
[Federal Register: February 28, 2008 (Volume 73, Number 40)]
[Notices]               
[Page 10837-10839]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28fe08-109]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57357; File No. SR-CBOE-2008-14]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change To Establish a 
Solicitation Auction Mechanism and To Amend Its Automated Improvement 
Mechanism

February 20, 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 February 7, 2008, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') 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 substantially 
prepared by the CBOE. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to establish a new automated mechanism for auctioning 
larger-sized orders and to modify its existing automated improvement 
mechanism (``AIM'') to permit its use for the execution of complex 
orders. The text of the proposed rule change is available on the 
Exchange's Web site at (http://www.cboe.org/Legal), at the 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, 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Under CBOE Rules 6.45A, Priority and Allocation of Equity Option 
Trades on the CBOE Hybrid System, and 6.45B, Priority and Allocation of 
Trades in Index Options and Options on ETFs on the CBOE Hybrid System, 
order entry firms that electronically enter orders are required to 
expose an unsolicited agency order (``Agency Order'') for at least 3 
seconds before crossing it against an order that it has solicited from 
other broker-dealers.\3\ Currently, an order entry firm can comply with 
this requirement by entering the Agency Order on the Exchange, waiting 
3 seconds, and then entering the solicited order. The Exchange states 
that, due to the 3-second exposure requirement, order entry firms have 
no level of assurance that they will be able to electronically pair 
solicited orders against Agency Orders for executions. As an 
alternative, CBOE has developed AIM, which permits an Agency Order to 
be electronically executed against principal or solicited interest.\4\
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    \3\ See CBOE Rule 6.45A.02 and 6.45B.02.
    \4\ See CBOE Rule 6.74A, Automated Improvement Mechanism 
(``AIM'').
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    To better compete with various other electronic alternatives 
available at other options exchanges, CBOE has also developed an 
enhanced auction mechanism for larger-sized simple and complex Agency 
Orders that are to be executed against solicited orders (the 
``Auction''). The proposed rule change would implement this 
functionality in options classes designated by the Exchange. Such 
orders would be required to be for at least 500 contracts, must be 
entered as all-or-none limit (``AON'') orders,\5\ and would be executed 
only if the price is at or better than the CBOE best bid or offer 
(``BBO'').
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    \5\ The Exchange's existing rules provide that an AON order may 
be crossed with another AON order if all bids or offers at the same 
price at which the cross is to be effected have been filled. See, 
e.g., Interpretation and Policy .01 to CBOE Rule 6.44, Bids and 
Offers in Relation to Units of Trading. The proposed Auction system 
is modeled after this principle, except that it would allow the 
crossing of large-sized AON orders to take place so long as there 
are no public customer orders at the proposed price and there is 
insufficient size at an improved price to accommodate the Agency 
Order.
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    When a proposed solicited cross is entered into the Auction, the 
Exchange would send a Request for Responses (``RFR'') message to all 
members that have elected to receive such messages. Members would then 
have 3 seconds to

[[Page 10838]]

respond with a price that would improve the proposed execution price 
for the Agency Order, except that responses would not be entered for 
the account of an options market maker from another options exchange. 
Responses may be entered and executed at prices that are in a multiple 
of the applicable minimum price increment that has been designated by 
the Exchange for the series, which increment may not be less than 
$0.01. The Exchange believes this would allow for greater flexibility 
in pricing large-sized orders and provide for a greater opportunity for 
price improvement.
    The Auction will conclude at the sooner of various conditions.\6\ 
At the conclusion of the Auction, the Agency Order would be executed 
against the solicited order unless there is sufficient size to execute 
the entire Agency Order at a price (or prices) that improves the 
proposed crossing price. In the case where there is one or more public 
customer orders resting in the book at the proposed execution price on 
the opposite side of the Agency Order, the solicited order would be 
cancelled and the Agency Order would be executed against other bids 
(offers) if there is sufficient size at the bid (offer) to execute the 
entire size of the Agency Order (size would be measured considering 
resting orders and quotes and responses).\7\ If there is not sufficient 
size to execute the entire Agency Order, the proposed cross would not 
be executed and both the Agency Order and solicited order would be 
cancelled. Additionally, the proposed cross would not be executed and 
both the Agency Order and solicited order would be cancelled if the 
execution price would be inferior to the BBO.
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    \6\ The Auction shall conclude at the sooner of: (i) The end of 
the response period, (ii) upon receipt by the Hybrid Trading System 
(``Hybrid'') of an unrelated order (in the same series as the Agency 
Order) that is marketable against either the Exchange's disseminated 
quote (when such quote is the NBBO) or the responses, (iii) upon 
receipt by Hybrid of an unrelated limit order (in the same series as 
the Agency Order and on the opposite side of the market as the 
Agency Order) that improves any response, (iv) any time a response 
matches the Exchange's disseminated quote on the opposite side of 
the market from the responses, or (v) any time there is a quote lock 
on the Exchange pursuant to CBOE Rule 6.45A(d) or 6.45B(d). See 
paragraph (b)(2) of proposed CBOE Rule 6.74B, Solicitation Auction 
Mechanism.
    \7\ When the Agency Order is executed at an improved price(s) or 
at the proposed execution price against electronic orders, quotes 
and responses, priority would be pursuant to the allocation 
algorithm in effect pursuant to CBOE Rule 6.45A or 6.45B, as 
applicable. The allocation for simple and complex orders would be 
the same, except that complex orders would also be subject to the 
complex order priority rules applicable to bids and offers in the 
individual series legs of a complex order contained in paragraphs 
(d) or .06 of CBOE Rule 6.53C, Complex Orders on the Hybrid System, 
as applicable.
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    The proposed rule would also require members to deliver to 
customers a written document describing the terms and conditions of the 
Auction mechanism prior to executing Agency Orders using the Auction 
mechanism. Such written document would be required to be in a form 
approved by the Exchange.
    The proposed rule would also specify that members may not use the 
Auction mechanism to circumvent the Exchange's rules limiting principal 
order transactions.\8\ Additionally, the Exchange notes that for 
purposes of paragraph (e) to CBOE Rule 6.9, Solicited Transactions, 
which paragraph prohibits anticipatory hedging activities prior to the 
entry of an order on the Exchange, the terms of an order would be 
considered ``disclosed'' to the trading crowd on the Exchange when the 
order is entered into the Auction mechanism.
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    \8\ See CBOE Rules 6.45A.01, 6.45B.01, 6.74, Crossing Orders, 
and 6.74A.
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    Finally, the Exchange is proposing to expand its existing AIM 
auction, which currently only applies to simple orders, to cover 
complex orders. Thus, complex orders would be eligible for execution 
through AIM at a net debit or net credit price provided the Auction 
eligibility requirements of the AIM rule are satisfied and the Agency 
Order is eligible for AIM considering its complex order type, order 
origin code (i.e., non-broker-dealer public customer, broker-dealers 
that are not Market-Makers or specialists on an options exchange, and/
or Market-Makers or specialists on an options exchange), class, and 
marketability as determined by the Exchange. Allocation of complex 
orders that are subject to AIM will be the same as the existing 
allocation procedures, provided that the complex order priority rules 
applicable to bids and offers in the individual series legs of a 
complex order contained in CBOE Rule 6.53C(d) or 6.53C.06, as 
applicable, will continue to apply. In addition, the Exchange is 
proposing to provide in its rules that it may determine on a class-by-
class basis that orders of 500 or more contracts may be executed 
through AIM without considering prices that might be available on other 
options exchanges. All other aspects of the AIM auction will continue 
to apply unchanged.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\9\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\10\ in particular, in that it 
is designed to prevent fraudulent and manipulative acts and practices, 
promote just and equitable principles of trade, 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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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants, or Others

    Written comments on the proposed rule change were neither solicited 
nor received.

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 Exchange 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 rule-comments@sec.gov. Please include 
File Number SR-CBOE-2008-14 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.


[[Page 10839]]


All submissions should refer to File Number SR-CBOE-2008-14. 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 the 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-2008-14 and should be 
submitted on or before March 20, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-3729 Filed 2-27-08; 8:45 am]

BILLING CODE 8011-01-P
