[Federal Register Volume 78, Number 59 (Wednesday, March 27, 2013)]
[Notices]
[Pages 18657-18660]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-07007]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69200; File No. SR-CBOE-2013-031]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change Relating to the Equity Rights Program of CBSX
March 21, 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 March 7, 2013, Chicago Board Options Exchange, Incorporated
(the ``Exchange'' or ``CBOE'') 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
CBOE proposes to modify an equity rights program of CBOE Stock
Exchange, LLC (``CBSX'').\3\ There are no proposed changes to the rule
text.
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\3\ CBSX is a stock trading facility of the Exchange.
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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
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the Program is to promote the long-term interests of
CBSX by providing incentives designed to encourage current and future
CBSX owners and market participants to contribute to the growth and
success of CBSX, by being active liquidity providers and takers to
provide enhanced levels of trading volume to CBSX's market, through an
opportunity to increase their proprietary interests in CBSX's
enterprise value.
Under the Program, in exchange for providing order flow to CBSX, a
participant may earn EPE Units representing the right to acquire Series
B Shares of CBSX pursuant to the terms of the Program. Under the
Program, a participant may earn up to the number of EPE Units that
would constitute, upon conversion, up to an aggregate of 19.99% of
then-outstanding CBSX equity (``Earn-Out Percentage''). EPE Units may
be earned based on a participant's trading activity in the initial
three years of the Program (``Measurement Period One'') and in years
three \4\ [sic] through five of the Program (``Measurement Period
Two''). EPE Units are earned and issued on the day following the end of
the applicable Measurement Period.
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\4\ Commission staff confirmed on a conference call with CBOE
staff that Measurement Period Two consists of years 4 and 5 of the
Program. Conference call between Tina Barry, Senior Special Counsel,
Division of Trading and Markets, Commission, and Laura Dickman,
Attorney, CBOE, on March 12, 2013.
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A participant will be eligible to earn EPE Units in Measurement
Period One provided that the participant is a Trading Permit Holder
(``TPH'') in good standing of CBSX, and that the participant has
achieved ``MADV'' during that period. ``MADV'' means a ``minimum
average daily volume'' of executions by the participant at CBSX that
equals at least 0.25% of ``TCAV.'' ``TCAV'' means the ``total
consolidated average daily trading volume'' of all NMS stocks as
disseminated pursuant to an effective national market system plan
during the applicable Measurement Period, less a 3% downward adjustment
for trades in quantities below 100 shares (odd-lot trades).\5\ Upon
achieving the
[[Page 18658]]
MADV, a participant will receive EPE Units in an amount equal to an
Earn-Out Percentage of 1.4%. For each 0.01% contribution of TCAV above
MADV, the participant's Earn-Out Percentage will increase 0.16% (up to
a maximum of the Measurement Period One Cap, as defined below). For
example, if a participant achieves 0.25% of TCAV during Measurement
Period One, the participant will receive an Earn-Out Percentage of
1.4%. If the participant achieves 0.26% of TCAV during Measurement
Period One, the participant will receive an Earn-Out Percentage of
1.56%. This would continue up to the Measurement Period One Cap.
Participants will not earn any EPE Units if they do not achieve MADV
during Measurement Period One. Notwithstanding the foregoing, in the
event of a liquidity event occurring in the first year of Measurement
Period One, the Earn-Out Percentage may not exceed 7.5%.
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\5\ Currently, odd-lot trades are not disseminated under
national market system (``NMS'') plans and thus are not included in
total consolidated trading volume of NMS stocks. Based on industry
discussions, CBSX expects that within the next year, NMS plans will
require exchanges to report odd-lot trades to the tape under those
plans. Pursuant to data that CBSX received from the Consolidated
Tape Association (CTA) and Consolidated Quotation (CQ) Plans, as
well as the OTC/UTP Plan (the two national market system plans for
reporting stock trades), if odd-lot trades were reported to the
tape, then the volume of larger exchanges (e.g. NYSE, NASDAQ) would
increase by approximately 5%, which would cause total consolidated
trading volume of NMS stocks to increase close to that amount.
However, the volume of CBSX would increase by approximately 1.5% to
2.0%. The increase in total consolidated trading volume would thus
be skewed against and much higher than the increase in volume on
CBSX. The purpose of the 3% adjustment to total consolidated trading
volume is to address this bias. CBSX believes the Program would make
it unnecessarily more difficult to achieve MADV without the
adjustment, as the amount of odd-lot trading on CBSX would not
offset the amount of the total consolidated trading volume
increases.
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A participant will be eligible to earn EPE Units in Measurement
Period Two provided that the participant is and remains a TPH in good
standing of CBSX and that the participant achieved the MADV in
Measurement Period One. Participants will not earn any EPE Units during
Measurement Period Two if their contributions of TCAV are less than or
equal to the MADV. For each 0.01% contribution of TCAV above MADV in
Measurement Period Two, the participant will receive an EPE Unit Earn-
Out 0.058706% up to a maximum of the Measurement Period Two Cap (as
defined below). For example, if a participant achieves MADV during
Measurement Period Two, the participant will earn no EPE Units. If the
participant achieves 0.26% of TCAV during Measurement Period Two, the
participant will receive an Earn-Out Percentage of 0.058706%. If the
participant achieves 0.27% of TCAV during Measurement Period Two, the
participant will receive an Earn-Out Percentage of 0.117412%. This
would continue up to the Measurement Period Two Cap.
As mentioned above, certain caps apply under the Program. In
Measurement Period One, a participant may earn a maximum Earn-Out
Percentage of 15% (the ``Measurement Period One Cap''). In Measurement
Period Two, a participant may earn a maximum Earn-Out Percentage of
4.99% (the ``Measurement Period Two Cap'' and, together with the
Measurement Period One Cap, the ``Participant Cap''). In addition, no
additional EPE Units may be earned or issued under the Program if those
additional EPE Units, together with the EPE Units outstanding at the
time, would be convertible into Series B Shares representing more than
a 33% percentage interest of then-outstanding CBSX equity (the
``Program Cap''). Any awards otherwise in excess of the Program Cap
will be reduced among participants on a pro-rata basis.
EPE Units may be converted to Series B Shares upon a ``Conversion
Event.'' A Conversion Event includes (i) a transfer of a majority of
the outstanding voting shares of CBSX to a third party and certain
other liquidity events, (ii) in the event that during any six month
period during Measurement Period One the trading volume on CBSX equals
at least 3% of TCAV, (iii) the expiration of Measurement Period Two, or
(iv) the termination of the Program. Until the conversion of the EPE
Units upon the occurrence of a Conversion Event, the EPE Units will not
entitle the holder thereof to any voting, allocation or distribution
rights or any share of the income, gain, loss, deduction or other tax
attributes or assets of CBSX, or any rights to participate as a CBSX
owner in any way. The Series B Shares issuable upon conversion of EPE
Units as a result of a Conversion Event will entitle the holder thereof
to all of the rights, benefits, privileges and obligations then
applicable under the Third Amended and Restated Operating Agreement of
CBSX, dated as of December 30, 2011, as amended from time to time (the
``Operating Agreement'') to outstanding Series B Shares and the holder
will become an owner with respect to the Series B Shares issued upon
conversion. Upon the occurrence of a Conversion Event, EPE Units earned
by a participant will, at participant's election, convert into Series B
Shares.
With respect to any or all Series B Shares and/or EPE Units held by
a participant, CBSX will have the right to purchase from the
participant up to all of the participant's Series B Shares or EPE Units
at a price based on a valuation provided by an independent third party
agreed upon by CBSX and the participant (the ``Independent Auditor'').
CBSX may exercise its call right at any time, in CBSX's sole
discretion, after Measurement Period Two. CBSX may exercise its call
right no more than one (1) time with respect to any participant.
With respect to any or all Series B Shares held by a participant
that have been earned under the Program, the participant will have the
right to sell to CBSX up to all of the participant's Series B Shares so
earned at a price based on a valuation provided by the Independent
Auditor. A participant may exercise its put right at any time, in the
participant's sole discretion, after two years after the occurrence of
a Conversion Event, provided that (i) No more than 20% of the
participant's ownership (as of the date of the first put exercise) may
be put in any 12-month period; (ii) CBSX may limit the participant's
exercise of the put right in any given period to the extent necessary
to preclude the Independent Auditor from issuing an opinion that raises
substantial doubt about CBSX's ability to continue as a going concern
for the subsequent 12 months; and (iii) exercise of the put right will
in all respects remain subject to the terms and conditions of Section
1.8 of the Operating Agreement.\6\ The costs of the Independent
Auditor's valuation and going concern assessment will be borne solely
by the participant(s) seeking to exercise the put right.
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\6\ Section 1.8 of the Operating Agreement provides that
notwithstanding anything otherwise contained in the Operating
Agreement to the contrary, so long as CBSX is a facility of CBOE, in
the event that CBOE, in its sole discretion, determines that any
action, transaction or aspect of an action or transaction, is
necessary or appropriate for, or interferes with, the performance or
fulfillment of CBOE's regulatory functions, its responsibilities
under the Act or as specifically required by the Committee, (i)
CBOE's affirmative vote will be required to be included in order to
constitute a super majority vote of the owners,'' (ii) without
CBOE's affirmative vote no such action, transaction or aspect of an
action or transaction will be authorized, undertaken or effective,
and (iii) CBOE will have the sole and exclusive right to direct that
any required, necessary or appropriate act, as it may determine in
its sole discretion, to be taken or transaction be undertaken by or
on behalf of CBSX without regard to the vote, act or failure to vote
or act by any other party in any capacity.
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All CBSX Series B Owners at the date of effectiveness of the
Program, and any subsequent Series B Owner that purchases Series B
Shares in an amount equaling 0.01% percentage interest \7\
[[Page 18659]]
and otherwise qualifies for Program participation during an Enrollment
Period, may request designation as a participant under the Program.
``Enrollment Period'' means a period of time designated by the Board
from time to time to allow interested qualifying parties to enroll in
the Program and satisfy the eligibility criteria required of Program
participants. In addition, to be designated as a participant, an
applicant must: (i) Be a TPH in good standing of CBSX; (ii) qualify as
an ``accredited investor'' as such term is defined in Regulation D of
the Securities Act of 1933; \8\ and (iii) have executed all required
documentation for Program participation. All applicants will be subject
to the same eligibility and designation criteria, and all Participants
will participate in the Program on the same terms, conditions and
restrictions.
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\7\ Section 3.2 of the Operating Agreement provides that the
Board may issue Series B Shares to new Owners in its sole
discretion, up to 0.01% of then-outstanding CBSX equity. In
connection with the approval of the Program, the Board authorized
issuance of 0.01% of Series B Shares to any TPH that requests to
participate in the Program and satisfies the other eligibility
criteria for the Program, as described in this filing.
\8\ The purpose of this criterion relates to the ability of CBSX
to sell Series B Shares pursuant to an exemption from registration
under the Securities Act of 1933. The definition of ``accredited
investor'' under Rule 501(a)(1) of the Act includes any broker or
dealer registered pursuant to Section 15 of the Act. CBOE Rules
3.2(a)(ii) and 3.3(a)(ii) require a TPH to be registered as a broker
or dealer pursuant to Section 15 of the Act, so all CBSX TPHs will
satisfy this criterion.
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As discussed above, the purpose of the Program is to encourage TPHs
to direct greater trade volume to CBSX to enhance trading volume in
CBSX's market. Increased volume will provide for greater liquidity and
enhanced price discovery, which benefits all market participants. Other
exchanges currently engage in the practice of incentiving increased
order flow in order to attract liquidity providers through equity
sharing arrangements.\9\ The Program similarly intends to attract order
flow, which will increase liquidity, thereby providing greater trading
opportunities and tighter spreads for other market participants and
causing a corresponding increase in order flow from these other market
participants. The Program will similarly reward the liquidity providers
that provide this additional volume with a potential proprietary
interest in CBSX.
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\9\ See, e.g., Securities Exchange Act Release No. 34-62358
(June 22, 2010), 75 FR 37861 (June 30, 2010) (SR-NSX-2010-006)
(order approving National Stock Exchange, Inc. equity rights program
[sic]); and Securities Exchange Act release No. 64742 (June 24,
2011), 76 FR 38436 (June 30, 2011) (SR-NYSEAmex-2011-018) (order
approving NYSE Amex LLC (now NYSE MKT LLC) options facility,
including a volume-based equity plan).
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The specific volume thresholds of the Program's Measurement Periods
were set based upon business determinations and an analysis of current
volume levels. The volume thresholds are intended to incentive firms to
increase the number of orders that are sent to CBSX to achieve the next
threshold. Increasing the number of orders that are sent to CBSX will
in turn provide tighter and more liquid markets, and therefore attract
more business overall.
CBSX currently intends to initiate an Enrollment Period, and
thereafter commence Measurement Period One on a date determined by CBSX
after effectiveness of the instant rule filing. CBSX will notify TPHs
of the implementation of the Program and the dates of the Enrollment
Period by regulatory circular, and will post a copy of this rule filing
on its Web site. Any CBSX TPH that is interested in participating in
the Program may contact CBSX for more information and legal
documentation and will be required to enter into a nondisclosure
agreement regarding this additional program information.
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.\10\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \11\ requirements that the rules
of an exchange be designed to prevent fraudulent and manipulative acts
and practices, to promote just and equitable principles of trade, to
foster cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitation transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public interest.
Additionally, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5)\12\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers. The Exchange also believes the
proposed rule change is consistent with Section 6(b)(4) of the Act,\13\
which requires that Exchange rules provide for the equitable allocation
of reasonable dues, fees, and other charges among its TPHs and other
persons using its facilities.
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\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(5).
\12\ Id.
\13\ 15 U.S.C. 78f(b)(4).
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In particular, the proposed rule change is equitable and not
unfairly discriminatory, because all TPHs may elect to participate (or
elect to not participate) in the Program and earn EPE Units on the same
terms and conditions, assuming they satisfy the same eligibility
criteria as described above. The eligibility criteria are objective;
thus, all TPHs have the ability to satisfy them. The Board also has
authorized CBSX to issue Series B Shares to any TPH that requests
designation to participate in the Program and otherwise satisfies the
eligibility criteria to ensure that all TPHs will have the opportunity
to own Series B Shares and thus participate in the Program if they so
choose. In addition, participants will receive Earn-Out Percentages
based on fixed volume thresholds that will apply to all participants.
The Exchange believes the Program is equitable and reasonable because
an increase in volume and liquidity would benefit all market
participants by providing more trading opportunities and tighter
spreads, even to those market participants that do not participate in
the Program. Additionally, the Exchange believes the proposed rule
change is consistent with the Act because, as described above, the
Program is designed to bring greater volume and liquidity to CBSX,
which will benefit all market participants by providing tighter quoting
and better prices, all of which perfects the mechanism for a free and
open market and national market system.
Given the robust competition for volume among equity markets, many
of which offer the same products, implementing a program to attract
orders like the one being proposed in this filing is consistent with
the above-mentioned goals of the Act. This is especially true for the
smaller equity markets, such as CBSX, which is competing for volume
with much larger exchanges that dominate the equity trading industry.
CBSX has a trading volume of less than 1% of total consolidated trading
volume, so it is unlikely that the Program could cause any competitive
harm to the equity market or to market participants, even though the
Program is offering equity rights to participants in exchange for
participants' provision of liquidity. The Program is a modest attempt
by a small equity market to attract order volume away from larger
competitors by adopting an innovative pricing strategy, as evidenced by
the volume thresholds of the Program that represent fractions of 1% of
TCAV. In support of this, the
[[Page 18660]]
Exchange notes that, unless there is a liquidity event or the Program
terminates, participants may only convert their EPE Units earned during
Measurement Period One to Series B Shares if there is a six-month
period during which the trading volume on CBSX equals at least 3% of
TCAV. While such percentage of TCAV would represent a large volume
increase for CBSX, it would represent a minimal reduction in volume of
its larger competitors in the industry.
The Exchange notes that 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, and markets are more open to
new users than ever before. 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 best price. When more
than one exchange is displaying the best price (which is often the
case), brokers often assign lowest priority in their order routing
tables to the exchange with the highest transaction fees (or lowest
rebates). This means that if an exchange sets high fees (or low
rebates), it risks losing business to exchanges with lower fees (or
higher rebates)--the same competitive pressure used by our free markets
every day to constrain price. 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. Equity
markets have different pricing models 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' fee structure. The Exchange believes that the Program
will help further competition, because market participants will have
yet another option in determining where to execute orders and post
liquidity if they factor the benefits of CBSX equity participation into
the determination.
B. Self-Regulatory Organization's Statement on Burden on Competition
CBOE 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. CBOE believes that the proposed
rule change will improve competition by providing market participants
with another option when determining where to execute orders and post
liquidity. See additional discussion above under ``Statutory Basis''
regarding the proposed rule change's impact on competition.
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) of the Act \14\ and paragraph (f) of Rule 19b-4 \15\
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. If the Commission
takes such action, the Commission will institute proceedings to
determine whether the proposed rule change should be approved or
disapproved.
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\14\ 15 U.S.C. 78s(b)(3)(A).
\15\ 17 CFR 240.19b-4(f).
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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-CBOE-2013-031 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-CBOE-2013-031. 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 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 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-CBOE-2013-031 and should be
submitted on or before April 17, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-07007 Filed 3-26-13; 8:45 am]
BILLING CODE 8011-01-P