Skip to Content


Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change and Amendment No. 1 Thereto by the Chicago Board Options Exchange, Incorporated To Establish a Fee Cap of $75,000 Per Month for Member Firms on All Firm Proprietary and Firm Facilitation Trading in CBOE Products, To Reinstate the Prospective Fee Reduction Program, and To Credit DPM P/A Linkage Order Transaction Fees

Document Details

Information about this document as published in the Federal Register.

Published Document

This document has been published in the Federal Register. Use the PDF linked in the document sidebar for the official electronic format.

Start Preamble March 1, 2004.

Pursuantto 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, 2004, 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 February 23, 2004, the Exchange filed Amendment No. 1 to the proposed rule change. The proposed rule change, as amended, has been filed by the CBOE as establishing or changing a due, fee, or other charge, pursuant to section 19 (b)(3)(A)(ii) [3] of the Act and Rule 19b-4(f)(2) [4] thereunder, which renders the proposal 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.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

The Exchange proposes to make several changes to its Fee Schedule to (1) establish a fee cap of $75,000 per month for member firms on all firm proprietary and firm facilitation trading in CBOE products; (2) reestablish the Start Printed Page 10493Prospective Fee Reduction Program for February and March 2004; and (3) credit DPMs for transaction fees they incur in executing outbound “principal acting as agent” (“P/A”) orders under the intermarket linkage program. The text of the proposed rule change is available at the CBOE and at the Commission.

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, 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 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

Fee Cap. The purpose of the proposed rule change is to establish a monthly fee cap of $75,000 per CBOE member organization [5] on all firm proprietary and firm facilitation trading across all CBOE products. CBOE stated that the fee cap in this proposal is functionally equivalent to File No. SR-Phlx-2003-61, which the Philadelphia Stock Exchange (“Phlx”) submitted effective upon filing on August 29, 2003,[6] in which the Phlx established a monthly fee cap of $50,000 for specified transaction charges by specified member organizations.

In addition, as the Phlx did in SR-Phlx-2003-61, the CBOE proposes to adopt a license fee of $0.10 per contract side for transactions in all licensed products other than the S&P 100® Index Options (OEX) [7] (collectively, the “licensed products”) that will be imposed on transactions in these products by member organizations that reach the $75,000 monthly fee cap described above. Thus, when a CBOE member organization exceeds the $75,000 cap on the fees described above, the organization will be charged $75,000 plus the license fee of $0.10 per contract side for any transactions in licensed products in addition to those transactions that were included in reaching the $75,000 level. In other words, the $0.10 per contract side license fee is in addition to the proposed $75,000 per month cap, if the cap is reached, on the products described above.

Prospective Fee Reduction Program. In recognition of high trading volume and positive financial results for the first six months of this fiscal year, the Exchange proposes to reimplement a Prospective Fee Reduction Program, as has previously been done.[8] Under the renewed program, CBOE Market-Makers (as defined in CBOE Rule 8.1) will have their transaction fees reduced from standard rates by $.02 per contract side. In addition, the CBOE will reduce all floor brokerage fees by $.003 per contract side. These reductions will be in effect for February and March 2004 only. During this time, the Exchange will continue to monitor its financial results to determine whether the Prospective Fee Reduction Program should be continued, modified, or eliminated.

Credits to DPM for Fees Relating to Duplicate Linkage Transactions. Under the intermarket Linkage, CBOE DPMs are required in certain circumstances to send a P/A order to another exchange, in order to obtain the National Best Bid or Offer (“NBBO”) price for their customers. The DPM pays transaction fees to the other exchange as well as the OCC to execute this P/A order at the other exchange. Then, under the Linkage procedure, when the DPM receives a fill of its P/A order from the other exchange, the CBOE DPM must then retrade the order back to their customer, again resulting in transaction fees, this time from CBOE and the OCC. Thus, the Linkage procedure's requirement to retrade means that DPMs who send such P/A orders to other exchanges incur duplicate transaction and Options Clearing Corporation (“OCC”) fees on P/A orders that substantially increase the costs of such transactions for the DPMs. To help offset these additional costs, the Exchange proposes a two-phased relief. First, the CBOE proposes to rebate all CBOE transaction and trade match fees related to the orders that CBOE DPMs fulfill by sending P/A transactions to other exchanges (i.e., the fees from the “retrade”). At current rates, this is $0.24 per contract.

Second, in order to help offset the Linkage costs that the DPMs are assessed on P/A orders by the OCC and the other exchanges, the CBOE will credit CBOE DPMs an additional 50% of the CBOE transaction and trade match fees related to each outbound P/A transactions. At current rates, this is $0.12 per contract. This second rebate will be funded by the amount of total transaction and trade match fees that CBOE receives from incoming P/A orders from other exchanges (“incoming P/A fees”), and the aggregate amount rebated in the second rebate will be limited to no more than the total amount of incoming P/A fees.

2. Statutory Basis

The Exchange believes the proposed rule change is consistent with section 6(b) of the Act,[9] in general, and furthers the objectives of section 6(b)(4) of the Act [10] in particular, in that it is designed to provide for the equitable allocation of reasonable dues, fees, and other charges among Exchange members.

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 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 solicited or received with respect to the proposed rule change.

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

The foregoing proposed rule change, as amended, has become effective pursuant to section 19(b)(3)(A)(ii) of the Start Printed Page 10494Act [11] and Rule 19b-4(f)(2) [12] thereunder, because it changes a fee imposed by the Exchange. At any time within 60 days of the filing of the 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.[13]

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. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. Comments may also be submitted electronically at the following e-mail address: All comment letters should refer to File No. SR-CBOE-2004-08. 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, comments should be sent in hardcopy or by e-mail but not by both methods. 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. Copies of such filing will also be available for inspection and copying at the principal office of the CBOE. All submissions should refer to File No. SR-CBOE-2004-08 and should be submitted by March 26, 2004.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[14]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble


3.  15 U.S.C. 78s(b)(3)(A)(ii).

Back to Citation

5.  This proposal applies to member organizations for orders for the proprietary account of any member or non-member broker dealer that derives more than 35% of its annual, gross revenues from commissions and principal transactions with customers. Member organizations will be required to verify this amount to the Exchange by certifying that they have reached this threshold and by submitting a copy of their annual report, which was prepared in accordance with Generally Accepted Accounting Principles (“GAAP”). In the event that a member organization has not been in business for one year, the most recent quarterly reports, prepared in accordance with GAAP, will be accepted. As part of this proposal, this footnote will be included in the CBOE Fee Schedule.

Back to Citation

6.  See Securities Exchange Act Release No. 48459 (September 8, 2003), 68 FR 54034 (September 15, 2003).

Back to Citation

7.  Currently, the most actively traded option classes in this category include options on the S&P 500® Index (SPX), the NASDAQ 100® Index Tracking StockSM (QQQ) the CBOE Mini-NDX Index (MNXSM), the Nasdaq-100® Index (NDX), the Dow Jones Industrial Average (DJX), DIAMONDS® (DIA), and the Russell 2000® Index (RUT).

Back to Citation

8.  See e.g., Securities Exchange Act Release No. 46266 (July 25, 2002), 67 FR 49969 (August 1, 2002).

Back to Citation

11.  15 U.S.C. 78(s)(b)(3)(A)(ii).

Back to Citation

13.  See 15 U.S.C. 78s(b)(3)(C). For purposes of calculating the 60-day abrogation period, the Commission considers the period to commence on February 23, 2004, the date the CBOE filed Amendment No. 1.

Back to Citation

[FR Doc. 04-4906 Filed 3-4-04; 8:45 am]