[Federal Register Volume 77, Number 75 (Wednesday, April 18, 2012)]
[Notices]
[Pages 23313-23316]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-9285]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66793; File No. SR-ISE-2012-27]
Self-Regulatory Organizations; International Securities
Exchange, LLC; Notice of Filing and Immediate Effectiveness of Proposed
Rule Change To Amend an Existing Fee Cap Program and Related Service
Fee
April 12, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given
that, on April 2, 2012, the International Securities Exchange, LLC (the
``Exchange'' or the ``ISE'') filed with the Securities and Exchange
Commission (the ``Commission'') the proposed rule change as described
in Items I, II, and III below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The ISE is proposing to amend an existing fee cap program and a
related service fee. 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
[[Page 23314]]
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 Exchange currently has a fee cap program that, subject to
certain exclusions, is applicable across all products traded on ISE.\3\
The fee cap currently applies to transactions executed in a member's
proprietary account. The fee cap also applies to crossing transactions
for the account of entities affiliated with a member. That is, the cap
applies 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.
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\3\ See Securities Exchange Act Release No. 64274 [sic] (April
8, 2011), 76 FR 20754 (April 13, 2012) (SR-ISE-2011-13).
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Under the fee cap program, the Exchange caps 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 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\ also counts towards the fee cap.
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\4\ See Securities Exchange Act Release No. 63955 (February 24,
2011), 76 FR 11533 (March 2, 2011) (SR-ISE-2010-73).
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In addition to the fee cap, ISE also currently has a service fee of
$0.01 per side on all transactions that are eligible for the fee cap.
The service fee applies once a member reaches the fee cap level and
applies to every contract side included in and above the fee cap. A
member who does not reach the monthly fee cap is not charged the
service fee. Additionally, the service fee is not calculated in
reaching the fee cap. Once the fee cap is reached, the service fee
applies 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 service fee, when charged for volume above
the cap when no other transaction fees are collected, was 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.
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\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).
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In calculating the fee cap, the Exchange currently excludes 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.
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\6\ Other exchanges 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 current 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.
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The Exchange's current 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\ Since its inception, the fee cap has served its
intended purpose of attracting order flow to the Exchange. However, in
response to the pricing competition prevalent across the options
markets today, the Exchange now proposes to make changes to the current
fee cap program that, once adopted, will allow members to continue to
benefit from a fee cap while benefitting the Exchange by way of
attracting increased and targeted order flow.
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\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).
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Specifically, the Exchange proposes to make four changes to its
current fee cap program. First, the Exchange proposes to lower the cap
from $100,000 to $75,000 per member per month. The proposal to lower
the cap amount will enable the Exchange to better compete with fee caps
that are currently in place at other exchanges. For example, CBOE and
PHLX both currently have their fee caps at $75,000 per month.
Second, the Exchange proposes to limit the fee cap to only trades
executed in the Exchange's Facilitation Mechanism, Price Improvement
Mechanism, Solicited Order Mechanism and Block Order Mechanism and to
Qualified Contingent Cross (``QCC'') orders. These orders are generally
known as crossing orders. For the sake of clarity, the Exchange
proposes to define crossing orders in the footnotes applicable to the
fee cap. The Exchange believes the proposal to limit the cap to these
order types will simplify the Exchange's fees and allow it to better
compete for trading volume that contributes to fee caps at other
exchanges. The Exchange also believes the proposal will make it easier
for members to track their fee cap-eligible trading activity. To
reflect change, the Exchange proposes to remove what was previously
footnote 2 on page 17 of the Exchange's Schedule of Fees and
consolidate the rule text applicable to the fee cap program into a
single footnote. As a result, footnote 1 on page 16, footnote 9 on page
19 and footnote 6 on page 21 now reflect that the fees are capped at
$75,000 per member per month on all Firm Proprietary and Non-ISE Market
Maker transactions that are part of a originating or contra side of a
crossing order.
Third, as noted above, in calculating the fee cap, the Exchange
currently excludes the maker and taker fees charged by the Exchange for
complex orders for certain option classes and the taker fees charged by
the Exchange for regular orders for the Select Symbols. The Exchange
proposes to remove these exclusions as they are no longer applicable
because this activity is not part of one of the crossing order
transactions and in order to simplify the fee schedule text. As a
result, the Exchange proposes to amend the text in footnote 9 on page
19 and footnote 6 on page 21 to reflect this change.
[[Page 23315]]
Finally, the Exchange proposes to make the current service fee of
$0.01 per side incremental after a member reaches the fee cap. As noted
above, the service fee currently applies once a member reaches the fee
cap level and applies to every contract side included in and above the
fee cap. The Exchange notes that since members pay a transaction fee
for contracts executed up to the cap level, they are defraying the
Exchange's costs for providing services that include trade matching and
processing, post trade allocation, submission for clearing and customer
service activities related to their trading activity on the Exchange.
ISE believes that the service fee need only be charged to incremental
contracts where no transaction fee is assessed to offset the Exchange's
costs.
The Exchange has designated this proposal to be operative on April
2, 2012.
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.
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\14\ 15 U.S.C. 78f(b).
\15\ 15 U.S.C. 78f(b)(4).
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The Exchange believes proposed amendment to the fee cap is
reasonable because it will continue to 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. The Exchange's fee cap applies 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 pricing that reduces rates for market
makers based on the level of business they bring to the Exchange.\18\
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\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.
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The Exchange further believes the proposed changes to the fee cap
program 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 the proposed change to 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 believes the proposed fee change will
attract additional order flow to the Exchange and thereby will benefit
all market participants.
The Exchange believes the proposed change to the service fee is
equitable and not unfairly discriminatory because it would apply
uniformly to all members engaged in proprietary trading. The proposed
change to the manner by which the service fee is charged 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 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. 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.\19\ At any time within 60 days of the
filing of the proposed rule change, the Commission summarily may
temporarily suspend such rule change if it appears to the Commission
that such action is necessary or appropriate in the public interest,
for the protection of investors, or otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission shall institute proceedings to determine whether the
proposed rule should be approved or disapproved.
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\19\ 15 U.S.C. 78s(b)(3)(A)(ii).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-ISE-2012-27 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-ISE-2012-27. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/
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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, 100 F
Street NE., Washington, DC 20549, on official business days between the
hours of 10 a.m. and 3 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-ISE-2012-27 and should be
submitted on or before May 9, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-9285 Filed 4-17-12; 8:45 am]
BILLING CODE 8011-01-P