Document ID: SEC-2010-0143-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Registered Representative Fee and Options Regulatory Fee
Posted Date: 2010-01-27T05:00Z

[Federal Register: January 27, 2010 (Volume 75, Number 17)]
[Notices]               
[Page 4431-4435]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27ja10-133]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61388; File No. SR-BX-2010-001]

 
 Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
Registered Representative Fee and Options Regulatory Fee

January 20, 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 January 4, 2010, NASDAQ OMX BX, Inc. (the ``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 self-regulatory organization. The Exchange 
filed the proposed rule change pursuant to 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

[[Page 4432]]

solicit comments on the proposed rule 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

    NASDAQ OMX BX, Inc. (the ``Exchange'') proposes to amend the Fee 
Schedule of the Boston Options Exchange Group, LLC (``BOX'') to 
institute a new transaction-based ``Options Regulatory Fee'' and 
eliminate registered representative fees. The text of the proposed rule 
change is available from the principal office of the Exchange, at the 
Commission's Public Reference Room, on the Exchange's Internet Web site 
at http://nasdaqomxbx.cchwallstreet.com/NASDAQOMXBX/Filings/, 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
    This proposed rule change is based on a filing previously submitted 
by the Chicago Board Options Exchange (``CBOE'') that was effective 
upon filing.\5\ The Exchange proposes to amend the BOX Fee Schedule to 
institute a new transaction-based ``Options Regulatory Fee'' and 
eliminate registered representative fees. Each Options Participant that 
registers an options principal and/or representative who is conducting 
business on BOX is assessed a registered representative fee (``RR 
Fee'') based on the action associated with the registration. There are 
annual fees as well as initial, transfer and termination fees. RR Fees 
as well as other regulatory fees collected by the Exchange were 
intended to cover only a portion of the cost of the Exchange's 
regulatory programs.\6\ Prior to recent rule changes by other options 
exchanges, such as CBOE, NASDAQ OMX PHLX (``PHLX'') and the 
International Securities Exchange (``ISE''), all options exchanges, 
regardless of size, charged registered representative fees.
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    \5\ See Securities Exchange Act Release No. 58817 (October 20, 
2008), 73 FR 63744 (October 27, 2008) (SR-CBOE-2008-105) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating 
to the Registered Representative Fee and an Options Regulatory Fee).
    \6\ See Securities Exchange Act Release No. 57152 (January 15, 
2008), 73 FR 3767 (January 22, 2008) (SR-BSE-2007-55).
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    The Exchange believes that the current RR Fee is not equitable. The 
options industry has evolved to a structure with many more Internet-
based and discount brokerage firms. These firms have few registered 
representatives and thus pay very little in RR Fees compared to full 
service brokerage firms that have many registered representatives. 
Further, due to the manner in which RR Fees are charged, it is possible 
for a BOX Options Participant to restructure its business to avoid 
paying these fees altogether. A firm can avoid RR Fees by terminating 
its Options Participant status and sending its business to BOX through 
another separate BOX Options Participant, even an affiliated firm that 
has many fewer registered representatives. If firms terminated their 
Options Participant status to avoid RR Fees, the Exchange would suffer 
the loss of a source of funding for its regulatory programs. More 
importantly, the regulatory effort the Exchange expends to review the 
transactions of each type of firm is not commensurate with the number 
of registered representatives that each firm employs.
    In order to address the inequity of the current regulatory fee 
structure and to offset more fully the cost of the Exchange's 
regulatory programs pertaining to BOX, the Exchange proposes to 
eliminate the current RR Fee for BOX Options Participants and adopt an 
Options Regulatory Fee (``ORF'') of $0.0030 per contract, with a 
minimum one-cent charge per trade.\7\ This fee would be assessed by the 
Exchange to each BOX Options Participant for all options transactions 
executed or cleared by the Options Participant that are cleared by The 
Options Clearing Corporation (``OCC'') in the customer range, i.e., 
transactions that clear in the customer account of the Options 
Participant's clearing firm at OCC, regardless of the marketplace of 
execution. In other words, the Exchange would impose the ORF on all 
options transactions executed by a BOX Options Participant, even if the 
transactions do not take place on BOX.\8\ The ORF would also be charged 
for transactions that are not executed by a BOX Options Participant but 
are ultimately cleared by a BOX Options Participant. In the case where 
a BOX Options Participant executes a transaction and a BOX Options 
Participant clears the transaction, the ORF would be assessed to the 
BOX Options Participant who executed the transaction. In the case where 
a non-BOX Options Participant executes a transaction and a BOX Options 
Participant clears the transaction, the ORF would be assessed to the 
BOX Options Participant who clears the transaction.
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    \7\ A fee similar to the RR fee may still apply to those BOX 
Options Participants that also conduct business on the NASDAQ OMX BX 
equities trading platform. Any such fees may be found at http://
www.nasdaqtrader.com/Trader.aspx?id=bx_pricing. NASDAQ OMX BX will 
not charge the applicable annual RR renewal fee for the 2010 
calendar year. See NASDAQ OMX Equity Regulatory Alert 2009-
17. In some instances, the Exchange will refund certain RR fees 
collected through the CRD system from BOX Options Participants that 
do not conduct business on NASDAQ OMX BX equities trading platform.
    \8\ The ORF would apply to all customer orders executed by a BOX 
Options Participant on BOX. Exchange rules require each BOX Options 
Participant to submit trade information in order to allow the 
Exchange to properly prioritize and match orders and quotations and 
report resulting transactions to the OCC. See BOX Rules Chapter V, 
Section 15. The Exchange represents that it has surveillances in 
place to verify that BOX Options Participants comply with the rule.
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    As noted, the ORF would replace RR Fees, which relate to a BOX 
Options Participant's options customer business. Further, RR Fees 
constituted the single-largest fee assessed that is related to BOX 
customer trading activity (in that BOX generally does not charge 
customer transaction fees),\9\ and the Exchange believes it is 
appropriate to charge the ORF only to transactions that clear as 
customer at the OCC. The Exchange believes that its broad regulatory 
responsibilities with respect to BOX Options Participants' activities 
supports applying the ORF to transactions cleared but not executed by a 
BOX Options Participant. The Exchange's regulatory responsibilities are 
the same regardless of whether a BOX Options Participant executes a 
transaction or clears a transaction executed on its behalf. The 
Exchange regularly reviews all such activities, including performing 
surveillance for position limit violations, manipulation, frontrunning, 
contrary exercise advice violations and insider trading.\10\ These 
activities span across multiple exchanges.
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    \9\ Under BOX's Take or Make fee structure, customer trading may 
generate Make fees, but these fees are not specifically related to 
customer activity and are offset by equal Take credits. Therefore, 
Make fees are not intended to directly raise funds for Exchange 
programs, including regulatory.
    \10\ The Exchange also participates in The Options Regulatory 
Surveillance Authority (``ORSA'') national market system plan and in 
doing so shares information and coordinates with other exchanges 
designed to detect the unlawful use of undisclosed material 
information in the trading of securities options. ORSA is a national 
market system comprised of several self-regulatory organizations 
whose functions and objectives include the joint development, 
administration, operation and maintenance of systems and facilities 
utilized in the regulation, surveillance, investigation and 
detection of the unlawful use of undisclosed material information in 
the trading of securities options. The Exchange compensates ORSA for 
the Exchange's portion of the cost to perform insider trading 
surveillance on behalf of the Exchange. The ORF will cover the costs 
associated with the Exchange's arrangement with ORSA.

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[[Page 4433]]

    The Exchange believes the initial level of the fee is reasonable 
because it relates to the recovery of the costs of supervising and 
regulating BOX Options Participants. The Exchange believes the amount 
of the ORF is fair and reasonably allocated because it is a closer 
approximation to the Exchange's actual costs in administering its 
regulatory program.
    The ORF would be collected indirectly from BOX Options Participants 
through their clearing firms by OCC on behalf of the Exchange. The 
Exchange expects that BOX Options Participants will pass-through the 
ORF to their customers in the same manner that firms pass-through to 
their customers the fees charged by Self Regulatory Organizations 
(``SROs'') to help the SROs meet their obligations under Section 31 of 
the Exchange Act.
    The ORF is designed to recover a material portion of the costs to 
the Exchange of the supervision and regulation of BOX Options 
Participants, including performing routine surveillances and 
investigations, as well as policy, rulemaking, interpretive and 
enforcement activities.\11\ The Exchange believes that revenue 
generated from the ORF will cover the substantial majority of the 
Exchange's regulatory costs related to the BOX market. At present, RR 
Fees make up the largest part of the Exchange's total options 
regulatory fee revenue, however, the total amount of BOX specific 
regulatory fees collected by the Exchange is significantly less than 
the regulatory costs incurred by BOX on an annual basis. The Exchange 
notes that its regulatory responsibilities with respect to BOX Options 
Participant compliance with options sales practice rules have been 
allocated to FINRA under a 17d-2 agreement. The ORF is not designed to 
cover the cost of options sales practice regulation.
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    \11\ As stated above, the RR Fees collected by the Exchange were 
originally intended to cover only a portion of the cost of the 
Exchange's regulatory programs.
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    The Exchange would monitor the amount of revenue collected from the 
ORF to ensure that it, in combination with its other BOX regulatory 
fees and fines, does not exceed the Exchange's total regulatory costs. 
The Exchange expects to monitor BOX regulatory costs and revenues at a 
minimum on an annual basis. If the Exchange determines BOX regulatory 
revenues exceed regulatory costs, the Exchange would adjust the ORF by 
submitting a fee change filing to the Commission. The Exchange would 
notify BOX Options Participants of adjustments to the ORF via a 
Regulatory Information Circular.
    The Exchange believes the proposed ORF is equitably allocated 
because it would be charged to all BOX Options Participants on all 
their customer options business. The Exchange believes the proposed ORF 
is reasonable because it will raise revenue related to the amount of 
customer options business conducted by BOX Options Participants, and 
thus the amount of Exchange regulatory services those BOX Options 
Participants will require, instead of how many registered 
representative a particular BOX Options Participant employs.\12\
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    \12\ The Exchange expects that implementation of the proposed 
ORF will result generally in many traditional brokerage firms paying 
less regulatory fees while Internet and discount brokerage firms 
will pay more.
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    As a fully-electronic exchange without a trading floor, the amount 
of resources required by the Exchange to surveil non-customer trading 
activity is significantly less than the amount of resources the 
Exchange must dedicate to surveil customer trading activity. This is 
because surveilling customer trading activity is much more labor-
intensive and requires greater expenditure of human and technical 
resources than surveilling non-customer trading activity, which tends 
to be more automated and less labor-intensive. As a result, the costs 
associated with administering the customer component of the Exchange's 
overall regulatory program are materially higher than the costs 
associated with administering the non-customer component (e.g., market 
maker) of its regulatory program.
    The Exchange believes it is reasonable and appropriate for the 
Exchange to charge the ORF for options transactions regardless of the 
exchange on which the transactions occur. The Exchange has a statutory 
obligation to enforce compliance by BOX Options Participants and their 
associated persons with the Exchange Act and the rules of the Exchange 
and to surveil for other manipulative conduct by market participants 
(including non-BOX Options Participants) trading on the Exchange. The 
Exchange cannot effectively surveil for such conduct without looking at 
and evaluating activity across all options markets. Many of the 
Exchange's market surveillance programs require the Exchange to look at 
and evaluate activity across all options markets, such as surveillance 
for position limit violations, manipulation, frontrunning and contrary 
exercise advice violations/expiring exercise declarations.\13\ Also, 
the Exchange and the other options exchanges are required to populate a 
consolidated options audit trail (``COATS'') system in order to surveil 
BOX Options Participant activities across markets.\14\
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    \13\ The Exchange and other options SROs are parties to a 17d-2 
agreement allocating among the SROs regulatory responsibilities 
relating to compliance by the common members with rules for expiring 
exercise declarations, position limits, OCC trade adjustments, and 
Large Option Position Report reviews. See Securities Exchange Act 
Release No. 56941 (December 11, 2007).
    \14\ COATS effectively enhances intermarket options surveillance 
by enabling the options exchanges to reconstruct the market promptly 
to effectively surveil certain rules.
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    In addition to its own surveillance programs, the Exchange works 
with other SROs and exchanges on intermarket surveillance related 
issues. Through its participation in the Intermarket Surveillance Group 
(``ISG''),\15\ the Exchange shares information and coordinates 
inquiries and investigations with other exchanges designed to address 
potential intermarket manipulation and trading abuses. The Exchange's 
participation in ISG helps it to satisfy the Exchange Act requirement 
that it have coordinated surveillance with markets on which security 
futures are traded and markets on which any security underlying 
security futures are traded to detect manipulation and insider 
trading.\16\
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    \15\ ISG is an industry organization formed in 1983 to 
coordinate intermarket surveillance among the SROs by cooperatively 
sharing regulatory information pursuant to a written agreement 
between the parties. The goal of the ISG's information sharing is to 
coordinate regulatory efforts to address potential intermarket 
trading abuses and manipulations.
    \16\ See Exchange Act Section 6(h)(3)(I).
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    The Exchange believes that charging the ORF across markets will 
avoid having BOX Options Participants direct their trades to other 
markets in order to avoid the fee and to thereby avoid paying for their 
fair share of regulation. If the ORF did not apply to activity across 
markets then BOX Options Participants would send their orders to the 
least cost, least regulated exchange. Other exchanges could impose a 
similar

[[Page 4434]]

fee on their member's activity, including the activity of those members 
on BOX.\17\
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    \17\ The Exchange notes that CBOE currently assesses an options 
regulatory fee similar to the one proposed herein, which fee is also 
assessed on the trading activity of a CBOE member on BOX. Similar 
regulatory fees have also recently been assessed by PHLX (See 
Securities Exchange Act Release No. 61133 (December 9, 2009), 74 FR 
66715 (December 16, 2009) (SR-Phlx-2009-100)); and ISE (See 
Securities Exchange Act Release No. 61154 (December 11, 2009), 74 FR 
67278 (December 18, 2009) (SR-ISE-2009-105)).
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    The Exchange notes that there is established precedent for an SRO 
charging a fee across markets, namely, FINRA's Trading Activity Fee 
\18\ and the CBOE's ORF.\19\ While the Exchange does not have all the 
same regulatory responsibilities as FINRA, the Exchange believes that, 
like the CBOE, its broad regulatory responsibilities with respect to 
BOX Options Participants' activities, irrespective of where their 
transactions take place, supports a regulatory fee applicable to 
transactions on other markets. Unlike FINRA's Trading Activity Fee, the 
ORF would apply only to a BOX Options Participant's customer options 
transactions.
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    \18\ See Securities Exchange Act Release No. 47946 (May 30, 
2003), 68 FR 3402 (June 6, 2003).
    \19\ See supra note 5.
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    The Exchange has designated this proposal to be operative on 
January 1, 2010.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act,\20\ in general, and Section 
6(b)(4) of the Act,\21\ in particular, in that it provides for the 
equitable allocation of reasonable dues, fees, and other charges among 
its members and issuers and other persons using its facilities. In 
particular, the Exchange believes the ORF is objectively allocated to 
BOX Options Participants because it would be charged to all BOX Options 
Participants on all their transactions that clear as customer at the 
OCC. Moreover, the Exchange believes the ORF ensures fairness by 
assessing higher fees to those BOX Options Participants that require 
more Exchange regulatory services based on the amount of customer 
options business they conduct.
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    \20\ 15 U.S.C. 78f(b).
    \21\ 15 U.S.C. 78f(b)(4).
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    The Commission has addressed the funding of an SRO's regulatory 
operations in the Concept Release Concerning Self-Regulation \22\ and 
the release on the Fair Administration and Governance of Self-
Regulatory Organizations.\23\ In the Concept Release, the Commission 
states that: ``Given the inherent tension between an SRO's role as a 
business and a regulator, there undoubtedly is a temptation for an SRO 
to fund the business side of its operations at the expense of 
regulation.'' \24\ In order to address this potential conflict, the 
Commission proposed in the Governance Release rules that would require 
an SRO to direct monies collected from regulatory fees, fines, or 
penalties exclusively to fund the regulatory operations and other 
programs of the SRO related to its regulatory responsibilities.\25\ The 
Exchange has designed the ORF to generate revenues that will 
approximately be equal to BOX's regulatory costs, which is consistent 
with the Commission's view that regulatory fees be used for regulatory 
purposes and not to support the Exchange's business side.
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    \22\ See Securities Exchange Act Release No. 50700 (November 18, 
2004), 69 FR 71256 (December 8, 2004) (``Concept Release'').
    \23\ See Securities Exchange Act Release No. 50699 (November 18, 
2004), 69 FR 71126 (December 8, 2004) (``Governance Release'').
    \24\ Concept Release at 71268.
    \25\ Governance Release at 71142.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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.

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

    The Exchange has 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)(ii) of the Exchange Act \26\ and Rule 19b-4(f)(2) \27\ 
thereunder, because it establishes or changes a due, fee, or other 
charge applicable only to a member.
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    \26\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \27\ 17 CFR 240.19b-4(f)(2).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate the rule change if it 
appears to the Commission that the action is necessary or appropriate 
in the public interest, for the protection of investors, or would 
otherwise further the purposes of the Act.

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 rule-comments@sec.gov. Please include 
File Number SR-BX-2010-001 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-BX-2010-001. 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 inspection and 
copying 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 available publicly. All 
submissions should refer to File No. SR-BX-2010-001 and should be 
submitted on or before February 17, 2010.

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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-1604 Filed 1-26-10; 8:45 am]
BILLING CODE 8011-01-P