[Federal Register Volume 74, Number 225 (Tuesday, November 24, 2009)]
[Notices]
[Pages 61395-61397]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-28100]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61024; File No. SR-CBOE-2009-025]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change, as Modified by 
Amendment No. 1, Related to the Simple Auction Liaison (SAL)

November 18, 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 May 4, 2009, the Chicago Board Options Exchange, Incorporated 
(``Exchange'' or ``CBOE'') 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 
Exchange. On November 13, 2009, the Exchange filed Amendment No. 1 to 
the proposal, which replaced the original filing in its entirety. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, 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 Rule 6.13A, Simple Auction Liaison 
(SAL), to revise the Designated Primary Market-Maker (``DPM'')/Lead 
Market-Maker (``LMM'') participation entitlement formula that is 
applicable to SAL executions in Hybrid 3.0 classes. The text of the 
proposed rule change is available on the Exchange's Web site (http://www.cboe.org/Legal), at the Office of the Secretary, CBOE 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of Amendment No. 1, which replaces the original filing 
in its entirety, is to modify the proposed rule change so that the 
revised DPM/LMM participation entitlement formula applicable to SAL 
executions in selected Hybrid 3.0 classes will operate on a 1-year 
pilot basis.
    SAL is a feature within CBOE's Hybrid System that auctions 
marketable orders for price improvement over the national best bid or 
offer (``NBBO''). For Hybrid 3.0 Classes, the Exchange determines, on a 
class-by-class basis, which electronic matching algorithm from Rule 
6.45B, Priority and Allocation of Trades in Index Options and Options 
on ETFs on the CBOE Hybrid System, shall apply to SAL executions (e.g., 
pro-rata, price-time, UMA priority with public customer, participation 
entitlement and/or market turner priority overlays). Additionally, the 
Exchange may establish, on a class-by-class basis, a DPM/LMM 
participation entitlement that is applicable only to SAL executions. 
Pursuant to Rules 8.15B and 8.87, the participation entitlement 
generally is 50% when there is one other 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. In addition, the participation entitlement must 
be in compliance with Rule 6.45B(a)(i)(2). In relevant part, Rule 
6.45B(a)(i)(2) provides that the DPM or LMM may not be allocated a 
total quantity greater than the quantity that it is quoting (including 
orders not part of quotes) at that price. In addition, if pro-rata 
priority is in effect and the DPM or LMM's allocation of an order 
pursuant to its participation entitlement is greater than its 
percentage share of quotes/orders at the best price at the time that 
the participation entitlement is granted (the ``pro-rata share''), the 
DPM or LMM shall not receive any further allocation of that order. The 
rule also provides that the participation entitlement shall not be in 
effect unless public customer priority is in effect in a priority 
sequence ahead of the participation entitlement and then the 
participation entitlement shall only apply to any remaining balance.\3\ 
In addition, responses to SAL auctions are capped to the size of the 
Agency Order for allocation purposes pursuant to Rule 6.13A.
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    \3\ Rule 6.45B(a)(i)(2) also provides that, to be entitled to 
their participation entitlement, the DPM/LMM's order and/or quote 
must be at the best price on the Exchange. For purposes of SAL 
executions, the Exchange interprets this to mean that the DPM/LMM 
must be at the best price at both the start and the conclusion of 
the SAL auction.
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    Thus, for example, assume an incoming agency order to buy 250 
contracts is received and at the conclusion of the SAL auction the LMM 
is offered at the best price for 200 contracts, 1 customer is offered 
at the best price for 50 contracts and 4 other Maker-Makers are offered 
at the best price for 140 contracts each. In this

[[Page 61396]]

scenario, the customer would be allocated 50 contracts, the LMM would 
be allocated 60 contracts (30% x 200 remaining contracts), and the 4 
other Market-Makers would be allocated the remaining 140 contract 
balance on a pro-rata basis with each receiving 35 contracts.
    In order to offer additional incentives for DPMs or LMMs to support 
and participate in SAL auctions in Hybrid 3.0 classes (which currently 
only includes options on the Standard and Poor's 500 Index, SPX), and 
thus offer additional opportunities for price improvement, we are 
proposing to modify the DPM/LMM entitlement when the pro-rata algorithm 
is in effect for SAL in selected Hybrid 3.0 classes as part of a pilot 
program that will operate on a 1-year basis. For such pro-rata classes, 
after all public customer orders in the book at the best bid/offer and 
the DPM/LMM participation entitlement have been satisfied, the DPM/LMM 
shall be eligible to participate in any remaining balance on a pro-rata 
basis (regardless of whether its participation entitlement is greater 
than its pro-rata share).
    Using the example above, the customer would be allocated 50 
contracts, the LMM would be allocated 60 contracts (30% x 200 remaining 
balance), and the LMM and 4 other Market-Makers would be allocated the 
remaining 140 contract balance on a pro-rata basis with each receiving 
28 contracts (140 remaining balance/(MM1's 140 contract offer + MM2's 
140 contract offer + MM3's 140 contract offer + MM4's 140 contract 
offer + LMM's 140 decremented contract offer) x applicable pro-rata 
share). Thus, the LMM would receive a total of 88 contracts under the 
revised algorithm.
    As part of the pilot program, on a quarterly basis the Exchange 
will evaluate the number of SAL executions in each pilot class where 
the DPM/LMM participation entitlement was applied and the allocation 
was greater than what it would have been under the pre-pilot allocation 
algorithm, i.e., the allocation was greater than (i) the DPM/LMM's pro-
rata share as calculated prior to the pilot and (ii) the DPM/LMM's 
participation entitlement share as calculated prior to the pilot. The 
Exchange will reduce the DPM/LMM participation entitlement for the 
class if the number of SAL executions that exceeded the benchmark is 
more than 1% of the total number of SAL executions in the class 
evaluated during the quarter. This evaluation will be based on a random 
sampling of three days for each month in each quarter. The 
``benchmark'' will be 60% where there is one Market-Maker also quoting 
at the best bid/offer on the Exchange; 40% where there are two Market-
Makers also quoting at the best bid/offer on the Exchange; and 40% 
where there are three or more Market-Makers also quoting at the best 
bid/offer on the Exchange. The benchmark percentages, which in some 
instances are greater than CBOE's DPM/LMM participation entitlement 
percentages contained in Rules 8.15B and 8.87 (see discussion above), 
are based on the market-maker participation entitlement percentages 
that are available on other options exchanges.\4\
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    \4\ See, e.g., International Securities Exchange Rule 
7.13.01(b)(provides a 60% participation right if there is only one 
other Professional Order or market maker quotation at the best 
price) and NYSE Arca, Inc. Rule 6.76A(a)(1)(A)(i)(provides a 40% 
participation right regardless of the number of other market 
participants at the best price).
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    During the pilot, the Exchange will submit a quarterly report 
containing certain data related to this evaluation to the Commission 
and any such data submitted will be provided on a confidential basis. 
The report will be submitted within 10 business days of the conclusion 
of each quarter. The report will provide data on the total number of 
SAL executions evaluated during the period. It will also provide data 
on SAL executions where a DPM/LMM participation entitlement was applied 
and the allocation was greater than it would have been under the pre-
pilot allocation algorithm, including information on the number of 
Market-Makers also quoting at the NBBO and on the actual allocation 
percentage the DPM/LMM received per execution as compared to the 
benchmark. For purposes of the report, the ``actual allocation 
percentage'' will be calculated by adding the participation entitlement 
contracts plus the pro-rata share contracts, and dividing the sum by 
the number of contracts executed on SAL less public customer orders 
that were satisfied.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act \5\ in general and furthers the objectives of 
Section 6(b)(5) of the Act \6\ in particular in that it is designed to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest. 
In particular, the Exchange believes that the proposed change would 
provide additional incentives for DPMs or LMMs to support and 
participate in SAL auctions in Hybrid 3.0 classes, which would result 
in additional opportunities to provide orders executions at improved 
prices.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 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 self-regulatory organization 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-2009-025 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.


[[Page 61397]]


All submissions should refer to File Number SR-CBOE-2009-025. 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 the filing also will be available for 
inspection and copying at the principal office 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-2009-025 and should be 
submitted on or before December 15, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-28100 Filed 11-23-09; 8:45 am]
BILLING CODE 8011-01-P