[Federal Register Volume 75, Number 75 (Tuesday, April 20, 2010)]
[Proposed Rules]
[Pages 20738-20763]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-9016]
[[Page 20737]]
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Part IV
Securities and Exchange Commission
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17 CFR Part 242
Proposed Amendments to Rule 610 of Regulation NMS; Proposed Rule
Federal Register / Vol. 75 , No. 75 / Tuesday, April 20, 2010 /
Proposed Rules
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 242
[Release No. 34-61902; File No. S7-09-10]
RIN 3235-AK62
Proposed Amendments to Rule 610 of Regulation NMS
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Proposed rule.
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SUMMARY: The Commission is publishing for comment proposed amendments
to Rule 610 under the Securities Exchange Act of 1934 (``Exchange
Act'') relating to access to quotations in listed options as well as
fees for such access. The proposed rule would prohibit an exchange from
imposing unfairly discriminatory terms that inhibit efficient access to
quotations in a listed option on its exchange and establish a limit on
access fees that an exchange would be permitted to charge for access to
its best bid and offer for listed options on its exchange.
DATES: Comments should be received on or before June 21, 2010.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
Send an e-mail to [email protected]. Please include
File No. S7-09-10 on the subject line; or
Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.
All submissions should refer to File No. S7-09-10. This file number
should be included on the subject line if e-mail is used. To help us
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/proposed.shtml). Comments
are also available for Web site viewing and printing in the
Commission's Public Reference Room, 100 F Street, NE., Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. All comments received will be posted without change; we do
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT: Jennifer Colihan, Special Counsel, at
(202) 551-5642; Edward Cho, Special Counsel, at (202) 551-5508; or
Brian O'Neill, Special Counsel, at (202) 551-5643, Division of Trading
and Markets (``Division''), Commission, 100 F Street, NE., Washington,
DC 20549-6628.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
II. Proposed Amendments to Rule 610(a)
III. Access Fees
IV. Technical Amendments to Rule 610
V. Request for Comments
VI. Paperwork Reduction Act
VII. Consideration of Costs and Benefits
VIII. Consideration of Burden on Competition and Promotion of
Efficiency, Competition, and Capital Formation
IX. Consideration of Impact on the Economy
X. Regulatory Flexibility Act Certification
XI. Statutory Authority
I. Introduction
The Commission is proposing to strengthen the national market
system for listed options by: (1) Prohibiting the imposition of
unfairly discriminatory terms by a national securities exchange that
inhibit efficient access to quotations in a listed option on its
exchange; and (2) establishing a limit on the amount a national
securities exchange would be permitted to charge to access the best bid
or offer for listed options on its exchange. These proposed amendments
would make the requirements for access to the listed options exchanges
comparable to the requirements for access to markets that trade NMS
stocks.\1\ Further, they would address concerns expressed by certain
market participants regarding access to options exchanges.\2\
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\1\ See 17 CFR 242.610.
\2\ See infra Section I.B and notes 34-40 and accompanying text.
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A. Background
In 1975, Congress determined that the ``linking of all markets''
through communications and data processing facilities would ``foster
efficiency; enhance competition; increase the information available to
brokers, dealers, and investors; facilitate the offsetting of
investors' orders; and contribute to the best execution of investors'
orders.''\3\ As such, Congress directed the Commission, through the
enactment of Section 11A of the Exchange Act, to facilitate the
establishment of a national market system (``NMS'') to link together
the multiple individual markets that trade securities. Congress
intended the Commission to take advantage of opportunities created by
new data processing and communications technologies to preserve and
strengthen the securities markets.
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\3\ See Section 11A(a)(1)(D) of the Exchange Act, 15 U.S.C. 78k-
1(a)(1)(D).
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As previously recognized by the Commission, for the NMS to fulfill
its statutory objectives, fair and efficient access to each of the
individual markets that participate in the NMS is essential.\4\ One of
the statutory NMS objectives, for example, is to assure the
practicability of brokers executing investors' orders in the best
market.\5\ Another is to assure the efficient execution of securities
transactions.\6\ Neither of these objectives can be achieved if brokers
cannot fairly and efficiently route orders to execute against the best
quotations, wherever such quotations are displayed in the NMS.\7\
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\4\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496 (June 29, 2005) (``NMS Adopting Release'') at
37538.
\5\ See Section 11A(a)(1)(C)(iv) of the Exchange Act, 15 U.S.C.
78k-1(a)(1)(C)(iv).
\6\ See Section 11A(a)(1)(C)(i) of the Exchange Act, 15 U.S.C.
78k-1(a)(1)(C)(i).
\7\ See NMS Adopting Release, supra note 4, at 37548.
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The Commission believes that intermarket price protection is
essential in a marketplace such as that for listed options where
multiple exchanges trade the same securities.\8\ For this reason, the
Commission in 1999 ordered the exchanges to jointly develop an NMS
linkage plan for listed options.\9\ The first such NMS plan, which
began operation in 2002 (``2002 Linkage Plan''), included a requirement
that its participant exchanges avoid trading through \10\ better priced
quotations displayed on other options exchanges and disseminated
pursuant to the Options Price Reporting Authority Plan (``OPRA Plan''),
as well as a mechanism by which
[[Page 20739]]
participating exchanges could seek satisfaction if an order was traded
through.\11\ In August 2009, the options exchanges implemented a new
NMS plan (``Plan''),\12\ approved by the Commission, which specifically
requires that each participating exchange establish, maintain, and
enforce written policies and procedures that are reasonably designed to
prevent trading through better priced quotations displayed on other
options exchanges and disseminated pursuant to the OPRA Plan (``trade-
throughs'').\13\ Rule 608(c) of Regulation NMS requires the options
exchanges to comply with the terms of the Plan and to enforce
compliance with the Plan by their members and persons associated with
their members, absent reasonable justification or excuse.\14\ Further,
each exchange adopted rules to implement the Plan that prohibit members
from effecting trade-throughs, subject to certain enumerated
exceptions.\15\ The approach to trade-throughs under the Plan is
similar to that taken by the Commission under Rule 611 of Regulation
NMS, which requires that a trading center establish, maintain, and
enforce written policies and procedures that are reasonably designed to
prevent the execution of trades at prices inferior to protected
quotations in NMS stocks displayed by other trading centers, subject to
applicable exceptions.\16\
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\8\ Eight exchanges currently offer options trading facilities
and another exchange is anticipated to begin operations shortly. See
Securities Exchange Act Release No. 61152 (December 10, 2009), 74 FR
66699 (December 16, 2009) (order approving C2 Options Exchange's
application for registration as a national securities exchange).
\9\ See Securities Exchange Act Release No. 42029 (October 19,
1999), 64 FR 57674 (October 26, 1999).
\10\ A ``trade-through'' was defined as a transaction in an
options series at a price that is inferior to the NBBO, but shall
not include a transaction that occurs at a price that is one minimum
quoting increment inferior to the NBBO provided a Linkage Order is
contemporaneously sent to each Participant disseminating the NBBO
for the full size of the Participant's bid (offer) that represents
the NBBO. See Section 2(29) of the 2002 Linkage Plan. ``NBBO'' was
defined as the national best bid and offer in an options series
calculated by a Participant. See Section 2(18) of the 2002 Linkage
Plan.
\11\ See Securities Exchange Act Release No. 43086 (July 28,
2000), 65 FR 48023 (August 4, 2000) (order approving 2002 Linkage
Plan). The OPRA Plan is a national market system plan approved by
the Commission pursuant to Section 11A of the Exchange Act and Rule
608 thereunder. See Securities Exchange Act Release No. 17638 (March
18, 1981), 22 S.E.C. Docket 484 (March 31, 1981).
\12\ This new Plan was designed, in part, to apply the
Regulation NMS price-protection provisions to the options exchanges.
See letter from Michael J. Simon, International Securities Exchange
LLC (``ISE''), to Nancy M. Morris, Secretary, Commission, dated
September 12, 2007, at 2-3.
\13\ See Securities Exchange Act Release No. 60405 (July 30,
2009), 74 FR 39362 (August 6, 2009) (``Plan Approval Order'') and
Section 5(a) of the Plan. A ``trade-through'' is defined in this new
Plan as a transaction in an option series, either as principal or
agent, at a price that is inferior to the best bid or offer in an
option series that is displayed by an exchange, and is disseminated
pursuant to the OPRA Plan. See Sections 2(1), 2(6), 2(14), 2(17),
and 2(21) of the Plan.
\14\ See 17 CFR 242.608(c).
\15\ See, e.g., ISE Rule 1901, NYSE Arca, Inc. (``NYSE Arca'')
Rule 6.94, and NASDAQ OMX PHLX, Inc. (``Nasdaq OMX Phlx'') Rule
1084. Prior to the adoption of the new Plan, the options exchanges
had in place rules addressing trade-throughs as required under the
2002 Linkage Plan. The exchanges revised these rules following the
adoption of the new Plan to reflect the trade-through requirements
in the new Plan.
\16\ 17 CFR 242.611(a). To be protected, a quotation must be
immediately and automatically accessible. See 17 CFR 242.600(b)(58)
(defining the term ``protected quotation'' as any protected bid or
protected offer); see also 17 CFR 242.600(b)(57). The term
``protected bid'' or ``protected offer'' means a quotation in an NMS
stock that is displayed by an automated trading center, is
disseminated pursuant to an effective national market system plan,
and is an automated quotation that is the best bid or best offer of
a national securities exchange, the best bid or best offer of The
Nasdaq Stock Market, Inc., or the best bid or best offer of a
national securities association other than the best bid or best
offer of The Nasdaq Stock Market, Inc.
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To satisfy the requirements of the trade-through provisions of the
Plan and the exchanges' rules \17\ (collectively referred to as
``Trade-Through Rules''), an options exchange with a best bid or best
offer that is inferior to another exchange's best quotation may choose
to handle a pending incoming marketable order by: (1) Cancelling the
order; (2) routing the order to another exchange displaying a better
price; \18\ or (3) providing an opportunity for its members, on their
own behalf or on behalf of other market participants, to ``step up''
and trade with the order at a price at least equal to the better
displayed price on an away exchange.\19\
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\17\ See Section 5(a) of the Plan; see also, e.g., ISE Rule
1901, NYSE Arca Rule 6.94 and Nasdaq OMX Phlx Rule 1084.
\18\ To implement the choice of routing to another exchange to
access a better-priced quotation, the options exchanges currently
use private routing arrangements that provide for indirect access to
quotations displayed by a particular options exchange through the
members of that exchange. The Commission has stated its belief that
the use of private linkages for routing will allow the exchanges to
take advantage of new technology that allows for efficient routing
and executions, and will give the exchanges greater flexibility for
order handling. See Plan Approval Order, supra note 13, at 39364.
The options exchanges complied with the requirements of the prior
linkage plan by utilizing a stand alone system (``centralized hub'')
to send and receive specific order types. The centralized hub was a
centralized data communications network that electronically linked
the options exchanges to one another. The Options Clearing
Corporation (``OCC'') operated the centralized hub. See id.
\19\ The Commission separately has proposed changes to Rule 602
of Regulation NMS that may affect these electronic ``step-up''
mechanisms, if adopted. See Securities Exchange Act Release No.
60684 (September 18, 2009), 74 FR 48632, 48633 (September 23, 2009)
(File No. S7-21-09) (``Flash Order Proposal''). See infra notes 72-
75 and accompanying text.
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In addition, broker-dealers have a duty of best execution.\20\ A
broker-dealer must carry out a regular and rigorous review of the
quality of the options markets to evaluate its best execution policies,
including the determination as to which options market it routes
customer order flow.\21\ The protection against trade-throughs
undergirds the broker-dealer's duty of best execution by helping ensure
that customer orders are not executed at prices inferior to the best
quotations, but does not supplant or diminish the broker-dealer's
responsibility for achieving best execution, including its duty to
evaluate the execution quality of markets to which it routes customer
orders.\22\
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\20\ A broker-dealer has a legal duty to seek to obtain best
execution of customer orders. See, e.g., Newton v. Merrill, Lynch,
Pierce, Fenner & Smith, Inc., 135 F.3d 266, 269-70, 274 (3d Cir.),
cert. denied, 525 U.S. 811 (1998); Certain Market Making Activities
on Nasdaq, Securities Exchange Act Release No. 40900 (Jan. 11, 1999)
(settled case) (citing Sinclair v. SEC, 444 F.2d 399 (2d Cir. 1971);
Arleen Hughes, 27 SEC 629, 636 (1948), aff'd sub nom. Hughes v. SEC,
174 F.2d 969 (D.C. Cir. 1949)). See also Order Execution
Obligations, Securities Exchange Act Release No. 37619A (Sept. 6,
1996), 61 FR 48290 (Sept. 12, 1996) (``Order Handling Rules
Release''). A broker-dealer's duty of best execution derives from
common law agency principles and fiduciary obligations, and is
incorporated in SRO rules and, through judicial and Commission
decisions, the antifraud provisions of the federal securities laws.
See Order Handling Rules Release, 61 FR at 48322. See also Newton,
135 F.3d at 270. The duty of best execution requires broker-dealers
to execute customers' trades at the most favorable terms reasonably
available under the circumstances, i.e., at the best reasonably
available price. Newton, 135 F.3d at 270. Newton also noted certain
factors relevant to best execution--order size, trading
characteristics of the security, speed of execution, clearing costs,
and the cost and difficulty of executing an order in a particular
market. Id. at 270 n.2 (citing Payment for Order Flow, Exchange Act
Release No. 33026 (Oct. 6, 1993), 58 FR 52934, 52937-38 (Oct. 13,
1993) (Proposed Rules)). See In re E.F. Hutton & Co., Securities
Exchange Act Release No. 25887 (July 6, 1988). See also Securities
Exchange Act Release No. 34902 (October 27, 1994), 59 FR 55006,
55008-55009 (November 2, 1994) (``Approval of Payment for Order Flow
Final Rules''). See also NMS Adopting Release, supra note 4, at
37537 (discussing the duty of best execution).
\21\ See Securities Exchange Act Release No. 49175 (February 3,
2004), 69 FR 6124, 6128 (February 9, 2004) (``Options Concept
Release''). See also NMS Adopting Release, supra note 4, at 37538.
\22\ See NMS Adopting Release, supra note 4, at 37538.
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These regulatory obligations mean that broker-dealers responsible
for routing customer orders, as well as customers making their own
order-routing decisions, must have fair and efficient access to the
best displayed quotations to achieve best execution of those orders,
and the exchanges themselves must have the ability to execute orders
against the displayed quotations of other exchanges.\23\ Moreover, the
benefits of intermarket price protection could be compromised if
exchanges were able to charge substantial fees for accessing their
quotations.\24\
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\23\ See id. at 37539.
\24\ See id. at 37544.
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Further, the Exchange Act authorizes the Commission to adopt rules
assuring the fairness and usefulness of quotation information.\25\ The
wider the disparity in the level of fees among the different exchanges,
the less useful and accurate are the displayed prices. For example, if
two options exchanges displayed quotations to sell an option for $10.00
per contract, one exchange offer could
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be accessible for a total price of $10.00 per contract plus a $0.50 per
contract access fee, while the second exchange might not charge any
such access fee. What appeared in the consolidated data stream to be
identical quotations would in fact not be identical in terms of all-in
costs. The Commission recognizes that there may be different ways to
achieve the objective of fair and useful quotations. One approach is to
limit the extent to which the all-in price for those who access
quotations can vary from the displayed price by limiting fees for
accessing those quotations, as proposed here in Rule 610(c)(2).\26\
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\25\ See Section 11A(c)(1)(B) of the Exchange Act, 15 U.S.C.
78k-1(c)(1)(B).
\26\ See NMS Adopting Release, supra note 4, at 37545 (stating
that for quotations to be fair and useful there must be some limit
on the extent to which the true price for those who access
quotations can vary from the displayed price).
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An access fee limit also creates more transparency in the cost of
accessing quoted prices. Currently, there are so many different fees
across options exchanges, across different categories of options
participants, and across different product types, that it is not easy
to estimate the total cost of executing against a quotation for a
particular transaction. An access fee cap would provide clearer
information on the maximum cost for accessing quoted prices. The
Commission recognizes, however, that although a cap on access fees
would promote the fairness and usefulness of displayed quotations and
transparency in the cost of assessing quoted prices, there may be other
fees assessed that would not be included in the proposed cap on access
fees.
B. Overview of Current Options Market Structure
In the listed options market, all orders are currently executed on
registered national securities exchanges. Options exchanges have, to
date, adopted one of two general business models. An exchange using the
first model--referred to as the ``Make or Take'' model--incents market
participants to quote aggressively by providing a rebate to an order or
quotation displayed on its exchange when such order or quotation is
executed. This rebate is funded through the fee charged to the order
that executed against the displayed order or quotation. The difference
between the fee charged for accessing the order or quotation and the
rebate is revenue to the exchange.
NYSE Arca was the first options exchange to implement the Make or
Take transaction fee model.\27\ The introduction of the Make or Take
model followed the reduction of the quoting increment in certain
options in 2007.\28\ As of February 1, 2010, market participants could
represent trading interest in penny increments in options series in 211
specified classes. These classes represent approximately 69.5 percent
of trading volume. By August 2, 2010, 361 classes will be included in
the Minimum Quoting Increment Pilot Program, representing approximately
88.1 percent of trading volume during February 2010.\29\
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\27\ See Securities Exchange Act Release No. 55223 (February 1,
2007), 72 FR 6306 (February 9, 2007) (SR-NYSEArca-2007-07). The
NASDAQ Options Market LLC (``NOM'') also uses a ``Make or Take'' fee
model for certain options classes. See The NASDAQ Options Market:
Execution and Routing Fees (available at http://www.nasdaqtrader.com/content/ProductsServices/PriceList/nasdaq_options_pricing.pdf) (current as of December 1, 2009).
\28\ On January 26, 2007, the then-existing six options
exchanges implemented a pilot program to quote certain options
series in thirteen classes in one-cent increments (``Minimum Quoting
Increment Pilot Program''). The NASDAQ Stock Market LLC (``Nasdaq'')
became a participant in the Minimum Quoting Increment Pilot Program
on March 31, 2008, when it commenced trading on NOM, and BATS
Exchange, Inc. (``BATS'') became a participant in the Minimum
Quoting Increment Pilot Program on February 26, 2010 when it
commenced trading on BATS Options Exchange Market. Since 2007, the
Minimum Quoting Increment Pilot Program has been extended and
expanded several times. See, e.g., Securities Exchange Act Release
Nos. 56276 (August 17, 2007), 72 FR 47096 (August 22, 2007) (SR-
CBOE-2007-98); 56567 (September 27, 2007), 72 FR 56396 (October 3,
2007) (SR-Amex-2007-96); 57579 (March 28, 2008), 73 FR 18587 (April
4, 2008) (SR-Nasdaq-2008-026); 60711 (September 23, 2009), 74 FR
49419 (September 28, 2009) (SR-NYSEArca-2009-44); and 61061
(November 24, 2009), 74 FR 62857 (December 1, 2009) (SR-NYSEArca-
2004-44).
\29\ The source of the data is OptionsMetrics, LLC
(``OptionsMetrics''). The data used for the estimates corresponds to
February 2010. By August 2010, the Minimum Quoting Increment Pilot
Program will incorporate 150 additional classes. Those classes will
be incorporated according to volume levels on the month before the
expansion. For the current approximation, Commission staff projected
which classes would be added by August 2010 using volume data
corresponding to February 2010.
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On an exchange with a ``Make or Take'' fee model, broker-dealers
representing customer orders must pay a ``Take'' fee to access a
displayed quotation on that exchange. In contrast, on an exchange
without that fee model, broker-dealers generally are not assessed a
similar fee when a customer order is executed. This distinction brought
attention to the issue of whether, and to what extent, access fees
impact fair and efficient access to displayed quotations in listed
options.
Exchanges using the second model--referred to as the ``Broker
Payment'' model--generally charge no or low fees for the execution of
customers' orders.\30\ However, these exchanges often charge other
types of fees on a per-transaction basis. For example, most options
exchanges charge a surcharge or ``royalty'' fee for executions in
certain index option classes.\31\ Many exchanges also charge a payment
for order flow or ``marketing'' fee to market makers that trade with
customer orders on the exchange.\32\ The exchange then makes
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the proceeds from such fees available to collectively fund payment for
order flow to brokers directing order flow to the exchange.\33\
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\30\ Exchanges that use the ``Broker Payment'' model also
generally give priority to customer orders at the best price over
other orders or quotations at that price. After customer orders are
executed, the rules of ``Broker Payment'' options exchanges dictate
how the remainder of an incoming order is allocated against resting
non-customer orders or quotations. ISE, for example, requires that
priority be given to public customer orders, and provides for pro-
rata allocation among non-customer orders and quotations. See
Securities Exchange Act Release No. 42455 (February 24, 2000), 65 FR
11388, 11395 (March 2, 2000) (order approving the registration of
the International Securities Exchange LLC as a national securities
exchange (``ISE Exchange Approval'')). Exchanges that use a ``Broker
Payment'' model do not give priority to orders from certain
customers who are ``professional'' customers under exchange rules.
See Securities Exchange Act Release Nos. 59287 (January 23, 2009),
74 FR 5694 (January 30, 2009) (SR-ISE-2006-26); 61198 (December 17,
2009), 74 FR 68880 (December 29, 2009) (SR-CBOE-2009-078); and 61802
(March 3, 2010) (SR-Phlx-2010-05). ``Professional'' customers are
treated on ISE, the Chicago Board Options Exchange, Incorporated
(``CBOE''), and Nasdaq OMX Phlx in the same manner as a broker-
dealer for purposes of specified order execution rules, including
priority rules. Under these exchange rules, ``Professional''
customers participate in ISE's, CBOE's, and Nasdaq OMX Phlx's
allocation processes on equal terms with broker-dealers, i.e., they
do not receive priority over broker-dealers in the allocation of
orders on the exchange. Several exchanges have, however, begun to
charge transaction fees to certain customers identified in exchange
rules as ``professionals.'' See Securities Exchange Act Release Nos.
59287 and 61198.
\31\ See BOX Fee Schedule, at 1 (available at http://www.bostonoptions.com/pdf/BOX_Fee_Schedule.pdf) (current as of
January 2010); CBOE Fee Schedule, at 1 (available at http://www.cboe.com/publish/feeschedule/CBOEFeeSchedule.pdf) (current as of
February 2, 2010); ISE Fee Schedule, at 6 (available at http://www.ise.com/assets//documents//OptionsExchange//legal/fee/fee_schedule.pdf) (current as of January 8, 2010); NYSE Amex Fee
Schedule, at 3 (available at http://www.nyse.com/pdfs/NYSE_Amex_Options_Fee_Schedule01.04.10.pdf) (current as of January 4, 2010);
NYSE Arca Fee Schedule, at 6 (available at http://www.nyse.com/pdfs/NYSE_Arca_Options_Fee_Schedule1-08-2010.pdf) (current as of
January 8, 2010); and Nasdaq OMX Phlx Fee Schedule, at 5 (available
at http://www.nasdaqomxtrader.com/content/marketregulation/membership/phlx/feesched.pdf) (current as of February 24, 2010).
\32\ See CBOE Fee Schedule, at 2 (available at http://www.cboe.com/publish/feeschedule/CBOEFeeSchedule.pdf) (current as of
February 2, 2010); ISE Fee Schedule, at 6 (available at http://www.ise.com/assets//documents//OptionsExchange//legal/fee/fee_schedule.pdf) (current as of January 8, 2010); NYSE Amex Fee
Schedule, at 3 (available at http://www.nyse.com/pdfs/NYSE_Amex_Options_Fee_Schedule01.04.10.pdf) (current as of January 4, 2010);
NYSE Arca Fee Schedule, at 6 (available at http://www.nyse.com/pdfs/NYSE_Arca_Options_Fee_Schedule1-08-2010.pdf) (current as of
January 8, 2010); and Nasdaq OMX Phlx Fee Schedule, at 6 (available
at http://www.nasdaqomxtrader.com/content/marketregulation/membership/phlx/feesched.pdf) (current as of February 24, 2010).
\33\ See, e.g., Nasdaq OMX Phlx Fee Schedule, at 6, 15
(available at http://www.nasdaqomxtrader.com/content/marketregulation/membership/phlx/feesched.pdf) (current as of
February 24, 2010). See also infra note 109 and accompanying text.
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In July 2008 the Commission received a Petition for Rulemaking to
Address Excessive Access Fees in the Options Markets from Citadel
Investment Group, L.L.C. (``Citadel Petition'').\34\ In the Citadel
Petition, Citadel petitions the Commission to engage in rulemaking to
limit the ``Take'' fees that options exchanges may charge non-members
to obtain access to quotations to $0.20 per contract. NYSE Arca also
filed a proposal in July 2008 to raise its ``Take'' fee for certain
classes. Specifically, NYSE Arca submitted a proposed rule change for
immediate effectiveness that raised its ``Take'' fee charged to members
for certain designated Minimum Quoting Increment Pilot Program issues
from $0.45 per contract to $0.55 per contract, and raised the
corresponding credit in those same issues from $0.30 per contract to
$0.40 per contract for market makers, and from $0.25 per contract to
$0.35 per contract for electronically executed broker-dealer and
customer orders.\35\ The Commission requested comment on the issue of
access fees when it published NYSE Arca's proposal for comment.\36\
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\34\ See letter from John C. Nagel, Managing Director & Deputy
General Counsel, Citadel, to Nancy M. Morris, Secretary, Commission,
dated July 15, 2008 (available at http://www.sec.gov/rules/petitions/2008/petn4-562.pdf).
\35\ These Pilot issues included: AAPL, CSCO, DIA, MSFT, IWM,
QQQQ, RIMM, XLF, SPY, YHOO. See Securities Exchange Act Release No.
58295 (August 4, 2008), 73 FR 46681 (August 11, 2008) (SR-NYSEArca-
2008-75).
\36\ Concurrently, NYSE Arca filed a proposed rule change to
increase the fee charged to orders received through the then-
existing options linkage in certain Minimum Quoting Increment Pilot
Program issues from $0.45 to $0.55 per contract. See SR-NYSEArca-
2008-76. The Commission has not published this proposed rule change
for notice and comment. Pending Commission action on SR-NYSEArca-
2008-76, NYSE Arca has stated that it will not implement its fee
changes included in SR-NYSEArca-2008-75.
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The Commission has received several comment letters in response to
its request for comment on the NYSE Arca proposed rule change and to
the Citadel Petition, which discuss the issue of access fees and
imposing a cap on such fees.\37\ The Commission also received several
comment letters in response to a proposal to amend Rule 602 of
Regulation NMS to effectively ban marketable ``flash orders'' in NMS
securities that discuss the issue of access fees in listed options.\38\
Commenters on the Flash Order Proposal expressed concern that
eliminating flash orders on the options exchanges would increase direct
costs associated with executing customers' listed options orders.\39\
The absence of a limit on fees that an options exchange can charge for
accessing its quotation was one reason commenters said that banning
flash orders would be more detrimental to listed options customers than
to cash equity customers.\40\ These concerns about the absence of a
limit on access fees on the listed options exchanges echo the comments
received in response to the Citadel Petition and NYSE Arca's proposal.
These comments were considered in developing this proposal and are
discussed below.
---------------------------------------------------------------------------
\37\ Letters received in response to SR-NYSEArca-2008-75: See
letters from John C. Nagel, Managing Director and Deputy General
Counsel, Citadel, to Nancy M. Morris, Secretary, Commission, dated
July 23, 2008 (``Citadel Letter''); Stephen Schuler and Daniel
Tierney, Managing Members, Global Electronic Trading Company to
Florence E. Harmon, Acting Secretary, Commission, dated September 2,
2008 (``GETCO Letter''); Christopher Nagy, Managing Director, Order
Routing Sales and Strategy, TD Ameritrade, Inc. to Florence E.
Harmon, Acting Secretary, Commission, dated September 9, 2008 (``TD
Ameritrade Letter''); and Robert R. Bellick, Managing Director,
Wolverine to Nancy M. Morris, Secretary, Commission, dated September
10, 2008 (``Wolverine Letter'') (available at http://www.sec.gov/comments/sr-nysearca-2008-75/nysearca200875.shtml).
Letter received in response to the Citadel Petition: See letter
from Lawrence Leibowitz, Group Executive Vice President and Head of
Global Execution and Technology, NYSE Euronext, to Florence E.
Harmon, Acting Secretary, Commission, dated September 3, 2008
(``NYSE Euronext Letter'') (available at http://www.sec.gov/comments/4-562/4-562.shtml).
Letters received in response to both the Citadel Petition and
SR-NYSEArca-2008-75: See letters from David M. Battan, Executive
Vice President, Interactive Brokers Group LLC, to Florence Harmon,
Acting Secretary, Commission, dated September 8, 2008 (``IB
Letter''); and William Easley, Vice Chairman, Boston Options
Exchange (``BOX'') to Florence E. Harmon, Acting Secretary,
Commission, dated September 11, 2008 (``BOX Letter'') (available at
http://www.sec.gov/comments/sr-nysearca-2008-75/nysearca200875.shtml).
Letters received in response to SR-NYSEArca-2009-44, which
proposed to expand the number of classes eligible to participate in
the Minimum Quoting Increment Pilot: See letters from Christopher
Nagy, Managing Director, Order Routing Strategy, TD Ameritrade, Inc.
to Elizabeth M. Murphy, Secretary, Commission, dated June 17, 2009
(``TD Ameritrade Letter II'') and December 1, 2009 (``TD Ameritrade
Letter III'') (available at http://www.sec.gov/comments/sr-nysearca-2009-44/nysearca200944.shtml).
\38\ See Flash Order Proposal, supra note 19. A ``flash order''
generally is any order qualifying for the ``immediate execution or
withdrawal'' exception from Rule 602. For more detail about the
basic features that define flash orders, see the Flash Order
Proposal. Flash orders allow options exchanges that charge no or low
fees to execute customer orders to ``step up'' and match better
displayed quotations on other exchanges.
\39\ See, e.g., letters from Christopher Nagy, Managing
Director, Order Routing Strategy, TD Ameritrade, Inc., to Elizabeth
M. Murphy, Secretary, Commission, dated November 23, 2009
(``Ameritrade Flash Letter''); letter from John C. Nagel, Managing
Director and Deputy General Counsel, Citadel, to Elizabeth M.
Murphy, Secretary, Commission, dated November 20, 2009 (``Citadel
Letter II''); Peter Bottini, EVP Trading and Customer Service, and
Hillary Victor, Associate General Counsel, optionsXpress, to
Elizabeth M. Murphy, Secretary, Commission, dated November 25, 2009
(``optionsXpress Flash Letter''); Thomas F. Price, Managing
Director, Securities Industry Financial Association, to Elizabeth M.
Murphy, Secretary, Commission, dated December 1, 2009 (``SIFMA Flash
Letter'') (available at http://www.sec.gov/comments/s7-21-09/s72109.shtml).
\40\ See SIFMA Flash Letter, supra note 39, at 5. See also
Citadel Letter II, infra note 39, at 1-2; Ameritrade Flash Letter,
supra note 39, at 3; and optionsXpress Flash Letter, supra note 39,
at 6.
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II. Proposed Amendments to Rule 610(a)
Access to displayed quotations, particularly the best quotations of
an exchange or association, is vital for the smooth functioning of
intermarket trading.\41\ Brokers responsible for routing their
customers' orders, as well as investors that make their own order-
routing decisions, must have fair and efficient access to the best
displayed quotations of all options exchanges to achieve best execution
of those orders. In addition, options exchanges themselves must have
the ability to route orders for execution against the displayed
quotations of other exchanges. Indeed, the concept of intermarket
protection against trade-throughs is premised on the ability of options
exchanges to trade with, rather than trade through, the quotations
displayed by other options exchanges.\42\
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\41\ See NMS Adopting Release, supra note 4, at 37539.
Currently, no national securities association quotes or trades
listed options.
\42\ See id.
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Currently, Rule 610(a) furthers the goal of fair and efficient
access to quotations primarily by prohibiting a national securities
exchange or national securities association from imposing unfairly
discriminatory terms that prevent or inhibit any person from obtaining
efficient access through a member of the national securities exchange
or national securities association to any quotations in an NMS stock
\43\ displayed by the exchange or association.\44\ This anti-
discrimination standard is designed to support indirect access by
persons to quotations in NMS stocks through members, and is
[[Page 20742]]
premised on fair and efficient access of exchange or association
members themselves to the quotations in NMS stocks.\45\
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\43\ See Rule 600(b)(47), 17 CFR 242.610(b)(47) (defining NMS
stock as any NMS security other than an option). See also Rule
600(b)(46), 17 CFR 242.610(b)(46) (defining NMS security as any
security or class of securities for which transaction reports are
collected, processed, and made available pursuant to an effective
transaction reporting plan, or an effective national market system
plan for reporting transactions in listed options).
\44\ See Rule 610(a), 17 CFR 242.610(a). See also NMS Adopting
Release, supra note 4, at 37539.
\45\ See NMS Adopting Release, supra note 4, at 37502.
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The Commission is proposing to amend Rule 610(a) to extend this
prohibition to NMS securities,\46\ which include listed options as well
as NMS stocks. The proposal to extend the anti-discrimination standard
in Rule 610(a) to the trading of listed options is designed to support
indirect access by persons to quotations in listed options through
members. Like current Rule 610(a), the proposed amendment is premised
on the need for fair and efficient access of members themselves to the
quotations of the exchange in listed options.
---------------------------------------------------------------------------
\46\ See supra note 43 (defining NMS security).
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Market participants can either become members of an exchange to
obtain direct access to its options quotations, or they can obtain
indirect access by ``piggybacking'' on the direct access of members.
Access to exchanges currently is addressed by several provisions of the
Exchange Act.\47\ In particular, Section 6(b)(5) of the Exchange Act
requires in part that the rules of an exchange not be designed to
permit unfair discrimination between customers, issuers, brokers, or
dealers.\48\ The proposed amendments to Rule 610(a) would build on this
existing access structure, including the prohibition in Section 6(b)(5)
against unfair discrimination, by specifically prohibiting unfair
discrimination that prevents or inhibits non-members from
``piggybacking'' on the access of members. The ability to fairly and
efficiently obtain indirect access through a member is necessary to
assure that non-members can readily access quotations in options to
meet the requirements of the Trade-Through Rules and to fulfill the
non-members' duty of best execution.\49\
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\47\ Section 6(b)(4) of the Exchange Act requires the rules of
an exchange to provide for the equitable allocation of reasonable
dues, fees, and other charges among its members and other persons
using its facilities, while Section 6(b)(5) of the Exchange Act
requires in part that its rules not be designed to permit unfair
discrimination between customers, brokers, or dealers. Section
6(b)(5) also requires an exchange to have rules designed to remove
impediments to, and perfect the mechanism of, a free and open market
and a national market system. In addition, Section 6(b)(1) of the
Exchange Act requires that an exchange must have the capacity to be
able to carry out the purposes of the Exchange Act. See 15 U.S.C.
78f(b)(4); 15 U.S.C. 78f(b)(5); 15 U.S.C. 78f(b)(1). Section
11A(a)(1)(C) of the Exchange Act provides that two of the objectives
of a national market system are to assure the economically efficient
execution of securities transactions and the practicability of
brokers executing investors' orders in the best market. See 15
U.S.C. 78k-1(a)(1)(C).
\48\ The requirements of Section 6(b)(5) of the Exchange Act
apply to any rule of an exchange, and as such are not limited to
access through members of an exchange to the quotations of that
exchange.
\49\ See supra notes 4-22 and accompanying text.
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The Commission does not believe that, if it were to prohibit
exchanges from imposing unfairly discriminatory terms on non-members
who obtain indirect access to quotations in options through members, it
would require exchanges to provide non-members with free access to such
quotations. Members who provide piggyback access to non-members would
be providing a useful service and presumably would charge a fee for
such service. The fee would be subject to competitive forces and likely
would reflect the costs of membership, plus some element of profit to
the members. As a result, non-members that frequently make use of
indirect access are likely to contribute indirectly to cover the costs
of membership in the market. In addition, the unfair discrimination
standard of Rule 610(a) as proposed to be amended would apply only to
access to quotations in NMS securities, including options. All other
services would be subject to the more general fair access provisions
applicable to national securities exchanges, as well as the statutory
provisions that govern their respective rules.\50\
---------------------------------------------------------------------------
\50\ See NMS Adopting Release, supra note 4, at 37540.
---------------------------------------------------------------------------
On the other hand, any attempt by an options exchange to charge
differential fees based solely on the non-member status of a person
obtaining indirect access to its quotations would violate Rule 610(a)
as proposed to be amended.\51\ As noted above, fair and efficient
access to quotations is essential to the functioning of the NMS.\52\
For example, if an exchange charges discriminatory fees to non-members
to access its quotations, this practice would interfere with the
functioning of the private linkage approach and detract from its
usefulness to exchanges in meeting their required responsibilities
under the Trade-Through Rules. Fair and efficient access to the best
quotations is also necessary for brokers to achieve best execution of
orders.\53\ Accordingly, the Commission is proposing to amend Rule
610(a) to establish baseline intermarket access rules for options
markets to promote indirect access to such markets by a non-member
through a member.
---------------------------------------------------------------------------
\51\ Id. For example, the Commission preliminarily believes an
exchange that charges a non-member broker-dealer that is registered
as an options market maker on another exchange a higher fee than the
fee charged to both member and non-member broker-dealers that also
are not market makers on that exchange for obtaining access to its
quotations would violate Rule 610(a), as proposed to be amended.
\52\ See supra notes 4-7 and accompanying text.
\53\ See NMS Adopting Release, supra note 4, at 37539. See also
supra notes 20-22 and accompanying text.
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The prohibition on imposing unfairly discriminatory terms in Rule
610(a) currently applies to terms that prevent or inhibit efficient
access to quotations. The term ``quotation'' is defined in Rule
600(a)(62) of Regulation NMS as a bid or offer, and ``bid'' or
``offer'' is defined in Rule 600(b)(8) of Regulation NMS as the bid
price or the offer price communicated by a member of a national
securities exchange or national securities association to any broker or
dealer or to any customer.\54\ Rule 610(a), therefore, applies to the
entire depth of book of displayed orders in NMS stocks, including
reserve size \55\ and displayed size at each price.\56\ The
Commission's proposal to extend Rule 610(a) to all NMS securities so
that listed options markets are covered by the Rule would apply in the
same manner.\57\ Thus, options markets would be prohibited from
imposing unfairly discriminatory terms that prevent or inhibit
efficient access to the entire depth of book of displayed orders.
---------------------------------------------------------------------------
\54\ See 17 CFR 242.600(b)(62) and 17 CFR 242.600(b)(8).
\55\ ``Reserve size'' generally means an undisplayed portion of
an order. Once the displayed size of an order is executed against,
the reserve size is used to refresh the market participant's
displayed size. See, e.g., NYSE Arca Rule 6.62(d)(3) and ISE Rule
2104(n).
\56\ See NMS Adopting Release, supra note 4, at 37548.
\57\ The Commission notes that, although fees are the most
likely way in which an exchange could discriminate against non-
members for access to its quote, the Commission's proposal would
more broadly prohibit any unfairly discriminatory terms.
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III. Access Fees
A. Proposed Rule 610(c)(2)
Generally, the Commission believes that market forces and the
dynamics of competition should determine the level of exchange fees
whenever possible.\58\ As discussed below, however, the Commission is
concerned that because of the requirements for intermarket price
protection, competitive forces, by themselves, are not, and will not
be, enough to prevent fees from being charged that interfere with fair
and
[[Page 20743]]
efficient access to an option exchange's displayed prices.\59\
Accordingly, the Commission is proposing to impose a limit on the
amount of fees that an exchange can impose (or permit to be imposed)
for the execution of an order against the exchange's best bid and
offer. This proposal also responds to market participants' concerns
regarding access fees,\60\ as discussed below.\61\
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\58\ See Securities Exchange Act Release Nos. 59039 (December 2,
2008), 73 FR 74770, 74781-82 (December 9, 2008) (``NYSE Arca Data
Order'') (stating in part that ``[t]he Exchange Act and its
legislative history strongly support the Commission's reliance on
competition, whenever possible, in meeting its regulatory
responsibilities for overseeing the SROs and the national market
system. Indeed, competition among multiple markets and market
participants trading the same products is the hallmark of the
national market system.'').
\59\ See NMS Adopting Release, supra note 4, at 37545
(concluding that imposing a fee limitation was necessary to support
the integrity of the price protection requirement established to
prevent trade-throughs: ``[T]he adopted fee limitation is designed
to preclude individual trading centers from raising their fees
substantially in an attempt to take improper advantage of
strengthened protection against trade-throughs and the adoption of a
private linkage regime. In particular, the fee limitation is
necessary to address ``outlier'' trading centers that otherwise
might charge high fees to other market participants required to
access their quotations by the Order Protection Rule.'').
\60\ These concerns, as noted above, have been raised by a
petition for rulemaking to limit the ``Take'' fees that options
exchanges may charge non-members to access quotations and comment
letters in response to this petition and NYSE Arca's proposal to
raise its ``Take'' fee. See Citadel Petition, supra note 34; see
also supra note 37.
\61\ See infra notes 70 and 79 and accompanying text.
---------------------------------------------------------------------------
Each of the options exchanges currently charges market participants
fees when incoming orders access their displayed quotations. Although
these fees may have different names (e.g., a ``Take'' fee versus a
transaction fee), and may vary in amount based on the type of account
from which the order is sent, these fees all have one thing in common--
they are fees triggered by the execution of an incoming order against
an order or quotation on that exchange.
In particular, on exchanges that use the ``Broker Payment'' fee
model,\62\ although orders executed on behalf of customer accounts may
not be charged any transaction fees, orders executed on behalf of non-
customer accounts are charged transaction fees.\63\ In some cases,
these fees may be substantial. For example, for options classes not
included in the Minimum Quoting Increment Pilot Program, one exchange
charges $0.50 per contract for electronically executed orders for the
account of a broker dealer or firm,\64\ while another exchange charges
$0.45 per contract for electronically executed broker-dealer
orders.\65\
---------------------------------------------------------------------------
\62\ See supra notes 30-33 and accompanying text.
\63\ A customer generally is understood to be a person that is
not a broker-dealer. See, e.g., ISE Rule 100(a)(38) (defining the
term ``public customer''). However, as noted above, some exchanges
have begun to charge transaction fees to certain customers
identified in exchange rules as ``professionals.'' See supra note
30.
\64\ See NYSE Arca Fee Schedule (available at http://www.nyse.com/pdfs/NYSE_Arca_Options_Fee_Schedule1-08-2010.pdf)
(current as of January 8, 2010).
\65\ See CBOE Fee Schedule (available at http://www.cboe.com/publish/feeschedule/CBOEFeeSchedule.pdf) (current as of February 2,
2010).
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In addition, on exchanges that use the ``Make or Take'' fee
model,\66\ an exchange charges ``Take'' fees to members that execute
orders against that exchange's quotations. These exchanges then pass a
substantial portion of that fee back as a rebate to the member that
supplied the accessed liquidity (i.e., market maker quotations or non-
marketable limit orders). The ``Take'' fees charged by these exchanges
also can be substantial. For example, for options classes in the
Minimum Quoting Increment Pilot Program, one exchange charges $0.45 per
contract when an order for the account of a non-customer (and $0.35 per
contract when an order for the account of a customer) trades against
liquidity on the exchange's book. The exchange then rebates $0.25 per
contract to the member (or members) that represented the order (or
orders) on its book that provided the liquidity to the incoming
order.\67\ Another exchange charges a $0.45 per-contract ``Take'' fee
when an order in a Minimum Quoting Increment Pilot Program options
class trades with liquidity on the exchange's book. This exchange then
rebates $0.30 per contract to an exchange market maker that provided
the liquidity to the incoming order and $0.25 per contract to the
member that represented a broker-dealer or customer order that provided
liquidity to the incoming order.\68\
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\66\ See supra note 27 and accompanying text.
\67\ See Section 1 of Nasdaq Rule 7050 and The NASDAQ Options
Market: Execution and Routing Fees (available at http://www.nasdaqtrader.com/content/ProductsServices/PriceList/nasdaq_options_pricing.pdf) (current as of January 4, 2010).
\68\ See ``Transaction Costs'' Section of the NYSE Arca Fee
Schedule (available at http://www.nyse.com/pdfs/NYSE_Arca_Options_Fee_Schedule1-08-2010.pdf) (current as of January 8,
2010). See also supra notes 35 and 36 and accompanying text.
---------------------------------------------------------------------------
The Commission believes that the benefits of intermarket price
protection and more efficient linkages could be compromised if options
exchanges charge substantial fees for accessing their best bids and
offers. For this reason, the Commission preliminarily believes that a
fee limitation is necessary to support the integrity of the price
protection requirement under the Trade-Through Rules.\69\ The
Commission's views are informed by commenters that argue that a limit
on fees for accessing quotations would support the integrity of the
rules limiting trade-throughs because a fee limitation would prohibit
individual exchanges from raising their fees substantially in an
attempt to take improper advantage of protection against trade-
throughs. In particular, commenters contend that, in the absence of a
fee limit, some exchanges may take advantage of the requirement to
protect displayed quotations by charging exorbitant fees to those
required to access the exchange's quotations, which could compromise
the fairness and efficiency of the NMS for trading standardized
options.\70\ Although the exchange charging the highest fees likely
would be the last exchange to which orders would be routed, prices
could not move to the next level until someone routed an order to take
out the displayed price at such a high fee exchange. Thus, while
exchanges would have significant incentives to compete to be near the
top in order-routing priority, arguably there would be little incentive
to avoid being the least-preferred exchange if fees were not
limited.\71\
---------------------------------------------------------------------------
\69\ See supra notes 13 and 17-19 and accompanying text for a
definition of ``Trade-Through Rules.''
\70\ See Citadel Petition, supra note 34, at 4 (arguing that
``Taker'' fees are sustained by virtue of the regulatory obligations
prohibiting trade-throughs, in that when an exchange is quoting
alone at the NBBO, market participants cannot avoid the Taker fees
imposed by such exchange, irrespective of how high such fees may
be); Citadel Letter II, supra note 37, at 6 (arguing that if the
Commission were to ban or limit the use of step-up mechanisms in the
options markets, the need for an access fee cap would become
essential); TD Ameritrade Letter, supra note 37, at 1 (arguing that
Make or Take fees have the potential to create incentives for
participants to post liquidity and lock markets to capture the
rebate and that other options exchanges would have to increase their
fees and rebates in order to defend their market share). See also
Wolverine Letter, supra note 37, at 6 (asserting that, while a cap
implemented as proposed by Citadel would reduce Take fees charged to
non-members who may be forced to access ``outlier'' markets due to
trade through obligations, members would still be forced to pay
unrestricted fees); GETCO Letter, supra note 37, at 3 (stating that
if the Commission does decide to place caps on access fees charged
by exchanges that use the ``Make or Take'' fee model, it should also
cap all-in access fees for traditional exchanges, i.e., those that
use the ``Broker Payment'' fee model, regardless of the type of
market participant accessing the exchange's quotation).
\71\ See NMS Adopting Release, supra note 4, at 37545.
---------------------------------------------------------------------------
The proposed fee limitation is designed to preclude this business
practice by limiting individual exchanges from having fee structures
that take improper advantage of the required protection against trade-
throughs and undermine the overall benefits of the new private routing
regime. It also would preclude an options exchange from charging
excessively high fees selectively to competitors.
[[Page 20744]]
The Commission notes that several exchanges have rules that allow--
and encourage--their members to electronically ``step up'' and match a
better-priced bid or offer available on another exchange--a ``flash''
functionality--rather than send orders to other exchanges for
execution.\72\ These exchanges stated that they implemented this
``flash'' functionality because of the high costs associated with
routing an order to away exchanges to be executed, particularly one
with a Make or Take fee model.\73\
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\72\ See, e.g., ISE Rule 803, Supplementary Material .02 and
Securities Exchange Act Release Nos. 57551 (March 25, 2008), 73 FR
16917 (March 31, 2008) (SR-ISE-2008-28) and 58038 (June 26, 2008),
73 FR 38261 (July 3, 2008) (SR-ISE-2008-50). See also ISE Fee
Schedule, supra note 32, at 3-4 (as an inducement to step-up and
avoid routing to away markets, ISE waives the transaction fee for
members when they execute against a public customer order that is
exposed pursuant to ISE Rule 803, i.e., ISE's step-up mechanism)
(current as of January 8, 2010).
\73\ See, e.g., letters from William J. Brodsky, Chairman and
Chief Executive Officer, CBOE, to Elizabeth M. Murphy, Secretary,
Commission, dated November 18, 2009, at 2 (comment to Flash Order
Proposal) (``CBOE Flash Letter''); Michael J. Simon, Secretary, ISE,
to Elizabeth Murphy, Secretary, Commission, dated November 23, 2009
at 5 (comment to Flash Order Proposal) (``ISE Flash Letter''); Tony
McCormick, CEO, BOX, to Elizabeth M. Murphy, Secretary, Commission,
dated November 23, 2009, at 3 (comment to Flash Order Proposal). See
also Securities Exchange Act Release Nos. 57551 (March 25, 2008), 73
FR at 16917 (March 31, 2008) (SR-ISE-2008-28) and 57937 (June 6,
2008), 73 FR 33865 (June 13, 2008) (SR-CBOE-2008-58) (relating to
electronic exposure on HAL).
---------------------------------------------------------------------------
The Commission separately has proposed changes to Rule 602 of
Regulation NMS that may affect these electronic ``step-up'' mechanisms,
if adopted.\74\ There are structural differences between the listed
options exchanges and the cash equity markets that commenters
identified as making the use of ``flash'' orders on the options
exchanges serve a different purpose. In particular, commenters stated
that eliminating the ability of market participants on the options
exchanges to ``step up'' to better prices on other exchanges through
the use of ``flash'' orders could impose significant costs on retail
options customers whose orders would be routed to other options
exchanges because, in part, of the absence of any limits on the fees
options exchanges may charge to access their quotations.\75\
---------------------------------------------------------------------------
\74\ See Flash Order Proposal, supra note 19.
\75\ See SIFMA Flash Letter, supra note 39, at 5; Ameritrade
Flash Letter, supra note 39, at 3; optionsXpress Flash Letter, supra
note 39, at 6; and Citadel Letter II, supra note 39, at 6 (arguing
that if the Commission were to ban or limit the use of step-up
mechanisms in the options markets, the need for an access fee cap
would become essential).
---------------------------------------------------------------------------
The Commission also believes that for quotations to be fair and
useful, there must be some limit on the extent to which the all-in
price for those who access quotations can vary from the displayed
price.\76\ The wider the disparity in the level of fees among the
different exchanges, the less useful and accurate are the displayed
prices. For example, if two options exchanges displayed quotations to
sell an option for $10.00 per contract, one exchange offer could be
accessible for a total price of $10.00 per contract plus a $0.50 per
contract access fee, while the second exchange might not charge any
such access fee. What appeared in the consolidated data stream to be
identical quotations in terms of all-in costs would in fact not be
identical. Access fees tend to be highest when exchanges use them to
fund substantial rebates to liquidity providers, rather than merely to
compensate for agency services.\77\ These concerns were also expressed
by several commenters who argue that for quotations to be fair and
useful, there must be some limit to the extent to which the displayed
price can vary from the ``all-in'' price \78\ of a quotation.\79\ If
exchanges were allowed to charge exorbitant fees and pass most of them
through as rebates, the published quotations of such exchanges would
not reliably indicate the all-in price actually available.
---------------------------------------------------------------------------
\76\ See NMS Adopting Release, supra note 4, at 37545.
\77\ Id. at 37544.
\78\ The term ``all-in'' price is intended to capture the total
costs for executing a trade. See infra note 90 and accompanying
text.
\79\ See BOX Letter, supra note 37, at 5-6 (stating its
agreement with Citadel and the Commission that ``[f]or quotations to
be fair and useful, there must be some limit on the extent to which
the true prices for those who access quotations can vary from the
displayed price''); Citadel Petition, supra note 34, at 3-5 (arguing
that markets employing a Make or Take fee model are charging
excessive fees to obtain access to their quotations and, as a
result, are causing distortions in such quotations, which should
otherwise reliably represent the true prices actually available to
investors.); NYSE Euronext Letter, supra note 37, at 3 (stating
generally that they are in favor of rules that ensure the
reasonableness of fees, similar to rate caps that were enacted in
the equities markets in Regulation NMS); TD Ameritrade Letter, supra
note 37, at 1-2; and Wolverine Letter, supra note 37, at 6
(asserting that unrestricted fees that members would have to pay
would result in executions at prices materially different from the
displayed quotations and, as a consequence, run contrary to the
purposes behind the trade-through rules and the principles of best
execution).
---------------------------------------------------------------------------
Section 11A(c)(1)(B) of the Exchange Act authorizes the Commission
to adopt rules assuring the fairness and usefulness of quotation
information. For quotations to be fair and useful, there must be some
limit on the extent to which the all-in price for those who access
quotations can vary from the displayed price. An access fee limit also
creates more transparency in the cost of accessing quoted prices.
Currently, there are so many different fees across options exchanges,
across different categories of options participants, and across
different product types, that it is not easy to estimate the total cost
of executing against a quotation for a particular transaction. An
access fee cap would provide clearer information on the maximum cost
for accessing quoted prices. Consequently, the proposed fee limitation
would further the statutory purposes of the Exchange Act by precluding
the distortional effects of access fees.
The Commission preliminarily believes that to fully support the
integrity of the price protection requirement in the Trade-Through
Rules and to achieve the goals that an exchange's displayed quotations
be fair and useful and reliably represent the all-in prices that are
actually available to investors, the proposed fee limitation should
apply to any fee, no matter what it is called,\80\ charged to any
person \81\ for the execution of an incoming order against an options
exchange's best bid and offer. As discussed above, the Commission
believes that the benefits of intermarket price protection and more
efficient linkages could be compromised if options exchanges charge
substantial fees for accessing their best bids and offers. The proposed
fee limitation is designed to preclude individual exchanges from having
fee structures that take improper advantage of the required protection
against trade-throughs and undermine the overall benefits of the new
private routing regime. It also would preclude an options exchange from
charging excessively high fees selectively to competitors. In this
regard, the Commission preliminarily believes that limiting the
proposed fee cap to apply to only one type of fee charged (for
instance, only to ``Take'' fees), or limiting the proposed fee cap to
fees charged only to certain persons (for example, only to non-members)
by an options exchange for execution against
[[Page 20745]]
the exchange's best bid and offer would not fully achieve these
objectives because it would not cover all fees that could be charged
for access to the exchange's best quotation.
---------------------------------------------------------------------------
\80\ See NYSE Euronext Letter, supra note 37, at 3 (stating that
access fees should be addressed not as one model versus the other,
but as a fee to access the market independent of the market
structure that marketplace employs).
\81\ See Wolverine Letter, supra note 37, at 6 (asserting that,
while a proposed fee cap would reduce Take fees charged to non-
members forced to access ``outlier'' markets at the NBBO due to
trade-through obligations, members would still be forced to pay
unrestricted fees) and GETCO Letter, supra note 37, at 3 (stating
that if the Commission does decide to place caps on access fees
charged by exchanges using the ``Make or Take'' fee model, it should
also cap all-in access fees for traditional exchanges, regardless of
the type of market participant accessing the exchange's quotation).
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The Commission has received comments that the Make or Take fee
structure exerts competitive pressure on the ``traditional'' fee
structure where market makers pay brokers for order flow, and that
imposing a cap on Take fees would limit the ability of exchanges that
employ a Make or Take model to compete effectively with other exchanges
that employ a Broker Payment model, to the detriment of investors.\82\
The Commission supports the development of competing market models, as
long as they are consistent with the requirements of the Exchange Act.
An exchange could not, however, engage in conduct that is otherwise
inconsistent with the requirements of the Exchange Act,\83\ even if
doing so would help that exchange to compete. As discussed above, the
Commission preliminarily believes that the benefits of intermarket
price protection and more efficient linkages could be compromised if
options exchanges charge substantial fees for accessing their best bids
and offers, and that a fee limitation is necessary to support the
integrity of the price protection requirement under the Trade-Through
Rules, but it requests comment on this issue.\84\ The Commission also
believes that for quotations to be fair and useful, there must be some
limit on the extent to which the all-in price for those who access
quotations can vary from the displayed price.\85\ The Commission
preliminarily believes that adopting an access fee limit of $0.30 per
contract for option exchanges, regardless of their particular market
structure, would not compromise the competitive viability of exchanges
employing a Make or Take fee structure because it preliminarily
believes that the proposed level of fee cap would provide those
exchanges with sufficient flexibility to structure their fees and
rebates to support their market model.\86\ Although the Commission
preliminarily believes that the proposed fee limit would continue to
allow for competition among the options exchanges, it requests comment
on this issue and comment on other ways to achieve the Commission's
objectives.\87\
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\82\ See BOX Letter, supra note 37, at 2-3; IB Letter, supra
note 37, at 2-3; and GETCO Letter, supra note 37, at 3.
\83\ See 15 U.S.C. 78f(b) and 15 U.S.C. 78s(g).
\84\ See supra note 69 and accompanying text.
\85\ See supra note 76 and accompanying text. See also NMS
Adopting Release, supra note 4, at 37545.
\86\ See infra Section VIII.A.2 (discussing the impacts of the
proposed amendments to Rules 610(a) and (c) on competition). See
also infra notes 89 and 172 and accompanying text (noting that the
experience of the markets trading NMS stocks in recent years
suggests that a fee cap of $0.30 per 100 shares did not prevent
markets using a Make or Take fee model from competing effectively in
a market where some participants engage in payment for order flow).
\87\ See infra Sections V (Request for Comment) and VIII.A.2
(discussing the impacts of the proposed amendments to Rules 610(a)
and (c) on competition).
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The Commission preliminarily believes that a limitation on access
fees of $0.30 per contract (equal to $0.003 per share) would be a fair
and appropriate solution. In the Commission's preliminary view,
limiting access fees to $0.30 per contract would promote intermarket
access, standardization of quotations, and the Commission's goals for
an effective and efficient linkage between and among the options
exchanges. The proposed fee limitation would place all options
exchanges on a level playing field in terms of the fees they can charge
for the execution of incoming options orders against their best bid and
offer. Some exchanges might choose to charge lower fees, thereby
increasing their ranking in the preferences of order routers; others
might charge the full $0.30 per-contract fee and rebate a substantial
portion to liquidity providers. The Commission preliminarily believes
that competition would ultimately determine which strategy is most
successful.
The Commission recognizes, however, that even though it is not
proposing to prohibit an exchange from employing any particular market
model, the proposed fee limitation may impact different market models
in different ways. An exchange with a Make or Take fee model that
currently charges a Take fee in excess of the proposed fee cap would
take in less revenue per contract from a reduced Take fee, while an
exchange with a Broker Payment fee model that charges a transaction fee
in excess of the proposed fee cap would take in less revenue per
contract from a reduced transaction fee. These reduced fees for
accessing an exchange's best bid or offer, standing alone, might have
an impact on the manner in which broker-dealers and other market
participants, including the exchanges, route order flow. The exchange
with the Make or Take fee model, however, might choose to recoup some
of that revenue by reducing its Make rebate, which may have an impact
on the quoting behavior of market participants that provide liquidity
on that exchange. An exchange with a Broker Payment model might choose
to recoup some of the revenue by amending other fees charged to its
members, which might impact the order routing or other behavior of
those members (and the members' customers), depending upon the type of
fee change. Accordingly, although the Commission preliminarily believes
that the proposed fee limit would allow for vigorous competition among
the options exchanges, it requests comment on the impact of the
proposed fee limit on the different exchanges' and market participants'
behavior.\88\
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\88\ See infra Sections V (Request for Comment) and VIII.A.2
(discussing the impacts of the proposed amendments to Rules 610(a)
and (c) on competition).
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The Commission is proposing to set a flat fee cap of $0.30 per
contract (the equivalent of $0.003 per share). The Commission is not
proposing to establish a cap for low-priced options based on a
percentage of the options' price, similar to the existing fee cap of
0.3 percent of the quotation price per share for NMS stocks. The
Commission's proposal is based on its preliminary view that the $0.30
per-contract level is consistent with the maximum fee limit for NMS
stocks under Rule 610(c). The experience of the markets trading NMS
stocks in recent years suggests that a fee cap of $0.30 per 100 shares
did not prevent markets using a Make or Take fee model from competing
effectively in a market where some participants engage in payment for
order flow.\89\ In addition, this access fee cap level would help
ensure that the ``all-in'' fee \90\ would be below the $1 minimum
quoting increment \91\ so that the quotations displayed in the NBBO
indicate the best prices. For example, having a $0.30 cap \92\ would
help ensure that an offer of $2 is not inferior to an offer of $2.01
once access and other per-contract fees were added to the price. Stated
another way, the Commission preliminarily believes that setting the
proposed fee cap at $0.30 per contract would allow options exchanges
flexibility to generate revenues from access fees while still providing
the exchange the ability to continue to charge other fees, such as
``licensing'' fees charged by exchanges for executions in certain index
[[Page 20746]]
options \93\ or routing fees,\94\ without exceeding the $1 minimum
increment.
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\89\ See infra note 172 and accompanying text.
\90\ The ``all in'' fee for transactions in options contracts
may include multiple charges such as ``Take'' fees or transaction
fees, routing fees, and licensing fees. See supra note 78.
\91\ Since every options quotation represents a cost equal to
100 times its price, a penny increment--the smallest possible
increment for certain options--equals $1.00 in option cost.
\92\ A $0.30 per-contract access fee is equal to a fee of $0.003
per underlying share.
\93\ These ``licensing'' fees generally do not exceed $0.22 per
contract. See, e.g., CBOE Fee Schedule (available at http://www.cboe.com/publish/feeschedule/CBOEFeeSchedule.pdf) (current as of
February 2, 2010); and NYSE Arca Fee Schedule (available at http://www.nyse.com/pdfs/NYSE_Arca_Options_Fee_Schedule1-08-2010.pdf)
(current as of January 8, 2010).
\94\ Fees charged by options exchanges for routing orders to
execute on other exchanges range from $0.00 to $0.95 per contract.
See NYSE Arca Fee Schedule (available at http://www.nyse.com/pdfs/NYSE_Arca_Options_Fee_Schedule1-08-2010.pdf) (current as of
January 8, 2010); and CBOE Fee Schedule (available at http://www.cboe.com/publish/feeschedule/CBOEFeeSchedule.pdf) (current as of
March 16, 2010) (CBOE charges a $0.50 per contract fee for routing
non-customer orders in addition to the customary CBOE execution
charge, which for electronic orders for broker-dealers is $0.45 per
contract).
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The Commission preliminarily believes that a flat $0.30 per-
contract fee cap for all options would strike the appropriate balance
between imposing a cap to carry out the objectives discussed above and
providing options exchanges flexibility to compete with one
another.\95\ The Commission preliminarily does not believe that a cap
for low-priced options should be based on a percentage of the quotation
price as it is for low-priced NMS stocks. The Commission preliminarily
believes that differences in the markets for NMS stocks and listed
options merit this distinction. First, if an NMS stock is trading at a
very low price, the access fee can become significant as a percentage
of the total economic exposure. This result is less likely for listed
options, given the leverage implicit in an option contract. For
example, if an NMS stock is trading for $0.01 per share, so that an
order for 100 shares represents $1 worth of stock, an access fee of
$0.30 for 100 shares would represent thirty percent of the total
economic position. On the other hand, an NMS stock priced at $10 per
share could have a short-term out-of-the-money option priced at $0.01.
If the Delta \96\ of this option is 0.05, then one option contract
would cost $1 but would give the investor exposure equivalent to an
investment of $50 of the stock. An access fee of $0.30 per contract for
the option would represent only six-tenths of one percent of the
economic position.\97\
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\95\ See infra Section VII.B.2 (discussing generally the costs
and benefits of the proposal) and notes 179-183 and accompanying
text (discussing the costs with respect to options exchanges that
would need to amend their rules to comply with the access fee
limitation as a result of proposed Rule 610(c)(2)).
\96\ Delta is measured as the change in the option price divided
by the change in the underlying asset price. See Guy Cohen, Options
Made Easy (2d ed., Upper Saddle River: FT Prentice Hall 2005).
\97\ A $0.30 per-contract access fee would be a more significant
percentage of the option price as the option price decreases. For
example, for an option priced at $0.01, a $0.30 per-contract access
fee would be 30% of the total option price ($0.01 x 100 = $1 per
contract, and $0.30 is 30% of $1). The Commission preliminarily
believes, however, that a flat cap of $0.30, rather than a cap based
on a percentage of the option price for low-priced options, strikes
the appropriate balance, for the reasons discussed in this section.
The Commission, however, requests comment on the issue. See infra
Section V (Request for Comment).
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Second, the restriction on subpenny quoting in NMS stocks does not
apply to stocks priced below $1.\98\ Thus, for certain low-priced NMS
stocks, an access fee of $0.003 per share could be larger than the
minimum quoting increment, making it possible for an order to be routed
to an exchange quoting a better price but ending up with an inferior
all-in price after the access fee. For NMS stocks, the percentage fee
cap for stocks priced below $1 helps to mitigate this concern. Because
listed options are not currently quoted in subpenny increments, these
concerns are not present, and, therefore, the Commission preliminarily
believes it is unnecessary to establish a cap based on a percentage of
the options' price for low-priced options. Further, if the Commission
were to propose a percent-based fee cap for low-priced options, the
access fee cap would be, in some cases, less than the amount of the
``licensing'' fees charged by exchanges for executions in certain index
options.
---------------------------------------------------------------------------
\98\ See Rule 612 of Regulation NMS, 17 CFR 242.612.
---------------------------------------------------------------------------
Finally, a significant percentage of options contract trading
volume is in lower priced options.\99\ Thus, the Commission estimates
that imposing a flat $0.30 per-contract cap, and not including a
percentage fee cap for low-priced options similar to the existing fee
cap of 0.3 percent of the quotation price per share for NMS stocks,
would result in less potential revenue loss for options exchanges from
the impact of the proposed fee cap and, therefore, possibly reduce the
need for the options exchange to impose other fees on market
participants.\100\
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\99\ Approximately 76% of the contract volume is in options
priced at $3 or below, and approximately 48% of the contract volume
is in options priced at $1 or below (these estimates are based on
December 2009 volume data from OptionsMetrics).
\100\ See infra notes 179-187 and accompanying text for a
discussion of the estimated costs of the proposed fee cap on options
exchanges.
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B. Terms of Proposed Rule 610(c)(2)
Under proposed Rule 610(c)(2), a national securities exchange would
be prohibited from imposing, or permitting to be imposed, any fee or
fees that exceeds or accumulates to more than $0.30 per contract for
the execution of an order against any quotation in an option series
that is the best bid or best offer of such national securities
exchange. Thus, when triggered, the proposed fee limitation would apply
to any order execution at the displayed price of the best bid or offer
and would therefore encompass executions of orders against both the
displayed size and any reserve size at the price of those quotations.
Further, proposed Rule 610(c)(2) would apply to any fee based on the
execution of an incoming order against an exchange's best bid or offer,
such as a ``Take'' fee or other ``transaction'' fee charged by the
exchange when an incoming order executes against the best bid or offer
of the exchange. The Commission preliminarily believes that the
proposed fee limitation would apply to other types of fees charged by
an exchange to a member who represents an incoming order that trades
against the exchange's best bid or offer.
For example, the proposed fee limitation would apply to fees
charged by various exchanges for the execution of orders in certain
options on indexes (called ``licensing'' or ``index surcharge'' or
``royalty'' fees) when the fee is charged for the execution of an
incoming order against the exchange's best bid or offer. The proposed
fee limitation also would apply to options regulatory fees (``ORF''),
such as those that have been adopted by several exchanges.\101\ For
those exchanges that have adopted an ORF, the fee is charged on a per-
contract basis and is assessed on each member for all options
transactions executed or cleared by the member in a customer account.
Because an ORF would constitute a fee for accessing the best bid or
offer of an options exchange when such fee is assessed on a customer
order that trades with the exchange's best bid or offer, the ORF would
be covered by the proposed amendments to Rule 610(c)(2). So long as the
fees are based on the execution of orders against the best bid or offer
of the exchange, the proposed restriction in Rule 610(c)(2) would
apply. Conversely, fees not triggered by the execution of orders
against such quotations (e.g., certain periodic fees
[[Page 20747]]
such as monthly or annual fees) would not be included.
---------------------------------------------------------------------------
\101\ See Securities Exchange Act Release Nos. 58817 (October
20, 2008), 73 FR 63744 (October 27, 2008) (SR-CBOE-2008-105); 61133
(December 9, 2009), 74 FR 66715 (December 16, 2009) (SR-Phlx-2009-
100); 61154 (December 11, 2009), 74 FR 67278 (December 18, 2009)
(SR-ISE-2009-105); and 61388 (January 20, 2010), 75 FR 4431 (January
27, 2010) (SR-BX-2010-001).
---------------------------------------------------------------------------
The proposed fee limitation in Rule 610(c)(2) would apply to any
fee charged directly by an options exchange. It would also limit any
fee charged by a market participant, such as a market maker, that
displays a quotation through the exchange's facilities. The Commission,
however, understands that market participants in the options markets
currently do not charge access fees. Nothing in proposed Rule 610(c)(2)
would preclude an options exchange from taking action to limit fees
beyond what would be required under the proposed rule, and such
exchange would have flexibility in establishing its respective fee
schedule to comply with proposed Rule 610(c)(2).
The proposed access fee limitation in Rule 610(c)(2) would apply
only to quotations that market participants are required to access to
comply with the Trade-Through Rules; it would not apply to depth of
book quotations. By proposing to apply the fee cap only to the best bid
or offer of an options exchange, the limitation is designed to have
minimal impact on competition and individual business models while
furthering the objectives of the Exchange Act by preserving the
fairness and usefulness of quotations, and by providing support for the
proper functioning of the Trade-Through Rules, as discussed above.\102\
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\102\ See NMS Adopting Release, supra note 4, at 37546.
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Further, as the Commission noted in adopting current Rule 610(c), a
market participant could intend to interact only with a quotation
subject to the access fee cap in Rule 610(c) but in fact execute
against a quotation not subject to the cap. For example, at the time a
market participant routes an order to an exchange, it could be
attempting to execute only against that exchange's best bid or offer,
which would be subject to the proposed fee cap. By the time the order
arrives at the exchange, the incoming order may, if a better priced bid
or offer has been displayed at the exchange for a size smaller than the
size of the incoming order, execute partially against the new best bid
or offer and partially against the quotation that was previously the
exchange's best bid or offer. If the exchange were to charge a fee
higher than the access fee cap to the market participant accessing the
previous best bid or offer, the Commission believes that such charge
could undermine the purpose of the proposed access fee cap as discussed
above. Therefore, the Commission believes that to meet the requirements
of proposed Rule 610(c)(2), an exchange would have to ensure that it
never charges a fee in excess of the cap when a market participant
tries to access only the exchange's best bid or offer.\103\
---------------------------------------------------------------------------
\103\ This is consistent with the approach in Regulation NMS.
Id.
---------------------------------------------------------------------------
The operation of this limitation would be based on quotations as
they are displayed in the consolidated quotation stream. Thus, the
exchange would be responsible for ensuring that any time lag between
prices in its internal systems and its quotations in the consolidated
quotation system do not cause fees to be charged that would violate the
limitation of proposed Rule 610(c)(2). Compliance with this requirement
obviously would not be a problem for exchanges that do not charge any
fees in excess of the proposed cap. If an exchange were to choose to
charge higher fees for access to its depth of book quotations,\104\ the
Commission does not believe the exchange could comply with the proposed
Rule 610(c)(2) unless it provided a functionality that enables market
participants to assure that they will never inadvertently be charged a
fee in excess of the cap. For example, such an exchange could provide a
``top-of-book only'' or ``limited-fee only'' order functionality. By
using this functionality, market participants themselves could assure
that they were never required to pay a fee in excess of the levels
proposed in Rule 610(c)(2).\105\ Further, for similar reasons, the
proposed access fee limitation in Rule 610(c)(2) would apply to an
exchange's non-displayed quotations in listed options that are priced
better than the exchange's displayed best bid or offer. Specifically,
if an exchange had an order type that allowed an order to be entered at
a price that is not displayed but is available for execution, the
proposed fee limitation would apply to an execution against that non-
displayed price.\106\
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\104\ The Commission is not aware of any options exchange that
charges differential fees for accessing depth-of-book quotations,
but requests comment on the issue.
\105\ The existing access fee cap for NMS stocks operates in
this same manner. See id.
\106\ See, e.g., Chapter VI, Sections 6 and 7 of the NOM Rules
governing NOM's price improving order type. ``Price Improving
Orders'' are defined under the NOM Rules as orders to buy or sell an
option at a specified price at an increment smaller than the minimum
price variation in the security. Price Improving Orders may be
entered in increments as small as one cent, and those Price
Improving Orders that are available for display must be displayed at
the minimum price variation in that security and rounded up for sell
orders and rounded down for buy orders. See Chapter VI, Section
1(e)(6) of the NOM Rules (defining Price Improving Orders).
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C. Payment for Order Flow
In a traditional payment for order flow arrangement in the options
market, a specialist or market maker offers cash and non-cash
inducements to brokers that direct orders to the specialist or market
maker. The specialist or market maker is willing to pay firms for this
order flow because it knows that it will be able to trade with a
portion of such orders due to specialist and market maker guarantees
provided by the exchanges.\107\ In addition, some exchanges have
adopted fees on market makers to facilitate their members' payment for
order flow.\108\ Typically, the exchange charges each market maker a
fee for trading with customer orders on the exchange. The exchange then
pools the proceeds from such fees and allows specialists and/or market
makers to use such funds to pay for order flow.\109\
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\107\ See, e.g., CBOE Rule 8.13 and ISE Rule 713.
\108\ See, e.g., Securities Exchange Release Nos. 48053 (June
17, 2003), 68 FR 37880 (June 25, 2003) (SR-Amex-2003-50)
(immediately effective proposed rule change to reinstate marketing
fee to raise revenue for Amex specialists to compete for order
flow); 47948 (May 30, 2003), 68 FR 33749 (June 5, 2003) (SR-CBOE-
2003-19) (immediately effective proposed rule change to reinstate
marketing fee to compete for order flow); 47090 (December 23, 2002),
68 FR 141 (January 2, 2003) (SR-Phlx-2002-75) (immediately effective
proposed rule change to reinstate marketing fee to compete for order
flow); 43833 (January 10, 2001), 66 FR 7822 (January 25, 2001) (SR-
ISE-00-10) (order approving ISE's payment for order flow program);
43290 (September 13, 2000), 65 FR 57213 (September 21, 2000) (SR-
PCX-00-30) (immediately effective proposed rule change to adopt a
payment for order flow fee); 43228 (August 30, 2000), 65 FR 54330
(September 7, 2000) (SR-Amex-00-38) (immediately effective proposed
rule change to establish new marketing fee to raise revenue for Amex
specialists to compete for order flow); 43177 (August 18, 2000), 65
FR 51889 (August 25, 2000) (SR-Phlx-00-77) (immediately effective
proposed rule change to adopt a payment for order flow fee); and
43112 (August 3, 2000), 65 FR 49040 (August 10, 2000) (SR-CBOE-00-
28) (immediately effective proposed rule change to establish new
CBOE marketing fee to raise revenue that could be used by CBOE
market makers to pay for order flow).
\109\ For example, NYSE Amex LLC (``NYSE Amex'') imposes a $0.65
per-contract marketing fee for non-Minimum Quoting Increment Pilot
Program classes and a $0.25 per-contract marketing fee for Minimum
Quoting Increment Pilot Program classes where a market maker trades
against an incoming electronic customer order. See NYSE Amex Options
Fee Schedule (available at http://www.nyse.com/pdfs/NYSE_Amex_Options_Fee_Schedule01.04.10.pdf) (current as of January 4,
2010).
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Several commenters argue that, if the Commission were to limit
``Take'' fees, it also should limit fees associated with payment for
order flow arrangements.\110\
[[Page 20748]]
This view is premised on the notion set forth by several commenters
that payment for order flow fees affect quoted prices, and thus
executions received by investors, because market makers that have to
pay for order flow will reflect that cost in their quoted prices.\111\
In this regard, one commenter petitioned the Commission to impose a cap
at the same level on private payment for order flow arrangements
between market makers and agency brokerage firms as any cap it imposes
on ``Take'' fees.\112\ Another commenter argues that fees relating to
``accessing'' quotations can be characterized broadly to include
exchange fees used to fund members' payment for order flow.\113\
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\110\ See BOX Letter, supra note 37, at 2 (stating its belief
that, if the Commission does decide to enact fee caps, a cap on Take
fees is acceptable only to the extent that other options exchanges
are willing to accept a comparable limit on payments and fees
associated with exchange payment for order flow) and Wolverine
Letter, supra note 37, at 7 (stating that any cap on make-take fees
should be made in conjunction with a commensurate cap on payment for
order flow fees).
\111\ See BOX Letter, supra note 37, at 4; GETCO Letter, supra
note 37, at 3-6; IB Letter, supra note 37, at 2-3 and 6-7; and
Wolverine Letter, supra note 37, at 4.
\112\ See IB Letter, supra note 37, at 1 and 6.
\113\ See Wolverine Letter, supra note 37, at 3.
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The Commission agrees with commenters that payment for order flow
fees, among other costs, affect quoted prices. However, the Commission
is not proposing to specifically limit payment for order flow, nor the
exchange fees imposed on market makers to fund members' payment for
order flow. Instead, the Commission is proposing to limit the amount of
fees that an exchange can impose, or permit to be imposed, for access
to the best bid and offer of the exchange. The Commission preliminarily
does not believe that an exchange payment for order flow fee on members
is an access fee, i.e., it is not a fee imposed for executing against
an exchange's quotation. The basis for the proposal, as discussed at
length above,\114\ is to (1) provide for fair and efficient access to
displayed quotations to support the integrity of the price protection
requirement contained in the Trade-Through Rules, and (2) further the
objective that quotations be fair and useful by limiting the extent to
which the all-in price can vary from the displayed price.
---------------------------------------------------------------------------
\114\ See supra notes 58-100 and accompanying text.
---------------------------------------------------------------------------
The Commission preliminarily believes these objectives can be
achieved without limiting payment for order flow fees. Payment for
order flow is when a market maker offers cash and non-cash inducements
to brokers that direct orders to the market maker. In addition, some
exchanges impose a fee on market makers to facilitate their members'
payment for order flow.\115\ Payment for order flow fees are not fees
imposed by an exchange on incoming orders for executing against an
exchange's quotations. Therefore, the Commission preliminarily does not
believe that payment for order flow fees directly impact the ability of
a market participant to access an exchange's best priced displayed
quotations, and therefore does not believe that limiting payment for
order flow fees is necessary to achieve the objectives of the proposed
fee cap--to provide for fair and efficient access to displayed
quotations and that displayed quotations be fair and useful.
---------------------------------------------------------------------------
\115\ See supra notes 107-109 and accompanying text.
---------------------------------------------------------------------------
However, if a market maker is charged a payment for order flow fee
by an exchange when the market maker is accessing the best bid or offer
of the exchange, then the proposed fee limitation would apply to that
fee because it would be a fee for the execution of an order against the
best bid or offer of the exchange. A payment for order flow fee would
be a fee for accessing an exchange's best bid or offer if, for example,
a market maker's quote traded against a resting customer limit order
that is the best bid or offer of the exchange. Similarly, a payment for
order flow fee would be a fee for accessing an exchange's best bid or
offer if a market maker sent an order in a class to which it is not
appointed as a market maker, and that order trades against a customer
order resting on the exchange's limit order book that is the best bid
or offer of the exchange. In sum, if the rules of the exchange provide
that the market maker would pay a payment for order flow fee for
executing against the resting customer order that is the best bid or
best offer of the exchange, that fee would be covered by proposed Rule
610(c)(2).
On several occasions, the Commission has recognized that the
anticipation of payment for order flow raises a potential conflict of
interest for brokers handling customer orders, and that reliance by
market centers on the strategy of simply paying money to attract orders
may present a threat to aggressive quotation competition.\116\ At the
same time, the Commission has stated that payment for order flow is not
necessarily inconsistent with a broker's duty of best execution, so
long as appropriate measures are taken to ensure that that duty is, in
fact, met.\117\ The Commission further acknowledges the broader concern
that payment for order flow may result in less aggressive competition
for order flow on the basis of price,\118\ such as through displaying
aggressively-priced quotations or offering opportunities for price
improvement. However, the Commission has stated that singling out and
banning only one particular form of such payment--for example, payment
made possible by an exchange through the collection of fees from its
market makers--would scarcely address the issue on the larger
scale.\119\
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\116\ See, e.g., Options Concept Release, supra note 21, at
6128-6130.
\117\ See Securities Exchange Act Release No. 43833 (January 10,
2001), 66 FR 7822 (January 25, 2001) (SR-ISE-00-10) (citing to
Securities Exchange Act Release No. 42450 (February 23, 2000), 65 FR
10577 (February 28, 2000)); see also Options Concept Release, supra
note 21, at 6128-6129.
\118\ See Securities Exchange Act Release No. 43833, supra note
117, at 7825.
\119\ Id.
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Further, as noted above, the Commission believes that market forces
and the dynamics of competition should determine exchange fees, to the
extent practicable.\120\ Payment for order flow fees generally are
charged by exchanges to market makers when they execute against a
customer order. If a market maker does not want to pay this fee, the
market maker is free to give up its appointment as a market maker on
that exchange and become a liquidity provider on another exchange with
a more attractive fee structure. For instance, an exchange may set a
fee to collect funds for members' payment for order flow at such a
level that a market maker may determine it can no longer effectively
compete for order flow based on its quotations, which must incorporate
the costs of all fees.\121\ The market maker may then make the
determination to become a liquidity provider on another exchange where
it is able to compete more effectively based on the price of its
quotations. Similarly, an exchange may determine to charge any market
participant a fee for providing liquidity on its exchange.\122\ If a
market participant did not want to pay this fee, it could choose to
send its non-marketable limit order to another options exchange with a
more
[[Page 20749]]
attractive fee structure. The Commission therefore preliminarily
believes that competition among the various options exchanges, and the
different market models, will act to restrict payment for order flow
and other fees for providing liquidity.\123\
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\120\ See supra note 58.
\121\ This would assume that the amount of the payment for order
flow fee impacts the price at which the market maker is willing to
quote.
\122\ See, e.g., BOX Fee Schedule, Section 7 (available at
http://www.bostonoptions.com/pdf/BOX_Fee_Schedule.pdf) (current as
of January 2010) (imposing a $0.55 fee for adding liquidity in Non-
Penny Classes, a $0.15 fee for adding liquidity in Penny Pilot
Classes except SPY, QQQQ, and IWM, and a $0.05 fee for adding
liquidity in SPY, QQQQ, and IWM). In its filing imposing this fee,
BOX stated that the changes proposed are in response to various
``Payment for Order Flow'' programs currently in operation on other
options exchanges. See Securities Exchange Act Release No. 60934
(November 4, 2009), 74 FR 58358 (November 12, 2009).
\123\ The Commission also notes that the exchanges generally
lowered the level of payment for order flow fees charged to their
market makers in classes included in the Minimum Quoting Increment
Pilot Program. See Securities Exchange Act Release Nos. Securities
Exchange Act Release Nos. 55328 (February 21, 2007), 72 FR 9050
(February 28, 2007) (SR-Amex-2007-16); 55265 (February 9, 2007), 72
FR 7697 (February 16, 2007) (SR-CBOE-2007-11); 55271 (February 12,
2007), 72 FR 7699 (February 16, 2007) (SR-ISE-2007-08); 55223
(February 1, 2007) 72 FR 6306 (February 9, 2007) (SR- NYSEArca-2007-
07); and 55290 (February 13, 2007), 72 FR 8051 (February 22, 2007)
(SR-Phlx-2007-05). As noted above, currently approximately 69.5
percent of trading volume is in classes included in the Minimum
Quoting Increment Pilot Program where trading interest can be
represented in the quote in one-cent increments, and by August 2,
2010, 363 classes will be included in the Minimum Quoting Increment
Pilot Program, representing approximately 88.1 percent of trading
volume during February 2010. See supra note 29 and accompanying
text.
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IV. Technical Amendments to Rule 610
The Commission is proposing to amend Rule 610(c) to reflect that
Nasdaq is now registered as a national securities exchange under
Section 6(a) of the Exchange Act.\124\ The current rule's prohibition
on a trading center imposing, or permitting to be imposed, fees in
excess of the stated limits applies to the execution of an order
against a protected quotation of the trading center or against any
other quotation of the trading center that is ``the best bid or best
offer of a national securities exchange, the best bid or best offer of
The Nasdaq Stock Market, Inc., or the best bid or best offer of a
national securities association other than the best bid or best offer
of The Nasdaq Stock Market, Inc. in an NMS stock.'' Given Nasdaq's
current status as a registered national securities exchange, there no
longer is a need to separately reference Nasdaq's best bid or best
offer. Therefore, the Commission is proposing to amend Rule 610(c)(1)
to simplify the relevant language to refer only to any other quotation
of the trading center that is the best bid or best offer of a national
securities exchange or the best bid or best offer of a national
securities association in an NMS stock.\125\
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\124\ See 15 U.S.C. 78f(a); see also Securities Exchange Act
Release No. 53128 (January 13, 2006), 71 FR 3550 (January 23, 2006).
\125\ See proposed Rule 610(c)(1).
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The Commission also is proposing to make technical changes to Rule
610(c) to reflect the addition of proposed Rule 610(c)(2) that would
apply to listed options.
V. Request for Comments
The Commission requests the views of commenters on all aspects of
this proposal, including whether the proposal is consistent with the
provisions of the Exchange Act. In particular, the Commission requests
comment on the following:
1. Rule 610(a) currently prohibits the imposition of unfairly
discriminatory terms that prevent or inhibit any person from obtaining
efficient access through a member of the exchange to quotations in NMS
stocks. The Commission requests comment on its proposal to extend this
prohibition to include access to quotations of listed options. The
Commission further requests comment on whether the Commission's rules
also should prohibit unfairly discriminatory terms for other services
offered by exchanges. For example, should the Commission rule be
expanded to cover exchange transaction fees generally, even those
transaction fees that are not based on accessing the exchange's
quotations?
2. Rule 610(a) as proposed to be amended would prohibit an exchange
from charging higher ``Take'' fees in certain options classes to non-
directed customers than to directed customers. Do commenters agree that
such a fee differential should be prohibited by the proposed amendments
to Rule 610(a)?
3. As discussed above, the Commission is proposing to limit fees
charged for accessing the best bid and offer in a listed option, as
proposed in Rule 610(c)(2), to support fair and efficient access to an
exchange's quotations, and to provide greater transparency in the
quoted price. To what extent is this action necessary to achieve these
objectives? To what extent do competitive forces in the options markets
currently act, or will continue to act, to keep fees such as access
fees at a level that does not impede fair and efficient access to an
exchange's quotations, or impede the transparency of the quoted price?
Does the existence of flash functionality at some of the exchanges that
trade listed options have an impact on the level at which options
exchanges set access fees? \126\
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\126\ The Commission separately has proposed changes to Rule 602
of Regulation NMS that, if adopted, would affect flash functionality
in the listed options markets, raising concerns about access to
order information and incentives for market participants to display
their trading interest publicly. See Flash Order Proposal, supra
note 19, and supra notes 72-75 and accompanying text.
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4. The markets for trading NMS stocks are similar in certain ways
to the markets for trading listed options, and in other ways are
different. The Commission requests comment on whether, and how, those
similarities and differences should impact a decision to apply an
access fee cap, as proposed, in the options markets. For example, both
NMS stocks and listed options can be traded on multiple markets, and
broker-dealers that trade NMS stock and listed options have a duty of
best execution with respect to each. Likewise, both markets have
prohibitions on trading-through. How, if at all, do these similarities
support, or not, the proposed fee cap for accessing an options
exchange's best bid and offer?
Unlike NMS stocks, listed options are only traded on exchanges, and
not in the over-the-counter (``OTC'') market. It can be argued that one
result of the lack of OTC trading in listed options is that more
``good'' order flow (that is, order flow relatively uninformed about
future prices) reaches the options exchanges than the exchanges that
trade NMS stocks.\127\ It can be further argued that because quotations
must be available for execution to all incoming order flow--both
informed and uninformed--the quotations must be wider than the prices
that could be offered exclusively to uninformed order flow.\128\ In
addition, it is argued that investors in listed options depend upon the
liquidity supplied by professional liquidity providers to a greater
extent than in the market for NMS stocks.\129\ Further, some market
participants state that liquidity providers price options differently
than liquidity providers price NMS stocks, pursuant to pricing models
or algorithms rather than based on the inherent value of the
issuer.\130\ Do commenters agree with these statements? How, if at all,
do these differences mitigate for or against applying the proposed fee
cap for accessing an options exchange's best bid and offer? Do these
differences impact the incentives for liquidity providers to quote
aggressively, or the competitiveness of an options exchange's fees,
differently than a
[[Page 20750]]
market participant or market trading NMS stocks?
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\127\ See ISE Flash Letter, supra note 73, Appendix B at 2.
\128\ See Letter from Larry Harris, Professor of Finance and
Business Economics, USC Marshall School of Business, dated December
4, 2009 (``Harris Letter'') at 4. Prices that could be offered
exclusively to uninformed order flow could incorporate tighter
spreads because the market maker does not need to protect itself
from adverse selection by informed traders by building in a wider
spread.
\129\ See CBOE Flash Letter, supra note 73, at 1 and 10; ISE
Flash Letter, supra note 73, at 9. See also Letter from Peter
Bottini, EVP Trading and Customer Service, and Hillary Victor,
Associate General Counsel, optionsXpress, Inc. (``optionsXpress'')
dated November 25, 2009 (``optionsXpress Letter'') at 3.
\130\ See ISE Flash Letter, supra note 73, at 7-8.
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5. The Commission requests comment on the different sources of
revenue available to options exchanges, and any differences between
those sources available to options exchanges and exchanges that trade
NMS stocks. For example, exchanges that have in place rules for listing
NMS stocks have the ability to charge listing fees to issuers for
listing on their market. Does the amount of revenue received from
market data differ significantly for options exchanges versus exchanges
that trade NMS stocks? How, if at all, should any differences in
sources of revenue for options exchanges versus exchanges that trade
NMS stocks mitigate for or against applying the proposed fee cap for
accessing an options exchange's best bid and offer? How, if at all,
should any differences in sources of revenue for options exchanges
versus exchanges that trade NMS stocks impact a determination as to the
level of an access fee cap to be imposed?
6. If commenters do not believe that the Commission should limit
fees charged for accessing the best bid and offer in a listed option,
as proposed in Rule 610(c)(2), do commenters believe that the
Commission should take any action with respect to fees charged, or
permitted to be charged, by an options exchange for executing against
the exchange's best bid or offer in a listed option? If not, please
explain why not. If so, please explain why, and what alternative action
the Commission should take. For example, would commenters support
action by the Commission to cap all fees for executing an options
order, including access fees, routing fees, and any other per contract
fee, at the minimum pricing variation for the option? Would this
alternative achieve the objectives of the proposed fee cap, as
discussed above in Section III? Would this alternative approach provide
more or less flexibility to exchanges than an access fee cap as
proposed in Rule 610(c)(2)?
7. The Commission is proposing a flat fee cap of $0.30 per
contract. As discussed above, the Commission's proposal is based on
several factors. First, the $0.30 per-contract level is consistent with
the maximum fee limit for NMS stocks under Rule 610(c). Experience of
the markets trading NMS stocks in recent years suggests that a fee cap
of $0.30 per 100 shares did not prevent markets using a Make or Take
fee model from competing effectively in a market where some
participants engage in payment for order flow.\131\ In addition, this
access fee cap level would help ensure that the ``all-in'' fee would be
below the $1 minimum quoting increment. Further, the Commission
preliminarily believes that setting the proposed fee cap at $0.30 per
contract would allow options exchanges flexibility to generate revenues
from access fees while still providing the exchange the ability to
continue to charge other fees, such as ``licensing'' fees charged by
exchanges for executions in certain index options or routing fees,
without exceeding the $1 minimum increment. The Commission requests
comment on this analysis. If commenters agree with this approach and
threshold, please explain why; if commenters do not agree, please
explain why not.
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\131\ See infra note 172 and accompanying text.
---------------------------------------------------------------------------
8. If a commenter believes that a fee cap for accessing the best
priced quotation in listed options is necessary and appropriate, the
Commission requests comment as to what level such a cap should be set,
and what considerations should be part of any analysis as to the level
of a fee cap. One commenter states that while 30% of the minimum
quoting increment is a reasonable access fee cap for the equity
markets, which allow internalization as a defense to excessive access
fees, a lower cap is needed in the options markets because
internalization is not permitted, and suggests a cap of $0.20 per
contract.\132\ Other commenters argue that any fee cap should not be
lower than $0.99 per contract (for options quoted in one-cent
increments) because a customer is still better off paying a $0.99 per
contract fee to execute against a price that is better by $1.00 per
contract.\133\ The Commission requests commenters' views on each of
these alternative levels, and the reasoning supporting them.
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\132\ See Citadel Petition, supra note 34, at 10.
\133\ See BOX Letter, supra note 37, at 5 (stating in part that
if the Commission were to impose a fee limit that it should be $0.01
per contract less than the standard trading increment of the class);
and IB Letter, supra note 37, at 4-5 (opposing any fee cap less than
$0.99 per contract for a contract quoted in pennies).
---------------------------------------------------------------------------
9. One of the bases for the proposed access fee cap is to support
the requirements of the Trade-Through Rules and the duty of best
execution. It could be argued that because investors will not be worse
off accessing a price that is better by $1 per contract as long as the
fee to access that quotation is not more than $0.99 per contract,\134\
any fee cap should not be lower than $0.99 per contract to support the
operation of the Trade-Through Rules. Do commenters agree with this
view? Should the fact that there is no guarantee that an order sent to
another exchange to access a better displayed price will actually
obtain an execution on the away exchange impact the level at which an
access fee is capped? Should there be the possibility for more than a
one-cent per contract advantage (which is what would result with an
access fee of $0.99 per contract) to require market participants to
attempt to access quotations in listed options on other exchanges that
are better priced by $1 per contract? What percent of the time do
orders sent to another exchange to access a better displayed price
actually obtain an execution on the away exchange? What other
considerations, if any, should the Commission take into account when
determining the level of any fee cap imposed for access to an
exchange's best bid or offer in a listed option?
---------------------------------------------------------------------------
\134\ Id.
---------------------------------------------------------------------------
10. As discussed above in Question 4, the markets for trading NMS
stocks are similar in certain ways to the markets for trading listed
options, and in other ways are different. The Commission requests
comment on whether, and how, those similarities and differences should
impact the level at which an access fee cap should be set for access to
an options exchange's best bid and offer. Should any limit on access
fees that can be imposed by the options exchanges be different than or
the same as the existing limit on access fees in the market for NMS
stocks? If different, please explain whether an access fee limit in the
options exchanges should be higher or lower than the limit for NMS
stocks, and the basis for the difference. If the same, please explain
why, with specificity.
11. As discussed above, the Commission has proposed a flat access
fee cap of $0.30 per contract, and not proposed a percentage fee limit
for low-priced options, similar to the 0.3 percent of the price per
share limit for NMS stocks priced under $1.\135\ The Commission
preliminarily believes that differences in the markets for NMS stocks
and listed options merit this distinction. Specifically, when an NMS
stock is trading at a very low price, the access fee can become
significant as a percentage of the total economic exposure. This result
is less likely for listed options, given the leverage implicit in an
option contract.\136\ In
[[Page 20751]]
addition, the restriction on subpenny quoting in NMS stocks does not
apply to stocks priced below $1. Thus, for certain low-priced NMS
stocks, an access fee of $0.003 per share could be larger than the
minimum quoting increment, making it possible for an order to be routed
to an exchange quoting a better price but ending up with an inferior
all-in price after the access fee. For NMS stocks, the percentage fee
cap for stocks priced below $1 helps to mitigate this concern. Because
listed options are not currently quoted in subpenny increments, these
concerns are not present, and, therefore, the Commission preliminarily
believes it is unnecessary to establish a cap based on a percentage of
the options' price for low-priced options.\137\
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\135\ See supra notes 96-100 and accompanying text.
\136\ For example, if an NMS stock is trading for $0.01 per
share, so that an order for 100 shares represents $1 worth of stock,
an access fee of $0.30 for 100 shares would represent thirty percent
of the total economic position. On the other hand, an NMS stock
priced at $10 per share could have a short-term out-of-the-money
option priced at $0.01. If the Delta of this option is 0.05, then
one option contract would cost $1 but would give the investor
exposure equivalent to an investment of $50 of the stock. An access
fee of $0.30 per contract for the option would only represent six-
tenths of one percent of the economic position.
\137\ Commission staff also estimates that imposing a flat $0.30
per-contract cap, and not including a percentage fee cap for low-
priced options similar to the existing fee cap of 0.3 percent of the
quotation price per share for NMS stocks, would result in less
potential revenue loss for options exchanges from the impact of the
proposed fee cap. See supra notes 99-100 and accompanying text.
---------------------------------------------------------------------------
The Commission requests comment on its analysis, and whether the
proposed access fee limit should have a percentage fee limit for low-
priced options, similar to the 0.3 percent of the price per share for
NMS stocks priced under $1, and on its reasoning for not proposing such
a percent-based limit for low-priced options. If commenters believe
that the proposed access fee cap should be different for low-priced
options, please explain with specificity why, and what the breakpoint
should be, and why.
12. As discussed above, one of the bases for the proposed fee cap
is to ensure the fairness and usefulness of displayed quotations, and
to enhance transparency of displayed quotations. The Commission
requests comment as to whether there is a need to promote transparency
of the displayed quotations in listed options beyond the status quo.
13. If commenters believe that, to support the transparency of
displayed quotations, there should be a limit as to how far away from
the quoted price the amount that the investor would pay (for a buy) or
receive (for a sell) inclusive of access fees should be, what factors
should go into determining the allowable deviation? For example, should
access fees be limited to one increment less than the minimum quoting
increment (for example, $0.99 per contract in an option that has a one-
cent minimum increment), such that the investor would always get a
better execution price net of access fees when the quoted price is
better by one minimum quoting increment? Should the access fees be
limited to less than half of the minimum quoting increment (for
example, $0.50 per contract in an option that has a one-cent minimum
increment), so that the net price to investors inclusive of access fees
is closer to the displayed price than the next worse price? Should the
allowable access fees be some other amount?
14. The Commission requests comment on whether there are
alternative methods other than the proposed access fee cap to achieve
the objective of greater transparency in displayed quotations of listed
options.
15. The Commission requests comment on the types of fees that
should be covered by an access fee limitation. For example, the
Commission believes that proposed Rule 610(c)(2) would apply to fees
charged for the execution of options on certain indexes (so-called
``licensing fees,'' ``royalty fees,'' or ``index surcharge fees'').
Please state why it would be appropriate or not appropriate to apply
the proposed fee limitation to licensing fees. What would be the impact
on these fees if the proposed fee limitation did apply? What would be
the impact on market quality if the proposed fee limitation applied to
licensing fees?
16. The Commission requests comment on its preliminary view of the
applicability of the proposal to an ORF.\138\ The Commission also
requests comment on any potential impact of the proposal on an ORF.
---------------------------------------------------------------------------
\138\ See supra note 101 and accompanying text.
---------------------------------------------------------------------------
17. As proposed, the fee limitation in Rule 610(c)(2) would apply
to fees charged for executions of orders in all listed options,
including those that are listed and traded only on one options exchange
(``non-multiply listed options''). Do commenters agree that Rule
610(c)(2) should apply to trades in such options? Or should any fee cap
apply only to multiply listed options? Or should the proposed fee
limitation in Rule 610(c)(2) be set at a different level for non-
multiply listed options? If commenters believe the proposed fee
limitation in Rule 610(c)(2) should not apply to fees charged for
executions of orders in non-multiply listed options, please explain why
and how ``non-multiply listed options'' should be defined.
18. As proposed, the fee limitation in Rule 610(c)(2) would apply
to fees charged for the execution of orders in FLEX options and to the
execution of complex orders.\139\ Do commenters agree that Rule
610(c)(2) should apply to such transactions? If so, should the proposed
fee limitation in Rule 610(c)(2) be set at a different level for orders
in FLEX options or complex orders? If commenters believe the proposed
fee limitation in Rule 610(c)(2) should not apply to fees charged for
the execution of orders in FLEX options or to the execution of complex
orders, please explain why.
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\139\ A complex order is any order involving the simultaneous
purchase and/or sale of two or more different options series in the
same underlying security, for the same account, in a ratio that is
equal to or greater than one-to-three (.333) and less than or equal
to three-to-one (3.00) and for the purpose of executing a particular
investment strategy. See, e.g., ISE Rule 722. See also, e.g., CBOE
Rule 6.53C (describing a complex order generally as any of the
following orders for the same account, including Spread Orders,
Straddle Orders, Strangle Orders, Combination Orders, Ratio Orders,
Butterfly Spread Orders, Box/Roll Spread Orders, Collar Orders and
Risk Reversals, Conversions and Reversals, and Stock-Option Orders).
A flex option is a customized option contract that provides the
ability to customize key contract terms, like exercise price,
exercise styles and expiration dates. See, e.g., http://www.cboe.com/Institutional/FLEX.aspx; CBOE Rule 24A.4.
---------------------------------------------------------------------------
19. What would be the impact of the proposed access fee cap in Rule
610(c) on market quality? In particular, the Commission encourages
submission of any data that quantifies potential benefits or harm.
20. Do commenters believe that limiting access fees as proposed in
Rule 610(c) would have a disparate effect on one type of market model
over another? If not, why not? If so, how? And if so, how would the
disparate effect impact the ability of exchanges with different market
models to compete with each other? The Commission further requests
comment as to whether, and if so how, the quoting, order routing or
other behavior of market participants would change if the proposed fee
cap were in place.
For example, as discussed above, several commenters express concern
with limiting Take fees without also limiting payment for order flow
fees.\140\ They argue that market participants on Make or Take exchange
quote more aggressively because of the Make rebates paid for providing
liquidity that are funded by the Take fees charged to liquidity
takers.\141\ Exchanges with Make or Take fee models thus provide direct
competition based on aggressive quoting to exchanges with payment for
[[Page 20752]]
order flow models because a market maker on a payment for order flow
exchange must match the better prices on the Make or Take exchange, or
route to the Make or Take exchange and pay the Take fee.\142\ Limiting
the amount of a Take fee a Make or Take exchange can charge will
directly impact the amount of a Make rebate the exchange can pay to
liquidity providers, which in turn will impact a liquidity provider's
incentive to quote aggressively, thus limiting the Make or Take
exchange's ability to compete with an exchange with a payment for order
flow fee model through aggressive quoting.\143\
---------------------------------------------------------------------------
\140\ See supra note 82 and accompanying text.
\141\ See BOX Letter, supra note 37, at 3; IB Letter, supra note
37, at 2-3. See also ISE Flash Letter, supra note 73, at 8; and
Harris Letter, supra note 128, at 2.
\142\ See IB Letter, supra note 37, at 3; GETCO Letter, supra
note 37, at 6-7.
\143\ See id.
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The Commission requests comment on whether commenters agree with
this view. Do commenters agree that liquidity providers on Make or Take
exchanges quote more aggressively than liquidity providers on other
exchanges once their displayed quotations are adjusted to account for
the effect of access fees on the ``all in'' cost to the investor? If
so, are liquidity rebates the only reason that liquidity providers on
Make or Take exchanges are willing to quote aggressively? For example,
does the absence of order flow captured by payments to routing brokers
or the absence of guaranteed allocations for liquidity providers also
contribute significantly to aggressive quoting by liquidity providers
on Make or Take exchanges?
Do commenters believe that limiting Take fees, which are a type of
access fee, would result in reduced Make rebates paid for supplying
liquidity? If so, what are commenters views as to how much Make rebates
would be reduced in reaction to reduced Take fees? What would be the
impact, if any, of reduced Make rebates on market participant
incentives to aggressively quote on exchanges employing a Make or Take
fee model? To the extent that commenters believe that limiting Take
fees would result in reduced Make rebates paid for supplying liquidity,
and that reduced Make rebates would adversely impact market participant
incentives to aggressively quote on exchanges employing a Make or Take
fee model, what impact would this have on those market participants
supplying liquidity? Or on investors taking liquidity?
The Commission requests comment as to the impact of the proposed
fee cap on the ability of an exchange with a Make or Take fee model to
compete with exchanges with a payment for order flow model. For
example, to the extent that commenters believe that limiting Take fees
would result in reduced Make rebates paid for supplying liquidity, and
that reduced Make rebates would adversely impact market participant
incentives to aggressively quote on exchanges employing a Make or Take
fee model, do commenters believe that a $0.30 per contract access fee
cap, as proposed, would allow Make or Take exchanges to pay a large
enough rebate to continue to incent market participants to quote
aggressively, and thus compete more aggressively on price with payment
for order flow exchanges?
21. The Commission notes the distinction between ``aggressive''
quotations and ``matching'' quotations. Aggressive quotations are price
leaders and help narrow the NBBO spread (by either improving the NBBO
or remaining alone at the NBBO). Matching quotations follow prices set
elsewhere and add size to the NBBO, but do not narrow the spread. To
what extent do liquidity providers on payment for order flow options
exchanges quote aggressively rather than merely matching the NBBO set
elsewhere? Would applying an access fee cap, as proposed, lead market
participants on one or both types of options exchange to quote more
aggressively and thereby narrow NBBO spreads for listed options? Or
would applying an access fee cap lead market participants on one or
both types of options exchanges to quote less aggressively? Does your
answer change depending on whether the Commission adopts a ban on flash
functionality in the options markets? \144\
---------------------------------------------------------------------------
\144\ See supra notes 19 and 72-75.
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22. As noted above, the Commission recognizes that even though it
is not proposing to prohibit an exchange from employing any particular
market model, the proposed fee limitation may impact different market
models in different ways. An exchange with either a Make or Take fee
model that charges a Take fee in excess of the proposed fee cap, or an
exchange with a Broker Payment fee model that charges a transaction fee
in excess of the proposed fee cap, would take in less revenue per
contract from a reduced Take or transaction fee, as applicable. These
reduced fees for accessing an exchange's best bid or offer, standing
alone, might have an impact on the manner in which broker-dealers and
other market participants, including the exchanges, route order flow.
The exchange with the Make or Take fee model, however, might choose to
recoup some of that revenue by reducing its Make rebate, which may have
an impact on the quoting behavior of market participants that provide
liquidity on that exchange. An exchange with a Broker Payment model
might choose to recoup some of the revenue by amending other fees
charged to its members, which might impact the order routing or other
behavior of those members (and the members' customers), depending upon
the type of fee change.
The Commission requests comment on how the exchanges might
reallocate their sources of revenue, if at all, in response to the
access fee limit in proposed Rule 610(c)(2). What changes, if any, to
fees other than access fees imposed by, or rebates paid by, exchanges
would the options exchanges make in response to being required to limit
access fees as proposed? Would any potential disparate impact from
these fees changes across exchange fee models lead to harm to
investors? If so, please explain. How, if at all, would potential
changes to fees other than access fees imposed on members by exchanges
impact the behavior of particular categories of market participants,
such as retail investors, market makers, and broker-dealers?
23. As noted above in Question 20, several commenters express
concern with limiting Take fees without also limiting payment for order
flow fees. They argue that limiting the amount of a Take fee a Make or
Take exchange can charge will directly impact the amount of a Make
rebate the exchange can pay to liquidity providers, which in turn will
impact a liquidity provider's incentive to quote aggressively, thus
limiting the Make or Take exchange's ability to compete with an
exchange with a payment for order flow fee model through aggressive
quoting.\145\ The Commission notes that the percent of overall contract
volume for trading in equity options for the month of February 2010 for
each exchange that primarily employs a Make or Take fee model ranges
from 2.83 percent to 15.36 percent, and that the aggregate market share
of these exchanges was 18.19 percent.\146\ Exchanges that primarily
employ a Broker Payment Model had an aggregate market share of overall
contract volume for trading in equity options for the month of February
2010 of 81.81 percent.\147\ The Commission requests comment as to the
reasons why
[[Page 20753]]
commenters believe that the Make or Take fee model has not resulted in
greater market share to date, given the arguments that the payment of a
Make rebate acts as a direct incentive to quote more aggressively. For
instance, how does the existence of flash functionality on other
exchanges impact the ability of Make or Take exchanges to compete on
quoted price?
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\145\ See supra notes 140-143 and accompanying text.
\146\ See http://www.theocc.com/webapps/exchange-volume. The
data is for the month of February 2010 and includes market share for
NOM and NYSE Arca, but does not include BATS, which began trading
options on February 26, 2010.
\147\ This data also is from OCC's public website and is for the
month of February 2010. See http://www.theocc.com/webapps/exchange-volume. This data covers percent volume for BOX, CBOE, ISE, NYSE
Amex, and Nasdaq OMX Phlx.
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24. The proposed fee limitation in Rule 610(c)(2) would prohibit an
exchange from imposing, or permitting to be imposed by market
participants, any fee or fees that exceed or accumulate to more than
the proposed limit. The Commission requests comment on whether it is
necessary in the listed options exchanges to include a prohibition, as
proposed, on an exchange permitting other market participants to impose
fees that exceed the limit. The Commission does not believe that market
makers in listed options currently impose fees for the execution of
orders against their quotes on an exchange, but requests comment on
whether they do. Do commenters think it likely that market makers would
in the future impose such fees?
25. In this proposal, the Commission has not proposed to limit
payment for order flow fees. As stated above, an exchange payment for
order flow fee on members is not an access fee, i.e., it is not a fee
imposed for executing against an exchange's quotation.\148\ The
Commission therefore preliminarily does not believe that it is
necessary or appropriate to prohibit payment for order flow fees to
achieve its stated objectives in proposing to cap access fees--to
ensure fair and efficient access to displayed quotation and to enhance
transparency of quoted prices. Several commenters, however, argue that
payment for order flow fees also impact the displayed (quoted) prices,
and thus the prices received by investors when their orders are
executed, because market makers that are charged the payment for order
flow fees adjust the price at which they are willing to quote to take
into account the amount of the payment for order flow fee. In this
regard, one commenter petitioned the Commission to impose a cap at the
same level on private payment for order flow arrangements between
market makers and agency brokerage firms as any cap it imposes on
``Take'' fees.\149\ Another commenter argues that fees relating to
``accessing'' quotations can be characterized broadly to include
exchange fees used to fund members' payment for order flow.\150\ Do
commenters agree with these statements? If so, do commenters believe
that the Commission should limit payment for order flow fees as an
``access fee''? The Commission further requests comment on its
preliminary determination not to limit payment for order flow fees, and
the basis for that determination.
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\148\ As noted above, if a market maker is charged a payment for
order flow fee by an exchange when the market maker is accessing the
best bid or offer of the exchange, then the proposed fee limitation
would apply to that fee because it would be a fee for the execution
of an order against the best bid or offer of the exchange. See supra
Section III.C (discussing payment for order flow fees).
\149\ See IB Letter, supra note 37, at 1 and 6-7.
\150\ See Wolverine Letter, supra note 37, at 3.
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26. As noted above, the Commission has previously acknowledged a
concern that payment for order flow may result in less aggressive
competition for order flow on the basis of price.\151\ To what extent,
if any, does payment for order flow in the options markets affect a
specialist's or market maker's incentive to quote aggressively? To what
extent does payment for order flow in the options markets affect the
opportunities for non-professional customers to receive better prices
than displayed quotations in price improvement mechanisms? If
commenters believe that payment for order flow diminishes a
specialist's or market maker's incentives to quote aggressively, what
impact, if any, do commenters believe that diminished incentive has on
the quality of displayed quotations? How, if at all, would limiting or
prohibiting payment for order flow fees impact broker-dealer's ability
to obtain best execution of their customer's orders?
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\151\ See supra note 116 and accompanying text.
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27. On several occasions, the Commission has recognized that the
anticipation of payment for order flow raises a potential conflict of
interest for brokers handling customer orders, and that reliance by
market centers on the strategy of simply paying money to attract orders
may present a threat to aggressive quotation competition. At the same
time, the Commission has stated that payment for order flow is not
necessarily inconsistent with a broker's duty of best execution, so
long as appropriate measures are taken to ensure that that duty is, in
fact, met.\152\ Do customer orders that are routed pursuant to payment
for order flow arrangements receive less favorable executions than
orders not subject to such arrangements?
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\152\ See supra notes 117-118 and accompanying text.
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28. Some may argue that specialists and market makers in the
options markets establish the prices and sizes of their quotations
based in part on the assumption that their counterparties will be other
professional traders, which involves more risk than trading with
uninformed non-professional traders.\153\ The desirability of trading
with uninformed order flow due to the lower risks of trading with non-
professionals should translate into those orders, on average, receiving
better prices than the specialist's or market maker's quotation.\154\
Under this argument, specialists and market makers may use payment for
order flow as an indirect way to provide a better execution to
uninformed or non-professional orders. Do commenters agree with these
statements?
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\153\ See Options Concept Release, supra note 21, at 6131. See
also supra note 128.
\154\ See Options Concept Release, supra note 21, at 6131.
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29. The Commission requests comment on what, if any, impact the
proposed limitation on access fees may have on payment for order flow
fees.
30. The Commission requests comment on whether the proposed access
fee limitation should apply only to the best bid and offer of each
exchange, or whether the limitation also should apply to ``depth of
book'' quotations.
31. Some commenters stated that Make or Take pricing leads to more
locked and crossed markets,\155\ while others dispute that.\156\ The
Commission requests commenters' views on this issue. Please provide
data that support your view. Could any increase in the incidence of
locked and crossed markets be caused or influenced by other factors,
such as more efficient and faster quotation updating and trading, or
the expansion of the Minimum Quoting Increment Pilot Program? How, if
at all, does the recently implemented Plan \157\ help alleviate the
frequency of locked and crossed markets? How, if at all, would the
proposed limitation on access fees affect the frequency of locked/
crossed markets?
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\155\ See Citadel Petition, supra note 34, at 5, and Ameritrade
Letter, supra note 37, at 11.
\156\ See BOX Letter, supra note 37, at 3; IB Letter, supra note
37, at 6; NYSE Euronext Letter, supra note 37, at 3-4; and GETCO
Letter, supra note 37, at 7.
\157\ See supra note 13.
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32. The Commission requests comment on what the impact of imposing
a limit on access fees, if any, would be if the Commission were to ban
flash orders on the options exchanges.\158\
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\158\ See Flash Order Proposal, supra note 19.
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33. The Commission requests comment on whether there are
alternative methods other than the
[[Page 20754]]
proposed access fee cap to achieve the objectives of the proposal--to
provide for fair and efficient access to displayed quotations and that
displayed quotations be fair and useful. For example, could additional
disclosure of fees charged by exchanges for executions against their
quotations in listed options achieve the same objectives by fostering
further competition based on transparent pricing? Why or why not?
Please address current disclosure by options exchanges of their fees,
and why that disclosure is or is not sufficient.
34. The Commission requests comment on whether, if it were to adopt
the proposed access provisions, a phase-in period would be necessary to
allow exchanges and market participants to adapt. If so, what aspect or
aspects of the proposal should be phased in, and what would be the
appropriate phase-in period?
The Commission recognizes that intermarket access presents a number
of complex problems to which there may be many possible solutions.
Interested persons may wish to propose and discuss specific,
alternative approaches to intermarket access that the Commission should
consider for future rulemaking as it seeks to accomplish its goal of
strengthening the NMS. Commenters may also wish to discuss whether
there are any reasons why the Commission should consider an alternative
approach.
VI. Paperwork Reduction Act
The Commission preliminarily does not believe that the proposed
amendments to Rule 610(a) pertaining to quotations in a listed option
and the proposed access fee limitation in Rule 610(c)(2) contain any
``collection of information'' requirements as defined by the Paperwork
Reduction Act of 1995, as amended (``PRA'').\159\ The proposed
amendment to Rule 610(a) would expand the rule to apply to listed
options, in addition to NMS stocks, and would prohibit each national
securities exchange or national securities association from imposing
unfairly discriminatory terms that prevent or inhibit any person from
obtaining efficient access through a member of such exchange or
association to any quotation in an NMS security. The Commission
preliminarily does not believe that the prohibition in Rule 610(a), as
proposed to be amended to apply to listed options, would require any
new or additional collection of information, as such term is defined in
the PRA, but the Commission encourages comments on this point.\160\
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\159\ 44 U.S.C. 3501, et seq.
\160\ See 44 U.S.C. 3502(3) (defining the term ``collection of
information'' to include, generally, the obtaining, causing to be
obtained, soliciting, or requiring the disclosure to third parties
or the public, of facts or opinions by or for an agency, regardless
of form or format, calling for either: (i) Answers to identical
questions posed to, or identical reporting or recordkeeping
requirements imposed on, ten or more persons, other than agencies,
instrumentalities, or employees of the United States; or (ii)
answers to questions posed to agencies, instrumentalities, or
employees of the United States which are to be used for general
statistical purposes).
The Commission notes that the requirement under the proposed
amendment to Rule 610(a) is substantially similar to current Rule
610(a) of Regulation NMS. See 17 CFR 242.610(a). The Commission
requested comment on its preliminary view that Rule 610 of
Regulation NMS pertaining to access to quotations in an NMS stock
did not contain a collection of information requirement as defined
by the PRA. See Securities Exchange Act Release No. 49325 (February
26, 2004), 69 FR 11126, 11160-61 (March 9, 2004) (File No. S7-10-04)
(``Regulation NMS Proposing Release''). The Commission notes that no
comments were received that addressed whether Rule 610(a) contained
a collection of information requirement. See Securities Exchange Act
Release No. 50870 (December 16, 2004), 69 FR 77424, 77476 (December
27, 2004) (``Regulation NMS Reproposing Release'').
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In addition, proposed Rule 610(c)(2) would prohibit a national
securities exchange from imposing, or permitting to be imposed, any fee
or fees for the execution of an order against a quotation that is the
best bid or best offer of such exchange in a listed option that exceeds
or accumulates to more than $0.30 per contract. The Commission
preliminarily does not believe that the access fee limitation in
proposed Rule 610(c)(2) would require any new or additional collection
of information, as such term is defined in the PRA, but the Commission
encourages comments on this determination.\161\
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\161\ The Commission notes that proposed Rule 610(c)(2) is
substantially similar to current Rule 610(c) of Regulation NMS. See
17 CFR 242.610(c). The Commission requested comment on its
preliminary view that Rule 610 of Regulation NMS pertaining to a
limit on access fees did not contain a collection of information
requirement as defined by the PRA. See Regulation NMS Proposing
Release, supra, note 160, at 11160-61. The Commission notes that no
comments were received that addressed whether the proposed access
fee cap under Rule 610 contained a collection of information
requirement. See Regulation NMS Reproposing Release, supra note 160,
at 37577 n.746.
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With respect to a proposed rule change that an options exchange may
be required to file pursuant to Section 19(b) of the Exchange Act and
Rule 19b-4 thereunder to bring its rules into compliance with the
proposed amendment to Rule 610(a) and proposed Rule 610(c)(2),\162\ the
burden of filing such proposed rule change would already be included
under the collection of information requirements contained in Rule 19b-
4 under the Exchange Act.\163\
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\162\ See infra Section VII.B.
\163\ See Securities Exchange Act Release No. 50486 (October 5,
2004), 69 FR 60287, 60293 (October 8, 2004) (File No. S7-18-04)
(describing the collection of information requirements contained in
Rule 19b-4 under the Exchange Act). The Commission has submitted
revisions to the current collection of information titled ``Rule
19b-4 Filings with Respect to Proposed Rule Changes by Self-
Regulatory Organizations'' (OMB Control No. 3235-0045). According to
the last submitted revision concluded as of August 5, 2008, the
current collection of information estimates 1279 total annual Rule
19b-4 filings with respect to proposed rule changes by self-
regulatory organizations.
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VII. Consideration of Costs and Benefits
The proposed amendments to Rule 610 of Regulation NMS would set
forth new standards governing means of access to quotations in listed
options. The proposal would prohibit an exchange or association from
imposing unfairly discriminatory terms that would prevent or inhibit
the efficient access of any person through members of such exchange or
association to any quotations in an NMS security, including in a listed
option, displayed through its SRO trading facility. In addition, to
ensure the fairness and accuracy of displayed quotations in listed
options, proposed Rule 610(c)(2) would establish an outer limit on the
cost of accessing the best bid and best offer on each exchange in a
listed option of no more than $ 0.30 per contract.
A. Benefits
The Commission preliminarily believes that the proposed amendments
to Rule 610 of Regulation NMS would help achieve the statutory
objectives for the NMS by promoting fair and efficient access to each
individual options exchange.
1. Proposed Amendment to Rule 610(a)
The access provision of Rule 610(a), as proposed to be amended, is
designed to strengthen the ability of all market participants that are
not members of an options exchange to fairly and efficiently route
orders to execute against quotations in a listed option, wherever such
quotations are displayed in the NMS, by prohibiting an exchange from
unfairly discriminating against any person trying to obtain access
through a member to that exchange's quotations. The Commission believes
that fair and efficient access to the best displayed quotations of all
options exchanges is critical to achieving best execution of those
orders.\164\ The Commission further believes that such fair and
efficient
[[Page 20755]]
access to the best displayed quotations of options exchanges is
critical for compliance with the requirements of the Trade-Through
Rules. Specifically, options exchanges themselves must have the ability
to route orders for execution against the displayed quotations of other
exchanges. Indeed, the concept of intermarket protection against trade-
throughs is premised on the ability of options exchanges to route
orders to execute against, rather than trade through, the quotations
displayed by other options exchanges.\165\
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\164\ See NMS Adopting Release, supra note 4, at 37539.
\165\ Id.
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Thus, the Commission preliminarily believes that the proposed
amendment to Rule 610(a) would benefit investors by furthering the
ability of brokers on behalf of their customers, and of investors
themselves, to achieve best execution of their orders in listed
options. The Commission also preliminarily believes that the proposed
amendment to Rule 610(a) would contribute to the smooth functioning of
intermarket trading by furthering the ability of options exchanges and
market participants, including investors, to fairly and efficiently
access the quotations of each options exchange.\166\
---------------------------------------------------------------------------
\166\ Id.
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The proposed amendment to Rule 610(a) also would help to clarify
when certain terms set by exchanges would be unfairly discriminatory,
including terms in current exchange rules. For example, an exchange
could not charge a higher per-contract access fee to a non-member
broker-dealer that is a registered options market maker on another
exchange (``non-member market maker'') acting for its own account than
to a member or non-member broker-dealer acting for its own account that
is not registered as a market maker on another exchange. In this
example, neither broker-dealer is registered as, nor is acting in the
capacity of, a market maker on that exchange.\167\ The Commission
preliminarily believes that this type of distinction could unfairly
discriminate against non-member market makers and prevent or inhibit
such non-member market makers from obtaining efficient access through a
member to that exchange's quotations. Similarly, an exchange could not
charge differing fees for accessing liquidity depending on whether the
order is for the account of a ``directed'' customer. The Commission
preliminarily believes that such a distinction could unfairly
discriminate against non-directed customer orders and prevent or
inhibit such non-directed customers from obtaining efficient access
through a member to that exchange's quotations in certain listed
options.
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\167\ See supra note 51 and accompanying text.
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2. Proposed Rule 610(c)(2)
The access fee limitation of proposed Rule 610(c)(2) would address
the potential distortions caused by substantial, disparate fees. When a
displayed quotation does not include the amount of any fee or fees
charged by an exchange for executing against that quotation, persons
attempting to execute, or evaluating whether they want to execute,
against that quotation cannot readily ascertain the all-in price for
the trade. The larger the non-displayed fee(s), the less accurate would
be the displayed price in comparison to the all-in price for the trade.
This concern is compounded when competing exchanges charge differing
fees, as the same displayed price on two or more options exchanges may
reflect different all-in prices for executing against the same-priced
quotations. Thus, the wider the disparity in the level of access fees
among different options exchanges, the less useful and accurate may be
the quoted prices at reflecting the full cost of a trade. As a result
of the proposed fee limitation, quoted prices should in many cases more
closely reflect the total cost of a trade because the highest potential
access fee that could be charged by any exchange would be $0.30 per
contract. This limitation, in turn, should enhance the usefulness of
quotation information.
An access fee limit also makes the cost of accessing quoted prices
more transparent. Currently, the eight options exchanges charge so many
different fees to different categories of options participants and for
different products that it is not easy to estimate that total cost of a
particular transaction. An access fee cap would limit the scope of
differences and therefore would result in quoted prices providing
clearer information on the total cost for executing against quoted
prices. Consequently, the proposed fee limitation would further the
statutory purposes of the Exchange Act by reducing the tendency of
access fees to distort quoted prices. In addition, by applying equally
to all types of options exchanges, the proposed fee limitation would
promote NMS objectives and further the goals of Section 11A of the
Exchange Act relating to equal regulation of markets and broker-
dealers.\168\
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\168\ See Section 11A(c)(1)(F) of the Exchange Act, 15 U.S.C.
78k-1(c)(1)(F) (providing objective to assure equal regulation of
all markets for qualified securities and all exchange members,
brokers, and dealers effecting transactions in such securities).
---------------------------------------------------------------------------
The proposed fee limitation also would benefit the markets and
market participants by addressing options exchanges that otherwise
might charge high fees to market participants required to access their
quotations under the Trade-Through Rules. The requirements under the
Trade-Through Rules and the use of private linkages could provide an
exchange the opportunity to take advantage of intermarket price
protection by acting essentially as a toll booth between price levels.
Even though the exchange charging the highest fees likely would be the
last exchange to which orders would be routed, orders could not be
executed against the next-best price level until someone routed an
order to take out the displayed price at such high fee exchange. While
exchanges would have significant incentives to compete to be near the
top in order-routing priority, arguably there would be little incentive
to avoid being the least-preferred exchange if fees were not limited.
Such a business model could detract from the usefulness of quotation
information and impede market efficiency and competition.\169\
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\169\ See NMS Adopting Release, supra note 4, at 37584
(concluding that, with respect to NMS stocks, an outlier business
model would detract from the usefulness of quotation information and
impede market efficiency and competition and that a fee cap would
limit such a business model). See also supra notes 69-71 and
accompanying text.
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The Commission preliminarily believes that the proposed access fee
cap would limit the viability of this business model. Consequently,
another benefit of the proposal would be to place all options exchanges
on a level playing field with respect to the maximum amount of access
fees they can charge, and, ultimately, the rebates they can pay to
liquidity providers, by establishing a clear limit on the fees they can
charge. Some options exchanges might choose to charge lower fees,
thereby increasing their ranking in the preferences of order routers.
Others might charge $0.30 per contract and rebate a substantial
proportion to liquidity providers.\170\ The Commission preliminarily
believes that competition will determine which strategy is most
successful. Proposed Rule 610(c)(2) also would preclude an options
exchange from charging high fees selectively to competitors.
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\170\ The Commission notes that nothing in proposed Rule
610(c)(2) would preclude an options exchange from taking action to
limit fees beyond what is required by the proposed Rule, and such
options exchanges would have flexibility in establishing their fee
schedules to comply with proposed Rule 610(c)(2), consistent with
existing requirements of the Exchange Act and the rules and
regulations thereunder.
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The Commission also preliminarily believes that the proposed access
fee
[[Page 20756]]
limitation would further the purposes of Section 11A(c)(1)(B) of the
Exchange Act, which authorizes the Commission to adopt rules assuring
the fairness and usefulness of quotation information. As discussed
above, if options exchanges are allowed to charge high fees and pass
most of them through as rebates, the published quotations of such
exchanges may not reliably indicate the all-in price that is actually
available to investors. For quotations to be fair and useful, there
must be some limit on the extent to which the all-in price for those
who access quotations can vary from the displayed price. Consequently,
the Commission preliminarily believes that the proposed access fee
limitation would further the statutory purposes of the NMS by limiting
the distortive effects of high fees. Moreover, the Commission
preliminarily believes that the proposed fee limitation would further
the statutory purpose of enabling broker-dealers to route orders in a
manner consistent with the operation of the NMS.\171\ Under the Trade-
Through Rules, one exchange cannot trade through another exchange
displaying the best-priced quotations. The purposes of the Trade-
Through Rules would be thwarted if market participants were allowed to
charge high fees that distort quoted prices in a listed option.
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\171\ Section 11A(c)(1)(E) of the Exchange Act, 15 U.S.C. 78k-
1(c)(1)(E), authorizes the Commission to adopt rules assuring that
broker-dealers transmit orders for securities in a manner consistent
with the establishment and operation of a national market system.
---------------------------------------------------------------------------
In proposing amendments to Rule 610, the Commission seeks to help
ensure that transactions in listed options can be executed efficiently
at any market center for reasonable execution fees. By enabling fair
access and transparent pricing among the different market places within
a unified national market, the Commission preliminarily believes that
the proposal would foster efficiency, enhance competition, and
contribute to the best execution of orders in listed options.
Finally, the Commission notes that the current access fee
limitation in Rule 610(c) has applied to the trading of NMS stocks for
several years and believes that such limitation has not caused any
apparent harm to competition among markets or market participants
trading NMS stocks. For example, when recently requesting comment on
various aspects of equity market structure, the Commission noted how
trading volume for NMS stocks is spread out among the registered
exchanges, ECNs, dark pools, and broker-dealers that execute trades
internally.\172\ The Commission notes that, currently, the options
exchanges are competitive.\173\ As such, the Commission preliminarily
believes that an access fee limitation applied to the trading of listed
options would not harm competition among exchanges or market
participants trading listed options.
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\172\ See Securities Exchange Act Release No. 61358 (January 14,
2010), 75 FR 3594, 3598 (January 21, 2010) (S7-02-10).
\173\ See infra Section VIII.A.1 (discussing market share data
for January 2010 among the eight options exchanges).
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The Commission also preliminarily believes that the proposed access
provisions would help to assure investors that their orders are
executed at the best prices and are not subject to large, non-
transparent fees by limiting the difference between the all-in price of
an investor executing its order and the displayed quotation, regardless
of the exchange on which the execution takes place.
B. Costs
1. Proposed Amendment to Rule 610(a)
If the proposed amendment to Rule 610(a) were adopted, it could
impose costs associated with modifications to an options exchange's
rules to comply with such proposed Rule's specific anti-discriminatory
standard for access to an exchange's quotations through a member. The
Commission notes, however, that each exchange registered as a national
securities exchange is currently subject to similar restrictions in
Section 6 of the Exchange Act, including the requirements in Section
6(b)(5) that the rules of a national securities exchanges be designed,
among other things, not to permit unfair discrimination between
customers, issuers, brokers, or dealers.\174\ Accordingly, the
Commission preliminarily believes that it would be unlikely for the
options exchanges to need to amend their rules to comply with Rule
610(a), as proposed to be amended. To the extent that any amendments
are necessary, the Commission preliminarily expects such amendments
would be minimal. The Commission, therefore, preliminarily believes
that any costs incurred as a result of the requirement under the
proposed amendment to Rule 610(a) by an options exchange would not be
significant.
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\174\ Section 6(b)(5) of the Exchange Act also requires in part
that the rules of a national securities exchanges be designed to:
(1) Promote just and equitable principles of trade; (2) remove
impediments to and perfect the mechanism of a free and open market
and a national market system; and (3) protect investors and the
public interest. See 15 U.S.C. 78f(b)(5). See also supra note 47 and
accompanying text. No national securities association currently
trades listed options.
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More specifically, an options exchange that would need to amend its
rules to comply with the proposed amendment to Rule 610(a) so as not to
unfairly discriminate would be required to file a proposed rule change
on Form 19b-4 with the Commission.\175\ The Commission further notes
that the proposed rule change filing format is not new to the options
exchanges, as multiple filings are made annually by such
exchanges.\176\ The Commission estimates that an average rule change
requires approximately 34 hours for an exchange to complete at an
average hourly cost of $305.\177\ The Commission estimates that the
aggregate cost of one proposed rule change for each options exchange,
which assumes that every options exchange would have to amend its rules
to eliminate any unfairly discriminatory terms not consistent with the
proposed amendments to Rule 610(a), would total approximately $82,960
($305 times 34 times 8). Therefore, the Commission preliminarily
believes that the costs incurred by an options exchange to make such a
filing as a result of the proposed amendment to Rule 610(a) would not
be substantial.\178\
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\175\ See 15 U.S.C. 78s(b) (requiring each SRO to file with the
Commission, in accordance with such rules as the Commission may
prescribe, copies of any proposed rule or any proposed change in,
addition to, or deletion from the rules of such SRO, accompanied by
a concise general statement of the basis and purpose of such
proposed rule change). See also 17 CFR 240.19b-4(a) (generally
requiring that filings with respect to proposed rule changes by an
SRO be made on Form 19b-4, 17 CFR 249.819).
\176\ The Commission notes that, for its 2009 fiscal year
(October 1, 2008 to September 30, 2009), the seven options exchanges
(NYSE Amex, BOX, CBOE, ISE, NOM, NYSE Arca, and Nasdaq OMX Phlx)
filed approximately 444 proposed rule changes in the aggregate
pursuant to Section 19(b) and Rule 19b-4 thereunder.
\177\ The $305 per-hour figure for an attorney is from SIFMA's
Management & Professional Earnings in the Securities Industry 2008,
modified by Commission staff to account for an 1800-hour work-year
and multiplied by 5.35 to account for bonuses, firm size, employee
benefits, and overhead. See Securities Exchange Act Release No.
59748 (April 10, 2009), 74 FR 18042, 18093 (April 20, 2009) (S7-08-
09) (noting the Commission's modification to the $305 per hour
figure for an attorney).
\178\ The Commission also notes that each options exchange
should already have in place policies and procedures to ensure that
terms of access to its market are consistent with the federal
securities laws and the rules thereunder. See supra note 174 and
accompanying text. The Commission preliminarily believes that such
options exchange's existing policies and procedures should not
change as a result of the proposed amendments to Rule 610, and,
therefore, should not incur any new costs, including administrative
costs, in this regard.
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2. Proposed Rule 610(c)(2)
The Commission preliminarily does not believe that the fee
limitation of
[[Page 20757]]
proposed Rule 610(c)(2) would impose significant new costs on the
options exchanges or market participants. The Commission preliminarily
believes that the proposed fee limitation would be relatively easy to
administer given that it would impose a single accumulated access fee
limitation for all options. For options exchanges that currently charge
and collect fees and that would continue to do so, the costs of
imposing and collecting fees are already incurred. The fee limitation
would not require an options exchange that does not currently charge
fees to begin charging fees. Thus, the Commission preliminarily
believes that the proposed fee limitation should not impose significant
new administrative costs.
The Commission recognizes that the fee limitations of proposed Rule
610(c)(2) would affect options exchanges that currently impose access
fees in excess of the proposed limits. As a result of the access fee
limitations of proposed Rule 610(c)(2), such options exchanges would be
required to modify their respective rules to ensure compliance with the
proposed Rule's fee cap. The Commission preliminarily believes,
however, that the potential administrative costs associated with any
necessary changes to the rules of an options exchange that may be
needed to account for the proposed access fee limitation would not be
substantial. The Commission notes that an options exchange that would
need to amend its rules and fee schedule to comply with the access fee
limitation as a result of proposed Rule 610(c)(2) would be required to
file a proposed rule change on Form 19b-4 with the Commission.\179\ The
Commission further notes that the proposed rule change filing format
and the process to change a due, fee, or other charge applicable only
to members is not new to the options exchanges, as multiple fee filings
are made annually by such exchanges.\180\ As stated above, the
Commission estimates that an average rule change requires approximately
34 hours for an exchange to complete at an average hourly cost of
$305.\181\ The Commission estimates that the aggregate cost for all
options exchanges of one proposed rule change for each exchange would
total approximately $82,960.\182\ Therefore, the Commission
preliminarily believes that the costs incurred by an options exchange
to make such a filing as a result of proposed Rule 610(c)(2) would not
be substantial.\183\
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\179\ See supra note 175.
\180\ An exchange generally would be able to amend its fees
imposed on its members by filing a proposed rule change pursuant to
Section 19(b)(3)(A) of the Exchange Act of Rule 19b-4(f)(2)
thereunder. See 15 U.S.C. 78s(b)(3)(A) and 17 CFR 240.19b-4(f)(2)
(permitting proposed rule changes that establish or change a due,
fee, or other charge applicable only to members to take effect upon
filing with the Commission). The Commission notes that, for its 2009
fiscal year, the seven options exchanges filed approximately 120
proposed rule changes in the aggregate pursuant to Section
19(b)(3)(A) of the Exchange Act and Rule 19b-4(f)(2) thereunder. See
supra note 176 (noting the approximate total of all proposed rule
changes filed by the options exchanges pursuant to Section 19(b) and
Rule 19b-4 thereunder during the same time period).
\181\ See supra note 177.
\182\ The Commission notes that if an exchange were required to
submit a proposed rule change to address a rule or fee that was not
consistent with the anti-discriminatory standard proposed in Rule
610(a), as well as a fee that exceeds the proposed fee cap, the
exchange could choose to submit one rule filing that would make
changes necessary to comply with proposed Rules 610(a) and 610(c)(2)
to reduce costs.
\183\ The Commission also notes that each options exchange
should already have in place policies and procedures to ensure that
all of the fees it charges, including access fees, are consistent
with the federal securities laws and the rules thereunder. The
Commission preliminarily believes that, while an options exchange
may be required to amend its fee schedule to account for the
proposed access fee limitation, such options exchange's existing
policies and procedures should not change as a result of the
proposed amendments to Rule 610, and therefore, should not incur any
new costs, including administrative costs, in this regard.
---------------------------------------------------------------------------
The Commission also recognizes that, as a result of the proposed
access fee limitation, certain options exchanges that currently charge
access fees that exceed, or accumulate to more than, $0.30 per contract
would be required to reduce their access fees, and that this action
could result in a reduction in revenue from transaction fees for those
exchanges.
The Commission preliminarily estimates that the imposition of an
access fee cap, as proposed, could reduce option exchanges' annual
transaction fee revenues by about $74 million under a flat $0.30 access
fee cap.\184\ The estimated revenue losses per exchange are set forth
in Table 3 of the Appendix. Commission staff estimates the proportion
of fee losses to total fees for December 2009 and applies that
proportion to the annual transaction fee revenue for each exchange. The
Commission staff utilized OCC data that contains aggregate two-sided
volume data by account type (customer, firm or market maker). In order
to estimate the impact on each option exchange's revenues,\185\
Commission staff makes a number of assumptions:
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\184\ For this estimate, Commission staff used December 2009
option trading data from OCC and OptionMetrics. The Commission staff
estimates that if the Commission were to impose a fee cap of 0.3
percent of the price of the option for options priced below $1--
similar to the existing cap for NMS stocks--the potential reduction
in revenue for the options exchanges would be $177 million.
The Commission has not included BATS in these revenue impact
calculations. As noted below, BATS recently started trading options
on February 26, 2010. See infra note 197. Further, BATS' only
transaction fee for listed options is $0.30 per contract for
removing liquidity (and a $0.20 per-contract rebate for providing
liquidity). See BATS Fee Schedule (available at http://batstrading.com/resources/regulation/rule_book/BATS_Ex_Fee_Schedule.pdf) (current as of February 26, 2010).
\185\ See infra note 187 and accompanying text for an estimate
of the impact of the proposed access fee cap on transaction fee
revenues using an assumption that the options exchanges that have a
Make or Take fee model reduce their ``Make'' fees to compensate for
a reduction in ``Take'' fees.
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Commission staff assumes that the options exchanges that
impose fees in excess of the proposed access fee cap would not adjust
their rebates or other fees to offset any shortfalls on revenues
imposed by the access fee cap.
Commission staff looked at a range of fees that each
options exchange charges for accessing the best bid or offer in listed
options on the exchange, based on its published fee schedule.\186\ The
fee ranges include any fee that is charged for execution of an order
against an exchange's best bid or offer. Thus, they include ``Take''
fees, transaction fees, index ``licensing'' fees, certain payment for
order flow fees, and ORF. The fee ranges exclude fees charged for
transactions in FLEX options, credit default options, and the fee that
ISE charges for transactions by broker-dealers registered as market
makers on other exchanges. Commission staff has excluded these specific
transaction fees from these calculations because it preliminarily
believes that the volume of transactions and the corresponding assessed
transaction fees are not significant, but requests comment on whether
such fees should be included in the cost impact calculation. Any
available volume discounts also are not taken into account because such
discounts are variable and if applied would reduce the cost estimates.
Tables 1 and 2 of the Appendix show the fee ranges used in estimating
the revenue impact.
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\186\ The fees used are as of January 2010, except that they do
not include fees or credits imposed by Nasdaq OMX Phlx in SR-Phlx-
2009-116, SR-Phlx-2010-14, and SR-Phlx-2009-104, which filings were
abrogated by the Commission on February 19, 2010. See Securities
Exchange Act Release No. 61547 (February 19, 2010), 75 FR 8762
(February 25, 2010).
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To estimate the impact on each option exchange's revenues,
the Commission staff generally assumes the maximum possible fee for
electronically transmitted orders grouped by account type, whether or
not the class is included in the Minimum Quoting Increment Pilot
Program, and option type. This assumption would lead, conservatively,
to higher estimates of
[[Page 20758]]
revenue losses. Further, because fee levels for equity options tend to
be different than fee levels for index options, and because the fee
levels for classes included in the Minimum Quoting Increment Pilot
Program sometimes are different than the fee levels for classes not
included in that Pilot Program, Commission staff estimates fees
separately for each.
Commission staff assumes that access fees only apply to
``Takers'' of liquidity at a particular exchange. Staff further assumes
that customers always ``take'' liquidity, market makers always ``make''
liquidity, and firms make up the difference. Based on December 2009
data, Commission staff estimates that average firm volume by option
class is about 52% on the ``take'' side and 48% on the ``make'' side.
The OCC classifies cleared trades based on OCC membership
rather than exchange membership. Therefore, Commission staff assumes
that the OCC ``firm'' classification applies to both member and non-
member firms at a particular exchange. If a particular exchange charges
different levels of fees for member and non-member firms, Commission
staff conservatively assumes the maximum fee applies to all trades
classified as ``firm'' accounts.
As noted above, this cost estimate assumes that the exchanges do
not make any changes to their other fees in response to the proposed
access fee cap. Options exchanges may, however, respond to access fee
limits by restructuring their fee schedules to mitigate the effect of
the proposed fee cap. For example, the impact of imposing a fee
limitation in a Make or Take fee model may be mitigated if exchanges
using such fee model reduce the rebates to reflect the reduced ``Take''
fees. In such a case, the net impact on exchange revenue would be less
than the amount by which an exchange is required to reduce its ``Take''
fee because the exchange would pay a smaller rebate to members
providing liquidity. In addition, certain options exchanges may simply
be able to re-calibrate existing fee structures to offset potential
revenue losses, while other exchanges may decide to charge additional
fees to make up for potential revenue losses.
Options exchanges have the ability, consistent with the
requirements of the Exchange Act, to levy fees on their members.
Currently, exchanges charge their members various types of fees for
membership, transacting on the exchange, and for other services
provided by the exchange, including connectivity fees, regulatory fees,
and other fees. The Commission preliminarily believes that exchanges
are likely to amend their fees that would not be impacted by the access
fee limitation to make up for the reduction in access fee revenue, thus
keeping the overall level of fees paid by members, and the amount of
revenue received by the exchange, relatively constant. Further, the
Commission preliminarily believes that exchanges that provide rebates
to liquidity providers based on the amount of fees the exchanges charge
for accessing liquidity may reduce such rebates commensurate with any
reduction in the fees charged for accessing liquidity. In this event,
the amount of revenue received by the exchange--the difference between
the ``Take'' fee and the ``Make'' rebate--would remain constant. If
exchanges with ``Make or Take'' models reduce their ``Make'' fees to
compensate for a reduction in ``Take'' fees due to the proposed access
fee cap, the Commission estimates that the imposition of an access fee
cap as proposed could reduce option exchanges' transaction fee revenues
by about $55 million under a flat $0.30 access fee cap.\187\
---------------------------------------------------------------------------
\187\ For this estimate, Commission staff used December 2009
option trading data from OCC and OptionMetrics. See infra Table 3 in
the Appendix.
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The Commission also preliminarily believes that the overall cost to
members of exchanges from the proposal to limit access fees would be
minimal. As noted above, exchange members pay various types of fees to
their exchanges, including transaction fees, regulatory fees, and other
fees. Some of these fees are charged for activity by the members'
customers or other non-member market participants that comes through
members. Exchange members today can choose to pass through these fees
to their customers, or not, subject to competition among members for
this order flow. As outlined above, the Commission preliminarily
believes that the overall revenue to the exchanges--and thus the
overall fees charged by exchanges to members--would remain constant,
although the levels of fees within individual fee categories may
change. Thus, the impact of fee changes on individual members and
market participants may vary, depending upon each participant's
business structure and trading strategies, and depending upon what
portion of the fees each member chooses to ``pass through'' to its
customers.
C. Request for Comment
The Commission requests general comment on the costs and benefits
of the proposed amendments to Rules 610(a) and (c) of Regulation NMS
discussed above, as well as any costs and benefits not already
described which could result from them. The Commission also requests
data to quantify any potential costs or benefits.
The Commission specifically requests comment on the cost estimates
made, and the assumptions underlying those cost estimates as outlined,
in Section VII.B.2. For example, do commenters believe that options
exchanges that currently impose fees in excess of the fee cap proposed
in Rule 610(c)(2) would or would not adjust their rebates or other fees
to offset the impact of a fee cap? If commenters believe that options
exchanges would adjust their rebates or other fees to offset the impact
of a fee cap, what specific types of changes would exchanges make?
Further, depending upon the specific change to rebates or fees that
commenters believe exchanges would make in response to the proposed fee
cap, how do commenters believe that such change(s) would impact the
quoting, order routing, or other behavior of particular categories of
market participants, such as retail investors, market makers, and
broker-dealers?
Do commenters believe that it is appropriate generally to consider
the maximum fee charged for electronically transmitted orders in
calculating the impact on an options exchange's revenue of the proposed
access fee cap? If so, please explain why. If not, please provide
detail as to what assumptions should underlie such a calculation.
Further, do commenters agree that it is reasonable to exclude specific
fees charged for the execution of orders in FLEX options or credit
default options, and the fee that ISE charges for transactions by
broker-dealers registered as market makers on other exchange, as well
as volume discounts, when determining the maximum fee charged by
options exchanges? Do commenters agree with the assumption that
customers always ``take'' liquidity, market makers always ``make''
liquidity, and firms make up the difference? If not, please provide
detail as to what assumptions should be made and any supporting
information, or describe another approach for estimating the costs of
this proposal.
VIII. Consideration of Burden on Competition and Promotion of
Efficiency, Competition, and Capital Formation
Section 3(f) of the Exchange Act requires the Commission, whenever
it engages in rulemaking and is required to consider or determine
whether an action is necessary or appropriate in the public interest,
to consider, in addition to the
[[Page 20759]]
protection of investors, whether the action would promote efficiency,
competition, and capital formation.\188\ In addition, Section 23(a)(2)
of the Exchange Act requires the Commission, when adopting rules under
the Exchange Act, to consider the impact such rules would have on
competition.\189\ Section 23(a)(2) prohibits the Commission from
adopting any rule that would impose a burden on competition not
necessary or appropriate in furtherance of the purposes of the Exchange
Act.\190\
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\188\ 15 U.S.C. 78c(f).
\189\ 15 U.S.C. 78w(a)(2).
\190\ Id.
---------------------------------------------------------------------------
A. Competition
The Commission begins its consideration of potential competitive
impacts with observations of the current structure of the option
markets and broker-dealers, mindful of the statutory requirements
regarding competition. Based on the Commission's experience in
regulating the options markets and broker-dealers, including reviewing
information provided by them in their registrations and filings with
the Commission and approving such registration applications, the
Commission discusses below the basic framework of the markets they
comprise.
1. Market Structure for Options Markets
In order to consider whether the proposed rules promote
competition, staff of the Commission's Division of Risk, Strategy, and
Financial Innovation evaluated the competitive structure of the
exchange-listed options trading industry in the United States. In
particular, Commission staff considered the nature of competition
between liquidity providers within exchanges and competition between
exchanges to attract order flow. Within the options exchanges, multiple
market makers, proprietary trading firms, and customers submitting
limit orders compete to provide liquidity to incoming market or
marketable limit orders. Options exchanges compete for order flow
through their quotations and, in some cases, through exchange-sponsored
payment for order flow.
In the late 1990s, the Commission took actions in response to
concerns that the options industry was not fully competitive.
Competition in the listed options market is significantly more rigorous
today that it has been in the past, as a result of several developments
since 1999. These include the move to multiple listing,\191\ the advent
of electronic exchanges,\192\ the extension of the Commission's Quote
Rule to options,\193\ the injunction against trading outside of the
national best bid and offer,\194\ the adoption of market structures on
the floor-based exchanges that permit individual market maker
quotations to be reflected in the exchange's quotation,\195\ and the
Minimum Quoting Increment Pilot Program,\196\ among other developments.
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\191\ See Securities Exchange Act Release No. 26870 (May 26,
1989), 54 FR 23963 (June 5, 1989) (S7-25-87).
\192\ See ISE Exchange Approval, supra note 30, 65 FR at 11395;
Securities Exchange Act Release Nos. 49068 (January 13, 2004), 69 FR
2775 (January 20, 2004) (approving options trading rules for BOX)
(``BOX Approval Order''); 54238 (July 28, 2006), 71 FR 44758 (August
7, 2006) (approving NYSE Arca's OX, a fully automated trading system
for standardized equity options intended to replace NYSE Arca's
options trading platform, PCX Plus); 57478 (March 12, 2008), 73 FR
14521 (March 18, 2008) (approving options trading rules for NOM)
(``NOM Approval Order''); and 61419 (January 26, 2010), 75 FR 5157
(February 1, 2010) (approving BATS Exchange proposal to operate as
an options exchange) (``BATS Approval Order'').
\193\ See Securities Exchange Act Release No. 43591 (November
17, 2000), 65 FR 75439 (December 1, 2000).
\194\ See supra notes 8-16 and accompanying text.
\195\ See, e.g., Securities Exchange Act Release No. 47959 (May
30, 2003), 68 FR 34441, 34442 (June 9, 2003) (SR-CBOE-2002-05)
(adopting, among other things, amendments to incorporate firm quote
requirements in CBOE's rules).
\196\ See supra notes 28-29 and accompanying text.
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Among the relevant considerations in assessing the degree of
competition in an industry are the number of competitors and
concentration of market share. Listed options in the United States are
currently traded on eight national securities exchanges, owned by six
entities. These eight exchanges are CBOE, ISE, NYSE Arca, NYSE Amex,
Nasdaq OMX Phlx, NOM, BOX, and BATS. Based on market share data for
January 2010 obtained from the OCC,\197\ the exchange with the highest
market share of option volume was CBOE, with 29.58%, followed by ISE at
22.86%. The two exchanges owned by NYSE Euronext together had a market
share of 25.82% (NYSE Arca had 13.94% and NYSE Amex had 11.88%). The
two exchanges owned by The NASDAQ OMX Group, Inc. together had a market
share of 19.76% (Nasdaq OMX Phlx had 17.17% and NOM had 2.59%). The BOX
had a market share of 1.98%.
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\197\ Although the Commission approved BATS Exchange's proposal
to operate as an options exchange in January 2010 (see BATS Approval
Order, supra note 192), BATS Exchange did not commence options
trading operations until February 26, 2010. As a result, there is no
market share data for BATS for purposes of this discussion.
---------------------------------------------------------------------------
Another key factor determining the competitiveness of an industry
is the extent to which there are significant barriers to entry. In the
Commission's assessment, barriers to entry in providing trading
platforms in the options market are higher than they are in the
equities market because equities may be traded off exchange while
options may not. Thus, new entrants in the options market face the
regulatory costs associated with establishing a national securities
exchange. These costs are not large enough to prevent entry, as
evidenced by the fact that four new option exchanges have entered the
industry since 2000,\198\ and another is anticipated to begin
operations soon.\199\ However, it is possible that the economic
barriers to entry to the options trading industry may be more
significant for participants who do not already have the infrastructure
required to operate registered exchanges. With the sole exception of
the ISE, every new entrant in the options market since 1973 has been
created by participants who were already operating securities
exchanges.
---------------------------------------------------------------------------
\198\ See ISE Exchange Approval, supra note 30; BOX Approval
Order, supra note 192; NOM Approval Order, supra note 192; and BATS
Approval Order, supra note 192.
\199\ See supra note 8 (referring to the order approving C2
Options Exchange's application for registration as a national
securities exchange).
---------------------------------------------------------------------------
Broker-dealers are required to register with the Commission and be
a member of at least one SRO. The broker-dealer industry, including
market makers, is a competitive industry, with most trading activity
concentrated among several dozen larger participants and with thousands
of smaller participants competing for niche or regional segments of the
market.
There are approximately 5,178 registered broker-dealers, of which
approximately 890 are small broker-dealers.\200\ Larger broker-dealers
often enjoy economies of scale over smaller broker-dealers and compete
with each other to service the smaller broker-dealers, who are both
their competitors and customers. The reasonably low barriers to entry
for broker-dealers are evidenced, for example, by the fact that the
average number of new broker-dealers entering the market each year
between 2001 and 2008 was 389.\201\
---------------------------------------------------------------------------
\200\ These numbers are based on a review of 2007 and 2008 FOCUS
Report filings reflecting registered broker-dealers, and discussions
with SRO staff. The number does not include broker-dealers that are
delinquent on FOCUS Report filings.
\201\ This number is based on a review of FOCUS Report filings
reflecting registered broker-dealers from 2001 through 2008. The
number does not include broker-dealers that are delinquent on FOCUS
Report filings. New registered broker-dealers for each year during
the period from 2001 through 2008 were identified by comparing the
unique registration number of each broker-dealer filed for the
relevant year to the registration numbers filed for each year
between 1995 and the relevant year.
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[[Page 20760]]
2. Discussion of Impacts of Proposed Amendments to Rules 610(a) and
610(c) on Competition
The Commission believes that the estimated costs associated with
implementing and complying with the proposed amendments to Rules 610(a)
and 610(c) are not so large as to raise significant barriers to entry,
or otherwise significantly alter the competitive landscape of the
listed options market. Given the reasonably high level of competition
for order flow in option markets and among broker-dealers, the
Commission believes that this industry would remain competitive,
despite the potential costs associated with implementing and complying
with the proposed amendments to Rules 610(a) and 610(c), even if those
costs influence to some degree the profitability of individual option
markets or entry and exit of broker-dealers at the margin.
Trading fees typically constitute the largest component of revenues
for option exchanges. For example, transaction fees accounted for
approximately 80.8% of total revenues for the CBOE in 2008. Thus, a
change in the fee structure that significantly reduces total fees could
potentially have an important impact on industry profits and thus on
the ability of smaller exchanges, including potential new entrants, to
meet their fixed costs. However, the Commission believes that the
proposed access fee limitations would have a limited, if any, negative
impact on the profitability of individual option markets because option
markets would be able to adjust their fee structures to accommodate the
access fee cap. Therefore, the Commission preliminarily believes that
limiting access fees to $0.30 per contract would not lead to a large
reduction in total revenues, and would not put an undue burden on
smaller exchanges or new entrants that would result in a decrease in
competition in the industry.
The Commission recognizes that a limit on access fees that applies
to exchanges utilizing a ``Make or Take'' market model effectively
limits the size of the liquidity rebate that such exchanges can offer,
inasmuch as the economic viability of the ``Make or Take'' model
generally requires that the rebate be smaller than the access fee. The
Commission also recognizes that effectively limiting the size of the
liquidity rebate in this way may limit the ability of exchanges
utilizing the ``Make or Take'' model to attract liquidity. However, the
Commission preliminarily believes that the proposal would not unduly
burden ``Make or Take'' fee models. In the ``Make or Take'' fee model,
the market earns the differential between the ``make'' credit and the
``take'' fee. The proposal allows for access fees of up to $0.30 per
contract and thus can accommodate a $0.30 per-contract differential in
``make'' credits and ``take'' fees. The largest differential charged by
``Make or Take'' model option markets currently is $0.20 per contract,
sufficiently within the $0.30 per-contract access fee limit of the
proposal. In addition, the Commission observes that the ``Make or
Take'' market model has become the dominant structure in the equity
market despite the cap of $0.003 per share, suggesting that a similar
cap in the option market would not prevent the ``Make or Take'' model
from succeeding in the option market. The Commission requests comment
on this preliminary view.\202\
---------------------------------------------------------------------------
\202\ See also Section V (Request for Comment).
---------------------------------------------------------------------------
Further, the proposed rules apply uniformly to exchanges with
different markets and fee structures, thereby facilitating the ability
of option markets to compete in a level regulatory environment. A fee
limitation is necessary to preclude individual markets from having fee
structures that take improper advantage of the protection against
trade-throughs in the Trade-Through Rules. Precluding option markets
from taking improper advantage of trade-through protection and making
sure that all option markets compete under the same regulatory
landscape should strengthen the ability of option markets to compete
fairly for business.
The Commission believes that the proposed access fee limitations
may have benefits that enhance quote competition among markets. The
proposed access fee provisions are intended to bolster transparency in
the options markets by improving the integrity of the quotations and
preventing large, non-transparent fees from being charged on orders
that are being sent to a particular market in order to comply with the
trade through provisions of the Trade-Through Rules. Since quotation
information would be more informative under the proposed access fee
limitations, the Commission expects that the proposed amendments would
likely encourage quote competition. Moreover, the Commission
preliminarily believes that, by prohibiting a national securities
exchange or national securities association from imposing unfairly
discriminatory terms that would prevent or inhibit the efficient access
of any person through members or non-member subscribers, the proposed
rule would promote competition to offer the best displayed quotation
among exchanges that trade listed options.
The Commission also believes that the proposal would have a minimal
effect on the competitiveness of the broker-dealer industry. Since the
proposal seeks to limit access fees, the proposal may result in a
reduction in fees paid by broker-dealers to options exchanges. On the
other hand, it is possible that options exchanges could increase
broker-dealer fees, including market maker fees, to offset any revenue
losses from an access fee limit. However, since transaction fee costs
are typically a small part of the total expenses for a broker-dealer,
the Commission preliminarily believes that any increase in transaction
fee costs for broker-dealers would have a minimal, if any, effect on
the competitiveness of the broker-dealer industry. The Commission seeks
comment, however, on the level of options exchange-levied fees on
broker-dealers and whether an increase in these fees would inhibit the
competitiveness of the broker-dealer industry.
In summary, the Commission preliminarily believes that the proposal
would not result in an undue burden on the competitiveness of any
option markets and, as a result, would not result in any decrease in
competition among option markets. Moreover, the Commission
preliminarily believes that the proposal would promote quote
competition in options. The Commission also preliminarily believes that
the proposal would not result in an undue burden on the competitiveness
of the broker dealer industry.
B. Capital Formation
A purpose of the proposed amendments to Rules 610(a) and 610(c) is
to strengthen transparency and quote competition in the option markets
regulated by the Commission which should help make investors more
willing to invest, resulting in the promotion of capital formation.
Long holdings of equity are integral to capital formation. Fair and
robust option markets, in which long holders can hedge risk through the
option markets, support the public offerings of the underlying equities
by which issuers raise capital and, as a result, investors who provided
private capital realize profits and manage risk. Therefore, the
Commission preliminarily believes that the proposed amendments to Rules
610(a) and 610(c) would increase transparency and quote competition,
thereby enhancing investment, and thus capital formation.
[[Page 20761]]
C. Efficiency
The access provision of Rule 610(a), as proposed to be amended, is
designed to strengthen the ability of all market participants that are
not members of an options exchange to fairly and efficiently route
orders to execute against quotations in a listed option, wherever such
quotations are displayed in the NMS, by prohibiting an exchange from
unfairly discriminating against any person trying to obtain access
through a member to that exchange's quotations. Fair and efficient
access to the best displayed quotations of all options exchanges is
necessary to achieving best execution of those orders.\203\ Further,
fair and efficient access to the best displayed quotations of options
exchanges is necessary for compliance with the requirements of the
Trade-Through Rules. Specifically, options exchanges themselves must
have the ability to route orders for execution against the displayed
quotations of other exchanges. Indeed, the concept of intermarket
protection against trade-throughs is premised on the ability of options
exchanges to route orders to execute against, rather than trade
through, the quotations displayed by other options exchanges.\204\ In
this way, fair and efficient indirect access would, through the
enhancement of the ability to achieve best execution and the support of
compliance with the Trade-Through Rules, increase the efficiency of
executions across option markets.
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\203\ See NMS Adopting Release, supra note 4, at 37539.
\204\ Id.
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The proposed access fee limit would apply equally to all national
securities exchanges, thereby promoting the NMS objective of equal
regulation of markets. A fee limitation is necessary to preclude
individual markets from having fee structures that take improper
advantage of the protection against trade-throughs in the Trade-Through
Rules. Precluding option markets from taking improper advantage of
trade-through protection and making sure that all option markets
compete under the same regulatory landscape should strengthen the
ability of option markets to compete on a more level playing field,
thereby promoting efficiency of execution across option markets by
reducing costs.
The Commission solicits comments on these matters with respect to
the proposed amendments to Rules 610(a) and (c). Would the proposed
amendments have an adverse effect on competition that is neither
necessary nor appropriate in furtherance of the purposes of the
Exchange Act? Would the proposed amendments, if adopted, promote
efficiency, competition, and capital formation? Commenters are
requested to provide empirical data and other factual support for their
views if possible.
IX. Consideration of Impact on the Economy
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996, or ``SBREFA,'' \205\ the Commission must advise the Office
of Management and Budget as to whether the proposed regulation
constitutes a ``major'' rule. Under SBREFA, a rule is considered
``major'' where, if adopted, it results or is likely to result in: (1)
An annual effect on the economy of $100 million or more (either in the
form of an increase or a decrease); (2) a major increase in costs or
prices for consumers or individual industries; or (3) significant
adverse effect on competition, investment or innovation. If a rule is
``major,'' its effectiveness will generally be delayed for 60 days
pending Congressional review.
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\205\ Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996)
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note
to 5 U.S.C. 601).
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The Commission requests comment on the potential impact of the
proposed amendments to Rule 610 on the economy on an annual basis, on
the costs or prices for consumers or individual industries, and on
competition, investment or innovation. Commenters are requested to
provide empirical data and other factual support for their view to the
extent possible.
X. Regulatory Flexibility Act Certification
The Regulatory Flexibility Act (``RFA'') \206\ requires Federal
agencies, in promulgating rules, to consider the impact of those rules
on small entities. Section 603(a) \207\ of the Administrative Procedure
Act,\208\ as amended by the RFA, generally requires the Commission to
undertake a regulatory flexibility analysis of all proposed rules, or
proposed rule amendments, to determine the impact of such rulemaking on
``small entities.'' \209\ Section 605(b) of the RFA specifically states
that this requirement shall not apply to any proposed rule or proposed
rule amendment, which if adopted, would not ``have a significant
economic impact on a substantial number of small entities.'' \210\
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\206\ 5 U.S.C. 601 et seq.
\207\ 5 U.S.C. 603(a).
\208\ 5 U.S.C. 551 et seq.
\209\ Although Section 601(b) of the RFA defines the term
``small entity,'' the statute permits agencies to formulate their
own definitions. The Commission has adopted definitions for the term
small entity for the purposes of Commission rulemaking in accordance
with the RFA. Those definitions, as relevant to this proposed
rulemaking, are set forth in Rule 0-10, 17 CFR 240.0-10. See
Securities Exchange Act Release No. 18452 (January 28, 1982), 47 FR
5215 (February 4, 1982) (File No. S7-879).
\210\ See 5 U.S.C. 605(b).
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The proposed amendment to Rule 610(a) of Regulation NMS would
prohibit a national securities exchange or national securities
association from imposing unfairly discriminatory terms that would
prevent or inhibit any person from obtaining efficient access through a
member of such exchange or association to the quotations in a listed
option. In addition, proposed Rule 610(c)(2) would prohibit a national
securities exchange from imposing, or permitting to be imposed, any fee
or fees for the execution of an order against any quotation that is the
best bid or best offer of such exchange in a listed option that exceeds
or accumulates to more than $0.30 per contract. As such, only national
securities exchanges registered with the Commission under Section 6 of
the Exchange Act and national securities associations registered with
the Commission under Section 15A of the Exchange Act would be subject
to the proposed amendments to Rules 610(a) and (c). None of the
national securities exchanges registered under Section 6 of the
Exchange Act or national securities associations registered with the
Commission under Section 15A of the Exchange Act that would be subject
to the proposed amendments are ``small entities'' for purposes of the
RFA.\211\ Accordingly, the Commission preliminarily does not believe
that the proposed amendments to Rule 610 would have a significant
economic impact on a substantial number of small entities.
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\211\ See 17 CFR 240.0-10(e). Paragraph (e) of Rule 0-10 states
that the term ``small business,'' when referring to an exchange,
means any exchange that has been exempted from the reporting
requirements of Rule 601 of Regulation NMS, 17 CFR 242.601, and is
not affiliated with any person (other than a natural person) that is
not a small business or small organization as defined in Rule 0-10.
Under this standard, none of the exchanges subject to the proposed
amendments to Rule 610 is a ``small entity'' for the purposes of the
RFA. The Financial Industry Regulatory Authority or ``FINRA'' (f/k/a
the National Association of Securities Dealers or ``NASD'') is not a
small entity as defined by 13 CFR 121.201.
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The Commission invites commenters to address whether the proposed
rules would have a significant economic impact on a substantial number
of small entities, and, if so, what would be the nature of any impact
on small entities. The Commission requests that commenters provide
empirical data to support the extent of such impact.
[[Page 20762]]
XI. Statutory Authority
Pursuant to the Exchange Act and particularly, Sections 2, 3(b), 5,
6, 11A, 15, 15A, 17(a) and (b), 19, and 23(a) thereof, 15 U.S.C. 78b,
78c(b), 78e, 78f, 78k-1, 78o, 78o-3, 78q(a) and (b), 78s, and 78w(a),
the Commission proposes to amend Rule 610 of Regulation NMS, as set
forth below.
Text of Proposed Rule
List of Subjects in 17 CFR Part 242
Brokers, Reporting and recordkeeping requirements, Securities.
In accordance with the foregoing, Title 17, Chapter II, of the Code
of Federal Regulations is proposed to be amended as follows.
PART 242--REGULATIONS M, SHO, ATS, AC, AND NMS AND CUSTOMER MARGIN
REQUIREMENTS FOR SECURITY FUTURES
1. The authority citation for part 242 continues to read as
follows:
Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2),
78i(a), 78j, 78k-1(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g),
78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-29, and
80a-37.
2. Amend Sec. 242.610 by revising paragraphs (a) and (c) to read
as follows:
Sec. 242.610 Access to quotations.
(a) Quotations of an SRO trading facility. A national securities
exchange or national securities association shall not impose unfairly
discriminatory terms that prevent or inhibit any person from obtaining
efficient access through a member of the national securities exchange
or national securities association to the quotations in an NMS security
displayed through its SRO trading facility.
* * * * *
(c) Fees for access to quotations. (1) A trading center shall not
impose, nor permit to be imposed, any fee or fees for the execution of
an order against a protected quotation of the trading center or against
any other quotation of the trading center that is the best bid or best
offer of a national securities exchange or the best bid or best offer
of a national securities association in an NMS stock that exceed or
accumulate to more than the following limits:
(i) If the price of a protected quotation or other quotation is
$1.00 or more, the fee or fees cannot exceed or accumulate to more than
$0.003 per share; or
(ii) If the price of a protected quotation or other quotation is
less than $1.00, the fee or fees cannot exceed or accumulate to more
than 0.3% of the quotation price per share.
(2) A national securities exchange shall not impose, nor permit to
be imposed, any fee or fees for the execution of an order against a
quotation that is the best bid or best offer of such exchange in a
listed option that exceed or accumulate to more than $0.30 per
contract.
* * * * *
By the Commission.
Dated: April 14, 2010.
Elizabeth M. Murphy,
Secretary.
Note: The following appendix will not appear in the Code of
Federal Regulations.
Appendix
Table 1--Range of Charges for Accessing Quotations*
----------------------------------------------------------------------------------------------------------------
Equity options Index options
--------------------------------------------------------------------------------
Classes not Classes not
Exchange Classes included in included in Classes included included in
minimum quoting minimum quoting in minimum quoting minimum quoting
increment pilot increment pilot increment pilot increment pilot
----------------------------------------------------------------------------------------------------------------
NYSE Amex...................... $0.00 to $0.42..... $0.00 to $0.82.... $0.00 to $0.64.... $0.00 to $1.04.
NYSE Arca...................... $0.45.............. $0.00 to $0.81.... $0.45 to $0.67.... $0.00 to $1.03.
BOX............................ -$0.147 to $0.10... -$0.547 to -$0.30. -$0.147 to $0.32.. -$0.547 to -$0.08.
CBOE........................... $0.004 to $0.45.... $0.004 to $0.85... $0.004 to $0.60... $0.004 to $1.00.
ISE............................ $0.0035 to $0.43... $0.0035 to $0.83.. $0.0035 to $0.65.. $0.0035 to $1.05.
NOM............................ $0.35 to $0.45..... -$0.20 to $0.45... $0.35 to $0.45.... -$0.20 to $0.45.
Nasdaq OMX Phlx................ $0.0035 to $0.56... $0.0035 to $1.01.. $0.30 to $0.45.... $0.30 to $0.45.
----------------------------------------------------------------------------------------------------------------
* As noted above, the Commission has not included BATS in its revenue impact calculations. See supra note 184.
Table 2--Range of Charges for Providing Side
----------------------------------------------------------------------------------------------------------------
Equity options Index options
--------------------------------------------------------------------------------
Classes not Classes not
Exchange Classes included in included in Classes included included in
minimum quoting minimum quoting in minimum quoting minimum quoting
increment pilot increment pilot increment pilot increment pilot
----------------------------------------------------------------------------------------------------------------
NYSE Amex...................... $0.00 to $0.42..... $0.00 to $0.82.... $0.00 to $0.64.... $0.00 to $1.04.
NYSE Arca...................... -$0.30 to -$0.25... $0.00 to $0.81.... -$0.25 to $-0.08.. $0.00 to $1.03.
BOX............................ $0.053 to $0.40.... $0.553 to $0.80... $0.053 to $0.62... $0.553 to $1.02.
CBOE........................... $0.004 to $0.45.... $0.004 to $0.85... $0.004 to $0.60... $0.004 to $1.00.
ISE............................ $0.0035 to $0.43... $0.0035 to $0.83.. $0.0035 to $0.65.. $0.0035 to $1.05.
NOM............................ -$0.25............. $0.00 to $0.30.... -$0.25............ $0.00 to $0.30.
Nasdaq OMX Phlx................ $0.0035 to $0.56... $0.0035 to $1.01.. $0.30 to $0.45.... $0.30 to $0.45.
----------------------------------------------------------------------------------------------------------------
[[Page 20763]]
Table 3--Estimates of Potential Revenue Impact on Options Exchanges
--------------------------------------------------------------------------------------------------------------------------------------------------------
$0.30 Cap $0.30 Cap
Annual $0.30 cap $0.30 cap estimated % of estimated revenue
Exchange transaction fee estimated % of estimated revenue revenues impacted loss ($Millions)
revenues \1\ revenues impacted loss ($Millions) assuming make assuming make
($Millions) rebate reductions rebate reductions
--------------------------------------------------------------------------------------------------------------------------------------------------------
NYSE Amex................................................ 66.5 0.2 0.1 0.2 0.1
NYSE Arca................................................ 114.8 26.0 29.8 12.5 14.4
BOX \2\.................................................. 4.0 0.0 0 0.0 0.0
CBOE..................................................... 314.5 7.6 23.9 7.6 23.9
ISE...................................................... 264.9 0.1 0.3 0.1 0.3
NOM...................................................... 38.3 11.0 4.2 0.0 0.0
Nasdaq OMX Phlx.......................................... 180.4 8.9 16.1 8.9 16.1
----------------------------------------------------------------------------------------------
Total................................................ 983.4 7.6 74.4 5.6 54.7
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The transaction fee revenue amounts are based on either an exchange's 2008 Annual Report, an exchange's 2009 unaudited financial results from
information circulars, or annualized from the exchange's latest 2009 10-Q.
\2\ Financial data on annual transaction fees are not available for BOX. Therefore, Commission staff annualized its December 2009 fee revenue estimate.
[FR Doc. 2010-9016 Filed 4-19-10; 8:45 am]
BILLING CODE 8011-01-P