[Federal Register Volume 71, Number 163 (Wednesday, August 23, 2006)]
[Notices]
[Pages 49493-49495]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-13931]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54328; File No. SR-BSE-2006-10]


Self-Regulatory Organizations; Boston Stock Exchange, Inc.; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change, as Modified by Amendment No. 2 Thereto, To Establish a Fee 
Per Contract Traded for Improvement Orders Submitted Into a Price 
Improvement Period by a Public Customer That Are Not Submitted as 
Customer PIP Orders

August 16, 2006.
    On March 6, 2006, 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 to amend the Fee Schedule of the Boston Options 
Exchange (``BOX'') in the manner described below. The proposed rule 
change was published for comment in the Federal Register on May 15, 
2006.\3\ The Commission received one comment letter concerning the 
proposal.\4\ On June 29, 2006, the Exchange filed Amendment No. 1 to 
the proposed rule change.\5\ On August 14, 2006, the Exchange filed 
Amendment No. 2 to the proposed rule change.\6\ This order publishes 
notice of and grants accelerated approval of the proposed rule change, 
as modified by Amendment No. 2, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 53774 (May 9, 2006), 
71 FR 28058 (``Notice'').
    \4\ Letter to Nancy Morris, Secretary, Commission, from Adam C. 
Cooper, Senior Managing Director & General Counsel, Citadel 
Investment Group, LLC (``Citadel''), dated June 9, 2006 (``Citadel 
Letter'').
    \5\ In Amendment No. 1, which superseded and replaced the 
original filing, the Exchange modified its proposal by lowering the 
proposed BOX fee from $.20 per contract traded to $.15 per contract 
traded. The Exchange also clarified its reasons for imposing the new 
fee.
    \6\ In Amendment No. 2, which supersedes and replaces Amendment 
No. 1 (and the original filing), the Exchange proposes to modify the 
proposed rule text and clarifies its reasons for imposing the new 
fee.
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 I. Description of the Proposal

    Currently, there are two ways Public Customer Orders \7\ can be 
submitted into a Price Improvement Period (``PIP'') auction as an 
Improvement Order.\8\ The first method is the Customer PIP Order 
(``CPO''), which is an order provided by a Public Customer to her/his 
BOX Order Flow Provider (``OFP'') that contains a standard limit order 
price in the standard minimum trading increment--the Book Reference 
Price \9\--and a limit order placed in a penny increment, the CPO PIP 
Reference Price.\10\ Through a CPO, a Public Customer may participate 
passively in a PIP auction (should one occur while her/his limit order 
is at the top of the BOX book) by virtue of the previously submitted 
instructions given to the OFP, i.e., the CPO PIP Reference Price.
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    \7\ The term ``Public Customer Order'' is defined as ``an order 
for the account of a Public Customer. See BOX Rules, Chapter I, 
Section 1(a)(51). ``Public Customer'' is defined as ``a person that 
is not a broker or dealer in securities.'' See BOX Rules Chapter I, 
Section 1(a)(50).
    \8\ The term ``Improvement Orders'' is defined in the BOX Rules 
Chapter V, Section 18(e)(i).
    \9\ The term ``Book Reference Price'' is defined in BOX Rules 
Chapter V, Section 18(g)(i).
    \10\ The term ``CPO PIP Reference Price'' is defined in BOX 
Rules Chapter V, Section 18(g)(i).
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    Alternatively, a Public Customer may submit an Improvement Order 
into a PIP auction through an OFP with any instructions that the OFP is 
willing to accept.\11\ These non-CPO Improvement Orders do not have a 
Book Reference Price and are not exposed on the BOX Book; OFPs submit 
them on behalf of Public Customers in response to a PIP Broadcast \12\ 
and PIP auction updates.
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    \11\ See BOX Rules Chapter V, Section 18(e)(i).
    \12\ The PIP broadcast is disseminated once a PIP is initiated 
and is distributed solely to BOX Options Participants. The 
broadcasting of this message advises the Options Participants: (1) 
That a Primary Improvement Order, as that term is defined in the BOX 
Rules Chapter V, Section 18(e), has been processed; (2) of 
information concerning series, size, price and side of market; and 
(3) when the PIP will conclude (``PIP Broadcast'').
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    Originally, the Exchange proposed to amend the BOX Fee Schedule to 
establish a fee of $.20 per contract traded for Improvement Orders 
submitted into a PIP by a Public Customer that are not submitted as 
CPOs.
    In its letter, which was submitted in response to the original 
proposed rule change, Citadel urges the Commission to disapprove the 
proposed rule change because the proposed $.20 per contract traded fee 
is inconsistent with three provisions of the Act. Citadel argues that 
the original proposed rule change was inconsistent with Section 6(b)(4) 
of the Act \13\ because it would effect an inequitable allocation of 
reasonable fees among members and persons using the BOX facilities. 
Specifically, Citadel stated that the proposed $.20 per contract fee 
was inequitable because Public Customers would not be afforded a volume 
discount similar to the one offered to BOX Market Makers \14\ who, 
according to Citadel, enjoy other benefits and privileges that are 
unavailable to Public Customers.
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    \13\ 15 U.S.C. 78(b)(4).
    \14\ BOX Market Makers may receive a volume discount of up to 
$.05 per cotract based upon total volume traded across all assigned 
classes. See Section 3.c. of the Fee Schedule.
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    Citadel also argues that the proposed rule change is inconsistent 
with Section 6(b)(5) of the Act \15\ in that it would discriminate 
unfairly between Public Customers with access to sophisticated 
technology and trading techniques (``Options Professionals'') and all 
other Public Customers (``Investors'') by imposing a fee upon Options 
Professionals and not Investors.
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    \15\ 15 U.S.C. 78f(b)(5).
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    Further, Citadel argues that the fee, as originally proposed, would 
be inconsistent with Section 6(b)(8) of the Act \16\ in that it would 
harm competition. Specifically, Citadel asserts that the proposed rule 
change would discourage Public Customers from sending non-CPO 
Improvement Orders to the BOX, which would result in fewer Improvement 
Orders competing to improve orders submitted to the PIP. Additionally, 
Citadel predicts that this diminished competition would make it easier 
for Market Makers to step ahead of Public Customer limit orders posted 
on the book, which would encourage BOX Participants to internalize more 
of their order flow, and thereby diminish price discovery and 
transparency and increase the costs of options investors.
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    \16\ 15 U.S.C. 78f(b)(8).
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    In response to the Citadel Letter, the Exchange proposes to modify 
its proposal in Amendment No. 2. In Amendment No. 2, the Exchange 
proposes to reduce the trading fee applicable to each Improvement Order 
for a Public Customer not submitted as CPOs from $.20 to $.15. Further, 
the Exchange proposes to clarify that, under the proposed Fee Schedule 
as amended, no trading fee would be charged for Public Customer 
Improvement Orders submitted as CPOs or for Public Customer Orders 
traded on BOX including marketable orders, which interact with a PIP 
already underway.

 II. Discussion

    After careful consideration of the Citadel Letter and the proposed 
rule change, as amended in response to the Citadel Letter, the 
Commission finds that the proposal, as amended, is consistent with the 
requirements of Section 6(b) of the Act \17\ in general and Section 
6(b)(4) of the Act \18\ in particular, in that it is designed to 
provide for the equitable allocation of

[[Page 49494]]

reasonable dues, fees, and other charges among its members and issuers 
and other persons using its facilities.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(4).
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    To justify this new trading fee on non-CPO Improvement Orders by 
Public Customers, the Exchange states that these types of orders, like 
the Improvement Orders of Market Makers and OFPs, are closely monitored 
for manipulative activity because they are submitted by sophisticated 
parties, with advanced technology, directly in response to PIP data 
updates. In contrast, the Exchange characterizes CPOs as more 
``passive'' orders, because they contain preset PIP auction 
instructions, which pose less of a manipulation risk and therefore draw 
less regulatory scrutiny. The Exchange states, therefore, that CPOs are 
less costly to surveil than non-CPO Improvement Orders.
    In addition, the Exchange states that the high volume of non-CPO 
Improvement Orders justifies the imposition of the proposed fee. The 
Exchange states that CPOs, as a result of their passive nature, 
generate fewer new Improvement Orders than non-CPO Improvement Orders, 
which are generated by sophisticated trading systems capable of 
generating many new Improvement Orders during a PIP. Increased 
Improvement Order traffic requires additional capacity on the BOX 
trading host, and investment in this additional capacity taxes the 
Exchange's resources. In light of the increased costs associated with 
non-CPO Improvement Orders,\19\ the proposed fee provides for an 
equitable allocation of reasonable dues, fees, and other charges among 
its members and issuers and other persons using its facilities.
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    \19\ As discussed below, broker-dealers and Market Makers pay 
comparable trading fees. See Sections 2 and 3 of the Fee Schedule.
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    As mentioned above, in Amendment No. 2, the Exchange proposes to 
decrease the amount of the proposed fee. Currently, Market Maker and 
broker-dealer accounts are charged $0.20 per executed contract for 
Improvement Orders traded in a PIP. As Citadel points out, however, 
some Market Makers receive volume discounts of up to $0.05 per 
contract. In response to the Citadel Letter, the Exchange modified its 
proposal to reduce the proposed trading fee applicable to non-CPO 
Improvement Orders for Public Customer accounts from $.20 to $.15 per 
executed contract.\20\ As a result, under the amended proposal, the BOX 
will impose upon Public Customers participating in the PIP through the 
use of non-CPO Improvement Orders the same transaction fee as a Market 
Maker receiving the highest volume discount.
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    \20\ See Amendment No. 2.
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    The Commission also finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act.\21\ Section 6(b)(5) of the 
Act prohibits only ``unfair discrimination,'' not discrimination 
simpliciter.\22\ On its face, the proposed fee discriminates between 
different means of participating in the PIP auction.\23\ However, a CPO 
and non-CPO Improvement Order impact the BOX differently. A non-CPO 
Improvement Order, which interacts in the PIP on a dynamic basis, taxes 
the Exchange's systems capacity and regulatory personnel to a greater 
degree than do passive CPO participants. In addition, the Book 
Reference Price associated with a CPO adds liquidity to the displayed 
BOX Book, which provides value to the BOX because it attracts 
additional orders. A non-CPO Improvement Order does not provide such 
liquidity. The Commission believes these differences are a reasonable 
basis for the Exchange to charge different fees. Discrimination on the 
basis of the disparate costs to the Exchange of administering the PIP 
auction is not unfair, particularly given the benefit (i.e., liquidity) 
provided to the Exchange by CPOs.
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    \21\ 15 U.S.C. 78s(b)(5).
    \22\ See Timpinaro v. SEC, 2 F.3d 453, 456 (DC Cir. 1993).
    \23\ The proposed fee would not apply to CPOs submitted by 
sophisticated Public Customers.
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    Finally, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(8) of the Act,\24\ which requires that the 
rules of the Exchange not impose any burden on competition not 
necessary or appropriate in furtherance of the purposes of the Act. A 
$0.15 fee per executed contract, or $0.0015 for each share underlying 
an option contract, will increase costs to Public Customers submitting 
non-CPO Improvement Orders by only a de minimus amount. Market Makers 
are charged comparable fees for participating in PIPs. Accordingly, the 
Commission does not believe this fee will discourage the submission of 
non-CPO Improvement Orders or impose a burden on competition.
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    \24\ 15 U.S.C. 78s(b)(8).
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    The Commission finds good cause for approving Amendment No. 2 to 
the proposed rule change prior to the 30th day after the amendment is 
published for comment in the Federal Register pursuant to Section 
19(b)(2) of the Act.\25\ The proposed rule change, in its original 
form, was published for comment \26\ and, as mentioned above, the 
Commission received only one comment letter. Amendment No. 2 modifies 
the substance of the original proposal only by decreasing the amount of 
the proposed transaction fee from $.20 per contract traded to $.15 per 
executed contract.\27\ This reduction to the proposed fee, which the 
Exchange offered in response to the Citadel Letter, does not raise any 
additional regulatory issues.
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    \25\ 15 U.S.C. 78s(b)(2).
    \26\ See Notice, supra at note 3.
    \27\ In Amendment No. 2, the Exchange also revised the proposed 
rule text to make explicit that ``[t]here are no trading fees for 
any other Public Customer Orders which may be executed including 
CPOs and Public Customer orders on the Book.'' This new language is 
consistent with the Exchange's description of the proposed rule 
change in the original filing: ``All other Public Customer Orders 
traded on BOX, including marketable orders, which interact with a 
PIP already underway, will continue to be free.''
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 III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning whether Amendment No. 2 to 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 No. SR-BSE-2006-10 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-BSE-2006-10. 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 Commissions 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

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available for inspection and copying in the Commission's Public 
Reference Room. Copies of such filing also will be available for 
inspection and copying at the principal office of the Exchange. 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-BSE-2006-10 and should be 
submitted on or before September 13, 2006.

 IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\28\ that the proposed rule change (SR-BSE-2006-10), as amended, is 
hereby approved on an accelerated basis.
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    \28\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-13931 Filed 8-22-06; 8:45 am]
BILLING CODE 8010-01-P