
[Federal Register: June 24, 2010 (Volume 75, Number 121)]
[Notices]               
[Page 36147-36148]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24jn10-93]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62317; File No. SR-CBOE-2010-038]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving Proposed Rule Change, as Modified by 
Amendment No. 1 Thereto, Related to the Hybrid Matching Algorithms

June 17, 2010.
    On April 22, 2010, 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 revise its market turner and 
modified participation entitlement priority overlays. On May 6, 2010, 
CBOE filed Amendment No. 1 to the proposed rule change. The proposed 
rule change was published for comment in the Federal Register on May 
18, 2010.\3\ The Commission received no comment letters on the 
proposal. This order approves the proposed rule change, as modified by 
Amendment No. 1.
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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. 62083 (May 12, 
2010), 75 FR 27850.
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    CBOE Rules 6.45A (Priority and Allocation of Equity Option Trades 
on the CBOE Hybrid System), and 6.45B (Priority and Allocation of 
Trades in Index Options and Options on ETFs on the CBOE Hybrid System) 
set forth, among other things, the manner in which incoming electronic 
orders in options are allocated on the Hybrid System. Each rule 
currently provides allocation algorithms the Exchange can utilize when 
executing incoming electronic orders, including the Ultimate Matching 
Algorithm (``UMA''), and price-time and pro-rata priority allocation 
algorithms. The price-time and pro-rata priority overlays currently 
include: public customer priority for public customer orders resting on 
the Hybrid System; participation entitlements for certain qualifying 
market-makers (the ``original participation entitlement(s)''); a market 
turner priority for participants that are the first to improve CBOE's 
disseminated quote; and a modified participation entitlement overlay 
\4\ in which the original participation entitlement would apply only if 
there are no public customer orders resting at the best price or a 
public customer was the first to rest interest at the best price. In 
addition, a small order participation entitlement overlay for 
Designated Primary Market-Makers (``DPMs'') and Lead Market-Makers 
(``LMMs'') can be applied to each of the three allocation algorithms 
(i.e., price-time, pro-rata or UMA).\5\ These overlays are all 
optional.
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    \4\ Securities Exchange Act Release No. 60665 (September 14, 
2009), 74 FR 48114 (September 21, 2009) (SR-CBOE-2009-052).
    \5\ If the small order priority overlay is in effect for an 
option class, then orders for five (5) contracts or fewer will be 
executed first by the DPM or LMM, as applicable, appointed to the 
option class. This participation entitlement is subject to certain 
conditions, including a condition that public customer priority must 
be in effect in priority sequence ahead of the participation 
entitlement. See Rules 6.45A(a)(iii) and 6.45B(a)(iii).
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    The proposed rule change would amend the Exchange's priority 
overlays. CBOE proposes to make the market turner overlay available for 
classes utilizing any of the priority methods offered by the Exchange. 
The Exchange also proposes to amend the application of the modified 
participation entitlement overlay. Under the proposal, a Market-Maker 
that is the subject of a participation entitlement would only receive 
an entitlement if the amount it is entitled to pursuant to the 
participation entitlement is greater than the amount the Market-Maker 
would otherwise receive pursuant to the algorithm. In all other cases, 
the participation entitlement and public customer priority would not be 
applied. This allocation would be subject to the following:
     The Market-Maker's entitlement share would be calculated 
based on any remaining balance after all public customer orders at the 
best price are satisfied. For options classes using the pro-rata 
method, the Exchange may determine on a class-by-class basis to 
calculate the Market-Maker's entitlement share using the UMA 
methodology or the pro-rata methodology. For options classes using the 
price-time method, the Market-Maker's entitlement share would be 
calculated using the price-time methodology only.\6\
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    \6\ This modified participation entitlement overlay would only 
be applicable to automatic executions and would not be applicable 
for executions of incoming electronic orders initiated from PAR or 
from electronic auctions. Instead, the original participation 
entitlement parameters would be applied for PAR and electronic 
auctions. In pro-rata classes where the UMA method is selected to 
calculate the Market-Maker's modified participation entitlement 
share, executions of incoming electronic orders initiated from PAR 
and electronic auctions would be allocated using the UMA method. 
Therefore, in such classes, the Market-Maker's original 
participation entitlement share of a PAR or electronic auction 
execution would be calculated using the UMA method.

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[[Page 36148]]

     When calculating the amount the Market-Maker would 
otherwise receive pursuant to the operation of the algorithm, the 
participation entitlement and public customer priority overlays would 
not be considered. Instead the calculation would be based on a price-
time or pro-rata basis, as applicable, and subject to any other 
applicable priority overlays, such as market turner priority.
    In addition, the Exchange proposes that the modified participation 
entitlement overlay would be available to modify the application of the 
small order participation entitlement.
    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; as well as Section 6(b)(8) of 
the Act, which requires the rules of an exchange not to impose any 
burden on competition not necessary or in furtherance of the Act.\9\
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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).
    \9\ 15 U.S.C. 78f(b)(8).
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    The Commission believes that the proposed rule change amending the 
market turner and modified participation entitlement overlays is 
consistent with the Act. All public customer orders at the best price 
will continue to be satisfied before a participation entitlement will 
be applied. If an entitlement is not applied, then the incoming order 
will be allocated among all market participants using the underlying 
matching algorithm--price-time or pro-rata--both of which the 
Commission already has found consistent with the Act.\10\ In addition, 
the Exchange's overlay determinations will be distributed via 
regulatory circular. For these reasons, the Commission believes that 
the proposed rule change is consistent with the Act.
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    \10\ 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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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-CBOE-2010-038), as modified 
by Amendment No. 1, be, and hereby is, approved.
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    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-15279 Filed 6-23-10; 8:45 am]
BILLING CODE 8010-01-P

