[Federal Register Volume 73, Number 169 (Friday, August 29, 2008)]
[Notices]
[Pages 51029-51032]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-20064]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58422; File No. SR-CBOE-2008-89]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change To Amend Its Rules Related to the Hybrid 3.0 Platform and 
Lead Market-Makers

August 25, 2008.
    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 22, 2008, the Chicago Board Options Exchange, 
Incorporated ( ``Exchange'' or ``CBOE'') filed with the Securities and 
Exchange Commission (the ``Commission'') the proposed rule change as 
described in Items I and II, which Items have been prepared by the 
Exchange. The Exchange filed the proposal as a ``non-controversial''

[[Page 51030]]

proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 
\3\ and Rule 19b-4(f)(6) thereunder.\4\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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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 relating to the Hybrid 3.0 
Platform (``Hybrid 3.0'') and Lead Market-Makers (``LMMs''). The text 
of the proposed rule change is available on the Exchange's Web site 
(http://www.cboe.org/Legal), at the Exchange'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 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 those 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 parts 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 Exchange is proposing various changes related to Hybrid 3.0 and 
LMMs. First, Hybrid 3.0 is an electronic trading platform on CBOE's 
Hybrid Trading System (``Hybrid'') that allows a single quoter to 
submit an electronic quote that represents the aggregate Market-Maker 
quoting interest in a series for the trading crowd. CBOE is proposing 
to amend its rules to permit one or more quoters to submit electronic 
quotes in Hybrid 3.0 classes. The quotes would continue to represent 
the aggregate Market-Maker quoting interest in a series for the trading 
crowd. In particular, for example, if there are two LMMs appointed to 
submit electronic quotes at the same time in a particular series of a 
Hybrid 3.0 class, the following would apply:
     The best bid and best offer quote would be determined by 
considering all quotes available. For example, if LMM1 submits a quote 
of $1-$1.20 for 100 contracts and LMM2 submits a quote of $0.95-$1.10 
for 50 contracts, the best bid and offer quote would be $1-$1.10, 100 X 
50, which represents a firm disseminated market quote that the trading 
crowd is responsible for on an aggregate basis.
     The size of multiple quotes at the same price would be 
aggregated. For example, if LMM1 submits a quote of $1-$1.10 for 100 
contracts and LMM2 submits a quote of $0.95-$1.10 for 50 contracts, the 
best bid and best offer quote would be $1-$1.10, 100 x 150, which 
represents a firm disseminated market quote that the trading crowd is 
responsible for on an aggregate basis.
    The Exchange believes having the flexibility to have more than one 
quoter submit electronic quotes would help the Exchange to maintain a 
fair and orderly market, including in those instances where a quoter 
may be experiencing system problems and back-up quotes are needed. The 
Exchange also believes the proposal is consistent with other provisions 
in our rules that permit the Exchange to appoint more than one market-
maker in good standing to determine a formula for generating 
automatically updated market quotations for a given class using the 
Exchange's AutoQuote system or a proprietary automated quotation 
updating system.\5\
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    \5\ See Rules 8.7.07, Additional Obligations for Classes in 
Which CBOE Hybrid System is NOT Implemented, and 8.15, Lead Market-
Makers and Supplemental Market-Makers in Non-Hybrid and Hybrid 3.0 
Classes. The Exchange is also proposing to amend the title of Rule 
8.15 to delete an outdated reference to ``Non-Hybrid'' since there 
are not any of these classes. See Securities Exchange Act Release 
No. 58153 (July 14, 2008), 73 FR 41386 (July 18, 2008) (SR-CBOE-
2008-67) (immediately effective rule change that, among other 
things, deleted references to ``Non-Hybrid'' classes in the CBOE 
Rules).
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    Second, consistent with the existing Hybrid 3.0 Platform, automatic 
execution against Market-Maker quotes would not be allowed. Thus, for 
example, quotes would not automatically execute against other quotes. 
In this regard, the Exchange is proposing to amend Rule 6.45B(d) to 
resolve an inconsistency in its rules and make clear what would happen 
in the scenario where two quotes lock the market in a Hybrid 3.0 class. 
In particular, though the Exchange's rules elsewhere indicate that 
there will not be automatic execution against quotes,\6\ Rule 6.45B(d) 
currently indicates that there will be up to a ten second counting 
period before locked quotes automatically execute against each other. 
To resolve this inconsistency, the Exchange is proposing to amend Rule 
6.45B(d) to provide that, in the event a Market-Maker's disseminated 
quote(s) in a Hybrid 3.0 class would interact with the disseminated 
quote(s) of another Market-Maker resulting in a ``locked'' quote (e.g., 
$1.00 bid-$1.00 offer), then (i) The Exchange will disseminate the 
locked market and both quotes will be deemed ``firm'' disseminated 
market quotes; (ii) the Market-Maker(s) whose quotes are locked will 
receive a quote update notification advising that their quotes are 
locked; and (iii) the locked quotes will not automatically execute 
against each other--instead they will remain locked until a quote is 
cancelled or changed.
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    \6\ See paragraph (b)(i)(A)(2) of Rule 6.13, CBOE Hybrid 
System's Automatic Execution Feature (which indicates only that 
eligible orders will receive automatic execution against public 
customer orders in the electronic book); see also Securities 
Exchange Act Release No. 55874 (June 7, 2007), 72 FR 32688 (June 13, 
2007) (SR-CBOE-2006-101) (order approving the Hybrid 3.0 Platform 
which indicates, among other things, that automatic execution 
against quotes (whether electronic or manual) will not be allowed).
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    Third, CBOE has an Off-Floor LMM program that provides LMMs with 
the flexibility to operate remotely away from CBOE's trading floor. 
CBOE is proposing to expand the program, which is currently limited to 
Hybrid classes,\7\ to include Hybrid 3.0 classes. Specifically, CBOE 
proposes to amend Rule 8.15 to provide that an LMM will generally 
operate on CBOE's trading floor (referred to as an ``On-Floor LMM''), 
but can request that the Exchange authorize the LMM to function 
remotely away from CBOE's trading floor (referred to as an ``Off-Floor 
LMM'') on a class-by-class basis for Hybrid 3.0 classes. The procedures 
for Off-Floor LMMs in Hybrid 3.0 classes will be substantially the same 
as the procedures that are applicable to Off-Floor LMMs in Hybrid 
classes.\8\ The procedures will provide the following:
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    \7\ See Securities Exchange Act Release No. 57747 (April 30, 
2007 [sic]), 73 FR 25811 (May 7, 2008) (SR-CBOE-2008-49) 
(immediately effective rule change adopting the Off-Floor LMM 
program for Hybrid classes).
    \8\ See Interpretation and Policy .01 to Rule 8.15A, Lead 
Market-Makers in Hybrid Classes.
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     An LMM can request that the Exchange authorize it to 
operate as an Off-Floor LMM in one or more classes. The Exchange will 
consider the factors specified in Rule 8.15(a)(1),\9\ as well as

[[Page 51031]]

the factors applicable to Off-Floor DPMs specified in paragraph (g) of 
Rule 8.83, Approval to Act as a DPM,\10\ in determining whether to 
permit an LMM to operate as an Off-Floor LMM. If an LMM is approved to 
operate as an Off-Floor LMM in one or more classes, the Off-Floor LMM 
can have an LMM designee trade in open outcry in the option classes 
allocated to the Off-Floor LMM, but the Off-Floor LMM shall not receive 
a participation entitlement under Rule 8.15B, Participation Entitlement 
of LMMs, with respect to orders represented in open outcry.
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    \9\ Rule 8.15(a)(1) provides that the factors to be considered 
in selecting LMMs in Hybrid 3.0 classes include: adequacy of 
capital, experience in trading index options or options on ETFs, 
presence in the trading crowd, adherence to Exchange rules and 
ability to meet the obligations specified below. An individual may 
be appointed as an LMM in only one zone for an expiration month but 
may also be appointed as a Supplemental Market-Maker (``SMM'') in 
other zones. When individual members are associated with one or more 
other members, only one member may receive an LMM appointment.
    \10\ In addition to CBOE's Off-Floor LMM program, CBOE also has 
an Off-Floor DPM program. Rule 8.83(g) provides that the factors to 
be consider in determining whether to permit a Designated Primary 
Market-Maker (``DPM'') to operate as an Off-Floor DPM include, but 
are not limited to, any one or more of the following: (i) Adequacy 
of capital; (ii) operational capacity; (iii) trading experience of 
and observance of generally accepted standards of conduct by the 
applicant, its associated persons, and the DPM Designees who will 
represent the applicant in its capacity as a DPM; (iv) number and 
experience of support personnel of the applicant who will be 
performing functions related to the applicant's DPM business; (v) 
regulatory history of and history of adherence to CBOE Rules by the 
applicant, its associated persons, and the DPM Designees who will 
represent the applicant in its capacity as a DPM; (vi) willingness 
and ability of the applicant to promote the Exchange as a 
marketplace; (vii) performance evaluations conducted pursuant to 
Rule 8.60, Evaluation of Trading Crowd Performance; and (viii) in 
the event that one or more shareholders, directors, officers, 
partners, managers, members, DPM Designees, or other principals of 
an applicant is or has previously been a shareholder, director, 
officer, partner, manager, member, DPM Designee, or other principal 
in another DPM, adherence by such DPM to the requirements set forth 
in Section C of Chapter VIII of the CBOE Rules respecting DPM 
responsibilities and obligations during the time period in which 
such person(s) held such position(s) with the DPM.
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     An LMM that is approved to operate as an Off-Floor LMM in 
one or more classes can request that the Exchange authorize it to 
operate as an On-Floor LMM in those option classes. In making such a 
determination, the Exchange should evaluate whether the change is in 
the best interests of the Exchange, and may consider any information 
that it believes will be of assistance to it. Factors to be considered 
may include, but are not limited to, performance, operational capacity 
of the Exchange or LMM, efficiency, number and experience of personnel 
of the LMM who will be performing functions related to the trading of 
the applicable securities, number of securities involved, number of 
Market-Makers affected, and trading volume of the securities.\11\
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    \11\ These On-/Off-Floor LMM provisions are substantially 
similar to the corresponding provisions for On-/Off-Floor Hybrid 
LMMs in paragraph .01(b) to Rule 8.15A and for On-/Off-Floor DPMs in 
paragraphs (g) and .01 to Rule 8.83.
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     In addition, CBOE is proposing to include a requirement 
that, as part of a pilot program until March 14, 2009, an Off-Floor LMM 
not allow more than one Market-Maker affiliated with the Off-Floor LMM 
to trade on CBOE's trading floor in any specific option class allocated 
to the Off-Floor LMM and provided such Market-Maker is trading on a 
separate membership (absent the pilot program, an Off-Floor LMM may not 
allow any Market-Makers affiliated with the Off-Floor LMM to trade on 
CBOE's trading floor in any class allocated to the Off-Floor LMM) and 
provided the Off-Floor LMM does not have an LMM designee trading in 
open outcry in the option classes allocated to the Off-Floor LMM.\12\
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    \12\ This provision is substantially similar to existing 
provisions in CBOE's rules respecting Off-Floor Hybrid LMMs and Off-
Floor DPM obligations. See paragraph .01(c) of CBOE Rule 8.15A and 
paragraph (a)(v) of CBOE Rule 8.85, DPM Obligations. CBOE is 
proposing a related cross-reference update to paragraph (c)(vii)(1) 
of CBOE Rule 8.3.
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    By permitting an LMM appointed to a Hybrid 3.0 class to function as 
an Off-Floor LMM, CBOE believes that the rule change provides more 
flexibility to a member organization that may wish to function 
remotely, and provides more flexibility to CBOE when allocating option 
classes to the best applicant. It also removes a potential operational 
dilemma for a Market-Maker that functions as a DPM or LMM in other 
Hybrid classes and would like to function remotely away from the 
trading floor as a DPM/LMM in all of its option classes. Accordingly, 
CBOE believes that the proposed rule change is designed to promote just 
and equitable principles of trade.
    Fourth, CBOE is proposing to update the LMM obligations listed in 
Rule 8.15 to include a requirement that, subject to paragraph (d) of 
Rule 54.7, General Prohibitions (under the CBOE Stock Exchange Rules), 
LMMs in Hybrid 3.0 classes (whether On-Floor or Off-Floor) maintain 
information barriers that are reasonably designed to prevent the misuse 
of material, non-public information with any affiliates that may 
conduct a brokerage business in option classes allocated to the LMM or 
act as specialist or Market-Maker in any security underlying options 
allocated to the LMM, and otherwise comply with the requirements of 
Rule 4.18, Prevention of the Misuse of Material, Non-Public 
Information.\13\
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    \13\ This language is substantially similar to existing language 
in CBOE's rules respecting Hybrid LMM obligations and e-DPM 
obligations. See paragraph (b)(vii) of Rule 8.15A and paragraph (x) 
of Rule 8.93, e-DPM Obligations.
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    Finally, CBOE is proposing to amend Rule 8.15B. Currently under the 
rule, if an LMM entitlement has been established for a class, the 
entitlement applies for both electronic and open outcry trades (except 
that, as discussed above, an Off-Floor LMM is not eligible to have an 
open outcry participation entitlement). The Exchange is proposing to 
amend the rule to provide that an LMM participation entitlement may be 
established for electronic and/or open outcry trading on a class-by-
class basis (except that an Off-Floor LMM would still not be eligible 
to have an open outcry participation entitlement). This change would 
apply for Hybrid and Hybrid 3.0 classes. The change will provide the 
Exchange with flexibility to determine, for example, to have a 
participation entitlement for electronic trades executed by an LMM(s) 
in Hybrid options class XYZ but have no participation entitlement for 
trades executed in open outcry by an LMM(s) in the same class.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations under the Act applicable to a 
national securities exchange and, in particular, the requirements of 
Section 6(b) of the Act.\14\ Specifically, the Exchange believes the 
proposed rule change is consistent with the Section 6(b)(5) Act \15\ 
requirements that the rules of an exchange be designed to promote just 
and equitable principles of trade, to prevent fraudulent and 
manipulative acts and, in general, to protect investors and the public 
interest. The Exchange believes that the proposed changes to allow for 
more than one quoter to submit electronic quotes in Hybrid 3.0 classes, 
to clarify the manner in which the Hybrid 3.0 Platform operates in a 
locked market scenario, to allow for Off-Floor Hybrid 3.0 LMMs and 
update our information barrier procedures for LMMs generally, and to 
allow for the application of an LMM participation entitlement for 
electronic and/or open outcry trades should help the Exchange to 
maintain a fair and orderly market and create incentives for LMMs to 
provide liquidity, and investors will benefit as a result.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 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

[[Page 51032]]

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

    The Exchange neither solicited nor received comments on the 
proposal.

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

    Because the foregoing rule does not (i) Significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate if consistent with the protection of investors 
and the public interest, provided that the self-regulatory organization 
has given the Commission written notice of its intent to file the 
proposed rule change at least five business days prior to the date of 
filing of the proposed rule change or such shorter time as designated 
by the Commission, the proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \16\ and Rule 19b-4(f)(6) 
thereunder.\17\ At any time within 60 days of the filing of such 
proposed rule change, the Commission may summarily abrogate such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.
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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(6).
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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-2008-89 on the subject line.

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 Number SR-CBOE-2008-89. 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 office of the CBOE. 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-2008-89 and should be 
submitted on or before September 19, 2008.
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    \18\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-20064 Filed 8-28-08; 8:45 am]
BILLING CODE 8010-01-P