
[Federal Register: June 30, 2008 (Volume 73, Number 126)]
[Notices]               
[Page 36939-36941]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30jn08-130]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57997; File No. SR-CBOE-2008-30]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change Relating to the 
Hybrid Opening System

June 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 June 5, 2008, 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 the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \7\ 17 CFR 200.30-3(a)(12).
    \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 revise its Hybrid Opening System 
(``HOSS'') procedures. The text of the proposed rule change is 
available at the Exchange, on the Exchange's Web site (http://
www.cboe.org/Legal), and in 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, the Exchange 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. 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
    CBOE proposes to amend CBOE Rule 6.2B, Hybrid Opening System 
(``HOSS''), which pertains to trading rotations for series trading on 
the CBOE Hybrid Trading System (``Hybrid''), in order to allow the 
Exchange to permit Hybrid Agency Liaison (``HAL'') functionality to be 
available on the openings in designated classes.\3\
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    \3\ See CBOE Rule 6.14, governing the operation of HAL.
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    The current HOSS method for opening chooses a single ``market 
clearing'' price that will leave bids and offers which cannot trade 
with each other.\4\ However, one or more series of a class may not open 
if one of the following conditions is met:
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    \4\ In determining the priority of orders and quotes to be 
traded, HOSS gives priority to market orders first, then to limit 
orders and quotes whose price is better than the opening price, and 
then to resting orders and quotes at the opening price. See Rule 
6.2B(c)(iv).
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     If no opening quote that complies with the legal width 
quote requirements of Rule 8.7(b)(iv) has been entered by at least one 
Market-Maker appointed to the class (or by the Designated Primary 
Market-Maker or Lead Market-Maker, if applicable for the particular 
class) (the ``opening quote condition'');
     The opening price is not within an acceptable range (as 
applicable for the particular class) compared to the lowest quote offer 
and the highest quote bid (the ``acceptable opening range condition''); 
or
     The opening trade would leave a market order imbalance 
(i.e., there are more market orders to buy or to sell for the 
particular series than can be satisfied by the limit orders, quotes and 
market orders on the opposite side) (the ``market order imbalance 
condition'').
    Under the current HOSS procedures, if the open quote condition or 
acceptable opening range condition is present, the senior official in 
the Exchange's control room may authorize the opening of the affected 
series where necessary to ensure a fair and orderly market. If the 
opening range condition is present, HOSS will not open the series but 
will send a notification to market participants indicating the reasons. 
If the market order imbalance condition is present, a notification will 
be sent to market participants indicating the size and direction (buy 
or sell) of the market order imbalance. HOSS will not open the series 
until the condition causing the delay is satisfied. HOSS will repeat 
the process until the series is open.
    Under the proposed rule change, the Exchange could designate the 
classes in which HAL would be activated for HOSS openings. For such 
designated classes, additional steps would be automatically taken using 
HAL functionality to address the opening quote, acceptable opening 
range, and market order imbalance conditions discussed above, as well 
as to address instances where CBOE's opening trade would be at a price 
that is not the current national best bid or offer (the ``NBBO 
condition''). In particular, in classes where HAL is activated for HOSS 
openings, the following procedures would apply if one of the following 
conditions is met:
     If the opening quote condition is present, HOSS would 
check to see if there is an NBBO quote on another market that falls 
within the acceptable opening range. If such an NBBO quote is present, 
the series would open and expose the marketable order(s) at the NBBO 
price. If such an NBBO quote is not present, HOSS would not open the 
series and would send a notification to market participants indicating 
the reason.\5\
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    \5\ For example, if there is no Market-Maker quote present but 
an NBBO market is present that meets CBOE's acceptable opening range 
parameter (e.g., the NBBO is $2.50-$2.80 25 x 25, while CBOE's pre-
opening BBO is $1.00-$5.00 25 x 25 and there is a market order to 
buy 10 contracts), HOSS will open without a trade and expose the 
market order to buy 10 contracts at $2.80.
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     If the acceptable opening range condition is present, HOSS 
would match orders and quotes to the extent possible at a single 
clearing price \6\ within the acceptable opening range and then expose 
the remaining marketable order(s) at the widest price point within the 
acceptable opening range or the NBBO price, whichever is better.\7\
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    \6\ In determining the priority of orders and quotes to be 
traded on the opening trade or through the subsequent exposure 
process, HOSS would give priority to public customer market orders 
first (with multiple orders ranked based on time priority), then to 
non-public customer market orders second (with multiple orders being 
ranked based on time priority), then to limit orders and quotes 
whose price is better than the opening price (with multiple orders 
and quotes being ranked in accordance with the allocation algorithm 
in effect for the option 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), and then to limit orders 
and quotes at the opening price (with multiple orders and quotes 
being ranked in accordance with the allocation algorithm in effect 
for the option class pursuant to Rule 6.45A or 6.45B). See proposed 
Interpretation and Policy .03(c)(i) to Rule 6.2B.
    \7\ For example, if the opening price would be outside of CBOE's 
acceptable opening range parameter (e.g., CBOE's pre-opening BBO is 
$2.40-$2.80 25 x 25, the next best CBOE pre-opening offer is $5.00 x 
25, and there is a market order to buy 50 contracts), HOSS will 
trade 25 contracts at $2.80 and then expose 25 contracts at $2.80 
(assuming the $2.80 acceptable opening range price is better than 
the NBBO price).

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[[Page 36940]]

     If the market order imbalance condition is present, HOSS 
would match orders and quotes to the extent possible at a single 
clearing price and then expose the remaining marketable order(s) at the 
widest price point within the acceptable opening range or the NBBO 
price, whichever is better.\8\
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    \8\ 8 For example, if there is an order imbalance and CBOE is at 
the NBBO (e.g., the NBBO is $1.00-$1.25 25 x 25, CBOE's pre-opening 
BBO $1.00-$1.20 25 x 25 and CBOE has a market order to buy 50 
contracts), HOSS would open with a trade of 25 contracts at $1.20 
and then expose 25 contracts at the NBBO price of $1.25 (assuming 
the $1.25 NBBO price is better than the acceptable opening range 
price).
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     If the NBBO condition is present, HOSS would match orders 
and quotes to the extent possible at a single clearing price within the 
acceptable opening range or the NBBO price, whichever is better, and 
then expose the remaining marketable order(s) at the NBBO price.\9\
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    \9\ For example, if an away exchange is open and posting an NBBO 
better than CBOE's anticipated opening price (e.g., the away 
exchange's BBO is $1.00-$1.15 25 x 25, while CBOE's pre-opening BBO 
is $1.00-$1.20 25 x 25, and CBOE also has a market order to buy 10 
contracts), HOSS would open with no trade and expose 10 contracts at 
a price of $1.15.
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    The order exposure process would be conducted pursuant to Rule 
6.14, Hybrid Agency Liaison (HAL). Under the HAL process, marketable 
orders would be electronically exposed to all Market-Makers appointed 
to the relevant option class if not executed at a single clearing 
price.\10\ For HOSS openings where HAL is used, this exposure period 
would afford Market-Makers appointed to the class an opportunity to 
match the widest price point within the opening range or the NBBO 
price, whichever is better. Assuming at least one Market-Maker 
committed to trade any portion of the exposed marketable order(s) 
during the exposure period, the exposure period would end and an 
allocation period would commence. The Exchange would determine on a 
class-by-class basis the applicable exposure period (which would not 
exceed 1.5 seconds) and allocation period (which, when combined with 
the designated exposure period time--as opposed to an exposure period 
that is terminated early \11\--would not exceed a total of 3 seconds) 
that would be applicable where HAL is activated for HOSS openings.
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    \10\ On an intra-day basis, orders are normally exposed through 
HAL to Market-Makers appointed to the relevant option class as well 
as members acting as agent for orders at the top of CBOE's book 
(``Qualifying Members'') in the relevant series. See Rule 6.14(b). 
For HOSS openings where HAL is used, the exposure to Qualifying 
Members would not be applicable because there would not be an 
established ``top of CBOE's book'' at the time. The Exchange notes 
that, as part of a separate rule filing, it recently modified Rule 
6.14 to permit electronic exposure of HAL orders on a class-by-class 
basis to all members that elect to receive HAL messages (not just 
Market-Makers appointed to the relevant option class and Qualifying 
Members) and to permit such members to participate in the HAL 
process. See Securities Exchange Act Release No. 57837 (May 20, 
2008), 73 FR 30431 (May 27, 2008) (SR-CBOE-2008-46). In classes 
where all members that elect to receive HAL messages are eligible to 
participate in the HAL process for a particular class on an intra-
day basis, all such members would also be eligible to participate in 
any HAL process that occurs as part of the HOSS opening in that 
class.
    \11\ In addition to the receipt of a response to trade any 
portion of the exposed order(s), the exposure period would also 
terminate early under the circumstances described in Rule 6.14(d).
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    At the conclusion of the allocation period, the order(s) would 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. 
There is no participation entitlement applicable to exposed orders, and 
response sizes are limited to the size of the exposed order for 
allocation purposes. If no responses are received or if there remains 
an unexecuted marketable order (or portion thereof), then the balance 
of the order would be booked if it is a limit order that is not 
marketable or processed in one of the following ways:
     If the remaining order balance is for the account of a 
public customer and is marketable against another exchange that is a 
participant in the Intermarket Options Linkage, then HAL would 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 shall be allocated to that order.
     If the remaining order balance is marketable against 
another exchange that is a participant in the Intermarket Options 
Linkage but is not for the account of a public customer, then HAL would 
route a Principal Linkage Order (``P Order'') on behalf of the 
Remaining Order through the Linkage and any resulting execution of the 
P Order shall 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 
would, 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''),\12\ against the 
Market-Makers that constituted the Exchange Initial BBO at a price 
equal to the Exchange Initial BBO.
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    \12\ With respect to new proposed HAL exposure period, 
``Exchange Initial BBO'' means the best bid (or offer) that exists 
in the system at the time the auction begins. This takes into 
account orders and quotes on the relevant side of the market that 
exist in the system at that time (including orders and quotes that 
may have been entered up until the beginning of the HAL auction). 
See e-mail from Jennifer Lamie, Assistant General Counsel, CBOE, to 
Sara Gillis, Special Counsel, Commission, dated June 19, 2008.
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     For all classes, any remaining balance of opening 
contingency orders not executed via HAL on the opening would be 
automatically cancelled.
     For single list classes, any remaining balance of 
marketable orders (other than opening contingency orders) not executed 
via HAL on the opening would route as determined by the Exchange on a 
class-by-class basis to PAR, BART, or at the order entry firm's 
discretion to the order entry firm's booth printer.
    Last, the Exchange notes that all transactions executed via HOSS, 
including through the new proposed HAL exposure period, must be in 
compliance with Section 11(a) of the Act \13\ and the rules promulgated 
thereunder. Section 11(a)(1) prohibits a member of a national 
securities exchange from effecting transactions on that exchange for 
its own account, the account of an associated person, or an account 
over which it or its associated person exercises investment discretion 
(collectively referred to herein as ``proprietary accounts'') unless an 
exception applies. In this regard, the Exchange notes its belief that 
orders for proprietary accounts submitted into HOSS, including any such 
orders submitted as a response through the proposed HAL exposure 
period, would qualify for an exception under Rule 11a2-2(T),\14\ 
commonly referred to as the ``effect versus execute'' exception, 
provided the member: (i) Must transmit the order from off the exchange 
floor; \15\

[[Page 36941]]

(ii) must not participate in the execution of the transaction once it 
has been transmitted to the member performing the execution; \16\ (iii) 
must not be affiliated with the executing member; \17\ and (iv) with 
respect to an account over which the member has investment discretion, 
neither the member nor its associated person may retain any 
compensation in connection with effecting the transaction except as 
provided in the rule. To the extent a member submits an order for a 
proprietary account into HOSS from on the floor (including an order for 
a proprietary account initiated from off the floor and routed to the 
member or an affiliated member on the floor for submission into HOSS), 
such an order would not qualify for the effect versus execute 
exception.
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    \13\ 15 U.S.C. 78k(a).
    \14\ 17 CFR 240.11a2-2(T).
    \15\ In the context of other automated trading systems, the 
Commission has found that the off-floor transmission requirement is 
met if an order for a proprietary account is transmitted from a 
remote location directly to an exchange's floor by electronic means. 
See, e.g., Securities Exchange Act Release No. 57478 (March 12, 
2008), 73 FR 14521, 14538 (March 18, 2008) (SR-NASDAQ-2007-004 and 
SR-NASDAQ-2007-080) (``NASDAQ Options Market Approval Order''). The 
Exchange believes this requirement is met if an order for a 
proprietary account is transmitted from a remote location directly 
into the HOSS system by electronic means.
    \16\ The Exchange states that given HOSS's existing and proposed 
automated matching and execution services, no Exchange member enjoys 
any special control or influence over the timing of execution or 
special order handling advantages for orders executed via HOSS 
(including as proposed to be amended), as all orders will be 
centrally processed for execution by computer, rather than being 
handled by a member through bids or offers made on the trading 
floor. The member may, however, participate in clearing and settling 
the transaction.
    \17\ The Commission has recognized in the past that this 
requirement is not applicable where automated exchange facilities 
are used, as long as the design of these systems ensures that 
members do not possess any special or unique trading advantages in 
handling their orders after transmitting them to the exchange. See, 
e.g., NASDAQ Options Market Approval Order, 73 FR at 14539, and 
Securities Exchange Act Release No. 15533 (January 29, 1979), 44 FR 
6084 (January 31, 1979). The Exchange believes that this principle 
is directly applicable to HOSS, including through the proposed new 
exposure period, due to HOSS's open, electronic structure that is 
designed to prevent any Exchange members from gaining any time and 
place advantages. Therefore, the Exchange believes that an Exchange 
member effecting a transaction through HOSS (including as proposed 
to be amended) satisfies the requirement for execution through an 
unaffiliated member.
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    The Exchange believes the proposed rule change should serve to 
further enhance the efficiency of HOSS opening rotations because it 
will further automate the process for addressing opening quote, 
acceptable opening range, and market order imbalance conditions that 
may occur on the openings, as well as address NBBO condition scenarios 
where the Exchange's opening trade might occur at a price when there is 
a better away market.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act,\18\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act,\19\ 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 should serve to enhance the efficiency of HOSS opening 
rotations.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 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 that is 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 the Exchange consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (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-2008-30 on the subject line.

Paper Comments

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

    All submissions should refer to File Number SR-CBOE-2008-30. 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 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-2008-30 and should be submitted on or before July 
21, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
Florence E. Harmon,
Acting Secretary.
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    \20\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E8-14764 Filed 6-27-08; 8:45 am]

BILLING CODE 8010-01-P
