[Federal Register Volume 76, Number 71 (Wednesday, April 13, 2011)]
[Notices]
[Pages 20754-20756]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-8921]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64270; File No. SR-ISE-2011-13]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change To Adopt a Fee Cap and a Service Fee

April 8, 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 March 31, 2011, the International Securities Exchange, LLC (the 
``Exchange'' or the ``ISE'') filed with the Securities and Exchange 
Commission the proposed rule change, as described in Items I, II, and 
III below, which items have been prepared by the self-regulatory 
organization. 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 Substance 
of the Proposed Rule Change

    The ISE is proposing to establish a fee cap of $100,000 per month 
and a related service fee for member firms on all proprietary trading, 
with certain exclusions, in all ISE products. 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, and at the 
Commission's Public Reference Room.

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 establish a monthly 
fee cap per ISE member organization, subject to certain exclusions, 
across all products traded on ISE. The proposed fee cap shall apply to 
transactions executed in a member's proprietary account. The cap also 
would apply to crossing transactions for the account of entities 
affiliated with a member. That is, the cap will apply to a member's 
crossing transactions even if the member executes crosses in the 
account of an affiliate, rather than the member's own account. This 
will provide members with the flexibility to effect transactions

[[Page 20755]]

where it makes the most business sense within their family of 
companies.
    For example, a member engaged in trading activity on ISE may have 
an affiliate engaged in a market making capacity on another exchange, 
which may be a separate broker/dealer entity. A crossing transaction by 
that member in which a customer order is facilitated against the 
proprietary trading interest of the member's affiliate would be 
eligible for the proposed fee cap. On the other hand, a crossing 
transaction by the same member where a customer order is facilitated 
against the proprietary trading interest of an unaffiliated entity 
would not be eligible for the fee cap.\3\
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    \3\ Each member would be responsible for notifying the Exchange 
of its affiliations so that fees and contracts of the member and its 
affiliates involved in crossing transactions may be aggregated for 
purposes of the fee cap.
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    Specifically, the Exchange proposes to cap proprietary transaction 
fees in all products traded on ISE, in the aggregate, at $100,000 per 
month per member, with certain exclusions which are noted below. All 
proprietary transactions, including non-ISE market maker contracts that 
are part of a crossing transaction, are eligible towards the proposed 
fee cap. Volume from regular and complex orders, as well as 
Facilitation Mechanism, Price Improvement Mechanism, Solicited Order 
Mechanism, Block Order Mechanism and Qualified Contingent Cross 
(``QCC'') orders,\4\ will also count towards the fee cap.
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    \4\ The Commission recently approved the QCC order type. See 
Securities Exchange Act Release No. 63955 (February 24, 2011) (SR-
ISE-2010-73). The Exchange filed a separate proposed rule change to 
adopt fees for QCC orders. See Securities Exchange Act Release No. 
64112 (March 23, 2011) (SR-ISE-2011-14).
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    In addition to adopting a fee cap, ISE proposes to adopt a service 
fee of $0.01 per side on all non-QCC transactions that are eligible for 
the fee cap. For QCC volume, the Exchange proposes to adopt a higher 
service fee of $0.05 per side, recognizing that this is a premium 
service that required substantial investment by the ISE to deliver to 
members. The proposed service fee shall apply once a member reaches the 
fee cap level and shall apply to every contract side included in and 
above the fee cap. A member who does not reach the monthly fee cap will 
not be charged the proposed service fee. Additionally, the proposed 
service fee is not calculated in reaching the fee cap. Once the fee cap 
is reached, the proposed service fee shall apply to both proprietary 
and other account designations \5\ in all ISE products in addition to 
those transactions that were included in reaching the fee cap. The 
proposed service fee, when charged for volume above the cap when no 
other transaction fees are collected, is being instituted to defray the 
Exchange's costs of providing services to members, which include trade 
matching and processing, post trade allocation, submission for clearing 
and customer service activities related to trading activity on the 
Exchange.
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    \5\ Other account designations include Prop-firm (Member trading 
for its own account and clearing in the F range at OCC), Prop-cust 
(Member trading for its own account and clearing in the C range at 
OCC), BD-firm (Member trading on behalf of another registered 
broker/dealer clearing in the F range at OCC), BD-cust (Member 
trading on behalf of another registered broker/dealer clearing in 
the C range at OCC), FarMM (Member trading on behalf of another 
registered broker/dealer clearing in the M range at OCC).
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    In calculating the proposed fee cap, the Exchange proposes to 
exclude the following: \6\ (1) Any surcharge fee charged by the 
Exchange on licensed products,\7\ (2) fees from Non-ISE Market Maker 
volume not related to an affiliated member's crossing activity, (3) the 
fee for responses to special orders \8\ in all products, (4) the maker 
and taker fees charged by the Exchange for complex orders \9\ for 
certain option classes,\10\ and (5) the taker fees charged by the 
Exchange for regular orders \11\ for the Select Symbols.
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    \6\ Other exchanges currently employ exclusions to their fee cap 
programs. For example, at the Chicago Board Options Exchange, Inc. 
(``CBOE''), Automated Improvement Mechanism (``AIM'') execution fees 
do not count towards the fee cap employed by that exchange. See CBOE 
Fees Schedule, Section 1 (Equity Options Fees).
    \7\ The Exchange currently charges a surcharge that ranges 
between $0.02 per contract to $0.22 per contract on the following 
licensed products: BKX, MFX, MID, MSH, SML, UKX, RMN, RUI, RUT, MVR, 
NDX, MNX, FUM, HSX, POW, TNY, WMX and NXTQ.
    \8\ Special orders are order types that involve a crossing 
transaction or an auction, where a broadcast is transmitted to 
Exchange members for potential participation and/or price 
improvement.
    \9\ A Complex Order is defined in Exchange Rule 722(a)(1) as any 
order involving the simultaneous purchase and/or sale of two or more 
different options series in the same underlying security, for the 
same account, in a ratio that is equal to or greater than one-to-
three (.333) and less than or equal to three-to-one (3.00) and for 
the purpose of executing a particular investment strategy.
    \10\ The proposed exclusion applies to options classes that are 
subject to Rebates and Fees for Adding and Removing Liquidity in 
Select Symbols (``Select Symbols'').
    \11\ An order means a commitment to buy or sell securities as 
defined in Exchange Rule 715.
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    The proposed fee cap is functionally similar to a ``Multiply-Listed 
Option Fee Cap'' in place at the CBOE \12\ and a ``Firm Related Equity 
Option Cap'' in place at NASDAQ OMX PHLX, Inc. (``PHLX'').\13\ The 
Exchange believes the proposed fee cap would create an incentive for 
members to continue to send order flow to the Exchange.
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    \12\ The CBOE fees are capped at $75,000. See CBOE Fees 
Schedule, Section 1 (Equity Options Fees).
    \13\ PHLX Firms are subject to a maximum fee of $75,000. See 
PHLX Fee Schedule, Section II (Equity Options Fees).
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    The Exchange has designated this proposal to be operative on April 
1, 2011.
2. Statutory Basis
    The Exchange believes that its proposal to amend its Schedule of 
Fees is consistent with Section 6(b) of the Act \14\ in general, and 
furthers the objectives of Section 6(b)(4) of the Act \15\ in 
particular, in that it is an equitable allocation of reasonable fees 
and other charges among Exchange members and other persons using its 
facilities.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that adopting the fee cap is reasonable 
because it will potentially lower transaction fees for members 
providing liquidity on the Exchange. Members who reach the fee cap 
during a month will not have to pay regular transaction fees and thus 
will be able to lower their monthly fees.
    The Exchange believes that the fee cap is not unfairly 
discriminatory because all members, including non-ISE market makers are 
eligible to reach the cap. Moreover, the transactional fees that apply 
to the cap are not focused on any particular type of trading or member. 
Indeed, the cap covers all types of proprietary business members 
conduct on the Exchange, including regular transactions, complex 
orders, as well as all ``special'' transactions, such as trades in the 
Facilitation Mechanism, Price Improvement Mechanism, Solicited Order 
Mechanism, Block Order Mechanism, and Qualified Contingent Crosses. The 
Exchange is applying the fee cap only to firm proprietary business, and 
not customer or market maker business, because the Exchange is 
specifically targeting this type of business as a competitive response 
to similar fee caps other exchanges have adopted,\16\ and thus to make 
it more attractive for members to send such business to the Exchange. 
The Exchange has adopted other incentive programs targeting other 
business areas: lower fees (or no fees) for customer orders; \17\ and 
tiered

[[Page 20756]]

pricing that reduces rates for market makers based on the level of 
business they bring to the Exchange.\18\
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    \16\ See supra notes 12 and 13.
    \17\ For example, the customer fee is $0.00 per contract for 
products other than Second Market Options, Singly Listed Indexes, 
Singly Listed ETFs and FX Options. For Second Market Options, the 
customer fee is $0.05 per contract and for Singly Listed Options, 
Singly Listed ETFs and FX Options, the customer fee is $0.18 per 
contract. The Exchange also currently has an incentive plan in place 
for certain specific FX Options which has its own pricing. See ISE 
Schedule of Fees.
    \18\ The Exchange currently has a sliding scale fee structure 
that ranges from $0.01 per contract to $0.18 per contract depending 
on the level of volume a Member trades on the Exchange in a month.
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    The Exchange further believes the proposal to adopt the fee cap is 
equitable because it would uniformly apply to all members engaged in 
proprietary trading in option classes traded on the Exchange. As noted, 
ISE market makers currently receive the benefit of a fee reduction 
under a sliding scale fee structure applicable to non-Select Symbols.
    The Exchange believes that adopting the service fee is reasonable 
because it will also potentially lower transaction fees for members. 
Members who reach the fee cap during a month will pay the service fee 
instead of the regular transaction fees and thus will be able to lower 
their monthly fees. The Exchange believes that charging a service fee 
is also reasonable because it will allow the Exchange to recoup the 
costs incurred in providing certain services, which include trade 
matching and processing, post trade allocation, submission for clearing 
and customer service activities related to trading activity on the 
Exchange. The Exchange also believes it is reasonable to charge a 
higher service fee for providing certain unique orders, such as QCC 
orders, recognizing the unique efforts and costs associated with 
developing that product. The Exchange believes the proposed fee change 
will attract additional order flow to the Exchange and thereby will 
benefit all market participants.
    The Exchange believes the proposal to adopt the service fee is 
equitable and not unfairly discriminatory because it would uniformly 
apply to all members engaged in proprietary trading. The proposed fee 
is designed to give members who trade a lot on the Exchange a benefit 
by way of a lower transaction fee.
    The Exchange believes the proposed service fee change will benefit 
market participants by potentially lowering their fees while allowing 
the Exchange to remain competitive with other exchanges that offer 
similar fee cap programs. The Exchange notes that the proposed service 
fee is similar to fees other exchanges charge for providing certain 
services to its members. For example, Phlx currently assesses a risk 
management fee.\19\ Additionally, the CBOE has a matched-unmatched fee 
that it applies.\20\ Both the Phlx and the CBOE fees are in essence 
fees charged by those exchanges for services they provide to their 
members.
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    \19\ See Phlx Fee Schedule, Section VI (Equity Options Fees).
    \20\ See CBOE Fees Schedule--Duplicate Fees Related To Manual 
Data Entry (Keypunch) Errors.
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    For the reasons noted above, the Exchange believes that the 
proposed fees are fair, equitable and not unfairly discriminatory.

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)(A)(ii) of the Act.\21\ At any time within 60 days of the 
filing of such 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. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.
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    \21\ 15 U.S.C. 78s(b)(3)(A)(ii).
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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

    <bullet> Use the Commission's Internet comment form http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an E-mail to <a href="/cdn-cgi/l/email-protection#f381869f96de909c9e9e969d8780b3809690dd949c85"><span class="__cf_email__" data-cfemail="9defe8f1f8b0fef2f0f0f8f3e9eeddeef8feb3faf2eb">[email protected]</span></a>. Please include 
File No. SR-ISE-2011-13 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-ISE-2011-13. 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 available for Web site viewing and printing 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 
ISE. 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-ISE-
2011-13 and should be submitted by May 4, 2011.
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    \22\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
Cathy Ahn,
Deputy Secretary.
[FR Doc. 2011-8921 Filed 4-12-11; 8:45 am]
BILLING CODE 8011-01-P


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