
[Federal Register: August 18, 2009 (Volume 74, Number 158)]
[Notices]
[Page 41761-41763]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18au09-82]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60479; File No. SR-CBOE-2009-058]


Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed
Rule Change Related to the Hybrid Matching Algorithms

August 11, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on August 6, 2009, the Chicago Board Options Exchange,
Incorporated (``Exchange'' or ``CBOE'') filed with the Securities and
Exchange Commission (the ``Commission'') the proposed rule change as
described in Items I and II below, which Items have been prepared by
the Exchange. 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.
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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 is proposing to introduce an additional priority
overlay related to small orders executed on its Hybrid System on a
pilot basis until August 31, 2009. 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.

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 self-regulatory organization
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 the
Statutory Basis for, the Proposed Rule Change

1. Purpose
    CBOE Rules 6.45A and 6.45B set forth, among other things, the
manner in which electronic Hybrid System trades in options are
allocated. Paragraph (a) of each rule essentially governs how incoming
orders received electronically by the Exchange are electronically
executed against interest in the CBOE quote. Paragraph (a) of each rule
currently provides a ``menu'' of matching algorithms to choose from
when executing incoming electronic orders. The menu format allows the
Exchange to utilize different matching algorithms on a class-by-class
basis. The menu includes, among other choices, the ultimate matching
algorithm (``UMA''), as well as price-time and pro-rata priority
matching algorithms with additional priority overlays. The priority
overlays for price-time and pro-rata currently include: public customer
priority for public customer orders resting on the Hybrid System,
participation entitlements for certain qualifying market-makers, and a
market turner priority for participants that are first to improve
CBOE's disseminated quote. These overlays are optional.
    The purpose of this rule filing is to adopt an additional priority
overlay for small orders that can be applied to each of the three
matching algorithms. The Exchange proposes to adopt the small order
priority overlay on a pilot basis expiring on August 31, 2009, at which
point the Exchange anticipates that this priority overlay will become
operative on a permanent basis through a separate rule change.\5\
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    \5\ The Exchange has submitted a separate rule change filing to
adopt the small order priority overlay on a permanent basis, SR-
CBOE-2009-056. That rule change is currently effective and, pursuant
to Section 19(b)(3)(A) of the Act, 15 U.S.C. 78s(b)(3)(A), and Rule
19b-4(6), 17 CFR 240.19b-4(f)(6) thereunder, will become operative
on or about August 31, 2009.
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    If the small order priority overlay is in effect for an option
class, then the following would apply:
     Orders for five (5) contracts or fewer will be executed
first by the Designated Primary Market-Maker (``DPM'') or Lead Market-
Maker (``LMM''), as applicable, that is appointed to the option class;
provided however, that on a quarterly basis the Exchange will evaluate
what percentage of the volume executed on the Exchange (excluding
volume resulting from the execution of orders in AIM (see CBOE Rule
6.74A, Automated Improvement Mechanism (``AIM'')) is comprised of
orders for five (5) contracts or fewer executed by DPMs and LMMs, and
will reduce the size of the orders included in this provision if such
percentage is over forty percent (40%).
     This procedure only applies to the allocation of
executions among non-customer orders and market maker quotes existing
in the EBook at the time the order is received by the Exchange. No
market participant is allocated any portion of an execution unless it
has an existing interest at the execution price. Moreover, no market
participant can execute a greater number of contracts than is
associated with the price of its existing interest. Accordingly, the
small order preference contained in this allocation procedure is not a
guarantee; the DPM or LMM, as applicable, (i) must be quoting at the
execution price to receive an allocation of any size, and (ii) cannot
execute a greater number of contracts than the size that is associated
with its quote.
     If a Preferred Market-Maker (see CBOE Rule 8.13, Preferred
Market-Maker Program) is not quoting at a price equal to the national
best bid or offer (``NBBO'') at the time a preferred order is received,
the allocation procedure for small orders described above shall be
applied to the execution of the preferred order. If a Preferred Market
Maker is quoting at the NBBO at the time the preferred order is
received, the allocation procedure for all other sized orders, shall be
applied to the execution of the preferred order (e.g., if the default
matching algorithm is pro-rata with a public customer and participation
entitlement overlay, the order will execute first against any public
customer orders, then the Preferred Market-Maker would receive its
participation entitlement, then the remaining balance would be
allocated on a pro-rata basis).
     The small order priority overlay will only be applicable
to automatic executions and will not be applicable to any electronic
auctions.\6\
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    \6\ In addition to AIM, CBOE has various electronic auctions
that are described under Rules 6.13A, Simple Auction Liaison
(``SAL''), 6.14, Hybrid Agency Liaison (HAL), and 6.74B,
Solicitation Auction Mechanism (``AIM SAM''). Each of these auctions
generally allocates executions pursuant to the matching algorithm in
effect for the options class with certain exceptions noted in the
respective rules.
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    Lastly, like the existing priority overlays, the small order
priority overlay is optional. All determinations would be set forth in
a regulatory circular.
    According to the Exchange, because DPMs and LMMs have unique

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obligations to the CBOE market,\7\ they are provided with certain
participation rights. Under the current rule, if the DPM or LMM, as
applicable, is one of the participants with a quote at the best price,
the participation entitlement is generally equal to 50% when there is
one Market-Maker also quoting at the best bid/offer on the Exchange,
40% when there are two Market-Makers also quoting at the best bid/offer
on the Exchange, and 30% when there are three or more Market-Makers
also quoting at the best bid/offer on the Exchange.\8\ The Exchange is
now seeking to expand these programs to make available an allocation
procedure on a pilot basis that provides that the DPM or LMM, as
applicable, has precedence to execute orders of five (5) contracts or
fewer. The Exchange believes that this small order priority overlay
will not necessarily result in a significant portion of the Exchange's
volume being executed by the DPM or LMM, as applicable. As stated
above, the DPM or LMM would execute against such orders only if it is
quoting at the best price, and only for the number of contracts
associated with its quotation. Nevertheless, the Exchange will evaluate
what percentage of the volume executed on the Exchange is comprised of
orders for five (5) contracts or fewer executed by DPMs and LMMs, and
will reduce the size of the orders included in this provision if such
percentage is over forty percent (40%).
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    \7\ For example DPMs must, among other things, (i) provide
continuous electronic quotes in at least 90% of the series of each
multiply-listed option classed allocated to it and in 100% of the
series of each singly-listed option class allocated to it, and
assure that its disseminated market quotes are accurate; (ii) comply
with bid/ask differential requirements; (iii) ensure that a trading
rotation is initiated promptly following the opening of the
underlying security (or promptly after 8:30 am Central Time in an
index class) in 100% of the series of each allocated class by
entering opening quotes as necessary. See CBOE Rule 8.85, DPM
Obligations; see also CBOE Rule 8.15A, Lead Market-Makers in Hybrid
Classes.
    \8\ See CBOE Rules 6.45A(a)(i)(C) and (ii)(2), 6.45B(a)(i)(2)
and (ii)(C), 8.15B, Participation Entitlement for LMMs, and 8.87,
Participation Entitlement of DPMs and e-DPMs.
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    The small order priority overlay described above is part of CBOE's
careful balancing of the rewards and obligations that pertain to each
of the Exchange's classes of memberships. This balancing is part of the
overall market structure that is designed to encourage vigorous price
competition between Market-Makers on the Exchange, as well as maximize
the benefits of price competition resulting from the entry of customer
and non-customer orders, while encouraging participants to provide
market depth. The Exchange believes the proposed small order priority
overlay, which includes participation rights for DPMs and LMMs only
when they are quoting at the best price, strikes the appropriate
balance within its market and maximizes the benefits of an electronic
market for all participants.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with
the Act \9\ and the rules and regulations thereunder and, in
particular, the requirements of Section 6(b) of the Act.\10\
Specifically, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \11\ requirements that the rules of
an exchange be designed to promote just and equitable principles of
trade, to prevent fraudulent and manipulative acts, to remove
impediments to and to perfect the mechanism for a free and open market
and a national market system, and, in general, to protect investors and
the public interest. In particular, as described further above, the
Exchange believes the proposed rule change is part of the balancing of
CBOE's overall market structure, which is designed to encourage
vigorous price competition between Market-Makers on the Exchange, as
well as maximize the benefits of price competition resulting from the
entry of customer and non-customer orders, while encouraging
participants to provide market depth.
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    \9\ 15 U.S.C. 78s(b)(1).
    \10\ 15 U.S.C. 78f(b).
    \11\ 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.

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

    Because the foregoing proposed rule change: (i) Does not
significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
by its terms, does not 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 \12\ and Rule 19b-4(f)(6) thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) normally may
not become operative prior to 30 days after the date of filing.\14\
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 to encourage fair
competition among brokers and dealers and the exchanges by allowing the
CBOE to effectively compete with options exchanges that offer a similar
program. The Commission believes that waiving the 30-day operative
delay is consistent with the protection of investors and the public
interest because such waiver would allow the pilot to be implemented
immediately.\16\ In addition, the Commission notes that the Exchange
has filed the proposed rule change that permanently adopts the small
order priority overlay,\17\ based on substantially similar rules
already in place at other national securities exchanges.\18\
Accordingly, the Commission designates the proposed rule change, to
adopt the small order priority overly on a pilot basis until August 31,
2009, operative upon filing.
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    \14\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file 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 deems this requirement to be met.
    \15\ 17 CFR 240.19b-4(f)(6)(iii).
    \16\ For purposes only of waiving the 30-day operative delay of
this proposal, the Commission has considered the proposed rule's
impact on efficiency, competition, and capital formation. See 15
U.S.C. 78c(f).
    \17\ See SR-CBOE-2009-056.
    \18\ See, e.g., ISE Rule 713.01 and 713.03.
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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

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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-2009-058 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CBOE-2009-058. 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-2009-058 and should be submitted on
or before September 8, 2009.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-19692 Filed 8-17-09; 8:45 am]

BILLING CODE 8010-01-P
