[Federal Register Volume 77, Number 179 (Friday, September 14, 2012)]
[Notices]
[Pages 56903-56905]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-22638]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67813; File No. SR-CBOE-2012-083]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to the Availability of a Data Product 
That Includes Option Valuations Through Market Data Express, LLC, an 
Affiliate of CBOE

September 10, 2012.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on August 28, 2012, the Chicago Board Options Exchange, 
Incorporated (``CBOE'' or the ``Exchange'') filed with the Securities 
and Exchange Commission (the ``Commission'') the proposed rule change 
as described in Items I, II, and III below, which Items have been 
prepared by the self-regulatory organization. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C.78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to make available, through its affiliate 
Market Data Express, LLC (``MDX''), a data product that includes option 
valuations. The text of the proposed rule change is available on the 
Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), 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 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to make available, through MDX, a new market 
data product, referred to as the CBOE Customized Option Valuation 
Service (the ``Service''). The Service would provide subscribers with 
an ``end-of-day'' file \4\ of valuations for Flexible Exchange 
(``FLEX'') \5\ options and certain over-the-counter (``OTC'') options 
(the ``Data''). The Data would be available for internal use and 
distribution by subscribers. MDX would offer the Data for sale to CBOE 
Trading Permit Holders (``TPHs'') and non-TPHs.
---------------------------------------------------------------------------

    \4\ An end of day file refers to data that is distributed prior 
to the opening of the next trading day.
    \5\ FLEX options are exchange traded options that provide 
investors with the ability to customize basic option features 
including size, expiration date, exercise style, and certain 
exercise prices.
---------------------------------------------------------------------------

    The Data would consist of indicative \6\ values for three 
categories of ``customized'' options. The first category of options is 
all open series of FLEX options listed on any exchange that

[[Page 56904]]

offers FLEX options for trading.\7\ The second category is OTC options 
that have the same degree of customization as FLEX options. The third 
category includes options with strike prices expressed in percentage 
terms. Values for such options would be expressed in percentage terms 
and would be theoretical values.\8\
---------------------------------------------------------------------------

    \6\ ``Indicative'' values are indications of potential market 
prices only and as such are neither firm nor the basis for a 
transaction.
    \7\ Current FLEX options open interest spans over 2,000 series 
on over 300 different underlying securities.
    \8\ These values would be theoretical in that they would be 
indications of potential market prices for options that have not 
traded (i.e. do not yet exist). Market participants sometimes 
express option values in percentage terms rather than in dollar 
terms because they find it is easier to assess the change, or lack 
of change, in the marketplace from one day to the next when values 
are expressed in percentage terms.
---------------------------------------------------------------------------

    A small number of market data vendors produce option value data 
that is similar to the Data.\9\ The Options Clearing Corporation 
(``OCC'') also produces FLEX option value data that is similar to the 
FLEX option value data that would be included in the Service.\10\ These 
vendors and the OCC use model-driven processes to produce their data. 
Instead of using a model-driven process, CBOE would use values produced 
by CBOE registered market-makers to produce the Data. Participating 
CBOE market-makers would submit values to MDX on options series 
specified by MDX on a daily basis. These values would be generated by 
the market-maker's internal pricing models. The valuations that MDX 
would ultimately publish would be an average of multiple contributions 
of values from participating CBOE market-makers. For each value 
provided by MDX through the Service, MDX would include a corresponding 
indication of the number of market-maker contributors that factored 
into that value.\11\
---------------------------------------------------------------------------

    \9\ These vendors include SuperDerivatives, Markit, Prism, and 
Bloomberg's BVAL service.
    \10\ The OCC makes this data available on its Web site at http://www.theocc.com/webapps/flex-reports.
    \11\ MDX would publish on its Web site a description of the 
methodology used for averaging the values submitted by market-makers 
to produce a single publishable value.
---------------------------------------------------------------------------

    CBOE market-makers that meet the following objective qualification 
criteria would be allowed to contribute values to MDX for purposes of 
producing Data for the Service. Interested CBOE market-makers must be 
approved by the Exchange, have the ability to provide daily valuations 
to MDX in a timely manner each day after the close of trading, and sign 
a services agreement with CBOE.\12\ Interested CBOE market-makers must 
also have the ability to provide valuations on several different types 
of options, including (i) Options on all open FLEX series traded on any 
exchange that offers FLEX options for trading, (ii) options on any 
potential new FLEX options series, (iii) OTC options that have the same 
degree of customization as FLEX options, and (iv) customized options 
where the strike price is expressed in percentage terms (the valuations 
provided to MDX must also be expressed in percentage terms). In 
addition, interested CBOE market-makers must participate in a testing 
phase with MDX. The values submitted by a market-maker during the 
testing phase and in live production must meet MDX's quality control 
standards designed to ensure the integrity and accuracy of the Data. 
MDX would implement procedures including monthly performance reviews 
and removal of outlier values in certain instances to help ensure the 
integrity and accuracy of the Data. MDX would not commence the Service 
with less than three market-makers committed to provide values for the 
Service.
---------------------------------------------------------------------------

    \12\ Among other terms, the services agreement will include a 
provision that CBOE does not guarantee the accuracy or completeness 
of the Data in the Service.
---------------------------------------------------------------------------

    In order to help ensure that MDX receives numerous values from 
multiple market-makers on a consistent basis, MDX would share revenue 
from the sale of the Data with qualifying CBOE market-makers that 
participate in this program. The amount of revenue that MDX would share 
with participating market-makers would not exceed thirty percent (30%) 
of the total revenue received by MDX from the sale of the Data. The 
revenue sharing would be based on the following table:

------------------------------------------------------------------------
Number of participating market-   Total revenue    Rev. share per market-
            makers                    share                maker
------------------------------------------------------------------------
3.............................                21%  7%.
4.............................                24%  6%.
5 or more.....................                30%  30% divided by the
                                                    number of
                                                    participating market-
                                                    makers.
------------------------------------------------------------------------

    If only three market-makers participate, MDX would share 21% of 
total revenue with each market-maker receiving a 7% share. If four 
market-makers participate, MDX would share 24% of total revenue with 
each market-maker receiving a 6% share. If five or more market-makers 
participate, MDX would share 30% of total revenue divided equally among 
the market-makers.
    In order to help ensure that participating market-makers submit 
values to MDX on 100% of the series to be valued, a market-maker's 
revenue share would be reduced as follows:
    [cir] There is one ``grace day'' per month, i.e., if a market-maker 
does not submit values for 100% of the series on just one day within a 
given month, that market-maker will not lose any portion of its revenue 
share for that month.
    [cir] If a market-maker submits values for less than 100% of the 
series on any two days within a month, that market-maker will forfeit 
10% of its revenue share for that month.
    [cir] If a market-maker submits values for less than 100% of the 
series on any three days within a month, that market-maker will forfeit 
25% of its revenue share for that month.
    [cir] If a market-maker submits values for less than 100% of the 
series on any four days within a month, that market-maker will forfeit 
50% of its revenue share for that month.
    [cir] If a market-maker submits values for less than 100% of the 
series on any five days within a month, that market-maker will forfeit 
75% of its revenue share for that month.
    [cir] If a market-maker submits values for less than 100% of the 
series on any six or more days within a month, that market-maker will 
forfeit 100% of its revenue share for that month.
    Subscribers would be able to purchase options daily, weekly, 
monthly or quarterly through the MDX Web site. TPHs and non-TPHs would 
be charged the same fees for the Data. The Exchange will file a 
separate proposed rule change to establish the fees to be charged by 
MDX for the Service. The Data would be delivered to subscribers via 
File Transfer Protocol (FTP) or secure copy shortly after the close of 
trading each day. MDX expects to launch the Service during the fourth 
quarter of 2012.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the provisions of Section 6 of the Securities

[[Page 56905]]

Exchange Act of 1934 (the ``Act'')\13\ in general and with Section 
6(b)(5) of the Act \14\ in particular in that it is designed to prevent 
fraudulent and manipulative acts and practices, promote just and 
equitable principles of trade, and, in general, to protect investors 
and the public interest, and is not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers. The 
proposed rule change would allow the Exchange, through MDX, to 
disseminate a new data service on a voluntary basis.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------

    The Exchange believes the proposal to share revenue from the sale 
of the Data with qualifying CBOE market-makers that decide to 
contribute values to MDX for purposes of producing the Data is 
reasonable in that the Exchange believes it will encourage market-
makers to provide values for the Service, which should enhance the 
quality of the Service. The Exchange believes using values produced by 
CBOE market-makers would not only differentiate the Service from the 
services of competing market data vendors, but would also add validity 
to the Data since the Data would be more closely related to tradable 
prices. The Exchange believes the proposal is equitable in that the 
revenue shared by MDX would be divided equally among participating 
market-makers. Further, the Exchange believes the proposal is not 
unfairly discriminatory in that CBOE market-makers would be selected to 
participate in this program based on objective qualifying criteria.

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 that is not necessary or appropriate in 
furtherance of the purposes of the Act. To the contrary, the Exchange 
believes the proposed rule change is pro-competitive in that it would 
allow the Exchange, through MDX, to disseminate a new data service on a 
voluntary basis. The Service is voluntary on the part of the Exchange, 
which is not required to offer such services, and voluntary on the part 
of prospective subscribers that are not required to use it. The 
Exchange believes that the Service would help attract new users and new 
order flow to the Exchange, thereby improving the Exchange's ability to 
compete in the market for options order flow and executions.

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 
proposed rule change.

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

    Because the foregoing proposed rule change does not:
    A. Significantly affect the protection of investors or the public 
interest;
    B. Impose any significant burden on competition; and
    C. Become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) \15\ of the Act and 
Rule 19b-4(f)(6) \16\ thereunder.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of this proposed rule 
change, the Commission summarily may temporarily suspend 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 
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 email to [email protected]. Please include 
File Number SR-CBOE-2012-083 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-2012-083. This file 
number should be included on the subject line if email 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 Web site viewing and 
printing 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-2012-083 and should be 
submitted on or before October 5, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

    \17\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-22638 Filed 9-13-12; 8:45 am]
BILLING CODE 8011-01-P