Document ID: SEC-2012-0290-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Stock Exchange, Inc.
Posted Date: 2012-02-21T05:00Z

[Federal Register Volume 77, Number 34 (Tuesday, February 21, 2012)]
[Notices]
[Pages 10013-10016]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-3899]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66391; File No. SR-CHX-2012-05]

Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend the Fee Schedule To Implement a Clearing Submission Fee Credit 
for Institutional Brokers

 February 14, 2012.
    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 February 2, 2012, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') filed with

[[Page 10014]]

the Securities and Exchange Commission (the ``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by CHX. CHX has filed the proposal pursuant to 
Section 19(b)(3)(A) 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 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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \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

    CHX proposes to amend its Fee Schedule, effective February 16, 
2012, to amend its Fee Schedule [sic] to implement a Clearing 
Submission Fee Credit for Institutional Brokers.
    The text of this proposed rule change is available on the 
Exchange's Web site at (www.chx.com) and in 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 CHX included statements 
concerning the purpose of and basis for the proposed rule changes and 
discussed any comments it received regarding the proposal. The text of 
these statements may be examined at the places specified in Item IV 
below. The CHX 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 Changes

1. Purpose
    Through this filing, the Exchange proposes to amend its Schedule of 
Fees and Assessments (the ``Fee Schedule''), effective February 16, 
2012, to create a Clearing Submission Fee Credit to be paid to 
Institutional Brokers and make other technical changes. In October 
2011, the Exchange added Article 21, Rule 6 authorizing the submission 
by the Exchange of non-CHX trades entered through an Institutional 
Broker to a Qualified Clearing Agency for clearance and settlement.\5\ 
Among other things, the Exchange imposes a Trade Processing Fee on the 
Clearing Participants named in these clearing submissions, pursuant to 
the provisions of Section E.7. of the Fee Schedule. In November 2011, 
the Exchange modified the definition of the Trade Processing Fee to be 
based upon non-CHX executed trades for which clearing information is 
entered by an Exchange-registered Institutional Broker into the 
Exchange's systems and submitted to a Qualified Clearing Agency 
pursuant to Article 21, Rule 6(a).\6\ The Exchange now proposes to 
rename the Trade Processing Fee as the ``Clearing Submission Fee'' for 
purposes of clarity and institute a Clearing Submission Fee Credit to 
share the revenue generated by these fees and incentivize this activity 
by its Institutional Brokers.\7\ The Exchange previously had in place a 
Trade Processing Fee Credit beginning in August 2008 through April 
2011, but repealed it pending the adoption of Article 21, Rule 6.\8\ 
With the implementation of that rule, the Exchange proposes to 
reinstate the credit formerly paid to Institutional Brokers regarding 
clearing submissions for non-CHX trades, albeit at a different rate 
than previously.\9\
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    \5\ See, Securities Exchange Act Release No. 65615 (Oct. 24, 
2011), 76 FR 67239 (Oct. 31, 2011) (SR-CHX-2011-17). Currently, the 
National Securities Clearing Corporation (``NSCC'') is the Qualified 
Clearing Agency for such transactions.
    \6\ See, Securities Exchange Act Release No. 65792 (Nov. 18, 
2011), 76 FR 72739 (Nov. 25, 2011) (SR-CHX-2011-31).
    \7\ The Exchange is also proposing to add text to Section E.3.a. 
of the Fee Schedule to emphasize that the fees imposed pursuant to 
that section are for trades executed in the Matching System and to 
distinguish that activity from transactions subject to Section E.7. 
of the Fee Schedule.
    \8\ See, Securities Exchange Act Release No. 58362, 73 FR 49511 
(SR-CHX-2008-13) (Aug. 14, 2008) (adopting a Trade Processing Fee 
Credit); Securities Exchange Act. Release No. 60259 (July 7, 2009), 
74 FR 34062 (July 14, 2009) (SR-CHX-2009-08) (changes to calculation 
and allocation of Trade Processing Fee Credits paid to Institutional 
Brokers); Securities Exchange Act Release No. 64173 (April 4, 2011), 
76 FR 19818 (April 8, 2011) (SR-CHX-2011-02) (repealing Trade 
Processing Fee Credit).
    \9\ At the time it was repealed, the Trade Processing Fee Credit 
was set at the same rate as the current Transaction fee credit, 
i.e., 16% of the fee paid by the Clearing Participant to the 
Exchange in the transaction.
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    The Exchange proposes to pay on a monthly basis a credit equal to 
8% of the Clearing Submission Fees collected by the Exchange pursuant 
to Section E.7. of the Fee Schedule to the Institutional Broker which 
acted as the broker for the ultimate Clearing Participant to the 
clearing submission (known as the ``Clearing Broker'').\10\ The 
Exchange believes that payment of a Clearing Submission Fee Credit to 
the Clearing Broker based on activity handled by it will incent 
Institutional Brokers to utilize the Exchange's systems and services in 
forwarding non-CHX trades to NSCC, rather than using alternative 
mechanisms such as correspondent clearing or Nasdaq's Automated 
Confirmation Transaction (``ACT'') system. The Exchange proposes to 
provide a credit equal to 50% of the credit paid to Institutional 
Broker for transactions handled by it which are executed on the 
Exchange.\11\ The Exchange believes that payment of a credit for non-
CHX trades at a lower rate than for CHX trades appears to strike an 
appropriate balance between incentivizing Institutional Brokers to 
execute trades on the CHX's facilities and competing with other venues 
to make clearing submissions for trades executed by Institutional 
Brokers in the over-the-counter (``OTC'') marketplace.\12\
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    \10\ The broker representing the ultimate clearing participant 
is currently known as the ``broker of credit.'' Since both that 
broker and the ``originating broker'' (defined as the Institutional 
Broker that executes a trade) can receive a credit, the Exchange 
believes that it would be more accurate to use the term ``Clearing 
Broker.'' The Exchange also proposes to capitalize the terms 
``Transaction Fee Credit,'' ``Clearing Broker'' and ``Originating 
Broker'' in the Fee Schedule to emphasize that those are defined 
terms. The Exchange notes that it is possible, although not 
required, for the same Institutional Broker to act as both the 
Originating Broker and Clearing Broker in any given transaction.
    \11\ A Transaction Fee Credit of 16% of the Transaction Fees 
generated pursuant to Section E.3.a. is paid to Institutional 
Brokers for trades submitted through that firm and which were 
executed on the Exchange. [sic] Section F.2. of the Fee Schedule. Of 
that amount, 4% is paid to the Originating Broker and 12% is paid to 
the Clearing Broker.
    \12\ The Exchange notes that it is uncertain as to whether the 
8% level for the Clearing Submission Fee Credit will ultimately 
prove to be the correct amount in effectuating its purpose, which is 
to incent Institutional Brokers to enter clearing submissions for 
non-CHX trades through the Exchange's system. At some point, the 
Exchange may seek to raise the 8% level of the Clearing Submission 
Fee Credit in order to attract business. If so, the Exchange would 
make the appropriate filing to modify its Fee Schedule as required 
by the rules of the Commission.
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    Only Institutional Brokers which are members of the Financial 
Industry Regulatory Authority, Inc. (``FINRA'') will be eligible for 
the Clearing Submission Fee Credit. Since the trading activities 
involved in the relevant clearing submissions by definition occurred in 
a market center other than the Exchange (normally the OTC marketplace), 
the provisions of Exchange Act Section 15(b)(8) are implicated.\13\ 
Under Section 15(b)(8), a registered broker or dealer must be a member 
of a securities association registered under Section 15A of the 
Exchange Act, unless it effects transactions in securities solely on a 
national securities exchange of which it is a member. Currently, the 
only registered securities association is

[[Page 10015]]

FINRA. Since transactions giving rise to a Clearing Submission Fee 
Credit are normally executed in the OTC marketplace, the Exchange 
proposes to limit the payment of Clearing Submission Fee Credits to 
Institutional Brokers which are members of FINRA in order to avoid 
creating a violation of Section 15(b)(8) by the Institutional Brokers 
receiving such credits.\14\
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    \13\ 15 U.S.C. 78o(b)(8).
    \14\ Exchange Act Rule 15b9-1 provides a limited exemption if 
the broker-dealer carries no customer accounts and has annual gross 
income derived from purchases and sales of securities otherwise than 
on a national securities exchange of which it is a member in an 
amount no greater than $1,000. 17 CFR 240.15b9-1. Since broker-
dealers can separately charge commissions, however, the Exchange 
will not ordinarily know whether a non-FINRA member has already 
received more than $1,000 compensation arising out of OTC 
transactions as commissions or some other means. The Exchange's 
proposed restriction will preclude an Institutional Broker's 
violation of these provisions by the receipt of Clearing Submission 
Fee Credits.
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    The Exchange recognizes that the Commission has raised concerns 
about so-called payment for order flow programs in variety of 
scenarios. For example, the 2007 Report Concerning Examinations of 
Options Order Routing and Execution stated, ``The Commission previously 
has expressed concern that payment for order flow and internalization 
in the markets contribute to an environment in which quote competition 
is not always rewarded, thereby discouraging the display of 
aggressively priced quotes and impeding investor's ability to obtain 
better prices. [footnote omitted]'' \15\ The Exchange believes that the 
proposed Clearing Submission Fee Credit materially differs from other 
programs inasmuch as payment of the credit does not depend on the 
execution of a trade on the CHX's facilities and therefore does not 
discourage aggressive quote competition. Rather, the credit is based on 
the receipt of a Clearing Submission Fee by the Exchange, which is 
assessed for the post-execution submission via the CHX's systems to 
NSCC for clearance and settlement.\16\ As such, the Exchange does not 
believe that a payment of a credit for post-trade clearing submissions 
raises the same execution quality issues which underlie the 
Commission's stated concerns about payment for order flow programs.
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    \15\ Report Concerning Examinations of Options Order Routing and 
Execution, U.S. Securities and Exchange Commission (Mar. 8, 2007), 
p.2.
    \16\ See, Article 21, Rule 6 and Securities Exchange Act Release 
No. 65615, supra, note 3. Among other things, the Exchange permits 
the post-trade substitution of Clearing Participants on a non-CHX 
trade prior to making the clearing submission. This substitution 
process is particularly important in facilitating the execution of 
the equity component of stock-option or stock-futures orders. The 
Clearing Submission Fee is designed to compensate the Exchange for 
the costs of providing the systems used, and oversight of, such 
activities.
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    Even taking the view that the Clearing Submission Fee Credit 
implicates market quality issues, the Exchange notes that a variety of 
other payment for order flow practices are prevalent in the securities 
industry. As the Commission has recognized, payment for order flow is 
not in itself unlawful.\17\ For example, many options exchanges have 
created payment for order flow programs which are reflected in their 
rules and fee schedules.\18\ It is also not uncommon for broker-dealers 
to ``internalize'' their order flow by trading as principal with their 
own clients. The Exchange's goal in creating a Clearing Submission Fee 
Credit is to incent transaction providers to conduct business using the 
CHX's systems and services, by which the Exchange can generate revenue. 
The implementation of a Clearing Submission Fee Credit should further 
this legitimate objective by encouraging Institutional Brokers to make 
clearing submissions for non-CHX trades using the Exchange's systems.
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    \17\ See, Securities Exchange Act Release No. 43833 (January 10, 
2001), 66 FR 7822 (January 25, 2001) (SR-ISE-00-10) [sic] at p.7825, 
note 28 and accompanying text.
    \18\ Id.; See, Securities Exchange Act Release No. 43112 (Aug. 
3, 2000), 65 FR 49040 (Aug. 10, 2000) (SR-CBOE-00-28) [sic]; 
Securities Exchange Act Release No. 43177 (Aug. 18, 2000), 65 FR 
51889 (Aug. 25, 2000) (SR-PHLX-00-77) [sic]; Securities Exchange Act 
Release No. 43228 (Aug. 30, 2000), 65 FR 54330 (Sept. 7, 2000) (SR-
AMEX-00-38) [sic]; Securities Exchange Act Release No. 43290 (Sept. 
13, 2000), 65 FR 57213 (Sept. 21, 2000) (SR-PCX-00-30) [sic].
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \19\ in general, and furthers the 
objectives of Section 6(b)(4) of the Act \20\ in particular, in that it 
provides for the equitable allocation of reasonable dues, fees and 
other charges among members and other persons using any facility or 
system which the Exchange operates or controls. The fundamental purpose 
of the Clearing Submission Fee Credit is to incent the entry of post-
trade clearing submissions for non-CHX trades by Institutional Brokers 
through the Exchange's systems, which generates revenue to the Exchange 
in the form of Clearing Submission Fees. The Exchange notes that most, 
if not all, other exchanges issue credits to their members in order to 
incent them to direct business to their facilities. For example, many 
exchanges offer a ``provide'' credit to members which provide liquidity 
by entering orders on the trading facilities of the exchange with which 
other orders can interact. Pursuant to Regulation NMS Rule 610 (the 
``Access Rule''), the maximum rate an exchange can charge to execute 
against its protected quote is $0.003 per share for transactions in 
securities priced over $1 per share.\21\ In most cases, exchanges offer 
a provide credit which is less than the maximum charge, although 
transactions in certain securities, most often Tape B securities, may 
offer a provide credit which is slightly higher than the maximum rate. 
The CHX notes that the proposed Clearing Submission Fee Credit is to be 
set at 8% of the Clearing Submission Fee. That Fee is currently set at 
the Access Rule maximum rate of $0.003/share (with a $100 cap per side) 
for securities priced over $1 per share, as specified in the Exchange's 
Schedule of Fees and Assessment. Thus, even assuming that the Clearing 
Submission Fee did not reach the $100 cap, the effective rate of the 
Clearing Submission Fee Credit is $0.00024 per share, which is far 
below the provide credits offered by many other exchanges.\22\ Based 
upon these facts, the Exchange believes that the proposed Clearing 
Submission Fee Credit represents an equitable allocation of reasonable 
dues, fee, credits and other charges among its members and issuers and 
other persons using its facilities.
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    \19\ 15 U.S.C. 78f.
    \20\ 15 U.S.C. 78f(b)(4).
    \21\ 17 CFR 242.610(c)(1).
    \22\ If the value of the trade was sufficiently large to result 
in the application of the $100 maximum fee, the per share amount 
would necessarily decline.
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    The Exchange further believes that the proposed rule change is 
consistent with Section 6(b) of the Act \23\ in general, and furthers 
the objectives of Section 6(b)(5) of the Act \24\ in particular, in 
that it provides for fees and credits which are not designed to permit 
unfair discrimination between customers, issuers, brokers or dealers. 
The Exchange notes that other exchanges have authorized credit payment 
programs which are available only to certain subcategories of their 
members. For example, the New York Stock Exchange (``NYSE'') pays a 
series of credits to its Designated Market Makers (``DMMs'').\25\ The 
credits paid to DMMs can exceed the provide credits paid to non-DMMs 
(which is $0.0015/share) by a substantial percentage. For example, DMMs 
can receive a credit of $0.0035/

[[Page 10016]]

share (or more than twice as much as paid to ordinary members) when 
adding liquidity in shares of less active securities under certain 
specified circumstances.\26\ The payment by CHX of a much smaller 
Clearing Submission Fee Credit to its Institutional Brokers would 
appear to be well within the scope of this precedent. The Exchange also 
notes that the entry of clearing submissions pursuant to Article 21, 
Rule 6(a), which gives rise to the Clearing Submission Fee, is limited 
to Institutional Brokers. Since only Institutional Brokers can engage 
in the activity which results in Clearing Submission Fees, there would 
be no purpose served in offering a financial incentive which is based 
upon the generation of those fees to non-Institutional Brokers. For 
these reasons, the Exchange believes that the proposed Clearing 
Submission Fee Credit represents a lawful payment which is distributed 
in a manner which is reasonable and not unfairly discriminatory.
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    \23\ 15 U.S.C. 78f.
    \24\ 15 U.S.C. 78f(b)(5).
    \25\ See, NYSE Price List 2012, Fees and Credits applicable to 
Designated Market Makers (``DMMs''), p.4, available on the NYSE's 
public Web site. DMMs (f/k/a specialists) are a subcategory of NYSE 
members with special rights and obligations, particularly as they 
relate to the execution of orders on the NYSE's facilities.
    \26\ Id., p.5.
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B. Self-Regulatory Organization's Statement of 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. The Exchange believes that 
payment of a Clearing Submission Fee Credit to the Clearing Broker 
based on activity handled by it will incent Institutional Brokers to 
utilize the Exchange's systems and services in forwarding non-CHX 
trades to NSCC, rather than using alternative mechanisms such as 
correspondent clearing or Nasdaq's ACT system.

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

    No written comments were either solicited or received.

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

    The proposed rule change is to take effect pursuant to Section 
19(b)(3)(A)(ii) of the Act \27\ and subparagraph (f)(2) of Rule 19b-4 
thereunder \28\ because it establishes or changes a due, fee or other 
charge applicable to the Exchange's members and non-members, which 
renders the proposed rule change effective upon filing.
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    \27\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \28\ 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 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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposal 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 rule-comments@sec.gov. Please include 
File Number SR-CHX-2012-05 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 No. SR-CHX-2012-05. 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 changes between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room on official business 
days between the hours of 10 a.m. and 3 p.m. Copies of such filing will 
also be available for inspection and copying at the principal office of 
the CHX. 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-CHX-
2012-05 and should be submitted on or before March 13, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-3899 Filed 2-17-12; 8:45 am]
BILLING CODE 8011-01-P