68 FR 55 pgs. 13972-13974 - Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by Chicago Board Options Exchange, Incorporated To Establish a Four-Month Pilot Program Implementing the Market Share Incentive Plan
Type: NOTICEVolume: 68Number: 55Pages: 13972 - 13974
Docket number: [Release No. 34-47508; File No. SR-CBOE-2003-06]
FR document: [FR Doc. 03-6828 Filed 3-20-03; 8:45 am]
Agency: Securities and Exchange Commission
Official PDF Version: PDF Version
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-47508; File No. SR-CBOE-2003-06]
Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by Chicago Board Options Exchange, Incorporated To Establish a Four-Month Pilot Program Implementing the Market Share Incentive Plan
March 14, 2003.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 ("Act"),1and rule 19b-42thereunder, notice is hereby given that on February 19, 2003, the Chicago Board Options Exchange, Inc. ("CBOE" or "Exchange") submitted to 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 CBOE. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
Footnotes:
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
The CBOE proposes to establish a four-month pilot program that makes a change to its Fee Schedule in order to implement a Market Share Incentive Plan. The text of the proposed rule change, showing the proposed fee schedule, is available at the principal offices of the CBOE and at the Commission.
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 CBOE 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 CBOE 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 CBOE proposes a four-month pilot program called the Market Share Incentive Plan ("MIP"). The MIP, which commenced on March 1, 2003, and will continue through June 30, 2003, will initially apply to the 300 CBOE equity option classes with the largest total trading volume nationwide (the "top 300 classes")3as well as options on the NASDAQ 100® Index Tracking Stock ("QQQ") (collectively, the "pilot MIP classes.") The MIP is designed to provide an incentive to CBOE Designated Primary Market-Makers ("DPMs") and market-makers to increase CBOE's share of national volume in the pilot MIP classes by continually maintaining highly competitive quotes with deeper, more liquid markets and tighter spreads.
Footnotes:
3 The top 300 classes represent approximately 85% of total CBOE equity option contract volume. The CBOE believes it would not be practical to include the remaining equity option classes in the MIP pilot program, given the swings in market share that can occur in such lower volume classes.
The MIP will do this by providing two types of fee refunds to DPMs and market-makers who achieve the following specified market share thresholds in the pilot MIP classes.
a. Maintaining CBOE Market Share At or Above 25%
DPMs and market makers in the pilot MIP classes who maintain a CBOE market share of 25% in those classes in a particular month will receive a transaction fee refund of $0.01 per contract for their transactions in those classes during that month. The refund per contract will increase by $0.01 for each 1% increase in CBOE market share above 25%, up to a maximum of a $0.16 per contract refund for a 40% CBOE market share, as set forth in the following table:
| Market share (percent) | Credit per MM contract |
|---|---|
| 25.0 | $0.01 |
| 26.0 | 0.02 |
| 27.0 | 0.03 |
| 28.0 | 0.04 |
| 29.0 | 0.05 |
| 30.0 | 0.06 |
| 31.0 | 0.07 |
| 32.0 | 0.08 |
| 33.0 | 0.09 |
| 34.0 | 0.10 |
| 35.0 | 0.11 |
| 36.0 | 0.12 |
| 37.0 | 0.13 |
| 38.0 | 0.14 |
| 39.0 | 0.15 |
| 40.0 | 0.16 |
b. Increasing CBOE Market Share
Additionally, where the DPM and market makers in a pilot MIP class succeed in increasing the CBOE monthly market share in that class by 1% over the prior six-month rolling average CBOE market share for the class, the DPM and market-makers will receive a $0.01 per contract refund in their transaction fees in that class for that month. The refund per contract will increase by $0.01 for each additional 1% increase in CBOE market share over the prior six-month rolling average up to a maximum of a $0.08 per contract refund for an 8% increase in CBOE market share, as set forth in the following table:
| Market share increase (percent) | Credit per MM contract |
|---|---|
| 1.0 | $0.01 |
| 2.0 | 0.02 |
| 3.0 | 0.03 |
| 4.0 | 0.04 |
| 5.0 | 0.05 |
| 6.0 | 0.06 |
| 7.0 | 0.07 |
| 8.0 | 0.08 |
c. General Provisions
As is customary with the CBOE's billing practices, MIP refunds will be provided after the close of a given month. At the end of each month, CBOE will calculate the market share of each option class and then send a credit through to each clearing firm, which will then credit individual market maker and DPM accounts. All market makers and DPMs will be provided with reports showing the total credit they received along with details supporting CBOE's calculations. In no case will the monthly aggregate fee refunds under the MIP program in any option class exceed $0.24 per contract, which is the current total of transaction and trade match fees currently paid by DPMs and market-makers.
The MIP will be funded by discontinuing the existing Prospective Fee Reduction Program4("Program") for all equity as well as the QQQ option classes during the same time period that the MIP is in effect.5The current Prospective Fee Reduction Program will remain in effect for all option classes other than the equity and the QQQ option classes.
Footnotes:
4 For the current CBOE fiscal year, the Program provides that if at the end of the second or third quarter of the Exchange's fiscal year, the Exchange's average contract volume per day on a fiscal year-to-date basis exceeds one of certain predetermined volume thresholds, the Exchange's market-maker transaction fees will be reduced in the following fiscal quarter in accordance with a fee reduction schedule. The temporary discontinuation of the Program has taken effect as part of this proposed rule change. Telephone conversation between Christopher Hill, Attorney, CBOE, and Cyndi Rodriguez, Special Counsel, Division of Market Regulation ("Division"), Commission, on March 13, 2003.
5 The Commission notes that the temporary discontinuation of the Program for the pilot MIP classes has taken effect as part of this proposed rule change.
According to the CBOE, the objective of the MIP program is similar to those of so-called "shortfall fee" programs6that became effective upon filing and were published by the Commission for several other options exchanges.7However, the CBOE believes that unlike "shortfall fee" programs, which penalize members when they fall below established market share expectations, the CBOE will use the MIP to provide positive incentives for members to increase their market share by continually maintaining highly competitive quotes.
Footnotes:
6 The CBOE believes that the goal of such "shortfall fee" programs is to encourage trading volume on the exchange. Telephone conversation among Christopher Hill, Attorney, CBOE and Cyndi Rodriguez, Special Counsel, Division, and Tim Fox, Attorney, Division, Commission, on March 6, 2003.
7 See Securities Exchange Act Release No. 45351 (January 29, 2002), 67 FR 5631 (February 6, 2002) (SR-PCX-2001-51); Securities Exchange Act Release No. 43201 (August 23, 2000), 65 FR 52465 (August 29, 2000) (SR-PHLX-00-07).
2. Statutory Basis
The Exchange believes that its proposed rule change is consistent with section 6(b) of the Act8in general, and furthers the objectives of section 6(b)(4) of the Act9in particular, in that it is designed to provide for the equitable allocation of reasonable dues, fees, and other charges among CBOE members.
Footnotes:
8 15 U.S.C. 78f(b).
9 15 U.S.C. 78f(b)(4).
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes that the proposed rule change will impose no burden on competition not necessary or appropriate in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others
No written comments were solicited or received in response to the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
The proposed rule change has become effective pursuant to section 19(b)(3)(A)(ii) of the Act10and rule 19b-4(f)(2)11thereunder because it establishes or changes a due, fee, or other charge imposed by the CBOE. At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate 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.
Footnotes:
10 15 U.S.C. 78s(b)(3)(A)(ii).
11 17 CFR 240.19b-4(f)(2).
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. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 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 inspection and copying in the Commission's Public Reference Room. Copies of such filing will also be available for inspection and copying at the principal office of the CBOE. All submissions should refer to File No. SR-CBOE-2003-06 and should be submitted by April 11, 2003.
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.12
Footnotes:
12 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-6828 Filed 3-20-03; 8:45 am]
BILLING CODE 8010-01-P