[Federal Register Volume 78, Number 17 (Friday, January 25, 2013)]
[Notices]
[Pages 5535-5538]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-01489]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68695; File No. SR-CBOE-2013-004]


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

January 18, 2013.
    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 January 7, 2013, Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission'' or ``SEC'') the proposed rule change as 
described in Items I, II, and III below, which Items have been 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.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's 
Office of the Secretary, and at the Commission.

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 Exchange 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 Exchange 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 Exchange proposes to amend its Fees Schedule. Specifically, the 
Exchange proposes to amend its Volume Incentive Program (``VIP''), 
through which the Exchange credits each Trading Permit Holder (``TPH'') 
the per contract amount resulting from each public customer (``C'' 
origin code) order transmitted by that TPH which is executed 
electronically on the Exchange in all multiply-listed option classes 
(excluding Qualified Contingent Cross (``QCC'') trades and executions 
related to contracts that are routed to one or more exchanges in 
connection with the Options Order Protection and Locked/Crossed Market 
Plan referenced in Rule 6.80), provided the Trading Permit Holder meets 
certain volume thresholds in a month. First, the Exchange proposes to 
change the different fee tier thresholds in the VIP from nominal 
customer contracts per day thresholds (i.e. contracts 250,001-375,000 
customer contracts per day (``CPD'')) to a relative contracts per month 
threshold structure (i.e. 2.25%-3.50% of total national customer volume 
in multiply-listed options monthly). Going forward, qualification for 
the different fee rates at different tiers in the VIP will be based on 
a TPH's percentage of national customer volume in multiply-listed 
options monthly, and the heading for the different percentage tiers 
will be Percentage Thresholds of National Customer Volume in Multiply-
Listed Options Classes (Monthly).\3\ The purpose of the change to move 
away from basing the fee tiers on a TPH's nominal customer contracts 
per day to a TPH's relative contracts per month (as a percentage of 
total national customer volume in multiply-listed options) is to 
control and account for changes in national industry-wide customer 
multiply-listed options volume. Corresponding to this change, the 
Exchange also proposes to amend the section of the ``Notes'' on the VIP 
table to state that, in the event of a CBOE System outage or other 
interruption of electronic trading on CBOE, the Exchange will adjust 
the national customer volume in multiply-listed options for the 
duration of the outage.\4\

[[Page 5536]]

This means that, in the event of a CBOE System outage or other 
interruption of electronic trading on CBOE, any national customer 
trading in multiply-listed options during the outage will not be 
counted towards the establishment of a TPH's VIP threshold.
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    \3\ The Exchange uses contract sides, rather than contracts, to 
calculate the denominator for the percentage of national customer 
volume. See email from Jeff Dritz, Assistant Secretary, CBOE, to 
Richard Holley, Assistant Director, SEC Division of Trading and 
Markets, Office of Market Supervision, dated January 11, 2013.
    \4\ Currently, the relevant passage states that ``In the event 
of a CBOE System outage or other interruption of electronic trading 
on CBOE, the Exchange will take into account, on a pro rata basis, 
the length of time of the interruption for purposes of calculating 
the contracts per day.'' However, this accounting (which is 
currently relevant as CBOE is measuring qualification for the VIP on 
a nominal customer contracts per day basis) will no longer be 
relevant under the proposed relative contracts per month VIP 
qualification structure.
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    The Exchange also proposes to change the amounts of the credits in 
the second and fourth tiers of the VIP. The credit in the second tier 
will be increased from $0.05 per contract to $0.07 per contract, and 
the credit in the fourth tier will be decreased from $0.20 per contract 
to $0.18 per contract. Going forward, the relative (percentage) volume 
thresholds and credit amounts will be as follows:

------------------------------------------------------------------------
                                                                  Per
Percentage thresholds of national customer volume in multiply-  contract
               listed options classes (monthly)                  credit
------------------------------------------------------------------------
0%-0.75%.....................................................      $0.00
Above 0.75%-2.25%............................................       0.07
Above 2.25%-3.50%............................................       0.12
Above 3.50%-5.00%............................................       0.18
Above 5.00%..................................................       0.05
------------------------------------------------------------------------

    The purpose of increasing the credit in the second tier and 
decreasing the credit in the fourth tier by $0.02 each is to 
rationalize the opportunity to receive a credit under the VIP across a 
broader set of participants. Lowering the credit in the fourth tier 
allows the Exchange to make up for increasing the credit in the second 
tier.
    The Exchange also proposes to add to the notes on the VIP table an 
additional credit of $0.10 per contract, on top of other VIP credits, 
at every tier, for the electronic execution of each leg of a customer 
complex order in multiply-listed options (the ``Customer Complex 
Credit''). The purpose of the proposed Customer Complex Credit is to 
respond to competitive pricing schedules of other exchanges that 
specifically attempt to attract customer complex order flow through 
increased rebates for electronic complex customer orders.\5\
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    \5\ See Section II of the Schedule of Fees of the International 
Securities Exchange, LLC (``ISE''), which shows significant rebates 
for Priority Customers executing complex orders (compare with 
Section I, which shows non-complex order fees). The ISE is an all-
electronic options exchange.
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    The Exchange also proposes to assess an additional surcharge of 
$0.10 per contract, on top of regular transaction fees, for the 
electronic execution of each leg of a complex order in multiply-listed 
options that executes against a customer complex order (the 
``Surcharge''). The Surcharge applies to all market participants except 
customers. This Surcharge will not be assessed to individual leg 
markets that execute against a customer complex order. The Surcharge 
will be described in proposed new footnote 30 to the Fees Schedule. The 
purpose of the Surcharge is to offset the additional payments that will 
be required by the Customer Complex Credit.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\6\ Specifically, the Exchange believes the proposed rule change is 
consistent with Section 6(b)(4) of the Act,\7\ which provides that 
Exchange rules may provide for the equitable allocation of reasonable 
dues, fees, and other charges among its Trading Permit Holders and 
other persons using its facilities. The Exchange believes that 
converting the qualification for the different fee tiers in the VIP 
from measuring by a TPH's nominal contracts per day to measuring by the 
TPH's relative contracts per month (based on the percentage of national 
customer volume in multiply-listed options that the TPH electronically 
executes) is reasonable because it allows the Exchange to control and 
account for changes in national industry-wide customer multiply-listed 
options volume. Further, it will still allow TPHs to receive a credit 
for electronically executing customer orders in multiply-listed 
options, just as prior to this change. The Exchange believes that the 
change is equitable and not unfairly discriminatory because it will be 
applied to all TPHs, who, like before, will be eligible to receive 
credits for electronically executing customer orders in multiply-listed 
options. The change merely switches out the measuring stick to use one 
that accounts for changes in industry-wide volume.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that the proposed changes to increase the 
credit in the second tier of the VIP and decrease the credit in the 
fourth tier by $0.02 each are reasonable. In the case of the increase 
in the credit for the second tier, the change will allow TPHs who reach 
the percentage threshold in that tier to receive an increased credit 
for doing so. In the case of the decrease in the credit for the fourth 
tier, the change will still allow TPHs who reach the percentage 
threshold in that tier to receive a credit (the highest credit of any 
tier). These changes are equitable and not unfairly discriminatory 
because they will be applied to all TPHs. Moreover, the purpose of 
these proposed changes is to encourage the sending and electronic 
execution of customer multiply-listed options volume to the Exchange. 
This increased volume creates greater trading opportunities that 
benefit all market participants (including TPHs that do not reach the 
higher-credit tiers in the VIP). Further, the increased volume and 
improved trading opportunities will provide such TPHs with a better 
opportunity to reach the higher-credit tiers in the VIP.
    The Exchange believes that the proposed Customer Complex Credit is 
reasonable because it will allow customers who electronically execute 
complex orders in multiply-listed options to receive an extra $0.10 
credit for doing so. Limiting the Customer Complex Credit to customers 
is equitable and not unfairly discriminatory because other market 
participants generally prefer to execute their orders against customer 
orders, and the Customer Complex Credit is designed to encourage the 
sending and electronic execution of customer complex orders to the 
Exchange, which will provide other market participants with more 
opportunities to achieve these preferred executions. Further, while 
only customer order flow qualifies for the proposed Customer Complex 
Credit 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. Limiting the 
Customer Complex Credit to multiply-listed options 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 also proposes limiting the Customer Complex Credit to 
electronic orders because the vast majority of TPHs that transmit 
customer orders in multiply-listed options to the Exchange do so 
electronically. 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. 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 
business models surrounding electronic orders and open outcry orders 
are different, and as such, the Exchange

[[Page 5537]]

offers different incentives to encourage the entry of electronic and 
open outcry orders. The Exchange also believes that paying a different 
credit 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. Further, the Exchange believes that the offering of the 
Customer Complex Credit will cause an increase in volume. The Exchange 
has expended considerable resources to develop its electronic trading 
platforms and seeks to recoup the costs of such expenditures through 
the receipt of the fees associated with such increased volume.
    The Exchange believes that the Surcharge is reasonable because it 
is necessary to offset the payments that will be made by the Exchange 
under the Customer Complex Credit. Further, other exchanges assess 
higher fees for complex orders than for non-complex ones.\8\ Applying 
the Surcharge to all market participants except customers is equitable 
and not unfairly discriminatory because other market participants 
generally prefer to execute their orders against customer orders. By 
exempting customer orders, the Surcharge will not discourage the 
sending of customer orders, and therefore there should still be plenty 
of customer orders for other market participants to trade with. 
Further, the options industry has a long-standing practice of assessing 
preferable fee structures to customers. Moreover, assessing the 
Surcharge only to complex orders that execute against customer orders 
is equitable and not unfairly discriminatory because, as stated above, 
other market participants generally prefer to execute their orders 
against customer orders, and therefore it is justifiable for them to be 
assessed a premium for such preferable executions.
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    \8\ See ISE Schedule of Fees, Section I (which lists regular 
Maker rebates and fees and Taker fees for Select Symbols) as 
compared to Section II (which lists complex order fees and rebates 
for Select Symbols). Market participants are assessed higher fees 
for executing complex orders, and specifically and especially for 
executions in complex orders that execute against Priority Customer 
orders.
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    Limiting the Surcharge to multiply-listed options 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 does not desire to risk discouraging the trading of such 
proprietary singly-listed options classes. The Exchange needs to retain 
funds collected from fees from proprietary singly-listed options 
transactions in order to recoup the expenditures associated with 
developing such products.
    Limiting the Surcharge to orders entered electronically is 
equitable and not unfairly discriminatory because 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 sometimes offer a different fee structure in 
order to compete with other exchanges for electronic orders. 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. 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. The Exchange also believes that assessing 
different fees and rebates for electronic orders than it does for open 
outcry orders is equitable and not unfairly discriminatory because the 
Exchange has expended considerable resources to develop its electronic 
trading platforms and seeks to recoup the costs of such expenditures.

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 that is not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange does not believe 
that the proposed conversion of the VIP thresholds to relative (as 
opposed to nominal) thresholds and the changes to the per-contract 
credit amounts in the second and fourth tiers of the VIP will impose an 
unnecessary burden on intramarket competition because the changes will 
apply to all CBOE TPHs (as the VIP will still and did previously apply 
to all CBOE TPHs). The Exchange also does not believe that such changes 
will impose any burden on intermarket competition that is not necessary 
or appropriate in furtherance of the purposes of the Act. To the extent 
that some of the changes to the VIP may attract greater trading volume 
to CBOE (and away from other exchanges), the Exchange notes that market 
participants trading on other exchanges can always elect to become TPHs 
on CBOE. Further, the Exchange exists in a competitive marketplace, and 
to the extent that these proposed changes make other exchanges less 
competitive with CBOE, market participants trading on those other 
exchanges can elect to trade on CBOE.
    CBOE does not believe that the adoption of the Customer Complex 
Credit will impose any burden on intramarket competition that is not 
necessary or appropriate in furtherance of the purposes of the Act. 
While the Customer Complex Credit only applies to customers, other 
market participants generally prefer to execute their orders against 
customer orders, and the Customer Complex Credit is designed to 
encourage the sending and electronic execution of customer complex 
orders to the Exchange, which will provide other market participants 
with more opportunities to achieve these preferred executions. Further, 
while only customer order flow qualifies for the proposed Customer 
Complex Credit 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. Therefore, 
any potential effects that the adoption of the Customer Complex Credit 
may have on intramarket competition are justifiable due to the reasons 
stated above. The Exchange does not believe that the adoption of the 
Customer Complex Credit will impose any burden on intermarket 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act. The Exchange believes that the Customer Complex 
Credit will increase competition with other exchanges, as the purpose 
of the proposed Customer Complex Credit is to respond to competitive 
pricing schedules of other exchanges that specifically attempt to 
attract customer complex order flow through increased rebates for 
electronic complex customer orders.\9\ To the extent that the adoption 
of Customer Complex Credit may result in increased trading volume on 
CBOE and lessened volume on these other exchanges, the Exchange notes 
that market participants trading on other exchanges can always elect to 
become TPHs on CBOE. Further, the Exchange exists in a competitive 
marketplace, and to the extent that these proposed changes make other 
exchanges less competitive with CBOE, market participants trading on 
those other exchanges can elect to trade on CBOE.
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    \9\ See Section II of the Schedule of Fees of the ISE, which 
shows significant rebates for Priority Customers executing complex 
orders (compare with Section I, which shows non-complex order fees). 
The ISE is an all-electronic options exchange.
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    The Exchange does not believe that the adoption of the Surcharge 
will impose any burden on intramarket

[[Page 5538]]

competition that is not necessary or appropriate in furtherance of the 
purposes of the Act. While it does apply to all market participants 
except for customers, other market participants generally prefer to 
execute their orders against customer orders. By exempting customer 
orders, the Surcharge will not discourage the sending of customer 
orders, and therefore there should still be plenty of customer orders 
for other market participants to trade with. Therefore, any potential 
effects that the adoption of the Surcharge may have on intramarket 
competition are justifiable. Further, the options industry has a long-
standing practice of assessing preferable fee structures to customers. 
The Exchange does not believe that the adoption of the Surcharge will 
impose any burden on intramarket [sic] competition that is not 
necessary or appropriate in furtherance of the purposes of the Act. The 
imposition of the Surcharge (which is important to offset the costs of 
the Customer Complex Credit) should not, by itself, attract trading 
volume from other exchanges (as it requires payment of a surcharge for 
an activity that did not previously require such payment). Further, 
other exchanges assess higher fees for complex orders than for non-
complex ones.\10\
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    \10\ See ISE Schedule of Fees, Section I (which lists regular 
Maker rebates and fees and Taker fees for Select Symbols) as 
compared to Section II (which lists complex order fees and rebates 
for Select Symbols). Market participants are assessed higher fees 
for executing complex orders, and specifically and especially for 
executions in complex orders that execute against Priority Customer 
orders.
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    The Exchange also notes that it operates in a highly-competitive 
market in which market participants can readily direct order flow to 
competing venues if they deem fee levels at a particular venue to be 
excessive. The proposed rule change reflects a competitive pricing 
structure designed to incent market participants to direct their order 
flow to the Exchange, and the Exchange believes that such structure 
will help the Exchange remain competitive with those fees and rebates 
assessed by other venues.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposed rule change.

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)(A) of the Act \11\ and paragraph (f) of Rule 19b-4 \12\ 
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).
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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 email to [email protected]. Please include 
File Number SR-CBOE-2013-004 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-2013-004. 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, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 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 available publicly. All 
submissions should refer to File Number SR-CBOE-2013-004, and should be 
submitted on or before February 15, 2013.

    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. 2013-01489 Filed 1-24-13; 8:45 am]
BILLING CODE 8011-01-P