[Federal Register Volume 69, Number 163 (Tuesday, August 24, 2004)]
[Notices]
[Pages 52051-52053]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-1890]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50212; File No. SR-CBOE-2004-55]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Inc. To Incorporate Electronic DPMs

August 18, 2004.
    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 August 3, 2004, the Chicago Board Options Exchange, Inc. (``CBOE'' 
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 CBOE. The CBOE has 
designated this proposal as one establishing or changing a due, fee, or 
other charge imposed by the CBOE under Section 19(b)(3)(A)(ii) of the 
Act,\3\ and Rule 19b-4(f)(2) thereunder,\4\ which renders the proposal 
effective upon filing with the Commission. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to amend its marketing fee to incorporate newly 
established electronic DPMs (``e-DPMs'') as part of the existing 
marketing fee.\5\ Below is the text of the proposed rule change. 
Proposed new language is italicized.
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    \5\ On July 12, 2004, the Commission approved the establishment 
of e-DPMs. See Securities Exchange Act Release No. 50003 (July 12, 
2004), 69 FR 43028 (July 19, 2004) (SR-CBOE-2004-24).
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CHICAGO BOARD OPTIONS EXCHANGE, INC. FEE SCHEDULE
    1. No Change.
    2. MARKET MAKER, e-DPM & DPM MARKETING FEE (in option classes in 
which a DPM has been appointed) (6) $.40
    3.-4. No Change.

Notes:

    (1)-(5) No Change.
    (6) The Marketing Fee will be assessed only on transactions of 
Market-Makers, e-DPMs and DPMs resulting from customer orders from 
payment accepting firms with which the DPM has agreed to pay for that 
firm's order flow, and with respect to orders from customers that are 
for 200 contracts or less.
    (7)-(13) No change.
* * * * *

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

    In its filing with the Commission, the CBOE included statements 
concerning the purpose of and basis for its proposal and discussed any 
comments it had received regarding the proposal. The text of these 
statements may be examined at the places specified in Item IV below. 
The CBOE has prepared summaries, set forth in Sections A, B and C 
below, of the most significant aspects of such statements.

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

1. Purpose
    Effective June 1, 2003, the Exchange reinstated its marketing fee 
program in order for the CBOE to compete with other markets in 
attracting options order flow in multiply traded options from firms 
that include payment as a factor in their order routing decisions in 
designated classes of options.\6\ The Exchange proposes to incorporate 
e-DPMs in the existing marketing fee program. The CBOE states that, in 
all other respects, the marketing fee

[[Page 52052]]

program would continue to function and operate in the same manner as 
the existing marketing fee program.\7\
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    \6\ See Securities Exchange Act Release No. 47948 (May 30, 
2003), 68 FR 33749 (June 5, 2003) (SR-CBOE-2003-19).
    \7\ Id.
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    The Exchange would impose the fee at a rate of $.40 per contract on 
Market-Maker transactions, including DPMs and e-DPMs, in all classes of 
options in which a DPM has been appointed, as described below. 
According to the CBOE, this program, like the CBOE's prior marketing 
fee program, provides for the equitable allocation of a reasonable fee 
among the CBOE's members and is designed to enable the CBOE to compete 
with other markets in attracting options order flow in multiply traded 
options from firms that include payment as a factor in their order 
routing decisions in designated classes of options. The CBOE proposes 
that the marketing fee be assessed only on those Market-Maker, DPM, and 
e-DPM transactions resulting from orders from customers of payment 
accepting firms (``payment accepting firms'') with which the DPM has 
agreed to pay for that firm's order flow.
    The Exchange states that it would not have any role with respect to 
the negotiations between DPMs and payment accepting firms on the amount 
of the payment, including which payment accepting firms DPMs negotiate 
with to send their order flow to CBOE and the amount of the payment. 
Rather, the Exchange proposes to facilitate payment to payment 
accepting firms from fees collected from Market-Makers, e-DPMs, and 
DPMs. In those classes for which a DPM has advised the Exchange that it 
has negotiated with a payment accepting firm to pay for that firm's 
order flow, the Exchange would provide administrative support for the 
program. Specifically, the Exchange would keep track of the number of 
qualified orders each payment accepting firm directs to the Exchange, 
and would make the necessary debits and credits to the accounts of the 
DPMs, e-DPMs, Market-Makers, and the payment accepting firms to reflect 
the payments that are to be made. The Exchange represents that all of 
the funds generated by the fee would be used only to pay the firms for 
the order flow sent to the Exchange.
    The Exchange believes that the $.40 per contract is an equitable 
allocation of a reasonable fee among the CBOE's members. The CBOE 
states that it has designed this program to enable it to compete with 
other markets in attracting options order flow in multiply traded 
options. If a DPM advises the Exchange that it has negotiated a lower 
amount, the Exchange would refund to Market-Makers, e-DPMs, and DPMs 
the excess fee collected.
    The CBOE proposes that the marketing fee be assessed only on 
transactions of Market-Makers (including e-DPMs and DPMs) resulting 
from orders for 200 contracts or less from customers of payment 
accepting firms. In the CBOE's view, because the marketing fee will be 
passed through to only those Market-Makers' transactions resulting from 
orders from customers of a payment accepting firm that the DPM has 
independently negotiated with to pay for that firm's order flow, there 
will be a direct and fair correlation between those members who pay the 
costs of the marketing program funded by the fee and those who receive 
the benefits of the program.
    According to the CBOE, it is important to note that although 
Market-Maker, DPM, and e-DPM transactions resulting from customer 
orders from firms that do not accept payment for their orders are not 
subject to the fee, Exchange Market-Makers, DPMs, and e-DPMs will have 
no way of identifying prior to execution whether a particular order is 
from a payment-accepting firm, or from a firm that does not accept 
payment for their order flow.\8\
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    \8\ The Exchange has reinstated, in Interpretation and Policy 
.12 to CBOE Rule 8.7, the Marketing Fee Voting Procedures as a six-
month pilot program by which a trading crowd may determine whether 
or not to participate in the Exchange's marketing fee program and to 
include e-DPMs into the Marketing Fee Voting Procedures. See 
Securities Exchange Act Release No. 50130 (July 30, 2004), 69 FR 
47965 (August 6, 2004) (SR-CBOE-2004-47).
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2. Statutory Basis
    The CBOE believes that because this marketing fee will serve to 
enhance the competitiveness of the Exchange and its members, this 
proposal is consistent with and furthers the objectives of the Act, 
including specifically Section 6(b)(5) thereof,\9\ which requires the 
rules of exchanges to be designed to remove impediments to and perfect 
the mechanism of a free and open market and a national market system, 
and Section 11A(a)(1) thereof,\10\ which reflects the finding of 
Congress that it is in the public interest and appropriate for the 
protection of investors and the maintenance of fair and orderly markets 
to assure fair competition among brokers and dealers and among exchange 
markets. The Exchange also believes that the proposed rule change is 
consistent with Section 6(b) of the Act,\11\ and furthers the 
objectives of Section 6(b)(4) of the Act \12\ in particular, in that it 
is designed to provide for the equitable allocation of reasonable dues, 
fees, and other charges among the CBOE's members.
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    \9\ 15 U.S.C. 78f(b)(5).
    \10\ 15 U.S.C. 78k-1(a)(1).
    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(4).
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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 CBOE neither solicited nor received written comments with 
respect to the proposed rule change.

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

    Because the foregoing rule change establishes or changes a due, 
fee, or other charge imposed by the Exchange, it has become effective 
pursuant to Section 19(b)(3)(A)(ii) of the Act \13\ and subparagraph 
(f) of Rule 19b-4 thereunder.\14\ At any time within 60 days after the 
filing of the proposed rule change, the Commission may summarily 
abrogate the rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.
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    \13\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \14\ 17 CFR 240.19b-4(f).
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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 proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-CBOE-2004-55 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-CBOE-2004-55. This 
file

[[Page 52053]]

number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 the filing 
also will be available for inspection and copying at the principal 
office of the CBOE. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make available publicly. All submissions should refer to File Number 
SR-CBOE-2004-55 and should be submitted on or before September 14, 
2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E4-1890 Filed 8-23-04; 8:45 am]
BILLING CODE 8010-01-P