
[Federal Register: May 27, 2008 (Volume 73, Number 102)]
[Notices]               
[Page 30431-30433]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27my08-100]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57837; File No. SR-CBOE-2008-46]

 
 Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Related To the Hybrid Agency Liaison

May 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 May 15, 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 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 filing with 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

    The Exchange proposes to modify Rule 6.14, Hybrid Agency Liaison 
(``HAL''), so that the Exchange may determine on a class-by-class basis 
to permit electronic exposure of HAL orders to all CBOE members to give 
additional opportunities to provide the orders with the best price. The 
text of the proposed rule change 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 those 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 parts of such 
statements.

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

1. Purpose
    In classes where HAL is activated, HAL automatically upon receipt 
processes market and limit orders if: (i) The market orders or limit 
orders are marketable against the Exchange's disseminated quotation 
while that quotation is not at the national best bid or offer 
(``NBBO''); (ii) the limit orders would improve the Exchange's 
disseminated quotation and are marketable against quotations 
disseminated by other exchanges participating in the Intermarket 
Options Linkage (``Linkage''); and (iii) for Hybrid 3.0 classes, the 
limit orders would improve the Exchange's disseminated quotation, 
except when the disseminated quotation is represented by a manual 
quote, in which case the limit order will automatically route to the 
electronic book instead of being processed by HAL, and the manual quote 
will be cancelled.\5\
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    \5\ See Rule 6.14(a).
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    When these circumstances occur, orders that are received by HAL are 
immediately upon receipt electronically exposed to all Market-Makers 
appointed to the relevant option class, as well as all members acting 
as agent for orders at the top of the Exchange's book (``Qualifying 
Members'') in the relevant series.\6\ At the conclusion of the HAL 
process:
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    \6\ The orders are exposed for a period determined by the 
Exchange on a class-by-class basis, which period shall not exceed 
1.5 seconds. If a Market-Maker or Qualifying Member (on behalf of 
the order it is representing) commits to trade with any portion of 
the order during the exposure period, then the exposure period will 
end, and an allocation period will begin. The allocation period is 
determined by the Exchange on a class-by-class basis and, when 
combined with the designated exposure period (as opposed to an 
exposure period that is terminated early), shall not exceed a total 
of 3 seconds. See Rule 6.14(b).

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[[Page 30432]]

     The order will be filled in accordance with the allocation 
algorithm in effect for the class pursuant to Rule 6.45A, Priority and 
Allocation of Equity Option Trades on the CBOE Hybrid System, or 6.45B, 
Priority and Allocation of Trades in Index Options and Options on ETFs 
on the CBOE Hybrid System, subject to certain requirements. In 
particular, there is no participation entitlement applicable to exposed 
orders, and response sizes are limited to the size of the exposed order 
for allocation purposes; or
     If no responses are received or if there remains an 
unexecuted portion of a marketable order, then the remaining balance of 
the order will be routed through Linkage.\7\
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    \7\ If the remaining order balance is for the account of a 
public customer and is marketable against another exchange that is a 
participant in Linkage, then HAL will route a Principal Acting as 
Agent Linkage Order (``P/A Order'') on behalf of the remaining order 
balance through the Linkage, and any resulting execution of the P/A 
Order will be allocated to that order. If the remaining order 
balance is marketable against another exchange that is a participant 
in Linkage but is not for the account of a public customer, then HAL 
will route a Principal Linkage Order (``P Order'') on behalf of the 
Remaining Order through the Linkage, and any resulting execution of 
the P Order will be allocated to the remaining order. In either 
situation above, if the Linkage order cannot be transmitted from the 
Exchange because the price of the Linkage order (or a better price) 
is no longer available on any market, then HAL will, pursuant to 
normal order allocation processing, execute the remaining order 
balance against the Exchange's existing quote (provided such 
execution would not cause a trade-through) or, if the Exchange's 
quote is inferior to the Exchange's best bid or offer at the time 
the order was received by HAL (``Exchange Initial BBO''), against 
the Market-Makers that constituted the Exchange Initial BBO at a 
price equal to the Exchange Initial BBO. If the remaining order is 
not marketable (either on CBOE or another exchange), it will be 
entered into the Hybrid book for dissemination. See Rule 
6.14(b)(i)--(iii).
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    If a marketable order is not executed via HAL, it is routed through 
Linkage to a competing exchange(s) even though there may be other CBOE 
members who would be willing to execute the order at the better price. 
Additionally, when an order is sent through Linkage, the other exchange 
charges an execution fee. The cost of sending the order through Linkage 
can be substantial, particularly with respect to other options 
exchanges that have adopted a maker-taker fee schedule.\8\ To retain as 
much order flow as possible on CBOE and to help reduce costs associated 
with the number of orders sent through Linkage,\9\ CBOE proposes to 
allow itself the flexibility to determine on a class-by-class basis to 
expose orders received by HAL to all members that have elected to 
receive HAL messages (not just Market-Makers appointed to the relevant 
option class and Qualifying Members), and to permit such members to 
respond to HAL on a proprietary or agency basis. This would provide for 
additional opportunities to provide orders with the best price on CBOE.
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    \8\ Several options exchanges have adopted a fee structure in 
which firms receive a rebate for the execution of orders resting in 
the limit order book (i.e., posting liquidity) and pay a fee for the 
execution of orders that trade against liquidity resting on the 
limit order book (i.e., taking liquidity). Taker fees currently 
range up to $0.45 per contract and are charged without consideration 
of the order origin category, including public customer orders. In 
contrast, CBOE does not generally charge a fee for the execution of 
public customer orders that are routed directly to our market. The 
effective price paid by a customer purchasing an option can be 
considerably higher on an exchange that charges a taker fee. For 
example, a customer that enters a marketable limit order to buy 10 
contracts for $0.10 would pay $100 on CBOE and $104.50 if executed 
on an exchange that charges a $0.45 taker fee (an effective 4.5% 
increase). Because orders cannot be executed at prices inferior to 
the NBBO, members are effectively forced to pay taker fees when an 
exchange with a taker fee structure is at the NBBO and the members' 
orders are directly routed to such an exchange or indirectly routed 
to such an exchange through Linkage (where the fees are passed 
through).
    \9\ Outbound Linkage costs are incurred by CBOE and its members. 
CBOE currently rebates DPM transaction fees generated from 
transactions against customer orders that underlie outbound P/A and 
P Orders (``CBOE Transactions''). In addition, when DPMs incur fees 
to execute P/A or P Orders at other exchanges (``Away 
Transactions''), those DPMs are credited an additional amount per 
contract to offset such fees. CBOE also credits DPMs an additional 
amount per contract on both CBOE Transactions and Away Transactions 
to offset the Sales Value Fee (which offsets fees payable to the 
Commission under Section 31 of the Act), the Options Clearing 
Corporation (``OCC'') per contract fee applicable to Market-Makers 
and specialists set forth on the OCC Schedule of Fees, and an 
estimated average clearing firm per contract fee. In the case of a P 
Order, the Exchange also passes through the total amount of the 
credits above to the member that originated the order underlying the 
P Order. See Section 21 of the CBOE Fees Schedule.
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    For such classes, each member that submits a response to trade with 
an order during the exposure or allocation periods would be entitled to 
receive an allocation of the order in accordance with the allocation 
algorithm in effect for the option class pursuant to Rule 6.45A or 
6.45B, subject to certain requirements. As with the existing HAL 
allocation process, there would be no participation entitlement 
applicable to exposed orders, and response sizes would be limited to 
the size of the exposed order for allocation purposes. In addition, if 
the applicable allocation algorithm in effect for the option class is 
price-time or pro-rata, then any public customer priority overlay in 
effect for a class would not be applicable. The Exchange believes this 
condition is a reasonable modification designed to give market 
participants a more balanced opportunity to participate in an 
allocation. The Exchange also notes that, in accordance with the 
existing provisions of Rules 6.45A and 6.45B, there is no requirement 
that a public customer priority overlay be in effect if there is no 
participation entitlement.
    Lastly, because all members would be permitted to respond on a 
proprietary or agency basis, the HAL provision that normally prohibits 
the dissemination of information regarding exposed orders to third 
parties would not apply.\10\ The Exchange believes that permitting the 
dissemination of this information by members to third parties will 
assist in its efforts to provide additional opportunities for orders to 
receive executions at the NBBO on CBOE and reduce costs by reducing the 
number of Linkage orders sent to other exchanges.
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    \10\ This prohibition only deals with disseminating information 
to third parties after an order is exposed in HAL. See Rule 6.14.02. 
The Exchange notes that members remain subject to the requirements 
of Rule 4.18, Prevention of the Misuse of Material, Nonpublic 
Information, and Rule 8.91, Limitations on Dealings of DPMs and 
Affiliated Persons of DPMs.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act \11\ in general and furthers the objectives of 
Section 6(b)(5) of the Act \12\ in particular in that it is designed to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, 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 Exchange believes that the proposed change would 
give additional opportunities to provide orders executions at the NBBO 
on CBOE and reduce costs by reducing the number of Linkage orders sent 
to other exchanges.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 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 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.

[[Page 30433]]

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

    Because the foregoing rule 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 \13\ and Rule 19b-4(f)(6) 
thereunder.\14\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 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 the Exchange 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) \15\ 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 Exchange believes that 
the expansion of HAL to permit all members to respond in the manner 
proposed will provide additional opportunities for orders to receive 
executions at the NBBO on CBOE and reduce costs by reducing the number 
of Linkage orders sent to other exchanges. The Exchange believes that 
the proposed rule change is non-controversial, does not raise any new, 
unique or substantive issues, and is essential for competitive purposes 
and to promote a free and open market for the benefit of investors. For 
these reasons, the Commission believes that waiving the 30-day 
operative delay is consistent with the protection of investors and the 
public interest. Accordingly, the Commission designates the proposed 
rule change to be operative upon filing with the Commission.\16\
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    \15\ 17 CFR 240.19b-4(f)(6)(iii).
    \16\ 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 such 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-2008-46 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-2008-46. 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-2008-46 and should be 
submitted on or before June 17, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-11703 Filed 5-23-08; 8:45 am]

BILLING CODE 8010-01-P
