[Federal Register Volume 75, Number 71 (Wednesday, April 14, 2010)]
[Notices]
[Pages 19449-19451]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-8542]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61869; File No. SR-ISE-2010-25]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule 
Change Relating to Fees and Rebates for Adding and Removing Liquidity

April 7, 2010.
    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 March 31, 2010, International Securities Exchange, LLC (``ISE'' 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. ISE has 
designated this proposal as one establishing or changing a member due, 
fee, or other charge imposed 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 ISE is proposing to amend its Schedule of Fees by adopting per 
contract transaction fees for options overlying the PowerShares QQQ 
Trust (``QQQQ'') [supreg]; Bank of America Corporation (``BAC'') and 
Citigroup Inc. (``C''). The fees would apply to transactions that take 
and remove liquidity in the above symbols. The Exchange also proposes 
to offer transaction rebates to certain market participants. The text 
of the proposed rule change is available on the Exchange's Web site 
(http://www.ise.com), at the principal office of the Exchange, at the 
Commission's Public Reference Room, and on the Commission's Web site at 
http://www.sec.gov.

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 self-regulatory organization 
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 self-regulatory organization 
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 purpose of the proposed rule change is to increase liquidity 
and attract order flow in QQQQ, BAC and C options on the Exchange.\5\
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    \5\ The fees proposed herein are similar to the ``maker/taker'' 
fees currently assessed by NASDAQ OMX PHLX (``PHLX''). PHLX 
currently charges a fee (a) for adding liquidity to the following 
class of market participants on that exchange: (i) Firm and (ii) 
Broker-Dealer; (b) for removing liquidity to the following class of 
market participants: (i) Customer, (ii) Directed Participant, (iii) 
Specialist, ROT, SQT and RSQT, (iv) Firm and (v) Broker-Dealer. PHLX 
also provides a rebate for adding liquidity to the following class 
of market participants: (i) Customer, (ii) Directed Participant, 
(iii) Specialist, ROT, SQT and RSQT. See Securities Exchange Act 
Release No. 61684 (March 10, 2010), 75 FR 13189 (March 18, 2010).
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Transaction Charges for Removing Liquidity
    The Exchange proposes to assess a per contract transaction charge 
in QQQQ, BAC and C options to market participants that remove, or 
``take,'' liquidity from the Exchange. The per contract transaction 
charge would depend on the category of market participant submitting an 
order or quote to the Exchange that removes liquidity.\6\
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    \6\ Although these options classes will no longer be subject to 
the tiered market maker transaction fees, the volume from these 
options classes will continue to be used in the calculation of the 
tiers so that this new pricing does not affect a market maker's fee 
in all other names.
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    The proposed amendment to the Exchange's Schedule of Fees 
identifies

[[Page 19450]]

the following categories of market participants: (i) Market Maker; (ii) 
Market Maker Plus; \7\ (iii) Non-ISE Market Maker; \8\ (iv) Firm 
Proprietary; (v) Customer (Professional); \9\ (vi) Priority 
Customer,\10\ 100 or more contracts; and (vii) Priority Customer, less 
than 100 contracts.\11\
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    \7\ A Market Maker Plus is a market maker who is on the National 
Best Bid or National Best Offer 80% of the time in that symbol 
during the current trading month for series trading between $0.03 
and $5.00 in premium. The Exchange will determine whether a market 
maker qualifies as a Market Maker Plus at the end of each month by 
looking back at each market maker's quoting statistics during that 
month. If at the end of the month, a market maker meets the 80% 
criteria, the Exchange will rebate $0.10 per contract for 
transactions executed by that market maker during that month. The 
Exchange will provide market makers a report on a daily basis with 
quoting statistics so that market makers can determine whether or 
not they are meeting the 80% criteria.
    \8\ A Non-ISE Market Maker, or Far Away Market Maker 
(``FARMM''), is a market maker as defined in Section 3(a)(38) of the 
Securities Exchange Act of 1934, as amended (``Exchange Act''), 
registered in the same options class on another options exchange.
    \9\ A Customer (Professional) is a person who is not a broker/
dealer and is not a Priority Customer.
    \10\ A Priority Customer is defined in ISE Rule 100(a)(37A) as a 
person or entity that is not a broker/dealer in securities, and does 
not place more than 390 orders in listed options per day on average 
during a calendar month for its own beneficial account(s).
    \11\ The Chicago Board Options Exchange (``CBOE'') currently 
makes a similar distinction between large size customer orders that 
are fee liable and small size customer orders whose fees are waived. 
CBOE currently waives fees for customer orders of 99 contracts or 
less in options on exchange-traded funds (``ETFs'') and Holding 
Company Depositary Receipts (``HOLDRs'') and charges a transaction 
fee for customer orders that exceed 99 contracts. See Securities 
Exchange Act Release No. 59892 (May 8, 2009), 74 FR 22790 (May 14, 
2009).
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    The transaction charges to be assessed for removing liquidity in 
QQQQ, BAC and C options from the Exchange are: (i) $0.25 per contract 
for Market Maker, Market Maker Plus, Firm Proprietary and Customer 
(Professional) orders; (ii) $0.35 per contract for Non-ISE Market Maker 
orders; (iii) $0.20 per contract for Priority Customer orders for 100 
or more contracts. Priority Customer orders for less than 100 contracts 
will not be assessed a fee for removing liquidity.
    The transaction charges to be assessed for each leg of Complex 
Orders that remove liquidity in QQQQ, BAC and C options are: (i) $0.25 
per contract for Market Maker, Market Maker Plus, Firm Proprietary and 
Customer (Professional) orders; and (ii) $0.35 per contract for Non-ISE 
Market Maker orders. Priority Customer Complex orders, regardless of 
size, will not be assessed a fee for removing liquidity.
Transaction Charges for Adding Liquidity
    The Exchange proposes to assess transaction charges for adding 
liquidity in QQQQ, BAC and C options on the Exchange, as follows: (i) 
$0.10 per contracts for Market Maker, Firm Proprietary and Customer 
(Professional) orders; and (ii) $0.20 per contract for Non-ISE Market 
Maker orders. Priority Customer orders, regardless of size, and Market 
Maker Plus orders will not be assessed a fee for adding liquidity.
    The transaction charges to be assessed for each leg of Complex 
Orders that add liquidity in QQQQ, BAC and C options are: (i) $0.10 per 
contract for Market Maker, Market Maker Plus, Firm Proprietary and 
Customer (Professional) orders; and (ii) $0.20 per contract for Non-ISE 
Market Maker orders. Priority Customer Complex orders, regardless of 
size, will not be assessed a fee for adding liquidity.
Rebates
    In order to promote and encourage liquidity in QQQQ, BAC and C 
options, the Exchange proposes a $0.10 per contract rebate for Market 
Maker Plus orders sent to the Exchange.\12\ Further, in order to 
incentivize members to direct retail orders to the Exchange, Priority 
Customer Complex orders, regardless of size, will receive a rebate of 
$0.15 per contract on all legs when these orders trade with non-
customer orders in the Exchange's Complex Orderbook.
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    \12\ The concept of incenting market makers with a rebate is not 
novel. In 2008, the CBOE established a program for its Hybrid Agency 
Liaison whereby it provides a $0.20 per contact rebate to its market 
makers provided that at least 80% of the market maker's quotes in a 
class during a month are on one side of the national best bid or 
offer. Market makers not meeting CBOE's criteria are not eligible to 
receive a rebate. See Securities Exchange Act Release No. 57231 
(January 30, 2008), 73 FR 6752 (February 5, 2008). The CBOE has 
since lowered the criteria from 80% to 60%. See Securities Exchange 
Act Release No. 57470 (March 11, 2008), 73 FR 14514 (March 18, 
2008).
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    The fee for orders executed in the Exchange's Facilitation, 
Solicited Order, Price Improvement and Block Order Mechanisms remain 
unchanged from what the Exchange currently charges. Specifically, 
Market Maker, Market Maker Plus, Non-ISE Market Maker, Firm Proprietary 
and Customer (Professional) orders in QQQQ, BAC and C options entered 
into these mechanisms will be charged $0.20 per contract. Priority 
Customer orders executed in the Exchange's Facilitation, Solicited 
Order, Price Improvement and Block Order Mechanisms, regardless of 
size, are not assessed a fee. The Exchange's Facilitation Mechanism has 
an auction which allows for participation in a trade by members other 
than the member who entered the trade. Thus, to incentivize members, a 
rebate of $0.15 per contract will apply to contracts that do not trade 
with the contra order in the Facilitation Mechanism.\13\
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    \13\ Assume the ISE BBO and NBBO are 0.95 x 1.00. A firm enters 
a Facilitation order for a Customer to buy 100 contracts for $0.98 
(originating order). The Firm is the Seller (contra order). During 
the auction period a market maker responds to sell 40 contracts at 
$0.98. At the conclusion of the auction, the Firm is allocated 60 
contracts and the market maker is allocated 40 contracts. The contra 
order will then receive a rebate of $0.15 per contract for the 40 
contracts that did not trade with it. See e-mail from Samir Patel, 
Assistant General Counsel, ISE, to Johnna B. Dumler, Special 
Counsel, Commission, and Andrew Madar, Special Counsel, Commission, 
dated April 1, 2010.
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Other Fees
     Fees for orders executed in the Exchange's Facilitation, 
Solicited Order, Price Improvement and Block Order Mechanisms are for 
contracts that are part of the originating or contra order.
     Complex orders executed in the Facilitation and Solicited 
Order Mechanisms are charged fees only for the leg of the trade 
consisting of the most contracts.
     Payment for Order Flow fees will not be collected on 
transactions on QQQQ, BAC and C options.\14\
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    \14\ ISE currently has a payment-for-order-flow (``PFOF'') 
program that helps the Exchange's market makers establish PFOF 
arrangements with an Electronic Access Member (``EAM'') in exchange 
for that EAM preferencing some or all of its order flow to that 
market maker. This program is funded through a fee paid by Exchange 
market makers for each customer contract they execute, and is 
administered by both Primary Market Makers (``PMM'') and Competitive 
Market Makers (``CMM''), depending to whom the order is preferenced.
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     The Cancellation Fee will continue to apply in QQQQ, BAC 
and C options.\15\
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    \15\ The Exchange assesses a Cancellation Fee of $2.00 to EAMs 
that cancel at least 500 orders in a month, for each order 
cancellation in excess of the total number of orders such member 
executed that month. All orders from the same clearing EAM executed 
in the same underlying symbol at the same price within a 300 second 
period are aggregated and counted as one executed order for purposes 
of this fee. This fee is charged only to customer orders.
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     The Exchange has a $0.20 per contract fee credit for 
members who, pursuant to Supplementary Material .02 to Rule 803, 
execute a transaction in the Exchange's flash auction as a response to 
orders from persons who are not broker/dealers and who are not Priority 
Customers.\16\ For QQQQ, BAC and C options, the Exchange proposes to 
lower the per contract fee credit for members who execute a transaction 
in the Exchange's flash auction as a response

[[Page 19451]]

to orders from persons who are not broker/dealers and who are not 
Priority Customers to $0.10 per contract.
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    \16\ See Securities Exchange Act Release No. 61731 (March 18, 
2010), 75 FR 14233 (March 24, 2010).
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     The Exchange has a $0.20 per contract fee for market maker 
orders sent to the Exchange by EAMs.\17\ Market Maker orders sent to 
the Exchange by EAMs will be assessed a fee of $0.25 per contract for 
removing liquidity in QQQQ, BAC and C options and $0.10 per contract 
for adding liquidity in QQQQ, BAC and C options.
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    \17\ See Securities Exchange Act Release No. 60817 (October 13, 
2009), 74 FR 54111 (October 21, 2009).
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    The Exchange has designated this proposal to be operative on April 
1, 2010.
2. Statutory Basis
    The basis under the Exchange Act for this proposed rule change is 
the requirement under Section 6(b)(4) that an exchange have an 
equitable allocation of reasonable dues, fees and other charges among 
its members and other persons using its facilities. The impact of the 
proposal upon the net fees paid by a particular market participant will 
depend on a number of variables, most important of which will be its 
propensity to add or remove liquidity in QQQQ, BAC and C options. The 
Exchange operates in a highly competitive market in which market 
participants can readily direct order flow to another exchange if they 
deem fee levels at a particular exchange to be excessive. The Exchange 
believes that the proposed fees it charges for options overlying QQQQ, 
BAC and C remain competitive with fees charged by other exchanges and 
therefore continue to be reasonable and equitably allocated to those 
members that opt to direct orders to the Exchange rather than to a 
competing exchange.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not 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 Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3) of the Act \18\ and Rule 19b-4(f)(2) \19\ thereunder. At any 
time within 60 days of the filing of such proposed rule change, the 
Commission may summarily abrogate such 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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    \18\ 15 U.S.C. 78s(b)(3)(A).
    \19\ 17 CFR 240.19b-4(f)(2).
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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-ISE-2010-25 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, Station Place, 100 F Street, NE., Washington, 
DC 20549-1090.

All submissions should refer to File Number SR-ISE-2010-25. 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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. 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 publicly available. All 
submissions should refer to File Number SR-ISE-2010-25 and should be 
submitted on or before May 5, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-8542 Filed 4-13-10; 8:45 am]
BILLING CODE 8011-01-P