
[Federal Register: April 20, 2010 (Volume 75, Number 75)]
[Proposed Rules]               
[Page 20737-20763]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20ap10-19]                         


[[Page 20737]]

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Part IV





Securities and Exchange Commission





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17 CFR Part 242



Proposed Amendments to Rule 610 of Regulation NMS; Proposed Rule


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 242

[Release No. 34-61902; File No. S7-09-10]
RIN 3235-AK62

 
Proposed Amendments to Rule 610 of Regulation NMS

AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Proposed rule.

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SUMMARY: The Commission is publishing for comment proposed amendments 
to Rule 610 under the Securities Exchange Act of 1934 (``Exchange 
Act'') relating to access to quotations in listed options as well as 
fees for such access. The proposed rule would prohibit an exchange from 
imposing unfairly discriminatory terms that inhibit efficient access to 
quotations in a listed option on its exchange and establish a limit on 
access fees that an exchange would be permitted to charge for access to 
its best bid and offer for listed options on its exchange.

DATES: Comments should be received on or before June 21, 2010.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/proposed.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File No. S7-09-10 on the subject line; or
     Use the Federal eRulemaking Portal (http://
www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File No. S7-09-10. This file number 
should be included on the subject line if e-mail is used. To help us 
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/proposed.shtml). Comments 
are also 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. All comments received will be posted without change; we do 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Jennifer Colihan, Special Counsel, at 
(202) 551-5642; Edward Cho, Special Counsel, at (202) 551-5508; or 
Brian O'Neill, Special Counsel, at (202) 551-5643, Division of Trading 
and Markets (``Division''), Commission, 100 F Street, NE., Washington, 
DC 20549-6628.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
II. Proposed Amendments to Rule 610(a)
III. Access Fees
IV. Technical Amendments to Rule 610
V. Request for Comments
VI. Paperwork Reduction Act
VII. Consideration of Costs and Benefits
VIII. Consideration of Burden on Competition and Promotion of 
Efficiency, Competition, and Capital Formation
IX. Consideration of Impact on the Economy
X. Regulatory Flexibility Act Certification
XI. Statutory Authority

I. Introduction

    The Commission is proposing to strengthen the national market 
system for listed options by: (1) Prohibiting the imposition of 
unfairly discriminatory terms by a national securities exchange that 
inhibit efficient access to quotations in a listed option on its 
exchange; and (2) establishing a limit on the amount a national 
securities exchange would be permitted to charge to access the best bid 
or offer for listed options on its exchange. These proposed amendments 
would make the requirements for access to the listed options exchanges 
comparable to the requirements for access to markets that trade NMS 
stocks.\1\ Further, they would address concerns expressed by certain 
market participants regarding access to options exchanges.\2\
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    \1\ See 17 CFR 242.610.
    \2\ See infra Section I.B and notes 34-40 and accompanying text.
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A. Background

    In 1975, Congress determined that the ``linking of all markets'' 
through communications and data processing facilities would ``foster 
efficiency; enhance competition; increase the information available to 
brokers, dealers, and investors; facilitate the offsetting of 
investors' orders; and contribute to the best execution of investors' 
orders.''\3\ As such, Congress directed the Commission, through the 
enactment of Section 11A of the Exchange Act, to facilitate the 
establishment of a national market system (``NMS'') to link together 
the multiple individual markets that trade securities. Congress 
intended the Commission to take advantage of opportunities created by 
new data processing and communications technologies to preserve and 
strengthen the securities markets.
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    \3\ See Section 11A(a)(1)(D) of the Exchange Act, 15 U.S.C. 78k-
1(a)(1)(D).
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    As previously recognized by the Commission, for the NMS to fulfill 
its statutory objectives, fair and efficient access to each of the 
individual markets that participate in the NMS is essential.\4\ One of 
the statutory NMS objectives, for example, is to assure the 
practicability of brokers executing investors' orders in the best 
market.\5\ Another is to assure the efficient execution of securities 
transactions.\6\ Neither of these objectives can be achieved if brokers 
cannot fairly and efficiently route orders to execute against the best 
quotations, wherever such quotations are displayed in the NMS.\7\
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    \4\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005) (``NMS Adopting Release'') at 
37538.
    \5\ See Section 11A(a)(1)(C)(iv) of the Exchange Act, 15 U.S.C. 
78k-1(a)(1)(C)(iv).
    \6\ See Section 11A(a)(1)(C)(i) of the Exchange Act, 15 U.S.C. 
78k-1(a)(1)(C)(i).
    \7\ See NMS Adopting Release, supra note 4, at 37548.
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    The Commission believes that intermarket price protection is 
essential in a marketplace such as that for listed options where 
multiple exchanges trade the same securities.\8\ For this reason, the 
Commission in 1999 ordered the exchanges to jointly develop an NMS 
linkage plan for listed options.\9\ The first such NMS plan, which 
began operation in 2002 (``2002 Linkage Plan''), included a requirement 
that its participant exchanges avoid trading through \10\ better priced 
quotations displayed on other options exchanges and disseminated 
pursuant to the Options Price Reporting Authority Plan (``OPRA Plan''), 
as well as a mechanism by which

[[Page 20739]]

participating exchanges could seek satisfaction if an order was traded 
through.\11\ In August 2009, the options exchanges implemented a new 
NMS plan (``Plan''),\12\ approved by the Commission, which specifically 
requires that each participating exchange establish, maintain, and 
enforce written policies and procedures that are reasonably designed to 
prevent trading through better priced quotations displayed on other 
options exchanges and disseminated pursuant to the OPRA Plan (``trade-
throughs'').\13\ Rule 608(c) of Regulation NMS requires the options 
exchanges to comply with the terms of the Plan and to enforce 
compliance with the Plan by their members and persons associated with 
their members, absent reasonable justification or excuse.\14\ Further, 
each exchange adopted rules to implement the Plan that prohibit members 
from effecting trade-throughs, subject to certain enumerated 
exceptions.\15\ The approach to trade-throughs under the Plan is 
similar to that taken by the Commission under Rule 611 of Regulation 
NMS, which requires that a trading center establish, maintain, and 
enforce written policies and procedures that are reasonably designed to 
prevent the execution of trades at prices inferior to protected 
quotations in NMS stocks displayed by other trading centers, subject to 
applicable exceptions.\16\
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    \8\ Eight exchanges currently offer options trading facilities 
and another exchange is anticipated to begin operations shortly. See 
Securities Exchange Act Release No. 61152 (December 10, 2009), 74 FR 
66699 (December 16, 2009) (order approving C2 Options Exchange's 
application for registration as a national securities exchange).
    \9\ See Securities Exchange Act Release No. 42029 (October 19, 
1999), 64 FR 57674 (October 26, 1999).
    \10\ A ``trade-through'' was defined as a transaction in an 
options series at a price that is inferior to the NBBO, but shall 
not include a transaction that occurs at a price that is one minimum 
quoting increment inferior to the NBBO provided a Linkage Order is 
contemporaneously sent to each Participant disseminating the NBBO 
for the full size of the Participant's bid (offer) that represents 
the NBBO. See Section 2(29) of the 2002 Linkage Plan. ``NBBO'' was 
defined as the national best bid and offer in an options series 
calculated by a Participant. See Section 2(18) of the 2002 Linkage 
Plan.
    \11\ See Securities Exchange Act Release No. 43086 (July 28, 
2000), 65 FR 48023 (August 4, 2000) (order approving 2002 Linkage 
Plan). The OPRA Plan is a national market system plan approved by 
the Commission pursuant to Section 11A of the Exchange Act and Rule 
608 thereunder. See Securities Exchange Act Release No. 17638 (March 
18, 1981), 22 S.E.C. Docket 484 (March 31, 1981).
    \12\ This new Plan was designed, in part, to apply the 
Regulation NMS price-protection provisions to the options exchanges. 
See letter from Michael J. Simon, International Securities Exchange 
LLC (``ISE''), to Nancy M. Morris, Secretary, Commission, dated 
September 12, 2007, at 2-3.
    \13\ See Securities Exchange Act Release No. 60405 (July 30, 
2009), 74 FR 39362 (August 6, 2009) (``Plan Approval Order'') and 
Section 5(a) of the Plan. A ``trade-through'' is defined in this new 
Plan as a transaction in an option series, either as principal or 
agent, at a price that is inferior to the best bid or offer in an 
option series that is displayed by an exchange, and is disseminated 
pursuant to the OPRA Plan. See Sections 2(1), 2(6), 2(14), 2(17), 
and 2(21) of the Plan.
    \14\ See 17 CFR 242.608(c).
    \15\ See, e.g., ISE Rule 1901, NYSE Arca, Inc. (``NYSE Arca'') 
Rule 6.94, and NASDAQ OMX PHLX, Inc. (``Nasdaq OMX Phlx'') Rule 
1084. Prior to the adoption of the new Plan, the options exchanges 
had in place rules addressing trade-throughs as required under the 
2002 Linkage Plan. The exchanges revised these rules following the 
adoption of the new Plan to reflect the trade-through requirements 
in the new Plan.
    \16\ 17 CFR 242.611(a). To be protected, a quotation must be 
immediately and automatically accessible. See 17 CFR 242.600(b)(58) 
(defining the term ``protected quotation'' as any protected bid or 
protected offer); see also 17 CFR 242.600(b)(57). The term 
``protected bid'' or ``protected offer'' means a quotation in an NMS 
stock that is displayed by an automated trading center, is 
disseminated pursuant to an effective national market system plan, 
and is an automated quotation that is the best bid or best offer of 
a national securities exchange, the best bid or best offer of The 
Nasdaq Stock Market, Inc., or the best bid or best offer of a 
national securities association other than the best bid or best 
offer of The Nasdaq Stock Market, Inc.
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    To satisfy the requirements of the trade-through provisions of the 
Plan and the exchanges' rules \17\ (collectively referred to as 
``Trade-Through Rules''), an options exchange with a best bid or best 
offer that is inferior to another exchange's best quotation may choose 
to handle a pending incoming marketable order by: (1) Cancelling the 
order; (2) routing the order to another exchange displaying a better 
price; \18\ or (3) providing an opportunity for its members, on their 
own behalf or on behalf of other market participants, to ``step up'' 
and trade with the order at a price at least equal to the better 
displayed price on an away exchange.\19\
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    \17\ See Section 5(a) of the Plan; see also, e.g., ISE Rule 
1901, NYSE Arca Rule 6.94 and Nasdaq OMX Phlx Rule 1084.
    \18\ To implement the choice of routing to another exchange to 
access a better-priced quotation, the options exchanges currently 
use private routing arrangements that provide for indirect access to 
quotations displayed by a particular options exchange through the 
members of that exchange. The Commission has stated its belief that 
the use of private linkages for routing will allow the exchanges to 
take advantage of new technology that allows for efficient routing 
and executions, and will give the exchanges greater flexibility for 
order handling. See Plan Approval Order, supra note 13, at 39364. 
The options exchanges complied with the requirements of the prior 
linkage plan by utilizing a stand alone system (``centralized hub'') 
to send and receive specific order types. The centralized hub was a 
centralized data communications network that electronically linked 
the options exchanges to one another. The Options Clearing 
Corporation (``OCC'') operated the centralized hub. See id.
    \19\ The Commission separately has proposed changes to Rule 602 
of Regulation NMS that may affect these electronic ``step-up'' 
mechanisms, if adopted. See Securities Exchange Act Release No. 
60684 (September 18, 2009), 74 FR 48632, 48633 (September 23, 2009) 
(File No. S7-21-09) (``Flash Order Proposal''). See infra notes 72-
75 and accompanying text.
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    In addition, broker-dealers have a duty of best execution.\20\ A 
broker-dealer must carry out a regular and rigorous review of the 
quality of the options markets to evaluate its best execution policies, 
including the determination as to which options market it routes 
customer order flow.\21\ The protection against trade-throughs 
undergirds the broker-dealer's duty of best execution by helping ensure 
that customer orders are not executed at prices inferior to the best 
quotations, but does not supplant or diminish the broker-dealer's 
responsibility for achieving best execution, including its duty to 
evaluate the execution quality of markets to which it routes customer 
orders.\22\
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    \20\ A broker-dealer has a legal duty to seek to obtain best 
execution of customer orders. See, e.g., Newton v. Merrill, Lynch, 
Pierce, Fenner & Smith, Inc., 135 F.3d 266, 269-70, 274 (3d Cir.), 
cert. denied, 525 U.S. 811 (1998); Certain Market Making Activities 
on Nasdaq, Securities Exchange Act Release No. 40900 (Jan. 11, 1999) 
(settled case) (citing Sinclair v. SEC, 444 F.2d 399 (2d Cir. 1971); 
Arleen Hughes, 27 SEC 629, 636 (1948), aff'd sub nom. Hughes v. SEC, 
174 F.2d 969 (D.C. Cir. 1949)). See also Order Execution 
Obligations, Securities Exchange Act Release No. 37619A (Sept. 6, 
1996), 61 FR 48290 (Sept. 12, 1996) (``Order Handling Rules 
Release''). A broker-dealer's duty of best execution derives from 
common law agency principles and fiduciary obligations, and is 
incorporated in SRO rules and, through judicial and Commission 
decisions, the antifraud provisions of the federal securities laws. 
See Order Handling Rules Release, 61 FR at 48322. See also Newton, 
135 F.3d at 270. The duty of best execution requires broker-dealers 
to execute customers' trades at the most favorable terms reasonably 
available under the circumstances, i.e., at the best reasonably 
available price. Newton, 135 F.3d at 270. Newton also noted certain 
factors relevant to best execution--order size, trading 
characteristics of the security, speed of execution, clearing costs, 
and the cost and difficulty of executing an order in a particular 
market. Id. at 270 n.2 (citing Payment for Order Flow, Exchange Act 
Release No. 33026 (Oct. 6, 1993), 58 FR 52934, 52937-38 (Oct. 13, 
1993) (Proposed Rules)). See In re E.F. Hutton & Co., Securities 
Exchange Act Release No. 25887 (July 6, 1988). See also Securities 
Exchange Act Release No. 34902 (October 27, 1994), 59 FR 55006, 
55008-55009 (November 2, 1994) (``Approval of Payment for Order Flow 
Final Rules''). See also NMS Adopting Release, supra note 4, at 
37537 (discussing the duty of best execution).
    \21\ See Securities Exchange Act Release No. 49175 (February 3, 
2004), 69 FR 6124, 6128 (February 9, 2004) (``Options Concept 
Release''). See also NMS Adopting Release, supra note 4, at 37538.
    \22\ See NMS Adopting Release, supra note 4, at 37538.
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    These regulatory obligations mean that broker-dealers responsible 
for routing customer orders, as well as customers making their own 
order-routing decisions, must have fair and efficient access to the 
best displayed quotations to achieve best execution of those orders, 
and the exchanges themselves must have the ability to execute orders 
against the displayed quotations of other exchanges.\23\ Moreover, the 
benefits of intermarket price protection could be compromised if 
exchanges were able to charge substantial fees for accessing their 
quotations.\24\
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    \23\ See id. at 37539.
    \24\ See id. at 37544.
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    Further, the Exchange Act authorizes the Commission to adopt rules 
assuring the fairness and usefulness of quotation information.\25\ The 
wider the disparity in the level of fees among the different exchanges, 
the less useful and accurate are the displayed prices. For example, if 
two options exchanges displayed quotations to sell an option for $10.00 
per contract, one exchange offer could

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be accessible for a total price of $10.00 per contract plus a $0.50 per 
contract access fee, while the second exchange might not charge any 
such access fee. What appeared in the consolidated data stream to be 
identical quotations would in fact not be identical in terms of all-in 
costs. The Commission recognizes that there may be different ways to 
achieve the objective of fair and useful quotations. One approach is to 
limit the extent to which the all-in price for those who access 
quotations can vary from the displayed price by limiting fees for 
accessing those quotations, as proposed here in Rule 610(c)(2).\26\
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    \25\ See Section 11A(c)(1)(B) of the Exchange Act, 15 U.S.C. 
78k-1(c)(1)(B).
    \26\ See NMS Adopting Release, supra note 4, at 37545 (stating 
that for quotations to be fair and useful there must be some limit 
on the extent to which the true price for those who access 
quotations can vary from the displayed price).
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    An access fee limit also creates more transparency in the cost of 
accessing quoted prices. Currently, there are so many different fees 
across options exchanges, across different categories of options 
participants, and across different product types, that it is not easy 
to estimate the total cost of executing against a quotation for a 
particular transaction. An access fee cap would provide clearer 
information on the maximum cost for accessing quoted prices. The 
Commission recognizes, however, that although a cap on access fees 
would promote the fairness and usefulness of displayed quotations and 
transparency in the cost of assessing quoted prices, there may be other 
fees assessed that would not be included in the proposed cap on access 
fees.

B. Overview of Current Options Market Structure

    In the listed options market, all orders are currently executed on 
registered national securities exchanges. Options exchanges have, to 
date, adopted one of two general business models. An exchange using the 
first model--referred to as the ``Make or Take'' model--incents market 
participants to quote aggressively by providing a rebate to an order or 
quotation displayed on its exchange when such order or quotation is 
executed. This rebate is funded through the fee charged to the order 
that executed against the displayed order or quotation. The difference 
between the fee charged for accessing the order or quotation and the 
rebate is revenue to the exchange.
    NYSE Arca was the first options exchange to implement the Make or 
Take transaction fee model.\27\ The introduction of the Make or Take 
model followed the reduction of the quoting increment in certain 
options in 2007.\28\ As of February 1, 2010, market participants could 
represent trading interest in penny increments in options series in 211 
specified classes. These classes represent approximately 69.5 percent 
of trading volume. By August 2, 2010, 361 classes will be included in 
the Minimum Quoting Increment Pilot Program, representing approximately 
88.1 percent of trading volume during February 2010.\29\
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    \27\ See Securities Exchange Act Release No. 55223 (February 1, 
2007), 72 FR 6306 (February 9, 2007) (SR-NYSEArca-2007-07). The 
NASDAQ Options Market LLC (``NOM'') also uses a ``Make or Take'' fee 
model for certain options classes. See The NASDAQ Options Market: 
Execution and Routing Fees (available at http://
www.nasdaqtrader.com/content/ProductsServices/PriceList/nasdaq_
options_pricing.pdf) (current as of December 1, 2009).
    \28\ On January 26, 2007, the then-existing six options 
exchanges implemented a pilot program to quote certain options 
series in thirteen classes in one-cent increments (``Minimum Quoting 
Increment Pilot Program''). The NASDAQ Stock Market LLC (``Nasdaq'') 
became a participant in the Minimum Quoting Increment Pilot Program 
on March 31, 2008, when it commenced trading on NOM, and BATS 
Exchange, Inc. (``BATS'') became a participant in the Minimum 
Quoting Increment Pilot Program on February 26, 2010 when it 
commenced trading on BATS Options Exchange Market. Since 2007, the 
Minimum Quoting Increment Pilot Program has been extended and 
expanded several times. See, e.g., Securities Exchange Act Release 
Nos. 56276 (August 17, 2007), 72 FR 47096 (August 22, 2007) (SR-
CBOE-2007-98); 56567 (September 27, 2007), 72 FR 56396 (October 3, 
2007) (SR-Amex-2007-96); 57579 (March 28, 2008), 73 FR 18587 (April 
4, 2008) (SR-Nasdaq-2008-026); 60711 (September 23, 2009), 74 FR 
49419 (September 28, 2009) (SR-NYSEArca-2009-44); and 61061 
(November 24, 2009), 74 FR 62857 (December 1, 2009) (SR-NYSEArca-
2004-44).
    \29\ The source of the data is OptionsMetrics, LLC 
(``OptionsMetrics''). The data used for the estimates corresponds to 
February 2010. By August 2010, the Minimum Quoting Increment Pilot 
Program will incorporate 150 additional classes. Those classes will 
be incorporated according to volume levels on the month before the 
expansion. For the current approximation, Commission staff projected 
which classes would be added by August 2010 using volume data 
corresponding to February 2010.
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    On an exchange with a ``Make or Take'' fee model, broker-dealers 
representing customer orders must pay a ``Take'' fee to access a 
displayed quotation on that exchange. In contrast, on an exchange 
without that fee model, broker-dealers generally are not assessed a 
similar fee when a customer order is executed. This distinction brought 
attention to the issue of whether, and to what extent, access fees 
impact fair and efficient access to displayed quotations in listed 
options.
    Exchanges using the second model--referred to as the ``Broker 
Payment'' model--generally charge no or low fees for the execution of 
customers' orders.\30\ However, these exchanges often charge other 
types of fees on a per-transaction basis. For example, most options 
exchanges charge a surcharge or ``royalty'' fee for executions in 
certain index option classes.\31\ Many exchanges also charge a payment 
for order flow or ``marketing'' fee to market makers that trade with 
customer orders on the exchange.\32\ The exchange then makes

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the proceeds from such fees available to collectively fund payment for 
order flow to brokers directing order flow to the exchange.\33\
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    \30\ Exchanges that use the ``Broker Payment'' model also 
generally give priority to customer orders at the best price over 
other orders or quotations at that price. After customer orders are 
executed, the rules of ``Broker Payment'' options exchanges dictate 
how the remainder of an incoming order is allocated against resting 
non-customer orders or quotations. ISE, for example, requires that 
priority be given to public customer orders, and provides for pro-
rata allocation among non-customer orders and quotations. See 
Securities Exchange Act Release No. 42455 (February 24, 2000), 65 FR 
11388, 11395 (March 2, 2000) (order approving the registration of 
the International Securities Exchange LLC as a national securities 
exchange (``ISE Exchange Approval'')). Exchanges that use a ``Broker 
Payment'' model do not give priority to orders from certain 
customers who are ``professional'' customers under exchange rules. 
See Securities Exchange Act Release Nos. 59287 (January 23, 2009), 
74 FR 5694 (January 30, 2009) (SR-ISE-2006-26); 61198 (December 17, 
2009), 74 FR 68880 (December 29, 2009) (SR-CBOE-2009-078); and 61802 
(March 3, 2010) (SR-Phlx-2010-05). ``Professional'' customers are 
treated on ISE, the Chicago Board Options Exchange, Incorporated 
(``CBOE''), and Nasdaq OMX Phlx in the same manner as a broker-
dealer for purposes of specified order execution rules, including 
priority rules. Under these exchange rules, ``Professional'' 
customers participate in ISE's, CBOE's, and Nasdaq OMX Phlx's 
allocation processes on equal terms with broker-dealers, i.e., they 
do not receive priority over broker-dealers in the allocation of 
orders on the exchange. Several exchanges have, however, begun to 
charge transaction fees to certain customers identified in exchange 
rules as ``professionals.'' See Securities Exchange Act Release Nos. 
59287 and 61198.
    \31\ See BOX Fee Schedule, at 1 (available at http://
www.bostonoptions.com/pdf/BOX_Fee_Schedule.pdf) (current as of 
January 2010); CBOE Fee Schedule, at 1 (available at http://
www.cboe.com/publish/feeschedule/CBOEFeeSchedule.pdf) (current as of 
February 2, 2010); ISE Fee Schedule, at 6 (available at http://
www.ise.com/assets//documents//OptionsExchange//legal/fee/fee_
schedule.pdf) (current as of January 8, 2010); NYSE Amex Fee 
Schedule, at 3 (available at http://www.nyse.com/pdfs/NYSE_Amex_
Options_Fee_Schedule01.04.10.pdf) (current as of January 4, 2010); 
NYSE Arca Fee Schedule, at 6 (available at http://www.nyse.com/pdfs/
NYSE_Arca_Options_Fee_Schedule1-08-2010.pdf) (current as of 
January 8, 2010); and Nasdaq OMX Phlx Fee Schedule, at 5 (available 
at http://www.nasdaqomxtrader.com/content/marketregulation/
membership/phlx/feesched.pdf) (current as of February 24, 2010).
    \32\ See CBOE Fee Schedule, at 2 (available at http://
www.cboe.com/publish/feeschedule/CBOEFeeSchedule.pdf) (current as of 
February 2, 2010); ISE Fee Schedule, at 6 (available at http://
www.ise.com/assets//documents//OptionsExchange//legal/fee/fee_
schedule.pdf) (current as of January 8, 2010); NYSE Amex Fee 
Schedule, at 3 (available at http://www.nyse.com/pdfs/NYSE_Amex_
Options_Fee_Schedule01.04.10.pdf) (current as of January 4, 2010); 
NYSE Arca Fee Schedule, at 6 (available at http://www.nyse.com/pdfs/
NYSE_Arca_Options_Fee_Schedule1-08-2010.pdf) (current as of 
January 8, 2010); and Nasdaq OMX Phlx Fee Schedule, at 6 (available 
at http://www.nasdaqomxtrader.com/content/marketregulation/
membership/phlx/feesched.pdf) (current as of February 24, 2010).
    \33\ See, e.g., Nasdaq OMX Phlx Fee Schedule, at 6, 15 
(available at http://www.nasdaqomxtrader.com/content/
marketregulation/membership/phlx/feesched.pdf) (current as of 
February 24, 2010). See also infra note 109 and accompanying text.
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    In July 2008 the Commission received a Petition for Rulemaking to 
Address Excessive Access Fees in the Options Markets from Citadel 
Investment Group, L.L.C. (``Citadel Petition'').\34\ In the Citadel 
Petition, Citadel petitions the Commission to engage in rulemaking to 
limit the ``Take'' fees that options exchanges may charge non-members 
to obtain access to quotations to $0.20 per contract. NYSE Arca also 
filed a proposal in July 2008 to raise its ``Take'' fee for certain 
classes. Specifically, NYSE Arca submitted a proposed rule change for 
immediate effectiveness that raised its ``Take'' fee charged to members 
for certain designated Minimum Quoting Increment Pilot Program issues 
from $0.45 per contract to $0.55 per contract, and raised the 
corresponding credit in those same issues from $0.30 per contract to 
$0.40 per contract for market makers, and from $0.25 per contract to 
$0.35 per contract for electronically executed broker-dealer and 
customer orders.\35\ The Commission requested comment on the issue of 
access fees when it published NYSE Arca's proposal for comment.\36\
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    \34\ See letter from John C. Nagel, Managing Director & Deputy 
General Counsel, Citadel, to Nancy M. Morris, Secretary, Commission, 
dated July 15, 2008 (available at http://www.sec.gov/rules/
petitions/2008/petn4-562.pdf).
    \35\ These Pilot issues included: AAPL, CSCO, DIA, MSFT, IWM, 
QQQQ, RIMM, XLF, SPY, YHOO. See Securities Exchange Act Release No. 
58295 (August 4, 2008), 73 FR 46681 (August 11, 2008) (SR-NYSEArca-
2008-75).
    \36\ Concurrently, NYSE Arca filed a proposed rule change to 
increase the fee charged to orders received through the then-
existing options linkage in certain Minimum Quoting Increment Pilot 
Program issues from $0.45 to $0.55 per contract. See SR-NYSEArca-
2008-76. The Commission has not published this proposed rule change 
for notice and comment. Pending Commission action on SR-NYSEArca-
2008-76, NYSE Arca has stated that it will not implement its fee 
changes included in SR-NYSEArca-2008-75.
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    The Commission has received several comment letters in response to 
its request for comment on the NYSE Arca proposed rule change and to 
the Citadel Petition, which discuss the issue of access fees and 
imposing a cap on such fees.\37\ The Commission also received several 
comment letters in response to a proposal to amend Rule 602 of 
Regulation NMS to effectively ban marketable ``flash orders'' in NMS 
securities that discuss the issue of access fees in listed options.\38\ 
Commenters on the Flash Order Proposal expressed concern that 
eliminating flash orders on the options exchanges would increase direct 
costs associated with executing customers' listed options orders.\39\ 
The absence of a limit on fees that an options exchange can charge for 
accessing its quotation was one reason commenters said that banning 
flash orders would be more detrimental to listed options customers than 
to cash equity customers.\40\ These concerns about the absence of a 
limit on access fees on the listed options exchanges echo the comments 
received in response to the Citadel Petition and NYSE Arca's proposal. 
These comments were considered in developing this proposal and are 
discussed below.
---------------------------------------------------------------------------

    \37\ Letters received in response to SR-NYSEArca-2008-75: See 
letters from John C. Nagel, Managing Director and Deputy General 
Counsel, Citadel, to Nancy M. Morris, Secretary, Commission, dated 
July 23, 2008 (``Citadel Letter''); Stephen Schuler and Daniel 
Tierney, Managing Members, Global Electronic Trading Company to 
Florence E. Harmon, Acting Secretary, Commission, dated September 2, 
2008 (``GETCO Letter''); Christopher Nagy, Managing Director, Order 
Routing Sales and Strategy, TD Ameritrade, Inc. to Florence E. 
Harmon, Acting Secretary, Commission, dated September 9, 2008 (``TD 
Ameritrade Letter''); and Robert R. Bellick, Managing Director, 
Wolverine to Nancy M. Morris, Secretary, Commission, dated September 
10, 2008 (``Wolverine Letter'') (available at http://www.sec.gov/
comments/sr-nysearca-2008-75/nysearca200875.shtml).
    Letter received in response to the Citadel Petition: See letter 
from Lawrence Leibowitz, Group Executive Vice President and Head of 
Global Execution and Technology, NYSE Euronext, to Florence E. 
Harmon, Acting Secretary, Commission, dated September 3, 2008 
(``NYSE Euronext Letter'') (available at http://www.sec.gov/
comments/4-562/4-562.shtml).
    Letters received in response to both the Citadel Petition and 
SR-NYSEArca-2008-75: See letters from David M. Battan, Executive 
Vice President, Interactive Brokers Group LLC, to Florence Harmon, 
Acting Secretary, Commission, dated September 8, 2008 (``IB 
Letter''); and William Easley, Vice Chairman, Boston Options 
Exchange (``BOX'') to Florence E. Harmon, Acting Secretary, 
Commission, dated September 11, 2008 (``BOX Letter'') (available at 
http://www.sec.gov/comments/sr-nysearca-2008-75/
nysearca200875.shtml).
    Letters received in response to SR-NYSEArca-2009-44, which 
proposed to expand the number of classes eligible to participate in 
the Minimum Quoting Increment Pilot: See letters from Christopher 
Nagy, Managing Director, Order Routing Strategy, TD Ameritrade, Inc. 
to Elizabeth M. Murphy, Secretary, Commission, dated June 17, 2009 
(``TD Ameritrade Letter II'') and December 1, 2009 (``TD Ameritrade 
Letter III'') (available at http://www.sec.gov/comments/sr-nysearca-
2009-44/nysearca200944.shtml).
    \38\ See Flash Order Proposal, supra note 19. A ``flash order'' 
generally is any order qualifying for the ``immediate execution or 
withdrawal'' exception from Rule 602. For more detail about the 
basic features that define flash orders, see the Flash Order 
Proposal. Flash orders allow options exchanges that charge no or low 
fees to execute customer orders to ``step up'' and match better 
displayed quotations on other exchanges.
    \39\ See, e.g., letters from Christopher Nagy, Managing 
Director, Order Routing Strategy, TD Ameritrade, Inc., to Elizabeth 
M. Murphy, Secretary, Commission, dated November 23, 2009 
(``Ameritrade Flash Letter''); letter from John C. Nagel, Managing 
Director and Deputy General Counsel, Citadel, to Elizabeth M. 
Murphy, Secretary, Commission, dated November 20, 2009 (``Citadel 
Letter II''); Peter Bottini, EVP Trading and Customer Service, and 
Hillary Victor, Associate General Counsel, optionsXpress, to 
Elizabeth M. Murphy, Secretary, Commission, dated November 25, 2009 
(``optionsXpress Flash Letter''); Thomas F. Price, Managing 
Director, Securities Industry Financial Association, to Elizabeth M. 
Murphy, Secretary, Commission, dated December 1, 2009 (``SIFMA Flash 
Letter'') (available at http://www.sec.gov/comments/s7-21-09/
s72109.shtml).
    \40\ See SIFMA Flash Letter, supra note 39, at 5. See also 
Citadel Letter II, infra note 39, at 1-2; Ameritrade Flash Letter, 
supra note 39, at 3; and optionsXpress Flash Letter, supra note 39, 
at 6.
---------------------------------------------------------------------------

II. Proposed Amendments to Rule 610(a)

    Access to displayed quotations, particularly the best quotations of 
an exchange or association, is vital for the smooth functioning of 
intermarket trading.\41\ Brokers responsible for routing their 
customers' orders, as well as investors that make their own order-
routing decisions, must have fair and efficient access to the best 
displayed quotations of all options exchanges to achieve best execution 
of those orders. In addition, options exchanges themselves must have 
the ability to route orders for execution against the displayed 
quotations of other exchanges. Indeed, the concept of intermarket 
protection against trade-throughs is premised on the ability of options 
exchanges to trade with, rather than trade through, the quotations 
displayed by other options exchanges.\42\
---------------------------------------------------------------------------

    \41\ See NMS Adopting Release, supra note 4, at 37539. 
Currently, no national securities association quotes or trades 
listed options.
    \42\ See id.
---------------------------------------------------------------------------

    Currently, Rule 610(a) furthers the goal of fair and efficient 
access to quotations primarily by prohibiting a national securities 
exchange or national securities association from imposing unfairly 
discriminatory terms that prevent or inhibit any person from obtaining 
efficient access through a member of the national securities exchange 
or national securities association to any quotations in an NMS stock 
\43\ displayed by the exchange or association.\44\ This anti-
discrimination standard is designed to support indirect access by 
persons to quotations in NMS stocks through members, and is

[[Page 20742]]

premised on fair and efficient access of exchange or association 
members themselves to the quotations in NMS stocks.\45\
---------------------------------------------------------------------------

    \43\ See Rule 600(b)(47), 17 CFR 242.610(b)(47) (defining NMS 
stock as any NMS security other than an option). See also Rule 
600(b)(46), 17 CFR 242.610(b)(46) (defining NMS security as any 
security or class of securities for which transaction reports are 
collected, processed, and made available pursuant to an effective 
transaction reporting plan, or an effective national market system 
plan for reporting transactions in listed options).
    \44\ See Rule 610(a), 17 CFR 242.610(a). See also NMS Adopting 
Release, supra note 4, at 37539.
    \45\ See NMS Adopting Release, supra note 4, at 37502.
---------------------------------------------------------------------------

    The Commission is proposing to amend Rule 610(a) to extend this 
prohibition to NMS securities,\46\ which include listed options as well 
as NMS stocks. The proposal to extend the anti-discrimination standard 
in Rule 610(a) to the trading of listed options is designed to support 
indirect access by persons to quotations in listed options through 
members. Like current Rule 610(a), the proposed amendment is premised 
on the need for fair and efficient access of members themselves to the 
quotations of the exchange in listed options.
---------------------------------------------------------------------------

    \46\ See supra note 43 (defining NMS security).
---------------------------------------------------------------------------

    Market participants can either become members of an exchange to 
obtain direct access to its options quotations, or they can obtain 
indirect access by ``piggybacking'' on the direct access of members. 
Access to exchanges currently is addressed by several provisions of the 
Exchange Act.\47\ In particular, Section 6(b)(5) of the Exchange Act 
requires in part that the rules of an exchange not be designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers.\48\ The proposed amendments to Rule 610(a) would build on this 
existing access structure, including the prohibition in Section 6(b)(5) 
against unfair discrimination, by specifically prohibiting unfair 
discrimination that prevents or inhibits non-members from 
``piggybacking'' on the access of members. The ability to fairly and 
efficiently obtain indirect access through a member is necessary to 
assure that non-members can readily access quotations in options to 
meet the requirements of the Trade-Through Rules and to fulfill the 
non-members' duty of best execution.\49\
---------------------------------------------------------------------------

    \47\ Section 6(b)(4) of the Exchange Act requires the rules of 
an exchange to provide for the equitable allocation of reasonable 
dues, fees, and other charges among its members and other persons 
using its facilities, while Section 6(b)(5) of the Exchange Act 
requires in part that its rules not be designed to permit unfair 
discrimination between customers, brokers, or dealers. Section 
6(b)(5) also requires an exchange to have rules designed to remove 
impediments to, and perfect the mechanism of, a free and open market 
and a national market system. In addition, Section 6(b)(1) of the 
Exchange Act requires that an exchange must have the capacity to be 
able to carry out the purposes of the Exchange Act. See 15 U.S.C. 
78f(b)(4); 15 U.S.C. 78f(b)(5); 15 U.S.C. 78f(b)(1). Section 
11A(a)(1)(C) of the Exchange Act provides that two of the objectives 
of a national market system are to assure the economically efficient 
execution of securities transactions and the practicability of 
brokers executing investors' orders in the best market. See 15 
U.S.C. 78k-1(a)(1)(C).
    \48\ The requirements of Section 6(b)(5) of the Exchange Act 
apply to any rule of an exchange, and as such are not limited to 
access through members of an exchange to the quotations of that 
exchange.
    \49\ See supra notes 4-22 and accompanying text.
---------------------------------------------------------------------------

    The Commission does not believe that, if it were to prohibit 
exchanges from imposing unfairly discriminatory terms on non-members 
who obtain indirect access to quotations in options through members, it 
would require exchanges to provide non-members with free access to such 
quotations. Members who provide piggyback access to non-members would 
be providing a useful service and presumably would charge a fee for 
such service. The fee would be subject to competitive forces and likely 
would reflect the costs of membership, plus some element of profit to 
the members. As a result, non-members that frequently make use of 
indirect access are likely to contribute indirectly to cover the costs 
of membership in the market. In addition, the unfair discrimination 
standard of Rule 610(a) as proposed to be amended would apply only to 
access to quotations in NMS securities, including options. All other 
services would be subject to the more general fair access provisions 
applicable to national securities exchanges, as well as the statutory 
provisions that govern their respective rules.\50\
---------------------------------------------------------------------------

    \50\ See NMS Adopting Release, supra note 4, at 37540.
---------------------------------------------------------------------------

    On the other hand, any attempt by an options exchange to charge 
differential fees based solely on the non-member status of a person 
obtaining indirect access to its quotations would violate Rule 610(a) 
as proposed to be amended.\51\ As noted above, fair and efficient 
access to quotations is essential to the functioning of the NMS.\52\ 
For example, if an exchange charges discriminatory fees to non-members 
to access its quotations, this practice would interfere with the 
functioning of the private linkage approach and detract from its 
usefulness to exchanges in meeting their required responsibilities 
under the Trade-Through Rules. Fair and efficient access to the best 
quotations is also necessary for brokers to achieve best execution of 
orders.\53\ Accordingly, the Commission is proposing to amend Rule 
610(a) to establish baseline intermarket access rules for options 
markets to promote indirect access to such markets by a non-member 
through a member.
---------------------------------------------------------------------------

    \51\ Id. For example, the Commission preliminarily believes an 
exchange that charges a non-member broker-dealer that is registered 
as an options market maker on another exchange a higher fee than the 
fee charged to both member and non-member broker-dealers that also 
are not market makers on that exchange for obtaining access to its 
quotations would violate Rule 610(a), as proposed to be amended.
    \52\ See supra notes 4-7 and accompanying text.
    \53\ See NMS Adopting Release, supra note 4, at 37539. See also 
supra notes 20-22 and accompanying text.
---------------------------------------------------------------------------

    The prohibition on imposing unfairly discriminatory terms in Rule 
610(a) currently applies to terms that prevent or inhibit efficient 
access to quotations. The term ``quotation'' is defined in Rule 
600(a)(62) of Regulation NMS as a bid or offer, and ``bid'' or 
``offer'' is defined in Rule 600(b)(8) of Regulation NMS as the bid 
price or the offer price communicated by a member of a national 
securities exchange or national securities association to any broker or 
dealer or to any customer.\54\ Rule 610(a), therefore, applies to the 
entire depth of book of displayed orders in NMS stocks, including 
reserve size \55\ and displayed size at each price.\56\ The 
Commission's proposal to extend Rule 610(a) to all NMS securities so 
that listed options markets are covered by the Rule would apply in the 
same manner.\57\ Thus, options markets would be prohibited from 
imposing unfairly discriminatory terms that prevent or inhibit 
efficient access to the entire depth of book of displayed orders.
---------------------------------------------------------------------------

    \54\ See 17 CFR 242.600(b)(62) and 17 CFR 242.600(b)(8).
    \55\ ``Reserve size'' generally means an undisplayed portion of 
an order. Once the displayed size of an order is executed against, 
the reserve size is used to refresh the market participant's 
displayed size. See, e.g., NYSE Arca Rule 6.62(d)(3) and ISE Rule 
2104(n).
    \56\ See NMS Adopting Release, supra note 4, at 37548.
    \57\ The Commission notes that, although fees are the most 
likely way in which an exchange could discriminate against non-
members for access to its quote, the Commission's proposal would 
more broadly prohibit any unfairly discriminatory terms.
---------------------------------------------------------------------------

III. Access Fees

A. Proposed Rule 610(c)(2)

    Generally, the Commission believes that market forces and the 
dynamics of competition should determine the level of exchange fees 
whenever possible.\58\ As discussed below, however, the Commission is 
concerned that because of the requirements for intermarket price 
protection, competitive forces, by themselves, are not, and will not 
be, enough to prevent fees from being charged that interfere with fair 
and

[[Page 20743]]

efficient access to an option exchange's displayed prices.\59\ 
Accordingly, the Commission is proposing to impose a limit on the 
amount of fees that an exchange can impose (or permit to be imposed) 
for the execution of an order against the exchange's best bid and 
offer. This proposal also responds to market participants' concerns 
regarding access fees,\60\ as discussed below.\61\
---------------------------------------------------------------------------

    \58\ See Securities Exchange Act Release Nos. 59039 (December 2, 
2008), 73 FR 74770, 74781-82 (December 9, 2008) (``NYSE Arca Data 
Order'') (stating in part that ``[t]he Exchange Act and its 
legislative history strongly support the Commission's reliance on 
competition, whenever possible, in meeting its regulatory 
responsibilities for overseeing the SROs and the national market 
system. Indeed, competition among multiple markets and market 
participants trading the same products is the hallmark of the 
national market system.'').
    \59\ See NMS Adopting Release, supra note 4, at 37545 
(concluding that imposing a fee limitation was necessary to support 
the integrity of the price protection requirement established to 
prevent trade-throughs: ``[T]he adopted fee limitation is designed 
to preclude individual trading centers from raising their fees 
substantially in an attempt to take improper advantage of 
strengthened protection against trade-throughs and the adoption of a 
private linkage regime. In particular, the fee limitation is 
necessary to address ``outlier'' trading centers that otherwise 
might charge high fees to other market participants required to 
access their quotations by the Order Protection Rule.'').
    \60\ These concerns, as noted above, have been raised by a 
petition for rulemaking to limit the ``Take'' fees that options 
exchanges may charge non-members to access quotations and comment 
letters in response to this petition and NYSE Arca's proposal to 
raise its ``Take'' fee. See Citadel Petition, supra note 34; see 
also supra note 37.
    \61\ See infra notes 70 and 79 and accompanying text.
---------------------------------------------------------------------------

    Each of the options exchanges currently charges market participants 
fees when incoming orders access their displayed quotations. Although 
these fees may have different names (e.g., a ``Take'' fee versus a 
transaction fee), and may vary in amount based on the type of account 
from which the order is sent, these fees all have one thing in common--
they are fees triggered by the execution of an incoming order against 
an order or quotation on that exchange.
    In particular, on exchanges that use the ``Broker Payment'' fee 
model,\62\ although orders executed on behalf of customer accounts may 
not be charged any transaction fees, orders executed on behalf of non-
customer accounts are charged transaction fees.\63\ In some cases, 
these fees may be substantial. For example, for options classes not 
included in the Minimum Quoting Increment Pilot Program, one exchange 
charges $0.50 per contract for electronically executed orders for the 
account of a broker dealer or firm,\64\ while another exchange charges 
$0.45 per contract for electronically executed broker-dealer 
orders.\65\
---------------------------------------------------------------------------

    \62\ See supra notes 30-33 and accompanying text.
    \63\ A customer generally is understood to be a person that is 
not a broker-dealer. See, e.g., ISE Rule 100(a)(38) (defining the 
term ``public customer''). However, as noted above, some exchanges 
have begun to charge transaction fees to certain customers 
identified in exchange rules as ``professionals.'' See supra note 
30.
    \64\ See NYSE Arca Fee Schedule (available at http://
www.nyse.com/pdfs/NYSE_Arca_Options_Fee_Schedule1-08-2010.pdf) 
(current as of January 8, 2010).
    \65\ See CBOE Fee Schedule (available at http://www.cboe.com/
publish/feeschedule/CBOEFeeSchedule.pdf) (current as of February 2, 
2010).
---------------------------------------------------------------------------

    In addition, on exchanges that use the ``Make or Take'' fee 
model,\66\ an exchange charges ``Take'' fees to members that execute 
orders against that exchange's quotations. These exchanges then pass a 
substantial portion of that fee back as a rebate to the member that 
supplied the accessed liquidity (i.e., market maker quotations or non-
marketable limit orders). The ``Take'' fees charged by these exchanges 
also can be substantial. For example, for options classes in the 
Minimum Quoting Increment Pilot Program, one exchange charges $0.45 per 
contract when an order for the account of a non-customer (and $0.35 per 
contract when an order for the account of a customer) trades against 
liquidity on the exchange's book. The exchange then rebates $0.25 per 
contract to the member (or members) that represented the order (or 
orders) on its book that provided the liquidity to the incoming 
order.\67\ Another exchange charges a $0.45 per-contract ``Take'' fee 
when an order in a Minimum Quoting Increment Pilot Program options 
class trades with liquidity on the exchange's book. This exchange then 
rebates $0.30 per contract to an exchange market maker that provided 
the liquidity to the incoming order and $0.25 per contract to the 
member that represented a broker-dealer or customer order that provided 
liquidity to the incoming order.\68\
---------------------------------------------------------------------------

    \66\ See supra note 27 and accompanying text.
    \67\ See Section 1 of Nasdaq Rule 7050 and The NASDAQ Options 
Market: Execution and Routing Fees (available at http://
www.nasdaqtrader.com/content/ProductsServices/PriceList/nasdaq_
options_pricing.pdf) (current as of January 4, 2010).
    \68\ See ``Transaction Costs'' Section of the NYSE Arca Fee 
Schedule (available at http://www.nyse.com/pdfs/NYSE_Arca_
Options_Fee_Schedule1-08-2010.pdf) (current as of January 8, 
2010). See also supra notes 35 and 36 and accompanying text.
---------------------------------------------------------------------------

    The Commission believes that the benefits of intermarket price 
protection and more efficient linkages could be compromised if options 
exchanges charge substantial fees for accessing their best bids and 
offers. For this reason, the Commission preliminarily believes that a 
fee limitation is necessary to support the integrity of the price 
protection requirement under the Trade-Through Rules.\69\ The 
Commission's views are informed by commenters that argue that a limit 
on fees for accessing quotations would support the integrity of the 
rules limiting trade-throughs because a fee limitation would prohibit 
individual exchanges from raising their fees substantially in an 
attempt to take improper advantage of protection against trade-
throughs. In particular, commenters contend that, in the absence of a 
fee limit, some exchanges may take advantage of the requirement to 
protect displayed quotations by charging exorbitant fees to those 
required to access the exchange's quotations, which could compromise 
the fairness and efficiency of the NMS for trading standardized 
options.\70\ Although the exchange charging the highest fees likely 
would be the last exchange to which orders would be routed, prices 
could not move to the next level until someone routed an order to take 
out the displayed price at such a high fee exchange. Thus, while 
exchanges would have significant incentives to compete to be near the 
top in order-routing priority, arguably there would be little incentive 
to avoid being the least-preferred exchange if fees were not 
limited.\71\
---------------------------------------------------------------------------

    \69\ See supra notes 13 and 17-19 and accompanying text for a 
definition of ``Trade-Through Rules.''
    \70\ See Citadel Petition, supra note 34, at 4 (arguing that 
``Taker'' fees are sustained by virtue of the regulatory obligations 
prohibiting trade-throughs, in that when an exchange is quoting 
alone at the NBBO, market participants cannot avoid the Taker fees 
imposed by such exchange, irrespective of how high such fees may 
be); Citadel Letter II, supra note 37, at 6 (arguing that if the 
Commission were to ban or limit the use of step-up mechanisms in the 
options markets, the need for an access fee cap would become 
essential); TD Ameritrade Letter, supra note 37, at 1 (arguing that 
Make or Take fees have the potential to create incentives for 
participants to post liquidity and lock markets to capture the 
rebate and that other options exchanges would have to increase their 
fees and rebates in order to defend their market share). See also 
Wolverine Letter, supra note 37, at 6 (asserting that, while a cap 
implemented as proposed by Citadel would reduce Take fees charged to 
non-members who may be forced to access ``outlier'' markets due to 
trade through obligations, members would still be forced to pay 
unrestricted fees); GETCO Letter, supra note 37, at 3 (stating that 
if the Commission does decide to place caps on access fees charged 
by exchanges that use the ``Make or Take'' fee model, it should also 
cap all-in access fees for traditional exchanges, i.e., those that 
use the ``Broker Payment'' fee model, regardless of the type of 
market participant accessing the exchange's quotation).
    \71\ See NMS Adopting Release, supra note 4, at 37545.
---------------------------------------------------------------------------

    The proposed fee limitation is designed to preclude this business 
practice by limiting individual exchanges from having fee structures 
that take improper advantage of the required protection against trade-
throughs and undermine the overall benefits of the new private routing 
regime. It also would preclude an options exchange from charging 
excessively high fees selectively to competitors.

[[Page 20744]]

    The Commission notes that several exchanges have rules that allow--
and encourage--their members to electronically ``step up'' and match a 
better-priced bid or offer available on another exchange--a ``flash'' 
functionality--rather than send orders to other exchanges for 
execution.\72\ These exchanges stated that they implemented this 
``flash'' functionality because of the high costs associated with 
routing an order to away exchanges to be executed, particularly one 
with a Make or Take fee model.\73\
---------------------------------------------------------------------------

    \72\ See, e.g., ISE Rule 803, Supplementary Material .02 and 
Securities Exchange Act Release Nos. 57551 (March 25, 2008), 73 FR 
16917 (March 31, 2008) (SR-ISE-2008-28) and 58038 (June 26, 2008), 
73 FR 38261 (July 3, 2008) (SR-ISE-2008-50). See also ISE Fee 
Schedule, supra note 32, at 3-4 (as an inducement to step-up and 
avoid routing to away markets, ISE waives the transaction fee for 
members when they execute against a public customer order that is 
exposed pursuant to ISE Rule 803, i.e., ISE's step-up mechanism) 
(current as of January 8, 2010).
    \73\ See, e.g., letters from William J. Brodsky, Chairman and 
Chief Executive Officer, CBOE, to Elizabeth M. Murphy, Secretary, 
Commission, dated November 18, 2009, at 2 (comment to Flash Order 
Proposal) (``CBOE Flash Letter''); Michael J. Simon, Secretary, ISE, 
to Elizabeth Murphy, Secretary, Commission, dated November 23, 2009 
at 5 (comment to Flash Order Proposal) (``ISE Flash Letter''); Tony 
McCormick, CEO, BOX, to Elizabeth M. Murphy, Secretary, Commission, 
dated November 23, 2009, at 3 (comment to Flash Order Proposal). See 
also Securities Exchange Act Release Nos. 57551 (March 25, 2008), 73 
FR at 16917 (March 31, 2008) (SR-ISE-2008-28) and 57937 (June 6, 
2008), 73 FR 33865 (June 13, 2008) (SR-CBOE-2008-58) (relating to 
electronic exposure on HAL).
---------------------------------------------------------------------------

    The Commission separately has proposed changes to Rule 602 of 
Regulation NMS that may affect these electronic ``step-up'' mechanisms, 
if adopted.\74\ There are structural differences between the listed 
options exchanges and the cash equity markets that commenters 
identified as making the use of ``flash'' orders on the options 
exchanges serve a different purpose. In particular, commenters stated 
that eliminating the ability of market participants on the options 
exchanges to ``step up'' to better prices on other exchanges through 
the use of ``flash'' orders could impose significant costs on retail 
options customers whose orders would be routed to other options 
exchanges because, in part, of the absence of any limits on the fees 
options exchanges may charge to access their quotations.\75\
---------------------------------------------------------------------------

    \74\ See Flash Order Proposal, supra note 19.
    \75\ See SIFMA Flash Letter, supra note 39, at 5; Ameritrade 
Flash Letter, supra note 39, at 3; optionsXpress Flash Letter, supra 
note 39, at 6; and Citadel Letter II, supra note 39, at 6 (arguing 
that if the Commission were to ban or limit the use of step-up 
mechanisms in the options markets, the need for an access fee cap 
would become essential).
---------------------------------------------------------------------------

    The Commission also believes that for quotations to be fair and 
useful, there must be some limit on the extent to which the all-in 
price for those who access quotations can vary from the displayed 
price.\76\ The wider the disparity in the level of fees among the 
different exchanges, the less useful and accurate are the displayed 
prices. For example, if two options exchanges displayed quotations to 
sell an option for $10.00 per contract, one exchange offer could be 
accessible for a total price of $10.00 per contract plus a $0.50 per 
contract access fee, while the second exchange might not charge any 
such access fee. What appeared in the consolidated data stream to be 
identical quotations in terms of all-in costs would in fact not be 
identical. Access fees tend to be highest when exchanges use them to 
fund substantial rebates to liquidity providers, rather than merely to 
compensate for agency services.\77\ These concerns were also expressed 
by several commenters who argue that for quotations to be fair and 
useful, there must be some limit to the extent to which the displayed 
price can vary from the ``all-in'' price \78\ of a quotation.\79\ If 
exchanges were allowed to charge exorbitant fees and pass most of them 
through as rebates, the published quotations of such exchanges would 
not reliably indicate the all-in price actually available.
---------------------------------------------------------------------------

    \76\ See NMS Adopting Release, supra note 4, at 37545.
    \77\ Id. at 37544.
    \78\ The term ``all-in'' price is intended to capture the total 
costs for executing a trade. See infra note 90 and accompanying 
text.
    \79\ See BOX Letter, supra note 37, at 5-6 (stating its 
agreement with Citadel and the Commission that ``[f]or quotations to 
be fair and useful, there must be some limit on the extent to which 
the true prices for those who access quotations can vary from the 
displayed price''); Citadel Petition, supra note 34, at 3-5 (arguing 
that markets employing a Make or Take fee model are charging 
excessive fees to obtain access to their quotations and, as a 
result, are causing distortions in such quotations, which should 
otherwise reliably represent the true prices actually available to 
investors.); NYSE Euronext Letter, supra note 37, at 3 (stating 
generally that they are in favor of rules that ensure the 
reasonableness of fees, similar to rate caps that were enacted in 
the equities markets in Regulation NMS); TD Ameritrade Letter, supra 
note 37, at 1-2; and Wolverine Letter, supra note 37, at 6 
(asserting that unrestricted fees that members would have to pay 
would result in executions at prices materially different from the 
displayed quotations and, as a consequence, run contrary to the 
purposes behind the trade-through rules and the principles of best 
execution).
---------------------------------------------------------------------------

    Section 11A(c)(1)(B) of the Exchange Act authorizes the Commission 
to adopt rules assuring the fairness and usefulness of quotation 
information. For quotations to be fair and useful, there must be some 
limit on the extent to which the all-in price for those who access 
quotations can vary from the displayed price. An access fee limit also 
creates more transparency in the cost of accessing quoted prices. 
Currently, there are so many different fees across options exchanges, 
across different categories of options participants, and across 
different product types, that it is not easy to estimate the total cost 
of executing against a quotation for a particular transaction. An 
access fee cap would provide clearer information on the maximum cost 
for accessing quoted prices. Consequently, the proposed fee limitation 
would further the statutory purposes of the Exchange Act by precluding 
the distortional effects of access fees.
    The Commission preliminarily believes that to fully support the 
integrity of the price protection requirement in the Trade-Through 
Rules and to achieve the goals that an exchange's displayed quotations 
be fair and useful and reliably represent the all-in prices that are 
actually available to investors, the proposed fee limitation should 
apply to any fee, no matter what it is called,\80\ charged to any 
person \81\ for the execution of an incoming order against an options 
exchange's best bid and offer. As discussed above, the Commission 
believes that the benefits of intermarket price protection and more 
efficient linkages could be compromised if options exchanges charge 
substantial fees for accessing their best bids and offers. The proposed 
fee limitation is designed to preclude individual exchanges from having 
fee structures that take improper advantage of the required protection 
against trade-throughs and undermine the overall benefits of the new 
private routing regime. It also would preclude an options exchange from 
charging excessively high fees selectively to competitors. In this 
regard, the Commission preliminarily believes that limiting the 
proposed fee cap to apply to only one type of fee charged (for 
instance, only to ``Take'' fees), or limiting the proposed fee cap to 
fees charged only to certain persons (for example, only to non-members) 
by an options exchange for execution against

[[Page 20745]]

the exchange's best bid and offer would not fully achieve these 
objectives because it would not cover all fees that could be charged 
for access to the exchange's best quotation.
---------------------------------------------------------------------------

    \80\ See NYSE Euronext Letter, supra note 37, at 3 (stating that 
access fees should be addressed not as one model versus the other, 
but as a fee to access the market independent of the market 
structure that marketplace employs).
    \81\ See Wolverine Letter, supra note 37, at 6 (asserting that, 
while a proposed fee cap would reduce Take fees charged to non-
members forced to access ``outlier'' markets at the NBBO due to 
trade-through obligations, members would still be forced to pay 
unrestricted fees) and GETCO Letter, supra note 37, at 3 (stating 
that if the Commission does decide to place caps on access fees 
charged by exchanges using the ``Make or Take'' fee model, it should 
also cap all-in access fees for traditional exchanges, regardless of 
the type of market participant accessing the exchange's quotation).
---------------------------------------------------------------------------

    The Commission has received comments that the Make or Take fee 
structure exerts competitive pressure on the ``traditional'' fee 
structure where market makers pay brokers for order flow, and that 
imposing a cap on Take fees would limit the ability of exchanges that 
employ a Make or Take model to compete effectively with other exchanges 
that employ a Broker Payment model, to the detriment of investors.\82\ 
The Commission supports the development of competing market models, as 
long as they are consistent with the requirements of the Exchange Act. 
An exchange could not, however, engage in conduct that is otherwise 
inconsistent with the requirements of the Exchange Act,\83\ even if 
doing so would help that exchange to compete. As discussed above, the 
Commission preliminarily believes that the benefits of intermarket 
price protection and more efficient linkages could be compromised if 
options exchanges charge substantial fees for accessing their best bids 
and offers, and that a fee limitation is necessary to support the 
integrity of the price protection requirement under the Trade-Through 
Rules, but it requests comment on this issue.\84\ The Commission also 
believes that for quotations to be fair and useful, there must be some 
limit on the extent to which the all-in price for those who access 
quotations can vary from the displayed price.\85\ The Commission 
preliminarily believes that adopting an access fee limit of $0.30 per 
contract for option exchanges, regardless of their particular market 
structure, would not compromise the competitive viability of exchanges 
employing a Make or Take fee structure because it preliminarily 
believes that the proposed level of fee cap would provide those 
exchanges with sufficient flexibility to structure their fees and 
rebates to support their market model.\86\ Although the Commission 
preliminarily believes that the proposed fee limit would continue to 
allow for competition among the options exchanges, it requests comment 
on this issue and comment on other ways to achieve the Commission's 
objectives.\87\
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    \82\ See BOX Letter, supra note 37, at 2-3; IB Letter, supra 
note 37, at 2-3; and GETCO Letter, supra note 37, at 3.
    \83\ See 15 U.S.C. 78f(b) and 15 U.S.C. 78s(g).
    \84\ See supra note 69 and accompanying text.
    \85\ See supra note 76 and accompanying text. See also NMS 
Adopting Release, supra note 4, at 37545.
    \86\ See infra Section VIII.A.2 (discussing the impacts of the 
proposed amendments to Rules 610(a) and (c) on competition). See 
also infra notes 89 and 172 and accompanying text (noting that the 
experience of the markets trading NMS stocks in recent years 
suggests that a fee cap of $0.30 per 100 shares did not prevent 
markets using a Make or Take fee model from competing effectively in 
a market where some participants engage in payment for order flow).
    \87\ See infra Sections V (Request for Comment) and VIII.A.2 
(discussing the impacts of the proposed amendments to Rules 610(a) 
and (c) on competition).
---------------------------------------------------------------------------

    The Commission preliminarily believes that a limitation on access 
fees of $0.30 per contract (equal to $0.003 per share) would be a fair 
and appropriate solution. In the Commission's preliminary view, 
limiting access fees to $0.30 per contract would promote intermarket 
access, standardization of quotations, and the Commission's goals for 
an effective and efficient linkage between and among the options 
exchanges. The proposed fee limitation would place all options 
exchanges on a level playing field in terms of the fees they can charge 
for the execution of incoming options orders against their best bid and 
offer. Some exchanges might choose to charge lower fees, thereby 
increasing their ranking in the preferences of order routers; others 
might charge the full $0.30 per-contract fee and rebate a substantial 
portion to liquidity providers. The Commission preliminarily believes 
that competition would ultimately determine which strategy is most 
successful.
    The Commission recognizes, however, that even though it is not 
proposing to prohibit an exchange from employing any particular market 
model, the proposed fee limitation may impact different market models 
in different ways. An exchange with a Make or Take fee model that 
currently charges a Take fee in excess of the proposed fee cap would 
take in less revenue per contract from a reduced Take fee, while an 
exchange with a Broker Payment fee model that charges a transaction fee 
in excess of the proposed fee cap would take in less revenue per 
contract from a reduced transaction fee. These reduced fees for 
accessing an exchange's best bid or offer, standing alone, might have 
an impact on the manner in which broker-dealers and other market 
participants, including the exchanges, route order flow. The exchange 
with the Make or Take fee model, however, might choose to recoup some 
of that revenue by reducing its Make rebate, which may have an impact 
on the quoting behavior of market participants that provide liquidity 
on that exchange. An exchange with a Broker Payment model might choose 
to recoup some of the revenue by amending other fees charged to its 
members, which might impact the order routing or other behavior of 
those members (and the members' customers), depending upon the type of 
fee change. Accordingly, although the Commission preliminarily believes 
that the proposed fee limit would allow for vigorous competition among 
the options exchanges, it requests comment on the impact of the 
proposed fee limit on the different exchanges' and market participants' 
behavior.\88\
---------------------------------------------------------------------------

    \88\ See infra Sections V (Request for Comment) and VIII.A.2 
(discussing the impacts of the proposed amendments to Rules 610(a) 
and (c) on competition).
---------------------------------------------------------------------------

    The Commission is proposing to set a flat fee cap of $0.30 per 
contract (the equivalent of $0.003 per share). The Commission is not 
proposing to establish a cap for low-priced options based on a 
percentage of the options' price, similar to the existing fee cap of 
0.3 percent of the quotation price per share for NMS stocks. The 
Commission's proposal is based on its preliminary view that the $0.30 
per-contract level is consistent with the maximum fee limit for NMS 
stocks under Rule 610(c). The experience of the markets trading NMS 
stocks in recent years suggests that a fee cap of $0.30 per 100 shares 
did not prevent markets using a Make or Take fee model from competing 
effectively in a market where some participants engage in payment for 
order flow.\89\ In addition, this access fee cap level would help 
ensure that the ``all-in'' fee \90\ would be below the $1 minimum 
quoting increment \91\ so that the quotations displayed in the NBBO 
indicate the best prices. For example, having a $0.30 cap \92\ would 
help ensure that an offer of $2 is not inferior to an offer of $2.01 
once access and other per-contract fees were added to the price. Stated 
another way, the Commission preliminarily believes that setting the 
proposed fee cap at $0.30 per contract would allow options exchanges 
flexibility to generate revenues from access fees while still providing 
the exchange the ability to continue to charge other fees, such as 
``licensing'' fees charged by exchanges for executions in certain index

[[Page 20746]]

options \93\ or routing fees,\94\ without exceeding the $1 minimum 
increment.
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    \89\ See infra note 172 and accompanying text.
    \90\ The ``all in'' fee for transactions in options contracts 
may include multiple charges such as ``Take'' fees or transaction 
fees, routing fees, and licensing fees. See supra note 78.
    \91\ Since every options quotation represents a cost equal to 
100 times its price, a penny increment--the smallest possible 
increment for certain options--equals $1.00 in option cost.
    \92\ A $0.30 per-contract access fee is equal to a fee of $0.003 
per underlying share.
    \93\ These ``licensing'' fees generally do not exceed $0.22 per 
contract. See, e.g., CBOE Fee Schedule (available at http://
www.cboe.com/publish/feeschedule/CBOEFeeSchedule.pdf) (current as of 
February 2, 2010); and NYSE Arca Fee Schedule (available at http://
www.nyse.com/pdfs/NYSE_Arca_Options_Fee_Schedule1-08-2010.pdf) 
(current as of January 8, 2010).
    \94\ Fees charged by options exchanges for routing orders to 
execute on other exchanges range from $0.00 to $0.95 per contract. 
See NYSE Arca Fee Schedule (available at http://www.nyse.com/pdfs/
NYSE_Arca_Options_Fee_Schedule1-08-2010.pdf) (current as of 
January 8, 2010); and CBOE Fee Schedule (available at http://
www.cboe.com/publish/feeschedule/CBOEFeeSchedule.pdf) (current as of 
March 16, 2010) (CBOE charges a $0.50 per contract fee for routing 
non-customer orders in addition to the customary CBOE execution 
charge, which for electronic orders for broker-dealers is $0.45 per 
contract).
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    The Commission preliminarily believes that a flat $0.30 per-
contract fee cap for all options would strike the appropriate balance 
between imposing a cap to carry out the objectives discussed above and 
providing options exchanges flexibility to compete with one 
another.\95\ The Commission preliminarily does not believe that a cap 
for low-priced options should be based on a percentage of the quotation 
price as it is for low-priced NMS stocks. The Commission preliminarily 
believes that differences in the markets for NMS stocks and listed 
options merit this distinction. First, if an NMS stock is trading at a 
very low price, the access fee can become significant as a percentage 
of the total economic exposure. This result is less likely for listed 
options, given the leverage implicit in an option contract. For 
example, if an NMS stock is trading for $0.01 per share, so that an 
order for 100 shares represents $1 worth of stock, an access fee of 
$0.30 for 100 shares would represent thirty percent of the total 
economic position. On the other hand, an NMS stock priced at $10 per 
share could have a short-term out-of-the-money option priced at $0.01. 
If the Delta \96\ of this option is 0.05, then one option contract 
would cost $1 but would give the investor exposure equivalent to an 
investment of $50 of the stock. An access fee of $0.30 per contract for 
the option would represent only six-tenths of one percent of the 
economic position.\97\
---------------------------------------------------------------------------

    \95\ See infra Section VII.B.2 (discussing generally the costs 
and benefits of the proposal) and notes 179-183 and accompanying 
text (discussing the costs with respect to options exchanges that 
would need to amend their rules to comply with the access fee 
limitation as a result of proposed Rule 610(c)(2)).
    \96\ Delta is measured as the change in the option price divided 
by the change in the underlying asset price. See Guy Cohen, Options 
Made Easy (2d ed., Upper Saddle River: FT Prentice Hall 2005).
    \97\ A $0.30 per-contract access fee would be a more significant 
percentage of the option price as the option price decreases. For 
example, for an option priced at $0.01, a $0.30 per-contract access 
fee would be 30% of the total option price ($0.01 x 100 = $1 per 
contract, and $0.30 is 30% of $1). The Commission preliminarily 
believes, however, that a flat cap of $0.30, rather than a cap based 
on a percentage of the option price for low-priced options, strikes 
the appropriate balance, for the reasons discussed in this section. 
The Commission, however, requests comment on the issue. See infra 
Section V (Request for Comment).
---------------------------------------------------------------------------

    Second, the restriction on subpenny quoting in NMS stocks does not 
apply to stocks priced below $1.\98\ Thus, for certain low-priced NMS 
stocks, an access fee of $0.003 per share could be larger than the 
minimum quoting increment, making it possible for an order to be routed 
to an exchange quoting a better price but ending up with an inferior 
all-in price after the access fee. For NMS stocks, the percentage fee 
cap for stocks priced below $1 helps to mitigate this concern. Because 
listed options are not currently quoted in subpenny increments, these 
concerns are not present, and, therefore, the Commission preliminarily 
believes it is unnecessary to establish a cap based on a percentage of 
the options' price for low-priced options. Further, if the Commission 
were to propose a percent-based fee cap for low-priced options, the 
access fee cap would be, in some cases, less than the amount of the 
``licensing'' fees charged by exchanges for executions in certain index 
options.
---------------------------------------------------------------------------

    \98\ See Rule 612 of Regulation NMS, 17 CFR 242.612.
---------------------------------------------------------------------------

    Finally, a significant percentage of options contract trading 
volume is in lower priced options.\99\ Thus, the Commission estimates 
that imposing a flat $0.30 per-contract cap, and not including a 
percentage fee cap for low-priced options similar to the existing fee 
cap of 0.3 percent of the quotation price per share for NMS stocks, 
would result in less potential revenue loss for options exchanges from 
the impact of the proposed fee cap and, therefore, possibly reduce the 
need for the options exchange to impose other fees on market 
participants.\100\
---------------------------------------------------------------------------

    \99\ Approximately 76% of the contract volume is in options 
priced at $3 or below, and approximately 48% of the contract volume 
is in options priced at $1 or below (these estimates are based on 
December 2009 volume data from OptionsMetrics).
    \100\ See infra notes 179-187 and accompanying text for a 
discussion of the estimated costs of the proposed fee cap on options 
exchanges.
---------------------------------------------------------------------------

B. Terms of Proposed Rule 610(c)(2)

    Under proposed Rule 610(c)(2), a national securities exchange would 
be prohibited from imposing, or permitting to be imposed, any fee or 
fees that exceeds or accumulates to more than $0.30 per contract for 
the execution of an order against any quotation in an option series 
that is the best bid or best offer of such national securities 
exchange. Thus, when triggered, the proposed fee limitation would apply 
to any order execution at the displayed price of the best bid or offer 
and would therefore encompass executions of orders against both the 
displayed size and any reserve size at the price of those quotations. 
Further, proposed Rule 610(c)(2) would apply to any fee based on the 
execution of an incoming order against an exchange's best bid or offer, 
such as a ``Take'' fee or other ``transaction'' fee charged by the 
exchange when an incoming order executes against the best bid or offer 
of the exchange. The Commission preliminarily believes that the 
proposed fee limitation would apply to other types of fees charged by 
an exchange to a member who represents an incoming order that trades 
against the exchange's best bid or offer.
    For example, the proposed fee limitation would apply to fees 
charged by various exchanges for the execution of orders in certain 
options on indexes (called ``licensing'' or ``index surcharge'' or 
``royalty'' fees) when the fee is charged for the execution of an 
incoming order against the exchange's best bid or offer. The proposed 
fee limitation also would apply to options regulatory fees (``ORF''), 
such as those that have been adopted by several exchanges.\101\ For 
those exchanges that have adopted an ORF, the fee is charged on a per-
contract basis and is assessed on each member for all options 
transactions executed or cleared by the member in a customer account. 
Because an ORF would constitute a fee for accessing the best bid or 
offer of an options exchange when such fee is assessed on a customer 
order that trades with the exchange's best bid or offer, the ORF would 
be covered by the proposed amendments to Rule 610(c)(2). So long as the 
fees are based on the execution of orders against the best bid or offer 
of the exchange, the proposed restriction in Rule 610(c)(2) would 
apply. Conversely, fees not triggered by the execution of orders 
against such quotations (e.g., certain periodic fees

[[Page 20747]]

such as monthly or annual fees) would not be included.
---------------------------------------------------------------------------

    \101\ See Securities Exchange Act Release Nos. 58817 (October 
20, 2008), 73 FR 63744 (October 27, 2008) (SR-CBOE-2008-105); 61133 
(December 9, 2009), 74 FR 66715 (December 16, 2009) (SR-Phlx-2009-
100); 61154 (December 11, 2009), 74 FR 67278 (December 18, 2009) 
(SR-ISE-2009-105); and 61388 (January 20, 2010), 75 FR 4431 (January 
27, 2010) (SR-BX-2010-001).
---------------------------------------------------------------------------

    The proposed fee limitation in Rule 610(c)(2) would apply to any 
fee charged directly by an options exchange. It would also limit any 
fee charged by a market participant, such as a market maker, that 
displays a quotation through the exchange's facilities. The Commission, 
however, understands that market participants in the options markets 
currently do not charge access fees. Nothing in proposed Rule 610(c)(2) 
would preclude an options exchange from taking action to limit fees 
beyond what would be required under the proposed rule, and such 
exchange would have flexibility in establishing its respective fee 
schedule to comply with proposed Rule 610(c)(2).
    The proposed access fee limitation in Rule 610(c)(2) would apply 
only to quotations that market participants are required to access to 
comply with the Trade-Through Rules; it would not apply to depth of 
book quotations. By proposing to apply the fee cap only to the best bid 
or offer of an options exchange, the limitation is designed to have 
minimal impact on competition and individual business models while 
furthering the objectives of the Exchange Act by preserving the 
fairness and usefulness of quotations, and by providing support for the 
proper functioning of the Trade-Through Rules, as discussed above.\102\
---------------------------------------------------------------------------

    \102\ See NMS Adopting Release, supra note 4, at 37546.
---------------------------------------------------------------------------

    Further, as the Commission noted in adopting current Rule 610(c), a 
market participant could intend to interact only with a quotation 
subject to the access fee cap in Rule 610(c) but in fact execute 
against a quotation not subject to the cap. For example, at the time a 
market participant routes an order to an exchange, it could be 
attempting to execute only against that exchange's best bid or offer, 
which would be subject to the proposed fee cap. By the time the order 
arrives at the exchange, the incoming order may, if a better priced bid 
or offer has been displayed at the exchange for a size smaller than the 
size of the incoming order, execute partially against the new best bid 
or offer and partially against the quotation that was previously the 
exchange's best bid or offer. If the exchange were to charge a fee 
higher than the access fee cap to the market participant accessing the 
previous best bid or offer, the Commission believes that such charge 
could undermine the purpose of the proposed access fee cap as discussed 
above. Therefore, the Commission believes that to meet the requirements 
of proposed Rule 610(c)(2), an exchange would have to ensure that it 
never charges a fee in excess of the cap when a market participant 
tries to access only the exchange's best bid or offer.\103\
---------------------------------------------------------------------------

    \103\ This is consistent with the approach in Regulation NMS. 
Id.
---------------------------------------------------------------------------

    The operation of this limitation would be based on quotations as 
they are displayed in the consolidated quotation stream. Thus, the 
exchange would be responsible for ensuring that any time lag between 
prices in its internal systems and its quotations in the consolidated 
quotation system do not cause fees to be charged that would violate the 
limitation of proposed Rule 610(c)(2). Compliance with this requirement 
obviously would not be a problem for exchanges that do not charge any 
fees in excess of the proposed cap. If an exchange were to choose to 
charge higher fees for access to its depth of book quotations,\104\ the 
Commission does not believe the exchange could comply with the proposed 
Rule 610(c)(2) unless it provided a functionality that enables market 
participants to assure that they will never inadvertently be charged a 
fee in excess of the cap. For example, such an exchange could provide a 
``top-of-book only'' or ``limited-fee only'' order functionality. By 
using this functionality, market participants themselves could assure 
that they were never required to pay a fee in excess of the levels 
proposed in Rule 610(c)(2).\105\ Further, for similar reasons, the 
proposed access fee limitation in Rule 610(c)(2) would apply to an 
exchange's non-displayed quotations in listed options that are priced 
better than the exchange's displayed best bid or offer. Specifically, 
if an exchange had an order type that allowed an order to be entered at 
a price that is not displayed but is available for execution, the 
proposed fee limitation would apply to an execution against that non-
displayed price.\106\
---------------------------------------------------------------------------

    \104\ The Commission is not aware of any options exchange that 
charges differential fees for accessing depth-of-book quotations, 
but requests comment on the issue.
    \105\ The existing access fee cap for NMS stocks operates in 
this same manner. See id.
    \106\ See, e.g., Chapter VI, Sections 6 and 7 of the NOM Rules 
governing NOM's price improving order type. ``Price Improving 
Orders'' are defined under the NOM Rules as orders to buy or sell an 
option at a specified price at an increment smaller than the minimum 
price variation in the security. Price Improving Orders may be 
entered in increments as small as one cent, and those Price 
Improving Orders that are available for display must be displayed at 
the minimum price variation in that security and rounded up for sell 
orders and rounded down for buy orders. See Chapter VI, Section 
1(e)(6) of the NOM Rules (defining Price Improving Orders).
---------------------------------------------------------------------------

 C. Payment for Order Flow

    In a traditional payment for order flow arrangement in the options 
market, a specialist or market maker offers cash and non-cash 
inducements to brokers that direct orders to the specialist or market 
maker. The specialist or market maker is willing to pay firms for this 
order flow because it knows that it will be able to trade with a 
portion of such orders due to specialist and market maker guarantees 
provided by the exchanges.\107\ In addition, some exchanges have 
adopted fees on market makers to facilitate their members' payment for 
order flow.\108\ Typically, the exchange charges each market maker a 
fee for trading with customer orders on the exchange. The exchange then 
pools the proceeds from such fees and allows specialists and/or market 
makers to use such funds to pay for order flow.\109\
---------------------------------------------------------------------------

    \107\ See, e.g., CBOE Rule 8.13 and ISE Rule 713.
    \108\ See, e.g., Securities Exchange Release Nos. 48053 (June 
17, 2003), 68 FR 37880 (June 25, 2003) (SR-Amex-2003-50) 
(immediately effective proposed rule change to reinstate marketing 
fee to raise revenue for Amex specialists to compete for order 
flow); 47948 (May 30, 2003), 68 FR 33749 (June 5, 2003) (SR-CBOE-
2003-19) (immediately effective proposed rule change to reinstate 
marketing fee to compete for order flow); 47090 (December 23, 2002), 
68 FR 141 (January 2, 2003) (SR-Phlx-2002-75) (immediately effective 
proposed rule change to reinstate marketing fee to compete for order 
flow); 43833 (January 10, 2001), 66 FR 7822 (January 25, 2001) (SR-
ISE-00-10) (order approving ISE's payment for order flow program); 
43290 (September 13, 2000), 65 FR 57213 (September 21, 2000) (SR-
PCX-00-30) (immediately effective proposed rule change to adopt a 
payment for order flow fee); 43228 (August 30, 2000), 65 FR 54330 
(September 7, 2000) (SR-Amex-00-38) (immediately effective proposed 
rule change to establish new marketing fee to raise revenue for Amex 
specialists to compete for order flow); 43177 (August 18, 2000), 65 
FR 51889 (August 25, 2000) (SR-Phlx-00-77) (immediately effective 
proposed rule change to adopt a payment for order flow fee); and 
43112 (August 3, 2000), 65 FR 49040 (August 10, 2000) (SR-CBOE-00-
28) (immediately effective proposed rule change to establish new 
CBOE marketing fee to raise revenue that could be used by CBOE 
market makers to pay for order flow).
    \109\ For example, NYSE Amex LLC (``NYSE Amex'') imposes a $0.65 
per-contract marketing fee for non-Minimum Quoting Increment Pilot 
Program classes and a $0.25 per-contract marketing fee for Minimum 
Quoting Increment Pilot Program classes where a market maker trades 
against an incoming electronic customer order. See NYSE Amex Options 
Fee Schedule (available at http://www.nyse.com/ pdfs/NYSE_Amex_
Options_Fee_ Schedule01.04.10.pdf) (current as of January 4, 
2010).
---------------------------------------------------------------------------

    Several commenters argue that, if the Commission were to limit 
``Take'' fees, it also should limit fees associated with payment for 
order flow arrangements.\110\

[[Page 20748]]

This view is premised on the notion set forth by several commenters 
that payment for order flow fees affect quoted prices, and thus 
executions received by investors, because market makers that have to 
pay for order flow will reflect that cost in their quoted prices.\111\ 
In this regard, one commenter petitioned the Commission to impose a cap 
at the same level on private payment for order flow arrangements 
between market makers and agency brokerage firms as any cap it imposes 
on ``Take'' fees.\112\ Another commenter argues that fees relating to 
``accessing'' quotations can be characterized broadly to include 
exchange fees used to fund members' payment for order flow.\113\
---------------------------------------------------------------------------

    \110\ See BOX Letter, supra note 37, at 2 (stating its belief 
that, if the Commission does decide to enact fee caps, a cap on Take 
fees is acceptable only to the extent that other options exchanges 
are willing to accept a comparable limit on payments and fees 
associated with exchange payment for order flow) and Wolverine 
Letter, supra note 37, at 7 (stating that any cap on make-take fees 
should be made in conjunction with a commensurate cap on payment for 
order flow fees).
    \111\ See BOX Letter, supra note 37, at 4; GETCO Letter, supra 
note 37, at 3-6; IB Letter, supra note 37, at 2-3 and 6-7; and 
Wolverine Letter, supra note 37, at 4.
    \112\ See IB Letter, supra note 37, at 1 and 6.
    \113\ See Wolverine Letter, supra note 37, at 3.
---------------------------------------------------------------------------

    The Commission agrees with commenters that payment for order flow 
fees, among other costs, affect quoted prices. However, the Commission 
is not proposing to specifically limit payment for order flow, nor the 
exchange fees imposed on market makers to fund members' payment for 
order flow. Instead, the Commission is proposing to limit the amount of 
fees that an exchange can impose, or permit to be imposed, for access 
to the best bid and offer of the exchange. The Commission preliminarily 
does not believe that an exchange payment for order flow fee on members 
is an access fee, i.e., it is not a fee imposed for executing against 
an exchange's quotation. The basis for the proposal, as discussed at 
length above,\114\ is to (1) provide for fair and efficient access to 
displayed quotations to support the integrity of the price protection 
requirement contained in the Trade-Through Rules, and (2) further the 
objective that quotations be fair and useful by limiting the extent to 
which the all-in price can vary from the displayed price.
---------------------------------------------------------------------------

    \114\ See supra notes 58-100 and accompanying text.
---------------------------------------------------------------------------

    The Commission preliminarily believes these objectives can be 
achieved without limiting payment for order flow fees. Payment for 
order flow is when a market maker offers cash and non-cash inducements 
to brokers that direct orders to the market maker. In addition, some 
exchanges impose a fee on market makers to facilitate their members' 
payment for order flow.\115\ Payment for order flow fees are not fees 
imposed by an exchange on incoming orders for executing against an 
exchange's quotations. Therefore, the Commission preliminarily does not 
believe that payment for order flow fees directly impact the ability of 
a market participant to access an exchange's best priced displayed 
quotations, and therefore does not believe that limiting payment for 
order flow fees is necessary to achieve the objectives of the proposed 
fee cap--to provide for fair and efficient access to displayed 
quotations and that displayed quotations be fair and useful.
---------------------------------------------------------------------------

    \115\ See supra notes 107-109 and accompanying text.
---------------------------------------------------------------------------

    However, if a market maker is charged a payment for order flow fee 
by an exchange when the market maker is accessing the best bid or offer 
of the exchange, then the proposed fee limitation would apply to that 
fee because it would be a fee for the execution of an order against the 
best bid or offer of the exchange. A payment for order flow fee would 
be a fee for accessing an exchange's best bid or offer if, for example, 
a market maker's quote traded against a resting customer limit order 
that is the best bid or offer of the exchange. Similarly, a payment for 
order flow fee would be a fee for accessing an exchange's best bid or 
offer if a market maker sent an order in a class to which it is not 
appointed as a market maker, and that order trades against a customer 
order resting on the exchange's limit order book that is the best bid 
or offer of the exchange. In sum, if the rules of the exchange provide 
that the market maker would pay a payment for order flow fee for 
executing against the resting customer order that is the best bid or 
best offer of the exchange, that fee would be covered by proposed Rule 
610(c)(2).
    On several occasions, the Commission has recognized that the 
anticipation of payment for order flow raises a potential conflict of 
interest for brokers handling customer orders, and that reliance by 
market centers on the strategy of simply paying money to attract orders 
may present a threat to aggressive quotation competition.\116\ At the 
same time, the Commission has stated that payment for order flow is not 
necessarily inconsistent with a broker's duty of best execution, so 
long as appropriate measures are taken to ensure that that duty is, in 
fact, met.\117\ The Commission further acknowledges the broader concern 
that payment for order flow may result in less aggressive competition 
for order flow on the basis of price,\118\ such as through displaying 
aggressively-priced quotations or offering opportunities for price 
improvement. However, the Commission has stated that singling out and 
banning only one particular form of such payment--for example, payment 
made possible by an exchange through the collection of fees from its 
market makers--would scarcely address the issue on the larger 
scale.\119\
---------------------------------------------------------------------------

    \116\ See, e.g., Options Concept Release, supra note 21, at 
6128-6130.
    \117\ See Securities Exchange Act Release No. 43833 (January 10, 
2001), 66 FR 7822 (January 25, 2001) (SR-ISE-00-10) (citing to 
Securities Exchange Act Release No. 42450 (February 23, 2000), 65 FR 
10577 (February 28, 2000)); see also Options Concept Release, supra 
note 21, at 6128-6129.
    \118\ See Securities Exchange Act Release No. 43833, supra note 
117, at 7825.
    \119\ Id.
---------------------------------------------------------------------------

    Further, as noted above, the Commission believes that market forces 
and the dynamics of competition should determine exchange fees, to the 
extent practicable.\120\ Payment for order flow fees generally are 
charged by exchanges to market makers when they execute against a 
customer order. If a market maker does not want to pay this fee, the 
market maker is free to give up its appointment as a market maker on 
that exchange and become a liquidity provider on another exchange with 
a more attractive fee structure. For instance, an exchange may set a 
fee to collect funds for members' payment for order flow at such a 
level that a market maker may determine it can no longer effectively 
compete for order flow based on its quotations, which must incorporate 
the costs of all fees.\121\ The market maker may then make the 
determination to become a liquidity provider on another exchange where 
it is able to compete more effectively based on the price of its 
quotations. Similarly, an exchange may determine to charge any market 
participant a fee for providing liquidity on its exchange.\122\ If a 
market participant did not want to pay this fee, it could choose to 
send its non-marketable limit order to another options exchange with a 
more

[[Page 20749]]

attractive fee structure. The Commission therefore preliminarily 
believes that competition among the various options exchanges, and the 
different market models, will act to restrict payment for order flow 
and other fees for providing liquidity.\123\
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    \120\ See supra note 58.
    \121\ This would assume that the amount of the payment for order 
flow fee impacts the price at which the market maker is willing to 
quote.
    \122\ See, e.g., BOX Fee Schedule, Section 7 (available at 
http://www.bostonoptions.com/pdf/BOX_Fee_Schedule.pdf) (current as 
of January 2010) (imposing a $0.55 fee for adding liquidity in Non-
Penny Classes, a $0.15 fee for adding liquidity in Penny Pilot 
Classes except SPY, QQQQ, and IWM, and a $0.05 fee for adding 
liquidity in SPY, QQQQ, and IWM). In its filing imposing this fee, 
BOX stated that the changes proposed are in response to various 
``Payment for Order Flow'' programs currently in operation on other 
options exchanges. See Securities Exchange Act Release No. 60934 
(November 4, 2009), 74 FR 58358 (November 12, 2009).
    \123\ The Commission also notes that the exchanges generally 
lowered the level of payment for order flow fees charged to their 
market makers in classes included in the Minimum Quoting Increment 
Pilot Program. See Securities Exchange Act Release Nos. Securities 
Exchange Act Release Nos. 55328 (February 21, 2007), 72 FR 9050 
(February 28, 2007) (SR-Amex-2007-16); 55265 (February 9, 2007), 72 
FR 7697 (February 16, 2007) (SR-CBOE-2007-11); 55271 (February 12, 
2007), 72 FR 7699 (February 16, 2007) (SR-ISE-2007-08); 55223 
(February 1, 2007) 72 FR 6306 (February 9, 2007) (SR- NYSEArca-2007-
07); and 55290 (February 13, 2007), 72 FR 8051 (February 22, 2007) 
(SR-Phlx-2007-05). As noted above, currently approximately 69.5 
percent of trading volume is in classes included in the Minimum 
Quoting Increment Pilot Program where trading interest can be 
represented in the quote in one-cent increments, and by August 2, 
2010, 363 classes will be included in the Minimum Quoting Increment 
Pilot Program, representing approximately 88.1 percent of trading 
volume during February 2010. See supra note 29 and accompanying 
text.
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IV. Technical Amendments to Rule 610

    The Commission is proposing to amend Rule 610(c) to reflect that 
Nasdaq is now registered as a national securities exchange under 
Section 6(a) of the Exchange Act.\124\ The current rule's prohibition 
on a trading center imposing, or permitting to be imposed, fees in 
excess of the stated limits applies to the execution of an order 
against a protected quotation of the trading center or against any 
other quotation of the trading center that is ``the best bid or best 
offer of a national securities exchange, the best bid or best offer of 
The Nasdaq Stock Market, Inc., or the best bid or best offer of a 
national securities association other than the best bid or best offer 
of The Nasdaq Stock Market, Inc. in an NMS stock.'' Given Nasdaq's 
current status as a registered national securities exchange, there no 
longer is a need to separately reference Nasdaq's best bid or best 
offer. Therefore, the Commission is proposing to amend Rule 610(c)(1) 
to simplify the relevant language to refer only to any other quotation 
of the trading center that is the best bid or best offer of a national 
securities exchange or the best bid or best offer of a national 
securities association in an NMS stock.\125\
---------------------------------------------------------------------------

    \124\ See 15 U.S.C. 78f(a); see also Securities Exchange Act 
Release No. 53128 (January 13, 2006), 71 FR 3550 (January 23, 2006).
    \125\ See proposed Rule 610(c)(1).
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    The Commission also is proposing to make technical changes to Rule 
610(c) to reflect the addition of proposed Rule 610(c)(2) that would 
apply to listed options.

V. Request for Comments

    The Commission requests the views of commenters on all aspects of 
this proposal, including whether the proposal is consistent with the 
provisions of the Exchange Act. In particular, the Commission requests 
comment on the following:
    1. Rule 610(a) currently prohibits the imposition of unfairly 
discriminatory terms that prevent or inhibit any person from obtaining 
efficient access through a member of the exchange to quotations in NMS 
stocks. The Commission requests comment on its proposal to extend this 
prohibition to include access to quotations of listed options. The 
Commission further requests comment on whether the Commission's rules 
also should prohibit unfairly discriminatory terms for other services 
offered by exchanges. For example, should the Commission rule be 
expanded to cover exchange transaction fees generally, even those 
transaction fees that are not based on accessing the exchange's 
quotations?
    2. Rule 610(a) as proposed to be amended would prohibit an exchange 
from charging higher ``Take'' fees in certain options classes to non-
directed customers than to directed customers. Do commenters agree that 
such a fee differential should be prohibited by the proposed amendments 
to Rule 610(a)?
    3. As discussed above, the Commission is proposing to limit fees 
charged for accessing the best bid and offer in a listed option, as 
proposed in Rule 610(c)(2), to support fair and efficient access to an 
exchange's quotations, and to provide greater transparency in the 
quoted price. To what extent is this action necessary to achieve these 
objectives? To what extent do competitive forces in the options markets 
currently act, or will continue to act, to keep fees such as access 
fees at a level that does not impede fair and efficient access to an 
exchange's quotations, or impede the transparency of the quoted price? 
Does the existence of flash functionality at some of the exchanges that 
trade listed options have an impact on the level at which options 
exchanges set access fees? \126\
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    \126\ The Commission separately has proposed changes to Rule 602 
of Regulation NMS that, if adopted, would affect flash functionality 
in the listed options markets, raising concerns about access to 
order information and incentives for market participants to display 
their trading interest publicly. See Flash Order Proposal, supra 
note 19, and supra notes 72-75 and accompanying text.
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    4. The markets for trading NMS stocks are similar in certain ways 
to the markets for trading listed options, and in other ways are 
different. The Commission requests comment on whether, and how, those 
similarities and differences should impact a decision to apply an 
access fee cap, as proposed, in the options markets. For example, both 
NMS stocks and listed options can be traded on multiple markets, and 
broker-dealers that trade NMS stock and listed options have a duty of 
best execution with respect to each. Likewise, both markets have 
prohibitions on trading-through. How, if at all, do these similarities 
support, or not, the proposed fee cap for accessing an options 
exchange's best bid and offer?
    Unlike NMS stocks, listed options are only traded on exchanges, and 
not in the over-the-counter (``OTC'') market. It can be argued that one 
result of the lack of OTC trading in listed options is that more 
``good'' order flow (that is, order flow relatively uninformed about 
future prices) reaches the options exchanges than the exchanges that 
trade NMS stocks.\127\ It can be further argued that because quotations 
must be available for execution to all incoming order flow--both 
informed and uninformed--the quotations must be wider than the prices 
that could be offered exclusively to uninformed order flow.\128\ In 
addition, it is argued that investors in listed options depend upon the 
liquidity supplied by professional liquidity providers to a greater 
extent than in the market for NMS stocks.\129\ Further, some market 
participants state that liquidity providers price options differently 
than liquidity providers price NMS stocks, pursuant to pricing models 
or algorithms rather than based on the inherent value of the 
issuer.\130\ Do commenters agree with these statements? How, if at all, 
do these differences mitigate for or against applying the proposed fee 
cap for accessing an options exchange's best bid and offer? Do these 
differences impact the incentives for liquidity providers to quote 
aggressively, or the competitiveness of an options exchange's fees, 
differently than a

[[Page 20750]]

market participant or market trading NMS stocks?
---------------------------------------------------------------------------

    \127\ See ISE Flash Letter, supra note 73, Appendix B at 2.
    \128\ See Letter from Larry Harris, Professor of Finance and 
Business Economics, USC Marshall School of Business, dated December 
4, 2009 (``Harris Letter'') at 4. Prices that could be offered 
exclusively to uninformed order flow could incorporate tighter 
spreads because the market maker does not need to protect itself 
from adverse selection by informed traders by building in a wider 
spread.
    \129\ See CBOE Flash Letter, supra note 73, at 1 and 10; ISE 
Flash Letter, supra note 73, at 9. See also Letter from Peter 
Bottini, EVP Trading and Customer Service, and Hillary Victor, 
Associate General Counsel, optionsXpress, Inc. (``optionsXpress'') 
dated November 25, 2009 (``optionsXpress Letter'') at 3.
    \130\ See ISE Flash Letter, supra note 73, at 7-8.
---------------------------------------------------------------------------

    5. The Commission requests comment on the different sources of 
revenue available to options exchanges, and any differences between 
those sources available to options exchanges and exchanges that trade 
NMS stocks. For example, exchanges that have in place rules for listing 
NMS stocks have the ability to charge listing fees to issuers for 
listing on their market. Does the amount of revenue received from 
market data differ significantly for options exchanges versus exchanges 
that trade NMS stocks? How, if at all, should any differences in 
sources of revenue for options exchanges versus exchanges that trade 
NMS stocks mitigate for or against applying the proposed fee cap for 
accessing an options exchange's best bid and offer? How, if at all, 
should any differences in sources of revenue for options exchanges 
versus exchanges that trade NMS stocks impact a determination as to the 
level of an access fee cap to be imposed?
    6. If commenters do not believe that the Commission should limit 
fees charged for accessing the best bid and offer in a listed option, 
as proposed in Rule 610(c)(2), do commenters believe that the 
Commission should take any action with respect to fees charged, or 
permitted to be charged, by an options exchange for executing against 
the exchange's best bid or offer in a listed option? If not, please 
explain why not. If so, please explain why, and what alternative action 
the Commission should take. For example, would commenters support 
action by the Commission to cap all fees for executing an options 
order, including access fees, routing fees, and any other per contract 
fee, at the minimum pricing variation for the option? Would this 
alternative achieve the objectives of the proposed fee cap, as 
discussed above in Section III? Would this alternative approach provide 
more or less flexibility to exchanges than an access fee cap as 
proposed in Rule 610(c)(2)?
    7. The Commission is proposing a flat fee cap of $0.30 per 
contract. As discussed above, the Commission's proposal is based on 
several factors. First, the $0.30 per-contract level is consistent with 
the maximum fee limit for NMS stocks under Rule 610(c). Experience of 
the markets trading NMS stocks in recent years suggests that a fee cap 
of $0.30 per 100 shares did not prevent markets using a Make or Take 
fee model from competing effectively in a market where some 
participants engage in payment for order flow.\131\ In addition, this 
access fee cap level would help ensure that the ``all-in'' fee would be 
below the $1 minimum quoting increment. Further, the Commission 
preliminarily believes that setting the proposed fee cap at $0.30 per 
contract would allow options exchanges flexibility to generate revenues 
from access fees while still providing the exchange the ability to 
continue to charge other fees, such as ``licensing'' fees charged by 
exchanges for executions in certain index options or routing fees, 
without exceeding the $1 minimum increment. The Commission requests 
comment on this analysis. If commenters agree with this approach and 
threshold, please explain why; if commenters do not agree, please 
explain why not.
---------------------------------------------------------------------------

    \131\ See infra note 172 and accompanying text.
---------------------------------------------------------------------------

    8. If a commenter believes that a fee cap for accessing the best 
priced quotation in listed options is necessary and appropriate, the 
Commission requests comment as to what level such a cap should be set, 
and what considerations should be part of any analysis as to the level 
of a fee cap. One commenter states that while 30% of the minimum 
quoting increment is a reasonable access fee cap for the equity 
markets, which allow internalization as a defense to excessive access 
fees, a lower cap is needed in the options markets because 
internalization is not permitted, and suggests a cap of $0.20 per 
contract.\132\ Other commenters argue that any fee cap should not be 
lower than $0.99 per contract (for options quoted in one-cent 
increments) because a customer is still better off paying a $0.99 per 
contract fee to execute against a price that is better by $1.00 per 
contract.\133\ The Commission requests commenters' views on each of 
these alternative levels, and the reasoning supporting them.
---------------------------------------------------------------------------

    \132\ See Citadel Petition, supra note 34, at 10.
    \133\ See BOX Letter, supra note 37, at 5 (stating in part that 
if the Commission were to impose a fee limit that it should be $0.01 
per contract less than the standard trading increment of the class); 
and IB Letter, supra note 37, at 4-5 (opposing any fee cap less than 
$0.99 per contract for a contract quoted in pennies).
---------------------------------------------------------------------------

    9. One of the bases for the proposed access fee cap is to support 
the requirements of the Trade-Through Rules and the duty of best 
execution. It could be argued that because investors will not be worse 
off accessing a price that is better by $1 per contract as long as the 
fee to access that quotation is not more than $0.99 per contract,\134\ 
any fee cap should not be lower than $0.99 per contract to support the 
operation of the Trade-Through Rules. Do commenters agree with this 
view? Should the fact that there is no guarantee that an order sent to 
another exchange to access a better displayed price will actually 
obtain an execution on the away exchange impact the level at which an 
access fee is capped? Should there be the possibility for more than a 
one-cent per contract advantage (which is what would result with an 
access fee of $0.99 per contract) to require market participants to 
attempt to access quotations in listed options on other exchanges that 
are better priced by $1 per contract? What percent of the time do 
orders sent to another exchange to access a better displayed price 
actually obtain an execution on the away exchange? What other 
considerations, if any, should the Commission take into account when 
determining the level of any fee cap imposed for access to an 
exchange's best bid or offer in a listed option?
---------------------------------------------------------------------------

    \134\ Id.
---------------------------------------------------------------------------

    10. As discussed above in Question 4, the markets for trading NMS 
stocks are similar in certain ways to the markets for trading listed 
options, and in other ways are different. The Commission requests 
comment on whether, and how, those similarities and differences should 
impact the level at which an access fee cap should be set for access to 
an options exchange's best bid and offer. Should any limit on access 
fees that can be imposed by the options exchanges be different than or 
the same as the existing limit on access fees in the market for NMS 
stocks? If different, please explain whether an access fee limit in the 
options exchanges should be higher or lower than the limit for NMS 
stocks, and the basis for the difference. If the same, please explain 
why, with specificity.
    11. As discussed above, the Commission has proposed a flat access 
fee cap of $0.30 per contract, and not proposed a percentage fee limit 
for low-priced options, similar to the 0.3 percent of the price per 
share limit for NMS stocks priced under $1.\135\ The Commission 
preliminarily believes that differences in the markets for NMS stocks 
and listed options merit this distinction. Specifically, when an NMS 
stock is trading at a very low price, the access fee can become 
significant as a percentage of the total economic exposure. This result 
is less likely for listed options, given the leverage implicit in an 
option contract.\136\ In

[[Page 20751]]

addition, the restriction on subpenny quoting in NMS stocks does not 
apply to stocks priced below $1. Thus, for certain low-priced NMS 
stocks, an access fee of $0.003 per share could be larger than the 
minimum quoting increment, making it possible for an order to be routed 
to an exchange quoting a better price but ending up with an inferior 
all-in price after the access fee. For NMS stocks, the percentage fee 
cap for stocks priced below $1 helps to mitigate this concern. Because 
listed options are not currently quoted in subpenny increments, these 
concerns are not present, and, therefore, the Commission preliminarily 
believes it is unnecessary to establish a cap based on a percentage of 
the options' price for low-priced options.\137\
---------------------------------------------------------------------------

    \135\ See supra notes 96-100 and accompanying text.
    \136\ For example, if an NMS stock is trading for $0.01 per 
share, so that an order for 100 shares represents $1 worth of stock, 
an access fee of $0.30 for 100 shares would represent thirty percent 
of the total economic position. On the other hand, an NMS stock 
priced at $10 per share could have a short-term out-of-the-money 
option priced at $0.01. If the Delta of this option is 0.05, then 
one option contract would cost $1 but would give the investor 
exposure equivalent to an investment of $50 of the stock. An access 
fee of $0.30 per contract for the option would only represent six-
tenths of one percent of the economic position.
    \137\ Commission staff also estimates that imposing a flat $0.30 
per-contract cap, and not including a percentage fee cap for low-
priced options similar to the existing fee cap of 0.3 percent of the 
quotation price per share for NMS stocks, would result in less 
potential revenue loss for options exchanges from the impact of the 
proposed fee cap. See supra notes 99-100 and accompanying text.
---------------------------------------------------------------------------

    The Commission requests comment on its analysis, and whether the 
proposed access fee limit should have a percentage fee limit for low-
priced options, similar to the 0.3 percent of the price per share for 
NMS stocks priced under $1, and on its reasoning for not proposing such 
a percent-based limit for low-priced options. If commenters believe 
that the proposed access fee cap should be different for low-priced 
options, please explain with specificity why, and what the breakpoint 
should be, and why.
    12. As discussed above, one of the bases for the proposed fee cap 
is to ensure the fairness and usefulness of displayed quotations, and 
to enhance transparency of displayed quotations. The Commission 
requests comment as to whether there is a need to promote transparency 
of the displayed quotations in listed options beyond the status quo.
    13. If commenters believe that, to support the transparency of 
displayed quotations, there should be a limit as to how far away from 
the quoted price the amount that the investor would pay (for a buy) or 
receive (for a sell) inclusive of access fees should be, what factors 
should go into determining the allowable deviation? For example, should 
access fees be limited to one increment less than the minimum quoting 
increment (for example, $0.99 per contract in an option that has a one-
cent minimum increment), such that the investor would always get a 
better execution price net of access fees when the quoted price is 
better by one minimum quoting increment? Should the access fees be 
limited to less than half of the minimum quoting increment (for 
example, $0.50 per contract in an option that has a one-cent minimum 
increment), so that the net price to investors inclusive of access fees 
is closer to the displayed price than the next worse price? Should the 
allowable access fees be some other amount?
    14. The Commission requests comment on whether there are 
alternative methods other than the proposed access fee cap to achieve 
the objective of greater transparency in displayed quotations of listed 
options.
    15. The Commission requests comment on the types of fees that 
should be covered by an access fee limitation. For example, the 
Commission believes that proposed Rule 610(c)(2) would apply to fees 
charged for the execution of options on certain indexes (so-called 
``licensing fees,'' ``royalty fees,'' or ``index surcharge fees''). 
Please state why it would be appropriate or not appropriate to apply 
the proposed fee limitation to licensing fees. What would be the impact 
on these fees if the proposed fee limitation did apply? What would be 
the impact on market quality if the proposed fee limitation applied to 
licensing fees?
    16. The Commission requests comment on its preliminary view of the 
applicability of the proposal to an ORF.\138\ The Commission also 
requests comment on any potential impact of the proposal on an ORF.
---------------------------------------------------------------------------

    \138\ See supra note 101 and accompanying text.
---------------------------------------------------------------------------

    17. As proposed, the fee limitation in Rule 610(c)(2) would apply 
to fees charged for executions of orders in all listed options, 
including those that are listed and traded only on one options exchange 
(``non-multiply listed options''). Do commenters agree that Rule 
610(c)(2) should apply to trades in such options? Or should any fee cap 
apply only to multiply listed options? Or should the proposed fee 
limitation in Rule 610(c)(2) be set at a different level for non-
multiply listed options? If commenters believe the proposed fee 
limitation in Rule 610(c)(2) should not apply to fees charged for 
executions of orders in non-multiply listed options, please explain why 
and how ``non-multiply listed options'' should be defined.
    18. As proposed, the fee limitation in Rule 610(c)(2) would apply 
to fees charged for the execution of orders in FLEX options and to the 
execution of complex orders.\139\ Do commenters agree that Rule 
610(c)(2) should apply to such transactions? If so, should the proposed 
fee limitation in Rule 610(c)(2) be set at a different level for orders 
in FLEX options or complex orders? If commenters believe the proposed 
fee limitation in Rule 610(c)(2) should not apply to fees charged for 
the execution of orders in FLEX options or to the execution of complex 
orders, please explain why.
---------------------------------------------------------------------------

    \139\ A complex order is any order involving the simultaneous 
purchase and/or sale of two or more different options series in the 
same underlying security, for the same account, in a ratio that is 
equal to or greater than one-to-three (.333) and less than or equal 
to three-to-one (3.00) and for the purpose of executing a particular 
investment strategy. See, e.g., ISE Rule 722. See also, e.g., CBOE 
Rule 6.53C (describing a complex order generally as any of the 
following orders for the same account, including Spread Orders, 
Straddle Orders, Strangle Orders, Combination Orders, Ratio Orders, 
Butterfly Spread Orders, Box/Roll Spread Orders, Collar Orders and 
Risk Reversals, Conversions and Reversals, and Stock-Option Orders). 
A flex option is a customized option contract that provides the 
ability to customize key contract terms, like exercise price, 
exercise styles and expiration dates. See, e.g., http://
www.cboe.com/Institutional/FLEX.aspx; CBOE Rule 24A.4.
---------------------------------------------------------------------------

    19. What would be the impact of the proposed access fee cap in Rule 
610(c) on market quality? In particular, the Commission encourages 
submission of any data that quantifies potential benefits or harm.
    20. Do commenters believe that limiting access fees as proposed in 
Rule 610(c) would have a disparate effect on one type of market model 
over another? If not, why not? If so, how? And if so, how would the 
disparate effect impact the ability of exchanges with different market 
models to compete with each other? The Commission further requests 
comment as to whether, and if so how, the quoting, order routing or 
other behavior of market participants would change if the proposed fee 
cap were in place.
    For example, as discussed above, several commenters express concern 
with limiting Take fees without also limiting payment for order flow 
fees.\140\ They argue that market participants on Make or Take exchange 
quote more aggressively because of the Make rebates paid for providing 
liquidity that are funded by the Take fees charged to liquidity 
takers.\141\ Exchanges with Make or Take fee models thus provide direct 
competition based on aggressive quoting to exchanges with payment for

[[Page 20752]]

order flow models because a market maker on a payment for order flow 
exchange must match the better prices on the Make or Take exchange, or 
route to the Make or Take exchange and pay the Take fee.\142\ Limiting 
the amount of a Take fee a Make or Take exchange can charge will 
directly impact the amount of a Make rebate the exchange can pay to 
liquidity providers, which in turn will impact a liquidity provider's 
incentive to quote aggressively, thus limiting the Make or Take 
exchange's ability to compete with an exchange with a payment for order 
flow fee model through aggressive quoting.\143\
---------------------------------------------------------------------------

    \140\ See supra note 82 and accompanying text.
    \141\ See BOX Letter, supra note 37, at 3; IB Letter, supra note 
37, at 2-3. See also ISE Flash Letter, supra note 73, at 8; and 
Harris Letter, supra note 128, at 2.
    \142\ See IB Letter, supra note 37, at 3; GETCO Letter, supra 
note 37, at 6-7.
    \143\ See id.
---------------------------------------------------------------------------

    The Commission requests comment on whether commenters agree with 
this view. Do commenters agree that liquidity providers on Make or Take 
exchanges quote more aggressively than liquidity providers on other 
exchanges once their displayed quotations are adjusted to account for 
the effect of access fees on the ``all in'' cost to the investor? If 
so, are liquidity rebates the only reason that liquidity providers on 
Make or Take exchanges are willing to quote aggressively? For example, 
does the absence of order flow captured by payments to routing brokers 
or the absence of guaranteed allocations for liquidity providers also 
contribute significantly to aggressive quoting by liquidity providers 
on Make or Take exchanges?
    Do commenters believe that limiting Take fees, which are a type of 
access fee, would result in reduced Make rebates paid for supplying 
liquidity? If so, what are commenters views as to how much Make rebates 
would be reduced in reaction to reduced Take fees? What would be the 
impact, if any, of reduced Make rebates on market participant 
incentives to aggressively quote on exchanges employing a Make or Take 
fee model? To the extent that commenters believe that limiting Take 
fees would result in reduced Make rebates paid for supplying liquidity, 
and that reduced Make rebates would adversely impact market participant 
incentives to aggressively quote on exchanges employing a Make or Take 
fee model, what impact would this have on those market participants 
supplying liquidity? Or on investors taking liquidity?
    The Commission requests comment as to the impact of the proposed 
fee cap on the ability of an exchange with a Make or Take fee model to 
compete with exchanges with a payment for order flow model. For 
example, to the extent that commenters believe that limiting Take fees 
would result in reduced Make rebates paid for supplying liquidity, and 
that reduced Make rebates would adversely impact market participant 
incentives to aggressively quote on exchanges employing a Make or Take 
fee model, do commenters believe that a $0.30 per contract access fee 
cap, as proposed, would allow Make or Take exchanges to pay a large 
enough rebate to continue to incent market participants to quote 
aggressively, and thus compete more aggressively on price with payment 
for order flow exchanges?
    21. The Commission notes the distinction between ``aggressive'' 
quotations and ``matching'' quotations. Aggressive quotations are price 
leaders and help narrow the NBBO spread (by either improving the NBBO 
or remaining alone at the NBBO). Matching quotations follow prices set 
elsewhere and add size to the NBBO, but do not narrow the spread. To 
what extent do liquidity providers on payment for order flow options 
exchanges quote aggressively rather than merely matching the NBBO set 
elsewhere? Would applying an access fee cap, as proposed, lead market 
participants on one or both types of options exchange to quote more 
aggressively and thereby narrow NBBO spreads for listed options? Or 
would applying an access fee cap lead market participants on one or 
both types of options exchanges to quote less aggressively? Does your 
answer change depending on whether the Commission adopts a ban on flash 
functionality in the options markets? \144\
---------------------------------------------------------------------------

    \144\ See supra notes 19 and 72-75.
---------------------------------------------------------------------------

    22. As noted above, the Commission recognizes that even though it 
is not proposing to prohibit an exchange from employing any particular 
market model, the proposed fee limitation may impact different market 
models in different ways. An exchange with either a Make or Take fee 
model that charges a Take fee in excess of the proposed fee cap, or an 
exchange with a Broker Payment fee model that charges a transaction fee 
in excess of the proposed fee cap, would take in less revenue per 
contract from a reduced Take or transaction fee, as applicable. These 
reduced fees for accessing an exchange's best bid or offer, standing 
alone, might have an impact on the manner in which broker-dealers and 
other market participants, including the exchanges, route order flow. 
The exchange with the Make or Take fee model, however, might choose to 
recoup some of that revenue by reducing its Make rebate, which may have 
an impact on the quoting behavior of market participants that provide 
liquidity on that exchange. An exchange with a Broker Payment model 
might choose to recoup some of the revenue by amending other fees 
charged to its members, which might impact the order routing or other 
behavior of those members (and the members' customers), depending upon 
the type of fee change.
    The Commission requests comment on how the exchanges might 
reallocate their sources of revenue, if at all, in response to the 
access fee limit in proposed Rule 610(c)(2). What changes, if any, to 
fees other than access fees imposed by, or rebates paid by, exchanges 
would the options exchanges make in response to being required to limit 
access fees as proposed? Would any potential disparate impact from 
these fees changes across exchange fee models lead to harm to 
investors? If so, please explain. How, if at all, would potential 
changes to fees other than access fees imposed on members by exchanges 
impact the behavior of particular categories of market participants, 
such as retail investors, market makers, and broker-dealers?
    23. As noted above in Question 20, several commenters express 
concern with limiting Take fees without also limiting payment for order 
flow fees. They argue that limiting the amount of a Take fee a Make or 
Take exchange can charge will directly impact the amount of a Make 
rebate the exchange can pay to liquidity providers, which in turn will 
impact a liquidity provider's incentive to quote aggressively, thus 
limiting the Make or Take exchange's ability to compete with an 
exchange with a payment for order flow fee model through aggressive 
quoting.\145\ The Commission notes that the percent of overall contract 
volume for trading in equity options for the month of February 2010 for 
each exchange that primarily employs a Make or Take fee model ranges 
from 2.83 percent to 15.36 percent, and that the aggregate market share 
of these exchanges was 18.19 percent.\146\ Exchanges that primarily 
employ a Broker Payment Model had an aggregate market share of overall 
contract volume for trading in equity options for the month of February 
2010 of 81.81 percent.\147\ The Commission requests comment as to the 
reasons why

[[Page 20753]]

commenters believe that the Make or Take fee model has not resulted in 
greater market share to date, given the arguments that the payment of a 
Make rebate acts as a direct incentive to quote more aggressively. For 
instance, how does the existence of flash functionality on other 
exchanges impact the ability of Make or Take exchanges to compete on 
quoted price?
---------------------------------------------------------------------------

    \145\ See supra notes 140-143 and accompanying text.
    \146\ See http://www.theocc.com/webapps/exchange-volume. The 
data is for the month of February 2010 and includes market share for 
NOM and NYSE Arca, but does not include BATS, which began trading 
options on February 26, 2010.
    \147\ This data also is from OCC's public website and is for the 
month of February 2010. See http://www.theocc.com/webapps/exchange-
volume. This data covers percent volume for BOX, CBOE, ISE, NYSE 
Amex, and Nasdaq OMX Phlx.
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    24. The proposed fee limitation in Rule 610(c)(2) would prohibit an 
exchange from imposing, or permitting to be imposed by market 
participants, any fee or fees that exceed or accumulate to more than 
the proposed limit. The Commission requests comment on whether it is 
necessary in the listed options exchanges to include a prohibition, as 
proposed, on an exchange permitting other market participants to impose 
fees that exceed the limit. The Commission does not believe that market 
makers in listed options currently impose fees for the execution of 
orders against their quotes on an exchange, but requests comment on 
whether they do. Do commenters think it likely that market makers would 
in the future impose such fees?
    25. In this proposal, the Commission has not proposed to limit 
payment for order flow fees. As stated above, an exchange payment for 
order flow fee on members is not an access fee, i.e., it is not a fee 
imposed for executing against an exchange's quotation.\148\ The 
Commission therefore preliminarily does not believe that it is 
necessary or appropriate to prohibit payment for order flow fees to 
achieve its stated objectives in proposing to cap access fees--to 
ensure fair and efficient access to displayed quotation and to enhance 
transparency of quoted prices. Several commenters, however, argue that 
payment for order flow fees also impact the displayed (quoted) prices, 
and thus the prices received by investors when their orders are 
executed, because market makers that are charged the payment for order 
flow fees adjust the price at which they are willing to quote to take 
into account the amount of the payment for order flow fee. In this 
regard, one commenter petitioned the Commission to impose a cap at the 
same level on private payment for order flow arrangements between 
market makers and agency brokerage firms as any cap it imposes on 
``Take'' fees.\149\ Another commenter argues that fees relating to 
``accessing'' quotations can be characterized broadly to include 
exchange fees used to fund members' payment for order flow.\150\ Do 
commenters agree with these statements? If so, do commenters believe 
that the Commission should limit payment for order flow fees as an 
``access fee''? The Commission further requests comment on its 
preliminary determination not to limit payment for order flow fees, and 
the basis for that determination.
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    \148\ As noted above, if a market maker is charged a payment for 
order flow fee by an exchange when the market maker is accessing the 
best bid or offer of the exchange, then the proposed fee limitation 
would apply to that fee because it would be a fee for the execution 
of an order against the best bid or offer of the exchange. See supra 
Section III.C (discussing payment for order flow fees).
    \149\ See IB Letter, supra note 37, at 1 and 6-7.
    \150\ See Wolverine Letter, supra note 37, at 3.
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    26. As noted above, the Commission has previously acknowledged a 
concern that payment for order flow may result in less aggressive 
competition for order flow on the basis of price.\151\ To what extent, 
if any, does payment for order flow in the options markets affect a 
specialist's or market maker's incentive to quote aggressively? To what 
extent does payment for order flow in the options markets affect the 
opportunities for non-professional customers to receive better prices 
than displayed quotations in price improvement mechanisms? If 
commenters believe that payment for order flow diminishes a 
specialist's or market maker's incentives to quote aggressively, what 
impact, if any, do commenters believe that diminished incentive has on 
the quality of displayed quotations? How, if at all, would limiting or 
prohibiting payment for order flow fees impact broker-dealer's ability 
to obtain best execution of their customer's orders?
---------------------------------------------------------------------------

    \151\ See supra note 116 and accompanying text.
---------------------------------------------------------------------------

    27. On several occasions, the Commission has recognized that the 
anticipation of payment for order flow raises a potential conflict of 
interest for brokers handling customer orders, and that reliance by 
market centers on the strategy of simply paying money to attract orders 
may present a threat to aggressive quotation competition. At the same 
time, the Commission has stated that payment for order flow is not 
necessarily inconsistent with a broker's duty of best execution, so 
long as appropriate measures are taken to ensure that that duty is, in 
fact, met.\152\ Do customer orders that are routed pursuant to payment 
for order flow arrangements receive less favorable executions than 
orders not subject to such arrangements?
---------------------------------------------------------------------------

    \152\ See supra notes 117-118 and accompanying text.
---------------------------------------------------------------------------

    28. Some may argue that specialists and market makers in the 
options markets establish the prices and sizes of their quotations 
based in part on the assumption that their counterparties will be other 
professional traders, which involves more risk than trading with 
uninformed non-professional traders.\153\ The desirability of trading 
with uninformed order flow due to the lower risks of trading with non-
professionals should translate into those orders, on average, receiving 
better prices than the specialist's or market maker's quotation.\154\ 
Under this argument, specialists and market makers may use payment for 
order flow as an indirect way to provide a better execution to 
uninformed or non-professional orders. Do commenters agree with these 
statements?
---------------------------------------------------------------------------

    \153\ See Options Concept Release, supra note 21, at 6131. See 
also supra note 128.
    \154\ See Options Concept Release, supra note 21, at 6131.
---------------------------------------------------------------------------

    29. The Commission requests comment on what, if any, impact the 
proposed limitation on access fees may have on payment for order flow 
fees.
    30. The Commission requests comment on whether the proposed access 
fee limitation should apply only to the best bid and offer of each 
exchange, or whether the limitation also should apply to ``depth of 
book'' quotations.
    31. Some commenters stated that Make or Take pricing leads to more 
locked and crossed markets,\155\ while others dispute that.\156\ The 
Commission requests commenters' views on this issue. Please provide 
data that support your view. Could any increase in the incidence of 
locked and crossed markets be caused or influenced by other factors, 
such as more efficient and faster quotation updating and trading, or 
the expansion of the Minimum Quoting Increment Pilot Program? How, if 
at all, does the recently implemented Plan \157\ help alleviate the 
frequency of locked and crossed markets? How, if at all, would the 
proposed limitation on access fees affect the frequency of locked/
crossed markets?
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    \155\ See Citadel Petition, supra note 34, at 5, and Ameritrade 
Letter, supra note 37, at 11.
    \156\ See BOX Letter, supra note 37, at 3; IB Letter, supra note 
37, at 6; NYSE Euronext Letter, supra note 37, at 3-4; and GETCO 
Letter, supra note 37, at 7.
    \157\ See supra note 13.
---------------------------------------------------------------------------

    32. The Commission requests comment on what the impact of imposing 
a limit on access fees, if any, would be if the Commission were to ban 
flash orders on the options exchanges.\158\
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    \158\ See Flash Order Proposal, supra note 19.
---------------------------------------------------------------------------

    33. The Commission requests comment on whether there are 
alternative methods other than the

[[Page 20754]]

proposed access fee cap to achieve the objectives of the proposal--to 
provide for fair and efficient access to displayed quotations and that 
displayed quotations be fair and useful. For example, could additional 
disclosure of fees charged by exchanges for executions against their 
quotations in listed options achieve the same objectives by fostering 
further competition based on transparent pricing? Why or why not? 
Please address current disclosure by options exchanges of their fees, 
and why that disclosure is or is not sufficient.
    34. The Commission requests comment on whether, if it were to adopt 
the proposed access provisions, a phase-in period would be necessary to 
allow exchanges and market participants to adapt. If so, what aspect or 
aspects of the proposal should be phased in, and what would be the 
appropriate phase-in period?
    The Commission recognizes that intermarket access presents a number 
of complex problems to which there may be many possible solutions. 
Interested persons may wish to propose and discuss specific, 
alternative approaches to intermarket access that the Commission should 
consider for future rulemaking as it seeks to accomplish its goal of 
strengthening the NMS. Commenters may also wish to discuss whether 
there are any reasons why the Commission should consider an alternative 
approach.

VI. Paperwork Reduction Act

    The Commission preliminarily does not believe that the proposed 
amendments to Rule 610(a) pertaining to quotations in a listed option 
and the proposed access fee limitation in Rule 610(c)(2) contain any 
``collection of information'' requirements as defined by the Paperwork 
Reduction Act of 1995, as amended (``PRA'').\159\ The proposed 
amendment to Rule 610(a) would expand the rule to apply to listed 
options, in addition to NMS stocks, and would prohibit each national 
securities exchange or national securities association from imposing 
unfairly discriminatory terms that prevent or inhibit any person from 
obtaining efficient access through a member of such exchange or 
association to any quotation in an NMS security. The Commission 
preliminarily does not believe that the prohibition in Rule 610(a), as 
proposed to be amended to apply to listed options, would require any 
new or additional collection of information, as such term is defined in 
the PRA, but the Commission encourages comments on this point.\160\
---------------------------------------------------------------------------

    \159\ 44 U.S.C. 3501, et seq.
    \160\ See 44 U.S.C. 3502(3) (defining the term ``collection of 
information'' to include, generally, the obtaining, causing to be 
obtained, soliciting, or requiring the disclosure to third parties 
or the public, of facts or opinions by or for an agency, regardless 
of form or format, calling for either: (i) Answers to identical 
questions posed to, or identical reporting or recordkeeping 
requirements imposed on, ten or more persons, other than agencies, 
instrumentalities, or employees of the United States; or (ii) 
answers to questions posed to agencies, instrumentalities, or 
employees of the United States which are to be used for general 
statistical purposes).
    The Commission notes that the requirement under the proposed 
amendment to Rule 610(a) is substantially similar to current Rule 
610(a) of Regulation NMS. See 17 CFR 242.610(a). The Commission 
requested comment on its preliminary view that Rule 610 of 
Regulation NMS pertaining to access to quotations in an NMS stock 
did not contain a collection of information requirement as defined 
by the PRA. See Securities Exchange Act Release No. 49325 (February 
26, 2004), 69 FR 11126, 11160-61 (March 9, 2004) (File No. S7-10-04) 
(``Regulation NMS Proposing Release''). The Commission notes that no 
comments were received that addressed whether Rule 610(a) contained 
a collection of information requirement. See Securities Exchange Act 
Release No. 50870 (December 16, 2004), 69 FR 77424, 77476 (December 
27, 2004) (``Regulation NMS Reproposing Release'').
---------------------------------------------------------------------------

    In addition, proposed Rule 610(c)(2) would prohibit a national 
securities exchange from imposing, or permitting to be imposed, any fee 
or fees for the execution of an order against a quotation that is the 
best bid or best offer of such exchange in a listed option that exceeds 
or accumulates to more than $0.30 per contract. The Commission 
preliminarily does not believe that the access fee limitation in 
proposed Rule 610(c)(2) would require any new or additional collection 
of information, as such term is defined in the PRA, but the Commission 
encourages comments on this determination.\161\
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    \161\ The Commission notes that proposed Rule 610(c)(2) is 
substantially similar to current Rule 610(c) of Regulation NMS. See 
17 CFR 242.610(c). The Commission requested comment on its 
preliminary view that Rule 610 of Regulation NMS pertaining to a 
limit on access fees did not contain a collection of information 
requirement as defined by the PRA. See Regulation NMS Proposing 
Release, supra, note 160, at 11160-61. The Commission notes that no 
comments were received that addressed whether the proposed access 
fee cap under Rule 610 contained a collection of information 
requirement. See Regulation NMS Reproposing Release, supra note 160, 
at 37577 n.746.
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    With respect to a proposed rule change that an options exchange may 
be required to file pursuant to Section 19(b) of the Exchange Act and 
Rule 19b-4 thereunder to bring its rules into compliance with the 
proposed amendment to Rule 610(a) and proposed Rule 610(c)(2),\162\ the 
burden of filing such proposed rule change would already be included 
under the collection of information requirements contained in Rule 19b-
4 under the Exchange Act.\163\
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    \162\ See infra Section VII.B.
    \163\ See Securities Exchange Act Release No. 50486 (October 5, 
2004), 69 FR 60287, 60293 (October 8, 2004) (File No. S7-18-04) 
(describing the collection of information requirements contained in 
Rule 19b-4 under the Exchange Act). The Commission has submitted 
revisions to the current collection of information titled ``Rule 
19b-4 Filings with Respect to Proposed Rule Changes by Self-
Regulatory Organizations'' (OMB Control No. 3235-0045). According to 
the last submitted revision concluded as of August 5, 2008, the 
current collection of information estimates 1279 total annual Rule 
19b-4 filings with respect to proposed rule changes by self-
regulatory organizations.
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VII. Consideration of Costs and Benefits

    The proposed amendments to Rule 610 of Regulation NMS would set 
forth new standards governing means of access to quotations in listed 
options. The proposal would prohibit an exchange or association from 
imposing unfairly discriminatory terms that would prevent or inhibit 
the efficient access of any person through members of such exchange or 
association to any quotations in an NMS security, including in a listed 
option, displayed through its SRO trading facility. In addition, to 
ensure the fairness and accuracy of displayed quotations in listed 
options, proposed Rule 610(c)(2) would establish an outer limit on the 
cost of accessing the best bid and best offer on each exchange in a 
listed option of no more than $ 0.30 per contract.

A. Benefits

    The Commission preliminarily believes that the proposed amendments 
to Rule 610 of Regulation NMS would help achieve the statutory 
objectives for the NMS by promoting fair and efficient access to each 
individual options exchange.
1. Proposed Amendment to Rule 610(a)
    The access provision of Rule 610(a), as proposed to be amended, is 
designed to strengthen the ability of all market participants that are 
not members of an options exchange to fairly and efficiently route 
orders to execute against quotations in a listed option, wherever such 
quotations are displayed in the NMS, by prohibiting an exchange from 
unfairly discriminating against any person trying to obtain access 
through a member to that exchange's quotations. The Commission believes 
that fair and efficient access to the best displayed quotations of all 
options exchanges is critical to achieving best execution of those 
orders.\164\ The Commission further believes that such fair and 
efficient

[[Page 20755]]

access to the best displayed quotations of options exchanges is 
critical for compliance with the requirements of the Trade-Through 
Rules. Specifically, options exchanges themselves must have the ability 
to route orders for execution against the displayed quotations of other 
exchanges. Indeed, the concept of intermarket protection against trade-
throughs is premised on the ability of options exchanges to route 
orders to execute against, rather than trade through, the quotations 
displayed by other options exchanges.\165\
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    \164\ See NMS Adopting Release, supra note 4, at 37539.
    \165\ Id.
---------------------------------------------------------------------------

    Thus, the Commission preliminarily believes that the proposed 
amendment to Rule 610(a) would benefit investors by furthering the 
ability of brokers on behalf of their customers, and of investors 
themselves, to achieve best execution of their orders in listed 
options. The Commission also preliminarily believes that the proposed 
amendment to Rule 610(a) would contribute to the smooth functioning of 
intermarket trading by furthering the ability of options exchanges and 
market participants, including investors, to fairly and efficiently 
access the quotations of each options exchange.\166\
---------------------------------------------------------------------------

    \166\ Id.
---------------------------------------------------------------------------

    The proposed amendment to Rule 610(a) also would help to clarify 
when certain terms set by exchanges would be unfairly discriminatory, 
including terms in current exchange rules. For example, an exchange 
could not charge a higher per-contract access fee to a non-member 
broker-dealer that is a registered options market maker on another 
exchange (``non-member market maker'') acting for its own account than 
to a member or non-member broker-dealer acting for its own account that 
is not registered as a market maker on another exchange. In this 
example, neither broker-dealer is registered as, nor is acting in the 
capacity of, a market maker on that exchange.\167\ The Commission 
preliminarily believes that this type of distinction could unfairly 
discriminate against non-member market makers and prevent or inhibit 
such non-member market makers from obtaining efficient access through a 
member to that exchange's quotations. Similarly, an exchange could not 
charge differing fees for accessing liquidity depending on whether the 
order is for the account of a ``directed'' customer. The Commission 
preliminarily believes that such a distinction could unfairly 
discriminate against non-directed customer orders and prevent or 
inhibit such non-directed customers from obtaining efficient access 
through a member to that exchange's quotations in certain listed 
options.
---------------------------------------------------------------------------

    \167\ See supra note 51 and accompanying text.
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2. Proposed Rule 610(c)(2)
    The access fee limitation of proposed Rule 610(c)(2) would address 
the potential distortions caused by substantial, disparate fees. When a 
displayed quotation does not include the amount of any fee or fees 
charged by an exchange for executing against that quotation, persons 
attempting to execute, or evaluating whether they want to execute, 
against that quotation cannot readily ascertain the all-in price for 
the trade. The larger the non-displayed fee(s), the less accurate would 
be the displayed price in comparison to the all-in price for the trade. 
This concern is compounded when competing exchanges charge differing 
fees, as the same displayed price on two or more options exchanges may 
reflect different all-in prices for executing against the same-priced 
quotations. Thus, the wider the disparity in the level of access fees 
among different options exchanges, the less useful and accurate may be 
the quoted prices at reflecting the full cost of a trade. As a result 
of the proposed fee limitation, quoted prices should in many cases more 
closely reflect the total cost of a trade because the highest potential 
access fee that could be charged by any exchange would be $0.30 per 
contract. This limitation, in turn, should enhance the usefulness of 
quotation information.
    An access fee limit also makes the cost of accessing quoted prices 
more transparent. Currently, the eight options exchanges charge so many 
different fees to different categories of options participants and for 
different products that it is not easy to estimate that total cost of a 
particular transaction. An access fee cap would limit the scope of 
differences and therefore would result in quoted prices providing 
clearer information on the total cost for executing against quoted 
prices. Consequently, the proposed fee limitation would further the 
statutory purposes of the Exchange Act by reducing the tendency of 
access fees to distort quoted prices. In addition, by applying equally 
to all types of options exchanges, the proposed fee limitation would 
promote NMS objectives and further the goals of Section 11A of the 
Exchange Act relating to equal regulation of markets and broker-
dealers.\168\
---------------------------------------------------------------------------

    \168\ See Section 11A(c)(1)(F) of the Exchange Act, 15 U.S.C. 
78k-1(c)(1)(F) (providing objective to assure equal regulation of 
all markets for qualified securities and all exchange members, 
brokers, and dealers effecting transactions in such securities).
---------------------------------------------------------------------------

    The proposed fee limitation also would benefit the markets and 
market participants by addressing options exchanges that otherwise 
might charge high fees to market participants required to access their 
quotations under the Trade-Through Rules. The requirements under the 
Trade-Through Rules and the use of private linkages could provide an 
exchange the opportunity to take advantage of intermarket price 
protection by acting essentially as a toll booth between price levels. 
Even though the exchange charging the highest fees likely would be the 
last exchange to which orders would be routed, orders could not be 
executed against the next-best price level until someone routed an 
order to take out the displayed price at such high fee exchange. While 
exchanges would have significant incentives to compete to be near the 
top in order-routing priority, arguably there would be little incentive 
to avoid being the least-preferred exchange if fees were not limited. 
Such a business model could detract from the usefulness of quotation 
information and impede market efficiency and competition.\169\
---------------------------------------------------------------------------

    \169\ See NMS Adopting Release, supra note 4, at 37584 
(concluding that, with respect to NMS stocks, an outlier business 
model would detract from the usefulness of quotation information and 
impede market efficiency and competition and that a fee cap would 
limit such a business model). See also supra notes 69-71 and 
accompanying text.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the proposed access fee 
cap would limit the viability of this business model. Consequently, 
another benefit of the proposal would be to place all options exchanges 
on a level playing field with respect to the maximum amount of access 
fees they can charge, and, ultimately, the rebates they can pay to 
liquidity providers, by establishing a clear limit on the fees they can 
charge. Some options exchanges might choose to charge lower fees, 
thereby increasing their ranking in the preferences of order routers. 
Others might charge $0.30 per contract and rebate a substantial 
proportion to liquidity providers.\170\ The Commission preliminarily 
believes that competition will determine which strategy is most 
successful. Proposed Rule 610(c)(2) also would preclude an options 
exchange from charging high fees selectively to competitors.
---------------------------------------------------------------------------

    \170\ The Commission notes that nothing in proposed Rule 
610(c)(2) would preclude an options exchange from taking action to 
limit fees beyond what is required by the proposed Rule, and such 
options exchanges would have flexibility in establishing their fee 
schedules to comply with proposed Rule 610(c)(2), consistent with 
existing requirements of the Exchange Act and the rules and 
regulations thereunder.
---------------------------------------------------------------------------

    The Commission also preliminarily believes that the proposed access 
fee

[[Page 20756]]

limitation would further the purposes of Section 11A(c)(1)(B) of the 
Exchange Act, which authorizes the Commission to adopt rules assuring 
the fairness and usefulness of quotation information. As discussed 
above, if options exchanges are allowed to charge high fees and pass 
most of them through as rebates, the published quotations of such 
exchanges may not reliably indicate the all-in price that is actually 
available to investors. For quotations to be fair and useful, there 
must be some limit on the extent to which the all-in price for those 
who access quotations can vary from the displayed price. Consequently, 
the Commission preliminarily believes that the proposed access fee 
limitation would further the statutory purposes of the NMS by limiting 
the distortive effects of high fees. Moreover, the Commission 
preliminarily believes that the proposed fee limitation would further 
the statutory purpose of enabling broker-dealers to route orders in a 
manner consistent with the operation of the NMS.\171\ Under the Trade-
Through Rules, one exchange cannot trade through another exchange 
displaying the best-priced quotations. The purposes of the Trade-
Through Rules would be thwarted if market participants were allowed to 
charge high fees that distort quoted prices in a listed option.
---------------------------------------------------------------------------

    \171\ Section 11A(c)(1)(E) of the Exchange Act, 15 U.S.C. 78k-
1(c)(1)(E), authorizes the Commission to adopt rules assuring that 
broker-dealers transmit orders for securities in a manner consistent 
with the establishment and operation of a national market system.
---------------------------------------------------------------------------

    In proposing amendments to Rule 610, the Commission seeks to help 
ensure that transactions in listed options can be executed efficiently 
at any market center for reasonable execution fees. By enabling fair 
access and transparent pricing among the different market places within 
a unified national market, the Commission preliminarily believes that 
the proposal would foster efficiency, enhance competition, and 
contribute to the best execution of orders in listed options.
    Finally, the Commission notes that the current access fee 
limitation in Rule 610(c) has applied to the trading of NMS stocks for 
several years and believes that such limitation has not caused any 
apparent harm to competition among markets or market participants 
trading NMS stocks. For example, when recently requesting comment on 
various aspects of equity market structure, the Commission noted how 
trading volume for NMS stocks is spread out among the registered 
exchanges, ECNs, dark pools, and broker-dealers that execute trades 
internally.\172\ The Commission notes that, currently, the options 
exchanges are competitive.\173\ As such, the Commission preliminarily 
believes that an access fee limitation applied to the trading of listed 
options would not harm competition among exchanges or market 
participants trading listed options.
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    \172\ See Securities Exchange Act Release No. 61358 (January 14, 
2010), 75 FR 3594, 3598 (January 21, 2010) (S7-02-10).
    \173\ See infra Section VIII.A.1 (discussing market share data 
for January 2010 among the eight options exchanges).
---------------------------------------------------------------------------

    The Commission also preliminarily believes that the proposed access 
provisions would help to assure investors that their orders are 
executed at the best prices and are not subject to large, non-
transparent fees by limiting the difference between the all-in price of 
an investor executing its order and the displayed quotation, regardless 
of the exchange on which the execution takes place.

B. Costs

1. Proposed Amendment to Rule 610(a)
    If the proposed amendment to Rule 610(a) were adopted, it could 
impose costs associated with modifications to an options exchange's 
rules to comply with such proposed Rule's specific anti-discriminatory 
standard for access to an exchange's quotations through a member. The 
Commission notes, however, that each exchange registered as a national 
securities exchange is currently subject to similar restrictions in 
Section 6 of the Exchange Act, including the requirements in Section 
6(b)(5) that the rules of a national securities exchanges be designed, 
among other things, not to permit unfair discrimination between 
customers, issuers, brokers, or dealers.\174\ Accordingly, the 
Commission preliminarily believes that it would be unlikely for the 
options exchanges to need to amend their rules to comply with Rule 
610(a), as proposed to be amended. To the extent that any amendments 
are necessary, the Commission preliminarily expects such amendments 
would be minimal. The Commission, therefore, preliminarily believes 
that any costs incurred as a result of the requirement under the 
proposed amendment to Rule 610(a) by an options exchange would not be 
significant.
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    \174\ Section 6(b)(5) of the Exchange Act also requires in part 
that the rules of a national securities exchanges be designed to: 
(1) Promote just and equitable principles of trade; (2) remove 
impediments to and perfect the mechanism of a free and open market 
and a national market system; and (3) protect investors and the 
public interest. See 15 U.S.C. 78f(b)(5). See also supra note 47 and 
accompanying text. No national securities association currently 
trades listed options.
---------------------------------------------------------------------------

    More specifically, an options exchange that would need to amend its 
rules to comply with the proposed amendment to Rule 610(a) so as not to 
unfairly discriminate would be required to file a proposed rule change 
on Form 19b-4 with the Commission.\175\ The Commission further notes 
that the proposed rule change filing format is not new to the options 
exchanges, as multiple filings are made annually by such 
exchanges.\176\ The Commission estimates that an average rule change 
requires approximately 34 hours for an exchange to complete at an 
average hourly cost of $305.\177\ The Commission estimates that the 
aggregate cost of one proposed rule change for each options exchange, 
which assumes that every options exchange would have to amend its rules 
to eliminate any unfairly discriminatory terms not consistent with the 
proposed amendments to Rule 610(a), would total approximately $82,960 
($305 times 34 times 8). Therefore, the Commission preliminarily 
believes that the costs incurred by an options exchange to make such a 
filing as a result of the proposed amendment to Rule 610(a) would not 
be substantial.\178\
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    \175\ See 15 U.S.C. 78s(b) (requiring each SRO to file with the 
Commission, in accordance with such rules as the Commission may 
prescribe, copies of any proposed rule or any proposed change in, 
addition to, or deletion from the rules of such SRO, accompanied by 
a concise general statement of the basis and purpose of such 
proposed rule change). See also 17 CFR 240.19b-4(a) (generally 
requiring that filings with respect to proposed rule changes by an 
SRO be made on Form 19b-4, 17 CFR 249.819).
    \176\ The Commission notes that, for its 2009 fiscal year 
(October 1, 2008 to September 30, 2009), the seven options exchanges 
(NYSE Amex, BOX, CBOE, ISE, NOM, NYSE Arca, and Nasdaq OMX Phlx) 
filed approximately 444 proposed rule changes in the aggregate 
pursuant to Section 19(b) and Rule 19b-4 thereunder.
    \177\ The $305 per-hour figure for an attorney is from SIFMA's 
Management & Professional Earnings in the Securities Industry 2008, 
modified by Commission staff to account for an 1800-hour work-year 
and multiplied by 5.35 to account for bonuses, firm size, employee 
benefits, and overhead. See Securities Exchange Act Release No. 
59748 (April 10, 2009), 74 FR 18042, 18093 (April 20, 2009) (S7-08-
09) (noting the Commission's modification to the $305 per hour 
figure for an attorney).
    \178\ The Commission also notes that each options exchange 
should already have in place policies and procedures to ensure that 
terms of access to its market are consistent with the federal 
securities laws and the rules thereunder. See supra note 174 and 
accompanying text. The Commission preliminarily believes that such 
options exchange's existing policies and procedures should not 
change as a result of the proposed amendments to Rule 610, and, 
therefore, should not incur any new costs, including administrative 
costs, in this regard.
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2. Proposed Rule 610(c)(2)
    The Commission preliminarily does not believe that the fee 
limitation of

[[Page 20757]]

proposed Rule 610(c)(2) would impose significant new costs on the 
options exchanges or market participants. The Commission preliminarily 
believes that the proposed fee limitation would be relatively easy to 
administer given that it would impose a single accumulated access fee 
limitation for all options. For options exchanges that currently charge 
and collect fees and that would continue to do so, the costs of 
imposing and collecting fees are already incurred. The fee limitation 
would not require an options exchange that does not currently charge 
fees to begin charging fees. Thus, the Commission preliminarily 
believes that the proposed fee limitation should not impose significant 
new administrative costs.
    The Commission recognizes that the fee limitations of proposed Rule 
610(c)(2) would affect options exchanges that currently impose access 
fees in excess of the proposed limits. As a result of the access fee 
limitations of proposed Rule 610(c)(2), such options exchanges would be 
required to modify their respective rules to ensure compliance with the 
proposed Rule's fee cap. The Commission preliminarily believes, 
however, that the potential administrative costs associated with any 
necessary changes to the rules of an options exchange that may be 
needed to account for the proposed access fee limitation would not be 
substantial. The Commission notes that an options exchange that would 
need to amend its rules and fee schedule to comply with the access fee 
limitation as a result of proposed Rule 610(c)(2) would be required to 
file a proposed rule change on Form 19b-4 with the Commission.\179\ The 
Commission further notes that the proposed rule change filing format 
and the process to change a due, fee, or other charge applicable only 
to members is not new to the options exchanges, as multiple fee filings 
are made annually by such exchanges.\180\ As stated above, the 
Commission estimates that an average rule change requires approximately 
34 hours for an exchange to complete at an average hourly cost of 
$305.\181\ The Commission estimates that the aggregate cost for all 
options exchanges of one proposed rule change for each exchange would 
total approximately $82,960.\182\ Therefore, the Commission 
preliminarily believes that the costs incurred by an options exchange 
to make such a filing as a result of proposed Rule 610(c)(2) would not 
be substantial.\183\
---------------------------------------------------------------------------

    \179\ See supra note 175.
    \180\ An exchange generally would be able to amend its fees 
imposed on its members by filing a proposed rule change pursuant to 
Section 19(b)(3)(A) of the Exchange Act of Rule 19b-4(f)(2) 
thereunder. See 15 U.S.C. 78s(b)(3)(A) and 17 CFR 240.19b-4(f)(2) 
(permitting proposed rule changes that establish or change a due, 
fee, or other charge applicable only to members to take effect upon 
filing with the Commission). The Commission notes that, for its 2009 
fiscal year, the seven options exchanges filed approximately 120 
proposed rule changes in the aggregate pursuant to Section 
19(b)(3)(A) of the Exchange Act and Rule 19b-4(f)(2) thereunder. See 
supra note 176 (noting the approximate total of all proposed rule 
changes filed by the options exchanges pursuant to Section 19(b) and 
Rule 19b-4 thereunder during the same time period).
    \181\ See supra note 177.
    \182\ The Commission notes that if an exchange were required to 
submit a proposed rule change to address a rule or fee that was not 
consistent with the anti-discriminatory standard proposed in Rule 
610(a), as well as a fee that exceeds the proposed fee cap, the 
exchange could choose to submit one rule filing that would make 
changes necessary to comply with proposed Rules 610(a) and 610(c)(2) 
to reduce costs.
    \183\ The Commission also notes that each options exchange 
should already have in place policies and procedures to ensure that 
all of the fees it charges, including access fees, are consistent 
with the federal securities laws and the rules thereunder. The 
Commission preliminarily believes that, while an options exchange 
may be required to amend its fee schedule to account for the 
proposed access fee limitation, such options exchange's existing 
policies and procedures should not change as a result of the 
proposed amendments to Rule 610, and therefore, should not incur any 
new costs, including administrative costs, in this regard.
---------------------------------------------------------------------------

    The Commission also recognizes that, as a result of the proposed 
access fee limitation, certain options exchanges that currently charge 
access fees that exceed, or accumulate to more than, $0.30 per contract 
would be required to reduce their access fees, and that this action 
could result in a reduction in revenue from transaction fees for those 
exchanges.
    The Commission preliminarily estimates that the imposition of an 
access fee cap, as proposed, could reduce option exchanges' annual 
transaction fee revenues by about $74 million under a flat $0.30 access 
fee cap.\184\ The estimated revenue losses per exchange are set forth 
in Table 3 of the Appendix. Commission staff estimates the proportion 
of fee losses to total fees for December 2009 and applies that 
proportion to the annual transaction fee revenue for each exchange. The 
Commission staff utilized OCC data that contains aggregate two-sided 
volume data by account type (customer, firm or market maker). In order 
to estimate the impact on each option exchange's revenues,\185\ 
Commission staff makes a number of assumptions:
---------------------------------------------------------------------------

    \184\ For this estimate, Commission staff used December 2009 
option trading data from OCC and OptionMetrics. The Commission staff 
estimates that if the Commission were to impose a fee cap of 0.3 
percent of the price of the option for options priced below $1--
similar to the existing cap for NMS stocks--the potential reduction 
in revenue for the options exchanges would be $177 million.
     The Commission has not included BATS in these revenue impact 
calculations. As noted below, BATS recently started trading options 
on February 26, 2010. See infra note 197. Further, BATS' only 
transaction fee for listed options is $0.30 per contract for 
removing liquidity (and a $0.20 per-contract rebate for providing 
liquidity). See BATS Fee Schedule (available at http://
batstrading.com/resources/regulation/rule_book/BATS_Ex_Fee_
Schedule.pdf) (current as of February 26, 2010).
    \185\ See infra note 187 and accompanying text for an estimate 
of the impact of the proposed access fee cap on transaction fee 
revenues using an assumption that the options exchanges that have a 
Make or Take fee model reduce their ``Make'' fees to compensate for 
a reduction in ``Take'' fees.
---------------------------------------------------------------------------

     Commission staff assumes that the options exchanges that 
impose fees in excess of the proposed access fee cap would not adjust 
their rebates or other fees to offset any shortfalls on revenues 
imposed by the access fee cap.
     Commission staff looked at a range of fees that each 
options exchange charges for accessing the best bid or offer in listed 
options on the exchange, based on its published fee schedule.\186\ The 
fee ranges include any fee that is charged for execution of an order 
against an exchange's best bid or offer. Thus, they include ``Take'' 
fees, transaction fees, index ``licensing'' fees, certain payment for 
order flow fees, and ORF. The fee ranges exclude fees charged for 
transactions in FLEX options, credit default options, and the fee that 
ISE charges for transactions by broker-dealers registered as market 
makers on other exchanges. Commission staff has excluded these specific 
transaction fees from these calculations because it preliminarily 
believes that the volume of transactions and the corresponding assessed 
transaction fees are not significant, but requests comment on whether 
such fees should be included in the cost impact calculation. Any 
available volume discounts also are not taken into account because such 
discounts are variable and if applied would reduce the cost estimates. 
Tables 1 and 2 of the Appendix show the fee ranges used in estimating 
the revenue impact.
---------------------------------------------------------------------------

    \186\ The fees used are as of January 2010, except that they do 
not include fees or credits imposed by Nasdaq OMX Phlx in SR-Phlx-
2009-116, SR-Phlx-2010-14, and SR-Phlx-2009-104, which filings were 
abrogated by the Commission on February 19, 2010. See Securities 
Exchange Act Release No. 61547 (February 19, 2010), 75 FR 8762 
(February 25, 2010).
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     To estimate the impact on each option exchange's revenues, 
the Commission staff generally assumes the maximum possible fee for 
electronically transmitted orders grouped by account type, whether or 
not the class is included in the Minimum Quoting Increment Pilot 
Program, and option type. This assumption would lead, conservatively, 
to higher estimates of

[[Page 20758]]

revenue losses. Further, because fee levels for equity options tend to 
be different than fee levels for index options, and because the fee 
levels for classes included in the Minimum Quoting Increment Pilot 
Program sometimes are different than the fee levels for classes not 
included in that Pilot Program, Commission staff estimates fees 
separately for each.
     Commission staff assumes that access fees only apply to 
``Takers'' of liquidity at a particular exchange. Staff further assumes 
that customers always ``take'' liquidity, market makers always ``make'' 
liquidity, and firms make up the difference. Based on December 2009 
data, Commission staff estimates that average firm volume by option 
class is about 52% on the ``take'' side and 48% on the ``make'' side.
     The OCC classifies cleared trades based on OCC membership 
rather than exchange membership. Therefore, Commission staff assumes 
that the OCC ``firm'' classification applies to both member and non-
member firms at a particular exchange. If a particular exchange charges 
different levels of fees for member and non-member firms, Commission 
staff conservatively assumes the maximum fee applies to all trades 
classified as ``firm'' accounts.
    As noted above, this cost estimate assumes that the exchanges do 
not make any changes to their other fees in response to the proposed 
access fee cap. Options exchanges may, however, respond to access fee 
limits by restructuring their fee schedules to mitigate the effect of 
the proposed fee cap. For example, the impact of imposing a fee 
limitation in a Make or Take fee model may be mitigated if exchanges 
using such fee model reduce the rebates to reflect the reduced ``Take'' 
fees. In such a case, the net impact on exchange revenue would be less 
than the amount by which an exchange is required to reduce its ``Take'' 
fee because the exchange would pay a smaller rebate to members 
providing liquidity. In addition, certain options exchanges may simply 
be able to re-calibrate existing fee structures to offset potential 
revenue losses, while other exchanges may decide to charge additional 
fees to make up for potential revenue losses.
    Options exchanges have the ability, consistent with the 
requirements of the Exchange Act, to levy fees on their members. 
Currently, exchanges charge their members various types of fees for 
membership, transacting on the exchange, and for other services 
provided by the exchange, including connectivity fees, regulatory fees, 
and other fees. The Commission preliminarily believes that exchanges 
are likely to amend their fees that would not be impacted by the access 
fee limitation to make up for the reduction in access fee revenue, thus 
keeping the overall level of fees paid by members, and the amount of 
revenue received by the exchange, relatively constant. Further, the 
Commission preliminarily believes that exchanges that provide rebates 
to liquidity providers based on the amount of fees the exchanges charge 
for accessing liquidity may reduce such rebates commensurate with any 
reduction in the fees charged for accessing liquidity. In this event, 
the amount of revenue received by the exchange--the difference between 
the ``Take'' fee and the ``Make'' rebate--would remain constant. If 
exchanges with ``Make or Take'' models reduce their ``Make'' fees to 
compensate for a reduction in ``Take'' fees due to the proposed access 
fee cap, the Commission estimates that the imposition of an access fee 
cap as proposed could reduce option exchanges' transaction fee revenues 
by about $55 million under a flat $0.30 access fee cap.\187\
---------------------------------------------------------------------------

    \187\ For this estimate, Commission staff used December 2009 
option trading data from OCC and OptionMetrics. See infra Table 3 in 
the Appendix.
---------------------------------------------------------------------------

    The Commission also preliminarily believes that the overall cost to 
members of exchanges from the proposal to limit access fees would be 
minimal. As noted above, exchange members pay various types of fees to 
their exchanges, including transaction fees, regulatory fees, and other 
fees. Some of these fees are charged for activity by the members' 
customers or other non-member market participants that comes through 
members. Exchange members today can choose to pass through these fees 
to their customers, or not, subject to competition among members for 
this order flow. As outlined above, the Commission preliminarily 
believes that the overall revenue to the exchanges--and thus the 
overall fees charged by exchanges to members--would remain constant, 
although the levels of fees within individual fee categories may 
change. Thus, the impact of fee changes on individual members and 
market participants may vary, depending upon each participant's 
business structure and trading strategies, and depending upon what 
portion of the fees each member chooses to ``pass through'' to its 
customers.

C. Request for Comment

    The Commission requests general comment on the costs and benefits 
of the proposed amendments to Rules 610(a) and (c) of Regulation NMS 
discussed above, as well as any costs and benefits not already 
described which could result from them. The Commission also requests 
data to quantify any potential costs or benefits.
    The Commission specifically requests comment on the cost estimates 
made, and the assumptions underlying those cost estimates as outlined, 
in Section VII.B.2. For example, do commenters believe that options 
exchanges that currently impose fees in excess of the fee cap proposed 
in Rule 610(c)(2) would or would not adjust their rebates or other fees 
to offset the impact of a fee cap? If commenters believe that options 
exchanges would adjust their rebates or other fees to offset the impact 
of a fee cap, what specific types of changes would exchanges make? 
Further, depending upon the specific change to rebates or fees that 
commenters believe exchanges would make in response to the proposed fee 
cap, how do commenters believe that such change(s) would impact the 
quoting, order routing, or other behavior of particular categories of 
market participants, such as retail investors, market makers, and 
broker-dealers?
    Do commenters believe that it is appropriate generally to consider 
the maximum fee charged for electronically transmitted orders in 
calculating the impact on an options exchange's revenue of the proposed 
access fee cap? If so, please explain why. If not, please provide 
detail as to what assumptions should underlie such a calculation. 
Further, do commenters agree that it is reasonable to exclude specific 
fees charged for the execution of orders in FLEX options or credit 
default options, and the fee that ISE charges for transactions by 
broker-dealers registered as market makers on other exchange, as well 
as volume discounts, when determining the maximum fee charged by 
options exchanges? Do commenters agree with the assumption that 
customers always ``take'' liquidity, market makers always ``make'' 
liquidity, and firms make up the difference? If not, please provide 
detail as to what assumptions should be made and any supporting 
information, or describe another approach for estimating the costs of 
this proposal.

VIII. Consideration of Burden on Competition and Promotion of 
Efficiency, Competition, and Capital Formation

    Section 3(f) of the Exchange Act requires the Commission, whenever 
it engages in rulemaking and is required to consider or determine 
whether an action is necessary or appropriate in the public interest, 
to consider, in addition to the

[[Page 20759]]

protection of investors, whether the action would promote efficiency, 
competition, and capital formation.\188\ In addition, Section 23(a)(2) 
of the Exchange Act requires the Commission, when adopting rules under 
the Exchange Act, to consider the impact such rules would have on 
competition.\189\ Section 23(a)(2) prohibits the Commission from 
adopting any rule that would impose a burden on competition not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act.\190\
---------------------------------------------------------------------------

    \188\ 15 U.S.C. 78c(f).
    \189\ 15 U.S.C. 78w(a)(2).
    \190\ Id.
---------------------------------------------------------------------------

A. Competition

    The Commission begins its consideration of potential competitive 
impacts with observations of the current structure of the option 
markets and broker-dealers, mindful of the statutory requirements 
regarding competition. Based on the Commission's experience in 
regulating the options markets and broker-dealers, including reviewing 
information provided by them in their registrations and filings with 
the Commission and approving such registration applications, the 
Commission discusses below the basic framework of the markets they 
comprise.
1. Market Structure for Options Markets
    In order to consider whether the proposed rules promote 
competition, staff of the Commission's Division of Risk, Strategy, and 
Financial Innovation evaluated the competitive structure of the 
exchange-listed options trading industry in the United States. In 
particular, Commission staff considered the nature of competition 
between liquidity providers within exchanges and competition between 
exchanges to attract order flow. Within the options exchanges, multiple 
market makers, proprietary trading firms, and customers submitting 
limit orders compete to provide liquidity to incoming market or 
marketable limit orders. Options exchanges compete for order flow 
through their quotations and, in some cases, through exchange-sponsored 
payment for order flow.
    In the late 1990s, the Commission took actions in response to 
concerns that the options industry was not fully competitive. 
Competition in the listed options market is significantly more rigorous 
today that it has been in the past, as a result of several developments 
since 1999. These include the move to multiple listing,\191\ the advent 
of electronic exchanges,\192\ the extension of the Commission's Quote 
Rule to options,\193\ the injunction against trading outside of the 
national best bid and offer,\194\ the adoption of market structures on 
the floor-based exchanges that permit individual market maker 
quotations to be reflected in the exchange's quotation,\195\ and the 
Minimum Quoting Increment Pilot Program,\196\ among other developments.
---------------------------------------------------------------------------

    \191\ See Securities Exchange Act Release No. 26870 (May 26, 
1989), 54 FR 23963 (June 5, 1989) (S7-25-87).
    \192\ See ISE Exchange Approval, supra note 30, 65 FR at 11395; 
Securities Exchange Act Release Nos. 49068 (January 13, 2004), 69 FR 
2775 (January 20, 2004) (approving options trading rules for BOX) 
(``BOX Approval Order''); 54238 (July 28, 2006), 71 FR 44758 (August 
7, 2006) (approving NYSE Arca's OX, a fully automated trading system 
for standardized equity options intended to replace NYSE Arca's 
options trading platform, PCX Plus); 57478 (March 12, 2008), 73 FR 
14521 (March 18, 2008) (approving options trading rules for NOM) 
(``NOM Approval Order''); and 61419 (January 26, 2010), 75 FR 5157 
(February 1, 2010) (approving BATS Exchange proposal to operate as 
an options exchange) (``BATS Approval Order'').
    \193\ See Securities Exchange Act Release No. 43591 (November 
17, 2000), 65 FR 75439 (December 1, 2000).
    \194\ See supra notes 8-16 and accompanying text.
    \195\ See, e.g., Securities Exchange Act Release No. 47959 (May 
30, 2003), 68 FR 34441, 34442 (June 9, 2003) (SR-CBOE-2002-05) 
(adopting, among other things, amendments to incorporate firm quote 
requirements in CBOE's rules).
    \196\ See supra notes 28-29 and accompanying text.
---------------------------------------------------------------------------

    Among the relevant considerations in assessing the degree of 
competition in an industry are the number of competitors and 
concentration of market share. Listed options in the United States are 
currently traded on eight national securities exchanges, owned by six 
entities. These eight exchanges are CBOE, ISE, NYSE Arca, NYSE Amex, 
Nasdaq OMX Phlx, NOM, BOX, and BATS. Based on market share data for 
January 2010 obtained from the OCC,\197\ the exchange with the highest 
market share of option volume was CBOE, with 29.58%, followed by ISE at 
22.86%. The two exchanges owned by NYSE Euronext together had a market 
share of 25.82% (NYSE Arca had 13.94% and NYSE Amex had 11.88%). The 
two exchanges owned by The NASDAQ OMX Group, Inc. together had a market 
share of 19.76% (Nasdaq OMX Phlx had 17.17% and NOM had 2.59%). The BOX 
had a market share of 1.98%.
---------------------------------------------------------------------------

    \197\ Although the Commission approved BATS Exchange's proposal 
to operate as an options exchange in January 2010 (see BATS Approval 
Order, supra note 192), BATS Exchange did not commence options 
trading operations until February 26, 2010. As a result, there is no 
market share data for BATS for purposes of this discussion.
---------------------------------------------------------------------------

    Another key factor determining the competitiveness of an industry 
is the extent to which there are significant barriers to entry. In the 
Commission's assessment, barriers to entry in providing trading 
platforms in the options market are higher than they are in the 
equities market because equities may be traded off exchange while 
options may not. Thus, new entrants in the options market face the 
regulatory costs associated with establishing a national securities 
exchange. These costs are not large enough to prevent entry, as 
evidenced by the fact that four new option exchanges have entered the 
industry since 2000,\198\ and another is anticipated to begin 
operations soon.\199\ However, it is possible that the economic 
barriers to entry to the options trading industry may be more 
significant for participants who do not already have the infrastructure 
required to operate registered exchanges. With the sole exception of 
the ISE, every new entrant in the options market since 1973 has been 
created by participants who were already operating securities 
exchanges.
---------------------------------------------------------------------------

    \198\ See ISE Exchange Approval, supra note 30; BOX Approval 
Order, supra note 192; NOM Approval Order, supra note 192; and BATS 
Approval Order, supra note 192.
    \199\ See supra note 8 (referring to the order approving C2 
Options Exchange's application for registration as a national 
securities exchange).
---------------------------------------------------------------------------

    Broker-dealers are required to register with the Commission and be 
a member of at least one SRO. The broker-dealer industry, including 
market makers, is a competitive industry, with most trading activity 
concentrated among several dozen larger participants and with thousands 
of smaller participants competing for niche or regional segments of the 
market.
    There are approximately 5,178 registered broker-dealers, of which 
approximately 890 are small broker-dealers.\200\ Larger broker-dealers 
often enjoy economies of scale over smaller broker-dealers and compete 
with each other to service the smaller broker-dealers, who are both 
their competitors and customers. The reasonably low barriers to entry 
for broker-dealers are evidenced, for example, by the fact that the 
average number of new broker-dealers entering the market each year 
between 2001 and 2008 was 389.\201\
---------------------------------------------------------------------------

    \200\ These numbers are based on a review of 2007 and 2008 FOCUS 
Report filings reflecting registered broker-dealers, and discussions 
with SRO staff. The number does not include broker-dealers that are 
delinquent on FOCUS Report filings.
    \201\ This number is based on a review of FOCUS Report filings 
reflecting registered broker-dealers from 2001 through 2008. The 
number does not include broker-dealers that are delinquent on FOCUS 
Report filings. New registered broker-dealers for each year during 
the period from 2001 through 2008 were identified by comparing the 
unique registration number of each broker-dealer filed for the 
relevant year to the registration numbers filed for each year 
between 1995 and the relevant year.

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[[Page 20760]]

2. Discussion of Impacts of Proposed Amendments to Rules 610(a) and 
610(c) on Competition
    The Commission believes that the estimated costs associated with 
implementing and complying with the proposed amendments to Rules 610(a) 
and 610(c) are not so large as to raise significant barriers to entry, 
or otherwise significantly alter the competitive landscape of the 
listed options market. Given the reasonably high level of competition 
for order flow in option markets and among broker-dealers, the 
Commission believes that this industry would remain competitive, 
despite the potential costs associated with implementing and complying 
with the proposed amendments to Rules 610(a) and 610(c), even if those 
costs influence to some degree the profitability of individual option 
markets or entry and exit of broker-dealers at the margin.
    Trading fees typically constitute the largest component of revenues 
for option exchanges. For example, transaction fees accounted for 
approximately 80.8% of total revenues for the CBOE in 2008. Thus, a 
change in the fee structure that significantly reduces total fees could 
potentially have an important impact on industry profits and thus on 
the ability of smaller exchanges, including potential new entrants, to 
meet their fixed costs. However, the Commission believes that the 
proposed access fee limitations would have a limited, if any, negative 
impact on the profitability of individual option markets because option 
markets would be able to adjust their fee structures to accommodate the 
access fee cap. Therefore, the Commission preliminarily believes that 
limiting access fees to $0.30 per contract would not lead to a large 
reduction in total revenues, and would not put an undue burden on 
smaller exchanges or new entrants that would result in a decrease in 
competition in the industry.
    The Commission recognizes that a limit on access fees that applies 
to exchanges utilizing a ``Make or Take'' market model effectively 
limits the size of the liquidity rebate that such exchanges can offer, 
inasmuch as the economic viability of the ``Make or Take'' model 
generally requires that the rebate be smaller than the access fee. The 
Commission also recognizes that effectively limiting the size of the 
liquidity rebate in this way may limit the ability of exchanges 
utilizing the ``Make or Take'' model to attract liquidity. However, the 
Commission preliminarily believes that the proposal would not unduly 
burden ``Make or Take'' fee models. In the ``Make or Take'' fee model, 
the market earns the differential between the ``make'' credit and the 
``take'' fee. The proposal allows for access fees of up to $0.30 per 
contract and thus can accommodate a $0.30 per-contract differential in 
``make'' credits and ``take'' fees. The largest differential charged by 
``Make or Take'' model option markets currently is $0.20 per contract, 
sufficiently within the $0.30 per-contract access fee limit of the 
proposal. In addition, the Commission observes that the ``Make or 
Take'' market model has become the dominant structure in the equity 
market despite the cap of $0.003 per share, suggesting that a similar 
cap in the option market would not prevent the ``Make or Take'' model 
from succeeding in the option market. The Commission requests comment 
on this preliminary view.\202\
---------------------------------------------------------------------------

    \202\ See also Section V (Request for Comment).
---------------------------------------------------------------------------

    Further, the proposed rules apply uniformly to exchanges with 
different markets and fee structures, thereby facilitating the ability 
of option markets to compete in a level regulatory environment. A fee 
limitation is necessary to preclude individual markets from having fee 
structures that take improper advantage of the protection against 
trade-throughs in the Trade-Through Rules. Precluding option markets 
from taking improper advantage of trade-through protection and making 
sure that all option markets compete under the same regulatory 
landscape should strengthen the ability of option markets to compete 
fairly for business.
    The Commission believes that the proposed access fee limitations 
may have benefits that enhance quote competition among markets. The 
proposed access fee provisions are intended to bolster transparency in 
the options markets by improving the integrity of the quotations and 
preventing large, non-transparent fees from being charged on orders 
that are being sent to a particular market in order to comply with the 
trade through provisions of the Trade-Through Rules. Since quotation 
information would be more informative under the proposed access fee 
limitations, the Commission expects that the proposed amendments would 
likely encourage quote competition. Moreover, the Commission 
preliminarily believes that, by prohibiting a national securities 
exchange or national securities association from imposing unfairly 
discriminatory terms that would prevent or inhibit the efficient access 
of any person through members or non-member subscribers, the proposed 
rule would promote competition to offer the best displayed quotation 
among exchanges that trade listed options.
    The Commission also believes that the proposal would have a minimal 
effect on the competitiveness of the broker-dealer industry. Since the 
proposal seeks to limit access fees, the proposal may result in a 
reduction in fees paid by broker-dealers to options exchanges. On the 
other hand, it is possible that options exchanges could increase 
broker-dealer fees, including market maker fees, to offset any revenue 
losses from an access fee limit. However, since transaction fee costs 
are typically a small part of the total expenses for a broker-dealer, 
the Commission preliminarily believes that any increase in transaction 
fee costs for broker-dealers would have a minimal, if any, effect on 
the competitiveness of the broker-dealer industry. The Commission seeks 
comment, however, on the level of options exchange-levied fees on 
broker-dealers and whether an increase in these fees would inhibit the 
competitiveness of the broker-dealer industry.
    In summary, the Commission preliminarily believes that the proposal 
would not result in an undue burden on the competitiveness of any 
option markets and, as a result, would not result in any decrease in 
competition among option markets. Moreover, the Commission 
preliminarily believes that the proposal would promote quote 
competition in options. The Commission also preliminarily believes that 
the proposal would not result in an undue burden on the competitiveness 
of the broker dealer industry.

B. Capital Formation

    A purpose of the proposed amendments to Rules 610(a) and 610(c) is 
to strengthen transparency and quote competition in the option markets 
regulated by the Commission which should help make investors more 
willing to invest, resulting in the promotion of capital formation. 
Long holdings of equity are integral to capital formation. Fair and 
robust option markets, in which long holders can hedge risk through the 
option markets, support the public offerings of the underlying equities 
by which issuers raise capital and, as a result, investors who provided 
private capital realize profits and manage risk. Therefore, the 
Commission preliminarily believes that the proposed amendments to Rules 
610(a) and 610(c) would increase transparency and quote competition, 
thereby enhancing investment, and thus capital formation.

[[Page 20761]]

C. Efficiency

    The access provision of Rule 610(a), as proposed to be amended, is 
designed to strengthen the ability of all market participants that are 
not members of an options exchange to fairly and efficiently route 
orders to execute against quotations in a listed option, wherever such 
quotations are displayed in the NMS, by prohibiting an exchange from 
unfairly discriminating against any person trying to obtain access 
through a member to that exchange's quotations. Fair and efficient 
access to the best displayed quotations of all options exchanges is 
necessary to achieving best execution of those orders.\203\ Further, 
fair and efficient access to the best displayed quotations of options 
exchanges is necessary for compliance with the requirements of the 
Trade-Through Rules. Specifically, options exchanges themselves must 
have the ability to route orders for execution against the displayed 
quotations of other exchanges. Indeed, the concept of intermarket 
protection against trade-throughs is premised on the ability of options 
exchanges to route orders to execute against, rather than trade 
through, the quotations displayed by other options exchanges.\204\ In 
this way, fair and efficient indirect access would, through the 
enhancement of the ability to achieve best execution and the support of 
compliance with the Trade-Through Rules, increase the efficiency of 
executions across option markets.
---------------------------------------------------------------------------

    \203\ See NMS Adopting Release, supra note 4, at 37539.
    \204\ Id.
---------------------------------------------------------------------------

    The proposed access fee limit would apply equally to all national 
securities exchanges, thereby promoting the NMS objective of equal 
regulation of markets. A fee limitation is necessary to preclude 
individual markets from having fee structures that take improper 
advantage of the protection against trade-throughs in the Trade-Through 
Rules. Precluding option markets from taking improper advantage of 
trade-through protection and making sure that all option markets 
compete under the same regulatory landscape should strengthen the 
ability of option markets to compete on a more level playing field, 
thereby promoting efficiency of execution across option markets by 
reducing costs.
    The Commission solicits comments on these matters with respect to 
the proposed amendments to Rules 610(a) and (c). Would the proposed 
amendments have an adverse effect on competition that is neither 
necessary nor appropriate in furtherance of the purposes of the 
Exchange Act? Would the proposed amendments, if adopted, promote 
efficiency, competition, and capital formation? Commenters are 
requested to provide empirical data and other factual support for their 
views if possible.

IX. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, or ``SBREFA,'' \205\ the Commission must advise the Office 
of Management and Budget as to whether the proposed regulation 
constitutes a ``major'' rule. Under SBREFA, a rule is considered 
``major'' where, if adopted, it results or is likely to result in: (1) 
An annual effect on the economy of $100 million or more (either in the 
form of an increase or a decrease); (2) a major increase in costs or 
prices for consumers or individual industries; or (3) significant 
adverse effect on competition, investment or innovation. If a rule is 
``major,'' its effectiveness will generally be delayed for 60 days 
pending Congressional review.
---------------------------------------------------------------------------

    \205\ Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note 
to 5 U.S.C. 601).
---------------------------------------------------------------------------

    The Commission requests comment on the potential impact of the 
proposed amendments to Rule 610 on the economy on an annual basis, on 
the costs or prices for consumers or individual industries, and on 
competition, investment or innovation. Commenters are requested to 
provide empirical data and other factual support for their view to the 
extent possible.

X. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') \206\ requires Federal 
agencies, in promulgating rules, to consider the impact of those rules 
on small entities. Section 603(a) \207\ of the Administrative Procedure 
Act,\208\ as amended by the RFA, generally requires the Commission to 
undertake a regulatory flexibility analysis of all proposed rules, or 
proposed rule amendments, to determine the impact of such rulemaking on 
``small entities.'' \209\ Section 605(b) of the RFA specifically states 
that this requirement shall not apply to any proposed rule or proposed 
rule amendment, which if adopted, would not ``have a significant 
economic impact on a substantial number of small entities.'' \210\
---------------------------------------------------------------------------

    \206\ 5 U.S.C. 601 et seq.
    \207\ 5 U.S.C. 603(a).
    \208\ 5 U.S.C. 551 et seq.
    \209\ Although Section 601(b) of the RFA defines the term 
``small entity,'' the statute permits agencies to formulate their 
own definitions. The Commission has adopted definitions for the term 
small entity for the purposes of Commission rulemaking in accordance 
with the RFA. Those definitions, as relevant to this proposed 
rulemaking, are set forth in Rule 0-10, 17 CFR 240.0-10. See 
Securities Exchange Act Release No. 18452 (January 28, 1982), 47 FR 
5215 (February 4, 1982) (File No. S7-879).
    \210\ See 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    The proposed amendment to Rule 610(a) of Regulation NMS would 
prohibit a national securities exchange or national securities 
association from imposing unfairly discriminatory terms that would 
prevent or inhibit any person from obtaining efficient access through a 
member of such exchange or association to the quotations in a listed 
option. In addition, proposed Rule 610(c)(2) would prohibit a national 
securities exchange from imposing, or permitting to be imposed, any fee 
or fees for the execution of an order against any quotation that is the 
best bid or best offer of such exchange in a listed option that exceeds 
or accumulates to more than $0.30 per contract. As such, only national 
securities exchanges registered with the Commission under Section 6 of 
the Exchange Act and national securities associations registered with 
the Commission under Section 15A of the Exchange Act would be subject 
to the proposed amendments to Rules 610(a) and (c). None of the 
national securities exchanges registered under Section 6 of the 
Exchange Act or national securities associations registered with the 
Commission under Section 15A of the Exchange Act that would be subject 
to the proposed amendments are ``small entities'' for purposes of the 
RFA.\211\ Accordingly, the Commission preliminarily does not believe 
that the proposed amendments to Rule 610 would have a significant 
economic impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \211\ See 17 CFR 240.0-10(e). Paragraph (e) of Rule 0-10 states 
that the term ``small business,'' when referring to an exchange, 
means any exchange that has been exempted from the reporting 
requirements of Rule 601 of Regulation NMS, 17 CFR 242.601, and is 
not affiliated with any person (other than a natural person) that is 
not a small business or small organization as defined in Rule 0-10. 
Under this standard, none of the exchanges subject to the proposed 
amendments to Rule 610 is a ``small entity'' for the purposes of the 
RFA. The Financial Industry Regulatory Authority or ``FINRA'' (f/k/a 
the National Association of Securities Dealers or ``NASD'') is not a 
small entity as defined by 13 CFR 121.201.
---------------------------------------------------------------------------

    The Commission invites commenters to address whether the proposed 
rules would have a significant economic impact on a substantial number 
of small entities, and, if so, what would be the nature of any impact 
on small entities. The Commission requests that commenters provide 
empirical data to support the extent of such impact.

[[Page 20762]]

XI. Statutory Authority

    Pursuant to the Exchange Act and particularly, Sections 2, 3(b), 5, 
6, 11A, 15, 15A, 17(a) and (b), 19, and 23(a) thereof, 15 U.S.C. 78b, 
78c(b), 78e, 78f, 78k-1, 78o, 78o-3, 78q(a) and (b), 78s, and 78w(a), 
the Commission proposes to amend Rule 610 of Regulation NMS, as set 
forth below.

Text of Proposed Rule

List of Subjects in 17 CFR Part 242

    Brokers, Reporting and recordkeeping requirements, Securities.

    In accordance with the foregoing, Title 17, Chapter II, of the Code 
of Federal Regulations is proposed to be amended as follows.

PART 242--REGULATIONS M, SHO, ATS, AC, AND NMS AND CUSTOMER MARGIN 
REQUIREMENTS FOR SECURITY FUTURES

    1. The authority citation for part 242 continues to read as 
follows:

    Authority:  15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2), 
78i(a), 78j, 78k-1(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g), 
78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-29, and 
80a-37.
    2. Amend Sec.  242.610 by revising paragraphs (a) and (c) to read 
as follows:


Sec.  242.610  Access to quotations.

    (a) Quotations of an SRO trading facility. A national securities 
exchange or national securities association shall not impose unfairly 
discriminatory terms that prevent or inhibit any person from obtaining 
efficient access through a member of the national securities exchange 
or national securities association to the quotations in an NMS security 
displayed through its SRO trading facility.
* * * * *
    (c) Fees for access to quotations. (1) A trading center shall not 
impose, nor permit to be imposed, any fee or fees for the execution of 
an order against a protected quotation of the trading center or against 
any other quotation of the trading center that is the best bid or best 
offer of a national securities exchange or the best bid or best offer 
of a national securities association in an NMS stock that exceed or 
accumulate to more than the following limits:
    (i) If the price of a protected quotation or other quotation is 
$1.00 or more, the fee or fees cannot exceed or accumulate to more than 
$0.003 per share; or
    (ii) If the price of a protected quotation or other quotation is 
less than $1.00, the fee or fees cannot exceed or accumulate to more 
than 0.3% of the quotation price per share.
    (2) A national securities exchange shall not impose, nor permit to 
be imposed, any fee or fees for the execution of an order against a 
quotation that is the best bid or best offer of such exchange in a 
listed option that exceed or accumulate to more than $0.30 per 
contract.
* * * * *

    By the Commission.

    Dated: April 14, 2010.
Elizabeth M. Murphy,
Secretary.

    Note:  The following appendix will not appear in the Code of 
Federal Regulations.

Appendix

                               Table 1--Range of Charges for Accessing Quotations*
----------------------------------------------------------------------------------------------------------------
                                              Equity options                           Index options
                                --------------------------------------------------------------------------------
                                                          Classes not                             Classes not
            Exchange             Classes included in      included in      Classes included       included in
                                   minimum quoting      minimum quoting   in minimum quoting    minimum quoting
                                   increment pilot      increment pilot     increment pilot     increment pilot
----------------------------------------------------------------------------------------------------------------
NYSE Amex......................  $0.00 to $0.42.....  $0.00 to $0.82....  $0.00 to $0.64....  $0.00 to $1.04.
NYSE Arca......................  $0.45..............  $0.00 to $0.81....  $0.45 to $0.67....  $0.00 to $1.03.
BOX............................  -$0.147 to $0.10...  -$0.547 to -$0.30.  -$0.147 to $0.32..  -$0.547 to -$0.08.
CBOE...........................  $0.004 to $0.45....  $0.004 to $0.85...  $0.004 to $0.60...  $0.004 to $1.00.
ISE............................  $0.0035 to $0.43...  $0.0035 to $0.83..  $0.0035 to $0.65..  $0.0035 to $1.05.
NOM............................  $0.35 to $0.45.....  -$0.20 to $0.45...  $0.35 to $0.45....  -$0.20 to $0.45.
Nasdaq OMX Phlx................  $0.0035 to $0.56...  $0.0035 to $1.01..  $0.30 to $0.45....  $0.30 to $0.45.
----------------------------------------------------------------------------------------------------------------
* As noted above, the Commission has not included BATS in its revenue impact calculations. See supra note 184.


                                  Table 2--Range of Charges for Providing Side
----------------------------------------------------------------------------------------------------------------
                                              Equity options                           Index options
                                --------------------------------------------------------------------------------
                                                          Classes not                             Classes not
            Exchange             Classes included in      included in      Classes included       included in
                                    minimum quoting     minimum quoting   in minimum quoting    minimum quoting
                                   increment pilot      increment pilot     increment pilot     increment pilot
----------------------------------------------------------------------------------------------------------------
NYSE Amex......................  $0.00 to $0.42.....  $0.00 to $0.82....  $0.00 to $0.64....  $0.00 to $1.04.
NYSE Arca......................  -$0.30 to -$0.25...  $0.00 to $0.81....  -$0.25 to $-0.08..  $0.00 to $1.03.
BOX............................  $0.053 to $0.40....  $0.553 to $0.80...  $0.053 to $0.62...  $0.553 to $1.02.
CBOE...........................  $0.004 to $0.45....  $0.004 to $0.85...  $0.004 to $0.60...  $0.004 to $1.00.
ISE............................  $0.0035 to $0.43...  $0.0035 to $0.83..  $0.0035 to $0.65..  $0.0035 to $1.05.
NOM............................  -$0.25.............  $0.00 to $0.30....  -$0.25............  $0.00 to $0.30.
Nasdaq OMX Phlx................  $0.0035 to $0.56...  $0.0035 to $1.01..  $0.30 to $0.45....  $0.30 to $0.45.
----------------------------------------------------------------------------------------------------------------


[[Page 20763]]


                                           Table 3--Estimates of Potential Revenue Impact on Options Exchanges
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                        $0.30 Cap          $0.30 Cap
                                                                 Annual           $0.30 cap          $0.30 cap        estimated % of   estimated revenue
                         Exchange                           transaction fee     estimated % of   estimated revenue  revenues impacted  loss  ($Millions)
                                                              revenues \1\    revenues impacted  loss  ($Millions)    assuming make       assuming make
                                                              ($Millions)                                           rebate reductions  rebate reductions
--------------------------------------------------------------------------------------------------------------------------------------------------------
NYSE Amex................................................               66.5                0.2                0.1                0.2                0.1
NYSE Arca................................................              114.8               26.0               29.8               12.5               14.4
BOX \2\..................................................                4.0                0.0                  0                0.0                0.0
CBOE.....................................................              314.5                7.6               23.9                7.6               23.9
ISE......................................................              264.9                0.1                0.3                0.1                0.3
NOM......................................................               38.3               11.0                4.2                0.0                0.0
Nasdaq OMX Phlx..........................................              180.4                8.9               16.1                8.9               16.1
                                                          ----------------------------------------------------------------------------------------------
    Total................................................              983.4                7.6               74.4                5.6              54.7
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The transaction fee revenue amounts are based on either an exchange's 2008 Annual Report, an exchange's 2009 unaudited financial results from
  information circulars, or annualized from the exchange's latest 2009 10-Q.
\2\ Financial data on annual transaction fees are not available for BOX. Therefore, Commission staff annualized its December 2009 fee revenue estimate.


[FR Doc. 2010-9016 Filed 4-19-10; 8:45 am]
BILLING CODE 8011-01-P

