[Federal Register Volume 78, Number 161 (Tuesday, August 20, 2013)]
[Notices]
[Pages 51242-51248]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-20217]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70200; File No. SR-Topaz-2013-01]
Self-Regulatory Organizations; Topaz Exchange, LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change to Establish
the Schedule of Fees
August 14, 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 August 5, 2013, the Topaz Exchange, LLC (the ``Exchange'' or
``Topaz'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II
and III below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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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 the
Substance of the Proposed Rule Change
Topaz is proposing to establish a Schedule of Fees by adopting fees
and rebates for all Regular Orders in standard options and Mini Options
traded on Topaz. The proposed fees and rebates will apply to
transactions that take and make liquidity in symbols traded on the
Exchange. The text of the proposed rule change is available on the
Exchange's Web site, 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 the
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in sections A, B and C below, of the
most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule filing is to establish a Schedule
of Fees by adopting fees and rebates for Regular Orders \3\ that make
or take liquidity in standard options and Mini Options traded on
Topaz.\4\
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\3\ A Regular Order is an order that consists of only a single
option series and is not submitted with a stock leg.
\4\ The fees proposed herein are similar to the maker/taker fees
currently assessed by NASDAQ Options Market (``NOM''). NOM currently
charges a fee for adding liquidity to the following class of market
participants on that exchange: (i) Firm, (ii) Broker-Dealer, and
(iii) Non-NOM Market Maker. NOM also charges a fee for removing
liquidity to the following class of market participants: (i)
Customer, (ii) Professional, (iii) Firm, (iv) Non-NOM Market Maker,
(v) NOM Market Maker and (vi) Broker-Dealer. NOM also provides a
rebate for adding liquidity to the following class of market
participants: (i) Customer, (ii) Professional, and (iii) NOM Market
Maker. See NOM Price List, Chapter XV, Options Pricing, at http://www.nasdaqtrader.com/Micro.aspx?id=optionsPricing.
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Fees and Rebates
The Exchange proposes to assess per contract transaction fees in
all option classes traded on the Exchange to market participants that
take liquidity from the Exchange's orderbook and provide rebates to
those participants that make liquidity. The fees depend on the category
of market participant submitting orders to the Exchange.
The proposed Schedule of Fees identifies the following categories
of market participants: (i) Market Maker; \5\ (ii) Non-Topaz Market
Maker; \6\ (iv) [sic] \7\ Firm Proprietary \8\/Broker-Dealer; \9\ (v)
Professional Customer; \10\ and (vi) Priority Customer.\11\ The fees to
be assessed for Regular Orders that take liquidity in standard options
that are in the Penny Pilot \12\ (including SPY) are: (i) $0.48 per
contract for Market Maker, Non-Topaz Market Maker, Firm Proprietary/
Broker-Dealer and Professional Customer orders; and (ii) $0.45 per
contract for Priority Customer orders. The transaction charges to be
assessed for Regular Orders that take liquidity in Mini Options that
are in the Penny Pilot (including SPY) are: (i) $0.048 per contract for
Market Maker, Non-Topaz Market Maker, Firm Proprietary/Broker-Dealer
and Professional Customer orders; and (ii) $0.045 per contract for
Priority Customer orders.
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\5\ The term Market Makers refers to ``Competitive Market
Makers'' and ``Primary Market Makers'' collectively. Market Maker
orders sent to the Exchange by an Electronic Access Member are
assessed fees at the same level as Market Maker orders. See footnote
2, Schedule of Fees, Section I and II.
\6\ A Non-Topaz Market Maker, or Far Away Market Maker
(``FARMM''), is a market maker as defined in Section 3(a)(38) of the
Securities Exchange Act of 1934, as amended (``Exchange Act''),
registered in the same options class on another options exchange.
\7\ The Commission notes that three ordered lists in the
Exchange's filing appear to have been misnumbered.
\8\ A Firm Proprietary order is an order submitted by a member
for its own proprietary account.
\9\ A Broker-Dealer order is an order submitted by a member for
a non-member broker-dealer account.
\10\ A Professional Customer is a person who is not a broker/
dealer and is not a Priority Customer.
\11\ A Priority Customer is a person or entity that is not a
broker/dealer in securities, and does not place more than 390 orders
in listed options per day on average during a calendar month for its
own beneficial account(s).
\12\ Under the Penny Pilot program, the minimum price variation
for all participating options classes, except for the Nasdaq-100
Index Tracking Stock (``QQQ''), the SPDR S&P 500 Exchange Traded
Fund (``SPY'') and the iShares Russell 2000 Index Fund (``IWM''), is
$0.01 for all quotations in options series that are quoted at less
than $3 per contract and $0.05 for all quotations in options series
that are quoted at $3 per contract or greater. The proposed fees and
rebates for Penny Pilot symbols (including SPY) apply to all classes
in the Penny Pilot, i.e., to series that are quoted at less than $3
that have a minimum price variation of $0.01 and to series that are
quoted at $3 or more that have an minimum price variation of $0.05.
QQQ, SPY and IWM are quoted in $0.01 increments for all options
series.
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The transaction charges to be assessed for Regular Orders that take
liquidity in standard options that are not in the Penny Pilot are: (i)
$0.84 per contract for Market Maker orders; (ii) $0.87 per contract for
Non-Topaz Market Maker, Firm Proprietary/Broker-Dealer and Professional
Customer orders; and (ii) [sic] $0.82 per contract for Priority
Customer orders. The transaction charges to be assessed for Regular
Orders that take liquidity in Mini Options that are not in the Penny
Pilot are: (i) $0.084 per contract for Market Maker orders; (ii) $0.087
per contract for Non-Topaz Market Maker, Firm Proprietary/Broker-Dealer
and Professional Customer orders; and (ii) [sic] $0.082 per contract
for Priority Customer orders.
In order to provide an incentive for market participants to provide
liquidity in option classes traded on the Exchange, Topaz proposes to
adopt per contract rebates. The per contract rebate for Regular Orders
that make liquidity in standard options that are in the Penny Pilot
are: (i) $0.37 per contract (for SPY, this rebate is $0.39 per
contract) for Market Maker orders; (ii) $0.25 per contract for Non-
Topaz
[[Page 51243]]
Market Maker, Firm Proprietary/Broker-Dealer and Professional Customer
orders; and (iii) $0.48 per contract for Priority Customer orders. The
per contract rebate for Regular Orders that make liquidity in Mini
Options that are in the Penny Pilot are: (i) $0.037 per contract (for
SPY, this rebate is $0.039 per contract) for Market Maker orders; (ii)
$0.025 per contract for Non-Topaz Market Maker, Firm Proprietary/
Broker-Dealer and Professional Customer orders; and (iii) $0.048 per
contract for Priority Customer orders.
The Exchange proposes to adopt per contract rebates for Regular
Orders that make liquidity in standard options that are not in the
Penny Pilot of: (i) $0.40 per contract for Market Maker orders; (ii)
$0.10 per contract for Non-Topaz Market Maker, Firm Proprietary/Broker-
Dealer and Professional Customer orders; and (iii) $0.82 per contract
for Priority Customer orders. The Exchange also proposes to adopt per
contract rebate for Regular Orders that make liquidity in Mini Options
that are not in the Penny Pilot of: (i) $0.040 per contract for Market
Maker orders; (ii) $0.010 per contract for Non-Topaz Market Maker, Firm
Proprietary/Broker-Dealer and Professional Customer orders; and (iii)
$0.082 per contract for Priority Customer orders.
The maker and taker fees and rebates noted above also apply to
orders that are exposed at the National Best Bid or Offer (NBBO) by the
Exchange (``Flash Order'').\13\ When Topaz is not at the NBBO, certain
orders are exposed to members to give them an opportunity to match the
NBBO before those orders are sent for execution pursuant to intermarket
linkage rules. For all Flash Orders, the Exchange will charge the
applicable taker fee and for responses that trade against a Flash
Order, the Exchange will provide the applicable maker rebate.
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\13\ See Topaz Rule 1901, Supplementary Material .02.
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The Exchange proposes to adopt fees of $0.20 per contract and
$0.020 per contract for Regular Crossing Orders in standard options and
Mini Options, respectively, in all symbols traded on the Exchange for
all market participants, except Priority Customers. The fee for Regular
Crossing Orders in standard options and Mini Options for Priority
Customer orders will be $0.00 per contract. A Crossing Order is an
order executed in the Exchange's Facilitation Mechanism, Solicited
Order Mechanism, Price Improvement Mechanism or submitted as a
Qualified Contingent Cross order. Orders executed in the Block Order
Mechanism are also considered Crossing Orders.
The Exchange proposes to adopt fees for Responses to Crossing
Orders. A Response to Crossing Order is any contra-side interest (i.e.,
orders and quotes) submitted after the commencement of an auction in
the Exchange's Facilitation Mechanism, Solicited Order Mechanism, Block
Order Mechanism or Price Improvement Mechanism. For Regular Orders in
standard options that are in the Penny Pilot (including SPY), the
Exchange proposes to adopt a fee of (i) $0.48 per contract for Market
Maker, Non-Topaz Market Maker, Firm Proprietary/Broker-Dealer and
Professional Customer orders; and (ii) $0.45 per contract for Priority
Customer orders. For Regular Orders in standard options that are not in
the Penny Pilot, the Exchange proposes to adopt a fee of (i) $0.84 per
contract for Market Maker orders; (ii) $0.87 per contract for Non-Topaz
Market Maker, Firm Proprietary/Broker-Dealer and Professional Customer
orders; and (iii) $0.82 per contract for Priority Customer orders. For
Regular Orders in Mini Options that are in the Penny Pilot (including
SPY), the Exchange proposes to adopt a fee of $0.048 per contract for
Market Maker, Non-Topaz Market Maker, Firm Proprietary/Broker-Dealer
and Professional Customer orders; and (ii) $0.045 per contract for
Priority Customer orders. For Regular Orders in Mini Options that are
not in the Penny Pilot, the Exchange proposes to adopt a fee of (i)
$0.084 per contract for Market Maker orders; (ii) $0.087 per contract
for Non-Topaz Market Maker, Firm Proprietary/Broker-Dealer and
Professional Customer orders; and (iii) $0.082 per contract for
Priority Customer orders.
The Exchange believes the proposed fees for Crossing Orders and
Responses to Crossing Orders are competitive with fees charges by other
options exchanges that have functionality for crossing orders. For
example, a crossing order at the BOX Options Exchange (``BOX'')
executed through its PIP is subject to a transaction fee as high as
$0.65 per contract for Penny Pilot symbols and $1.10 per contract for
non-Penny Pilot symbols, as follows: the customer side of the order
being auctioned is not charged a fee and receives a `Credit for
Removing Liquidity' of $0.30 per contract in Penny Pilot symbols and
$0.75 per contract in non-Penny Pilot symbols. The improvement side of
the order (on behalf of the BOX member seeking to internalize the
customer order) would be charged a fee of as much as $0.35 per contract
or as little as $0.10 per contract based on that members' ADV at BOX--
keeping in mind that the `Credit for Removing Liquidity' mentioned
above is credited to that executing broker, either completely negating
the total fee paid or creating a credit for that member firm.
For responding to PIP and participating or improving the customer
side of the order, BOX participants are charged the `Fee for Adding
Liquidity' of $0.30 per contract in Penny Pilot symbols and $0.75 per
contract in non-Penny Pilot symbols. This fee is in addition to regular
transaction fees charged to BOX members, which range between $0.10 per
contract and $0.35 per contract. As a result, the total fee charged for
responding to PIP orders on BOX ranges between $0.40 and $0.65 per
contract for Penny Pilot symbols and $0.85 and $1.10 for non-Penny
Pilot symbols. The fees proposed by Topaz for Responses to Crossing
Orders are well below those charged for similar orders on BOX.\14\
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\14\ These fees apply to Improvement Orders on BOX. Primary
Improvement Orders are not subject to any fees in addition to their
ADV-based fees therefore the differential at BOX for Primary
Improvement Orders is even greater.
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Further, the Chicago Board Options Exchange (``CBOE''), for
transactions executed in its Automated Improvement Mechanism (``AIM''),
does not charge any fees on facilitation orders, where the initiating
firm is seeking to internalize a customer order. Other transactions
executed in AIM are charged a fee as high as $0.05 per contract. At
CBOE, firms internalizing customer orders are also able to generate
payment for order flow (``PFOF'') fees of $0.25 and $0.65 per contract
for Penny Pilot and non-Penny Pilot symbols, respectively, when market
makers responding to auctions interact with customer orders that are
part of the AIM auction. These market makers are also eligible to
collect rebates under CBOE's VIP program based on that member's average
daily volume.
The fees for responding to AIM auctions at CBOE depend on the
category of the responder and range dramatically. For broker/dealers,
these fees are $0.45 and $0.60 per contract in Penny Pilot and non-
Penny Pilot symbols, respectively, and for firm proprietary orders,
these fees are $0.25 per contract. Fees for market makers on CBOE vary
as they depend on the member's average daily volume and can range
between $0.03 and $0.25 per contract in addition to being subject to a
PFOF fee of $0.25 and $0.65 per contract for Penny Pilot and non-Penny
Pilot symbols, respectively. Thus, market maker fees on CBOE range
[[Page 51244]]
between $0.28 and $0.50 per contract in Penny Pilot symbols and between
$0.68 and $0.90 per contract in non-Penny Pilot symbols. As a result,
the fees paid by members initiating the crossing auctions are
significantly lower at CBOE than the fees paid by members responding,
resulting in a differential ranging from as little as $0.20 (i.e., when
a initiating firm pays $0.05 per contract and a responding member pays
$0.25 per contract) to as much as $0.50 per contract (i.e., when an
initiating firm pays no fee and a market maker responding pays $0.25
per contract, in addition to a payment for order flow fee of $0.25 per
contract in a Penny Pilot symbol). The Exchange notes that the
differential in the fees is even higher in Non-Penny Pilot symbols.
The Exchange believes that when taken as a whole, i.e., the low fee
charged to an internalizing member at CBOE, even without the potential
for a credit provided to that member through CBOE's VIP program and the
PFOF fee collected from market makers, the differential between fees
charged by CBOE for crossing orders and for responses to crossing
orders is comparable to the fee differential proposed by Topaz, and in
some cases, exceeds the fee differential proposed by Topaz.
Route-Out Fees
The Exchange proposes to adopt a fee of $0.50 per contract and
$0.55 per contract for executions of Priority Customer and Professional
Customer orders, respectively, for standard options in symbols that are
in the Penny Pilot (including SPY) that are routed to one or more
exchanges in connection with the Options Order Protection and Locked/
Crossed Market Plan. For Mini Options in these symbols, the Exchange
proposes to adopt a fee of $0.050 per contract for Priority Customer
orders and $0.055 per contract for Professional Customer orders.
The Exchange proposes to adopt a fee of $0.90 per contract and
$0.95 per contract for executions of Priority Customer and Professional
Customer orders, respectively, for standard options in symbols that are
not in the Penny Pilot that are routed to one or more exchanges in
connection with the Options Order Protection and Locked/Crossed Market
Plan. For Mini Options in these symbols, the Exchange proposes to adopt
a fee of $0.090 per contract for Priority Customer orders and $0.095
per contract for Professional Customer orders.
The route-out fee offsets costs incurred by the Exchange in
connection with using unaffiliated broker-dealers to access other
exchanges for linkage executions and is therefore appropriate because
market professionals, in this case, Professional Customers, that are
submitting these orders can route them directly to away exchanges, if
desired, and should not be able to forgo an away market fee by
directing their orders to the Exchange. The Exchange believes that it
is appropriate to assess lower route-out fees to Priority Customer
orders than to Professional Customer orders because Priority Customers
have historically been assessed lower fees than other market
participants. Further, Professional Customers are market professionals
and engage in trading activity similar to that conducted by broker-
dealers. While the Exchange does not have any obligation to route-out
broker/dealer orders, it does have an obligation to route-out
Professional Customer orders and believes it is appropriate to charge
these orders a higher fee because these orders are submitted by market
professionals that have the ability to send their orders directly to
the exchange displaying the best quote but choose not to do so. The
Exchange therefore believes it is appropriate to charge these orders
the proposed fee in order to recoup costs associated with routing out
these orders.
Options Regulatory Fee
The Exchange proposes to adopt an Options Regulatory Fee (``ORF'')
of $0.0010 per contract for both standard options and Mini Options in
order to recoup its regulatory expenses while also ensuring that the
ORF will not exceed costs. The per-contract ORF will be assessed by the
Exchange to each Exchange member for all options transactions executed
and cleared, or simply cleared, by the member, that are cleared by The
Options Clearing Corporation (``OCC'') in the ``customer'' range,
regardless of the exchange on which the transaction occurs. The ORF
will be collected indirectly from members through their clearing firms
by OCC on behalf of the Exchange.
The ORF also will be charged for transactions that are not executed
by a member but are ultimately cleared by a member. In the case where a
non-member executes a transaction and a member clears the transaction,
the ORF will be assessed to the member who clears the transaction. In
the case where a member executes a transaction and another member
clears the transaction, the ORF will be assessed to the member who
clears the transaction. As a practical matter, it is not feasible or
reasonable for the Exchange (or any SRO) to identify each executing
member that submits an order on a trade-by-trade basis. There are
countless executing market participants, and each day such participants
can and often do drop their connection to one market center and
establish themselves as participants on another. It is virtually
impossible for any exchange to identify, and thus assess fees such as
an ORF on, each executing participant on a given trading day.
Clearing members, however, are distinguished from executing
participants because they remain identified to the Exchange regardless
of the identity of the initiating executing participant, their
location, and the market center on which they execute transactions.
Therefore, the Exchange believes it is more efficient for the operation
of the Exchange and for the marketplace as a whole to assess the ORF to
clearing members.
The Exchange believes it is appropriate to charge the ORF only to
transactions that clear as customer at the OCC.
The Exchange believes that its broad regulatory responsibilities
with respect to a member's activities supports applying the ORF to
transactions cleared but not executed by a member. The Exchange's
regulatory responsibilities are the same regardless of whether a member
executes a transaction or clears a transaction executed on its behalf.
The Exchange regularly reviews all such activities, including
performing surveillance for position limit violations, manipulation,
front-running, contrary exercise advice violations and insider
trading.\15\ These activities span across multiple exchanges.
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\15\ The Exchange also participates in The Options Regulatory
Surveillance Authority (``ORSA'') national market system plan and in
doing so shares information and coordinates with other exchanges
designed to detect the unlawful use of undisclosed material
information in the trading of securities options. ORSA is a national
market system comprised of several self-regulatory organizations
whose functions and objectives include the joint development,
administration, operation and maintenance of systems and facilities
utilized in the regulation, surveillance, investigation and
detection of the unlawful use of undisclosed material information in
the trading of securities options. The Exchange compensates ORSA for
the Exchange's portion of the cost to perform insider trading
surveillance on behalf of the Exchange. The ORF will cover the costs
associated with the Exchange's arrangement with ORSA.
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The ORF is designed to recover a material portion of the costs to
the Exchange of the supervision and regulation of members' customer
options business, including performing routine surveillances and
investigations, as well as policy, rulemaking, interpretive and
enforcement activities. The Exchange believes that revenue
[[Page 51245]]
generated from the ORF, when combined with all of the Exchange's other
regulatory fees and fines, will cover a material portion, but not all,
of the Exchange's regulatory costs. The Exchange notes that its
regulatory responsibilities with respect to member compliance with
options sales practice rules have been allocated to the Financial
Industry Regulatory Authority (``FINRA'') under a 17d-2 Agreement. The
ORF is not designed to cover the cost of options sales practice
regulation.
The Exchange will continue to monitor the amount of revenue
collected from the ORF to ensure that it, in combination with its other
regulatory fees and fines, does not exceed the Exchange's total
regulatory costs. The Exchange expects to monitor Topaz regulatory
costs and revenues at a minimum on an annual basis. If the Exchange
determines regulatory revenues exceed regulatory costs, the Exchange
will adjust the ORF by submitting a fee change filing to the
Commission. The Exchange will notify members of adjustments to the ORF
via regulatory circular.
The Exchange believes it is reasonable and appropriate for the
Exchange to charge the ORF for options transactions regardless of the
exchange on which the transactions occur. The Exchange has a statutory
obligation to enforce compliance by members and their associated
persons under the Act and the rules of the Exchange and to surveil for
other manipulative conduct by market participants (including non-
members) trading on the Exchange. The Exchange cannot effectively
surveil for such conduct without looking at and evaluating activity
across all options markets. Many of the Exchange's market surveillance
programs require the Exchange to look at and evaluate activity across
all options markets, such as surveillance for position limit
violations, manipulation, front-running and contrary exercise advice
violations/expiring exercise declarations. Also, the Exchange and the
other options exchanges are required to populate a consolidated options
audit trail (``COATS'') \16\ system in order to surveil a member's
activities across markets.
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\16\ COATS effectively enhances intermarket options surveillance
by enabling the options exchanges to reconstruct the market promptly
to effectively surveil certain rules.
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In addition to its own surveillance programs, the Exchange works
with other SROs and exchanges on intermarket surveillance related
issues. Through its participation in the Intermarket Surveillance Group
(``ISG''),\17\ the Exchange shares information and coordinates
inquiries and investigations with other exchanges designed to address
potential intermarket manipulation and trading abuses. The Exchange's
participation in ISG helps it to satisfy the requirement that it has
coordinated surveillance with markets on which security futures are
traded and markets on which any security underlying security futures
are traded to detect manipulation and insider trading.\18\
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\17\ ISG is an industry organization formed in 1983 to
coordinate intermarket surveillance among the SROs by co-operatively
sharing regulatory information pursuant to a written agreement
between the parties. The goal of the ISG's information sharing is to
coordinate regulatory efforts to address potential intermarket
trading abuses and manipulations.
\18\ See Section 6(h)(3)(I) of the Act.
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The Exchange believes that charging the ORF across markets will
avoid having members direct their trades to other markets in order to
avoid the fee and to thereby avoid paying for their fair share for
regulation. If the ORF did not apply to activity across markets then a
member would send their orders to the least cost, least regulated
exchange. Other exchanges do impose a similar fee on their member's
activity, including the activity of those members on the Exchange.\19\
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\19\ Similar regulatory fees have been instituted by Nasdaq OMX
PHLX (See Securities Exchange Act Release No. 61133 (December 9,
2009), 74 FR 66715 (December 16, 2009) (SR-Phlx-2009-100)); and
Miami International Securities Exchange (See Securities Exchange Act
Release No. 68711 (January 23, 2013), 78 FR 6155 (January 29, 2013)
(SR-MIAX-2013-01)).
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The Exchange notes that there is established precedent for an SRO
charging a fee across markets, namely, FINRAs Trading Activity Fee \20\
and the ORF currently charged by a number of other options exchanges.
While the Exchange does not have all the same regulatory
responsibilities as FINRA, the Exchange believes that, like other
exchanges that have adopted an ORF, its broad regulatory
responsibilities with respect to a member's activities, irrespective of
where their transactions take place, supports a regulatory fee
applicable to transactions on other markets. Unlike FINRA's Trading
Activity Fee, the ORF would apply only to a member's customer options
transactions.
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\20\ See Securities Exchange Act Release No. 47946 (May 30,
2003), 68 FR 34021 (June 6, 2003).
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FINRA Web CRD Fees
The Exchange proposes to adopt regulatory fees related to Web CRD,
which are collected by the Financial Industry Regulatory Authority
(``FINRA'') (``FINRA Web CRD Fees'').\21\ The proposed fees are
collected and retained by FINRA via Web CRD for the registration of
employees of Topaz members that are not FINRA members (``Non-FINRA
members''). The Exchange is merely listing these fees on its Schedule
of Fees. The Exchange does not collect or retain these fees.
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\21\ FINRA operates Web CRD, the central licensing and
registration system for the U.S. securities industry. FINRA uses Web
CRD to maintain the qualification, employment and disciplinary
histories of registered associated persons of broker-dealers.
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The FINRA Web CRD Fees listed on Topaz Schedule of Fees consists of
General Registration Fees of $100 (for each initial Form U4 filed for
the registration of a representative or principal), $110 (for the
additional processing of each initial or amended Form U4, Form U5 or
Form BD that includes the initial reporting, amendment or certification
of one of more disclosure events or proceedings), and $45 (annual
system processing fee assessed only during renewals). The FINRA Web CRD
Fees also consist of Fingerprint Processing Fees for the initial,
second and third submissions. There is a separate fee for electronic
submissions and paper submissions. The initial electronic and paper
submission fees are $29.50 and $44.50, respectively. The second
electronic and paper submission fees are $15.00 and $30.00,
respectively. The third electronic and paper submission fees are $29.50
and $44.50, respectively. Finally, there is a $30 processing fee for
fingerprint results submitted by self-regulatory organizations other
than FINRA. The FINRA Web CRD Fees are user-based and there is no
distinction in the cost incurred by FINRA if the user is a FINRA member
or a Non-FINRA member. Accordingly, the proposed fees mirror those
currently assessed by FINRA.\22\
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\22\ See Securities Exchange Act Release No. 67247 (June 25,
2012), 77 FR 38866 (June 29, 2012) (SR-FINRA-2012-030) (the ``FINRA
Fee Filing'').
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The Exchange does not propose to adopt any other fees at this time.
The Exchange expects to adopt additional fees, i.e., membership fees,
access fees, market data fees, etc., at a later date and will submit a
fee change filing with the Commission prior to any such fees becoming
effective.
2. Statutory Basis
The Exchange believes that its proposal to adopt a Schedule of Fees
is consistent with Section 6(b) of the Securities and Exchange Act of
1934 (the ``Exchange Act'') \23\ in general, and
[[Page 51246]]
furthers the objectives of Section 6(b)(4) of the Exchange Act \24\ in
particular, in that it is an equitable allocation of reasonable dues,
fees and other charges among Exchange Members and other persons using
its facilities.
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\23\ 15 U.S.C. 78f(b).
\24\ 15 U.S.C. 78f(b)(4).
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The Exchange believes the fees proposed for transactions on Topaz
are reasonable. Topaz will operate within a highly competitive market
in which market participants can readily send order flow to any of
eleven other competing venues if they deem fees at a particular venue
to be excessive. The proposed fee structure is intended to attract
order flow to Topaz by offering market participants incentives to
submit their orders to Topaz.
The Exchange has determined to charge fees and provide rebates for
Regular Orders in Mini Options at a rate that is 1/10th the rate of
fees and rebates the Exchange currently provides for trading in
standard options. The Exchange believes it is reasonable and equitable
and not unfairly discriminatory to assess lower fees and rebates to
provide market participants an incentive to trade Mini Options on the
Exchange. The Exchange believes the proposed fees and rebates are
reasonable and equitable in light of the fact that Mini Options have a
smaller exercise and assignment value, specifically 1/10th that of a
standard option contract, and, as such, levying fees that are 1/10th of
what market participants pay today.
The Exchange believes that its proposal to assess per contract
taker fee for Market Maker, Non-Topaz Market Maker, Firm Proprietary/
Broker-Dealer, Professional Customer and Priority Customer orders is
reasonable and equitably allocated because the proposed fees are within
the range of fees assessed by other exchanges employing similar pricing
schemes. For example, NOM currently charges a taker fee as high as
$0.48 per contract in symbols that are in the Penny Pilot and as much
as $0.89 per contract in symbols that are not in the Penny Pilot.\25\
The Exchange believes the proposed taker fees are not unfairly
discriminatory because they would apply uniformly to all market
participants.
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\25\ See supra note 4.
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The Exchange believes proposed fee for Crossing Orders is
reasonable and equitably allocated because the proposed fees are also
within the range of fees assessed by other exchanges. For example, the
International Securities Exchange (``ISE'') currently charges an
identical fee for Crossing Orders. The Exchange believes the proposed
fee for Crossing Orders is not unfairly discriminatory because they
would uniformly apply to all market participants, except Priority
Customers, who historically have paid lower fees than other market
participants as an incentive to attract that order flow to an exchange.
The Exchange further believes it is reasonable and equitable to
charge the proposed fees for Responses to Crossing Orders because an
execution resulting from a Response to a Crossing Order is akin to an
execution and therefore its proposal to establish execution fees and
fees for Responses to Crossing Orders that are identical is reasonable
and equitable. The Exchange further believes that while the
differential between the fee charged for Crossing Orders and the fee
for Responses to Crossing Orders is significant, the differential on
Topaz is less than the differential that currently exists on other
exchanges that offer a similar functionality, and therefore, the
Exchange believes the proposed fees are reasonable and equitably
allocated because they are within the range of fees assessed by other
exchanges employing similar pricing schemes and differ from each other
far less than the fees at other exchanges. As noted above, the
differential between the fee charged to participants that internalize
customer orders and the response fee charged on BOX and CBOE is much
greater than the differential proposed by Topaz. The Exchange is not
introducing a novel pricing scheme for Crossing Orders and for
Responses to Crossing Orders. This functionality is currently available
on a number of exchanges, all of whom have a pricing differential that
promotes internalizing customer orders. The differential proposed by
Topaz is simply smaller than that which currently exists, notably at
CBOE and BOX. The Exchange believes the fees for Responses to Crossing
Orders are not unfairly discriminatory because they would uniformly
apply to all market participants.
The Exchange believes that it is reasonable and equitable to
provide rebates because paying a rebate will attract order flow to the
Exchange and create liquidity in the symbols that are subject to the
rebate, which the Exchange believes ultimately will benefit all market
participants who trade on Topaz. The Exchange believes that the
proposed rebates are competitive with rebates provided by other
exchanges and are therefore reasonable and equitably allocated to those
members that direct orders to the Exchange rather than to a competing
exchange.
The Exchange believes that the price differentiation between the
various market participants is justified. With respect to fees for
Market Maker orders, the Exchange believes that the price
differentiation between the various market participants is appropriate
and not unfairly discriminatory because Market Makers have different
requirements and obligations to the Exchange that the other market
participants do not (such as quoting requirements and paying
membership-related non-transaction fees). The Exchange believes that it
is equitable and not unfairly discriminatory to assess a higher fee to
market participants that do not have such requirements and obligations
that Exchange Market Makers do. The Exchange believes that the proposed
fees are fair, equitable and not unfairly discriminatory because the
proposed fees are consistent with price differentiation that exists
today at other options exchanges.
The Exchange believes charging lower fees and providing higher
rebates to Priority Customer orders attracts that order flow to the
Exchange and thereby creates liquidity to the benefit of all market
participants who trade on the Exchange. Further, the Exchange believes
that it is equitable and not unfairly discriminatory to assess lower
fees to Priority Customer orders than to Professional Customer orders.
A Priority Customer is by definition not a broker or dealer in
securities, and does not place more than 390 orders in listed options
per day on average during a calendar month for its own beneficial
account(s). This limitation does not apply to participants on the
Exchange whose behavior is substantially similar to that of market
professionals, including Professional Customers, non-Topaz Market
Makers, and Firm Proprietary/Broker-Dealers, who will generally submit
a higher number of orders (many of which do not result in executions)
than Priority Customers. Further, Professional Customers engage in
trading activity similar to that conducted by market makers and
proprietary traders. For example, Professional Customers continue to
join bids and offers on the Exchange and thus compete for incoming
order flow whereas Priority Customers do not engage in such activity.
The Exchange believes the proposed route-out fees are reasonable
and equitable as they provides the Exchange the ability to recover
costs associated with using unaffiliated broker-dealers to route
Priority Customer and Professional Customer orders to other exchanges
for linkage executions. The
[[Page 51247]]
Exchange also believes that the proposed fees are not unfairly
discriminatory because these fees would be uniformly applied to all
Priority Customer and Professional Customer orders. As fees to access
liquidity for Priority and Professional Customer orders have risen at
other exchanges, it has become necessary for the Exchange to adopt
routing fees in order to recoup the costs associated with routing
orders. The Exchange notes that a number of other exchanges currently
charge a variety of routing related fees associated with customer and
non-customer orders that are subject to linkage handling. The Exchange
also notes that the fees proposed herein are within the range of fees
charged by some of the Exchange's competitors.\26\
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\26\ See NASDAQ OMX PHLX Fee Schedule, Section V, Routing Fees;
and Chicago Board Options Exchange Fees Schedule, Linkage Fees.
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The Exchange believes the ORF is equitable and not unfairly
discriminatory because it is objectively allocated to members in that
it is charged to all members on all their transactions that clear as
customer at the OCC. Moreover, the Exchange believes the ORF ensures
fairness by assessing fees to those members that are directly based on
the amount of customer options business they conduct. Regulating
customer trading activity is much more labor intensive and requires
greater expenditure of human and technical resources than regulating
non-customer trading activity, which tends to be more automated and
less labor-intensive. As a result, the costs associated with
administering the customer component of the Exchange's overall
regulatory program are materially higher than the costs associated with
administering the non-customer component (e.g., member proprietary
transactions) of its regulatory program.
The ORF is designed to recover a material portion of the costs of
supervising and regulating members' customer options business including
performing routine surveillances, investigations, examinations,
financial monitoring, and policy, rulemaking, interpretive, and
enforcement activities. The Exchange will monitor, on at least an
annual basis the amount of revenue collected from the ORF to ensure
that it, in combination with its other regulatory fees and fines, does
not exceed the Exchange's total regulatory costs. If the Exchange
determines regulatory revenues exceed regulatory costs, the Exchange
will adjust the ORF by submitting a fee change filing to the
Commission. The Exchange will notify Members of adjustments to the ORF
via regulatory circular.
The Exchange has designed the ORF to generate revenues that, when
combined with all of the Exchange's other regulatory fees, will be less
than or equal to the Exchange's regulatory costs, which is consistent
with the Commission's view that regulatory fees be used for regulatory
purposes and not to support the Exchange's business side. In this
regard, the Exchange believes that the initial level of the fee is
reasonable.
The Exchange believes that its proposal to adopt the FINRA Web CRD
Fees is reasonable because the proposed fees are identical to those
adopted by FINRA for use of Web CRD for disclosure and the registration
of FINRA members and their associated persons. In the FINRA Fee Filing,
FINRA noted that it believed that its fees are reasonable based on the
increased costs associated with operating and maintaining Web CRD, and
listed a number of enhancements made to Web CRD in support of its fee
change. These costs are borne by FINRA when a Non-FINRA member uses Web
CRD. FINRA further noted its belief that the fees are reasonable
because they help to ensure the integrity of the information in Web
CRD, which is very important because the Commission, FINRA, other self-
regulatory organizations and state securities regulators use Web CRD to
make licensing and registration decisions, among other things. The
Exchange notes that the proposed rule change is reasonable because the
amount of the fees are those provided by FINRA, and the Exchange does
not collect or retain these fees. The proposed rule change is also
equitable and not unfairly discriminatory because the Exchange will not
be collecting or retaining these fees, therefore will not be in a
position to apply them in an inequitable or unfairly discriminatory
manner.
The Exchange notes that the proposed rule filing is intended to
establish Topaz as an attractive venue for market participants to
direct their order flow as the proposed fees and rebates are
competitive with those established by other exchanges for similar
trading strategies. The Exchange will be operating in a highly
competitive market in which market participants can readily direct
order flow to another exchange if they deem fees at a particular
exchange to be too high, or in the case of rebates, not high enough.
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
This proposed rule change does not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Exchange Act.
The Exchange notes that the difference between the fees for
Crossing Orders and the fees for Responses to Crossing Orders may
appear discriminatory and an undue burden on competition. The Exchange,
however, believes the crossing mechanisms on Topaz provide incentives
for market participants to submit customer order flow to the Exchange
and thus, creates a greater opportunity for customers to receive better
executions. The crossing mechanisms on Topaz provide an opportunity for
market participants to compete for customer orders, and have no
limitations regarding the number of and type of market participant that
can participate and compete for such orders. Topaz notes that its
market model and fees are generally intended to attract a specific
segment of the options industry and the Exchange is competing with
exchanges that currently attract that segment. The Exchange further
notes that the proposed fees are more transparent than PFOF
arrangements and are generally less than fees that include PFOF.
Unilateral action by Topaz in establishing fees for services
provided to its Members and others using its facilities will not have
any adverse impact on competition. As a new entrant in the already
highly competitive environment for equity options trading, Topaz does
not have the market power necessary to set prices for services that are
inequitably allocated, unreasonable or unfairly discriminatory in
violation of the Act. Topaz's proposed fees and rebates, as described
herein, are comparable to fees charged and rebates provided by other
options exchanges for the same or similar services. To the extent the
proposed fees and rebates prove unattractive to attract order flow away
from its competitors, Topaz will necessarily have to adjust level of
fees and rebates.
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.
[[Page 51248]]
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 \27\ and subparagraph (f)(2) of Rule 19b-4
thereunder,\28\ because it establishes a due, fee, or other charge
imposed by Topaz.
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\27\ 15 U.S.C. 78s(b)(3)(A)(ii).
\28\ 17 CFR 240.19b-4(f)(2).
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At any time within 60 days of the filing of such proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
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-Topaz-2013-01 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-Topaz-2013-01. 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 such filing also will be
available for inspection and copying at the principal offices 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-
Topaz-2013-01, and should be submitted on or before September 10, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\29\
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\29\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-20217 Filed 8-19-13; 8:45 am]
BILLING CODE 8011-01-P