
[Federal Register: September 21, 2009 (Volume 74, Number 181)]
[Notices]               
[Page 48114-48115]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21se09-87]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60665; File No. SR-CBOE-2009-052]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving a Proposed Rule Change Related to the 
Hybrid Matching Algorithms

September 14, 2009.
    On July 17, 2009, the Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend CBOE Rules 6.45A and 
6.45B to adopt a modified participation entitlement overlay to orders 
executed electronically on the CBOE Hybrid System (``Hybrid System''). 
The proposed rule change was published for comment in the Federal 
Register on August 10, 2009.\3\ The Commission received no comments on 
the proposed rule change. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 60420 (August 3, 
2009), 74 FR 39989.
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    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 both 
rules currently provides for several different matching algorithms, 
including price-time and pro-rata priority matching algorithms with 
additional priority overlays.\4\ The priority overlays currently 
include: public customer priority, market turner priority, and 
participation entitlements for certain qualifying market-makers.\5\ 
These overlays are optional.
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    \4\ Rules 6.45A and 6.45B also include the Ultimate Matching 
Algorithm (``UMA''). CBOE did not propose any changes to the UMA in 
this filing.
    \5\ Under the existing participation entitlements, the Exchange 
may determine to grant market-makers participation entitlements 
pursuant to the provisions of Rules 8.87, Participation Entitlement 
of DPMs and e-DPMs; 8.13, Preferred Market-Maker Program; or 8.15B, 
Participation Entitlement of LLMs. More than one such participation 
entitlement may be activated for an option class (including at 
different priority sequences), however in no case may more than one 
participation entitlement be applied on the same trade. In 
allocating the participation entitlement, all of the following 
apply: (i) To be entitled to its participation entitlement, the 
market-maker's order and/or quote must be at the best price on the 
Exchange; (ii) the market-maker may not be allocated a total 
quantity greater than the quantity that it is quoting (including 
orders not part of quotes) at that price (if pro-rata priority is in 
effect, and the market-maker's allocation of an order pursuant to 
its participation entitlement is greater than its percentage share 
of quotes/orders at the best price at the time that the 
participation entitlement is granted, the market-maker shall not 
receive any further allocation of that order); (iii) in establishing 
the counterparties to a particular trade, the participation 
entitlement must first be counted against that market-maker's 
highest priority bids or offers; and (iv) the participation 
entitlement shall not be in effect unless the public customer 
priority is in effect in a priority sequence ahead of the 
participation entitlement and then the participation entitlement 
shall only apply to any remaining balance. See Rules 6.45A(a)(ii)(2) 
and 6.45B(a)(i)(2).
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    The purpose of the rule filing is to adopt the ``modified 
participation entitlement,'' an additional optional priority overlay 
for the price-time and pro-rata matching algorithms. The modified 
participation entitlement will operate in the same manner as the 
existing participation entitlement for certain qualifying market-
makers; however, if at the time of execution there is one or more 
public customer orders resting at the execution price but none was 
entered first in time sequence, then the market-maker participation 
entitlement and public customer priority overlays would not be applied 
to the allocation--i.e. the allocation would revert back to the price-
time or pro-rata methods. The participation entitlement for certain 
qualifying market-makers would therefore only be applied to the 
execution of an inbound order if there are no public customer orders 
resting on the Hybrid System at the best price or if a public customer 
was the first to rest interest at the best price, in which case the 
public customer order would have priority over the order of the market 
maker. This outcome is a

[[Page 48115]]

change from how the existing participation entitlement works today.\6\
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    \6\ For example, assume the matching algorithm for an options 
class is established so that public customer orders have first 
priority, the modified participation entitlement has second 
priority, and any remaining balance is allocated using the pro-rata 
matching algorithm. If, at the time of execution, there is one or 
more public customer orders at the execution price but none is first 
in time sequence (for instance, because a market-maker quote was the 
first trading interest posted at the execution price), then the 
market-maker participation entitlement and public customer priority 
overlays would not be applied and the incoming order would be 
allocated solely on a pro-rata basis.
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    The Commission has carefully reviewed the proposed rule change and 
finds that it is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange.\7\ In particular, the Commission finds that the proposed rule 
change is consistent with Section 6(b)(5) of the Act,\8\ which 
requires, among other things, that the rules of an exchange be designed 
to promote just and equitable principles of trade, 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; and are not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \7\ 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).
    \8\ 15 U.S.C. 78f(b)(5).
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    The new priority overlay is the same as the current market-maker 
participation entitlement overlay, except that the participation 
entitlement will only be applied if there are no public customer orders 
resting at the best price or if a public customer was the first to rest 
interest at the best price. Otherwise, neither the current public 
customer priority overlay nor the market-maker participation 
entitlement priority overlay will be in effect. Thus, public customer 
orders will have priority over the orders of other market participants 
if they are the first orders entered at the best price; if they are not 
the first orders at the best price, then the order will be allocated 
among market participants using the underlying matching algorithm--
price-time or pro-rate--both of which the Commission already has found 
as consistent with the Act.\9\ The Commission therefore believes that 
the modified participation entitlement priority overlay is consistent 
with the Act.
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    \9\ See Securities Exchange Act Release No. 51822 (June 10, 
2005), 70 FR 35321 (June 17, 2005) (Adopting CBOE Rule 6.45B).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-CBOE-2009-052), be, and 
hereby is, approved.
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    \10\ 15 U.S.C. 78s(b)(2).
    \11\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-22683 Filed 9-18-09; 8:45 am]

BILLING CODE 8010-01-P
