
[Federal Register: May 30, 2008 (Volume 73, Number 105)]
[Notices]               
[Page 31167-31169]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30my08-97]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57849; File No. SR-CBOE-2008-16]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change To Reduce 
Certain Order Exposure Times From Three Seconds to One Second

May 22, 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 16, 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 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

    The Exchange proposes to reduce the order handling and exposure 
periods contained in certain of its rules from three seconds to one 
second. The text of the proposed rule change is available on the 
Exchange's Web site (http://www.cboe.org/Legal), at CBOE's principal 
office, 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 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
    The purpose of the proposed rule change is to reduce the order 
handling and exposure periods contained in Rules 6.45A, Priority and 
Allocation of Equity Option Trades on the CBOE Hybrid System, 6.45B, 
Priority and Allocation of Trades in Index Options and Options on ETFs 
on the CBOE Hybrid System, 6.74A, Automated Improvement Mechanism 
(``AIM''), and 6.74B, Solicitation Auction Mechanism, from three 
seconds to one second.
    Rules 6.45A and 6.45B provide that an order entry firm may not 
execute an order it represents as agent with a facilitation or 
solicited order (referred to herein as ``crossing orders'') using the 
Hybrid Trading System (``Hybrid'') unless it first complies with the 
three-second exposure requirement. Specifically, order entry firms may 
not execute a facilitation cross unless: (i) The agency order is first 
exposed on Hybrid for at least three seconds; (ii) the order entry firm 
has been bidding or offering for at least three seconds prior to 
receiving the agency order that is executable against such bid or 
offer; or (iii) the order entry firm proceeds in accordance with the 
floor-based open outcry crossing rules contained in CBOE Rule 6.74, 
Crossing Orders. Similarly, order entry firms may not execute an order 
they represent as agent against orders solicited from members and non-
member broker-dealers unless the agency order is first exposed on 
Hybrid for at least three seconds. During this three-second exposure 
period for crossing orders, other members may enter orders to trade 
against the exposed order. Under the proposal, these exposure periods 
would be reduced to one second.\3\
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    \3\ For Hybrid 3.0 classes, the exposure period is established 
on a class-by-class basis, provided the minimum exposure time must 
be at least three seconds and shall not exceed 30 seconds. See CBOE 
Rule 6.45B.03. The Exchange is proposing to reduce the minimum time 
from three seconds to one second. The 30-second parameter will 
remain unchanged.
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    Rule 6.74A contains the requirements applicable to the execution of 
orders using AIM. AIM allows members to enter cross transactions on 
Hybrid. Currently, orders entered into AIM are exposed for a random 
time period determined by the system that is not less than three 
seconds and not more than five seconds, giving an opportunity

[[Page 31168]]

for additional trading interest to be entered before the orders are 
automatically executed. Under the proposal, the random exposure period 
for AIM would be reduced to one second.
    Rule 6.74B contains the requirements applicable to the execution of 
orders using the Solicitation Auction Mechanism (the ``SAM Auction''). 
The SAM Auction allows members to enter larger-sized cross transactions 
on Hybrid (i.e., orders of 500 contracts or more). Orders entered into 
the SAM Auction are currently exposed for a three second period, giving 
an opportunity for additional trading interest to be entered before the 
orders are automatically executed. Under the proposal, the exposure 
period for the SAM Auction would be reduced to one second.
    The Exchange notes that in adopting the various three-second order 
handling and exposure periods, it recognized that three seconds would 
not be long enough to allow human interaction with the orders (or RFQs, 
as applicable). Rather, market participants had become sufficiently 
automated that they could react to these orders electronically. In this 
context, CBOE believes it would be in all market participants' best 
interest to minimize the exposure period to a time frame that continues 
to allow adequate time for market participants to electronically 
respond, as both the order being exposed and the participants 
responding are subject to market risk during the exposure period. In 
this respect, the Exchange states that its experience with the three-
second exposure time period indicates that one second would provide an 
adequate response time.\4\ Most members wait until the end of the last 
second of the three second period before responding to exposed orders 
in order to minimize market risk. Accordingly, the Exchange does not 
believe it is necessary or beneficial to the orders being exposed to 
continue to subject them to market risk for a full three seconds.
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    \4\ The Exchange has numerous market participants that have the 
capability and do opt to respond within a one-second exposure period 
on its Hybrid trading platform. In this regard, the Exchange notes 
that it has other Hybrid electronic exposure mechanisms for which 
timers set at or below one second provide for an adequate response 
time. For example, the exposure and allocation timers for the 
Exchange's Hybrid Agency Liaison (``HAL'') mechanism are currently 
both set at 0.300 seconds, and numerous market participants can and 
do opt to respond to HAL exposure messages within this time frame. 
See CBOE Rule 6.14.
    HAL is a feature that provides automated order handling in 
designated classes for qualifying electronic orders that are not 
automatically executed. Qualifying orders that are received by HAL 
are electronically exposed immediately upon receipt for an exposure 
period of 0.300 seconds. If during the exposure period a Market-
Maker or Qualifying Member commits to trade any portion of the 
order, the exposure period ends and the allocation period of 0.300 
seconds will begin. At the conclusion of the allocation period the 
order is executed or, if no responses are received, processed in 
accordance with the procedures set forth in Rule 6.14.
    The Exchange believes that its experience with the HAL mechanism 
supports its view that one second is sufficient time for market 
participants to respond to CBOE's AIM and SAM Auction mechanisms, 
which operate on the Hybrid trading system and employ the same type 
of mechanical messaging as the HAL mechanism. The Exchange also 
believes its experience with the HAL mechanism supports its view 
that one second is sufficient time for market participants to have 
an opportunity to enter orders to trade against an order exposed in 
the book before the order entry firm is permitted to enter a contra-
side facilitation or solicited order. This is because market 
participants receive mechanically messaged information about book 
updates, and are able and do opt to automatically submit orders and 
quotes in response to those book updates on the Hybrid trading 
system in substantially the same manner as they would respond to a 
HAL message. The Exchange also notes that any delay or latency 
associated with submitting responses to an AIM or SAM Auction, or 
responding to a book update, would be the same as responding to HAL 
because all such responses are processed over the same network.
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    When approving the existing three-second order handling and 
exposure periods, the Commission concluded that, in the electronic 
environment of Hybrid, reducing the exposure period to three seconds 
could facilitate the prompt execution of orders while providing 
participants in Hybrid with an adequate opportunity to compete for 
exposed bids and offers.\5\ Continuing on that same logic, CBOE 
believes that reducing its order handling and exposure periods from 
three seconds to one second will benefit market participants. Since 
members react to these orders electronically, and generally only opt to 
respond at the tail end of the three-second period in order to minimize 
market risk, CBOE believes that reducing the time periods to one second 
will continue to provide CBOE members with sufficient time to ensure 
effective interaction with orders.\6\ At the same time, CBOE believes 
that reducing the time periods to one second will allow it to provide 
investors and other market participants with more timely executions, 
thereby reducing market risk.
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    \5\ See, e.g., Securities Exchange Act Release No. 53567 (March 
29, 2006), 71 FR 17529 (April 6, 2006) (SR-CBOE-2006-09) (order 
approving the reduction of the exposure period for crossing orders 
in Hybrid under Rules 6.45A and 6.45B from ten seconds to three 
seconds).
    \6\ The Exchange believes that the proposed timeframe would give 
market participants sufficient time to respond, compete, and provide 
price improvement for orders. The Exchange also notes that 
electronic systems are readily available to, if not already in place 
for, CBOE members that allow them to respond in a meaningful way 
within the proposed timeframe.
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    This shortened exposure period is fully consistent with the 
electronic nature of Hybrid. CBOE members have electronic systems 
available that would allow them to respond in a meaningful way within 
the proposed timeframe. It will continue to provide market participants 
with sufficient time to respond, compete, and provide price improvement 
for orders.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act \7\ in general and furthers the objectives of 
Section 6(b)(5) of the Act \8\ 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 rule change will 
provide investors with more timely execution of their options orders, 
while ensuring that there is an adequate exposure of all crossing 
orders in the CBOE marketplace.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 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

    No written comments were solicited or received with respect to the 
proposed rule change.

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 CBOE consents, the Commission will:
    (A) By order approve such proposed rule change, or

[[Page 31169]]

    (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-2008-16 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-2008-16. 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-2008-16 and should be 
submitted on or before June 20, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
J. Lynn Taylor,
Assistant Secretary.
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    \9\ 17 CFR 200.30-3(a)(12).
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 [FR Doc. E8-12030 Filed 5-29-08; 8:45 am]

BILLING CODE 8010-01-P
