[Federal Register Volume 74, Number 158 (Tuesday, August 18, 2009)]
[Notices]
[Pages 41761-41763]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-19692]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60479; File No. SR-CBOE-2009-058]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Related to the Hybrid Matching Algorithms

August 11, 2009.
    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 6, 2009, 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 below, which Items have been prepared by 
the Exchange. The Exchange filed the proposal as a ``non-
controversial'' 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 is proposing to introduce an additional priority 
overlay related to small orders executed on its Hybrid System on a 
pilot basis until August 31, 2009. 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.

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
    CBOE Rules 6.45A and 6.45B set forth, among other things, the 
manner in which electronic Hybrid System trades in options are 
allocated. Paragraph (a) of each rule essentially governs how incoming 
orders received electronically by the Exchange are electronically 
executed against interest in the CBOE quote. Paragraph (a) of each rule 
currently provides a ``menu'' of matching algorithms to choose from 
when executing incoming electronic orders. The menu format allows the 
Exchange to utilize different matching algorithms on a class-by-class 
basis. The menu includes, among other choices, the ultimate matching 
algorithm (``UMA''), as well as price-time and pro-rata priority 
matching algorithms with additional priority overlays. The priority 
overlays for price-time and pro-rata currently include: public customer 
priority for public customer orders resting on the Hybrid System, 
participation entitlements for certain qualifying market-makers, and a 
market turner priority for participants that are first to improve 
CBOE's disseminated quote. These overlays are optional.
    The purpose of this rule filing is to adopt an additional priority 
overlay for small orders that can be applied to each of the three 
matching algorithms. The Exchange proposes to adopt the small order 
priority overlay on a pilot basis expiring on August 31, 2009, at which 
point the Exchange anticipates that this priority overlay will become 
operative on a permanent basis through a separate rule change.\5\
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    \5\ The Exchange has submitted a separate rule change filing to 
adopt the small order priority overlay on a permanent basis, SR-
CBOE-2009-056. That rule change is currently effective and, pursuant 
to Section 19(b)(3)(A) of the Act, 15 U.S.C. 78s(b)(3)(A), and Rule 
19b-4(6), 17 CFR 240.19b-4(f)(6) thereunder, will become operative 
on or about August 31, 2009.
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    If the small order priority overlay is in effect for an option 
class, then the following would apply:
     Orders for five (5) contracts or fewer will be executed 
first by the Designated Primary Market-Maker (``DPM'') or Lead Market-
Maker (``LMM''), as applicable, that is appointed to the option class; 
provided however, that on a quarterly basis the Exchange will evaluate 
what percentage of the volume executed on the Exchange (excluding 
volume resulting from the execution of orders in AIM (see CBOE Rule 
6.74A, Automated Improvement Mechanism (``AIM'')) is comprised of 
orders for five (5) contracts or fewer executed by DPMs and LMMs, and 
will reduce the size of the orders included in this provision if such 
percentage is over forty percent (40%).
     This procedure only applies to the allocation of 
executions among non-customer orders and market maker quotes existing 
in the EBook at the time the order is received by the Exchange. No 
market participant is allocated any portion of an execution unless it 
has an existing interest at the execution price. Moreover, no market 
participant can execute a greater number of contracts than is 
associated with the price of its existing interest. Accordingly, the 
small order preference contained in this allocation procedure is not a 
guarantee; the DPM or LMM, as applicable, (i) must be quoting at the 
execution price to receive an allocation of any size, and (ii) cannot 
execute a greater number of contracts than the size that is associated 
with its quote.
     If a Preferred Market-Maker (see CBOE Rule 8.13, Preferred 
Market-Maker Program) is not quoting at a price equal to the national 
best bid or offer (``NBBO'') at the time a preferred order is received, 
the allocation procedure for small orders described above shall be 
applied to the execution of the preferred order. If a Preferred Market 
Maker is quoting at the NBBO at the time the preferred order is 
received, the allocation procedure for all other sized orders, shall be 
applied to the execution of the preferred order (e.g., if the default 
matching algorithm is pro-rata with a public customer and participation 
entitlement overlay, the order will execute first against any public 
customer orders, then the Preferred Market-Maker would receive its 
participation entitlement, then the remaining balance would be 
allocated on a pro-rata basis).
     The small order priority overlay will only be applicable 
to automatic executions and will not be applicable to any electronic 
auctions.\6\
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    \6\ In addition to AIM, CBOE has various electronic auctions 
that are described under Rules 6.13A, Simple Auction Liaison 
(``SAL''), 6.14, Hybrid Agency Liaison (HAL), and 6.74B, 
Solicitation Auction Mechanism (``AIM SAM''). Each of these auctions 
generally allocates executions pursuant to the matching algorithm in 
effect for the options class with certain exceptions noted in the 
respective rules.
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    Lastly, like the existing priority overlays, the small order 
priority overlay is optional. All determinations would be set forth in 
a regulatory circular.
    According to the Exchange, because DPMs and LMMs have unique

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obligations to the CBOE market,\7\ they are provided with certain 
participation rights. Under the current rule, if the DPM or LMM, as 
applicable, is one of the participants with a quote at the best price, 
the participation entitlement is generally equal to 50% when there is 
one Market-Maker also quoting at the best bid/offer on the Exchange, 
40% when there are two Market-Makers also quoting at the best bid/offer 
on the Exchange, and 30% when there are three or more Market-Makers 
also quoting at the best bid/offer on the Exchange.\8\ The Exchange is 
now seeking to expand these programs to make available an allocation 
procedure on a pilot basis that provides that the DPM or LMM, as 
applicable, has precedence to execute orders of five (5) contracts or 
fewer. The Exchange believes that this small order priority overlay 
will not necessarily result in a significant portion of the Exchange's 
volume being executed by the DPM or LMM, as applicable. As stated 
above, the DPM or LMM would execute against such orders only if it is 
quoting at the best price, and only for the number of contracts 
associated with its quotation. Nevertheless, the Exchange will evaluate 
what percentage of the volume executed on the Exchange is comprised of 
orders for five (5) contracts or fewer executed by DPMs and LMMs, and 
will reduce the size of the orders included in this provision if such 
percentage is over forty percent (40%).
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    \7\ For example DPMs must, among other things, (i) provide 
continuous electronic quotes in at least 90% of the series of each 
multiply-listed option classed allocated to it and in 100% of the 
series of each singly-listed option class allocated to it, and 
assure that its disseminated market quotes are accurate; (ii) comply 
with bid/ask differential requirements; (iii) ensure that a trading 
rotation is initiated promptly following the opening of the 
underlying security (or promptly after 8:30 am Central Time in an 
index class) in 100% of the series of each allocated class by 
entering opening quotes as necessary. See CBOE Rule 8.85, DPM 
Obligations; see also CBOE Rule 8.15A, Lead Market-Makers in Hybrid 
Classes.
    \8\ See CBOE Rules 6.45A(a)(i)(C) and (ii)(2), 6.45B(a)(i)(2) 
and (ii)(C), 8.15B, Participation Entitlement for LMMs, and 8.87, 
Participation Entitlement of DPMs and e-DPMs.
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    The small order priority overlay described above is part of CBOE's 
careful balancing of the rewards and obligations that pertain to each 
of the Exchange's classes of memberships. This balancing is part of the 
overall market structure that is designed to encourage vigorous price 
competition between Market-Makers on the Exchange, as well as maximize 
the benefits of price competition resulting from the entry of customer 
and non-customer orders, while encouraging participants to provide 
market depth. The Exchange believes the proposed small order priority 
overlay, which includes participation rights for DPMs and LMMs only 
when they are quoting at the best price, strikes the appropriate 
balance within its market and maximizes the benefits of an electronic 
market for all participants.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act \9\ and the rules and regulations thereunder and, in 
particular, the requirements of Section 6(b) of the Act.\10\ 
Specifically, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \11\ requirements that the rules of 
an exchange be designed to promote just and equitable principles of 
trade, to prevent fraudulent and manipulative acts, to remove 
impediments to and to perfect the mechanism for a free and open market 
and a national market system, and, in general, to protect investors and 
the public interest. In particular, as described further above, the 
Exchange believes the proposed rule change is part of the balancing of 
CBOE's overall market structure, which is designed to encourage 
vigorous price competition between Market-Makers on the Exchange, as 
well as maximize the benefits of price competition resulting from the 
entry of customer and non-customer orders, while encouraging 
participants to provide market depth.
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    \9\ 15 U.S.C. 78s(b)(1).
    \10\ 15 U.S.C. 78f(b).
    \11\ 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

    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 proposed rule change: (i) Does not 
significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
by its terms, does not 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, it has become effective pursuant to Section 
19(b)(3)(A) of the Act \12\ and Rule 19b-4(f)(6) thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) normally may 
not become operative prior to 30 days after the date of filing.\14\ 
However, Rule 19b-4(f)(6)(iii) \15\ permits the Commission to designate 
a shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange has requested that the 
Commission waive the 30-day operative delay to encourage fair 
competition among brokers and dealers and the exchanges by allowing the 
CBOE to effectively compete with options exchanges that offer a similar 
program. The Commission believes that waiving the 30-day operative 
delay is consistent with the protection of investors and the public 
interest because such waiver would allow the pilot to be implemented 
immediately.\16\ In addition, the Commission notes that the Exchange 
has filed the proposed rule change that permanently adopts the small 
order priority overlay,\17\ based on substantially similar rules 
already in place at other national securities exchanges.\18\ 
Accordingly, the Commission designates the proposed rule change, to 
adopt the small order priority overly on a pilot basis until August 31, 
2009, operative upon filing.
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    \14\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give 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 Commission deems this requirement to be met.
    \15\ 17 CFR 240.19b-4(f)(6)(iii).
    \16\ For purposes only of waiving the 30-day operative delay of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. See 15 
U.S.C. 78c(f).
    \17\ See SR-CBOE-2009-056.
    \18\ See, e.g., ISE Rule 713.01 and 713.03.
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    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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule

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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-2009-058 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-CBOE-2009-058. 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-2009-058 and should be submitted on 
or before September 8, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-19692 Filed 8-17-09; 8:45 am]
BILLING CODE 8010-01-P