

[Federal Register: January 8, 2008 (Volume 73, Number 5)]
[Notices]               
[Page 1378-1380]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08ja08-91]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57082; File No. SR-CBOE-2007-153]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Relating to Rule 6.14 (Hybrid Agency Liaison)

January 2, 2008.
    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 December 28, 2007, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities

[[Page 1379]]

and Exchange Commission (``Commission'') the proposed rule change as 
described in Items I and II below, which Items have been substantially 
prepared by CBOE. The Exchange filed the proposal as a ``non-
controversial'' proposed rule change pursuant to section 
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ 
which renders the proposal effective upon receipt of this filing by the 
Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to modify the application of its Hybrid Agency 
Liaison (``HAL'') system. The text of the rule proposal is available on 
the Exchange's Web site (http://www.cboe.org/legal), at the Exchange's 

Office of the Secretary, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, CBOE 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. CBOE 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
    CBOE Rule 6.14 governs the operation of the Exchange's HAL system. 
HAL provides automated order handling in designated classes trading on 
Hybrid for qualifying electronic orders that are not automatically 
executed. The purpose of this filing is to modify the HAL eligibility 
and order handling process for non-marketable limit orders that improve 
the Exchange's disseminated quote.
Description of HAL
    CBOE Rule 6.14 provides that the Exchange, with input from the 
appropriate Floor Procedure Committee, shall designate the classes in 
which HAL shall be activated.\5\ For these designated classes, HAL 
currently (i) processes market and limit orders that are marketable 
against the Exchange's disseminated quotation while that quotation is 
not the National Best Bid or Offer (``NBBO''), (ii) processes limit 
orders that are marketable against the NBBO when CBOE is not the NBBO, 
and (iii) processes limit orders that improve CBOE's disseminated 
quotation.\6\
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    \5\ See CBOE Rule 6.14(a).
    \6\ See CBOE Rule 6.14(a).
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    The HAL order handling process operates as follows.\7\ HAL flashes 
an eligible order to gauge if there is any interest from any Market-
Maker or member acting as agent for orders at the top of the Exchange's 
book (``Qualifying Member'') to trade the order at the flash price. For 
orders that are marketable against the Exchange's disseminated quote or 
the NBBO, the flash price is the NBBO price. For limit orders that 
``middle'' the Exchange's disseminated quote and that are not 
marketable against the NBBO, the flash price is the limit price of the 
order(s). This flash/exposure period is configurable but cannot exceed 
1.5 seconds. If, during the exposure period, a Market-Maker or 
Qualifying Member commits to trade with any portion of the order, then 
the exposure period ends and an allocation period begins. The 
allocation period, when combined with the flash period, cannot exceed 
three seconds.
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    \7\ See CBOE Rule 6.14(b).
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    Exposed orders are filled at the conclusion of the allocation 
period in accordance with the allocation algorithm in effect for the 
option class pursuant to Rule 6.45A or Rule 6.45B. There is no 
participation entitlement applicable to exposed orders, and the 
response size is limited to the size of the exposed order for 
allocation purposes. If no responses are received during the exposure 
period, then a linkage order is routed to the NBBO market on behalf of 
the exposed order in cases where the exposed order is marketable 
against the NBBO, or if there remains an unexecuted portion of a limit 
order that is not marketable at the conclusion of the allocation 
period, then the limit order or remaining balance is entered into the 
electronic book.

Proposed Changes

    This filing makes two HAL changes. First, for all non-Hybrid 3.0 
Classes, limit orders that better the Exchange's quote but that are 
not-marketable (orders that fall under 6.14(a)(iii)) will no longer be 
flashed through HAL. Instead, these orders will route directly and 
automatically to the electronic book. Second, non-marketable limit 
orders that would improve the Exchange's disseminated quote in Hybrid 
3.0 Classes will be flashed and handled under normal HAL processing, 
except when the eligible order is entered on the same side of the 
market as a manual quote. In that case, the eligible limit order will 
automatically route into the electronic book instead of being processed 
by HAL, and the manual quote will automatically cancel, so that the 
Exchange's disseminated quote will be represented by the limit order's 
bid/offer. This is consistent with how the limit order would currently 
be processed in Hybrid 3.0 Classes when a manual quote is present.
    The Exchange proposes the first change in connection with a recent 
fee change it submitted (SR-CBOE-2007-152) which provides a rebate, 
under certain circumstances, to Market-Makers that ``step-up'' to trade 
orders flashed in HAL. The rebate program is meant to reduce the number 
of orders that route to away exchanges. Thus, the rebate is geared more 
toward encouraging matching better priced quotes on other markets than 
it is toward trading middle market limit orders. Therefore, the 
Exchange proposes to directly book those middle market limit orders and 
not submit them for HAL processing. This way, rebates are not provided 
for stepping-up to trade orders that will otherwise book. Additionally, 
direct booking allows a wider range of users to trade against the order 
sooner.
    The second change allows the Exchange to introduce the HAL process 
in Hybrid 3.0 Classes. By initiating HAL in Hybrid 3.0 Classes, the 
Exchange will provide further automation to the order handling process 
by allowing Market-Makers appointed to the relevant option class to 
electronically participate on such orders.
    In all other respects, HAL shall operate as it currently operates 
today.
2. Statutory Basis
    The Exchange believes the proposed rule change to amend CBOE Rule 
6.14 to modify the eligibility and order handling process for limit 
orders that improve the Exchange's disseminated quote when HAL is 
activated is consistent with the Act and the rules and regulations 
under the Act applicable to national securities exchanges and, in 
particular, the requirements of section 6(b) of the Act.\8\ 
Specifically, the Exchange believes the proposed rule change is 
consistent with

[[Page 1380]]

the section 6(b)(5) \9\ requirements that the rules of an exchange be 
designed to promote just and equitable principles of trade, to prevent 
fraudulent and manipulative acts, to remove impediments to and perfect 
the mechanism for a free and open market and a national market system, 
and, in general, to protect investors and the public interest.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 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 result in 
any burden on competition that is 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

    The Exchange neither solicited nor received comments on the 
proposal.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, if consistent with 
the protection of investors and the public interest, it has become 
effective pursuant to section 19(b)(3)(A) of the Act \10\ and Rule 19b-
4(f)(6) thereunder.\11\
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires that a self-regulatory organization submit to the 
Commission written notice of its intent to file the proposed rule 
change, along with a brief description and text of the proposed rule 
change, at least five business days prior to the date of filing of 
the proposed rule change, or such shorter time as designated by the 
Commission. The Commission notes that CBOE has satisfied the five-
day pre-filing notice requirement.
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    Normally, a proposed rule change filed under 19b-4(f)(6) may not 
become operative prior to 30 days after the date of filing. However, 
Rule 19b-4(f)(6)(iii) \12\ permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange has requested that the 
Commission waive the 30-day operative delay. In its filing, the 
Exchange noted that waiver of the 30-day operative delay, and immediate 
implementation of the described rule change, would allow the Exchange 
to (i) implement direct-booking of non-marketable non-Hybrid 3.0 
Classes concurrent with related fee changes, which were filed with the 
Commission for immediate effectiveness on December 21, 2007 and which 
take effect on January 1, 2008; and (ii) immediately utilize HAL in 
Hybrid 3.0 Classes, which will allow Market-Makers appointed to the 
relevant Hybrid 3.0 option class to electronically participate on 
qualifying flashed orders.
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    \12\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest. 
The proposed rule change will allow a greater number of users to trade 
against certain orders sooner. In addition, initiating HAL for Hybrid 
3.0 Classes provides further automation to order handling by allowing 
Market-Makers to electronically participate on such orders. 
Accordingly, consistent with the protection of investors and the public 
interest, the Commission designates the proposed rule change to be 
operative upon filing with the Commission.\13\
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    \13\ For the purposes only of waiving the 30-day operative 
delay, the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate 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 e-mail to rule-comments@sec.gov. Please include 

File Number SR-CBOE-2007-153 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2007-153. 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 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-2007-153 and should be 
submitted on or before January 29, 2008.
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    \14\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-95 Filed 1-7-08; 8:45 am]

BILLING CODE 8011-01-P
