
[Federal Register: August 26, 2009 (Volume 74, Number 164)]
[Notices]               
[Page 43196-43200]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26au09-131]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60551; File No. SR-CBOE-2009-040]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of a Proposed Rule Change To 
Adopt Rules Implementing the Options Order Protection and Locked/
Crossed Market Plan

August 20, 2009.

I. Introduction

    On June 24, 2009, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend and adopt rules to 
implement the Options Order Protection and Locked/Crossed Market Plan. 
The proposed rule change was published for comment in the Federal 
Register on July 8, 2009.\3\ The Commission received no comments on the 
proposal. This order approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 60187 (June 29, 
2009), 74 FR 32664 (``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposal

    The Exchange proposes to amend and adopt new CBOE rules to 
implement the Options Order Protection and Locked/Crossed Market Plan 
(``Plan'').\4\ Specifically, the Exchange proposes to completely 
replace its current Intermarket Linkage Rules (Rules 6.80--6.85) with 
new rules implementing the Plan, amend other Exchange rules to reflect 
the Plan, and delete rules rendered unnecessary by the Plan.
---------------------------------------------------------------------------

    \4\ The Plan is a national market system plan proposed by the 
seven existing options exchanges and approved by the Commission. See 
Securities Exchange Act Release No. 59647 (March 30, 2009), 74 FR 
15010 (April 2, 2009) (File No. 4-546) (``Plan Notice'') and 60405 
(July 30, 2009), 74 FR 39362 (August 6, 2009) (File No. 4-546) 
(``Plan Approval''). The seven options exchanges are: International 
Securities Exchange LLC (``ISE''); The NASDAQ Stock Market LLC 
(``NASDAQ''); NASDAQ OMX BX, Inc. (``BOX''); NASDAQ OMX PHLX, Inc. 
(``Phlx''); NYSE Amex LLC (``NYSE Amex''); NYSE Arca, Inc. (``NYSE 
Arca''); and CBOE (each exchange individually a ``Participant'' and, 
together, the ``Participating Options Exchanges'').
---------------------------------------------------------------------------

The Old Plan

    Each of the Participating Options Exchanges are signatories to the 
Plan for the Purpose of Creating and Operating an Intermarket Option 
Linkage (``Old Plan'').\5\ In pertinent part, the Old Plan generally 
requires its participants to avoid trading at a price inferior to the 
national best bid or offer (``trade-through''), although it provides 
for a number of exceptions to trade-through liability.\6\ The 
Participating Options Exchanges comply with this requirement of the Old 
Plan by utilizing a stand alone system (``Linkage Hub'') to send and 
receive specific order types,\7\ namely Principal Acting as Agent 
Orders (``P/A Orders''), Principal Orders, and Satisfaction Orders.\8\ 
The Old Plan also provided that dissemination of ``locked'' or 
``crossed'' markets should be avoided, and remedial actions that should 
be taken to unlock or uncross such market.\9\ Each of the Participating 
Options Exchanges, including the Exchange, has submitted an amendment 
to the Old Plan to withdraw from such Plan.\10\ The withdrawals will be 
effective upon approval by the Commission of such amendments pursuant 
to Rule 608 of Regulation NMS under the Act (``Regulation NMS'').\11\
---------------------------------------------------------------------------

    \5\ On July 28, 2000, the Commission approved the Old Plan as a 
national market system plan for the purpose of creating and 
operating an intermarket options market linkage proposed by the 
American Stock Exchange LLC (n/k/a NYSE Amex), CBOE, and ISE. See 
Securities Exchange Act Release No. 43086 (July 28, 2000), 65 FR 
48023 (August 4, 2000). Subsequently, Philadelphia Stock Exchange, 
Inc. (n/k/a Phlx), Pacific Exchange, Inc. (n/k/a NYSE Arca), Boston 
Stock Exchange, Inc. (n/k/a BOX), and Nasdaq joined the Linkage 
Plan. See Securities Exchange Act Release Nos. 43573 (November 16, 
2000), 65 FR 70851 (November 28, 2000); 43574 (November 16, 2000), 
65 FR 70850 (November 28, 2000); 49198 (February 5, 2004), 69 FR 
7029 (February 12, 2004); and 57545 (March 21, 2008), 73 FR 16394 
(March 27, 2008).
    \6\ Section 8(c) of the Old Plan.
    \7\ The Linkage Hub is a centralized data communications network 
that electronically links the Participating Options Exchanges to one 
another. The Options Clearing Corporation (``OCC'') operates the 
Linkage Hub.
    \8\ Section 2(16) of the Old Plan.
    \9\ Section 7(a)(i)(C) of the Old Plan.
    \10\ See Securities Exchange Act Release No. 60360 (July 21, 
2009) 74 FR 37265 (July 28, 2009) (File No. 4-429).
    \11\ 17 CFR 242.608.
---------------------------------------------------------------------------

The Plan

    The Plan does not require a central linkage mechanism akin to the 
Old Plan's Linkage Hub. Instead, the Plan includes the framework for 
routing orders via private linkages that exist for NMS stocks under 
Regulation NMS.\12\ The Plan requires the Participating Options 
Exchanges to adopt rules ``reasonably designed to prevent Trade-
Throughs.'' \13\ Participating Options Exchanges are also required to 
conduct surveillance of their respective markets on a regular basis to 
ascertain the effectiveness of the policies and procedures to prevent 
Trade-Throughs and to take prompt action to remedy deficiencies in such 
policies and procedures.\14\ As further described below, the Plan 
incorporates a number of exceptions to trade-through liability.\15\ 
Some of these exceptions are carried over from the Old Plan, including 
exceptions for trading rotations, non-firm quotes, and complex 
trades.\16\ Others are substantially similar to exceptions available 
for NMS stocks

[[Page 43197]]

under Regulation NMS, such as exceptions for systems issues, crossed 
markets, quote flickering, customer stopped orders, benchmark trades 
and, notably, intermarket sweep orders (``ISOs'').\17\ In addition, the 
Plan contains a new exception for stopped orders and price 
improvement.\18\
---------------------------------------------------------------------------

    \12\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005) (File No. S7-10-04); 17 CFR 
242.600 et seq. For discussions of the similarities between the 
provisions of Regulation NMS and the provisions in the Plan, see the 
Plan Notice and Plan Approval, supra note 4.
    \13\ Under the Plan, a ``Trade-Through'' is generally defined as 
a transaction in an option series, either as principal or agent, at 
a price that is lower than a Protected Bid or higher than a 
Protected Offer.'' See Section 2(21) of the Plan. A ``Protected 
Bid'' and ``Protected Offer'' generally means a bid or offer in an 
option series, respectively, that is displayed by a Participant, is 
disseminated pursuant to the Options Price Reporting Authority 
(``OPRA'') Plan, and is the Best Bid or Best Offer. See Section 
2(17) of the Plan. A ``Best Bid'' or ``Best Offer'' means the 
highest bid price and the lowest offer price. Section (2)(1) of the 
Plan. ``Protected Bid'' and ``Protected Offer,'' together are 
referred to herein as ``Protected Quotation.'' See Section 2(18) of 
the Plan.
    \14\ Section 5(a)(ii) of the Plan.
    \15\ Section 5(b) of the Plan.
    \16\ Subparagraphs (ii), (vii), and (viii), respectively, of 
Section 5(b) of the Plan.
    \17\ Subparagraphs (i), (iii), (vi), (ix), (xi), and (iv)-(v), 
respectively, of Section 5(b) of the Plan.
    \18\ Subparagraph (x) of Section 5(b) of the Plan.
---------------------------------------------------------------------------

    The Plan also requires each Participant to establish, maintain, and 
enforce written rules that: require its members reasonably to avoid 
displaying locked and crossed markets; assure the reconciliation of 
locked and crossed markets; and prohibit its members from engaging in a 
pattern or practice of displaying locked and crossed markets; subject 
to exceptions as may be contained in the rules of the Participant, as 
approved by the Commission.\19\
---------------------------------------------------------------------------

    \19\ Section 6 of the Plan. The Plan also contains provisions 
relating to the operation of the Plan including, for example, 
provisions relating to the entry of new parties to the Plan; 
withdrawal from the Plan; and amendments to the Plan.
---------------------------------------------------------------------------

The Exchange's Proposal

    To implement the Plan, the Exchange proposes to replace its current 
rules relating to the Old Plan with new rules relating to the Plan, and 
makes amendments to other rules as necessary to conform to the 
requirements of the Plan.\20\ As such, the Exchange proposes to adopt 
all applicable definitions from the Plan into the Exchange's rules.\21\
---------------------------------------------------------------------------

    \20\ A more detailed description of the Exchange's proposed rule 
change may be found in the Notice, supra, note 3.
    \21\ Proposed CBOE Rule 6.80.
---------------------------------------------------------------------------

    In addition, the Exchange proposes to prohibit its members from 
effecting Trade-Throughs, unless an exception applies.\22\ Consistent 
with the Plan, the Exchange also proposes exceptions to the prohibition 
on trade throughs relating to: System issues; trading rotations; 
crossed markets; intermarket sweep orders; quote flickering; non-firm 
quotes; complex trades; customer stopped orders; stopped orders and 
price improvement; and benchmark trades.\23\
---------------------------------------------------------------------------

    \22\ Proposed CBOE Rule 6.81(a).
    \23\ Proposed CBOE Rule 6.81(b)(1)-(10). In addition, the 
Exchange proposes to add ISOs as a new type of order under proposed 
CBOE Rule 6.53(p).
---------------------------------------------------------------------------

    The Exchange also proposes a rule to address locked and crossed 
markets, as required by the Plan.\24\ Specifically, the Exchange 
proposes that, except for quotations that fall within a stated 
exception, members shall reasonably avoid displaying, and shall not 
engage in a pattern or practice of displaying, any quotations that lock 
or cross a Protected Quote.\25\
---------------------------------------------------------------------------

    \24\ A ``locked market'' is defined as a quoted market in which 
a Protected Bid is equal to a Protected Offer. Proposed CBOE Rule 
6.80(9). A ``crossed market'' is defined as a quoted market in which 
a Protected Bid is higher than a Protected Offer. Proposed CBOE Rule 
6.80(5).
    \25\ Proposed CBOE Rule 6.82(a).
---------------------------------------------------------------------------

    The Exchange proposes four exceptions to the prohibition against 
locked and crossed markets: when the Exchange is experiencing a 
failure, material delay, or malfunction of its systems or equipment; 
when the locking or crossing quotation was displayed at a time where 
there is a crossed market; when an Exchange member simultaneously 
routes an ISO to execute against the full displayed size of any locked 
or crossed Protected Bid or Protected Offer; and, when the locking 
quotation is otherwise permissible pursuant to Rules CBOE 6.45A(d) and 
6.45B(d).
    The Exchange also proposes rules that would permit it to continue 
to send and accept P/A Orders and Principal Orders from Participating 
Options Exchanges.\26\ The Exchange noted that, during the transition 
to operation under the Plan, it will continue to receive and execute P/
A and Principal Orders if the Exchange is the NBBO. Thus, the Exchange 
has proposed to retain certain rules governing the receipt of P/A 
Orders and Principal Orders until such time that all Participating 
Options Exchanges are operating pursuant to the Plan. Further, the 
Exchange intends to access other Participants using P/A Orders and 
Principal Orders on a temporary basis and proposes to retain rules 
governing the transmission of P/A Orders and Principal Orders.\27\
---------------------------------------------------------------------------

    \26\ Proposed CBOE Temporary Rule 6.83.
    \27\ The Exchange has stated that it intends to request 
exemptive relief from the Plan for a temporary period to accommodate 
the use of P/A Orders and P Orders until the Exchange's roll-out of 
its ISO functionality is complete.
---------------------------------------------------------------------------

    The Exchange has also proposed to amend to its rules relating to 
its Hybrid Agency Liaison System and Price Check Parameters.\28\ First, 
the Exchange proposes to adopt rules governing a new Hybrid Agency 
Liaison System (``HAL2''). Under these proposed rules, the Exchange 
would determine the eligible order size, eligible order type, eligible 
order origin code (i.e., public customer orders, non-Market Maker 
broker-dealer orders, and Market Maker broker-dealer orders), and 
classes for HAL2. When the Exchange receives a qualifying order that is 
marketable against the NBBO and/or the Exchange's BBO,\29\ HAL2 would 
expose the order at the NBBO price to allow CBOE Market-Makers 
appointed in that class as well as all members acting as agent for 
orders at the top of the Exchange's book in the relevant series to 
step-up to the NBBO price.\30\ The duration of the exposure period 
would not exceed one second. The first responder to indicate an 
interest to trade at the NBBO price would trade against the exposed 
order up to the size of the response (the exposure period would 
continue for any unexecuted balance). Responders would also be allowed 
to respond at prices worse than the NBBO but equal to or better than 
the Exchange's BBO. At the end of the response period (if no responders 
have matched the NBBO price or if there is a remainder on the exposed 
order) the HAL2 system would ascertain the best available price(s) 
between all pending responses and the best disseminated prices on other 
exchanges, and then execute the exposed order at the best price(s) by 
trading it against exposed responses first and transmitting ISOs to 
other exchanges second. All resulting executions would be in compliance 
with the prohibition against trade-throughs.
---------------------------------------------------------------------------

    \28\ See CBOE Rules 6.14A and 6.13.
    \29\ Unless the Exchange's quotation contains resting orders and 
does not contain sufficient Market-Maker quotation interest to 
satisfy the entire order.
    \30\ The qualifying order may also be exposed to other members, 
if permitted by the Exchange.
---------------------------------------------------------------------------

    If any portion of an order that is routed away returns unfilled, 
the Exchange would deem it a ``new'' order for processing purposes and 
trade it against the best bid or offer on the Exchange unless another 
exchange is quoting a better price in which case the Exchange would 
attempt to access such better price with a new ISO order. Any 
executions at the Exchange's best bid or offer would be handled in two 
batches: first against all interest resting at that price at the time 
the exposed order was received; and second against any interest that 
joined at that price after the exposure process commenced (in both 
cases the matching algorithm in effect for that class will be used). 
Order senders could bypass HAL2 processing by submitting Immediate or 
Cancel Orders.
    Paragraph (d) of proposed Rule 6.14A lists the circumstances in 
which an exposure period would terminate early. Those are: (1) If the 
Exchange receives an unrelated order on the same side of the market as 
the exposed order that is priced equal to or better than the exposed 
order; (2) if, in the case of an exposed order that is marketable 
against the Exchange's BBO, Market-Maker interest at the BBO decrements 
to a size that would be equal to or smaller than the size of the 
exposed order; and (3) if an unrelated order or quote on the

[[Page 43198]]

opposite side of the market from the exposed order is received that 
could trade against the exposed order at the prevailing NBBO or better 
in which case the orders would trade at the NBBO unless the unrelated 
order is a customer order, in which case the orders would trade at the 
midpoint of the unrelated order's limit price and the NBBO.\31\ Lastly, 
Interpretation and Policy .01 to CBOE Rule 6.14A provides that the 
Exchange would limit redistribution of exposed order messages to third 
parties.
---------------------------------------------------------------------------

    \31\ E.g., the NBBO/exposure price for a buy order is 1.15, 
during the exposure period a customer limit order to sell at 1.13 is 
received, the orders would be matched to the greatest extent 
possible at 1.14 providing price improvement to both orders. If the 
unrelated order was smaller than the exposed order, then the 
exposure period would continue for the unexecuted balance of the 
exposed order.
---------------------------------------------------------------------------

    The Exchange has also proposed a new price check parameter in 
connection with the new HAL2 process.\32\ For classes in which HAL2 is 
activated, the Exchange would not automatically execute orders that are 
marketable if the NBBO width is not within an acceptable price range 
established by the Exchange (``APR''), or if an execution would follow 
an initial partial execution and occur at a price that is not within an 
acceptable tick distance from the initial execution as established by 
the Exchange (``ATD''). If an execution is suspended because of the 
APR, the order would route to PAR for handling. If an execution is 
suspended because of the ATD, the order would be exposed pursuant to 
the HAL2 process using the ATD as the exposure price. If a quantity 
remains after the HAL2 process, the balance would route to PAR.\33\ 
Users could bypass this processing by submitting orders with an 
immediate or cancel designation.
---------------------------------------------------------------------------

    \32\ Proposed CBOE Rule 6.13(b)(vi).
    \33\ In this regard, the HAL2 processing for these orders would 
be different that normal HAL2 processing.
---------------------------------------------------------------------------

    The Exchange has also proposed to adopt new CBOE Rule 6.14B which 
would govern the Exchange's process for routing sweep orders to other 
markets. The Exchange has represented that it intends to contract with 
one or more routing brokers that are not affiliated with the Exchange 
to route sweep orders to other exchanges. Any such contract would 
restrict the use of any confidential and proprietary information that 
the routing broker receives to legitimate business purposes necessary 
for routing orders at the direction of the Exchange. Routing services 
would be available to members only and are optional. Members that do 
not want orders routed could use the Immediate or Cancel designation to 
avoid routing.
    The proposed rule also provides that: (1) The Exchange shall 
establish and maintain procedures and internal controls reasonably 
designed to adequately restrict the flow of confidential and 
proprietary information between the Exchange and the routing broker, 
and any other entity, including any affiliate of the routing broker, 
and, if the routing broker or any of its affiliates engages in any 
other business activities other than providing routing services to the 
Exchange, between the segment of the routing broker or affiliate that 
provides the other business activities and the segment of the routing 
broker that provides the routing services; (2) the Exchange may not use 
a routing broker for which the Exchange or any affiliate of the 
Exchange is the designated examining authority; (3) the Exchange will 
provide its routing services in compliance with the provisions of the 
Act and the rules thereunder, including, but not limited to, the 
requirements in Section 6(b)(4) and (5) of the Act that the rules of a 
national securities exchange provide for the equitable allocation of 
reasonable dues, fees, and other charges among its members and issuers 
and other persons using its facilities, and not be designed to permit 
unfair discrimination between customers, issuers, brokers, or dealers; 
(4) the Exchange will determine the logic that provides when, how, and 
where orders are routed away to other exchanges; (5) the routing broker 
cannot change the terms of an order or the routing instructions, nor 
does the routing broker have any discretion about where to route an 
order; and (6) any bid or offer entered on the Exchange routed to 
another exchange via a routing broker that results in an execution 
shall be binding on the member that entered such bid/offer.
    The Exchange has also proposed to adopt several new order types 
that would be added to CBOE Rule 6.53 in addition to the ISO. The first 
is the AIM sweep order (``AIM ISO''). The AIM ISO would require the 
transmission of two orders for crossing pursuant to CBOE Rule 6.74A 
without regard for better priced Protected Bids or Protected Offers 
because the member transmitting the AIM ISO to the Exchange has, 
simultaneously with the routing of the AIM ISO, routed one or more 
ISOs, as necessary, to execute against the full displayed size of any 
Protected Bid/Offer that is superior to the starting AIM auction price 
and has swept all interest in the Exchange's book priced better than 
the proposed auction starting price (with any execution(s) resulting 
from such sweeps shall accrue to the AIM Agency Order). The second 
proposed order type is the Sweep and AIM Order. A sweep and AIM order 
would require the transmission of two orders for crossing pursuant to 
CBOE Rule 6.74A with an auction starting price that does not need to be 
within the Exchange's best bid and offer and where the Exchange will 
``sweep'' all Protected Bids and Protected Offers by routing one or 
more ISOs, as necessary, to execute against the full displayed size of 
any Protected Bid or Protected Offer that is superior to the starting 
AIM auction price, as well as sweep all interest in the Exchange's book 
priced better than the proposed auction starting price concurrent with 
the commencement of the AIM auction with any execution(s) resulting 
from such sweeps accruing to the AIM Agency Order. The final proposed 
order type is the CBOE-Only Order. A CBOE-only order would be an order 
to buy or sell that is to be executed in whole or in part on the 
Exchange without routing the order to another market center. A CBOE-
only order would be cancelled if routing would be required under the 
Exchange's rules.
    Finally, the Exchange proposes to amend certain other rules to 
reflect the Plan and changes to other Exchange rules as described 
above. In particular, the Exchange proposes to add a reference to HAL2 
to CBOE Rule 6.2B, eliminate the ``Removal of Unreliable Quotes'' 
provision of CBOE Rule 6.13, eliminate references in the Exchange's 
crossing mechanisms to the block trade exemption of the Old Plan,\34\ 
and delete CBOE Rule 8.52 relating to the now defunct Pilot Program for 
Away Market Maker Access.
---------------------------------------------------------------------------

    \34\ Exchange Rules 6.74A and 6.74B.
---------------------------------------------------------------------------

    The Exchange also represented that the proposed rules would not 
become operative until the Exchange has withdrawn from the Old Plan.

II. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\35\ In particular, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Act \36\ which 
requires, among other things, that the rules of a national securities 
exchange be

[[Page 43199]]

designed to promote just and equitable principles of trade, 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. The Commission also finds that the proposal is 
consistent with Rule 608(c) of Regulation NMS under the Act, which 
requires that each exchange comply with the terms of any effective 
national market system plan of which it is a participant.\37\ Finally, 
the Commission finds that the proposed rule change is consistent with 
the requirements of the Plan.\38\
---------------------------------------------------------------------------

    \35\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \36\ 15 U.S.C. 78f(b)(5).
    \37\ 17 CFR 242.608(c). Section 1 of the Plan provides in 
pertinent part that, ``The Participants will submit to the 
[Commission] for approval their respective rules that will implement 
the framework of the Plan.''
    \38\ See supra note 5.
---------------------------------------------------------------------------

    Proposed CBOE Rule 6.80 would define applicable terms in a manner 
that are substantively identical to the defined terms of the Plan. As 
such, the Commission finds that proposed CBOE Rule 6.80 is consistent 
with the Act and the Plan.
    Proposed CBOE Rule 6.81(a) would prohibit members from effecting 
Trade-Throughs unless an exception applies. Proposed CBOE Rule 6.81(b) 
would provide for ten exceptions to the general Trade-Through 
prohibition, relating to systems issues, trading rotations, crossed 
markets, ISOs, quote flickering, non-firm quotes, complex trades, 
customer stopped orders, stopped orders and price improvement, and 
benchmark trades.\39\ Aside from the proposed exception relating to 
systems issues, each proposed exception would be substantively 
identical to the parallel exception under Section 5(b) of the Plan.
---------------------------------------------------------------------------

    \39\ Proposed CBOE Rule 6.81(b)(1)-(10).
---------------------------------------------------------------------------

    The systems issues exception under proposed CBOE Rule 6.81(b)(1) 
would implement the parallel exception available under Section 5(b)(i) 
of the Plan and would permit the Exchange to bypass the Protected 
Quotation of another Participant if such other Participant repeatedly 
fails to respond within one second to incoming orders attempting to 
access its Protected Quotations. The Exchange's rule would require the 
Exchange to notify such non-responding Participant immediately after 
(or at the same time as) electing self-help, and assess whether the 
cause of the problem lies with the Exchange's own systems and, if so, 
take immediate steps to resolve the problem. Finally, the Exchange 
would be required to promptly document its reasons supporting any such 
determination to bypass a Protected Quotation. The Commission believes 
that this exception should provide the Exchange with the necessary 
flexibility for dealing with problems that occur on an away market 
during the trading day. At the same time, the exception's requirements 
to immediately notify such away market of its determination and also 
assess its own system should help prevent the use of this exception 
when there in fact is a problem with the Exchange's own systems, rather 
than those of an away market.
    The Commission notes that included among the exception in proposed 
CBOE Rule 1901(b) would be an exception for certain transactions 
involving ISOs.\40\ An order identified as an ISO would be immediately 
executable by the Exchange (or any other Plan Participant that received 
such an order) based on the premise that the market participant sending 
the ISO has already attempted to access all better-priced Protected 
Quotations up to their displayed size. The Commission believes that 
this exception should help ensure more efficient and faster executions 
in the options markets.
---------------------------------------------------------------------------

    \40\ Proposed CBOE Rule 6.81(b)(4).
---------------------------------------------------------------------------

    The Commission notes that, in addition to these rules regarding 
Trade-Throughs, the Plan requires that each Participant establish, 
maintain and enforce written policies and procedures that are 
reasonably designed to prevent Trade-Throughs in that Participant's 
market that do not fall within an applicable exception and, if relying 
on such exception, that are reasonably designed to assure compliance 
with the terms of the exception. In addition, the Commission notes that 
the Plan requires each Participant to conduct surveillance of its 
market on a regular basis to ascertain the effectiveness of such 
policies and procedures and to take prompt action to remedy any 
deficiencies in such policies and procedures.
    Accordingly, the Commission finds that proposed CBOE Rule 6.81 is 
consistent with Section 5 of the Plan and Section 6(b)(5) of the Act 
\41\ which requires, among other things, that the rules of a national 
securities exchange be designed to promote just and equitable 
principles of trade, 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.
---------------------------------------------------------------------------

    \41\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Proposed CBOE Rule 6.82(a) would require Exchange members to 
reasonably avoid displaying, and not engage in a pattern or practice of 
displaying, any quotation that locks or crosses a Protected Quotation, 
subject to certain exceptions delineated in proposed CBOE Rule 6.82(b). 
The Commission recognizes that locked and crossed markets may occur 
accidentally and cannot always be avoided. However, the Commission 
believes that giving priority to the first-displayed Protected Bid or 
Protected Offer, particularly when it includes a public customer's 
order, will encourage price discovery and contribute to fair and 
orderly markets. Therefore, the Commission believes that the proposed 
rule, which corresponds to the Plan's language, to require members to 
reasonably avoid displaying, and not engaging in a pattern or practice 
of, locks and crosses is appropriate.
    Proposed CBOE Rule 6.82(b) would permit four exceptions to the 
Exchange's general rule relating to locked and crossed markets.\42\ The 
first three would be similar to analogous trade-through exceptions 
under proposed CBOE Rule 6.81(b), and relate to when the Exchange is 
experiencing systems issues, when there is a crossed market, and when a 
member simultaneously routes ISOs against the full displayed size of 
any locked or crossed Protected Bid or Protected Offer. The fourth 
exception would permit a locking quotation if it is otherwise 
permissible pursuant to CBOE Rules 6.45A(d) and 6.45B(d).
---------------------------------------------------------------------------

    \42\ Section 6 of the Plan permits exceptions to the Plan's 
locked and crossed market rules as may be contained in the rules of 
a Participant approved by the Commission.
---------------------------------------------------------------------------

    The Commission believes that the Exchange's proposed rules relating 
to locked and crossed markets are consistent with the Plan and the Act 
and should help ensure that the display of locked or crossed markets 
will be limited and that any such display will be promptly reconciled. 
The Commission also believes that each of the proposed exceptions to 
locked and crossed markets relate to circumstances when it is 
appropriate to permit a limited, narrow exception to the general locked 
and crossed market rule.
    Therefore, the Commission finds that Exchange's rule regarding 
locked and crossed markets appropriately implements Section 6 of the 
Plan, and is consistent with Section 6(b)(5) of the Act \43\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to promote just and equitable principles of trade, 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market

[[Page 43200]]

system, and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \43\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission also finds that proposed CBOE Temporary Rule 6.83, 
which facilitates the participation of certain Participating Options 
Exchanges, including CBOE, who may require the use of P/A Orders and 
Principal Orders after implementation of the Plan, and would permit 
CBOE to transmit P/A Orders and Principal Orders, is consistent with 
the Act. Although the Commission has already approved the Plan,\44\ the 
Commission also recognizes that the Exchange and other Plan 
Participants may require a temporary transition period during which 
they may want to utilize these order types that exist currently under 
the Old Plan.\45\ The Exchange and each of the other Participating 
Options Exchanges have proposed substantially identical temporary 
provisions to accommodate this.\46\ Further, because the Exchange 
intends also to send P/A Orders and Principal Orders for a temporary 
period, the Exchange has proposed temporary rules to permit this.\47\ 
The Commission finds that the proposed rule relating to the Exchange's 
receipt and handling, and transmission of P/A Orders and Principal 
Orders, and imposing certain obligations on the Exchange with respect 
to such orders that are similar to those that exist under the Old Plan, 
is appropriate and consistent with Section 6(b)(5) of the Act \48\ 
which requires, among other things, that the rules of a national 
securities exchange be designed to promote just and equitable 
principles of trade, 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.
---------------------------------------------------------------------------

    \44\ See Plan Approval, supra, note 5.
    \45\ The Commission notes that any Participating Options 
Exchange that wishes to utilize such order types in a manner that 
would result in a Trade-Through would need to separately request an 
exemption from the Plan for such use. See, supra, note 27.
    \46\ The Commission notes that the rules contained in CBOE 
Temporary Rule 6.83 are not required by the Plan, but rather are 
rules proposed by the Exchange in order to facilitate the 
participation in the Plan of certain exchanges, including CBOE, 
during an initial transition period.
    \47\ See also, supra, note 27.
    \48\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission further finds that CBOE's proposed rule governing 
routing of sweep orders is consistent with the Act. As described above, 
the Exchange would enter into agreements that govern the routing of 
orders to away markets. Further, the routing of sweep orders would be 
optional; \49\ and the Exchange would be responsible for routing 
decisions and would retain control of the routing logic. Neither the 
Exchange, nor any affiliate of the Exchange, may be the designated 
examining authority for the routing service provider.\50\ The 
Commission also notes that the rule contemplates procedures and 
internal controls designed to protect confidential and proprietary 
information, which should help ensure that the routing service provider 
does not misuse routing information obtained from the Exchange. In 
addition, the Exchange would provide its routing services in compliance 
with the Act and the rules thereunder, including but not limited to, 
the requirements in Sections 6(b)(4) and (5) of the Act \51\ that the 
rules of a national securities exchange provide for the equitable 
allocation of reasonable dues, fees, and other charges among Exchange 
members and other persons using the Exchange's facilities, and not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.\52\
---------------------------------------------------------------------------

    \49\ Members may choose to avoid routing by using the Immediate 
or Cancel designation. See Notice.
    \50\ See proposed CBOE Rule 6.14B(c).
    \51\ 15 U.S.C. 78f(b)(4) and (5).
    \52\ See proposed CBOE Rule 6.14B(c).
---------------------------------------------------------------------------

    Proposed CBOE Rule 6.53 proposes four new order types: ISO, AIM 
ISO, Sweep and AIM Order, and CBOE-only Order. The Commission believes 
that the design of each of these order types should ensure that 
Protected Bids and Protected Orders are not traded-through in violation 
of the Plan while also providing market participants with flexibility 
in executing transactions that meet the specific requirements of the 
order type. Therefore, the Commission finds that Exchange's rule 
permitting these new order types is consistent with Section 6(b)(5) of 
the Act \53\ which requires, among other things, that the rules of a 
national securities exchange be designed to promote just and equitable 
principles of trade, 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.
---------------------------------------------------------------------------

    \53\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange is also proposing to introduce an updated HAL process 
(i.e., HAL2) and revise its rule governing automatic executions.\54\ 
The Commission finds that such changes are appropriate and consistent 
with the Act and the Plan.
---------------------------------------------------------------------------

    \54\ See notes 28-32, infra, and accompanying text.
---------------------------------------------------------------------------

    Finally, the Commission finds that CBOE's proposed amendments to 
certain other CBOE rules to reflect the provisions of the Plan, and to 
delete provisions of CBOE's rules rendered unnecessary due to the Plan, 
are appropriate and consistent with the Act and the Plan.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\55\ that the proposed rule change (SR-CBOE-2009-040), be, and it 
hereby is, approved.
---------------------------------------------------------------------------

    \55\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\56\
---------------------------------------------------------------------------

    \56\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-20542 Filed 8-25-09; 8:45 am]

BILLING CODE 8010-01-P
