
[Federal Register Volume 78, Number 161 (Tuesday, August 20, 2013)]
[Notices]
[Pages 51242-51248]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-20217]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70200; File No. SR-Topaz-2013-01]


Self-Regulatory Organizations; Topaz Exchange, LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change to Establish 
the Schedule of Fees

August 14, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on August 5, 2013, the Topaz Exchange, LLC (the ``Exchange'' or 
``Topaz'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

    Topaz is proposing to establish a Schedule of Fees by adopting fees 
and rebates for all Regular Orders in standard options and Mini Options 
traded on Topaz. The proposed fees and rebates will apply to 
transactions that take and make liquidity in symbols traded on the 
Exchange. The text of the proposed rule change is available on the 
Exchange's Web site, at the principal office of the Exchange, and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

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

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule filing is to establish a Schedule 
of Fees by adopting fees and rebates for Regular Orders \3\ that make 
or take liquidity in standard options and Mini Options traded on 
Topaz.\4\
---------------------------------------------------------------------------

    \3\ A Regular Order is an order that consists of only a single 
option series and is not submitted with a stock leg.
    \4\ The fees proposed herein are similar to the maker/taker fees 
currently assessed by NASDAQ Options Market (``NOM''). NOM currently 
charges a fee for adding liquidity to the following class of market 
participants on that exchange: (i) Firm, (ii) Broker-Dealer, and 
(iii) Non-NOM Market Maker. NOM also charges a fee for removing 
liquidity to the following class of market participants: (i) 
Customer, (ii) Professional, (iii) Firm, (iv) Non-NOM Market Maker, 
(v) NOM Market Maker and (vi) Broker-Dealer. NOM also provides a 
rebate for adding liquidity to the following class of market 
participants: (i) Customer, (ii) Professional, and (iii) NOM Market 
Maker. See NOM Price List, Chapter XV, Options Pricing, at http://www.nasdaqtrader.com/Micro.aspx?id=optionsPricing.
---------------------------------------------------------------------------

Fees and Rebates
    The Exchange proposes to assess per contract transaction fees in 
all option classes traded on the Exchange to market participants that 
take liquidity from the Exchange's orderbook and provide rebates to 
those participants that make liquidity. The fees depend on the category 
of market participant submitting orders to the Exchange.
    The proposed Schedule of Fees identifies the following categories 
of market participants: (i) Market Maker; \5\ (ii) Non-Topaz Market 
Maker; \6\ (iv) [sic] \7\ Firm Proprietary \8\/Broker-Dealer; \9\ (v) 
Professional Customer; \10\ and (vi) Priority Customer.\11\ The fees to 
be assessed for Regular Orders that take liquidity in standard options 
that are in the Penny Pilot \12\ (including SPY) are: (i) $0.48 per 
contract for Market Maker, Non-Topaz Market Maker, Firm Proprietary/
Broker-Dealer and Professional Customer orders; and (ii) $0.45 per 
contract for Priority Customer orders. The transaction charges to be 
assessed for Regular Orders that take liquidity in Mini Options that 
are in the Penny Pilot (including SPY) are: (i) $0.048 per contract for 
Market Maker, Non-Topaz Market Maker, Firm Proprietary/Broker-Dealer 
and Professional Customer orders; and (ii) $0.045 per contract for 
Priority Customer orders.
---------------------------------------------------------------------------

    \5\ The term Market Makers refers to ``Competitive Market 
Makers'' and ``Primary Market Makers'' collectively. Market Maker 
orders sent to the Exchange by an Electronic Access Member are 
assessed fees at the same level as Market Maker orders. See footnote 
2, Schedule of Fees, Section I and II.
    \6\ A Non-Topaz Market Maker, or Far Away Market Maker 
(``FARMM''), is a market maker as defined in Section 3(a)(38) of the 
Securities Exchange Act of 1934, as amended (``Exchange Act''), 
registered in the same options class on another options exchange.
    \7\ The Commission notes that three ordered lists in the 
Exchange's filing appear to have been misnumbered.
    \8\ A Firm Proprietary order is an order submitted by a member 
for its own proprietary account.
    \9\ A Broker-Dealer order is an order submitted by a member for 
a non-member broker-dealer account.
    \10\ A Professional Customer is a person who is not a broker/
dealer and is not a Priority Customer.
    \11\ A Priority Customer is a person or entity that is not a 
broker/dealer in securities, and does not place more than 390 orders 
in listed options per day on average during a calendar month for its 
own beneficial account(s).
    \12\ Under the Penny Pilot program, the minimum price variation 
for all participating options classes, except for the Nasdaq-100 
Index Tracking Stock (``QQQ''), the SPDR S&P 500 Exchange Traded 
Fund (``SPY'') and the iShares Russell 2000 Index Fund (``IWM''), is 
$0.01 for all quotations in options series that are quoted at less 
than $3 per contract and $0.05 for all quotations in options series 
that are quoted at $3 per contract or greater. The proposed fees and 
rebates for Penny Pilot symbols (including SPY) apply to all classes 
in the Penny Pilot, i.e., to series that are quoted at less than $3 
that have a minimum price variation of $0.01 and to series that are 
quoted at $3 or more that have an minimum price variation of $0.05. 
QQQ, SPY and IWM are quoted in $0.01 increments for all options 
series.
---------------------------------------------------------------------------

    The transaction charges to be assessed for Regular Orders that take 
liquidity in standard options that are not in the Penny Pilot are: (i) 
$0.84 per contract for Market Maker orders; (ii) $0.87 per contract for 
Non-Topaz Market Maker, Firm Proprietary/Broker-Dealer and Professional 
Customer orders; and (ii) [sic] $0.82 per contract for Priority 
Customer orders. The transaction charges to be assessed for Regular 
Orders that take liquidity in Mini Options that are not in the Penny 
Pilot are: (i) $0.084 per contract for Market Maker orders; (ii) $0.087 
per contract for Non-Topaz Market Maker, Firm Proprietary/Broker-Dealer 
and Professional Customer orders; and (ii) [sic] $0.082 per contract 
for Priority Customer orders.
    In order to provide an incentive for market participants to provide 
liquidity in option classes traded on the Exchange, Topaz proposes to 
adopt per contract rebates. The per contract rebate for Regular Orders 
that make liquidity in standard options that are in the Penny Pilot 
are: (i) $0.37 per contract (for SPY, this rebate is $0.39 per 
contract) for Market Maker orders; (ii) $0.25 per contract for Non-
Topaz

[[Page 51243]]

Market Maker, Firm Proprietary/Broker-Dealer and Professional Customer 
orders; and (iii) $0.48 per contract for Priority Customer orders. The 
per contract rebate for Regular Orders that make liquidity in Mini 
Options that are in the Penny Pilot are: (i) $0.037 per contract (for 
SPY, this rebate is $0.039 per contract) for Market Maker orders; (ii) 
$0.025 per contract for Non-Topaz Market Maker, Firm Proprietary/
Broker-Dealer and Professional Customer orders; and (iii) $0.048 per 
contract for Priority Customer orders.
    The Exchange proposes to adopt per contract rebates for Regular 
Orders that make liquidity in standard options that are not in the 
Penny Pilot of: (i) $0.40 per contract for Market Maker orders; (ii) 
$0.10 per contract for Non-Topaz Market Maker, Firm Proprietary/Broker-
Dealer and Professional Customer orders; and (iii) $0.82 per contract 
for Priority Customer orders. The Exchange also proposes to adopt per 
contract rebate for Regular Orders that make liquidity in Mini Options 
that are not in the Penny Pilot of: (i) $0.040 per contract for Market 
Maker orders; (ii) $0.010 per contract for Non-Topaz Market Maker, Firm 
Proprietary/Broker-Dealer and Professional Customer orders; and (iii) 
$0.082 per contract for Priority Customer orders.
    The maker and taker fees and rebates noted above also apply to 
orders that are exposed at the National Best Bid or Offer (NBBO) by the 
Exchange (``Flash Order'').\13\ When Topaz is not at the NBBO, certain 
orders are exposed to members to give them an opportunity to match the 
NBBO before those orders are sent for execution pursuant to intermarket 
linkage rules. For all Flash Orders, the Exchange will charge the 
applicable taker fee and for responses that trade against a Flash 
Order, the Exchange will provide the applicable maker rebate.
---------------------------------------------------------------------------

    \13\ See Topaz Rule 1901, Supplementary Material .02.
---------------------------------------------------------------------------

    The Exchange proposes to adopt fees of $0.20 per contract and 
$0.020 per contract for Regular Crossing Orders in standard options and 
Mini Options, respectively, in all symbols traded on the Exchange for 
all market participants, except Priority Customers. The fee for Regular 
Crossing Orders in standard options and Mini Options for Priority 
Customer orders will be $0.00 per contract. A Crossing Order is an 
order executed in the Exchange's Facilitation Mechanism, Solicited 
Order Mechanism, Price Improvement Mechanism or submitted as a 
Qualified Contingent Cross order. Orders executed in the Block Order 
Mechanism are also considered Crossing Orders.
    The Exchange proposes to adopt fees for Responses to Crossing 
Orders. A Response to Crossing Order is any contra-side interest (i.e., 
orders and quotes) submitted after the commencement of an auction in 
the Exchange's Facilitation Mechanism, Solicited Order Mechanism, Block 
Order Mechanism or Price Improvement Mechanism. For Regular Orders in 
standard options that are in the Penny Pilot (including SPY), the 
Exchange proposes to adopt a fee of (i) $0.48 per contract for Market 
Maker, Non-Topaz Market Maker, Firm Proprietary/Broker-Dealer and 
Professional Customer orders; and (ii) $0.45 per contract for Priority 
Customer orders. For Regular Orders in standard options that are not in 
the Penny Pilot, the Exchange proposes to adopt a fee of (i) $0.84 per 
contract for Market Maker orders; (ii) $0.87 per contract for Non-Topaz 
Market Maker, Firm Proprietary/Broker-Dealer and Professional Customer 
orders; and (iii) $0.82 per contract for Priority Customer orders. For 
Regular Orders in Mini Options that are in the Penny Pilot (including 
SPY), the Exchange proposes to adopt a fee of $0.048 per contract for 
Market Maker, Non-Topaz Market Maker, Firm Proprietary/Broker-Dealer 
and Professional Customer orders; and (ii) $0.045 per contract for 
Priority Customer orders. For Regular Orders in Mini Options that are 
not in the Penny Pilot, the Exchange proposes to adopt a fee of (i) 
$0.084 per contract for Market Maker orders; (ii) $0.087 per contract 
for Non-Topaz Market Maker, Firm Proprietary/Broker-Dealer and 
Professional Customer orders; and (iii) $0.082 per contract for 
Priority Customer orders.
    The Exchange believes the proposed fees for Crossing Orders and 
Responses to Crossing Orders are competitive with fees charges by other 
options exchanges that have functionality for crossing orders. For 
example, a crossing order at the BOX Options Exchange (``BOX'') 
executed through its PIP is subject to a transaction fee as high as 
$0.65 per contract for Penny Pilot symbols and $1.10 per contract for 
non-Penny Pilot symbols, as follows: the customer side of the order 
being auctioned is not charged a fee and receives a `Credit for 
Removing Liquidity' of $0.30 per contract in Penny Pilot symbols and 
$0.75 per contract in non-Penny Pilot symbols. The improvement side of 
the order (on behalf of the BOX member seeking to internalize the 
customer order) would be charged a fee of as much as $0.35 per contract 
or as little as $0.10 per contract based on that members' ADV at BOX--
keeping in mind that the `Credit for Removing Liquidity' mentioned 
above is credited to that executing broker, either completely negating 
the total fee paid or creating a credit for that member firm.
    For responding to PIP and participating or improving the customer 
side of the order, BOX participants are charged the `Fee for Adding 
Liquidity' of $0.30 per contract in Penny Pilot symbols and $0.75 per 
contract in non-Penny Pilot symbols. This fee is in addition to regular 
transaction fees charged to BOX members, which range between $0.10 per 
contract and $0.35 per contract. As a result, the total fee charged for 
responding to PIP orders on BOX ranges between $0.40 and $0.65 per 
contract for Penny Pilot symbols and $0.85 and $1.10 for non-Penny 
Pilot symbols. The fees proposed by Topaz for Responses to Crossing 
Orders are well below those charged for similar orders on BOX.\14\
---------------------------------------------------------------------------

    \14\ These fees apply to Improvement Orders on BOX. Primary 
Improvement Orders are not subject to any fees in addition to their 
ADV-based fees therefore the differential at BOX for Primary 
Improvement Orders is even greater.
---------------------------------------------------------------------------

    Further, the Chicago Board Options Exchange (``CBOE''), for 
transactions executed in its Automated Improvement Mechanism (``AIM''), 
does not charge any fees on facilitation orders, where the initiating 
firm is seeking to internalize a customer order. Other transactions 
executed in AIM are charged a fee as high as $0.05 per contract. At 
CBOE, firms internalizing customer orders are also able to generate 
payment for order flow (``PFOF'') fees of $0.25 and $0.65 per contract 
for Penny Pilot and non-Penny Pilot symbols, respectively, when market 
makers responding to auctions interact with customer orders that are 
part of the AIM auction. These market makers are also eligible to 
collect rebates under CBOE's VIP program based on that member's average 
daily volume.
    The fees for responding to AIM auctions at CBOE depend on the 
category of the responder and range dramatically. For broker/dealers, 
these fees are $0.45 and $0.60 per contract in Penny Pilot and non-
Penny Pilot symbols, respectively, and for firm proprietary orders, 
these fees are $0.25 per contract. Fees for market makers on CBOE vary 
as they depend on the member's average daily volume and can range 
between $0.03 and $0.25 per contract in addition to being subject to a 
PFOF fee of $0.25 and $0.65 per contract for Penny Pilot and non-Penny 
Pilot symbols, respectively. Thus, market maker fees on CBOE range

[[Page 51244]]

between $0.28 and $0.50 per contract in Penny Pilot symbols and between 
$0.68 and $0.90 per contract in non-Penny Pilot symbols. As a result, 
the fees paid by members initiating the crossing auctions are 
significantly lower at CBOE than the fees paid by members responding, 
resulting in a differential ranging from as little as $0.20 (i.e., when 
a initiating firm pays $0.05 per contract and a responding member pays 
$0.25 per contract) to as much as $0.50 per contract (i.e., when an 
initiating firm pays no fee and a market maker responding pays $0.25 
per contract, in addition to a payment for order flow fee of $0.25 per 
contract in a Penny Pilot symbol). The Exchange notes that the 
differential in the fees is even higher in Non-Penny Pilot symbols.
    The Exchange believes that when taken as a whole, i.e., the low fee 
charged to an internalizing member at CBOE, even without the potential 
for a credit provided to that member through CBOE's VIP program and the 
PFOF fee collected from market makers, the differential between fees 
charged by CBOE for crossing orders and for responses to crossing 
orders is comparable to the fee differential proposed by Topaz, and in 
some cases, exceeds the fee differential proposed by Topaz.
Route-Out Fees
    The Exchange proposes to adopt a fee of $0.50 per contract and 
$0.55 per contract for executions of Priority Customer and Professional 
Customer orders, respectively, for standard options in symbols that are 
in the Penny Pilot (including SPY) that are routed to one or more 
exchanges in connection with the Options Order Protection and Locked/
Crossed Market Plan. For Mini Options in these symbols, the Exchange 
proposes to adopt a fee of $0.050 per contract for Priority Customer 
orders and $0.055 per contract for Professional Customer orders.
    The Exchange proposes to adopt a fee of $0.90 per contract and 
$0.95 per contract for executions of Priority Customer and Professional 
Customer orders, respectively, for standard options in symbols that are 
not in the Penny Pilot that are routed to one or more exchanges in 
connection with the Options Order Protection and Locked/Crossed Market 
Plan. For Mini Options in these symbols, the Exchange proposes to adopt 
a fee of $0.090 per contract for Priority Customer orders and $0.095 
per contract for Professional Customer orders.
    The route-out fee offsets costs incurred by the Exchange in 
connection with using unaffiliated broker-dealers to access other 
exchanges for linkage executions and is therefore appropriate because 
market professionals, in this case, Professional Customers, that are 
submitting these orders can route them directly to away exchanges, if 
desired, and should not be able to forgo an away market fee by 
directing their orders to the Exchange. The Exchange believes that it 
is appropriate to assess lower route-out fees to Priority Customer 
orders than to Professional Customer orders because Priority Customers 
have historically been assessed lower fees than other market 
participants. Further, Professional Customers are market professionals 
and engage in trading activity similar to that conducted by broker-
dealers. While the Exchange does not have any obligation to route-out 
broker/dealer orders, it does have an obligation to route-out 
Professional Customer orders and believes it is appropriate to charge 
these orders a higher fee because these orders are submitted by market 
professionals that have the ability to send their orders directly to 
the exchange displaying the best quote but choose not to do so. The 
Exchange therefore believes it is appropriate to charge these orders 
the proposed fee in order to recoup costs associated with routing out 
these orders.
Options Regulatory Fee
    The Exchange proposes to adopt an Options Regulatory Fee (``ORF'') 
of $0.0010 per contract for both standard options and Mini Options in 
order to recoup its regulatory expenses while also ensuring that the 
ORF will not exceed costs. The per-contract ORF will be assessed by the 
Exchange to each Exchange member for all options transactions executed 
and cleared, or simply cleared, by the member, that are cleared by The 
Options Clearing Corporation (``OCC'') in the ``customer'' range, 
regardless of the exchange on which the transaction occurs. The ORF 
will be collected indirectly from members through their clearing firms 
by OCC on behalf of the Exchange.
    The ORF also will be charged for transactions that are not executed 
by a member but are ultimately cleared by a member. In the case where a 
non-member executes a transaction and a member clears the transaction, 
the ORF will be assessed to the member who clears the transaction. In 
the case where a member executes a transaction and another member 
clears the transaction, the ORF will be assessed to the member who 
clears the transaction. As a practical matter, it is not feasible or 
reasonable for the Exchange (or any SRO) to identify each executing 
member that submits an order on a trade-by-trade basis. There are 
countless executing market participants, and each day such participants 
can and often do drop their connection to one market center and 
establish themselves as participants on another. It is virtually 
impossible for any exchange to identify, and thus assess fees such as 
an ORF on, each executing participant on a given trading day.
    Clearing members, however, are distinguished from executing 
participants because they remain identified to the Exchange regardless 
of the identity of the initiating executing participant, their 
location, and the market center on which they execute transactions. 
Therefore, the Exchange believes it is more efficient for the operation 
of the Exchange and for the marketplace as a whole to assess the ORF to 
clearing members.
    The Exchange believes it is appropriate to charge the ORF only to 
transactions that clear as customer at the OCC.
    The Exchange believes that its broad regulatory responsibilities 
with respect to a member's activities supports applying the ORF to 
transactions cleared but not executed by a member. The Exchange's 
regulatory responsibilities are the same regardless of whether a member 
executes a transaction or clears a transaction executed on its behalf. 
The Exchange regularly reviews all such activities, including 
performing surveillance for position limit violations, manipulation, 
front-running, contrary exercise advice violations and insider 
trading.\15\ These activities span across multiple exchanges.
---------------------------------------------------------------------------

    \15\ The Exchange also participates in The Options Regulatory 
Surveillance Authority (``ORSA'') national market system plan and in 
doing so shares information and coordinates with other exchanges 
designed to detect the unlawful use of undisclosed material 
information in the trading of securities options. ORSA is a national 
market system comprised of several self-regulatory organizations 
whose functions and objectives include the joint development, 
administration, operation and maintenance of systems and facilities 
utilized in the regulation, surveillance, investigation and 
detection of the unlawful use of undisclosed material information in 
the trading of securities options. The Exchange compensates ORSA for 
the Exchange's portion of the cost to perform insider trading 
surveillance on behalf of the Exchange. The ORF will cover the costs 
associated with the Exchange's arrangement with ORSA.
---------------------------------------------------------------------------

    The ORF is designed to recover a material portion of the costs to 
the Exchange of the supervision and regulation of members' customer 
options business, including performing routine surveillances and 
investigations, as well as policy, rulemaking, interpretive and 
enforcement activities. The Exchange believes that revenue

[[Page 51245]]

generated from the ORF, when combined with all of the Exchange's other 
regulatory fees and fines, will cover a material portion, but not all, 
of the Exchange's regulatory costs. The Exchange notes that its 
regulatory responsibilities with respect to member compliance with 
options sales practice rules have been allocated to the Financial 
Industry Regulatory Authority (``FINRA'') under a 17d-2 Agreement. The 
ORF is not designed to cover the cost of options sales practice 
regulation.
    The Exchange will continue to monitor the amount of revenue 
collected from the ORF to ensure that it, in combination with its other 
regulatory fees and fines, does not exceed the Exchange's total 
regulatory costs. The Exchange expects to monitor Topaz regulatory 
costs and revenues at a minimum on an annual basis. If the Exchange 
determines regulatory revenues exceed regulatory costs, the Exchange 
will adjust the ORF by submitting a fee change filing to the 
Commission. The Exchange will notify members of adjustments to the ORF 
via regulatory circular.
    The Exchange believes it is reasonable and appropriate for the 
Exchange to charge the ORF for options transactions regardless of the 
exchange on which the transactions occur. The Exchange has a statutory 
obligation to enforce compliance by members and their associated 
persons under the Act and the rules of the Exchange and to surveil for 
other manipulative conduct by market participants (including non-
members) trading on the Exchange. The Exchange cannot effectively 
surveil for such conduct without looking at and evaluating activity 
across all options markets. Many of the Exchange's market surveillance 
programs require the Exchange to look at and evaluate activity across 
all options markets, such as surveillance for position limit 
violations, manipulation, front-running and contrary exercise advice 
violations/expiring exercise declarations. Also, the Exchange and the 
other options exchanges are required to populate a consolidated options 
audit trail (``COATS'') \16\ system in order to surveil a member's 
activities across markets.
---------------------------------------------------------------------------

    \16\ COATS effectively enhances intermarket options surveillance 
by enabling the options exchanges to reconstruct the market promptly 
to effectively surveil certain rules.
---------------------------------------------------------------------------

    In addition to its own surveillance programs, the Exchange works 
with other SROs and exchanges on intermarket surveillance related 
issues. Through its participation in the Intermarket Surveillance Group 
(``ISG''),\17\ the Exchange shares information and coordinates 
inquiries and investigations with other exchanges designed to address 
potential intermarket manipulation and trading abuses. The Exchange's 
participation in ISG helps it to satisfy the requirement that it has 
coordinated surveillance with markets on which security futures are 
traded and markets on which any security underlying security futures 
are traded to detect manipulation and insider trading.\18\
---------------------------------------------------------------------------

    \17\ ISG is an industry organization formed in 1983 to 
coordinate intermarket surveillance among the SROs by co-operatively 
sharing regulatory information pursuant to a written agreement 
between the parties. The goal of the ISG's information sharing is to 
coordinate regulatory efforts to address potential intermarket 
trading abuses and manipulations.
    \18\ See Section 6(h)(3)(I) of the Act.
---------------------------------------------------------------------------

    The Exchange believes that charging the ORF across markets will 
avoid having members direct their trades to other markets in order to 
avoid the fee and to thereby avoid paying for their fair share for 
regulation. If the ORF did not apply to activity across markets then a 
member would send their orders to the least cost, least regulated 
exchange. Other exchanges do impose a similar fee on their member's 
activity, including the activity of those members on the Exchange.\19\
---------------------------------------------------------------------------

    \19\ Similar regulatory fees have been instituted by Nasdaq OMX 
PHLX (See Securities Exchange Act Release No. 61133 (December 9, 
2009), 74 FR 66715 (December 16, 2009) (SR-Phlx-2009-100)); and 
Miami International Securities Exchange (See Securities Exchange Act 
Release No. 68711 (January 23, 2013), 78 FR 6155 (January 29, 2013) 
(SR-MIAX-2013-01)).
---------------------------------------------------------------------------

    The Exchange notes that there is established precedent for an SRO 
charging a fee across markets, namely, FINRAs Trading Activity Fee \20\ 
and the ORF currently charged by a number of other options exchanges. 
While the Exchange does not have all the same regulatory 
responsibilities as FINRA, the Exchange believes that, like other 
exchanges that have adopted an ORF, its broad regulatory 
responsibilities with respect to a member's activities, irrespective of 
where their transactions take place, supports a regulatory fee 
applicable to transactions on other markets. Unlike FINRA's Trading 
Activity Fee, the ORF would apply only to a member's customer options 
transactions.
---------------------------------------------------------------------------

    \20\ See Securities Exchange Act Release No. 47946 (May 30, 
2003), 68 FR 34021 (June 6, 2003).
---------------------------------------------------------------------------

FINRA Web CRD Fees
    The Exchange proposes to adopt regulatory fees related to Web CRD, 
which are collected by the Financial Industry Regulatory Authority 
(``FINRA'') (``FINRA Web CRD Fees'').\21\ The proposed fees are 
collected and retained by FINRA via Web CRD for the registration of 
employees of Topaz members that are not FINRA members (``Non-FINRA 
members''). The Exchange is merely listing these fees on its Schedule 
of Fees. The Exchange does not collect or retain these fees.
---------------------------------------------------------------------------

    \21\ FINRA operates Web CRD, the central licensing and 
registration system for the U.S. securities industry. FINRA uses Web 
CRD to maintain the qualification, employment and disciplinary 
histories of registered associated persons of broker-dealers.
---------------------------------------------------------------------------

    The FINRA Web CRD Fees listed on Topaz Schedule of Fees consists of 
General Registration Fees of $100 (for each initial Form U4 filed for 
the registration of a representative or principal), $110 (for the 
additional processing of each initial or amended Form U4, Form U5 or 
Form BD that includes the initial reporting, amendment or certification 
of one of more disclosure events or proceedings), and $45 (annual 
system processing fee assessed only during renewals). The FINRA Web CRD 
Fees also consist of Fingerprint Processing Fees for the initial, 
second and third submissions. There is a separate fee for electronic 
submissions and paper submissions. The initial electronic and paper 
submission fees are $29.50 and $44.50, respectively. The second 
electronic and paper submission fees are $15.00 and $30.00, 
respectively. The third electronic and paper submission fees are $29.50 
and $44.50, respectively. Finally, there is a $30 processing fee for 
fingerprint results submitted by self-regulatory organizations other 
than FINRA. The FINRA Web CRD Fees are user-based and there is no 
distinction in the cost incurred by FINRA if the user is a FINRA member 
or a Non-FINRA member. Accordingly, the proposed fees mirror those 
currently assessed by FINRA.\22\
---------------------------------------------------------------------------

    \22\ See Securities Exchange Act Release No. 67247 (June 25, 
2012), 77 FR 38866 (June 29, 2012) (SR-FINRA-2012-030) (the ``FINRA 
Fee Filing'').
---------------------------------------------------------------------------

    The Exchange does not propose to adopt any other fees at this time. 
The Exchange expects to adopt additional fees, i.e., membership fees, 
access fees, market data fees, etc., at a later date and will submit a 
fee change filing with the Commission prior to any such fees becoming 
effective.
2. Statutory Basis
    The Exchange believes that its proposal to adopt a Schedule of Fees 
is consistent with Section 6(b) of the Securities and Exchange Act of 
1934 (the ``Exchange Act'') \23\ in general, and

[[Page 51246]]

furthers the objectives of Section 6(b)(4) of the Exchange Act \24\ in 
particular, in that it is an equitable allocation of reasonable dues, 
fees and other charges among Exchange Members and other persons using 
its facilities.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78f(b).
    \24\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

    The Exchange believes the fees proposed for transactions on Topaz 
are reasonable. Topaz will operate within a highly competitive market 
in which market participants can readily send order flow to any of 
eleven other competing venues if they deem fees at a particular venue 
to be excessive. The proposed fee structure is intended to attract 
order flow to Topaz by offering market participants incentives to 
submit their orders to Topaz.
    The Exchange has determined to charge fees and provide rebates for 
Regular Orders in Mini Options at a rate that is 1/10th the rate of 
fees and rebates the Exchange currently provides for trading in 
standard options. The Exchange believes it is reasonable and equitable 
and not unfairly discriminatory to assess lower fees and rebates to 
provide market participants an incentive to trade Mini Options on the 
Exchange. The Exchange believes the proposed fees and rebates are 
reasonable and equitable in light of the fact that Mini Options have a 
smaller exercise and assignment value, specifically 1/10th that of a 
standard option contract, and, as such, levying fees that are 1/10th of 
what market participants pay today.
    The Exchange believes that its proposal to assess per contract 
taker fee for Market Maker, Non-Topaz Market Maker, Firm Proprietary/
Broker-Dealer, Professional Customer and Priority Customer orders is 
reasonable and equitably allocated because the proposed fees are within 
the range of fees assessed by other exchanges employing similar pricing 
schemes. For example, NOM currently charges a taker fee as high as 
$0.48 per contract in symbols that are in the Penny Pilot and as much 
as $0.89 per contract in symbols that are not in the Penny Pilot.\25\ 
The Exchange believes the proposed taker fees are not unfairly 
discriminatory because they would apply uniformly to all market 
participants.
---------------------------------------------------------------------------

    \25\ See supra note 4.
---------------------------------------------------------------------------

    The Exchange believes proposed fee for Crossing Orders is 
reasonable and equitably allocated because the proposed fees are also 
within the range of fees assessed by other exchanges. For example, the 
International Securities Exchange (``ISE'') currently charges an 
identical fee for Crossing Orders. The Exchange believes the proposed 
fee for Crossing Orders is not unfairly discriminatory because they 
would uniformly apply to all market participants, except Priority 
Customers, who historically have paid lower fees than other market 
participants as an incentive to attract that order flow to an exchange.
    The Exchange further believes it is reasonable and equitable to 
charge the proposed fees for Responses to Crossing Orders because an 
execution resulting from a Response to a Crossing Order is akin to an 
execution and therefore its proposal to establish execution fees and 
fees for Responses to Crossing Orders that are identical is reasonable 
and equitable. The Exchange further believes that while the 
differential between the fee charged for Crossing Orders and the fee 
for Responses to Crossing Orders is significant, the differential on 
Topaz is less than the differential that currently exists on other 
exchanges that offer a similar functionality, and therefore, the 
Exchange believes the proposed fees are reasonable and equitably 
allocated because they are within the range of fees assessed by other 
exchanges employing similar pricing schemes and differ from each other 
far less than the fees at other exchanges. As noted above, the 
differential between the fee charged to participants that internalize 
customer orders and the response fee charged on BOX and CBOE is much 
greater than the differential proposed by Topaz. The Exchange is not 
introducing a novel pricing scheme for Crossing Orders and for 
Responses to Crossing Orders. This functionality is currently available 
on a number of exchanges, all of whom have a pricing differential that 
promotes internalizing customer orders. The differential proposed by 
Topaz is simply smaller than that which currently exists, notably at 
CBOE and BOX. The Exchange believes the fees for Responses to Crossing 
Orders are not unfairly discriminatory because they would uniformly 
apply to all market participants.
    The Exchange believes that it is reasonable and equitable to 
provide rebates because paying a rebate will attract order flow to the 
Exchange and create liquidity in the symbols that are subject to the 
rebate, which the Exchange believes ultimately will benefit all market 
participants who trade on Topaz. The Exchange believes that the 
proposed rebates are competitive with rebates provided by other 
exchanges and are therefore reasonable and equitably allocated to those 
members that direct orders to the Exchange rather than to a competing 
exchange.
    The Exchange believes that the price differentiation between the 
various market participants is justified. With respect to fees for 
Market Maker orders, the Exchange believes that the price 
differentiation between the various market participants is appropriate 
and not unfairly discriminatory because Market Makers have different 
requirements and obligations to the Exchange that the other market 
participants do not (such as quoting requirements and paying 
membership-related non-transaction fees). The Exchange believes that it 
is equitable and not unfairly discriminatory to assess a higher fee to 
market participants that do not have such requirements and obligations 
that Exchange Market Makers do. The Exchange believes that the proposed 
fees are fair, equitable and not unfairly discriminatory because the 
proposed fees are consistent with price differentiation that exists 
today at other options exchanges.
    The Exchange believes charging lower fees and providing higher 
rebates to Priority Customer orders attracts that order flow to the 
Exchange and thereby creates liquidity to the benefit of all market 
participants who trade on the Exchange. Further, the Exchange believes 
that it is equitable and not unfairly discriminatory to assess lower 
fees to Priority Customer orders than to Professional Customer orders. 
A Priority Customer is by definition not a broker or dealer in 
securities, and does not place more than 390 orders in listed options 
per day on average during a calendar month for its own beneficial 
account(s). This limitation does not apply to participants on the 
Exchange whose behavior is substantially similar to that of market 
professionals, including Professional Customers, non-Topaz Market 
Makers, and Firm Proprietary/Broker-Dealers, who will generally submit 
a higher number of orders (many of which do not result in executions) 
than Priority Customers. Further, Professional Customers engage in 
trading activity similar to that conducted by market makers and 
proprietary traders. For example, Professional Customers continue to 
join bids and offers on the Exchange and thus compete for incoming 
order flow whereas Priority Customers do not engage in such activity.
    The Exchange believes the proposed route-out fees are reasonable 
and equitable as they provides the Exchange the ability to recover 
costs associated with using unaffiliated broker-dealers to route 
Priority Customer and Professional Customer orders to other exchanges 
for linkage executions. The

[[Page 51247]]

Exchange also believes that the proposed fees are not unfairly 
discriminatory because these fees would be uniformly applied to all 
Priority Customer and Professional Customer orders. As fees to access 
liquidity for Priority and Professional Customer orders have risen at 
other exchanges, it has become necessary for the Exchange to adopt 
routing fees in order to recoup the costs associated with routing 
orders. The Exchange notes that a number of other exchanges currently 
charge a variety of routing related fees associated with customer and 
non-customer orders that are subject to linkage handling. The Exchange 
also notes that the fees proposed herein are within the range of fees 
charged by some of the Exchange's competitors.\26\
---------------------------------------------------------------------------

    \26\ See NASDAQ OMX PHLX Fee Schedule, Section V, Routing Fees; 
and Chicago Board Options Exchange Fees Schedule, Linkage Fees.
---------------------------------------------------------------------------

    The Exchange believes the ORF is equitable and not unfairly 
discriminatory because it is objectively allocated to members in that 
it is charged to all members on all their transactions that clear as 
customer at the OCC. Moreover, the Exchange believes the ORF ensures 
fairness by assessing fees to those members that are directly based on 
the amount of customer options business they conduct. Regulating 
customer trading activity is much more labor intensive and requires 
greater expenditure of human and technical resources than regulating 
non-customer trading activity, which tends to be more automated and 
less labor-intensive. As a result, the costs associated with 
administering the customer component of the Exchange's overall 
regulatory program are materially higher than the costs associated with 
administering the non-customer component (e.g., member proprietary 
transactions) of its regulatory program.
    The ORF is designed to recover a material portion of the costs of 
supervising and regulating members' customer options business including 
performing routine surveillances, investigations, examinations, 
financial monitoring, and policy, rulemaking, interpretive, and 
enforcement activities. The Exchange will monitor, on at least an 
annual basis the amount of revenue collected from the ORF to ensure 
that it, in combination with its other regulatory fees and fines, does 
not exceed the Exchange's total regulatory costs. If the Exchange 
determines regulatory revenues exceed regulatory costs, the Exchange 
will adjust the ORF by submitting a fee change filing to the 
Commission. The Exchange will notify Members of adjustments to the ORF 
via regulatory circular.
    The Exchange has designed the ORF to generate revenues that, when 
combined with all of the Exchange's other regulatory fees, will be less 
than or equal to the Exchange's regulatory costs, which is consistent 
with the Commission's view that regulatory fees be used for regulatory 
purposes and not to support the Exchange's business side. In this 
regard, the Exchange believes that the initial level of the fee is 
reasonable.
    The Exchange believes that its proposal to adopt the FINRA Web CRD 
Fees is reasonable because the proposed fees are identical to those 
adopted by FINRA for use of Web CRD for disclosure and the registration 
of FINRA members and their associated persons. In the FINRA Fee Filing, 
FINRA noted that it believed that its fees are reasonable based on the 
increased costs associated with operating and maintaining Web CRD, and 
listed a number of enhancements made to Web CRD in support of its fee 
change. These costs are borne by FINRA when a Non-FINRA member uses Web 
CRD. FINRA further noted its belief that the fees are reasonable 
because they help to ensure the integrity of the information in Web 
CRD, which is very important because the Commission, FINRA, other self-
regulatory organizations and state securities regulators use Web CRD to 
make licensing and registration decisions, among other things. The 
Exchange notes that the proposed rule change is reasonable because the 
amount of the fees are those provided by FINRA, and the Exchange does 
not collect or retain these fees. The proposed rule change is also 
equitable and not unfairly discriminatory because the Exchange will not 
be collecting or retaining these fees, therefore will not be in a 
position to apply them in an inequitable or unfairly discriminatory 
manner.
    The Exchange notes that the proposed rule filing is intended to 
establish Topaz as an attractive venue for market participants to 
direct their order flow as the proposed fees and rebates are 
competitive with those established by other exchanges for similar 
trading strategies. The Exchange will be operating in a highly 
competitive market in which market participants can readily direct 
order flow to another exchange if they deem fees at a particular 
exchange to be too high, or in the case of rebates, not high enough. 
For the reasons noted above, the Exchange believes that the proposed 
fees are fair, equitable and not unfairly discriminatory.

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

    This proposed rule change does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Exchange Act.
    The Exchange notes that the difference between the fees for 
Crossing Orders and the fees for Responses to Crossing Orders may 
appear discriminatory and an undue burden on competition. The Exchange, 
however, believes the crossing mechanisms on Topaz provide incentives 
for market participants to submit customer order flow to the Exchange 
and thus, creates a greater opportunity for customers to receive better 
executions. The crossing mechanisms on Topaz provide an opportunity for 
market participants to compete for customer orders, and have no 
limitations regarding the number of and type of market participant that 
can participate and compete for such orders. Topaz notes that its 
market model and fees are generally intended to attract a specific 
segment of the options industry and the Exchange is competing with 
exchanges that currently attract that segment. The Exchange further 
notes that the proposed fees are more transparent than PFOF 
arrangements and are generally less than fees that include PFOF.
    Unilateral action by Topaz in establishing fees for services 
provided to its Members and others using its facilities will not have 
any adverse impact on competition. As a new entrant in the already 
highly competitive environment for equity options trading, Topaz does 
not have the market power necessary to set prices for services that are 
inequitably allocated, unreasonable or unfairly discriminatory in 
violation of the Act. Topaz's proposed fees and rebates, as described 
herein, are comparable to fees charged and rebates provided by other 
options exchanges for the same or similar services. To the extent the 
proposed fees and rebates prove unattractive to attract order flow away 
from its competitors, Topaz will necessarily have to adjust level of 
fees and rebates.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

[[Page 51248]]

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act \27\ and subparagraph (f)(2) of Rule 19b-4 
thereunder,\28\ because it establishes a due, fee, or other charge 
imposed by Topaz.
---------------------------------------------------------------------------

    \27\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \28\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of such proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-Topaz-2013-01 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-Topaz-2013-01. This file 
number should be included on the subject line if email is used.
    To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for Web site 
viewing and printing in the Commission's Public Reference Room, 100 F 
Street NE., Washington, DC 20549, on official business days between the 
hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be 
available for inspection and copying at the principal offices of the 
Exchange. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
Topaz-2013-01, and should be submitted on or before September 10, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
---------------------------------------------------------------------------

    \29\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-20217 Filed 8-19-13; 8:45 am]
BILLING CODE 8011-01-P


