

[Federal Register: December 19, 2007 (Volume 72, Number 243)]
[Notices]               
[Page 71977-71978]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19de07-134]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56951; File No. SR-CBOE-2007-74]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of Proposed Rule Change, as 
Modified by Amendment No. 1 Thereto, To Amend CBOE Rule 6.13A To Modify 
the Simple Auction Liaison Auction Process and Incorporate Specific 
Provisions for Hybrid 3.0 Classes

December 12, 2007.

I. Introduction

    On July 2, 2007, the 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 Rule 6.13A to 
modify the Simple Auction Liason (``SAL'') auction process. On October 
16, 2007, CBOE filed Amendment No. 1 to the proposed rule change. The 
proposed rule change, as amended, was published for comment in the 
Federal Register on November 7, 2007.\3\ The Commission received no 
comments on the proposal. This order approves the proposed rule change, 
as amended.
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    \1\ 15 U.S.C. 78s(b)(l).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 56730 (November 1, 
2007), 72 FR 62883 (November 7, 2007) (the ``Notice'').
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II. Description of the Proposal

    CBOE Rule 6.13A governs the operation of the Exchange's SAL system. 
SAL is a feature on CBOE's Hybrid system that auctions certain 
marketable orders for price improvement over the National Best Bid and 
Offer (``NBBO''). The SAL rules provide for an auction, for a period of 
time not to exceed two seconds as determined by the Exchange on a 
class-by-class basis, for any qualifying order (``Agency Order'') that 
is eligible for automatic execution by CBOE's Hybrid System.\4\ CBOE 
Rule 6.13A(b) outlines the procedures regarding how a response shall be 
submitted during the auction and provides that the response may be 
submitted in one-cent increments. CBOE proposes to modify this rule to 
allow the auction response in all option classes in which SAL is 
activated to be submitted in one-cent increments or standard 
increments, as determined by

[[Page 71978]]

the Exchange.\5\ CBOE believes that this modification may encourage 
market makers and other market participants to quote more aggressively 
overall.
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    \4\ See CBOE Rule 6.13(b)(C)(i).
    \5\ See proposed changes to CBOE Rule 6.13A(b)(ii).
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    The Exchange believes that applying SAL to Hybrid 3.0 classes will 
provide a more automated order handling process in those classes. CBOE 
proposes to modify the operation of SAL, however, with respect to 
Hybrid 3.0 classes. The existing SAL rules provide that Agency Orders 
are to be allocated in two rounds.\6\ For Hybrid 3.0 Classes, CBOE 
proposes to conduct only one round of allocations, because the 
Designated Primary Market Maker or Lead Market Maker (``DPM'' or 
``LMM'') is the only ``quoter'' on the Hybrid 3.0 Platform.\7\ 
Specifically, the first round allocation specified in Rule 6.13A(c)(i) 
will not apply; rather, in Hybrid 3.0 Classes, the single allocation 
round will be conducted pursuant to the criteria in Rule 6.13A(c)(ii) 
for Hybrid and Hybrid 2.0 classes, with a few differences.
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    \6\ See CBOE Rule 6.13A(c).
    \7\ Pursuant to CBOE Rule 1.1(aaa), the Hybrid 3.0 Platform is 
an electronic trading platform on the Hybrid trading system that 
allows a single quoter to submit an electronic quote which 
represents the aggregate Market-Maker quoting interest in a series 
for the trading crowd.
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    The current SAL rule allocates the Agency Order pursuant to the 
matching algorithm that is in effect for the class pursuant to Rule 
6.45A or Rule 6.45B.\8\ CBOE's proposal will allow the matching 
algorithm as applied to SAL to be different from the matching algorithm 
that is currently in effect for the Hybrid 3.0 Class. Therefore, for 
Hybrid 3.0 Classes, the Exchange proposes to allow the appropriate 
Exchange Procedure Committee to determine, on a class-by-class basis, 
which electronic matching algorithm will apply to SAL executions. The 
matching algorithm applied to SAL in Hybrid 3.0 Classes will continue 
to be pursuant to Rule 6.45B.
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    \8\ See CBOE Rule 6.13A(c)(1).
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    The existing SAL rule also provides for a Market-Maker to receive a 
participation entitlement only if the applicable matching algorithm 
(from Rule 6.45A or 6.45B) that is in effect for the class includes a 
participation entitlement.\9\ Currently, Hybrid 3.0 does not permit an 
LMM or DPM to receive a participation entitlement as it pertains to the 
allocation of incoming electronic orders.\10\ Since the LMM or DPM does 
not receive a participation entitlement with regard to incoming 
electronic orders, CBOE proposes to permit the appropriate Exchange 
Market Performance Committee to establish, on a class-by-class basis, 
an LMM or DPM participation entitlement applicable only to SAL 
executions in Hybrid 3.0 Classes. Incorporating SAL on the Hybrid 3.0 
Platform will provide Market-Makers with electronic access to the 
Agency Order since Market-Makers will be able to electronically respond 
to the Agency Order through SAL. The Exchange stated in its Notice that 
with Market-Makers having access to electronically respond to the 
Agency Order, incorporating a LMM/DPM participation entitlement to SAL 
executions may provide for more aggressive quoting. The participation 
entitlement, if any, will be in compliance with the provisions of Rule 
6.45B(a)(i)(2).
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    \9\ See CBOE Rule 6.13A(c)(3).
    \10\ In Hybrid 3.0 Classes, pursuant to existing rules, all 
eligible orders pursuant to Rule 6.13 can receive automatic 
execution against public customer orders in the electronic book. The 
remaining balance of the eligible order, if any, may be represented 
in the electronic book, provided such order is eligible for book 
entry pursuant to Rule 7.4; if not book eligible, the remaining 
balance of the eligible order will route to PAR, BART, or the order 
entry firm's booth printer. See CBOE Rule 6.13(b)(i)(A)(2). Orders 
not eligible for automatic execution will route on a class-by-class 
basis to PAR, BART, or the order entry firm's booth printer. See 
CBOE Rule 6.13(b)(i)(B).
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    When the SAL system is enabled, the Exchange will conduct a SAL 
auction in Hybrid 3.0 classes only when the Exchange's quote is 
represented by the DPM/LMM quote. The Exchange will not conduct a SAL 
auction when the Exchange's quote is represented by a manual quote.\11\ 
All other aspects of SAL pursuant to CBOE Rule 6.13A will apply to 
Hybrid 3.0 Classes.
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    \11\ See proposed CBOE Rule 6.13A.04(iii).
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III. Discussion and Commission Findings

    The Commission has carefully reviewed the proposed rule change and 
finds that it is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange.\12\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\13\ which, 
among other things, requires that the rules of a national securities 
exchange be designed to promote just and equitable principles of trade, 
to foster cooperation and coordination with persons engaged in 
regulating 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.
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    \12\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that SAL is a feature which auctions certain 
orders for price improvement over the NBBO. The Commission believes 
that it is reasonable and consistent with the Act to allow the Exchange 
flexibility to determine the minimum trading increment in which 
responses in the auction--responses to provide price improvement--can 
be submitted. The Commission notes that orders that participate in a 
SAL auction will, at a minimum, receive executions at the NBBO.
    Applying the SAL functionality to Hybrid 3.0 classes should serve 
to further automate the order handling process for certain orders in 
those classes. Automation may increase efficiency in the marketplace, 
which would be in the interest of the Exchange, its members, and the 
investing public. Further, the Commission believes the differences in 
the application of SAL to Hybrid 3.0 classes are reasonable and 
consistent with the Act, in part because of the differences in the 
operation of Hybrid 3.0. The Commission notes, however, that the 
Exchange has the duty to surveil for compliance with its own rules and 
Rule 602 of Regulation NMS \14\ in all instances, including when an 
order is received when the Exchange's quote is represented by a manual 
quote.
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    \14\ 17 CFR 242.602.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-CBOE-2007-74), as modified 
by Amendment No. 1, be, and hereby is, approved.
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    \15\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-24533 Filed 12-18-07; 8:45 am]

BILLING CODE 8011-01-P
