[Federal Register Volume 74, Number 193 (Wednesday, October 7, 2009)]
[Notices]
[Pages 51626-51628]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-24078]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60746; File No. SR-CBOE-2009-070]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change Related to 
Preferred Market Makers

September 30, 2009.
    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 September 28, 2009, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``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 prepared by the CBOE. 
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 CBOE is proposing to amend its Preferred Market-Maker program 
to allow for the preferencing of complex orders entered into the 
complex order book (``COB'') and the complex order RFR auction 
(``COA''). In addition, CBOE is proposing to make a clarification 
regarding the existing operation of the Preferred Market-Maker program 
for simple orders. The text of the proposed rule change is available on 
the Exchange's Web site at (http://www.cboe.org/Legal), at the Office 
of the Secretary, CBOE, and at the Commission's Public Reference Room.

[[Page 51627]]

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
    The Exchange is proposing to adopt a Preferred Market-Maker program 
for complex orders that is modeled after its existing Preferred Market-
Maker program for simple orders, Rule 8.13. Under the proposal, the 
Exchange may allow, on a class-by-class basis, for the receipt of 
Preferred Market-Maker complex orders through the COB and/or COA 
systems, and a qualifying recipient of a Preferred Market-Maker complex 
order shall be afforded a participation entitlement.
    Under the proposal, any Exchange Market-Maker type could be 
designated as a Preferred Market-Maker (e.g., Lead Market-Maker, 
Designated Primary Market-Maker, Market-Makers), however, the Hybrid 
System is programmed so that a recipient of a Preferred Market-Maker 
complex order would only receive a participation entitlement for such 
complex order if the following provisions are met: First, whether the 
participation entitlement is applied to COB and/or COA, the Preferred 
Market-Maker has an appointment/allocation in the relevant option 
class. Second, with respect to classes where there is a participation 
entitlement for COB, the Preferred Market-Maker is quoting in COB at 
the best net priced bid/offer when the order is received. With respect 
to classes where there is a participation entitlement for COA, (i) at 
the beginning of the auction, the Preferred Market-Maker is quoting at 
either (a) the best bid/offer on the Exchange in at least one of the 
component series of the complex order or (b) the best net priced bid/
offer in COB for the complex order; and (ii) at the conclusion of the 
auction, the Preferred Market-Maker is quoting at the best net priced 
bid/offer in COA.\3\
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    \3\ In this regard, CBOE's proposal prohibits an order flow 
provider from notifying a Preferred Market-Maker regarding its 
intention to submit a preferenced complex order so that such 
Preferred Market-Maker could change its quotation to match the NBBO 
immediately prior to submission of the preferenced order, and then 
fade its quote. CBOE states that Rule 4.18, Prevention of the Misuse 
of Material, Nonpublic Information, prohibits this sort of misuse of 
material, non-public information. Further, CBOE represents that it 
will conduct surveillance for, and enforce against, such violations.
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    Provided the eligibility requirements have been met, the Preferred 
Market-Maker participation entitlement would be 40% when there are two 
or more Market-Makers also quoting at the best net priced bid/offer 
execution price (which is the price at the time a complex order is 
received in the case of a COB participation entitlement or the price at 
the conclusion of the auction in the case of a COA participation 
entitlement), and 50% when there is only one other Market-Maker quoting 
at the best net priced bid/offer execution price.\4\ In addition, the 
following would apply: First, the Preferred Market-Maker would not be 
allocated a total quantity greater than the quantity that the Preferred 
Market-Maker is quoting at the best net priced bid/offer execution 
price. Second, the entitlement would be based on the number of 
contracts remaining after the incoming complex order has traded against 
equivalent derived net priced orders and quotes in the individual 
series of the EBook and equivalent net priced public customer complex 
orders resting in COB that have priority over the Preferred Maker-Maker 
in accordance with Rule 6.53C, Complex Orders on the Hybrid System. 
Third, if a Preferred Market-Maker receives a participation entitlement 
for its complex order resting in COB or its response to COA, then no 
other participation entitlements for complex orders set forth in 
Exchange Rules (e.g., Rule 8.87, Participation Entitlement of DPMs and 
e-DPMs, and Rule 8.15B, Participation Entitlement of LMMs) shall apply 
to complex orders resting in COB or entered in response to COA.\5\
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    \4\ The Exchange notes that, if a Market-Maker is also eligible 
for an allocation pursuant to the operation of the applicable 
algorithm in effect for a class (for example, an allocation based on 
price-time or a pro rata percentage), the Market-Maker would be 
entitled to receive an allocation (not to exceed the size of the 
Market-Maker's quote) of the greater of the amount the Market-Maker 
would be entitled to pursuant to the participation entitlement or 
the amount it would otherwise receive pursuant to the operation of 
the algorithm in accordance with Rule 6.45A or 6.45B, as applicable.
    \5\ The Exchange notes that, to the extent a complex order 
trades with the equivalent derived net priced orders and quotes in 
the individual series of the EBook, there may also be a 
participation entitlement applied to those individual series legs in 
accordance with Rule 6.45A or 6.45B, as applicable. For example, if 
a complex order executes against the individual series legs, then 
the remainder executes against COB resting orders or COA responses, 
a Preferred Market-Maker entitlement may apply both on the 
individual series legs execution and on the COB or COA execution. 
Also, if a complex order automatically exercises against the 
individual series legs upon receipt or at the conclusion of a COA, a 
Preferred Market-Maker entitlement may apply to the individual 
series legs. Similarly, if a resting complex order becomes 
marketable against the individual series legs, a Preferred Market-
Maker entitlement may apply to the individual series legs.
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    Lastly, the proposed rule text notes that a Preferred Market-Maker 
must comply with the quoting obligations applicable to its Market-Maker 
type under Exchange rules and must provide continuous electronic quotes 
(as defined in Rule 1.1(ccc)) in at least 90% of the series of each 
class for which it receives Preferred Market-Maker orders in accordance 
with the requirements for the preferencing of simple orders (the ``90% 
quoting obligation'').
    In this regard, the Exchange is proposing to revise the existing 
text of Rule 8.13 regarding the current operation of its preferencing 
program for simple orders to more specifically reflect the way the 
Hybrid System operates. Substantively, the requirements of the rule are 
not changing. The existing rule text indicates that a recipient of a 
Preferred Market-Maker order will only receive a participation 
entitlement for such order if the following provisions are met: (i) The 
Preferred Market-Maker must have an appointment/allocation in the 
relevant option class; (ii) the Preferred Market-Maker must be quoting 
at the best bid/offer on the Exchange; and (iii) the Preferred Market-
Maker must comply with the quoting obligations applicable to its 
Market-Maker type under Exchange rules and must provide continuous 
electronic quotes (as defined in Rule 1.1(ccc)) in at least 90% of the 
series of each class for which it receives Preferred Market-Maker 
orders. The Exchange is amending the text to clarify that the Hybrid 
System is programmed so that the recipient of a Preferred Market-Maker 
order will only receive a participation entitlement for such order if 
provisions (i) and (ii) above are met. Separately, a Preferred Market-
Maker must also comply with the quoting obligations applicable to its 
Market-Maker type under Exchange rules and the 90% quoting obligation. 
The 90% quoting obligation, as with the various other Market-Making 
quoting obligations, are subject to Exchange market performance, 
surveillance, and/or disciplinary programs to assess and enforce 
compliance.

[[Page 51628]]

2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the Act 
\6\ in general and furthers the objectives of Section 6(b)(5) of the 
Act \7\ in particular in that it should promote just and equitable 
principles of trade, serve to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and 
protect investors and the public interest. The proposed rule change 
will help generate greater complex order flow for the Exchange and 
provide additional incentives for Market-Makers to trade with that 
order flow, which in turn adds depth and liquidity to CBOE's markets.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 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 the Exchange 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-2009-070 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-2009-070. 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-2009-070 and should be 
submitted on or before October 28, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-24078 Filed 10-6-09; 8:45 am]
BILLING CODE 8011-01-P