[Federal Register Volume 69, Number 159 (Friday, October 8, 2004)]
[Notices]
[Pages 60440-60445]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2536]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50484; File No. SR-CBOE-2003-33]


Self-Regulatory Organizations; Order Granting Approval of 
Proposed Rule Change and Amendment No. 1 Thereto by the Chicago Board 
Options Exchange, Inc., and Notice of Filing and Order Granting 
Accelerated Approval to Amendments No. 2, 3 and 4 Relating to Non-
Member Market Maker Transaction Fees

October 1, 2004.

I. Introduction

    On July 30, 2003, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') submitted to 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 to increase the transaction fee 
for non-member market fees by $0.02 per contract. On November 13, 2003, 
CBOE filed Amendment No. 1 to the proposed rule change via 
facsimile.\3\ The proposed rule change, as amended, was published in 
the Federal Register for notice and comment on November 28, 2003.\4\ 
The Commission received one comment on the proposal.\5\ On March 5, 
2004, CBOE filed Amendment No. 2 to the proposed rule change.\6\ On 
April 22, 2004, CBOE filed Amendment No. 3 to the proposed rule 
change.\7\ On August 20, 2004, CBOE filed Amendment No. 4 to the 
proposed rule change.\8\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Christopher R. Hill, Attorney II, Office of 
Enforcement, Legal Department, CBOE, to Leah Mesfin, Special 
Counsel, Division of Market Regulation (``Division''), Commission, 
dated November 13, 2003 (``Amendment No. 1''). In Amendment No. 1, 
CBOE revised its statement of the purpose of the proposed rule 
change to modify its argument in support of the proposal.
    \4\ See Securities Exchange Act Release No. 48815 (November 20, 
2003), 68 FR 66908.
    \5\ See letter from Michael J. Simon, Senior Vice President and 
Secretary, International Stock Exchange, Inc. (``ISE''), to Jonathan 
G. Katz, Secretary, Commission, dated December 19, 2003.
    \6\ See letter from Christopher R. Hill, Attorney II, Office of 
Enforcement, Legal Department, CBOE, to Nancy Sanow, Assistant 
Director, Division, Commission, dated March 5, 2004 (``Amendment No. 
2''). In Amendment No. 2, CBOE replaced the rule text to more 
clearly indicate the changes to be made to the Exchange's Fee 
Schedule.
    \7\ See letter from Christopher R. Hill, Attorney II, Office of 
Enforcement, Legal Department, CBOE, to Nancy Sanow, Assistant 
Director, Division, Commission, dated April 21, 2004 (``Amendment 
No. 3''). In Amendment No. 3, CBOE revised the rule text to clarify 
that the proposed fee increase would not apply to Linkage orders.
    \8\ See letter from Jaime Galvin, Attorney, Legal Division, 
CBOE, to Jennifer Colihan, Special Counsel, Division, Commission, 
dated August 19, 2004 (``Amendment No. 4''). In Amendment No. 4, 
CBOE replaced the rule text to reflect recent changes made to the 
Exchange's Fee Schedule.
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    This order approves the proposed rule change as modified by 
Amendment No. 1. In addition, the Commission is approving on an 
accelerated basis, and is soliciting comments on, Amendments No. 2, 3 
and 4 to the proposed rule change.

II. Description

    The Exchange is proposing to change its Fee Schedule to increase 
transaction fees for orders originating from non-member market makers 
by $0.02 per contract. In its proposed rule change, CBOE explained that 
currently the Exchange charges transaction fees for orders executed on 
behalf of non-member market makers that are equal to member market 
maker and member firm rates for equity and QQQ options and

[[Page 60441]]

equal to customer rates for index products. CBOE represented that its 
members have complained that such equivalence of fees is unfair to 
Exchange members who pay a variety of additional fees through their 
membership in the Exchange to help offset the Exchange's expenses. 
Therefore, CBOE explained that it is proposing to increase transaction 
fees charged to non-member market makers in order to more fairly assess 
Exchange costs among the individuals and organizations who avail 
themselves of the Exchange's trading facilities.
    In addition, CBOE has represented that because it does not permit 
non-members to enter orders on the Exchange, it would not assess 
directly any such fees upon non-members and that the $0.02 increase 
would not apply to Linkage orders.

III. Summary of Comments and CBOE's Response

    The Commission received one comment letter on the proposal rule 
change in opposition to the proposal.\9\ The ISE opposed the proposed 
rule change on several grounds.
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    \9\ See supra footnote 5.
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    First, the ISE argued that the CBOE failed to explain sufficiently 
how the proposed rule change is consistent with Sections 6(b)(4) \10\ 
and 6(b)(5)\11\ of the Act. The ISE rejected the Exchange's rationale 
that CBOE members' complaints that uniform fees for all non-customer 
executions is unfair to Exchange members, who pay a variety of 
additional fees through their membership to help offset CBOE's systems 
expenses, as sufficient justification for the proposal. The ISE also 
argued that even if the issue of fairness in sharing the costs for use 
of CBOE's systems justified a fee increase, such a fee increase should 
be imposed on all non-members (including non-member broker-dealers), 
and not just on non-member market makers. According to the ISE, the 
Exchange's failure to justify why the fee would be levied on only one 
subset of non-members, instead of on all non-members, undermines CBOE's 
argument that it is simply responding to member complaints about the 
fairness of fees.
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    \10\ Section 6(b)(4) of the Act 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.'' 15 U.S.C. 78f(b)(4).
    \11\ Section 6(b)(5) of the Act prohibits ``unfair 
discrimination between customers, issuers, brokers, or dealers.'' 15 
U.S.C. 78f(b)(5).
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    In response to these comments, the CBOE emphasized that Section 
6(b)(4) the Act only requires an exchange to provide for an ``equitable 
allocation'' of fees among its members and issuers and other persons 
using its facilities.\12\ The CBOE stated that the Act's use of the 
term ``equitable'' does not necessarily mean ``equal,'' but rather 
``fair.'' This understanding is confirmed, the CBOE argued, by the fact 
that Section 6(b)(5) of the Act prohibits only ``unfair'' 
discrimination, not all discrimination. The CBOE argued that the 
proposed $0.02 per contract fee for non-member market makers to help 
offset Exchange expenses is an equitable allocation of fees because its 
members already pay a variety of other fees as members of the Exchange 
to help meet the Exchange's expenses.
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    \12\ See letter from Joanne Moffic-Silver, General Counsel, 
CBOE, to Jonathan G. Katz, Secretary, Commission, dated February 27, 
2004 (``CBOE Letter'').
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    The ISE also asserted that the proposed rule change is anti-
competitive because it could act as a disincentive for non-member 
market makers to send order flow to the CBOE and thus could hinder the 
price-discovery process. The ISE noted that, while the proposal exempts 
Linkage transactions from the $0.02 increase, the Linkage Plan states 
that market makers ``should send Principal Orders through Linkage on a 
limited basis and not as a primary aspect of their business.'' Further, 
the ISE stated that the Linkage Plan imposes a strict mathematical 
limit on the number of Principal Orders that a market maker can send 
through the Linkage. Thus, the ISE argued, Linkage would not offer an 
adequate routing alternative for non-member market makers to send 
Principal Orders to CBOE.
    In response to this argument, the CBOE noted that, like other self-
regulatory organizations, it needs the ability to spread its operating 
costs fairly among the parties using its facilities and stated that the 
ISE overlooks this fact. The CBOE noted that this concern requires it 
to strike a balance in setting fees on member and non-member market 
maker transactions. The Exchange stated that the proposed differential 
between member and non-member market maker fees could not be so small 
as to incent current CBOE market-makers to abandon their memberships 
and simply send in their orders as non-members to avoid member dues and 
fees, as well as market making and regulatory requirements that apply 
to members. Simultaneously, CBOE conceded that the differential in fees 
could not be so great as to give non-member market makers a 
disincentive to routing their orders to CBOE. Thus, CBOE contended that 
the $0.02 fee differential strikes a fair and reasonable balance 
between these two competing concerns.
    The CBOE also rejected the ISE's contention that the fee increase 
would impede inter-market price discovery because, in the CBOE's view, 
the proposal would expressly exempt Linkage orders from the fee change 
and because the proposed differential in member and non-member fees is 
small. CBOE stated that any effect that a fee increase would impose on 
price discovery is a function of the degree of any proposed price 
differential. CBOE argued that it has proposed a reasonably small 
differential in order to achieve its objective of more equitably 
assessing its costs without negating inter-market price discovery.
    Finally, the ISE objected to the proposed rule change because it 
believed that its approval by the Commission would prompt other 
exchanges to file similar proposals with the Commission. As a result, 
the ISE argued, market makers would increasingly have disincentives to 
send order flow to other exchanges, which could lead to decreasing 
market efficiency and harming price discovery.
    In response to this concern, CBOE suggested that the current highly 
competitive market for order flow among the various options exchanges 
would discipline exchanges to keep their transaction fee proposals 
within reasonable limits.

IV. Discussion and Commission Findings

    Under Section 19(b)(2) of the Act,\13\ the Commission must approve 
the CBOE's proposed rule change if it finds that the proposed rule 
change is consistent with the requirements of the Act and the rules 
thereunder applicable to a national securities exchange. If the 
Commission is unable to make that finding, it must institute 
proceedings to consider whether to disapprove the proposed rule change.
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    \13\ 15 U.S.C. 78s(b)(2).
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    The statutory requirements relevant to such a determination 
generally are found in Section 6(b) of the Act.\14\ That statutory 
section sets forth the purposes or objectives that the rules of a 
national securities exchange should be designed to achieve. Those 
purposes or objectives, which take the form of positive goals, such as 
to protect investors and the public interest, or prohibitions, such as 
to not permit unfair discrimination among customers, issuers, brokers 
or dealers or to not

[[Page 60442]]

permit any unnecessary or inappropriate burden on competition, are 
stated as broad and elastic concepts. They afford the Commission 
considerable discretion to use its judgment and knowledge in 
determining whether a proposed rule change complies with the 
requirements of the Act.\15\ Furthermore, the subsections of Section 
6(b) of the Act must be read with reference to one another and to other 
applicable provisions of the Act and the rules thereunder.\16\ Within 
this framework, the Commission must weigh and balance the proposed rule 
change, assess the views and arguments of commenters, and make 
predictive judgments about the consequences of approving the proposed 
rule.\17\
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    \14\ 15 U.S.C. 78f(b).
    \15\ See Bradford National Clearing Corp. v. Securities and 
Exchange Commission, 590 F.2d 1085 (D.C. Cir. 1978).
    \16\ See Securities Exchange Act Release No. 37273 (June 4, 
1996), 61 FR 29438 (June 10, 1996).
    \17\ Id.
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    After careful consideration of the proposed rule change, the 
comment letter received, and the Exchange's response to the comment 
letter, the Commission finds that the proposed rule change, as amended, 
is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange. In 
particular, the Commission finds that the proposal is consistent with 
the requirements of Section 6(b)(4) of the Act,\18\ which states that 
the rules of the exchange must provide for the equitable allocation of 
reasonable dues, fees, and other charges among its members and issuers 
and other persons using its facilities, and with the requirements of 
Section 6(b)(5) of the Act,\19\ which, among other things, states that 
the rules of the exchange must not be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers. In 
addition, the Commission finds that the proposal is consistent with the 
requirements of Section 6(b)(8) of the Act,\20\ which states that the 
rules of an exchange not impose any burden on competition that is not 
necessary or appropriate in furtherance of the purposes of the Act.
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    \18\ 15 U.S.C. 78f(b)(4).
    \19\ 15 U.S.C. 78f(b)(5).
    \20\ 15 U.S.C. 78f(b)(8).
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    The Commission notes that whether a proposed fee can be considered 
an equitable allocation of a reasonable fee among members and issuers 
and others using its facilities would depend on the facts and 
circumstances of the proposal. In evaluating such a proposal, the 
Commission necessarily would consider and weigh all of the relevant 
factors. These factors may include, among others, the amount of the fee 
and whether the fee is an increase or decrease, the classes of persons 
subject to the fee, the basis for any distinctions in classes of 
persons subject to the fee, the potential impact on competition, and 
the impact of any disparate treatment on the goals of the Act.
    Taking into account these factors, the Commission believes that the 
proposed fee satisfies the requirements of Section 6(b)(4) of the Act 
because, while the fee distinguishes between member and non-member 
market makers, as well as non-member broker-dealers and non-member 
market makers, it does not do so in a manner that imposes a significant 
cost burden on the non-member market makers who send their orders to 
CBOE. The ISE claims that the Exchange's proposal does not provide for 
an equitable allocation of reasonable fees among members and, further, 
does not provide sufficient justification for charging member and non-
member market makers disparate fees. The Commission agrees with the 
position stated in the CBOE Letter, namely, that the Act does not 
require that members, issuers, and others to pay the same fees for use 
of an exchange's facilities, but that the fees assessed these 
categories of users must be equitably allocated, i.e., that they be 
allocated in a fair manner. Accordingly, the Commission finds that the 
$0.02 per contract differential for non-member market makers is 
consistent with Section 6(b)(4) of the Act.
    In addition, the ISE takes issue with the fact that the fee 
differential would be applied to a subset of non-member users of the 
CBOE's facilities and not to all non-member broker-dealers. Under 
Section 6(b)(5) of the Act, the rules of the Exchange must not be 
designed to permit unfair discrimination between brokers, dealers and 
customers. The Commission notes that the Act does not require that the 
Exchange's rules be designed to prohibit all discrimination, but rather 
they must not permit unfair discrimination. In the Commission's view, 
the $0.02 per contract fee differential for non-member market makers is 
reasonable under the circumstances and it is not unfairly 
discriminatory for the Exchange to charge non-member market makers a 
nominally higher fee than other non-members who submit orders to the 
Exchange. Accordingly, the Commission finds that the proposed rule 
change is consistent with Section 6(b)(5) of the Act.
    The ISE further argues that the proposed rule change is anti-
competitive because it would act as a disincentive for non-member 
market makers to send order flow to the Exchange in an attempt to 
further the price discovery process. Thus, the ISE raises the issue 
whether the fee differential satisfies the requirement of Section 
6(b)(8) of the Act that it not impose any burden on competition that is 
not necessary or appropriate in furtherance of the Act's purposes. The 
Commission does not believe that the proposed fee imposes an 
unnecessary or inappropriate burden on competition. Fair competition 
among the options markets must take into account all of the relevant 
facts and circumstances, including the fact that they are organizations 
composed of members. It is important to note that membership carries 
with it certain duties, responsibilities, and costs not applicable to 
non-members. Thus, in the circumstances of this filing, it is not 
inconsistent with fair competition for the CBOE to charge non-member 
market makers a reasonable fee when utilizing systems whose development 
has been financed by CBOE members.
    Moreover, because access to CBOE's facilities would not be more 
restrictive under the proposed rule change and because non-member 
market makers can submit orders via the Linkage system, the Commission 
does not believe that the proposal would harm the depth and liquidity 
of the options market.\21\ The Commission notes that the depth and 
liquidity of any particular option is dependent on numerous variables, 
including the degree of buying and selling activity in the underlying 
security. In addition, the degree to which an options exchange captures 
order flow in a particular option is dependent on various factors, such 
as the narrowness of spreads and the speed of execution. The 
Commission, however, does not dispute that if such a fee were too large 
it possibly could deter some non-member market makers from sending 
order flow to the Exchange, which, in turn, ultimately could have an 
adverse effect on competition. As the CBOE Letter pointed out, however, 
the Exchange has an incentive to assure that any differential in fees 
not be so large as to discourage non-member market makers from sending 
orders to the Exchange.

[[Page 60443]]

The Commission believes that, in this case, the fee differential is 
consistent with Section 6(b)(8) of the Act.
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    \21\ The Commission does not intend the approval of this 
proposal to establish a precedent that would permit the Exchange to 
make distinctions in the treatment of orders on its floor or through 
its electronic facilities as a means to discriminate unfairly 
against its competitors. Orders for the account of non-member market 
makers must continue to be treated in the same way as other orders. 
For example, the proposal would not affect the way non-member market 
maker orders are routed or the priority they are given.
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    Finally, the ISE posits that approval of the proposed rule changed 
would have ``cascading negative effects,'' because other exchanges 
likely would submit proposed rule changes that impose higher fees on 
non-member market makers and because, in the ISE's view, differential 
treatment of non-member market makers across exchanges ultimately could 
decrease market efficiency and harm the price discovery process. The 
Commission agrees that the current system whereby each exchange charges 
the same transaction fees for member and non-member market makers is 
easy and practical to administer both for the Commission, when it 
determines whether those fees are consistent with the Act, and for the 
exchanges, when they assess those fees on users of their facilities. As 
noted above, however, the Commission believes that the Act does not 
require identical treatment for each class or subclass of users of an 
exchange's facilities, but rather mandates fair treatment, assuming 
that a proposed fee differential does not raise other issues under the 
Act. If any other exchange files a similar fee proposal with the 
Commission, it would have to be analyzed based on its own set of facts 
and circumstances. Nevertheless, the Commission intends to monitor 
whether the CBOE's proposed fee differential for non-member market 
makers has any adverse consequences for the options markets.

V. Amendments No. 2, 3 and 4

    The Commission finds good cause for approving Amendments No. 2, 3 
and 4 prior to the thirtieth day after the date of publication of 
notice thereof in the Federal Register. In Amendments No. 2, 3 and 4, 
the Exchange, respectively, set forth the rule text of the complete Fee 
Schedule relating to transaction costs, clarified the treatment of 
Linkage orders in the rule text of the Fee Schedule, and updated the 
rule text of the Fee Schedule to reflect recent revisions.\22\ In the 
Commission's view, these amendments were not significant and did not 
affect the substance of the proposed rule change. Therefore, the 
Commission finds that granting accelerated approval to Amendments No. 
2, 3 and 4 is appropriate and consistent with Section 19(b)(2) of the 
Act.\23\
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    \22\ See Securities Exchange Act Release No. 50175 (August 10, 
2004), 69 FR 51129 (August 17, 2004).
    \23\ 15 U.S.C. 78s(b)(2).
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VI. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendments No. 2, 3 and 4, including whether it 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-2003-33 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-2003-33. This 
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, 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 Section, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal office of 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-2003-33 
and should be submitted on or before October 29, 2004.

VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\24\ that the proposed rule change (SR-CBOE-2003-33), as amended by 
Amendment No. 1, be, and it hereby is, approved, and that Amendments 
No. 2, 3 and 4 to the proposed rule change be, and hereby are, approved 
on an accelerated basis.
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    \24\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\25\
Margaret H. McFarland,
Deputy Secretary.
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    \25\ 17 CFR 200.30-3(a)(12).
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Exhibit A

    New text is italicized; deleted text is in [brackets].

    Chicago Board Options Exchange, Inc. Fee Schedule--August 1, 2004
------------------------------------------------------------------------
 
------------------------------------------------------------------------
1. OPTION TRANSACTION FEES (1)(3)(4)(7).................             Per
                                                                Contract
    EQUITY OPTIONS (13):
        I. CUSTOMER.....................................            $.00
            MARKET-MAKER (MM) (standard rate)(10).......             .22
        II. MEMBER FIRM PROPRIETARY: (11)...............
             FACILITATION OF CUSTOMER ORDER.....             .20
             NON-FACILITATION ORDER.............             .24
        IV. BROKER-DEALER...............................             .25
        V. NON-MEMBER MARKET MAKER [(8)]................         .[24]26
        VI. DESIGNATED PRIMARY MARKET-MAKER (DPM) (10)..             .12
        VII. ELECTRONIC DPM (e-DPM) (14)................             .25
        VIII. LINKAGE ORDERS (8)........................             .24
    QQQ OPTIONS:
        I. CUSTOMER $.00................................
        II. MARKET-MAKER (MM) AND DPM (standard                      .24
         rate)(10)......................................

[[Page 60444]]

 
        III. MEMBER FIRM PROPRIETARY: (11)..............
             FACILITATION OF CUSTOMER ORDER.....             .20
             NON-FACILITATION ORDER.............             .24
        IV. BROKER-DEALER...............................             .25
        V. NON-MEMBER MARKET MAKER [(8)]................         .[24]26
        VI. LINKAGE ORDERS (8)..........................             .24
        INDEX OPTIONS (includes Dow Jones DIAMONDS, OEF
         and other ETF index options):
        I. CUSTOMER (2):
             S&P 100, PREMIUM > or = $1.........             .35
             S&P 100, PREMIUM <$1...............             .20
             MNX (MINI-NASDAQ 100)..............             .20
             OTHER INDEXES, PREMIUM > OR = $1...             .45
             OTHER INDEXES, PREMIUM <$1.........             .25
        II. MARKET-MAKER AND DPM--EXCLUDING DOW JONES                .24
         PRODUCTS (10)..................................
            MARKET-MAKER--DOW JONES PRODUCTS (10).......             .34
        III. MEMBER FIRM PROPRIETARY: (11)
             FACILITATION OF CUSTOMER ORDER.....             .20
             NON-FACILITATION ORDER.............             .24
        IV. BROKER-DEALER, EXCLUDING MINI-NASDAQ 100               Index
         (MNX)..........................................        Customer
                                                                   Rates
             BROKER-DEALER--MNX, PREMIUM > or =              .45
             $1.........................................
             BROKER-DEALER--MNX, PREMIUM <$1....             .25
        V. NON-MEMBER MARKET MAKER [(8)]:
             S&P 100 (including OEF), PREMIUM >          .[35]37
             or = $1....................................
             S&P 100 (including OEF), PREMIUM            .[20]22
             <$1........................................
             OTHER INDEXES, PREMIUM > or = $1...         .[45]47
             OTHER INDEXES, PREMIUM <$1.........         .[25]27
        VI. MNX DPM SUPPLEMENTAL TRANSACTION FEE........             .25
        VII. RUT DPM and MARKET MAKER LICENSE FEE                    .40
         (Russell 2000 cash settled index) (12).........
        VIII. LINKAGE ORDERS (8):
             S&P 100 (OEF), PREMIUM               .35
             or = $1....................................
             S&P 100 (OEF), PREMIUM <$1.........             .20
             OTHER INDEXES, PREMIUM               .45
             or = $1....................................
             OTHER INDEXES, PREMIUM <$1.........             .25
2. MARKET-MAKER, e-DPM & DPM MARKETING FEE (in option                .40
 classes in which a DPM has been appointed)(6)..........
3. FLOOR BROKERAGE FEE (1)(5):
     EQUITY & QQQ CUSTOMER ORDER................             .00
     ALL OTHER EQUITY, QQQ AND INDEX OPTIONS (8)             .04
     CROSSED ORDERS.............................             .02
4. RAES ACCESS FEE (RETAIL AUTOMATIC EXECUTION SYSTEM)
 (1)(4):
    INDEX CUSTOMER TRANSACTIONS.........................             .25
         DOW JONES, ASSESSED ON THE FIRST 25
         CONTRACTS ONLY
    NON-CUSTOMER TRANSACTIONS (ORIGIN CODE OTHER THAN                .30
     ``C'')(8)(9).......................................
------------------------------------------------------------------------
Notes:
(1) Per contract side, including FLEX options. Transaction Fees are also
  applicable to orders processed via CBOEdirect.
(2) Please see item 18 for details of the Customer Large Trade Discounts
  for the period 7/1/03-12/31/04.
(3) Member transaction fee policies and rebate programs are described in
  the last section.
(4) Transaction and RAES fees are charged to the CBOE executing firm on
  the input record.
(5) Charged to executing broker. DPMs are assessed for agency and
  ``book'' executions (non-cust. orders). Market-Maker and DPM floor
  brokerage fees are eligible for the Prospective Fee Reduction Program,
  as described in Section 19. To be eligible for the discounted
  ``crossed'' rate, the executing broker acronym, executing firm number
  and order ID data must be the same on both the buy and sell side of an
  order.
(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) Cabinet trades are not assessed transaction fees. Only index options
  are assessed a cabinet fee of $.10 per contract side.
(8) [Includes,] Linkage order fees in effect on a pilot basis until July
  31, 2005, [orders from members of other exchanges executing Linkage
  transactions,] except for Satisfaction Orders, which are not assessed
  Exchanges fees per Linkage rules. The floor brokerage fee for ``all
  other equity, QQQ and index options'' and the RAES access fee for non-
  customer transactions also apply to linkage orders.
(9) Effective 10/1/03, non-customer equity options RAES orders entered
  from the trading floor will not be assessed the RAES access fee.
(10) Eligible for the Prospective Fee Reduction Program as described in
  Section 19.
(11) Please see Section 20 for details of the Member Firm Proprietary
  and Firm Facilitation Fees Cap.
(12) The RUT License Transaction Fee applies to all RUT contracts traded
  by the DPM and other Market-Makers. The RUT DPM shall be assessed for
  any shortfall between the proceeds of the RUT License Fee and the
  Exchange's license obligation to Russell.
(13) Market-Maker, firm and broker-dealer transaction fees are capped at
  2,000 per dividend spread transaction, defined as any trade done to
  achieve a dividend arbitrage between any two deep-in-the-money
  options. To qualify a transaction for the cap, a rebate request with
  supporting documentation must be submitted to the Exchange.
(14) Effective October 1, 2004, DPMs and e-DPMs may elect to pay a fixed
  annual fee of $1.75 million instead of being assessed transaction fees
  on a per contract basis for their DPM and e-DPM transactions only in
  all equity option classes. The fixed fee does not cover any floor
  brokerage fees. DPMs electing to pay the fixed fee will neither be
  charged CBOE transaction fees for CBOE transactions related to such
  outgoing P/A orders, nor will they receive the credit back for such
  fees as set forth in Section 21 of this Fee Schedule. However,
  pursuant to the second phase of linkage fee set forth in Section 21 of
  this Fee Schedule, all CBOE DPMs, including those electing the fixed
  annual fee, who pay transaction fees at other exchanges to execute P/A
  orders there, will receive a credit of up to 50% of CBOE DPM
  transaction charges for each such order (currently up to $.06 per
  contract, with the total of such credits not to exceed the total
  amount of inbound linkage transaction fees received by CBOE) to help
  offset the transaction fees of other exchanges that CBOE DPMs incur in
  filling P/A orders at those exchanges.


[[Page 60445]]

    Remainder of Fee Schedule: Unchanged.

[FR Doc. E4-2536 Filed 10-7-04; 8:45 am]
BILLING CODE 8010-01-P