[Federal Register Volume 78, Number 25 (Wednesday, February 6, 2013)]
[Notices]
[Pages 8621-8628]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-02630]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68792; File No. SR-C2-2013-004]
Self-Regulatory Organizations; C2 Options Exchange, Incorporated;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
To Amend the Fees Schedule
January 31, 2013.
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 January 24, 2013, C2 Options Exchange, Incorporated (the
``Exchange'' or ``C2'') 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 Exchange proposes to amend the Fees Schedule. The text of the
proposed rule change is available on the Exchange's Web site (http://www.c2exchange.com/Legal/), at the Exchange's Office of the Secretary,
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 Exchange 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 Exchange 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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend its transaction fees for simple,
non-complex orders in equity options classes (all of which may be
listed on other exchanges as well as C2). Going forward, fees will be
calculated based on the following formula (fees are calculated on a
per-contract basis): Fee = (C2 BBO Market Width at time of execution) x
(Market Participant Rate) x 50. The C2 BBO Market Width is the
difference between the quoted best offer and best bid in each class on
C2 (the displayed C2 ask price minus the displayed C2 bid price). The
Market Participant Rates are different rates for different types of
market participants, as follows:
------------------------------------------------------------------------
Rate
Market Participant (percent)
------------------------------------------------------------------------
C2 Market-Maker............................................. 30
Public Customer (Maker)..................................... 40
All other origins........................................... 50
------------------------------------------------------------------------
The Exchange multiplies the C2 BBO Market Width and the Market
Participant Rate by 50 because this allows C2 to reach a per-contract
amount that takes into account half of the C2 BBO Market Width. The use
of 50 as a multiplier is mathematically equivalent to the nominal C2
BBO Market Width divided by two, academically making the assumption
that the theoretical value of the difference between the ask price and
the bid price is the midpoint between the two. For purposes of this fee
structure, the Exchange will be using the BBO as calculated by C2. The
fee does not apply to Public Customer Takers because they will be
receiving a rebate for such transactions (to be described later in this
proposed rule change).
The Exchange uses different Market Participant Rates for different
market participants as a function of each market participant's
obligations and responsibilities in the relevant class, as well as to
provide incentives for Market-Makers to quote in a manner that narrows
bid-ask spreads, which promotes market liquidity and therefore enhances
market quality. C2 Market-Makers purchase permits and have quoting
obligations, thereby justifying a lower Market Participant Rate. Public
Customers have a lower Market Participant Rate than orders originating
from other origins (other than C2 Market-Makers) because Public
Customer order flow is a desirable commodity for all options exchanges
and the Exchange seeks to attract such order flow. Further, Public
Customers do not have access to many of the resources (such as
technology, capital treatment, etc.) that other market participants may
more easily access. Moreover, assessing different fee rates to
different types of market participants is a common practice within the
options industry, and many options exchanges, including C2, currently
do so.\3\
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\3\ See current C2 Fees Schedule, Section 1, which lists lower
transaction fees for Public Customers than other market
participants. See also Chicago Board Options Exchange, Incorporated
(``CBOE'') Fees Schedule, Rate Tables on pages 1-2, which list lower
transaction fees for Customers and CBOE Market-Makers than other
market participants. See also International Securities Exchange, LLC
(``ISE'') Schedule of Fees, Section 1, which lists lower transaction
fees for Customers and ISE Market-Makers than other market
participants.
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The maximum fee for simple, non-complex orders in all equity
options classes will be $0.85 per contract because, notwithstanding the
tenets of the overall proposal, the Exchange does not want to have fees
and rebates match or exceed the minimum trading increment ($0.01 x the
100 multiplier, or $1.00 per contract). This maximum fee amount is
reasonable because, among other things, the fee will not always be
assessed for the maximum amount. The fee will only be for the maximum
amount when the BBO Market Width is wide. Otherwise, the fee will be
smaller. Indeed, the purpose of the proposed new fees structure is to
encourage tighter quoting by linking lower fees to such tighter
quoting. A maximum fee amount is necessary to prevent fees from
becoming prohibitively high in the event of a wide BBO Market Width. A
maximum fee amount of $0.85 per contract is reasonable because it is
lower than the minimum trading increment. The Commission has, in the
past, noted the argument that a maximum fee of $0.99 per contract or
lower may be viable
[[Page 8622]]
because any maximum fee of $0.99 per contract or lower still allows for
price improvement.\4\ Purchasing an options contract at $2.00 with an
execution fee of $0.99 is a better all-inclusive price than purchasing
the same options contract at $2.01 with no execution fees. Simply put,
the execution of an order at a $0.01 better price will bring a better
all-inclusive price as long as the fee is $0.99 per contract or lower.
The proposed maximum fee here is not even $0.99 per contract, but only
$0.85 per contract. And, as stated above, $0.85 will not be assessed on
all transactions, but is merely a maximum fee amount based on the
formula described above for determining fees under the proposed fees
structure. Indeed, the Exchange anticipates that the vast majority of
transactions will be assessed a significantly lower per-contract fee
than $0.85.
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\4\ See Securities Exchange Act Release No. 61902 (April 14,
2010), 75 FR 20738 (April 20, 2010) (File No. S7-09-10) at 20750
(``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,
any fee cap should not be lower than $0.99 per contract * * *'').
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In conjunction with this new fee calculation for simple, non-
complex orders in all equity options classes, the Exchange proposes to
adopt a rebate (in lieu of a fee) for simple, non-complex Public
Customer orders in all equity options classes that remove liquidity
(i.e. takers) based upon the following formula (rebates are calculated
on a per-contract basis):
Rebate = (C2 BBO Market Width at time of execution) x (Order Size
Multiplier) x 50
The Order Size Multiplier is a different multiplier based upon the
size of the order:
------------------------------------------------------------------------
Multiplier
Number of contracts in order (percent)
------------------------------------------------------------------------
1-10........................................................ 36
11-99....................................................... 30
100-250..................................................... 20
251+........................................................ 0
------------------------------------------------------------------------
The rebate is limited to Public Customer taker orders because, at
this time, C2 seeks to provide extra incentives for Public Customer
order flow to route to the Exchange. Further, providing rebates
targeted towards Public Customers is a common practice within the
options industry, and many options exchanges, including C2, currently
do so.\5\ The Exchange applies different Order Size Multipliers for
different size orders because the Exchange desires to attract smaller
orders, and on related note, because of different hedging
considerations associated with these smaller orders. Smaller orders are
more attractive to Market-Makers because they are easier to hedge than
large orders. For example, imagine a situation in which a Public
Customer executes a 5-contract trade of at-the-money calls against a
counterparty. In a practical delta hedge, the counterparty would
execute a stock trade for 250 shares of the underlying stock (5
contracts X 50 delta). In contemporary stock markets, this size share
block is relatively easy to execute. Had the transaction been for 500
contracts, the counterparty would have had to trade 25,000 shares of
the underlying stock, which would be much more difficult. C2 will be
most able to incent counterparties to participate in trades if they
have a reasonable assumption that a meaningful amount of incoming
orders will be for smaller quantities. This can be achieved by
incentivizing order flow providers to direct small Public Customer
``taker'' orders to C2.
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\5\ See current C2 Fees Schedule, Section 1, and NASDAQ Stock
Market LLC Options Market (``NOM'') Chapter XV (Options Pricing),
Section 2.
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The proposed maximum rebate will be $0.75 per contract for the same
reasons described above for limiting the maximum per-contract fee. It
is necessary to maintain a spread between the maximum fee of $0.85 per
contract and the maximum rebate, because, in the event that the maximum
fee and rebate both apply, the $0.10 per-contract difference will allow
the Exchange to maintain a minimum level of profit potential. Rebate
amounts are often generally lower than fee amounts on the Exchange, as
well as on other exchanges,\6\ for this reason (among others).
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\6\ See current C2 Fees Schedule, Section 1, and NOM Chapter XV
(Options Pricing), Section 2.
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With respect to the rebate, in order to prevent order flow
providers from ``shredding'' large Public Customer orders into smaller
orders in order to take advantage of the higher rebates offered to such
smaller Public Customer taker orders, multiple orders from the same
executing firm for itself or for a Clearing Member Trading Agreement
(``CMTA'') or correspondent firm in the same series on the same side of
the market that are received by the Exchange within 500 milliseconds
will be aggregated for purposes of determining the order quantity. 500
milliseconds is the proper amount of time to discourage shredding to
take advantage of quantity-based fees. Such a time interval is lengthy
enough to discourage ``shredding'' due to the market risk the sender
would realize in trying to game this interval. This time interval also
matches that used by the Chicago Board Options Exchange, Incorporated
(``CBOE'') to prevent ``shredding.''\7\
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\7\ See CBOE Fees Schedule Table on ``Linkage Fees''.
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To illustrate how the new fee and rebate structure would operate,
consider the following examples. First, consider a situation in which
the C2 market in an equity options class is 1.00-1.03, with the offer
comprised of a resting C2 Market-Maker quote to sell 10 contracts. A
Public Customer order to buy 10 contracts comes in and executes against
that C2 Market-Maker quote at 1.03. At the time of the execution, the
BBO Market Width is 0.03 (the difference between the C2 offer and the
C2 bid). The fee for the C2 Market-Maker would be calculated by
multiplying 0.03 by 30% (the Market Participant Rate for C2 Market-
Makers), and then multiplying that by 50. As such, the fee for the C2
Market-Maker would be $0.45 per contract. Because the Public Customer
order is a ``taker'' order, the Public Customer would receive a rebate.
This rebate would be calculated by multiplying the BBO Market Width of
0.03 by the Order Size Multiplier of 36% (because the Public Customer
order is for 10 contracts), and then multiplying that by 50. As such,
the Public Customer would receive a rebate of $0.54 per contract.
Now, consider a situation in which the C2 market in an equity
options class is 3.50--3.52. The resting offer on the C2 Book is a C2
Market-Maker quote for 10 contracts, and next on the C2 Book sits a
broker-dealer sell order at the same price for 15 contracts. Following
that is a C2 Market-Maker quote for 25 contracts at 3.53 and a broker-
dealer order for 20 contracts at 3.55. The best offer on another
exchange is 3.54 for 25 contracts. A Public Customer (``taker'') market
order to buy 60 contracts at the market is received by C2.
The Public Customer buy order would trade with all interest at
3.52. The BBO Market Width here is 0.02. Therefore, the fees for
execution of the C2 Market-Maker quote resting at 3.52 and the broker-
dealer behind the C2 Market-Maker (but also at 3.52) would be
calculated by multiplying 0.02 by the Market Participant Rate, which
for a C2 Market-Maker is 30% and for a broker-dealer is 50%, and then
multiplying each of those amounts by 50. The C2 Market-Maker sell
quote's execution fee for those first 10 contracts would therefore be
$0.30 per contract (0.02 x 30% x 50), and the broker-dealer sell
order's fee for the next 15 contracts
[[Page 8623]]
would be $0.50 per contract (0.02 x 50% x 50). The rebate for the
Public Customer buy order would be calculated by multiplying the BBO
Market Width (0.02) by the Order Size Multiplier (30%, because the size
of the total order sent in by the Public Customer was 60 contracts),
and then multiplying that amount by 50. Therefore, the Public Customer
rebate would be $0.30 per contract for these first 25 contracts that
traded at 3.52.
With 35 contracts remaining in the Public Customer buy order, it
would then interact with the resting C2 Market-Maker quote to sell 25
contracts at 3.53. The fee for execution of this C2 Market-Maker quote
would be calculated by multiplying the new BBO Market Width (now 0.03)
by the C2 Market-Maker Market Participant Rate of 30%, and then
multiplying that amount by 50. Therefore, the C2 Market-Maker's fee for
these 25 contracts would be $0.45 per contract. The rebate for the
Public Customer buy order (for these next 25 contracts) would be
calculated by multiplying this new BBO Market Width of 0.03 by the
Order Size Multiplier of 30%, and then multiplying that by 50.
Therefore, the Public Customer rebate for these 25 contracts would be
$0.45 per contracts.
There remain 10 contracts on Public Customer's buy order. However,
because another exchange is now quoting a resting order for 25
contracts at 3.54, and this quote is now the National Best Offer, the
remaining 10 contracts on the buy order would be routed to that
exchange rather than trading with the resting broker-dealer order on
the C2 Book that is priced at 3.55.
Finally, consider a situation in which the C2 market in an equity
options class is 1.00-1.05. A C2 Market-Maker quote to buy 5 contracts
for at 1.00 sits on the C2 Book, with a broker-dealer order to buy
another 5 contracts at the same price resting behind it. A Public
Customer (``taker'') order to sell 10 contracts at the market comes in
and executes against the C2 Market-Maker quote and the broker-dealer
buy order. The fee for the C2 Market-Maker would be calculated by
multiplying the BBO Market Width of .05 by the C2 Market-Maker Market
Participant Rate of 30%, and then multiplying that by 50. The fee for
the C2 Market-Maker would be $0.75 per contract. The fee for the
broker-dealer would be calculated by multiplying the BBO Market Width
of .05 by the broker-dealer Market Participant Rate of 50%, and then
multiplying that by 50. This comes out to $1.25 per contract. However,
because this amount is higher than the maximum per-contract fee of
$0.85 per contract, the broker-dealer's fee would be brought down to
$0.85 per contract. The Public Customer's rebate would be calculated by
multiplying the BBO Market Width of 0.05 by the Order Size Multiplier
of 36% (since the order is for 10 contracts) and then multiplying that
by 50. This comes out to $0.90 per contract. However, because this
amount is higher than the maximum per-contract rebate of $0.75 per
contract, the Public Customer's rebate would be $0.75 per contract.
As with the current fee structure, there will be no fees or rebates
for trades on the open. Because orders would have been received before
the Exchange was disseminating a market, it would not be appropriate to
assess fees (or provide rebates) based on an unknown BBO Market Width.
The Exchange proposes to adopt this new method of calculating fees
and rebates because BBO Market Width is an important component of
market quality and of the cost of using an exchange market. In
addition, the structure of the Market Participant Rate, which is a
component of the proposed fees structure, is designed to provide
incentives for Market-Makers to quote in a manner that narrows bid-ask
spreads, promotes market liquidity, and enhances market quality.
Moreover, C2 believes that the proposed fee and rebate structure
addresses issues with respect to maker-taker pricing that have been
identified in academic studies. These studies find that although maker-
taker pricing has led to a reduction in quoted spreads, it has not led
to a decline in true economic spreads once access fees and liquidity
rebates are accounted for.\8\ C2 believes that, calibrated correctly, a
fee formula for transaction fees and rebates based on BBO Market Width,
Market Participant Rate, and order size harnesses the incentives of
different market participants that leads them to behave in a way that
narrows bid-ask spreads, promotes market liquidity, and thereby
enhances overall market quality. C2 believes that its competitive
position for order flow relative to other option exchanges is improved
through rules and policies that help promote high-quality markets.
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\8\ See James Angel, Lawrence Harris, and Chester S. Spatt,
``Equity Trading in the 21st Century,'' USC Marshall School of
Business, May 18, 2010, page 42. See also Katya Malinova and Andreas
Park, ``Subsidizing Liquidity: The Impact of Make/Take Fees on
Market Quality,'' available at: http://ssrn.com/abstract=1823600.
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The proposed new fee and rebate structure will potentially
compliment brokers' best-execution obligations towards their customers.
First, the proposed fee structure provides a generous ``taker'' rebate
for public customers. The concept of ``best execution'' is primarily
geared towards the treatment of retail order flow by brokers, and, on
C2, the majority of public retail customer orders take liquidity, as
opposed to make liquidity. Further, the amount of the fee or rebate for
a transaction is easily determinable by applying the simple formulas
described above. Order routers and other market participants have
complex options pricing and routing software that should easily handle
C2's proposed formula for fees or rebates. Moreover, even if it were
difficult for brokers to determine the fee amounts, they could always
assume the fee would equal the $0.85 per contract cap and route orders
accordingly (even though the Exchange expects that fees for most
transactions will fall short of that cap). Importantly, the $0.85 per
contract cap is less than $1.00 per contract, which means that, in any
situation in which C2 had even a one-cent better price than any other
exchange, a market participant will be getting the best all-inclusive
price by routing an order to C2. In situations in which C2 as well as
another exchange(s) is at the NBBO, the market participant or order
router can determine the exchange to which to send the order; there are
multiple factors along with fees, including systems speed, service,
etc., that are taken into account to determine ``best execution'', and
since trade-throughs are of course prevented, the market participant
will still be getting the best price. Finally, it will not be difficult
to verify the BBO Market Width at the time of execution, as it could be
deduced from the fee (which will be listed on the market participant's
billing reports). Additionally, the Exchange is currently developing
the system functionality to list the BBO Market Width at the time of
execution on the trade fill report.
The proposed new fee and rebate structure will benefit all market
participants and the markets in general. A fee structure that is based
upon BBO Market Width, in which fees are lower when such BBO Market
Width is smaller, will encourage tighter quoting (which in turn means
better prices). The rebates for Public Customers will bring greater
Public Customer order flow to the Exchange, and this increased volume
and liquidity will benefit all market participants. On a broader level,
a new, original, different fee structure benefits investors and the
market in general by providing a new and different option for investors
to consider when they decide which exchange
[[Page 8624]]
provides the most attractive option for directing order flow.
The proposed changes are to take effect on February 1, 2013.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of Section 6(b) of the
Act.\9\ Specifically, the Exchange believes the proposed rule change is
consistent with Section 6(b)(4) of the Act\10\, which provides that
Exchange rules may provide for the equitable allocation of reasonable
dues, fees, and other charges among its Trading Permit Holders and
other persons using its facilities. The proposed fee formula for
simple, non-complex orders in all equity options classes is reasonable
because it takes into account BBO Market Width, which is a factor in
determining the liquidity associated with any potential options trade.
Offering a different fee based on BBO Market Width is equitable and not
unfairly discriminatory because assessing a lower fee for narrower
spreads will provide incentives to quote more narrowly, which thereby
results in better prices for all market participants.
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\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(4).
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Offering a lower Market Participant Rate for C2 Market-Makers than
for other market participants is equitable and not unfairly
discriminatory because C2 Market-Makers take on a number of
obligations, including quoting obligations and the need to purchase
permits, that some other market participants do not have. Further, a
fees structure that includes a lower Market Participant Rate for C2
Market-Makers, who are the market participants that do the vast
majority of quoting, incentivizes more and narrower quoting, thereby
encouraging liquidity provision, which is vital to the marketplace and
benefits all market participants. Offering a lower Market Participant
Rate for Public Customers than for orders originating from other market
participants (except C2 Market-Makers) is equitable and not unfairly
discriminatory because those other market participants do not have the
obligations of C2 Market-Makers yet have access to many of the
resources (technology, capital treatment, etc.) that Public Customers
do not.
Not assessing fees or providing rebates for trades on the open is
reasonable because it allows market participants to avoid having to pay
fees for such trades. This is equitable and not unfairly discriminatory
because orders would have been received before the Exchange was
disseminating a market, and therefore it would not be appropriate to
assess fees (or provide rebates) based on an unknown BBO Market Width.
In the past, in the context of market data fees, the Commission has
acknowledged that exchanges can offer different prices to ``particular
classes of subscribers'' based on market conditions such as ``their
economic circumstances and their need for and use of'' a particular
product or service.\11\ For example, the Commission has previously
approved or cited favorably to differential pricing between retail and
non-retail investors.\12\ Further, assessing different fee rates to
different types of market participants is a common practice within the
options industry, and many options exchanges, including C2, currently
do so.\13\ Far from undermining the purposes of the Exchange Act, the
Commission has found that such differential pricing ``provide[s] an
opportunity for many investors to have access to'' products and
services that they otherwise might choose to forego.\14\ Indeed, in the
past, the Commission has disapproved fees when such fees would
interfere with the operation of the national market system--for
example, by providing market participants with quicker access to ``top
of book'' data that broker dealers are required by law to access
pursuant to their duty of best execution.\15\ The current proposal does
not present any such concerns.
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\11\ See Securities Exchange Act No. 42208 (December 9, 1999),
64 FR 70613 (December 17, 1999) at 70630 (Concept Release,
Regulation of Market Information Fees and Revenues) (File No. S7-28-
99).
\12\ See id. at 70630-31; see also Securities Exchange Act
Release No. 46843 (November 18, 2002), 67 FR 70471 (November 22,
2002) at 70472 (Order Approving Proposed Rule Change and Notice of
Filing and Order Granting Accelerated Approval to Amendment No. 5 to
the Proposed Rule Change by the National Association of Securities
Dealers, Inc., Relating to Fees for Nasdaq Data Entitlement
Packages) (SR-NASD-2002-33).
\13\ See current C2 Fees Schedule, Section 1, which lists lower
transaction fees for Public Customers than other market
participants. See also CBOE Fees Schedule, Rate Tables on pages 1-2,
which list lower transaction fees for Customers and CBOE Market-
Makers than other market participants. See also ISE Schedule of
Fees, Section 1, which lists lower transaction fees for Customers
and ISE Market-Makers than other market participants.
\14\ See Securities Exchange Act Release No. 46843 (November 18,
2002), 67 FR 70471 (November 22, 2002) at 70472 (Order Approving
Proposed Rule Change and Notice of Filing and Order Granting
Accelerated Approval to Amendment No. 5 to the Proposed Rule Change
by the National Association of Securities Dealers, Inc., Relating to
Fees for Nasdaq Data Entitlement Packages) (SR-NASD-2002-33).
\15\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496 (June 29, 2005) at 37569 (Final Rules and
Amendments to Joint Industry Plans (``Regulation NMS'')) (File No.
S7-10-04).
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Having a maximum per-contract fee amount under the proposed new
formula is reasonable because it will limit the amount that market
participants can pay. This maximum fee amount is reasonable because the
fee will not always be for the maximum amount. The fee will only be for
the maximum amount when the BBO Market Width is wide. Otherwise, the
fee will be smaller. Indeed, the purpose of the proposed new fees
structure is to encourage tighter quoting by linking lower fees to such
tighter quoting. A maximum fee amount is necessary to prevent fees from
becoming prohibitively high in the event of a wide BBO Market Width. A
maximum fee amount of $0.85 per contract is reasonable because it is
lower than the minimum trading increment. The Commission has, in the
past, noted the argument that a maximum fee of $0.99 per contract or
lower may be viable because any maximum fee of $0.99 per contract or
lower still allows for price improvement.\16\ Purchasing an options
contract at $2.00 with an execution fee of $0.99 is a better all-
inclusive price than purchasing the same options contract at $2.01 with
no execution fees. Simply put, the execution of an order at a $0.01
better price will bring a better all-inclusive price as long as the fee
is $0.99 per contract or lower. The proposed maximum fee here is not
even $0.99 per contract, but only $0.85 per contract. And, as stated
above, $0.85 will not be assessed on all transactions, but is merely a
maximum fee amount based on the formula described above for determining
fees under the proposed fees structure. The maximum per-contract fee is
equitable and not unfairly discriminatory because this limit will apply
to all market participants.
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\16\ See Securities Exchange Act Release No. 61902 (April 14,
2010), 75 FR 20738 (April 20, 2010) (File No. S7-09-10) at 20750
(``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,
any fee cap should not be lower than $0.99 per contract * * *'').
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Providing a rebate for Public Customer orders in all equity options
classes that remove liquidity (i.e. takers) is reasonable because it
will allow Public Customer takers to receive a rebate, as opposed to
pay a fee, for the execution of orders. Providing this rebate to Public
Customer takers only is equitable and not unfairly discriminatory
because the increased volume and liquidity that the rebate will
incentivize will benefit all other market participants. The rebate for
``take''
[[Page 8625]]
orders will incentivize Public Customers to ``take'' orders from all
market participants, thereby providing a counterparty for resting
``make'' orders from all market participants. Further, providing
rebates targeted towards Public Customers is a common practice within
the options industry.\17\
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\17\ See current C2 Fees Schedule, Section 1, and NOM Chapter XV
(Options Pricing), Section 2.
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Offering different Order Size Multipliers for different-sized
orders is equitable and not unfairly discriminatory because the highest
profit opportunity exists for the lowest-size orders since the profit
potential is not captured until after the counter-party has executed
its hedging transaction. Smaller orders are much easier to hedge than
large orders, which makes smaller orders more attractive to Market-
Makers. C2 will be most able to incent counterparties to participate in
trades if they have a reasonable assumption that a meaningful amount of
incoming orders will be for smaller quantities. This can be achieved by
incentivizing order flow providers to direct small Public Customer
``taker'' orders to C2. This will benefit all market participants with
the improved liquidity and trading opportunities. Market-Makers, who
have greater obligations (including quoting), will be able to engage in
more trades (especially hedging) due to the incenting of the direction
of small Public Customer ``taker'' orders to C2.
Having a maximum rebate of $0.75 is reasonable because it is
necessary to maintain a spread between the maximum fee of $0.85 per
contract and the maximum rebate in order for the Exchange to maintain a
minimum level of profit potential, and the $0.10 per contract
difference allows the Exchange to do so. Currently, rebates are lower
than fee amounts on the Exchange, as well as on other exchanges, for
this reason. Moreover, the amount of the maximum rebate is higher than
the maximum rebate currently offered on the Exchange \18\ and is either
higher than or within the range of rebates offered on other
exchanges.\19\ The maximum rebate is equitable and not unfairly
discriminatory because it will be applied to all Public Customers
equally. Further, providing this rebate to Public Customer takers only
is equitable and not unfairly discriminatory because the increased
volume and liquidity that the rebate will incentivize will benefit all
other market participants. The rebate for ``take'' orders will
incentivize Public Customers to ``take'' orders from all market
participants, thereby providing a counterparty for resting ``make''
orders from all market participants. Further, providing rebates
targeted towards Public Customers is a common practice within the
options industry.\20\
---------------------------------------------------------------------------
\18\ See Exchange Fees Schedule, Section 1.
\19\ See and NOM Chapter XV (Options Pricing), Section 2.
\20\ See current C2 Fees Schedule, Section 1, and NOM Chapter XV
(Options Pricing), Section 2.
---------------------------------------------------------------------------
Aggregating, for the purposes of determining the order quantity,
multiple orders from the same executing firm for itself or for a CMTA
or correspondent firm in the same series on the same side of the market
that are received by the Exchange within 500 milliseconds is consistent
with the Section 6(b)(5) \21\ requirements that the rules of an
exchange be designed to promote just and equitable principles of trade,
to prevent fraudulent and manipulative acts, to remove impediments to
and to perfect the mechanism for a free and open market and a national
market system, and, in general, to protect investors and the public
interest by preventing the ``shredding'' of large orders into multiple
smaller ones in order to accrue a larger rebate. 500 milliseconds is
the proper amount of time to discourage shredding to take advantage of
quantity-based fees. Such a time interval is lengthy enough to
discourage ``shredding'' due to the market risk the sender would
realize in trying to game this interval. This time interval also
matches that used by CBOE to prevent ``shredding.'' \22\
---------------------------------------------------------------------------
\21\ 15 U.S.C. 78f(b)(5).
\22\ See CBOE Fees Schedule Table on ``Linkage Fees''.
---------------------------------------------------------------------------
Finally, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5)\23\ requirements that the rules of
an exchange be designed to promote just and equitable principles of
trade, to prevent fraudulent and manipulative acts, to remove
impediments to and to perfect the mechanism for a free and open market
and a national market system, and, in general, to protect investors and
the public interest. Offering the proposed fee structure based on BBO
Market Width provides a new and different option for investors looking
to determine to which exchange to route orders, one that encourages
tighter quoting and better prices, all of which perfects the mechanism
for a free and open market and national market system.
---------------------------------------------------------------------------
\23\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Given the robust competition for order flow that exists in the
options market, new, innovative price schedules like the one being
proposed here are consistent with the above-mentioned goals of the
Exchange Act. Indeed, by and large, the Commission historically has
permitted exchanges to set their own fees absent some evidence that
market forces were insufficient to constrain prices. There is no such
evidence here.
When Congress charged the Commission with supervising the
development of a ``national market system'' for securities, a premise
of its action was that prices ordinarily would be determined by market
forces. See, e.g., H.R. Rep. No. 94-229, at 92 (1975) (Conf. Rep.)
(stating Congress's intent that the ``national market system evolve
through the interplay of competitive forces as unnecessary regulatory
restrictions are removed''). Consistent with this purpose, Congress and
the Commission have repeatedly stated their preference for competition,
rather than regulatory intervention, to determine prices, products, and
services in the securities markets. See S. Rep. No. 94-75, 94th Cong.,
1st Sess. 8 (1975) (``The objective [in enacting the 1975 amendments to
the Exchange Act] would be to enhance competition and to allow economic
forces, interacting within a fair regulatory field, to arrive at
appropriate variations in practices and services.''); Order Approving
Proposed Rule Change Relating to NYSE Arca Data, Securities Exchange
Act Release No. 59039 (December 2, 2008), 73 FR 74770 (Dec. 9, 2008) at
74781 (``The 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.'') (SR-NYSEArca-2006-21); Regulation NMS, 70 FR
at 37499 (observing that NMS regulation ``has been remarkably
successful in promoting market competition in [the] forms that are most
important to investors and listed companies'').
In NetCoalition v. Securities and Exchange Commission, 615 F.3d 525
(D.C. Cir. 2010), the D.C. Circuit approved the Commission's practice
of relying on ``competitive forces'' in determining whether an
exchange's proposed data fees were consistent with the purposes of the
Exchange Act--as long as it had a ``reasoned basis'' for doing so. Id.
at 544. Around the same time, Congress reaffirmed the primary role that
exchanges have in setting prices when it enacted the Dodd-Frank
amendments to the Exchange Act, which expanded the authorization of
[[Page 8626]]
exchanges to file immediately effective fee schedules, subject only to
limited post-effectiveness review by the Commission. 15 U.S.C.
78s(b)(3)(A).
This consistent and considered judgment of Congress and the
Commission is correct, particularly in light of evidence of robust
competition in the options market for orders and liquidity. There are
more options exchanges now than ever before, with no single exchange
commanding at a given time more than 35% of listed options market
share, a very different picture than 10 or 20 years ago. As the
Commission recently estimated, order volume is fairly evenly
distributed between the four largest entities that own options
exchanges.\24\ Indeed, recent data demonstrates this distribution of
market share: The CBOE Holdings entities (CBOE and C2) have combined a
market share of 26.40%, the International Securities Exchange has a
market share of 15.85%, the NYSE Euronext entities (NYSE Amex and NYSE
Arca) have a combined market share of 25.59%, and The NASDAQ OMX Group,
Inc. entities (NASDAQ OMX BX, NASDAQ OMX Phlx, and NASDAQ Options
Market) have a combined market share of 25.55%.\25\ None of these four
entities (which control over 93% of the market) could afford to charge
opportunistic fees that resulted in being placed at the bottom of an
order routing table and losing market share to competitors.
---------------------------------------------------------------------------
\24\ See Securities Exchange Act Release No. 61902 (April 14,
2010), 75 FR. 20738 (April 20, 2010) at 20759 (Proposed Amendments
to Rule 610 of Regulation NMS) (File No. S7-09-10).
\25\ Market share for November 2012, as provided by the Options
Clearing Corporation (available at http://www.optionsclearing.com/webapps/exchange-volume).
---------------------------------------------------------------------------
In the case of C2, it is particularly unlikely that an innovative
pricing approach could cause competitive harm to the options market or
to market participants. C2 is a new market participant that currently
handles only about 1.45% percent of total market share in options
trading.\26\ Thus, the proposed rule is a modest attempt by a new
market entrant to attract order volume away from more established
competitors by adopting an innovative pricing strategy. C2 believes
that this new pricing strategy will benefit the options markets and
public consumers in particular. Indeed, it is well-established that new
market entrants and new business models have procompetitive effects,
and that innovations like the proposed rule can incentivize competitors
to develop their own innovations in response. See, e.g., Leegin
Creative Leather Prods. v. PSKS, Inc., 551 U.S. 877, 891 (2007) (``New
products and new brands are essential to a dynamic economy''); Brooke
Group v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 243 (1993)
(noting that ``sound antitrust policy'' encouraged ``maverick'' pricing
strategies because of their procompetitive effects); U.S. Dep't of
Justice & Fed. Trade Comm'n, Horizontal Merger Guidelines ] 2.1.5
(expressing view of DOJ and FTC that ``maverick'' firms benefit
consumers by ``threaten[ing] to disrupt market conditions with a new
technology or business model,'' ``tak[ing] the lead in price cutting or
other competitive conduct,'' and ``resist[ing] otherwise prevailing
industry norms''). The fact that an exchange proposes something new is
a reason to be receptive, not skeptical--innovation is the life-blood
of a vibrant competitive market--and that is particularly so in the
case of a new market entrant of relatively small size like C2 that can
cause no widespread competitive harm if the proposed fees structure
fails to attract significant order volume.
---------------------------------------------------------------------------
\26\ Id.
---------------------------------------------------------------------------
Access to exchange quotes is also more efficient than ever and
helps to promote price transparency and competition among exchanges for
order flow. Orders are processed and executed electronically in
milliseconds (also very different than 10 years ago) and markets are
more open to new users than ever before. Under the NMS plan for order
protection in listed options (``Options Linkage Plan''), each
participating options exchange is required ``to establish, maintain,
and enforce written policies and procedures as approved by the
Commission that are reasonably designed to prevent Trade-Throughs'' in
each exchange's listed options contracts.\27\ When more than one
exchange is displaying the NBBO (which is overwhelmingly the case),
brokers often assign lowest priority in their order routing tables to
the exchange with the highest transaction fees. This means that if an
exchange sets high fees, it risks losing business to exchanges with
lower fees--the same competitive pressure used by our free markets
every day to constrain price.
---------------------------------------------------------------------------
\27\ See Securities Exchange Act Release No. 60405 (July 30,
2009), 74 FR 39362 (August 6, 2009) at 39264-65 (Joint Industry
Plan; Order Approving the National Market System Plan Relating to
Options Order Protection and Locked/Crossed Markets Submitted by the
Chicago Board Options Exchange, Incorporated, International
Securities Exchange, LLC, The NASDAQ Stock Market LLC, NASDAQ OMX
BX, Inc., NASDAQ OMS PHLX, Inc., NYSE Amex LLC, and NYSE Arca,
Inc.).
---------------------------------------------------------------------------
Indeed, order routers' ability to effectively view all exchanges'
displayed prices simultaneously and execute at the exchange that
charges the lowest fees is more disciplining than the market forces
that operate in many other industries. A customer in the market for a
new television, for instance, cannot simultaneously know the price of
every television at every retail store. And even if all those prices
were known, transaction costs often would prevent the customer from
buying at the lowest price--perhaps the cheapest television is twenty
miles away, for example. In the options markets, by contrast, order
routers can simultaneously view and execute orders at the exchange with
the lowest transaction fees when more than one exchange has, or may
match, the NBBO. Plus, broker-dealers, who have accepted responsibility
for handling orders on behalf of customers, are monitoring displayed
quotes. They are typically more sophisticated and better-informed
market participants than customers in non-financial markets, and
therefore are better able to make the types of decisions that will
produce efficient markets and constrain prices.
Options exchanges have adopted different pricing models (``Make or
Take'' or ``Broker Payment'') based on their competitive assessment of
the incentives that will best attract order flow and liquidity. This
competition has helped to exert competitive pressure on the exchanges'
transaction fees. The Exchange believes that its proposed model will
help further competition by providing market participants with yet
another option in determining where to execute orders and post
liquidity. By expanding the universe of pricing models, the Exchange's
proposal will help competition to achieve one of its signature
benefits, i.e., allowing the marketplace to determine which pricing
model best serves consumer needs.
B. Self-Regulatory Organization's Statement on Burden on Competition
C2 does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. On the contrary, C2 believes
that the proposed rule change will promote competition. A new,
original, different fee structure benefits investors and the market in
general by providing a new and different option for investors to
consider when they decide which exchange provides the most attractive
option for directing order flow.
In the case of C2, it is particularly unlikely that an innovative
pricing approach could cause competitive harm to the options market or
to market participants. C2 is a new market participant that currently
handles only
[[Page 8627]]
about 1.45% percent of total market share in options trading.\28\ Thus,
the proposed rule is a modest attempt by a new market entrant to
attract order volume away from more established competitors by adopting
an innovative pricing strategy. C2 believes that this new pricing
strategy will benefit the options markets and public consumers in
particular. Indeed, it is well-established that new market entrants and
new business models have procompetitive effects, and that innovations
like the proposed rule can incentivize competitors to develop their own
innovations in response. See, e.g., Leegin Creative Leather Prods. v.
PSKS, Inc., 551 U.S. 877, 891 (2007) (``New products and new brands are
essential to a dynamic economy''); Brooke Group v. Brown & Williamson
Tobacco Corp., 509 U.S. 209, 243 (1993) (noting that ``sound antitrust
policy'' encouraged ``maverick'' pricing strategies because of their
procompetitive effects); U.S. Dep't of Justice & Fed. Trade Comm'n,
Horizontal Merger Guidelines ] 2.1.5 (expressing view of DOJ and FTC
that ``maverick'' firms benefit consumers by ``threaten[ing] to disrupt
market conditions with a new technology or business model,'' ``tak[ing]
the lead in price cutting or other competitive conduct,'' and
``resist[ing] otherwise prevailing industry norms''). The fact that an
exchange proposes something new is a reason to be receptive, not
skeptical--innovation is the life-blood of a vibrant competitive
market--and that is particularly so in the case of a new market entrant
of relatively small size like C2 that can cause no widespread
competitive harm if the proposed fees structure fails to attract
significant order volume.
---------------------------------------------------------------------------
\28\ Market share for November 2012, as provided by the Options
Clearing Corporation (available at http://www.optionsclearing.com/webapps/exchange-volume).
---------------------------------------------------------------------------
Access to exchange quotes is also more efficient than ever and
helps to promote price transparency and competition among exchanges for
order flow. Orders are processed and executed electronically in
milliseconds (also very different than 10 years ago) and markets are
more open to new users than ever before. Under the Options Linkage
Plan, each participating options exchange is required ``to establish,
maintain, and enforce written policies and procedures as approved by
the Commission that are reasonably designed to prevent Trade-Throughs''
in each exchange's listed options contracts.\29\ When more than one
exchange is displaying the NBBO (which is overwhelmingly the case),
brokers often assign lowest priority in their order routing tables to
the exchange with the highest transaction fees. This means that if an
exchange sets high fees, it risks losing business to exchanges with
lower fees--the same competitive pressure used by our free markets
every day to constrain price.
---------------------------------------------------------------------------
\29\ See Securities Exchange Act Release No. 60405 (July 30,
2009), 74 FR 39362 (August 6, 2009) at 39264-65 (Joint Industry
Plan; Order Approving the National Market System Plan Relating to
Options Order Protection and Locked/Crossed Markets Submitted by the
Chicago Board Options Exchange, Incorporated, International
Securities Exchange, LLC, The NASDAQ Stock Market LLC, NASDAQ OMX
BX, Inc., NASDAQ OMS PHLX, Inc., NYSE Amex LLC, and NYSE Arca,
Inc.).
---------------------------------------------------------------------------
Indeed, order routers' ability to effectively view all exchanges'
displayed prices simultaneously and execute at the exchange that
charges the lowest fees is more disciplining than the market forces
that operate in many other industries. A customer in the market for a
new television, for instance, cannot simultaneously know the price of
every television at every retail store. And even if all those prices
were known, transaction costs often would prevent the customer from
buying at the lowest price--perhaps the cheapest television is twenty
miles away, for example. In the options markets, by contrast, order
routers can simultaneously view and execute orders at the exchange with
the lowest transaction fees when more than one exchange has, or may
match, the NBBO. Plus, broker-dealers, who have accepted responsibility
for handling orders on behalf of customers, are monitoring displayed
quotes. They are typically more sophisticated and better-informed
market participants than customers in non-financial markets, and
therefore are better able to make the types of decisions that will
produce efficient markets and constrain prices.
Options exchanges have adopted different pricing models (``Make or
Take'' or ``Broker Payment'') based on their competitive assessment of
the incentives that will best attract order flow and liquidity. This
competition has helped to exert competitive pressure on the exchanges'
transaction fees. The Exchange believes that its proposed model will
help further competition by providing market participants with yet
another option in determining where to execute orders and post
liquidity. By expanding the universe of pricing models, the Exchange's
proposal will help competition to achieve one of its signature
benefits, i.e., allowing the marketplace to determine which pricing
model best serves consumer needs.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
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) \30\ of the Act and paragraph (f) of Rule 19b-4 \31\
thereunder. 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.
---------------------------------------------------------------------------
\30\ 15 U.S.C. 78s(b)(3)(A).
\31\ 17 CFR 240.19b-4(f).
---------------------------------------------------------------------------
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-C2-2013-004 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-C2-2013-004. 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/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
[[Page 8628]]
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 10:00 a.m. and 3:00 p.m. Copies of
such filing also will be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-C2-2013-004 and should be submitted by February 27,
2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
---------------------------------------------------------------------------
\32\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-02630 Filed 2-5-13; 8:45 am]
BILLING CODE 8011-01-P