Exchange via the MAX
         system or where compensation is paid to induce the routing of
         the order to the Exchange; or (b) any trade between a
         specialist and a market maker in which the market maker is
         exercising rights under the market maker entitlement rules, in
         which case the marketing fee shall be assessed against the
         market maker only.]
        [(b) The marketing fee assessed and collected by the Exchange
         shall be remitted to the specialist trading the Subject Issue.
         To the extent that all marketing fees collected during a three-
         month period are not expended by the specialist during such
         period, the Exchange shall refund any remaining marketing fees
         to the payors pro rata in proportion to the marketing fees paid
         by such payors; provided, however, that the Exchange shall not
         be obligated to refund amounts of $1000 or less.]
G. Space Charges
    No change to text.
H. Equipment, Information Services and Technology Charges
 
                              * * * * * * *
    [NYFIX Network and Connection    [All NYFIX charges above $15,000
     Charges]                         per month will be re-billed
                                      monthly to member firms that
                                      access the NYFIX network, based on
                                      the proportion of each firm's use
                                      of the network during the month.]
 
                              * * * * * * *
    MAX Access Charge                $[1,000]3,000 per access point,
                                      allocated pro rata among the firms
                                      that gain access to the Exchange's
                                      MAX system through that access
                                      point. (Effective February 1,
                                      2004)
    OTC Access and Connection        No change to text.
     Charges
 
                              * * * * * * *
I. Clearing Support Fees
    (minimum clearing support fee
     is $600 per month)
    1. Account Fee
        No change to text.
    2. CUSIP Fees
        Specialist OTC CUSIP Fee     $50 per OTC CUSIP per month
        Market Maker CUSIP Fee       $10 per CUSIP per month
        Odd-Lot Dealer CUSIP         $2.50 per CUSIP per month
         Fee[\2\]
        Floor Broker as Principal    $2 per CUSIP per month
        The above Specialist OTC CUSIP Fee will be subject to the
         following discounts:
         If between 20 and 200 trades occur in a particular CUSIP in a
         given month, the Specialist OTC CUSIP Fee for that CUSIP shall
         be $40 for that month.

[[Page 11684]]

 
         If less than 20 trades occur in a particular CUSIP in a given
         month, the Specialist OTC CUSIP Fee for that CUSIP shall be $20
         for that month.
         The Odd Lot Dealer CUSIP fee does not apply to any issue in
         which the odd-lot dealer is also the specialist for the issue.
    3. Processing Fees
        Transactions [in OTC         $.0015/share, up to $100 per side.
         securities] that are
         executed by floor brokers
         in securities that are not
         listed or traded UTP on
         the Exchange [assessed a
         Specialist OTC CUSIP Fee]
         but are processed by the
         Exchange's clearing
         systems.
J. Listing Fees
    No change to text.
K. Market Regulation and Market Surveillance Fees
    No change to text.
L. Supplies and Reports
    No change to text.
M. Credits
 
                              * * * * * * *
    4. Credits for Dedicated Odd-
     Lot Dealers
        Total monthly fees owed by a Dedicated Odd-Lot Dealer will be
         reduced (and these odd-lot dealers will be paid each month for
         any unused credits) by a credit of $.08 per round-lot trade
         sent by the Dedicated Odd-Lot Dealer to Exchange specialists
         for execution.
 
[\1\ This fee shall not be applicable to memberships to which a nominee
  has not been assigned and which are not otherwise being used.]
[\2\ The Odd Lot Dealer CUSIP fee does not apply to any issue in which
  the odd-lot dealer is also the specialist for the issue.]

* * * * *

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
    The Exchange proposes to amend its Fee Schedule, effective February 
1, 2004. These fee changes would be part of the CHX's 2004 budget. The 
Exchange proposes to reduce the fees charged to the Exchange's 
specialists, floor brokers and odd-lot dealers.\4\ Specifically, the 
Exchange seeks to reduce the total fixed fee charged specialists 
trading listed securities by $50,000 per month, and also proposes a 
reduction of approximately $40,000 in the monthly fixed fee charged to 
specialists trading Nasdaq/NM securities,\5\ with an opportunity for 
the fee to be reduced to $0 for each month if the Exchange's overall 
share volume in Nasdaq/NM securities reaches specific targets.\6\ The 
Exchange also proposes a $50,000 reduction in the annual dedicated odd-
lot dealer fee and a corresponding credit of $.08 per round-lot trade 
for orders that these odd-lot dealers send to Exchange specialists for 
execution. Finally, the Exchange proposes to eliminate the current re-
billing, to floor brokers, of certain charges relating to the use of 
the NYFIX network. According to the Exchange, these fee reductions and 
credits are designed to allow the Exchange to continue to remain 
competitive in its efforts to provide an efficient floor-based venue 
for its members to act as specialists, floor brokers and odd-lot 
dealers.
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    \4\ See CHX Fee Schedule, Section E and Section H.
    \5\ Under the proposed schedule, the fixed fee for specialists 
trading Nasdaq/NM securities is based on the fixed fee charged for 
the month of December 2003. This fixed fee used to be based on the 
lowest fixed fee charged for the period from January through June 
2002, less the market data rebate earned by the firm in June 2002. 
Prior to July 2002, the fixed fee for specialists trading Nasdaq/NM 
securities was calculated much as the fixed fee is currently 
calculated for specialists trading listed securities--the total 
fixed fee was divided among specialist firms based on how active 
their assigned stocks were in the market as a whole. The Exchange 
and its OTC specialist firms believed that it was appropriate, in 
July 2002, to move to a constant fixed fee for OTC specialist firms 
and is simply continuing that notion under the proposed fee 
schedule, with updated text. See Securities Exchange Act Release No. 
46491 (September 11, 2002), 67 FR 58831 (September 18, 2002).
    \6\ Under the proposal, the monthly fixed fee would be reduced 
to $0 for all specialists trading Nasdaq/NM securities for each 
month if the Exchange's overall share volume in those securities 
reaches the following targets: 40 million average daily shares (in 
the first quarter of 2004); 50 million average daily shares (in the 
second quarter of 2004); 65 million average daily shares (in the 
third quarter of 2004); and 80 million average daily are shares (in 
the fourth quarter of 2004). See Fee Schedule, Section E. The 
Exchange believes that it is appropriate to base a specialist 
reduction in this fixed fee on the total number of shares traded in 
Nasdaq/NM securities on the Exchange, whether the shares are 
executed by a specialist or floor broker, for two primary reasons: 
(1) To reward the specialists assigned to these securities, who 
typically participate in the execution of a majority of the trades 
and shares executed on the Exchange in Nasdaq/NM securities (e.g., 
78.3% of the shares executed in these securities in 2003); and (2) 
to create an incentive for specialists to continue to maintain their 
assignments in Nasdaq/NM securities, because trades in these 
securities can currently be executed on the Exchange only if the 
securities are assigned to a specialist. The Exchange believes it is 
important to provide these awards and incentives to specialists to 
ensure the viability of its OTC program, which the Exchange has seen 
some recent declines in trading volume.
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    Another proposed change to the Fee Schedule confirms the 
elimination of the Exchange's marketing fee and an increase, from 
$.0035 per share to $.0050 per share, of the transaction fees charged 
to the Exchange's market makers.\7\ The Exchange first imposed a 
marketing fee in 2001, to ensure that all members that trade particular 
securities share, with CHX specialist firms, the

[[Page 11685]]

costs associated with attracting order flow to the Exchange, as well as 
the license fees assessed by the owners of trademarks associated with 
certain exchange-traded funds (``ETFs'').\8\ Because the Exchange now 
believes that this fee is no longer necessary to help specialists 
attract order flow to the Exchange, and because the Exchange has now 
taken on the responsibility for paying any ETF license fees, the 
Exchange allowed the marketing fee to expire on December 31, 2003, and 
now proposes to delete that provision from the Fee Schedule. At the 
same time, the Exchange believes that it is appropriate to increase the 
transaction fees charged to the Exchange's market makers to help the 
Exchange defray the costs associated with its market maker-related 
regulatory activities and the costs associated with any license fees 
that the Exchange is now responsible for paying.\9\
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    \7\ These transaction fees are subject to a maximum of $100 per 
side and are subject to other reductions and caps set out in the 
Exchange's Fee Schedule. See Fee Schedule, Section F.(4)(d).
    \8\ See Securities Exchange Act Release No. 44646 (August 2, 
2001), 66 FR 41641 (August 8, 2001) (announcing immediate 
effectiveness of the new marketing fee provision to the CHX Fee 
Schedule, through December 31, 2001).
    \9\ With respect to the Exchange's costs associated with market 
maker surveillance and licenses fees, market makers, on the CHX, 
primarily trade for their own proprietary accounts. According to the 
Exchange, market makers are required to effect transactions so that 
they constitute a course of dealings reasonably calculated to 
contribute to the maintence of a fair and orderly market, and must 
make a market when requested by a floor broker, but have a few other 
affirmative obligations to contribute to the Exchange's market. See 
CHX Article XXXIV. The Exchange conducts surveillance of market 
maker trading activity, reviewing, among other things, compliance 
with the short sale rule's tick test and marking requirements. When 
the Exchange is the designated examining authority for a firm with a 
market maker account, it also conducts periodic examinations to 
assess compliance with other Commission and CHX rules. According to 
the Exchange, to the extent that these firms operate from the CHX 
trading floor, they do not currently pay any market regulation or 
market surveillance fees associated with those routine examinations. 
See Fee Schedule, Section K, including footnote 3.
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    The CHX also proposes to make changes to the Exchange's Fee 
Schedule to increase, from $10,000 to $12,500, the monthly transaction 
fee cap on the execution of orders sent through the Exchange's MAX 
system to specialists; increase, from $1,000 to $3,000, the annual MAX 
access charge assessed to firms that gain access to the Exchange's MAX 
system; and extend, to listed securities, the Exchange's processing 
fees that are currently charged only for transactions executed by floor 
brokers in Nasdaq/NM securities that are not traded on the Exchange's 
floor.\10\ The Exchange believes that these fee changes are designed to 
ensure that the Exchange's costs of providing systems and services are 
appropriately allocated among its members. For example, by increasing 
the monthly transaction fee cap on orders sent through the Exchange's 
MAX system to specialists and increasing the MAX system access charge--
fees that are paid by the Exchange's order-sending firms--the Exchange 
can ensure that its order-sending firms pay an appropriate, but still 
competitive, level of fees to help cover the costs associated with 
their transactions on the Exchange (or associated with their access to 
the Exchange).\11\ The Exchange also believes that by extending the 
Exchange's processing fees to listed securities, the CHX ensures that 
these transactions are assessed an appropriate fee to help cover the 
costs associated with the back-office work provided by the 
Exchange.\12\
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    \10\ According to the Exchange, the proposed rule change to 
Sections B. and I.(2) of the Fee Schedule move text from footnotes 
to the primary text of each section to ensure that the information 
is more understandable.
    \11\ Specifically, the Exchange believes that these fees help 
defray the costs, among other things, of maintaining and upgrading 
the Exchange's MAX system. This system, and other, interrelated 
functionalities, are used to handle orders sent to the Exchange. 
Among other things, they record the receipt of orders, route those 
orders to specialists (or where selected by the order-sending firm, 
to a floor broker representative) for handling and, for eligible 
orders, provide automatic executions.
    \12\ According to the Exchange, the transactions that are 
assessed this clearing processing fee are transactions in securities 
that are not listed or traded pursuant to unlisted trading 
privileges on the Exchange. If one of the Exchange's members, who is 
also a member of another Exchange or Nasdaq, effects a trade on that 
other market, the member can report the trade to the other Exchange 
or Nasdaq (without sending it to clearing) and then enter the 
transaction into the Exchange's back-office clearing systems to 
ensure that that transaction is included in the Exchange's clearing 
report. Information about that transaction then appears in the 
reports prepared by the Exchange for member firm use.
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2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with the provisions of section 6(b) of the Act,\13\ in 
general, and section 6(b)(4) of the Act,\14\ in particular, in that it 
provides for the equitable allocation of reasonable dues, fees and 
other charges among its members.
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    \13\ 15 U.S.C. 78(f)(b).
    \14\ 15 U.S.C. 78f(b)(4).
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B. Self-Regulatory Organization's Statement of Burden on Competition

    The Exchange does not believe that the proposed rule change, as 
amended, will impose any burden on competition.

C. Self-Regulatory Organization's Statement on Comments Regarding the 
Proposed Rule Change Received from Members, Participants or Others

    No written comments were either solicited or received with respect 
to the proposed rule change, as amended.

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

    The foregoing proposed rule change, as amended, has become 
effective pursuant to section 19(b)(3)(A)(ii) \15\ of the Act, and Rule 
19b-4(f)(2) \16\ thereunder, because it establishes or changes a due, 
fee or other charge imposed by the Exchange. At any time within 60 days 
of the filing of such rule change, the Commission may summarily 
abrogate such proposed rule change if it appears to the Commission that 
such action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.\17\
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    \15\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \16\ 17 CFR 240.19b-4(f)(2).
    \17\ See 15 U.S.C. 78s(b)(3)(C). For purposes of calculating the 
60-day abrogation period, the Commission considers the period to 
commence March 2, 2004 the date the CHX filed Amendment No. 1.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposal, as 
amended, 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. 
Comments may also be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-CHX-2004-09. The file number should be included on the 
subject line if e-mail is used. To help the Commission process and 
review your comments more efficiently, comments should be sent in 
hardcopy or by e-mail but not by both methods. 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, as 
amended, 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

[[Page 11686]]

Room. Copies of such filing will also be available for inspection and 
copying at the principal office of the Exchange. All submissions should 
refer to the File No. SR-CHX-2004-09 and should be submitted by April 
1, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR.200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-5549 Filed 3-10-04; 8:45 am]
BILLING CODE 8010-01-P