
[Federal Register: March 24, 2008 (Volume 73, Number 57)]
[Notices]               
[Page 15546-15548]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24mr08-97]                         

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SECURITIES AND EXCHANGE COMMISSION

Release No. 34-57512; File No. SR-CBOE-2008-19]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change, as Modified by Amendment No. 1 Thereto, Relating to 
Customer-to-Customer Immediate Crosses

March 17, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on March 4, 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 and II below, which Items have been prepared substantially by 
CBOE. On March 14, 2008, CBOE submitted Amendment No. 1 to the proposed 
rule change. CBOE filed the proposed rule change as a ``non-
controversial'' proposed rule change pursuant to Section 19(b)(3)(A) of 
the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ which renders it 
effective upon filing with the Commission. The Commission is publishing 
this notice to solicit comments on the proposed rule change, as 
amended, 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).
    \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 amend its Automated Improvement Mechanism 
(``AIM'') Rule to permit customer-to-customer orders to be entered 
paired and to be crossed without any AIM auction exposure period. The 
text of the proposed rule change is available at CBOE, the Commission's 
Public Reference Room, and http://www.cboe.com.

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. 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 proposes to amend Rule 6.74A to permit customer-to-customer 
orders to be entered paired and to be crossed without any AIM auction 
exposure period. Currently, CBOE Rules provide for a minimum exposure 
time of three seconds for crossing orders on the Hybrid Trading System 
(``Hybrid'') when an order entry firm (i) executes as principal against 
orders it represents as agent, or (ii) executes orders it represents as 
agent against orders solicited from members and non-member broker-
dealers to transact with such orders.\5\ However, the three second 
exposure period is not applicable when crossing two orders that are 
both for the accounts of non-broker-dealer customers. Thus, two non-
broker-dealer customer orders may be entered separately into Hybrid by 
the same order entry firm to trade against each other without waiting 
three seconds. To enhance and automate order entry firms' ability to 
submit two contra-side customer orders, the Exchange is proposing to 
introduce and to codify a new feature in its AIM Rule \6\ that the 
Exchange refers to as a ``customer-to-customer immediate cross.''
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    \5\ See CBOE Rule 6.45A, Priority and Allocation of Equity 
Option Trades on the CBOE Hybrid System, Interpretations and 
Policies .01 and .02, and Rule 6.45B, Priority and Allocation of 
Trades in Index Options and Options on ETFs on the CBOE Hybrid 
System.
    \6\ AIM is an automated auction mechanism through which a member 
that represents agency orders may electronically execute an order it 
represents as agent (``agency order'') against principal or 
solicited interest. When the Exchange receives an agency order 
properly designated for an AIM auction, a request for responses 
(``RFR'') is initiated and, subject to certain exceptions delineated 
in Rule 6.74A, the RFR lasts for a random time determined by the 
system between three and five seconds. Once the AIM auction 
concludes, the agency order is allocated at the best prices pursuant 
to allocation procedures in the Rule. See CBOE Rule 6.74A.
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    When using the AIM customer-to-customer immediate cross feature, 
the proposed rule will provide that an order entry firm (``Initiating 
Member'') may enter an agency order for the account of a non-broker-
dealer customer in AIM, paired with a solicited order for the account 
of a non-broker-dealer customer. Under the rule proposal, those paired 
orders will be automatically executed without an exposure period so 
long as the execution price: (i) Is in the applicable standard 
increment (i.e., $0.10 for series quoted at or above $3, $0.05 for 
series quotes below $3, $0.01 for series participating in the Penny 
Pilot Program, and the applicable standard or $0.01 increment for 
complex orders as designated pursuant to Rule 6.53C); (ii) will not 
trade at the same price as any resting customer order; and (iii) 
subject to certain exceptions, is not at a price that trades through 
the national best bid or offer (``NBBO''). If the Exchange determines 
on a class-by-class basis to (i) designate complex orders as eligible 
for AIM customer-to-customer immediate crosses or (ii) permit orders of 
500 or more contracts and that have a premium value of at least 
$150,000 to be executed without considering prices that might be 
available on other options exchanges, the NBBO condition shall not 
apply to such orders and instead the execution price will not trade 
through CBOE's best bid or offer (``BBO'').\7\ In addition, the 
execution price must be in the applicable standard increment and will 
not trade at the same price as any resting customer order. In the case 
of a complex order, this means that the execution price will not trade 
at the same price as any customer complex order resting in the CBOE's 
electronic complex order book. To be eligible to use the customer-to-
customer immediate cross feature, the proposed rule will also provide 
that the agency

[[Page 15547]]

order must be in a class designated by the Exchange as eligible for the 
feature and within the designated order eligibility size parameters, as 
such parameters are determined by the Exchange.
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    \7\ See proposed paragraph .09(b) to CBOE Rule 6.74A.
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    Lastly, the proposed rule will contain a cross-reference to 
Interpretation and Policy .01 to CBOE Rules 6.45A and 6.45B. 
Specifically, the proposed rule will note that Interpretation and 
Policy .01 to CBOE Rules 6.45A and 6.45B prevent an order entry firm 
from executing agency orders to increase its economic gain from trading 
against the order without first giving other trading interests on the 
Exchange an opportunity to either trade with the agency order or to 
trade at the execution price when the member was already bidding or 
offering on the book. However, as the proposed rule will also note, the 
Exchange recognizes that it may be possible for a firm to establish a 
relationship with a customer or other person to deny agency orders the 
opportunity to interact on the Exchange and to realize similar economic 
benefits as it would achieve by executing agency orders as principal. 
Therefore, the proposed rule will provide that it would be a violation 
of Interpretation and Policy .01 to Rule 6.45A or 6.45B, as applicable, 
for a firm to circumvent Interpretation and Policy .01 to Rule 6.45A or 
6.45B, as applicable, by providing an opportunity for (i) a customer 
affiliated with the firm, or (ii) a customer with whom the firm has an 
arrangement that allows the firm to realize similar economic benefits 
from the transaction as the firm would achieve by executing agency 
orders as principal, to regularly execute against agency orders handled 
by the firm immediately upon their entry as AIM customer-to-customer 
immediate crosses. The Exchange believes that this provision should 
help prevent a firm from doing indirectly what it is prohibited from 
doing directly as principal. This provision of CBOE's proposed rule is 
substantially similar to a provision in ISE's Rules.\8\
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    \8\ See Supplemental Material .01 to ISE Rule 717.
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2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) of the Act \9\ that an exchange have 
rules that are designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of 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. In particular, the proposed rule change will provide 
members with a more efficient means of executing their customer option 
orders subject to the Exchange's existing requirements limiting 
principal transactions, and will allow CBOE to effectively compete with 
ISE.
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    \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 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

    CBOE 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, 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).
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    A proposed rule change filed under 19b-4(f)(6) normally may not 
become operative prior to 30 days after the date of filing.\12\ 
However, Rule 19b-4(f)(6)(iii) \13\ 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. The Commission believes 
that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest because it will allow 
customers to benefit from the proposed rule change without delay.\14\ 
The Commission hereby grants the Exchange's request and designates the 
proposal as operative upon filing.
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    \12\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file 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. 
CBOE has complied with this requirement.
    \13\ Id.
    \14\ For purposes only of waiving the 30-day operative delay of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 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, as amended, 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 No. SR-CBOE-2008-19 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CBOE-2008-19. 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, 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

[[Page 15548]]

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-2008-19 and should be submitted on or before April 14, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-5795 Filed 3-21-08; 8:45 am]

BILLING CODE 8011-01-P
