
[Federal Register: June 13, 2008 (Volume 73, Number 115)]
[Notices]               
[Page 33865-33867]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13jn08-97]                         

=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57937; File No. SR-CBOE-2008-58]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change To Allow the Exchange To Determine To Permit Electronic 
Exposure of SAL, HAL, and/or COA Orders to All CBOE Market-Makers

June 6, 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 June 3, 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\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to modify Rules 6.13A, Simple Auction Liaison 
(``SAL''), 6.14, Hybrid Agency Liaison (``HAL''), and 6.53C(d), Process 
for Complex Order RFR Auction (``COA''),

[[Page 33866]]

so that the Exchange may determine on a class-by-class basis to permit 
electronic exposure of SAL, HAL and/or COA orders to all CBOE Market-
Makers 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 aspects 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 SAL, HAL and/or COA are activated, orders are 
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 
options series. During the applicable exposure period, the orders that 
are subject to exposure are eligible to receive a better price.\5\ At 
the conclusion of the SAL, HAL or COA process, as applicable, the order 
is then allocated pursuant to the allocation algorithms described in 
the relevant rules. In addition, in the case of HAL, 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 to a competing exchange(s).\6\ 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.\7\
---------------------------------------------------------------------------

    \5\ SAL is a feature within CBOE's Hybrid System that auctions 
eligible marketable orders for price improvement over the national 
best bid or offer (``NBBO''). See Rule 6.13A. HAL is a feature 
within CBOE's Hybrid System that provides automated order handling 
for eligible 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 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. See Rule 6.14. COA is a 
feature within CBOE's Hybrid System that auctions eligible complex 
orders for price improvement. See Rule 6.53C.
    \6\ 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).
    \7\ 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).
---------------------------------------------------------------------------

    In order to offer additional opportunities for price improvement 
and, in the case of HAL, to retain as much order flow as possible on 
CBOE and to help reduce costs associated with the number of orders sent 
through Linkage,\8\ CBOE proposes to allow the Exchange to determine on 
a class-by-class basis to permit responses to orders exposed through 
SAL, HAL and/or COA to be submitted by all CBOE Market-Makers (not just 
Market-Makers appointed to the relevant option class) and Qualifying 
Members. This would provide for additional opportunities to provide 
orders with price improvement and, in the case of HAL, to provide those 
orders with the best price on CBOE instead of routing the order through 
Linkage.
---------------------------------------------------------------------------

    \8\ 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 PA and P 
Orders (``CBOE Transactions''). In addition, when DPMs incur fees to 
execute PA 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.
---------------------------------------------------------------------------

    For such classes, each CBOE Market-Maker that submits a response to 
trade with an order during the response period would be entitled to 
receive an allocation of the order in accordance with the existing 
allocation algorithms in effect for the option class, as described in 
the SAL, HAL and COA rules, as applicable. All other provisions of the 
SAL, HAL and/or COA rules, as applicable, would apply unchanged.
    To the extent the Exchange determines to permit all CBOE Market-
Makers to respond to SAL, HAL and/or COA, the Exchange may also 
determine to apply a seat cost, if any, to Market-Makers not assigned 
to the class that elect to receive the SAL, HAL and/or COA messages. 
Any such seat cost so determined by the Exchange would be submitted to 
the Commission in a separate rule filing.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act \9\ in general and furthers the objectives of 
Section 6(b)(5) of the Act \10\ 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

[[Page 33867]]

public interest. In particular, the Exchange believes that the proposed 
change would give additional opportunities to provide orders executions 
at improved prices and, in the case of HAL, executions at the NBBO on 
CBOE and reduce costs by reducing the number of Linkage orders sent to 
other exchanges.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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.

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, 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 \11\ and Rule 19b-
4(f)(6) thereunder.\12\
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 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.
---------------------------------------------------------------------------

    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-2008-58 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CBOE-2008-58. 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-2008-58 and should be 
submitted on or before July 7, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-13303 Filed 6-12-08; 8:45 am]

BILLING CODE 8010-01-P
