[Federal Register Volume 73, Number 35 (Thursday, February 21, 2008)]
[Notices]
[Pages 9610-9611]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-3198]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57332; File No. SR-CBOE-2008-08]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change Regarding CBOE 
Rules 6.45A and 6.45B

February 14, 2008.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 6, 2008, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or the ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been substantially 
prepared by the Exchange. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its rules regarding the application 
of participation entitlements to orders executed electronically on the 
CBOE Hybrid Trading System (``Hybrid system''). The text of the 
proposed rule change is available on the Exchange's Web site (http://www.cboe.org/Legal) at the CBOE's Office of the Secretary, and at the 
Commission's Public Reference Room.

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

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

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

1. Purpose
    CBOE Rules 6.45A and 6.45B govern priority and allocation of trades 
on the Hybrid system for equity options and index/ETF options, 
respectively. Paragraph (a) of both rules sets forth the manner in 
which incoming electronic orders are allocated (the rules are 
substantially similar). Within paragraph (a) there is a ``menu'' of 
matching/priority possibilities that allows for greater customization 
in creating an allocation structure for option classes trading on the 
Hybrid system. Essentially, the first step is to select a base matching 
algorithm. The choices are price-time priority (in which allocations 
are based on the time of receipt of order/quotes at the best price), 
pro-rata priority (in which allocations are based on the size of the 
quotes/orders at the best price), or CBOE's Ultimate Matching Algorithm 
(which takes into account the number of participants quoting at the 
NBBO and the size of those quotes and orders). After a base matching 
algorithm is selected, the Exchange may utilize optional priority 
overlays that would be applied on a trade before the matching algorithm 
was used to allocate an order. The optional priority overlays may be 
applied in any sequence determined by the appropriate Procedure 
Committee (subject to certain restrictions set forth in the Rules). The 
overlays are public customer priority (self-explanatory), market turner 
priority (in which priority goes to the participant that turned/
improved the market to that price point), and a Market-Maker 
participation entitlement (in which Market-Makers and/or Designated 
Primary Market-Makers (``DPMs''), e-DPMs, and Lead Market-Makers 
(``LMMs'') receive special allocations up to certain percentage 
maximums).
    Currently, participation entitlements may be established for Hybrid 
electronic executions pursuant to different Exchange rules. More 
specifically, CBOE Rule 8.13 allows for the establishment of a 
participation entitlement for Preferred Market-Makers (in which an 
order sender may designate a ``preferred'' Market-Maker for an order 
and if that Market-Maker is quoting at the Exchange's best bid/offer at 
the time the order is received, it will receive the designated 
participation entitlement). CBOE Rule 8.87 allows for a designated 
participation entitlement applicable to the DPM in the class (or the 
DPM and the e-DPMs combined, if there are e-DPMs in the class), if the 
DPM is quoting at the Exchange best bid/offer at the time the order is 
received. CBOE Rule 8.15B is virtually identical to Rule 8.87 except 
that it applies to LMMs.
    This proposed rule change proposes to allow for more than one 
participation entitlement to be activated for an option class (for 
purposes of electronic trading on the Hybrid system under Rules 6.45A 
and 6.45B), including in different priority sequences, provided that no 
more than one entitlement could be applied on any given trade. Thus, 
the Exchange could set up an allocation structure that contemplates 
using both the Preferred Market-Maker entitlement and the DPM or LMM 
entitlement (DPMs and LMMs cannot be assigned to the same class) with 
different priority positions. For example, a class could be designated 
as a pro-rata class with the

[[Page 9611]]

following priority overlays (in order): (1) Public customer; (2) 
Preferred Market-Maker entitlement; (3) Market Turner; and (4) DPM 
entitlement. If an order was received by the Hybrid system while this 
allocation structure was in place, public customer orders would trade 
first, the Preferred Market-Maker would trade second, the Market Turner 
would trade third, the DPM (DPM Complex) would trade fourth, if the 
Preferred Market-Maker was not present at the best price, and any 
remaining balance would trade using pro-rata.
    The Exchange believes that adding this flexibility to its matching 
rules will allow for greater customization, resulting in enhanced 
service to its customers and users.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
section 6(b) of the Act \3\ in general, and furthers the objectives of 
section 6(b)(5) of the Act \4\ in particular, because: (i) The filing 
allows the Exchange to further customize the Hybrid matching algorithm 
in connection with customer preference without increasing the 
participation entitlement percentages applicable to option trading, 
which serves to remove impediments to and perfect the mechanism of a 
free and open market; and (ii) the filing proposes continued use of a 
purely objective method for allocating option trades which promotes 
just and equitable principles of trade.
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    \3\ 15 U.S.C. 78f(b).
    \4\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which CBOE consents, the Commission will:
    (A) By order approve such proposed rule change; or
    (B) Institute proceedings to determine whether the proposed rule 
change should be 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 e-mail to [email protected]. Please include 
File Number SR-CBOE-2008-08 on the subject line.

Paper Comments

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

    All submissions should refer to File Number SR-CBOE-2008-08. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Room, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of such filing 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-CBOE-2008-08 and should be 
submitted on or before March 13, 2008.
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    \5\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\5\
Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-3198 Filed 2-20-08; 8:45 am]
BILLING CODE 8011-01-P