[Federal Register Volume 76, Number 71 (Wednesday, April 13, 2011)]
[Notices]
[Pages 20754-20756]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-8921]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64270; File No. SR-ISE-2011-13]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule
Change To Adopt a Fee Cap and a Service Fee
April 8, 2011.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on March 31, 2011, the International Securities Exchange, LLC (the
``Exchange'' or the ``ISE'') filed with the Securities and Exchange
Commission the proposed rule change, as described in Items I, II, and
III below, which items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The ISE is proposing to establish a fee cap of $100,000 per month
and a related service fee for member firms on all proprietary trading,
with certain exclusions, in all ISE products. The text of the proposed
rule change is available on the Exchange's Web site (http://www.ise.com), at the principal office of the Exchange, and at the
Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in sections A, B and C below, of the
most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to establish a monthly
fee cap per ISE member organization, subject to certain exclusions,
across all products traded on ISE. The proposed fee cap shall apply to
transactions executed in a member's proprietary account. The cap also
would apply to crossing transactions for the account of entities
affiliated with a member. That is, the cap will apply to a member's
crossing transactions even if the member executes crosses in the
account of an affiliate, rather than the member's own account. This
will provide members with the flexibility to effect transactions
[[Page 20755]]
where it makes the most business sense within their family of
companies.
For example, a member engaged in trading activity on ISE may have
an affiliate engaged in a market making capacity on another exchange,
which may be a separate broker/dealer entity. A crossing transaction by
that member in which a customer order is facilitated against the
proprietary trading interest of the member's affiliate would be
eligible for the proposed fee cap. On the other hand, a crossing
transaction by the same member where a customer order is facilitated
against the proprietary trading interest of an unaffiliated entity
would not be eligible for the fee cap.\3\
---------------------------------------------------------------------------
\3\ Each member would be responsible for notifying the Exchange
of its affiliations so that fees and contracts of the member and its
affiliates involved in crossing transactions may be aggregated for
purposes of the fee cap.
---------------------------------------------------------------------------
Specifically, the Exchange proposes to cap proprietary transaction
fees in all products traded on ISE, in the aggregate, at $100,000 per
month per member, with certain exclusions which are noted below. All
proprietary transactions, including non-ISE market maker contracts that
are part of a crossing transaction, are eligible towards the proposed
fee cap. Volume from regular and complex orders, as well as
Facilitation Mechanism, Price Improvement Mechanism, Solicited Order
Mechanism, Block Order Mechanism and Qualified Contingent Cross
(``QCC'') orders,\4\ will also count towards the fee cap.
---------------------------------------------------------------------------
\4\ The Commission recently approved the QCC order type. See
Securities Exchange Act Release No. 63955 (February 24, 2011) (SR-
ISE-2010-73). The Exchange filed a separate proposed rule change to
adopt fees for QCC orders. See Securities Exchange Act Release No.
64112 (March 23, 2011) (SR-ISE-2011-14).
---------------------------------------------------------------------------
In addition to adopting a fee cap, ISE proposes to adopt a service
fee of $0.01 per side on all non-QCC transactions that are eligible for
the fee cap. For QCC volume, the Exchange proposes to adopt a higher
service fee of $0.05 per side, recognizing that this is a premium
service that required substantial investment by the ISE to deliver to
members. The proposed service fee shall apply once a member reaches the
fee cap level and shall apply to every contract side included in and
above the fee cap. A member who does not reach the monthly fee cap will
not be charged the proposed service fee. Additionally, the proposed
service fee is not calculated in reaching the fee cap. Once the fee cap
is reached, the proposed service fee shall apply to both proprietary
and other account designations \5\ in all ISE products in addition to
those transactions that were included in reaching the fee cap. The
proposed service fee, when charged for volume above the cap when no
other transaction fees are collected, is being instituted to defray the
Exchange's costs of providing services to members, which include trade
matching and processing, post trade allocation, submission for clearing
and customer service activities related to trading activity on the
Exchange.
---------------------------------------------------------------------------
\5\ Other account designations include Prop-firm (Member trading
for its own account and clearing in the F range at OCC), Prop-cust
(Member trading for its own account and clearing in the C range at
OCC), BD-firm (Member trading on behalf of another registered
broker/dealer clearing in the F range at OCC), BD-cust (Member
trading on behalf of another registered broker/dealer clearing in
the C range at OCC), FarMM (Member trading on behalf of another
registered broker/dealer clearing in the M range at OCC).
---------------------------------------------------------------------------
In calculating the proposed fee cap, the Exchange proposes to
exclude the following: \6\ (1) Any surcharge fee charged by the
Exchange on licensed products,\7\ (2) fees from Non-ISE Market Maker
volume not related to an affiliated member's crossing activity, (3) the
fee for responses to special orders \8\ in all products, (4) the maker
and taker fees charged by the Exchange for complex orders \9\ for
certain option classes,\10\ and (5) the taker fees charged by the
Exchange for regular orders \11\ for the Select Symbols.
---------------------------------------------------------------------------
\6\ Other exchanges currently employ exclusions to their fee cap
programs. For example, at the Chicago Board Options Exchange, Inc.
(``CBOE''), Automated Improvement Mechanism (``AIM'') execution fees
do not count towards the fee cap employed by that exchange. See CBOE
Fees Schedule, Section 1 (Equity Options Fees).
\7\ The Exchange currently charges a surcharge that ranges
between $0.02 per contract to $0.22 per contract on the following
licensed products: BKX, MFX, MID, MSH, SML, UKX, RMN, RUI, RUT, MVR,
NDX, MNX, FUM, HSX, POW, TNY, WMX and NXTQ.
\8\ Special orders are order types that involve a crossing
transaction or an auction, where a broadcast is transmitted to
Exchange members for potential participation and/or price
improvement.
\9\ A Complex Order is defined in Exchange Rule 722(a)(1) as 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.
\10\ The proposed exclusion applies to options classes that are
subject to Rebates and Fees for Adding and Removing Liquidity in
Select Symbols (``Select Symbols'').
\11\ An order means a commitment to buy or sell securities as
defined in Exchange Rule 715.
---------------------------------------------------------------------------
The proposed fee cap is functionally similar to a ``Multiply-Listed
Option Fee Cap'' in place at the CBOE \12\ and a ``Firm Related Equity
Option Cap'' in place at NASDAQ OMX PHLX, Inc. (``PHLX'').\13\ The
Exchange believes the proposed fee cap would create an incentive for
members to continue to send order flow to the Exchange.
---------------------------------------------------------------------------
\12\ The CBOE fees are capped at $75,000. See CBOE Fees
Schedule, Section 1 (Equity Options Fees).
\13\ PHLX Firms are subject to a maximum fee of $75,000. See
PHLX Fee Schedule, Section II (Equity Options Fees).
---------------------------------------------------------------------------
The Exchange has designated this proposal to be operative on April
1, 2011.
2. Statutory Basis
The Exchange believes that its proposal to amend its Schedule of
Fees is consistent with Section 6(b) of the Act \14\ in general, and
furthers the objectives of Section 6(b)(4) of the Act \15\ in
particular, in that it is an equitable allocation of reasonable fees
and other charges among Exchange members and other persons using its
facilities.
---------------------------------------------------------------------------
\14\ 15 U.S.C. 78f(b).
\15\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------
The Exchange believes that adopting the fee cap is reasonable
because it will potentially lower transaction fees for members
providing liquidity on the Exchange. Members who reach the fee cap
during a month will not have to pay regular transaction fees and thus
will be able to lower their monthly fees.
The Exchange believes that the fee cap is not unfairly
discriminatory because all members, including non-ISE market makers are
eligible to reach the cap. Moreover, the transactional fees that apply
to the cap are not focused on any particular type of trading or member.
Indeed, the cap covers all types of proprietary business members
conduct on the Exchange, including regular transactions, complex
orders, as well as all ``special'' transactions, such as trades in the
Facilitation Mechanism, Price Improvement Mechanism, Solicited Order
Mechanism, Block Order Mechanism, and Qualified Contingent Crosses. The
Exchange is applying the fee cap only to firm proprietary business, and
not customer or market maker business, because the Exchange is
specifically targeting this type of business as a competitive response
to similar fee caps other exchanges have adopted,\16\ and thus to make
it more attractive for members to send such business to the Exchange.
The Exchange has adopted other incentive programs targeting other
business areas: lower fees (or no fees) for customer orders; \17\ and
tiered
[[Page 20756]]
pricing that reduces rates for market makers based on the level of
business they bring to the Exchange.\18\
---------------------------------------------------------------------------
\16\ See supra notes 12 and 13.
\17\ For example, the customer fee is $0.00 per contract for
products other than Second Market Options, Singly Listed Indexes,
Singly Listed ETFs and FX Options. For Second Market Options, the
customer fee is $0.05 per contract and for Singly Listed Options,
Singly Listed ETFs and FX Options, the customer fee is $0.18 per
contract. The Exchange also currently has an incentive plan in place
for certain specific FX Options which has its own pricing. See ISE
Schedule of Fees.
\18\ The Exchange currently has a sliding scale fee structure
that ranges from $0.01 per contract to $0.18 per contract depending
on the level of volume a Member trades on the Exchange in a month.
---------------------------------------------------------------------------
The Exchange further believes the proposal to adopt the fee cap is
equitable because it would uniformly apply to all members engaged in
proprietary trading in option classes traded on the Exchange. As noted,
ISE market makers currently receive the benefit of a fee reduction
under a sliding scale fee structure applicable to non-Select Symbols.
The Exchange believes that adopting the service fee is reasonable
because it will also potentially lower transaction fees for members.
Members who reach the fee cap during a month will pay the service fee
instead of the regular transaction fees and thus will be able to lower
their monthly fees. The Exchange believes that charging a service fee
is also reasonable because it will allow the Exchange to recoup the
costs incurred in providing certain services, which include trade
matching and processing, post trade allocation, submission for clearing
and customer service activities related to trading activity on the
Exchange. The Exchange also believes it is reasonable to charge a
higher service fee for providing certain unique orders, such as QCC
orders, recognizing the unique efforts and costs associated with
developing that product. The Exchange believes the proposed fee change
will attract additional order flow to the Exchange and thereby will
benefit all market participants.
The Exchange believes the proposal to adopt the service fee is
equitable and not unfairly discriminatory because it would uniformly
apply to all members engaged in proprietary trading. The proposed fee
is designed to give members who trade a lot on the Exchange a benefit
by way of a lower transaction fee.
The Exchange believes the proposed service fee change will benefit
market participants by potentially lowering their fees while allowing
the Exchange to remain competitive with other exchanges that offer
similar fee cap programs. The Exchange notes that the proposed service
fee is similar to fees other exchanges charge for providing certain
services to its members. For example, Phlx currently assesses a risk
management fee.\19\ Additionally, the CBOE has a matched-unmatched fee
that it applies.\20\ Both the Phlx and the CBOE fees are in essence
fees charged by those exchanges for services they provide to their
members.
---------------------------------------------------------------------------
\19\ See Phlx Fee Schedule, Section VI (Equity Options Fees).
\20\ See CBOE Fees Schedule--Duplicate Fees Related To Manual
Data Entry (Keypunch) Errors.
---------------------------------------------------------------------------
For the reasons noted above, the Exchange believes that the
proposed fees are fair, equitable and not unfairly discriminatory.
B. Self-Regulatory Organization's Statement on Burden on Competition
The proposed rule change does not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments from members or other interested
parties.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act.\21\ At any time within 60 days of the
filing of such proposed rule change, the Commission summarily may
temporarily suspend such rule change if it appears to the Commission
that such action is necessary or appropriate in the public interest,
for the protection of investors, or otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission shall institute proceedings to determine whether the
proposed rule should be approved or disapproved.
---------------------------------------------------------------------------
\21\ 15 U.S.C. 78s(b)(3)(A)(ii).
---------------------------------------------------------------------------
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form http://www.sec.gov/rules/sro.shtml); or
Send an E-mail to [email protected]. Please include
File No. SR-ISE-2011-13 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-ISE-2011-13. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commissions Internet Web site (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for Web site viewing and printing in
the Commission's Public Reference Room. Copies of such filing also will
be available for inspection and copying at the principal office of the
ISE. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-ISE-
2011-13 and should be submitted by May 4, 2011.
---------------------------------------------------------------------------
\22\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
Cathy Ahn,
Deputy Secretary.
[FR Doc. 2011-8921 Filed 4-12-11; 8:45 am]
BILLING CODE 8011-01-P