[Federal Register Volume 78, Number 222 (Monday, November 18, 2013)]
[Notices]
[Pages 69168-69171]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-27471]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70845; File No. SR-CBOE-2013-104]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change Relating to Fees for the Customized Option Pricing
Service
November 12, 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 October 29, 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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Chicago Board Options Exchange, Incorporated (the ``Exchange'' or
``CBOE'') proposes to amend the fee schedule for the Customized Option
Pricing Service (``COPS'') to add a fee for historical COPS data. The
text of the proposed rule change is available on the Exchange's Web
site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), 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
[[Page 69169]]
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 proposed rule change is to amend the fee
schedule for the COPS data product.\3\
---------------------------------------------------------------------------
\3\ The Exchange submitted proposed rule changes in 2012 to
establish COPS and COPS fees. See Securities Exchange Act Release
No. 67813 (September 10, 2012), 77 FR 56903 (September 14, 2012) and
Securities Exchange Act Release No. 67928 (September 26, 2012), 77
FR 60161 (October 2, 2012). The service was originally entitled
``Customized Option Valuation Service'' but is now referred to as
the ``Customized Option Pricing Service''.
---------------------------------------------------------------------------
Background
COPS provides subscribers with an ``end-of-day'' file \4\ of
valuations for Flexible Exchange (``FLEX'') \5\ options and certain
over-the-counter (``OTC'') options (``COPS Data''). COPS Data consists
of indicative \6\ values for three categories of ``customized''
options. The first category of options is all open series of FLEX
options listed on any exchange that offers FLEX options for trading.\7\
The second category is OTC options that have the same degree of
customization as FLEX options. The third category includes options with
strike prices expressed in percentage terms. Values for such options
are expressed in percentage terms and are theoretical values.\8\ Market
Data Express, LLC (``MDX''), an affiliate of CBOE, offers COPS Data for
sale to all market participants.
---------------------------------------------------------------------------
\4\ An end of day file refers to data that is distributed prior
to the opening of the next trading day.
\5\ FLEX options are exchange traded options that provide
investors with the ability to customize basic option features
including size, expiration date, exercise style, and certain
exercise prices.
\6\ ``Indicative'' values are indications of potential market
prices only and as such are neither firm nor the basis for a
transaction.
\7\ Current FLEX options open interest spans over 2,000 series
on over 300 different underlying securities.
\8\ These values are theoretical in that they are indications of
potential market prices for options that have not traded (i.e. do
not yet exist). Market participants sometimes express option values
in percentage terms rather than in dollar terms because they find it
is easier to assess the change, or lack of change, in the
marketplace from one day to the next when values are expressed in
percentage terms.
---------------------------------------------------------------------------
The fees that MDX charges for COPS Data are set forth on the Price
List on the MDX Web site (www.marketdataexpress.com). MDX currently
charges a fee per option per day for COPS Data. The amount of the fee
is reduced based on the number of options purchased. A subscriber pays
$1.25 per option per day for each option purchased up to 50 options,
$1.00 per option per day for each option purchased from 51 to 100
options, $0.75 per option per day for each option purchased from 101 to
500 options, and $0.50 per option per day for each option purchased
over 500 options.
The Exchange has submitted a separate proposed rule change to make
historical COPS data (``Historical COPS Data'') available through
MDX.\9\ Historical COPS Data consists of COPS Data that is over one
month old (i.e., copies of the ``end-of-day'' COPS file that are over
one month old). Pursuant to that proposed rule change, the Exchange
will make COPS Data and COPS Historical Data (collectively, the
``Data'') available to ``Subscribers'' for internal use and internal
distribution \10\ and to ``Customers'' who, pursuant to a written
vendor agreement between MDX and the Customer, may distribute the data
externally (i.e., act as a vendor) and/or use and distribute the Data
internally. Customers will not be charged any fees initially for
external distribution of the Data.
---------------------------------------------------------------------------
\9\ See Securities Exchange Act Release No. 70705 (October 17,
2013), 78 FR 63265 (October 23, 2013) (SR-CBOE-2013-097).
\10\ Pursuant to a written agreement between MDX and a
Subscriber, a Subscriber may not act as a vendor and distribute the
Data externally.
---------------------------------------------------------------------------
Fee for Historical COPS Data
The Exchange proposes to establish a fee of $75 per day for
Historical COPS Data. For example, a Subscriber would pay a total of
$750 for 10 days of Historical COPS Data. Market participants would be
able to purchase Historical COPS Data through the MDX Web site. The
proposed fee would apply equally to all market participants and be
effective on November 4, 2013.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the requirements of Section 6(b) of the Securities Exchange Act of 1934
(``Act'') \11\ in general, and, in particular, with Section 6(b)(4) of
the Act \12\ in that it provides for the equitable allocation of
reasonable dues, fees and other charges among users and recipients of
the Data, and with Section 6(b)(5) \13\ of the Act in that it is not
designed to permit unfair discrimination between them. The Exchange
believes the proposed fee for Historical COPS Data is equitable and not
unfairly discriminatory because it would apply equally to all market
participants. In addition, the Exchange believes the proposed fee is
equitable because COPS is purely optional. Only those customers that
deem the product to be of sufficient overall value and usefulness would
purchase it. The Exchange believes the proposed fee is reasonable
because potential COPS customers have indicated to the Exchange that
the proposed fee compares favorably to fees that competing market data
vendors charge for similar data. A small number of market data vendors
produce option value data that is similar to the Data.\14\ The Options
Clearing Corporation (``OCC'') also produces FLEX option value data
that is similar to the FLEX option value data that is included in
COPS.\15\
---------------------------------------------------------------------------
\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(4).
\13\ 15 U.S.C. 78f(b)(5).
\14\ These vendors include SuperDerivatives, Markit, Prism, and
Bloomberg's BVAL service.
\15\ The OCC makes this data available on its Web site at http://www.theocc.com/webapps/flex-reports.
---------------------------------------------------------------------------
For the reasons cited above, the Exchange believes the proposed
rule change is equitable, reasonable and not unfairly discriminatory.
In addition, the Exchange believes that no substantial countervailing
basis exists to support a finding that the proposed fee fails to meet
the requirements of the Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
In accordance with Section 6(b)(8) of the Act,\16\ 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. An exchange's ability to price its proprietary
data products is constrained by (1) the existence of actual competition
for the sale of such data, (2) the joint product nature of exchange
platforms, and (3) the existence of alternatives to proprietary data.
---------------------------------------------------------------------------
\16\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
The Existence of Actual Competition. The Exchange believes
competition provides an effective constraint on the market data fees
that the Exchange, through MDX, has the ability and the incentive to
charge. CBOE has a compelling need to attract order flow from market
participants in order to maintain its share of trading volume. This
compelling need to attract order flow imposes significant pressure on
CBOE to act reasonably in setting its fees for market data,
particularly given that the market participants that will pay such fees
often will be the same
[[Page 69170]]
market participants from whom CBOE must attract order flow. These
market participants include broker-dealers that control the handling of
a large volume of customer and proprietary order flow. Given the
portability of order flow from one exchange to another, any exchange
that sought to charge unreasonably high data fees would risk alienating
many of the same customers on whose orders it depends for competitive
survival. CBOE currently competes with eleven options exchanges
(including CBOE's affiliate, C2 Options Exchange) for order flow.\17\
---------------------------------------------------------------------------
\17\ The Commission has previously made a finding that the
options industry is subject to significant competitive forces. See
e.g., Securities Exchange Act Release No. 59949 (May 20, 2009), 74
FR 25593 (May 28, 2009) (SR-ISE-2009-97) (order approving ISE's
proposal to establish fees for a real-time depth of market data
offering).
---------------------------------------------------------------------------
In addition, in the case of products that are distributed through
market data vendors, the market data vendors themselves provide
additional price discipline for proprietary data products because they
control the primary means of access to certain end users. These vendors
impose price discipline based upon their business models. For example,
vendors that assess a surcharge on data they sell are able to refuse to
offer proprietary products that their end users do not or will not
purchase in sufficient numbers. Internet portals, such as Google,
impose price discipline by providing only data that they believe will
enable them to attract ``eyeballs'' that contribute to their
advertising revenue. Similarly, Customers will not offer COPS data
unless this product will help them maintain current users or attract
new ones. For example, a broker-dealer will not choose to offer COPS
data to its retail customers unless the broker-dealer believes that the
retail customers will use and value the data and the provision of such
data will help the broker-dealer maintain the customer relationship,
which allows the broker-dealer to generate profits for itself.
Professional users will not request COPS data from Customers unless
they can use the data for profit-generating purposes in their
businesses. All of these operate as constraints on pricing proprietary
data products.
Joint Product Nature of Exchange Platform. Transaction execution
and proprietary data products are complementary in that market data is
both an input and a byproduct of the execution service. In fact, market
data and trade executions are a paradigmatic example of joint products
with joint costs. The decision whether and on which platform to post an
order will depend on the attributes of the platforms where the order
can be posted, including the execution fees, data quality, and price
and distribution of their data products. The more trade executions a
platform does, the more valuable its market data products become. The
costs of producing market data include not only the costs of the data
distribution infrastructure, but also the costs of designing,
maintaining, and operating the exchange's transaction execution
platform and the cost of regulating the exchange to ensure its fair
operation and maintain investor confidence. The total return that a
trading platform earns reflects the revenues it receives from both
products and the joint costs it incurs. Moreover, an exchange's broker-
dealer customers view the costs of transaction executions and market
data as a unified cost of doing business with the exchange.
Analyzing the cost of market data product production and
distribution in isolation from the cost of all of the inputs supporting
the creation of market data and market data products will inevitably
underestimate the cost of the data and data products. Thus, because it
is impossible to obtain the data inputs to create market data products
without a fast, technologically robust, and well-regulated execution
system, system costs and regulatory costs affect the price of both
obtaining the market data itself and creating and distributing market
data products. It would be equally misleading, however, to attribute
all of an exchange's costs to the market data portion of an exchange's
joint products. Rather, all of an exchange's costs are incurred for the
unified purposes of attracting order flow, executing and/or routing
orders, and generating and selling data about market activity. The
total return that an exchange earns reflects the revenues it receives
from the joint products and the total costs of the joint products.
The level of competition and contestability in the market is
evident in the numerous alternative venues that compete for order flow,
including 12 options self-regulatory organization (``SRO'') markets, as
well as internalizing broker-dealers (``BDs'') and various forms of
alternative trading systems (``ATSs''), including dark pools and
electronic communication networks (``ECNs''). Competition among trading
platforms can be expected to constrain the aggregate return that each
platform earns from the sale of its joint products, but different
platforms may choose from a range of possible, and equally reasonable,
pricing strategies as the means of recovering total costs. For example,
some platforms may choose to pay rebates to attract orders, charge
relatively low prices for market data products (or provide market data
products free of charge), and charge relatively high prices for
accessing posted liquidity. Other platforms may choose a strategy of
paying lower rebates (or no rebates) to attract orders, setting
relatively high prices for market data products, and setting relatively
low prices for accessing posted liquidity. In this environment, there
is no economic basis for regulating maximum prices for one of the joint
products in an industry in which suppliers face competitive constraints
with regard to the joint offering.
The Existence of Alternatives. CBOE is constrained in pricing COPS
data by the availability to market participants of alternatives to
purchasing COPS data. CBOE must consider the extent to which market
participants would choose one or more alternatives instead of
purchasing the exchange's data. Other market data vendors can and have
produced their own option valuation products, and thus are sources of
potential competition for MDX. As noted above, SuperDerivatives,
Markit, Prism, and Bloomberg are some of the market data vendors that
offer market data products that compete with COPS. Also, OCC makes
similar data available at no cost, thus constraining CBOE's ability to
price the Data. The vendor proprietary data and the OCC data are
significant alternatives to COPS data. The large number of SROs, BDs,
and ATSs that currently produce proprietary data or are currently
capable of producing it provides further pricing discipline for
proprietary data products. Each SRO, ATS, and BD is currently permitted
to produce proprietary data products, and many currently do.
The existence of numerous alternatives to the Exchange's products,
including proprietary data from other sources, ensures that the
Exchange cannot set unreasonable fees, or fees that are unreasonably
discriminatory, when vendors and subscribers can elect these
alternatives or choose not to purchase a specific proprietary data
product if its cost to purchase is not justified by the returns any
particular vendor or subscriber would achieve through the purchase.
COPS is voluntary on the part of the Exchange, which is not
required to offer such services, and voluntary on the part of
prospective Customers that are not required to use it. The Exchange
believes COPS data offered by MDX will help attract new users and new
order flow to the Exchange, thereby improving the Exchange's ability to
compete in the market for options order flow and executions.
[[Page 69171]]
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 \18\ and paragraph (f) of Rule 19b-4 \19\
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.
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78s(b)(3)(A).
\19\ 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-CBOE-2013-104 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-2013-104. 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-2013-104 and should be
submitted on or before December 9, 2013.
---------------------------------------------------------------------------
\20\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-27471 Filed 11-15-13; 8:45 am]
BILLING CODE 8011-01-P