
[Federal Register: April 1, 2008 (Volume 73, Number 63)]
[Notices]               
[Page 17388]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01ap08-86]                         


[[Page 17388]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57558; File No. SR-CBOE-2008-08]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving a Proposed Rule Change Regarding CBOE 
Rules 6.45A and 6.45B

March 26, 2008.
    On February 6, 2008, 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 Rules 6.45A and 
6.45B regarding the application of participation entitlements to orders 
executed electronically on the CBOE Hybrid Trading System (``Hybrid 
system''). The proposed rule change was published for comment in the 
Federal Register on February 21, 2008.\3\ The Commission received no 
comments on 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\See Securities Exchange Act Release No. 57332 (February 14, 
2008), 73 FR 9610.
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    CBOE Rules 6.45A and 6.45B govern priority and allocation of trades 
on the Hybrid system for equity options and index/ETF options, 
respectively. Paragraph (a) of both rules set forth the manner in which 
incoming electronic orders are allocated (the rules are substantially 
the same). First, the appropriate Procedure Committee selects a base 
matching algorithm (price-time priority, pro-rata priority, or CBOE's 
Ultimate Matching Algorithm). If price-time or pro-rata priority 
matching algorithms are selected, additional optional priority overlays 
may be applied on a trade before the matching algorithm is used to 
allocate the order. These additional optional priority overlays are 
public customer priority, market-turner priority, and a Market-Maker 
participation entitlement.\4\
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    \4\ The appropriate Procedure Committee determines, on a class-
by-class basis, whether one or more such optional priority overlays 
may be applied and the sequence in which they are applied.
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    Currently, participation entitlements may be established for Hybrid 
electronic executions pursuant to different Exchange rules. 
Specifically, CBOE Rule 8.13 allows for the establishment of a 
participation entitlement for a Preferred Market-Maker, if that Market-
Maker is quoting at the Exchange's best bid/offer at the time the order 
is received. CBOE Rule 8.87 allows for a designated participation 
entitlement applicable to the DPM in the class (or the DPM and the e-
DPMs combined, if there are e-DPMs in the class), if the DPM is quoting 
at the Exchange best bid/offer at the time the order is received. CBOE 
Rule 8.15B is virtually identical to Rule 8.87 except that it applies 
to LMMs. In each case, the Market-Maker must be quoting at the best 
bid/offer on the Exchange (the ``Exchanges BBO'') in order to receive a 
participation entitlement.
    This proposed rule change will allow for more than one 
participation entitlement to be activated for an option class (for 
purposes of electronic trading on the Hybrid system under Rules 6.45A 
and 6.45B), including in different priority sequences, provided that no 
more than one entitlement could be applied on any given trade. Thus, 
the Exchange could set up an allocation structure for a given option 
class that contemplates using both the Preferred Market-Maker 
entitlement and the DPM or LMM entitlement (DPMs and LMMs cannot be 
assigned to the same class) with different priority positions. Since 
participation entitlements are only awarded when a Market-Maker is 
quoting at the Exchange's BBO, if the first designated Market-Maker is 
not quoting at the Exchange's BBO, the proposed rule change will allow 
for another designated Market-Maker later in the sequence to receive a 
participation entitlement as long as it is quoting at the Exchange's 
BBO.
    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.\5\ In 
particular, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\6\ which requires, among other things, that 
the rules of an exchange be designed to 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, 
protect investors and the public interest. Although this change will 
allow for more than one participation entitlement to be activated for a 
class, it will not increase the participation entitlement percentage 
applicable to any individual transaction above the existing level, 
because only one entitlement will be applied on any given transaction. 
The Commission therefore believes that the proposal is consistent with 
the Act.
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    \5\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \6\15 U.S.C. 78f(b)(5).
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    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\7\ that the proposed rule change (SR-CBOE-2008-08) is approved.
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    \7\15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
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    \8\17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-6610 Filed 3-31-08; 8:45 am]

BILLING CODE 8011-01-P
