
[Federal Register: April 10, 2008 (Volume 73, Number 70)]
[Notices]               
[Page 19535-19537]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10ap08-99]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57610; File No. SR-CBOE-2008-14]

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

April 3, 2008.

I. Introduction

    On February 7, 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 proposal 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 proposed rule change was published for comment in 
the Federal Register on February 28, 2008.\3\ The Commission received 
no comments regarding the proposed rule change. This order approves the 
proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 57357 (February 20, 
2008), 73 FR 10837.
---------------------------------------------------------------------------

II. Description of the Proposal

    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

[[Page 19536]]

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.\4\ 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. According to the 
Exchange, because of 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.\5\
---------------------------------------------------------------------------

    \4\ See CBOE Rule 6.45A.02 and 6.45B.02.
    \5\ See CBOE Rule 6.74A, Automated Improvement Mechanism 
(``AIM'').
---------------------------------------------------------------------------

    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 proposal 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,\6\ and would be executed 
only if the price is at or better than the CBOE best bid or offer 
(``BBO'').
---------------------------------------------------------------------------

    \6\ 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.
---------------------------------------------------------------------------

    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 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.\7\ 
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).\8\ 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.
---------------------------------------------------------------------------

    \7\ 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.
    \8\ 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.
---------------------------------------------------------------------------

    The proposed rule would also require members to deliver to 
customers a written document, in a form approved by the Exchange, 
describing the terms and conditions of the Auction mechanism prior to 
executing Agency Orders using the Auction mechanism.
    The proposed rule would also specify that members may not use the 
Auction mechanism to circumvent the Exchange's rules limiting principal 
order transactions.\9\ 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.
---------------------------------------------------------------------------

    \9\ See CBOE Rules 6.45A.01, 6.45B.01, 6.74, Crossing Orders, 
and 6.74A.
---------------------------------------------------------------------------

    Finally, the Exchange is proposing to expand its existing AIM 
auction, which currently only applies to simple orders, to cover 
complex orders. Accordingly, 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.

III. Discussion

    After careful review, 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.\10\ In particular, the Commission finds that the proposal is 
consistent with Section 6(b)(5) of the Act,\11\ which requires, among 
other things, that the rules of a national securities exchange be 
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

[[Page 19537]]

and a national market system, and, in general, to protect investors and 
the public interest. The Commission believes that the proposal should 
allow for greater flexibility in pricing large-sized orders and may 
provide a greater opportunity for price improvement. The Commission 
also notes that the proposal is substantially similar to requirements 
set forth in the rules of another exchange.\12\
---------------------------------------------------------------------------

    \10\ In approving the 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).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ See paragraphs (d) and (e) of ISE Rule 716.
---------------------------------------------------------------------------

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-CBOE-2008-14), be, and 
hereby is approved.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-7505 Filed 4-9-08; 8:45 am]

BILLING CODE 8011-01-P
