[Federal Register Volume 78, Number 71 (Friday, April 12, 2013)]
[Notices]
[Pages 21981-21982]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-08603]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69338; File No. SR-CBOE-2013-019]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving a Proposed Rule Change Relating to 
Market-Maker Continuous Quoting Obligations

April 8, 2013.

I. Introduction

    On February 4, 2013, Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend CBOE's rules relating to 
Market-Maker \3\ continuous quoting obligations. The proposed rule 
change was published for comment in the Federal Register on February 
22, 2013.\4\ The Commission did not receive any comment letters 
regarding the proposal. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ CBOE Rule 8.1 defines ``Market-Maker'' as ``an individual 
Trading Permit Holder [(``TPH'')] or a TPH organization that is 
registered with the Exchange for the purpose of making transactions 
as dealer-specialist on the Exchange.''
    \4\ See Securities Exchange Act Release No. 68944 (February 15, 
2013), 78 FR 12377 (``Notice'').
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II. Description of the Proposal

    The Exchange proposes to amend its rules to exclude intra-day add-
on series (``Intra-day Adds'') from Market-Makers' continuous quoting 
obligations on the day during which such series are added for 
trading.\5\ In addition, the Exchange proposes to permit Preferred 
Market-Makers (``PMMs''),\6\ Lead Market-Makers (``LMMs''),\7\ DPMs,\8\ 
and Electronic DPMs (``e-DPMs'') \9\ (Market-Makers, PMMs, LMMs, DPMs, 
and e-DPMs are collectively referred to as ``Market-Makers'' unless the 
context provides otherwise) to receive participation entitlements in 
all Intra-day Adds on the day during which such series are added for 
trading provided that the Market-Maker meets all other requirements to 
receive a participation entitlement set forth in the applicable 
rules.\10\
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    \5\ See id. at 12377. According to the Exchange, Intra-day Adds 
are series that are added to the Exchange system after the opening 
of the Exchange, rather than prior to the beginning of trading. See 
id.
    \6\ CBOE Rule 8.13 defines ``Preferred Market Maker'' as a 
Market-Maker designated by a TPH to receive that TPH's orders in a 
specific class.
    \7\ CBOE Rule 8.15A defines ``Lead Market-Maker'' as a Market-
Maker in good standing appointed by the Exchange in an option class 
for which a Designated Primary Market-Maker (``DPM'') has not been 
appointed.
    \8\ CBOE Rule 8.80 defines ``Designated Primary Market-Maker'' 
as a ``TPH organization that is approved by the Exchange to function 
in allocated securities as a Market-Maker (as defined in Rule 8.1) 
and is subject to the obligations under Rule 8.85.''
    \9\ CBOE Rule 8.92 defines ``Electronic DPM'' as ``a TPH 
organization that is approved by the Exchange to remotely function 
in allocated option classes as a DPM and to fulfill certain 
obligations required of DPMs except for Floor Broker and Order Book 
Official obligations.''
    \10\ See Notice, supra note 4, 78 FR at 12377.
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III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\11\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\12\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of

[[Page 21982]]

trade, 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.
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    \11\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78f(b)(5).
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    According to CBOE, several Market-Makers have communicated to the 
Exchange that their trading systems do not automatically produce 
continuous quotes in Intra-day Adds on the trading day during which 
those series are added and that the only way they could quote in these 
series on the trading day during which they were added would be to shut 
down and restart their systems.\13\ Further, the Exchange states that 
Market-Makers have indicated that the work that would be required to 
modify their systems to permit quoting in Intra-day Adds would be 
significant and costly.\14\ In addition, the Exchange indicates that 
Intra-day Adds represent only approximately 0.0046% of the average 
number of series listed on the Exchange each trading day, and that 
Market-Makers will still be obligated to provide continuous two-sided 
markets in a substantial number of series in their appointed 
classes.\15\
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    \13\ See Notice, supra note 4, 78 FR at 12378.
    \14\ See id.
    \15\ See id. at 12379.
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    In addition, the Exchange intends to implement changes to 
continuous quoting obligations. The Exchange represents that given the 
pending heightened quoting obligations and the considerable costs that 
would otherwise be involved for Market-Makers to adjust their systems 
to quote Intra-day Adds on the trading day during which they are 
listed, several PMMs have informed the Exchange that they intend to 
withdraw from the PMM program, while other Market-Makers have requested 
that the Exchange suspend their pending applications to join the PMM 
program.
    The Exchange believes that it would be impracticable, particularly 
given that a number of Market-Makers use their systems to quote on 
multiple markets and not solely on the Exchange, for Market-Makers to 
turn off their entire systems to accommodate quoting in Intra-day Adds 
on the day during which those series are added on the Exchange. In 
addition, the Exchange believes this would interfere with the 
continuity of its market and reduce liquidity, which would ultimately 
harm investors and contradicts the purpose of the Market-Maker 
continuous quoting obligations.
    The Exchange does not believe that the proposed rule change would 
adversely affect the quality of the Exchange's markets or lead to a 
material decrease in liquidity. Rather, the Exchange believes that its 
current market structure, with its high rate of participation by 
Market-Makers, permits the proposed rule change without fear of losing 
liquidity. The Exchange also believes that market-making activity and 
liquidity could materially decrease without the proposed rule change to 
exclude Intra-day Adds from Market-Maker continuous quoting obligations 
on the trading day during which they are added for trading.
    The Exchange believes that this proposed relief will encourage 
Market-Makers to continue appointments and other TPHs to request 
Market-Maker appointments, and, as a result, expand liquidity in 
options classes listed on the Exchange to the benefit of the Exchange 
and its TPHs and public customers. The Exchange believes that its 
Market-Makers would be disadvantaged without this proposed relief, and 
other TPHs and public customers would also be disadvantaged if Market-
Makers withdrew from appointments in options classes, resulting in 
reduced liquidity and volume in these classes.
    In addition, the Exchange believes that the proposed rule change to 
clarify that Market-Makers may receive participation entitlements in 
Intraday Adds on the day during which such series are added for trading 
if it satisfies the other entitlement requirements as set forth in 
Exchange rules, even if the rules do not require the Market-Makers to 
continuously quote in those series, will incentivize Market-Makers to 
quote in series in which they are not required to quote, which may 
increase liquidity in their appointed classes.
    The Exchange's proposal to exclude Intra-day Adds from Market-
Makers' continuous electronic quoting obligations on the day during 
which such series are added for trading would not affect Market-Makers' 
other obligations. For example, Market-Makers will still be required to 
engage in activities that constitute a course of dealings reasonably 
calculated to contribute to the maintenance of a fair and orderly 
market,\16\ including (1) to compete with other Market-Makers to 
improve markets in all series of options classes comprising their 
appointments; (2) to make markets that, absent changed market 
conditions, will be honored in accordance with firm quote rules; and 
(3) to update market quotations in response to changed market 
conditions in their appointed options classes and to assure that any 
market quote it causes to be disseminated is accurate.\17\ In addition, 
the proposed rule change would not excuse a Market-Maker from its 
obligation to submit a single quote or to maintain continuous quotes in 
one or more series of a class to which the Market-Maker is appointed 
when called upon by an Exchange official if, in the judgment of such 
official, it is necessary to do so in the interest of maintaining a 
fair and orderly market.\18\
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    \16\ See CBOE Rule 8.7(a).
    \17\ See CBOE Rule 8.7(b).
    \18\ See CBOE Rule 8.7(d)(iv).
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    The Commission notes that the Exchange believes that Market-Makers 
would be required to shut down and restart their systems, or make 
costly systems changes, in order to quote in Intra-day Adds. A 
requirement for Market-Makers to maintain continuous electronic quotes 
in Intra-day Adds, which represents a minor part of Market-Makers' 
overall obligations, may not justify the system resources, or the 
disruption to trading, the Exchange states would be necessary to 
accommodate quoting in Intra-day Adds. Accordingly, the Commission 
believes that the Exchange's proposal concerning Intra-day Adds would 
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.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-CBOE-2013-019) is approved.
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    \19\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-08603 Filed 4-11-13; 8:45 am]
BILLING CODE 8011-01-P