[Federal Register Volume 76, Number 251 (Friday, December 30, 2011)]
[Notices]
[Pages 82332-82334]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-33590]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66054; File No. SR-CBOE-2011-120]


 Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change to Amend the Fees Schedule

December 23, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on December 12, 2011, the Chicago Board Options Exchange, 
Incorporated (the ``Exchange'' or ``CBOE'') filed with the Securities 
and Exchange Commission (the ``Commission'') the proposed rule change 
as described in Items I, II, and III below, which Items have been 
substantially prepared by the Exchange. 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.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend its Fees Schedule. The text of the 
proposed rule change is available on the Exchange's Web site (http://www.cboe.org/legal), at the Exchange's Office of the Secretary, and at 
the Commission.

II. Self-Regulatory Organization's Statement of the Purpose of, and the 
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 those 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 parts of such statements.

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

1. Purpose
    The Exchange proposes to implement a Volume Incentive Program (the 
``Program''). Under the Program, the Exchange shall credit each Trading 
Permit Holder (``TPH'') the per contract amount set forth in the table 
below resulting from each public customer (``C'' origin code or ``C'') 
order transmitted by that TPH which is executed electronically on the 
Exchange in all multiply-listed option classes (excluding qualified 
contingent cross (``QCC'') trades), provided the TPH meets certain 
volume thresholds in a month as described below. The volume thresholds 
are calculated based on the customer average daily volume over the 
course of the month. Volume will be recorded for and credits will be 
delivered to the TPH Firm that enters the order into CBOEdirect.

------------------------------------------------------------------------
    Customer contracts per day
 (``CPD'') threshold per month in   Per contract credit at each tier per
  multiply-listed option classes                trading day
------------------------------------------------------------------------
Contracts 0-100,000 Customer CPD.  $.00 per contract.
Contracts 100,001-250,000          $.05 per contract.
 Customer CPD.
Contracts 250,001-375,000          $.12 per contract.
 Customer CPD.
Contracts 375,001 + Customer CPD.  $.20 per contract.
------------------------------------------------------------------------

    The Exchange will aggregate the contracts resulting from customer 
orders transmitted and executed electronically on the Exchange from 
affiliated TPHs for purposes of the thresholds below, provided there is 
at least 75% common ownership between the firms as reflected on each 
firm's Form BD, Schedule A. Additionally, the Exchange will aggregate 
all the contracts contained in any complex order (e.g., a 10-lot 
butterfly spread will count as 40 contracts).
    By way of example, Electronic Access Permit (``EAP'') TPH Firm XYZ, 
Inc. (``XYZ'') electronically executes 3,000,000 customer (C) multiply-
listed option contracts during the month of January. XYZ, also executes 
1,000,000 customer (C) multiply-listed option contracts in open outcry, 
and 800,000 customer (C) SPX and VIX option contracts both 
electronically and in open outcry during the month of January, for a 
total of 4,800,000 customer contracts. The 1,000,000 customer (C) 
multiply-listed option contracts executed in open outcry would not 
count towards the Program, because they were not executed 
electronically. The 800,000 SPX and VIX option contracts would also not 
count towards the Program because those are not multiply-listed 
products. Assume for the sake of these examples that there are 20 
trading days in the month. The 3,000,000 customer (C) multiply-listed 
option contracts executed during the month by XYZ, divided by the 20 
trading days in the month, yields an average of 150,000 contracts per 
day (``CPD''). Per the Program, XYZ would receive a $0.00 credit for 
the first 100,000 CPD, and a $.05/contract credit for the 50,000 CPD 
above the first 100,000 CPD. Therefore, XYZ would receive a credit of 
$2,500 per day, multiplied by the 20 trading days in the month, for a 
total credit of $50,000 for the month.
    For another example, EAP TPH Firm ABC, Inc. (``ABC'') 
electronically executes 6,000,000 customer (C) multiply-listed option 
contracts during the month of January. The 6,000,000 customer (C) 
multiply-listed option contracts executed during the month by ABC, 
divided by the 20 trading days in the month, yields an average of 
300,000 CPD. Per the Program, XYZ would receive a $0.00 credit for the 
first 100,000 CPD, and a $.05/contract credit for the next 150,000 CPD 
(100,001 CPD-250,000 CPD), and then a credit of $0.12/contract for the 
last 50,000 CPD (250,001-300,000 CPD). Therefore, ABC would receive a 
credit of $13,500 per day, multiplied by the 20 trading days in the 
month, for a total credit of $270,000 for the month.
    The purpose of the Program is to encourage TPHs to direct greater 
customer trade volume to the Exchange. Increased customer volume will 
provide for greater liquidity, which benefits all market participants. 
The practice of incentivizing increased retail customer order flow in 
order to attract professional liquidity providers (Market-Makers) is, 
and has been, commonly practiced in the options markets. As such, 
marketing fee programs,\3\ customer posting incentive

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programs,\4\ and equity sharing arrangements,\5\ are based on 
attracting public customer order flow. The Program similarly intends to 
attract customer order flow, which will increase liquidity, thereby 
providing greater trading opportunities and tighter spreads for other 
market participants and causing a corresponding increase in order flow 
from such other market participants.
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    \3\ See CBOE Fees Schedule, Footnote 6
    \4\ See NYSE Arca, Inc. Fees Schedule, page 3 (section titled 
``Customer Monthly Posting Thresholds in Post/Take Executions in 
Penny Pilot Issues'').
    \5\ See the NYSE Amex, LLC's ``Volume-Based Equity Plan'', 
Securities Exchange Act Release No. 64742 (June 24, 2011) (SR-
NYSEAmex-2011-18).
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    The specific volume thresholds of the Program's tiers were set 
based upon business determinations and an analysis of current volume 
levels. The volume thresholds are intended to incentivize firms that 
route some customer orders to the Exchange to increase the number of 
orders that are sent to the Exchange to achieve the next threshold. 
Increasing the number of orders sent to the Exchange will in turn 
provide tighter and more liquid markets, and therefore attract more 
business overall. Similarly, the different credit rates at the 
different tier levels were based on an analysis of revenue and volume 
levels and are intended to provide increasing ``rewards'' for 
increasing the volume of trades sent to the Exchange. The specific 
amounts of the tiers and rates were set in order to encourage suppliers 
of customer order flow to reach for higher tiers.
    The Exchange proposes limiting the Program to multiply-listed 
options classes because CBOE does not compete with other exchanges for 
order flow in the Exchange's proprietary, singly-listed products. 
Further, the Exchange devoted a lot of resources to developing the 
Exchange's proprietary products, and desires to retain funds collected 
in order to recoup those expenditures.
    The Exchange also proposes limiting the Program to electronic 
orders because the vast majority of TPHs that transmit customer orders 
in multiply-listed options to the Exchange do so electronically. 
Moreover, the competitive pressures from other exchanges in electronic 
orders and different business model for electronic orders as opposed to 
open outcry orders leads the Exchange to offer a rebate in order to 
compete with other exchanges for electronic orders.
    The Exchange proposes excluding QCC trades from the Program because 
the vast majority of QCC trades in multiply-listed classes are 
facilitation trades on which the Exchange does not collect revenue. As 
such, it would not be viable for the Exchange to pay credits for QCC 
trades that do not create revenue for the Exchange.
    The credits paid out as part of the program will be drawn from the 
general revenues of the Exchange.\6\ The Exchange calculates volume 
thresholds on a daily basis over the course of a month instead of a 
flat monthly basis because some months contain more trading days than 
others. The proposed rule change is to take effect January 1, 2011 
[sic].\7\
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    \6\ Despite providing credits under the Program, the Exchange 
represents that it will continue to have adequate resources to fund 
its regulatory program and fulfill its responsibilities as a self-
regulatory organization. See email from Jeff Dritz, Attorney, CBOE, 
to Sara Hawkins, Special Counsel, and Adam Moore, Attorney Advisor, 
Division of Trading and Markets, Commission, dated December 20, 
2011.
    \7\ The Commission notes that CBOE intends the proposed rule 
change to be effective on January 1, 2012, not 2011, as stated in 
the Form 19b-4.
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2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Act,\8\ in general, and furthers the objectives of Section 6(b)(4) \9\ 
of the Act in particular, in that it is designed to provide for the 
equitable allocation of reasonable dues, fees, and other charges among 
CBOE Trading Permit Holders and other persons using Exchange 
facilities. The Program is reasonable because it will allow providers 
of customer order flow to receive a credit for such activity. The 
Program is equitable and not unfairly discriminatory because, while 
only customer order flow qualifies for the Program, an increase in 
customer order flow will bring greater volume and liquidity, which 
benefit all market participants by providing more trading opportunities 
and tighter spreads. Similarly, offering increasing credits for 
executing higher numbers of customer contracts (increased credit rates 
at increased volume tiers) is equitable and not unfairly discriminatory 
because such increased rates and tiers encourage TPHs to direct 
increased amounts of customer contracts to the Exchange. The resulting 
increased volume and liquidity will benefit those TPHs who receive the 
lower tier levels, or do not qualify for the Program at all, by 
providing more trading opportunities and tighter spreads.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(4).
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    Limiting the Program to multiply-listed options classes is 
reasonable because those parties trading heavily in multiply-listed 
classes will now begin to receive a credit for such trading, and is 
equitable and not unfairly discriminatory because the Exchange has 
devoted a lot of resources to develop its proprietary singly-listed 
options classes, and therefore needs to retain funds collected in order 
to recoup those expenditures.
    The Exchange believes that it is reasonable to offer a rebate only 
for order entered electronically in an attempt to attract greater 
electronic business and compete with other exchanges for such business. 
The business models surrounding electronic orders and open outcry 
orders are different, and as such, the Exchange offers different 
incentives to encourage the entry of electronic and open outcry orders. 
For example, the Exchange waives the transaction fee for public 
customer orders in SPY and XLF options that are executed in open 
outcry.\10\ Furthermore, in assessing whether to offer rebates, the 
Exchange experiences different competitive pressures from other 
exchanges with respect to electronic orders than it does with respect 
to open outcry orders. The Exchange also believes that paying a 
different rebate for electronic orders than it does for open outcry 
orders is equitable and not unfairly discriminatory because other 
exchanges distinguish between delivery methods for certain market 
participants and pay different rebates depending on the method of 
delivery. This type of distinction is not novel and has long existed 
within the industry.
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    \10\ See Exchange Fees Schedule, footnote 8.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will impose any 
burden on competition 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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    The proposed rule change is designated by the Exchange as 
establishing or changing a due, fee, or other charge, thereby 
qualifying for effectiveness on filing pursuant to Section 19(b)(3)(A) 
of the Act \11\ and subparagraph (f)(2) of Rule 19b-4 \12\

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thereunder. At any time within 60 days of the filing of the proposed 
rule change, the Commission summarily may temporarily suspend 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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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 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-CBOE-2011-120 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CBOE-2011-120. This file 
number should be included on the subject line if email 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 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 offices 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-CBOE-2011-120, and should be submitted on or before 
January 20, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-33590 Filed 12-29-11; 8:45 am]
BILLING CODE 8011-01-P