Document ID: SEC-2010-0144-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Implement a Cancellation Fee
Posted Date: 2010-01-27T05:00Z

[Federal Register: January 27, 2010 (Volume 75, Number 17)]
[Notices]               
[Page 4436-4438]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27ja10-135]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61392; File No. SR-CHX-2010-02]

 
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Implement a Cancellation Fee

January 21, 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 13, 2010, Chicago Stock Exchange, Inc. (``Exchange'' or 
``CHX'') 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. 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

    The CHX proposes to amend its Schedule of Participant Fees and 
Assessments (the ``Fee Schedule''), effective January 25, 2010, to 
implement a cancellation fee for Participants entering and subsequently 
cancelling orders under certain circumstances. The text of this 
proposed rule change is available on the Exchange's Web site at http://
www.chx.com/rules/proposed_rules.htm and in the Commission's Public 
Reference Room, 100 F Street, NE., Washington, DC 20549.

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 Change

1. Purpose
    Through this filing, the Exchange would amend its Fee Schedule, 
effective January 25, 2010, to impose a charge for order cancellations 
in issues priced $1.00 per share or more submitted by Participants 
whose orders rarely are at or near the National Best Bid or Offering 
(``NBBO'').\5\ The Exchange believes that the order cancellation fee 
will either incent Participants to submit orders which are closer to 
the NBBO or compensate the Exchange for the systems and operational 
costs and burdens associated with handling and recording orders which 
rarely execute.
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    \5\ We are excluding orders and cancellations in issues priced 
under $1 per share from this proposal as it does not appear that the 
activity in those issues gives rise to the same concerns as 
expressed herein for issues priced at or greater than $1 per share.
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    In determining whether the order cancellation fee would be imposed 
upon a given Participant, the Exchange would utilize a formula which 
subtracts the number of Quotable or ``Q'' orders submitted by the 
Participant in the Regular Trading Session in a particular month from 
the number of Wide or ``W'' orders. Q orders are defined as provide 
orders in issues priced $1.00 per share or more submitted by the 
Participant in the Regular Trading Session which are priced at the 
relevant side of the NBBO up to (but not including) two (2) cents 
inferior to the relevant side of the NBBO (bid for buy orders; offer 
for sell orders) at the time the order is received by the Matching 
System.\6\ W orders are defined as those submitted by the Participant 
in the Regular Trading Session in issues priced $1.00 per share or more 
which are two (2) or more cents inferior to the relevant side of the 
NBBO at the time the order is received by the Matching System.\7\ The 
difference between these two values is then divided by ``E,'' which is 
defined as the greater of (a) one (1) or (b) the number of all provide 
orders (W and Q) which are submitted and executed (in whole or in part) 
in the Regular Trading Session (excluding cross transactions) within 
the Matching System during the calendar month in

[[Page 4437]]

question by the Participant.\8\ If the remaining value is greater than 
100, then the cancellation fee applies to the Participant for that 
month's activity and the Participant would be assessed a fee of $0.01 
per order cancellation. If the value is 100 or less, the Participant 
would not be assessed any fee on its cancellation instructions.
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    \6\ Provide orders are those which, for some period of time, 
reside in our Matching System prior to trade execution. They 
contrast with ``take'' orders, which interact with orders resting in 
our book.
    \7\ As a result, W order can only be ``provide'' orders and 
never ``takers'' of liquidity residing in our Matching System.
    \8\ Cancellations from ``Immediate or Cancel'' or ``Fill or 
Kill'' orders will not be counted towards the number of 
cancellations resulting in a fee charged to a Participant. In the 
event that a Participant has no executed provide orders in a month, 
we assume that E has a value of one (1) in order to avoid a 
mathematical error in applying the cancellation fee formula.
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    The cancellation fee will be calculated and applied as to the 
Account Symbols maintained by each clearing Participant. Individual 
Account Symbols are assigned to each trading account maintained by a 
clearing Participant. Each clearing Participant which executes orders 
on the Exchange has at least one Account Symbol, while some clearing 
Participants have multiple account symbols. Multiple accounts can be 
used by clearing Participants, for example, to segregate the order 
activity of different clients. Calculating and applying the 
cancellation fee by the Account Symbols maintained by the clearing 
Participant provides a more precise way of identifying the conduct and 
correspondent firms implicated by the proposed fee provisions.
    The operation of this formula can be illustrated by the use of some 
examples. For Example 1, we assume that in a given month, a Participant 
firm submits 1,000,000 provide orders to our Matching System. Of this 
amount, 950,000 orders are two (2) cents or more inferior to the 
prevailing NBBO at the time when the Matching System received them, and 
would therefore be classified as Wide or W orders. The remaining 50,000 
orders were priced at the NBBO or within two (2) cents at the time when 
the Matching System received them, and would therefore be classified as 
Quotable or Q orders. Of these 1,000,000 orders, we assume that a total 
of 10,000 orders are executed in whole or in part during the month.\9\ 
Finally, we assume that the Participant submits 1,000,000 cancellation 
instructions for the W and Q orders noted above during the month. 
Pursuant to the proposed formula, the difference between W and Q 
(950,000 less 50,000) would be 900,000. Dividing that figure by the 
number of orders which were executed (E or 10,000) gives us an amount 
of 90. Since that value is less than 100, no fee would be imposed on 
the cancellations.
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    \9\ Since orders may be partially executed, the Participants may 
receive more trade executions than orders. The Exchange believes 
that the formula should be based upon the number of orders executed 
and not the number of trades reported.
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    For Example 2, we assume the same facts as above, with the 
exception that the Participant firm submits a total of 2,000,000 
provide orders to our Matching System and 1,950,000 of those orders are 
two (2) cents or more inferior to the prevailing NBBO at the time when 
the Matching System received them, and would therefore be classified as 
Wide or W orders. Pursuant to the proposed formula, the difference 
between W and Q (1,950,000 less 50,000) would be 1,900,000. Dividing 
that figure by the number of orders which were executed (E or 10,000) 
gives us an amount of 190. Since that value exceeds 100, a fee would be 
imposed on the cancellations associated with the orders. Multiplying 
the number of those cancellations (1,000,000) by the proposed rate 
would result in a monthly cancellation fee to the Participant of ten 
thousand dollars ($10,000).
    For the month of December 2009, CHX Participants entered in total 
11,293,590 Wide (W) orders and 5,603,173 Quotable (Q) orders, of which 
161,420 were executed in whole or in part (the ``E'' value under the 
proposal). Of the approximately 11.3 million W-type orders submitted in 
December, over 7.75 million of them were entered by a single CHX 
Participant firm. This same firm was responsible for the entry of 
7,754,446 cancellation instructions in December, out of a total of 
16,629,795 such instructions for all Participant firms, and it would 
have been assessed a cancellation fee pursuant to the proposal.
    The purpose of this charge is to incent high-frequency trading 
Participants to submit orders which, when quoted, are at or close to 
the NBBO or, if their behavior remains unchanged, to compensate the 
Exchange for the processing and electronic storage costs associated 
with orders which ``quote around'' the NBBO and rarely execute. Under 
the proposed formula, the likelihood that the cancellation fee would be 
imposed increases the greater the number of Wide orders submitted by 
the Participant. The formula is designed to isolate a pattern of 
behavior in which a firm submits orders which are quoted well outside 
the NBBO and frequently cancels and reenters such order to continuously 
stay outside the NBBO.\10\ Firms which submit a small number of Wide 
orders or which also submit a relatively significant number of Quotable 
orders are less likely to be impacted by the proposed fee. In addition, 
the likelihood that the cancellation fee will be assessed diminishes as 
the number of provide orders actually executed (E) increases.
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    \10\ Although the Exchange is not privy to the trading 
strategies of the firms submitting large numbers of orders well 
outside the NBBO, it appears that they are hoping to benefit from 
Intermarket Sweep Order (``ISO'') satisfaction orders sent to the 
Exchange pursuant to the requirements of Regulation NMS when a trade 
through occurs on another trading center and the Wide orders are at 
the CHX BBO. Since the sending of ISO satisfaction orders is not 
required for non-Regular Trading Session activity, we are excluding 
such activity from the proposed fee.
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    The Exchange believes that there is relatively little benefit added 
to the national market system by the behavior impacted by the proposed 
cancellation fee. The processing of such orders and the associated 
cancellation instructions has the potential to impact our systems 
capacity and does result in increased order and market data storage 
costs. Because Wide orders are infrequently executed (which normally 
generates trading fee revenue for the Exchange), such orders are more 
expensive on a relative basis for the Exchange to receive and process. 
Moreover the presence of Wide orders in our book can make it more 
difficult to execute other, Reg NMS trade-through exempt orders, due to 
our normal price-time order priority provisions. By discouraging the 
frequent use of Wide orders, the Exchange believes that such trade-
through exempt transactions can be more readily executed.
    The Exchange proposes to implement the cancellation charge 
effective January 25, 2010. The formula by which the cancellation fee 
is derived shall be calculated for the remaining trading days in 
January and billed after the end of the month, and thereafter 
calculated for the entire month and billed after the end of that month.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \11\ in general, and furthers the 
objectives of Section 6(b)(4) of the Act \12\ in particular, in that it 
provides for the equitable allocation of reasonable dues, fees and 
other charges among its members. Among other things, the Exchange 
believes that the cancellation fee described herein should help address 
the operational costs and burdens associated with the processing and 
storage of orders well outside the NBBO.
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    \11\ 15 U.S.C. 78f.
    \12\ 15 U.S.C. 78f(b)(4)

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[[Page 4438]]

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

    No written comments were either solicited or received.

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 \13\ and subparagraph (f)(2) of Rule 19b-4 
thereunder \14\ because it establishes or changes a due, fee, or other 
charge applicable only to a member imposed by the self-regulatory 
organization. Accordingly, the proposal is effective upon Commission 
receipt of the filing. At any time within 60 days of the filing of such 
rule change, 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 purpose of the Act.
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    \13\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \14\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-CHX-2010-02 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-CHX-2010-02. 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 publicly available. All 
submissions should refer to File Number SR-CHX-2010-02 and should be 
submitted on or before February 17, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-1606 Filed 1-26-10; 8:45 am]
BILLING CODE 8011-01-P