Document ID: SEC-2005-0298-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Chicago Board Options Exchange, Inc.
Posted Date: 2005-11-29T05:00Z

[Federal Register: November 29, 2005 (Volume 70, Number 228)]
[Notices]               
[Page 71568-71571]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29no05-108]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52818; File No. SR-CBOE-2005-91]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change and Amendment No. 1 Thereto Relating to Its 
Marketing Fee Program

November 22, 2005.

    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 November 2, 2005, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' 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. On November 17, 2005, the CBOE submitted Amendment No. 1 to 
the proposed rule change.\3\ The CBOE has designated this proposal as 
one changing a fee imposed by the CBOE under Section 19(b)(3)(A)(ii) of 
the Act \4\ and Rule 19b-4(f)(2) thereunder,\5\ which renders the 
proposal, as amended, effective upon filing with the Commission. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Partial Amendment No. 1 (``Amendment No. 1''): (1) Amended 
the effective date of the proposal from November 1, 2005 to November 
2, 2005; (2) amended the purpose section of the filing to clarify 
that the Preferred Market-Maker Program is a pilot program set to 
expire on June 2, 2006; (3) amended the rule text to specify that 
the marketing fee program will expire on June 2, 2006, the date the 
Preferred Market-Maker Program is set to expire; and (4) made a 
technical correction to a footnote.
    \4\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \5\ 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 CBOE proposes to amend its Fees Schedule and its marketing fee 
program in a number of respects, including to

[[Page 71569]]

permit a ``Preferred Market-Maker'' to direct the Exchange to disburse 
funds generated by the marketing fee where an order provider sends an 
order to the Exchange designating a Preferred Market-Maker. These 
changes to the marketing fee program would be effective November 2, 
2005 and remain in effect until June 2, 2006, which is the date that 
CBOE's pilot program establishing its Preferred Market-Maker program is 
scheduled to expire, unless extended through a rule filing submitted to 
and approved by the Commission.\6\
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    \6\ See Amendment No. 1, supra note 3.
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    Below is the text of the proposed rule change, as amended. Proposed 
new language is in italic; proposed deletions are in [brackets].\7\
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    \7\ Id.
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CHICAGO BOARD OPTIONS EXCHANGE, INC.

FEES SCHEDULE

[October 25] November 2, 2005

    1. No Change.
    2. MARKETING FEE (6)(16)--$.22
    3.-4. No Change.

    FOOTNOTES:

    (1)-(5) No Change.
    (6) The Marketing Fee will be assessed only on transactions of 
Market-Makers, RMMs, e-DPMs, DPMs, and LMMs at the rate of $.22 per 
contract on all classes of equity options, options on HOLDRs, options 
on SPDRs, and options on DIA. The fee will not apply to Market-Maker-
to-Market-Maker transactions. This fee shall not apply to index options 
and options on ETFs (other than options on SPDRs and options on DIA). 
If less than 80% of the marketing fee funds are paid out by the DPM or 
LMM in a given month, then [Should any surplus of the marketing fees at 
the end of each month occur,] the Exchange would [then] refund such 
surplus at the end of the month[, if any,] on a pro rata basis based 
upon contributions made by the Market-Makers, RMMs, e-DPMs, DPMs and 
LMMs. However, if 80% or more of the accumulated funds in a given month 
are paid out by the DPM or LMM, there will not be a rebate for that 
month and the funds will carry over and will be included in the pool of 
funds to be used by the DPM or LMM the following month. At the end of 
each quarter, the Exchange would then refund any surplus, if any, on a 
pro rata basis based upon contributions made by the Market-Makers, 
RMMs, DPMs, e-DPMs and LMMs. CBOE's marketing fee program as described 
above will be in effect until June 2, 2006.
* * * * *

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 CBOE included statements 
concerning the purpose of and basis for the proposed rule change, as 
amended, and discussed any comments it received on the proposed rule 
change, as amended. The text of these statements may be examined at the 
places specified in Item IV below. The CBOE 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 states that on October 29, 2004, it amended its 
marketing fee program.\8\ The current marketing fee is assessed upon 
Designated Primary Market-Makers (``DPMs''), Electronic DPMs (``e-
DPMs''), Remote Market-Makers (``RMMs''), Lead Market-Makers 
(``LMMs''), and Market-Makers at a rate of $0.22 for every contract 
they enter into on the Exchange other than Market-Maker-to-Market-Maker 
transactions (which includes all transactions between any combination 
of DPMs, e-DPMs, RMMs, LMMs, and Market-Makers). The marketing fee is 
assessed in all equity option classes and options on 
HOLDRs[reg] \9\, options on SPDRs[reg] \10\ and 
options on DIA.\11\ The Exchange represents that the purpose of the 
marketing fee program is to provide the members of the Exchange with 
the ability to compete for the opportunity to trade with those orders 
that may otherwise be routed to other exchanges.
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    \8\ For a description of CBOE's marketing fee program, see 
Securities Exchange Act Release No. 50736 (November 24, 2004), 69 FR 
69966 (December 1, 2004) (SR-CBOE-2004-68).
    \9\ HOLDRs are trust-issued receipts that represent an 
investor's beneficial ownership of a specified group of stocks. See 
Interpretation .07 to CBOE Rule 5.3.
    \10\ See, Securities Exchange Act Release No. 51052 (January 18, 
2005), 70 FR 3757 (January 26, 2005) (SR-CBOE-2005-05).
    \11\ See, Securities Exchange Act Release No. 52474 (September 
20, 2005), 70 FR 56520 (September 27, 2005) (SR-CBOE-2005-72).
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    The Exchange states that under the current program, all funds 
generated by the marketing fee are collected by the Exchange and 
recorded according to the DPM or LMM, as applicable, station and class 
where the options subject to the fee are traded. The money collected is 
disbursed by the Exchange according to the instructions of the DPM or 
LMM. Those funds are made available to the DPM or LMM solely for those 
trading crowds where the fee was assessed and may only be used by that 
DPM or LMM to attract orders in the classes of options for which the 
fee was assessed.
    CBOE recently obtained approval of a rule filing adopting a 
Preferred Market-Maker program.\12\ Under that program, order providers 
can send an order to the Exchange designating any CBOE Market-Maker 
(including any DPM, e-DPM, LMM, RMM, and Market-Maker) as a Preferred 
Market-Maker. If the Preferred Market-Maker is quoting at the NBBO at 
the time the order is received on CBOE, the Preferred Market-Maker is 
entitled to a participation entitlement of 50% when there is one 
Market-Maker also quoting at the best bid/offer on the Exchange and 40% 
when there are two or more Market-Makers quoting at the best bid/offer 
on the Exchange.
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    \12\ See Securities Exchange Act Release No. 52506 (September 
23, 2005), 70 FR 57340 (September 30, 2005) (SR-CBOE-2005-58).
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    CBOE proposes to amend its marketing fee program in a number of 
respects in light of the recent adoption of its Preferred Market-Maker 
program. These changes to the marketing fee program would be effective 
November 2, 2005 and expire on June 2, 2006, which is the date that 
CBOE's pilot program establishing its Preferred Market-Maker program is 
scheduled to expire, unless extended through a rule filing submitted to 
and approved by the Commission.\13\ In particular, CBOE proposes to 
amend its marketing fee program to provide that a Market-Maker would 
have access to the marketing fee funds generated by orders sent to the 
Exchange designating that Market-Maker as a ``Preferred Market-Maker.''
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    \13\ See Amendment No. 1, supra note 3.
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    The following is a description of the three-step process by which 
the entire pool of funds generated by the marketing fee would be 
apportioned between the DPM or LMM, and Preferred Market-Makers. First, 
consistent with the current program, each month all funds generated by 
the marketing fee would be collected by the Exchange and recorded 
according to the DPM or LMM, as applicable, station and class where the 
option classes subject to the fee are traded. If a Market-Maker 
(including any DPM, e-DPM, LMM, and RMM) is designated as a Preferred 
Market-Maker on an order from a payment accepting firm (``PAF''), the 
Market-Maker would be given access to the marketing fee funds generated 
from that order, even if the Preferred Market-Maker did not participate 
in the

[[Page 71570]]

execution of the order because the Market-Maker was not quoting at the 
NBBO at the time the order was received on CBOE.\14\ The Exchange 
believes that it is appropriate to give Preferred Market-Makers access 
to all of the funds generated by the marketing fee for any order as to 
which they were designated the Preferred Market-Maker because the 
Preferred Market-Maker negotiated with a PAF to send their order flow 
to CBOE and to designate a particular Market-Maker as the Preferred 
Market-Maker. Second, the DPM or LMM, as applicable, would be given 
access to the marketing fee funds generated from all other orders from 
PAFs in its appointed classes in a particular trading station. Third, 
the marketing fee funds generated by orders from non-PAFs, if any, 
would be apportioned monthly among the DPM or LMM, and Preferred 
Market-Makers on a on a pro-rata basis, based on the percentage of 
contracts traded by each DPM or LMM and Preferred Market-Maker against 
orders from PAFs during the month in the option classes located at a 
particular trading station.
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    \14\ For example, assume a Market-Maker is designated as a 
Preferred Market-Maker on an order for 50 contracts which is 
executed on CBOE. Under this first step, the Preferred Market-Maker 
would be given access to a total of $11 (50 contracts x $.22), 
whether or not the Preferred Market-Maker traded with the order or 
not.
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    The following is an example of how funds generated from CBOE's 
marketing fee program would be allocated to Preferred Market-Makers, 
DPMs, and LMMs pursuant to the preceding three steps. As noted above, 
each month all funds generated by the marketing fee are collected by 
the Exchange and recorded according to the DPM or LMM, as applicable, 
station and class where the option classes subject to the fee are 
traded. Thus, assuming 45,455 contracts traded in a particular month at 
Station 1 on the trading floor, $10,000 (45,455 contracts x $.22) would 
be generated as a result of the marketing fee to be used to attract 
order flow to CBOE.
    Pursuant to Step 1, assuming the DPM and two other Market-Makers 
were designated as Preferred Market-Makers for orders executed in 
option classes at Station 1, they would be allocated the following 
funds:

------------------------------------------------------------------------
                                            Contracts   Funds Allocated
------------------------------------------------------------------------
DPM......................................       5,000             $1,100
                                                          ($.22 * 5,000)
Preferred Market-Maker 1........       2,500               $550
                                                          ($.22 * 2,500)
Preferred Market-Maker 2........       3,500               $770
                                                          ($.22 * 3,500)
      Total..............................      11,000             $2,420
                                                         ($.22 * 11,000)
------------------------------------------------------------------------

    Pursuant to Step 2, the Exchange would determine the amount of 
funds generated from orders from PAFs that were executed in option 
classes at Station 1, and these funds would be allocated to the DPM to 
attract order flow to CBOE. Assuming orders from PAFs representing 
10,000 contracts were executed with Market-Makers (including the DPM or 
LMM, e-DPM(s), and RMM(s)), at Station 1, $2,200 (10,000*$.22) in funds 
would be generated and allocated to the DPM.
    As a result of Steps 1 and 2 above, the original pool of funds 
generated by the marketing fee at Station ($10,000), would have been 
depleted in Step 1 by $2,420, and in Step 2 by $2,200. Assuming 
remaining number of contracts executed at Station 1, i.e., 24,455 
contracts, \15\ were from orders from non-PAFs, a total of $5,380 
(24,455 * $.22) would be the remaining balance of funds. Pursuant to 
Step 3, these funds would be apportioned monthly among the DPM (or LMM) 
and Preferred Market-Makers on a pro-rata basis, based on the 
percentage of contracts traded by each DPM (or LMM) and Preferred 
Market-Maker against orders from PAFs. Assuming the DPM and the two 
Preferred Market-Makers executed the following percentage of contracts 
from orders from PAFs at Station 1, they would be allocated the 
following funds:
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    \15\ 45,455 less 11,000 contracts (see Step 1) and 10,000 
contracts (see Step 2).

------------------------------------------------------------------------
                                            % of PAF
                                            contracts   Funds allocated
                                            (percent)      (percent)
------------------------------------------------------------------------
DPM......................................          65             $3,497
                                                           (65 * $5,380)
Preferred Market-Maker 1........          15                807
                                                           (15 * $5,380)
Preferred Market-Maker 2........          20              1,076
                                                           (20 * $5,380)
------------------------------------------------------------------------

    The funds generated by the marketing fee would continue to be 
collected by the Exchange and recorded according to the applicable 
trading station and class where the options subject to the fee are 
traded. The money collected would be disbursed by the Exchange 
according to the instructions of the DPM, LMM or the Preferred Market-
Maker. These funds shall only be used to attract order flow to CBOE 
from PAF, and the funds made available to the DPM or LMM may only be 
used to attract orders in the option classes located at the trading 
station where the fee was assessed. Thus, a member organization 
appointed as the DPM at a particular trading station on the trading 
floor cannot use the funds from that trading station to attract order 
flow to another trading station on the trading floor where that member 
serves as the DPM.
    Additionally, the Exchange does not intend to continue to require 
that the funds collected from e-DPMs and RMMs can only be used to 
attract order flow for the classes in which the e-DPM or RMM is 
appointed. The Exchange does not believe such a restriction is 
necessary or reasonable in light of manner in which firms negotiate 
with PAFs to direct their order flow to the Exchange. Specifically, the 
Exchange notes that many DPMs or LMMs negotiate with PAFs to route 
their order flow to the Exchange for all of the classes located at a 
particular trading station, and not necessarily on a class-by-class 
basis. Additionally, any use of the marketing fees by the DPM outside 
of an RMM's or an e-DPM's appointment may still benefit the RMM or e-
DPM because e-DPMs and RMMs are permitted under Exchange rules to enter 
orders in option classes traded on the Exchange that are not included 
within their appointment. Therefore, the Exchange believes that there 
is an equitable allocation of use of the fees by the DPM because the 
order flow from a PAF can be accessed by an RMM or eDPM, outside their 
appointments, through ``M'' orders.
    In the event a Preferred Market-Maker does not disburse all of the 
funds generated by the marketing fee in a given month, then the funds 
the Preferred Market-Maker does not disburse would be made available to 
the DPM or LMM, as applicable, for the following month to attract 
orders in the classes of options where the DPM or LMM is appointed.
    Finally, the Exchange proposes to amend the program with respect to 
the manner in which surplus funds are refunded to Market-Makers, RMMs, 
DPMs, e-DPMs, and LMMs. Currently, the Exchange refunds any surplus at 
the end of the month on a pro rata basis based upon contributions made 
by the Market-Makers, RMMs, DPMs, e-DPMs, and LMMs. Going forward, if 
80% or more of the accumulated funds in a given month are paid out by 
the DPM or LMM, there would not be a rebate for that month and the 
funds would carry over and would be included in the pool

[[Page 71571]]

of funds to be used by the DPM or LMM in the following month. If less 
than 80% of the funds is paid out, Market-Maker rebates would continue 
to be made on a monthly basis. At the end of each quarter, the Exchange 
would then refund any surplus, if any, on a pro rata basis based upon 
contributions made by the Market-Makers, RMMs, DPMs, e-DPMs, and LMMs.
    In the foregoing example, the DPM and Preferred Market-Maker 
1 and Preferred Market-Maker 2 were allocated the 
following amounts:

------------------------------------------------------------------------
                                                         Total allocated
------------------------------------------------------------------------
DPM...................................................            $6,797
                                                         ($1,100 + 2,200
                                                                + 3,497)
Preferred Market-Maker 1.....................             1,357
                                                            ($550 + 807)
Preferred Market-Maker 2.....................             1,846
                                                           ($770 + 1076)
------------------------------------------------------------------------

    If the DPM only paid out a total of $6,150 of the $6,797 allocated 
to it in a given month (or 90% of its funds), then $647 would carry 
over for the DPM to use to attract order in the following month. If 
Preferred Market-Maker 1 paid out a total of $1,200 of the 
$1,357 allocated to it in a given month, then $157 would be made 
available to the DPM (or LMM) for the following month to attract orders 
in the classes of options where the DPM (or LMM) is appointed. If 
Preferred Market-Maker 2 paid out a total of $1,846 allocated 
to it in a given month, then none of Preferred Market-Maker 
2's funds would carry over to the DPM (or LMM) for the 
following month.
    As in the current marketing fee program, the Exchange would not be 
involved in the determination of the terms governing the orders that 
qualify for payment with any PAF or the amount of any such payment. The 
Exchange would provide administrative support for the program in such 
matters as maintaining the funds, keeping track of the number of 
qualified orders each firm directs to the Exchange, and making the 
necessary debits and credits to the accounts of the traders and the 
PAFs to reflect the payments that are made. Exchange Market-Makers, 
RMMs, DPMs, e-DPMs, and LMMs would have no way of identifying prior to 
execution whether a particular order is from a PAF or a non-PAF.
2. Statutory Basis
    The Exchange believes that its proposal, as amended, is consistent 
with Section 6(b) of the Act\16\ in general, and furthers the 
objectives of Section 6(b)(4) of the Act\17\ in particular, in that it 
is an equitable allocation of reasonable dues, fees, and other charges 
among CBOE members and other persons using its facilities.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(4).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change, as 
amended, will impose any inappropriate 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 either solicited or received.

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

    The foregoing proposed rule change, as amended, has been designated 
as a fee change pursuant to Section 19(b)(3)(A)(ii) of the Act \18\ and 
Rule 19b-4(f)(2) \19\ thereunder, because it establishes or changes a 
due, fee, or other charge imposed by the Exchange. Accordingly, the 
proposal will took effect upon filing with the Commission. At any time 
within 60 days of the filing of such proposed rule change, as amended, 
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.\20\
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    \18\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \19\ 17 CFR 240.19b-4(f)(2).
    \20\ The effective date of the original proposed rule change is 
November 2, 2005, the effective date of Amendment No. 1 is November 
17, 2005. For purposes of calculating the 60-day period within which 
the Commission may summarily abrogate the proposal, the Commission 
considers the period to commence on November 17, 2005, the date on 
which the Exchange submitted Amendment No. 1.
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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, as amended, 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-CBOE-2005-91 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-CBOE-2005-91. 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, as amended, 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. 
Copies of such filing also will be available for inspection and copying 
at the principal office of the CBOE. 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-2005-91 and should be submitted on 
or before December 20, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-6659 Filed 11-28-05; 8:45 am]

BILLING CODE 8010-01-P