Self-Regulatory Organizations; Proposed Rule Changes:

Federal Register Volume 76, Number 146 (Friday, July 29, 2011)

Notices

Pages 45626-45629

From the Federal Register Online via the Government Printing Office [www.gpo.gov]

FR Doc No: 2011-19189

SECURITIES AND EXCHANGE COMMISSION

Release No. 34-64953; File No. SR-CHX-2011-19

Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;

Notice of Filing and Immediate Effectiveness of Proposed Rule Change To

Clarify the Application of the Fee Schedule to Certain Transactions of, and Services to, CHX Participants and Make Certain Rate Changes

July 25, 2011.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on July 20, 2011, the Chicago Stock Exchange, Inc. (``CHX'' or

``Exchange'') 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 Exchange. CHX has filed the proposal pursuant to Section 19(b)(3)(A) of the Act \3\ and

Rule 19b-4(f)(2) thereunder,\4\ which renders the proposal effective upon filing with the Commission. 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.

\3\ 15 U.S.C. 78s(b)(3)(A).

\4\ 17 CFR 240.19b-4(f)(2).

1. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

   The CHX proposes to amend its Schedule of Participant Fees and

   Assessments (the ``Fee Schedule''), effective July 25, 2011, to amend its Fee Schedule to clarify the application of the Fee Schedule to certain transactions of, and services to, CHX Participants and make certain rate changes. The text of this proposed rule change is available on the Exchange's Web site at http://www.chx.com/rules/proposed_rules.htm and in the Commission's Public Reference Room.

2. Self-Regulatory Organization's Statement of the Purpose of, and

   Statutory Basis for, the Proposed Rule Change

   In its filing with the Commission, the CHX included statements concerning the purpose of and basis for the proposed rule changes and discussed any comments it received regarding the proposal. The text of these statements may be examined at the places specified in Item IV below. The CHX has prepared summaries, set forth in sections A, B and C below, of the most significant aspects of such statements.

   1. Self-Regulatory Organization's Statement of the Purpose of, and

      Statutory Basis for, the Proposed Rule Change 1. Purpose

      Through this filing, the Exchange is proposing to amend its

      Schedule of Fees and Assessments (``Fee Schedule'') to clarify the application of the Fee Schedule to various transactions consummated on or through the Exchange and to certain services provided by the

      Exchange to its Participants. The proposed changes accurately describe the manner in which the Exchange has and will continue to apply the Fee

      Schedule to such transactions and services.

      Currently, the Fee Schedule provides for Processing Fees for fingerprinting, background checks and the provision of access badges by the Exchange.\5\ The Exchange no longer provides either fingerprinting or background checking services for current or prospective CHX

      Participants, and we no longer wish to impose a fee for access badges.

      Therefore, the Exchange proposes to eliminate the fees for these services.

      \5\ Section C. (Registration Fees) of the Fee Schedule.

      The Exchange is also clarifying the application of Section E.1.

      (Matching System single-sided order executions (one-sided orders of 100+ shares)) of the Fee Schedule to note that the Average Daily Volume

      (``ADV'') calculations performed by the Exchange to determine the amount of provide credit paid to a Participant are not being performed when the Regular Trading Session closes early.\6\ Trade volume on days on which the Late Trading Sessions close early, however, would continue to be counted towards the ADV calculation. In addition, we are eliminating the provide credit paid to Exchange-registered

      Institutional Brokers (``Institutional Brokers'') in transactions in securities priced less than one dollar. As noted in the discussion of the changes to Section E.3. of the Fee Schedule, supra, we are proposing to eliminate the charge in transactions in securities priced less than one dollar to Participants which submit orders through an

      Institutional Broker. It would not be economically feasible for the

      Exchange to continue to pay a provide credit to Institutional Brokers in transactions in which the Exchange

      Page 45627

      does not earn any transaction revenue. Finally, the provide credit paid to Institutional Brokers in transactions in securities at or above one dollar during the Regular Trading Session is being reduced to $0.0027/ share in Tape A and C securities and $0.0028/share in Tape B securities from $0.0029/share. This reduction reflects the lower amount of revenue generated in such transactions due to the rate changes for agency executions submitted through an Institutional Broker.\7\ The Exchange is also lowering the rate of the provide credit paid to Institutional

      Brokers representing the Participant which originated the order

      (regardless of the ADV attributable to either firm) for trades executed in the Early and Late Trading Sessions to $0.0022/share in Tape A, B and C securities priced $1.00/share.

      \6\ The Exchange proposes to change the phrase ``single order executions'' in the caption to Section E.1, to ``single-sided order executions'' to clarify that this section does not apply to cross orders.

      \7\ These rate changes are discussed infra as part of the modifications to Section E.3. of the Fee Schedule.

      The Exchange believes that it would be beneficial to clarify the application of the Fee Schedule to certain cross transactions by modifying the text of Section E.2. (Matching System crosses (All

      Sessions)) of the Fee Schedule. The Exchange proposes to move the reference to proprietary trades by an Institutional Broker from Section

      E.2. to Section E.3. (Executions through an Institutional Broker

      Registered with the Exchange Under Article 17 (All Sessions)). The

      Exchange believes that Section E.2. is properly construed to apply solely to cross transactions entered directly by a Participant firm to the Matching System by electronic means, and without the involvement of an Institutional Broker. Unlike transactions (including cross trades) handled by an Institutional Broker, cross transactions entered directly into the Matching System by a CHX Participant and executed there are not assessed any charge. The removal of the language regarding proprietary cross trades executed by an Institutional Broker from this section should help to eliminate any potential ambiguity on this treatment. To reinforce this point, we are adding a clause to the last sentence in this section which states that these provisions do not apply to cross orders submitted by an Institutional Broker registered with the Exchange.\8\

      \8\ Throughout the proposal, the Exchange proposes to modify references to ``institutional brokers'' to clarify that such references are limited to Institutional Brokers registered with the

      Exchange pursuant to Article 17 of our rules, and not to institutional brokers as colloquially referred to in the securities industry.

      The Exchange is modifying Section E.3. of the Fee Schedule to clarify the proper application of the Fee Schedule to transactions handled by an Institutional Broker. We propose to move the charge relating to proprietary crosses of an Institutional Broker formerly reflected in Section E.2 to new Section E.3.b. (Proprietary

      Executions). The new language clarifies that the fee assessed to the

      Institutional Broker of $.0007/share also applies to any odd lot component of the cross trade. The new text also explicitly provides that the Participant on the other side of the transaction is to be assessed the fee normally assessed to a Participant whose order is handled by an Institutional Broker, as set forth in proposed new

      Section E.3.a. of the Fee Schedule. Current Section E.3. has been renumbered as Proposed Section E.3.a. Proposed Section E.3.a. sets forth a revised fee rate of $.003/share for all trades (regardless of whether the security is a Tape A, B or C security) handled through an

      Institutional Broker.\9\ The revised text makes explicit that the fees pursuant to both Section 3.a. of the Fee Schedule are charged to the

      Participant Firm in which name the transaction is submitted for clearance and settlement (including both single-sided and cross orders) through an Institutional Broker. The Exchange proposes to add text excluding odd-lot orders from these provisions, as those orders are assessed the Odd Lot fee pursuant to Section E.4. (Odd-lot Matching

      System fee (single-sided orders of less than 100 shares) (All

      Sessions)) of the Fee Schedule. The Exchange also proposes to eliminate the reference to trades executed by an Institutional Broker ``in another market,'' since the Exchange does not impose the transaction fee under Section E.3. for non-CHX executions. The Exchange further proposes to clarify that the maximum charge per side shall be computed for each Participant firm on a side (buy or sell) of a execution and separately for a Participant which is represented by more than one

      Institutional Broker Representative (as defined in Article 17, Rule 1 of the Exchange's rules). Finally, the Exchange proposes to add a provision setting the fees at zero for Institutional Broker-handled transactions in securities priced under $1.

      \9\ The revised fee rate conforms to the proscriptions of the

      Reg NMS Rule 610 (the ``Access Rule'').

      The Exchange proposes to modify the text of Section E.4. of the Fee

      Schedule relating to transactions in odd lots. The proposed new language would clarify that the odd lot fees apply to orders submitted to the Matching System (whether electronically by the Participant or through an Institutional Broker) as an odd-lot order. The revised text reflects CHX's current practice of not applying odd lot fees to orders not entered into the Matching System as an odd-lot order, but which become odd lots due to partial executions. Transactions in odd-lot remainders would be charged the fee rate set forth in Section E.1. of the Fee Schedule.

      The Exchange is proposing to delete Section E.6. of the Fee

      Schedule relating to Matching System routing fees, since the CHX does not currently offer automated routing services. This Section will be reserved for future use in the event that the Exchange decides to offer such services, or for other purposes.

      The Exchange is proposing certain changes to the trade processing fees to clarify that such fees are charged to CHX Participants for cross transactions that are executed in the over-the-counter (``OTC'') marketplace and are reported to clearing by the Exchange's systems, pursuant to Section E.7. (Trade Processing Fees) of the Fee Schedule.

      The Exchange is also modifying the types of transactions subject to the

      Trade Processing Fee to eliminate transaction executed directly in the

      OTC marketplace by an Institutional Broker and in its place substitute executed cross trades which originated with an Institutional Broker and were transmitted to and executed by another broker-dealer (which is not an Institutional Broker) in the OTC marketplace and which were submitted to clearing by the Exchange's systems.\10\ This amendment reflects ongoing discussions between the Exchange and the staff of the

      Commission regarding limitations on the ability of Institutional

      Brokers to directly execute trades in the OTC marketplace. The Exchange also proposes to modify the current fee rate and maximum charge for trade processing fees to conform to the rates charged for transactions submitted through an Institutional Broker pursuant to Section E.3. of the Fee Schedule. In such transactions, the Exchange currently charges

      $.0035/share, up to a maximum of $100 per side for Tape A and B securities, and $.0025/share, up to a maximum of $100 per side for Tape

      C securities. By this proposal, we would change these rates to $.003/ share, up to

      Page 45628

      a maximum of $100 per side for all securities. We are also proposing to define ``per side'' in the same manner as in Section E.3. These changes would maintain the current state under which the fees charged pursuant to Sections E.3. and E.7. are identical.

      \10\ In such transactions, the third-party broker-dealer would report the transaction to the appropriate Trade Reporting Facility, and provide an execution report to the Institutional Broker, which in turn would enter the information into the Exchange's systems for submission to clearing.

      The Exchange is proposing to eliminate the Clearing Support Fees currently set forth in Section H of the Fee Schedule. The CHX no longer performs the services described in Section H and has no present intention of doing so in the future. The elimination of these fees would clarify to CHX Participants that the Exchange does not provide clearing support services.

      Finally, the Exchange proposes to eliminate the fees for CCH

      Rulebooks (which the Exchange no longer provides to Participants) and monthly Brokerplex reports (which the Exchange will provide at no cost) pursuant to Section L.2. and 3. (Supplies and Reports), respectively. 2. Statutory Basis

      The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Act \11\ in general, and furthers the objectives of Section 6(b)(4) of the Act \12\ in particular, in that it provides for the equitable allocation of reasonable dues, fees and other charges among members and other persons using any facility or system which the Exchange operates or controls. The Exchange is proposing to eliminate certain fees in their entirety which would reduce the financial obligation of Participants to the CHX. The fees to be eliminated include certain processing fees for fingerprints, background checks and badges (Section C of the Fee Schedule), Matching

      System routing fees (Section E.6. of the Fee Schedule), Clearing

      Support Fees (Section H of the Fee Schedule), and fees for rulebooks and certain reports (Section L of the Fee Schedule). In Section E.1., the Exchange is reducing the provide credit paid to Institutional

      Brokers in Regular Trading Hours session transaction from $0.0029/share in Tape A and C securities to $0.0027/share and from transaction from

      $0.0031/share in Tape B securities to $0.0028/share. In this same

      Section, the Exchange is further proposing a provide credit be paid to

      Institutional Brokers of $0.0022/share in securities priced greater than $1.00/share for trades in the Early and Late Trading Sessions. The

      Exchange also proposes that no provide credit shall be paid to

      Institutional Brokers in transactions in securities priced less than

      $1.00/share. The Exchange believes that the reduction in provide credits paid to Institutional Brokers for trades during the Regular

      Trading Session, as well as the elimination of the provide credit paid to Institutional Brokers in transactions in all trading sessions in securities priced less than $1.00, are appropriate because they will enable the Exchange to retain a greater amount of the revenue associated with such transactions, which in turn will assist the CHX in funding its internal operations including the oversight of

      Institutional Brokers. The Exchange further believes that the rate changes in Section E.1. as to the Early and Late Trading Sessions are appropriate because the proposed rates corresponds to the provide credit generally paid to Participants for trades in the Early and Late

      Trading Sessions.

      \11\ 15 U.S.C. 78f.

      \12\ 15 U.S.C. 78f(b)(4).

      The Exchange believes that the rate changes for CHX-executed transactions entered through an Institutional Broker are fair and appropriate (Section E.3. of the Fee Schedule). The Exchange hopes that these rate changes will help it attract additional order flow to the

      Exchange, as well as be consistent with the limitations on fees charged by exchanges for access to quotations as set forth in Rule 610(c) of

      Regulation NMS. The Exchange is making parallel changes to the Trade

      Processing Fees set forth in Section E.7. of the Fee Schedule charged in connection with the submission to clearing by the CHX of non-

      Exchange trades handled by an Institutional Broker in order to maintain the current level of parity in such fees with the fees charged pursuant to Section E.3. of the Fee Schedule. The Exchange is also adding to the types of transactions subject to the Trade Processing Fee any executed trades submitted to Clearing by the Exchange's systems which originated with an Institutional Broker and were transmitted to and executed by another broker-dealer in the over-the-counter market. This addition reflects ongoing discussions between the Exchange and the staff of the

      Commission regarding limitations on the ability of Institutional

      Brokers to directly execute trades in the over-the-counter marketplace.

      The Exchange further believes that the proposed rule change is consistent with Section 6(b) of the Act in general, and furthers the objectives of Section 6(b)(1) of the Act in particular, in that it allows the Exchange to be organized and have the capacity to be able to carry out the purposes of the Act and to comply, and (subject to any rule or order of the Commission pursuant to section 17(d) or 19(g)(2) of the Act) to enforce compliance by its members and persons associated with such members, with the provisions of the Act, the rules and regulations thereunder, and the rules of the exchange. The proposed clarifying changes to the Fee Schedule would establish the fees as they were approved by the Exchange and would contribute to the ability of its Participants to comply with the provisions of the Fee Schedule by clarifying to such Participants the basis upon which the Exchange charges for various of its fees and services. The proposed clarifying changes include the following: (1) The limitation of Section E.1. to single-sided orders (2) that the Average Daily Trading volume calculation for purposes of applying the tiered rate schedule of

      Section E.1. does not include days when the Regular Trading Session closes early; (3) that the phrase ``institutional broker'' be capitalized to reflect the intention to limit it to Institutional

      Brokers registered with the CHX pursuant to Article 17 of our rules;

      (4) that the provisions of Section E.2. apply only to crosses executed in the Matching System and which were not entered through an

      Institutional Broker; (5) the manner in which the CHX imposes fees on

      Institutional Brokers for proprietary trades executed in the Matching

      System; (6) the manner in which the CHX imposes fees on Participants for Exchange transactions entered through an Institutional Broker; (7) the application of the $100 maximum charge in the transactions noted in

      (6); and (8) the imposition of fees on odd-lot orders.

   2. Self-Regulatory Organization's Statement on Burden on Competition

      The Exchange 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.

   3. 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.

3. 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 \13\ and subparagraph (f)(2) of Rule 19b-4 thereunder \14\ because it establishes or changes a due, fee or other charge

   Page 45629

   applicable to the Exchange's members, which renders the proposed rule change effective upon filing.

   \13\ 15 U.S.C. 78s(b)(3)(A)(ii).

   \14\ 17 CFR 240.19b-4(f)(2).

   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.

4. 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 e-mail to rule-comments@sec.gov. Please include

   File Number SR-CHX-2011-19 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-CHX-2011-19. This file number should be included on the subject line if e-mail 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 a.m. and 3 p.m. Copies of such filing will also 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 No. SR-CHX-2011-19 and should be submitted on or before August 19, 2011.

   For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\15\

   \15\ 17 CFR 200.30-3(a)(12).

   Elizabeth M. Murphy,

   Secretary.

   FR Doc. 2011-19189 Filed 7-28-11; 8:45 am

   BILLING CODE 8011-01-P