
[Federal Register Volume 76, Number 179 (Thursday, September 15, 2011)]
[Notices]
[Pages 57097-57100]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-23602]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65310; File No. SR-CBOE-2011-082]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Related to Opening and Complex Order Price Check Parameter 
Features

September 9, 2011.
    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 26, 2011, 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 has designated 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 expand the operation of an existing 
price check parameter feature to its opening rotation process and to 
include an additional price check parameter feature for its complex 
order process. 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'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 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange has in place various price check parameter features 
that are designed to prevent incoming orders from automatically 
executing at potentially erroneous prices. These price check parameter 
features are designed to help maintain a fair and orderly market. The 
Exchange is proposing to expand the operation of an existing price 
check parameter feature to its opening rotation process and to include 
an additional price check parameter feature for its complex order 
process. The Exchange believes the below-described protection features 
will enhance the existing functionality and assist with the maintenance 
of fair and orderly markets by providing an automated process that 
helps to mitigate the potential risks associated with orders drilling 
through multiple price points on the opening (thereby resulting in 
executions at prices that are extreme and potentially erroneous) and 
complex orders trading at prices that are inconsistent with particular 
complex order strategies (thereby resulting in executions at prices 
that are extreme and potentially erroneous).
    With respect to opening rotations, the Exchange is proposing to 
amend Rule 6.2B, Hybrid Opening System (``HOSS''), to extend the 
application of an existing price check parameter feature to apply to 
the opening order exposure process. By way of background, currently the 
Exchange has in place a price check parameter under paragraph (b)(vi) 
of Rule 6.13, CBOE Hybrid System Automatic Execution Feature, which 
provides in relevant part that the Exchange will not automatically 
execute eligible orders that are marketable if the execution would 
follow an initial partial execution on the Exchange and would be at a 
subsequent price that is not within an acceptable tick distance from 
the initial execution (which is equivalent to the national best bid or 
offer (``NBBO'')). For purposes of this provision, the acceptable tick 
distance is determined by the Exchange on a series-by-series and 
premium basis for market orders and/or marketable limit orders 
(provided it is not less than 2 minimum increment ticks) and announced 
via Regulatory Circular. Also by way of background, currently certain 
classes utilize the Hybrid Agency Liaison (``HAL'') functionality as 
part of the opening rotation process. For each class that utilizes the 
HAL opening procedure, additional steps are automatically taken using 
HAL/HAL2 (Rule 6.14/6.14A) \5\ automated order handling functionality 
to address certain opening quote, acceptable price range, market order 
imbalance, and NBBO conditions. At the conclusion of the HAL/HAL2 
exposure process, the remaining balance of any orders not executed via 
HAL/HAL2 on the opening are automatically executed if marketable or 
booked if not marketable, except that (i) For all classes, any 
remaining balance of opening contingency orders are automatically 
cancelled; and (ii) for single list classes, any remaining balance of 
marketable orders route as determined by the Exchange on a class-by-
class basis to PAR or, at the order entry firm's discretion, to the 
order entry firm's booth. Orders that are subject to the HAL/HAL2 
exposure process are not currently subject to the price check parameter 
described above.
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    \5\ The Exchange notes that all classes that utilize HAL 
processing are currently utilizing the HAL2 version set forth in 
Rule 6.14A. The HAL version set forth in Rule 6.14 is no longer 
utilized.
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    The purpose of the proposed rule change is to extend the 
application of the existing price check protection feature to apply to 
orders that are subject to the HAL/HAL2 exposure process, with certain 
modifications described below. In particular, the Exchange is proposing 
to amend the process noted in (i) and (ii) above to instead provide 
that, following the HAL/HAL2 exposure process, the CBOE Hybrid Trading 
System will not automatically execute or book the remaining balance of 
any orders not executed after HAL/HAL2 that are priced or would execute 
at a price that is not within an acceptable tick distance from the 
initial HAL/HAL2 price. Any remaining balance of such orders will route 
as determined by the Exchange on a class-by-class basis to PAR or, at 
the order entry firm's discretion, to the order entry firm's booth 
(except that any remaining balance of opening contingency orders will 
be cancelled).\6\

[[Page 57098]]

If an order is not eligible to route to PAR (and the order entry firm 
has not designed a booth), then the remaining balance will be 
cancelled. The ``acceptable tick distance'' will be determined by the 
Exchange on a series-by-series and premium basis and shall be no less 
than 2 minimum increment ticks. For classes in which HAL2 is activated, 
the acceptable tick distance will be the same as the acceptable tick 
distance established under Rule 6.13(b)(vi). In accordance with Rule 
6.2B.05, all pronouncements regarding the acceptable tick distances and 
routing parameters determined by the Exchange will be announced to 
Trading Permit Holders via Regulatory Circular. The Exchange notes that 
the only distinctions in the application of the existing price check 
parameter to the opening order exposure process are that: (i) The price 
from which the acceptable tick distance is measured will be the initial 
HAL/HAL2 price,\7\ not the NBBO; and (ii) all orders that are part of 
the opening order exposure process will be subject to the price check 
parameter, not just market orders and/or marketable limit orders.
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    \6\ The Exchange notes that opening contingency orders are 
currently subject to the order exposure process and, under the price 
check parameter, would also be subject to execution at prices within 
the acceptable tick distance. Any remaining balance of any opening 
contingency order that is not executed within the acceptable tick 
distance will be cancelled.
    \7\ The initial HAL/HAL2 price varies depending on the 
particular conditions that exist. For certain conditions, the 
initial HAL/HAL2 price is the NBBO. For other conditions, the 
initial HAL/HAL2 price is the widest point within the acceptable 
opening range or the NBBO, whichever is better. See Rule 6.2B.03(a)-
(b).
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    For example, the Exchange may determine that an acceptable tick 
distance for a series trading in penny increments with premiums ranging 
from $1.00--$2.99 is five ticks (i.e., $0.05). Thus, if the initial 
HAL/HAL2 price for a series is $1.20, any remaining balance of an order 
not executed via HAL/HAL2 on the opening will route as determined by 
the Exchange to PAR or, at the order entry firm's discretion, to the 
order entry firm's booth to the extent the order is priced or would 
execute at a price that is more than $0.05 away from the initial HAL/
HAL2 price of $1.20 (e.g., a market order to buy that would execute 
above $1.25 or a limit order to buy that is priced above $1.25).
    The Exchange believes that extending the existing price protection 
feature to include the opening HAL/HAL2 process will assist with the 
maintenance of fair and orderly markets by helping to mitigate the 
potential risks associated with orders drilling through multiple price 
points when the Exchange first opens for trading (thereby resulting in 
executions at prices that are extreme and potentially erroneous). 
Rather than automatically executing or booking orders at extreme and 
potentially erroneous prices, the Exchange will route orders that are 
not within the price check parameters to PAR or the order entry firm's 
booth so that the orders can be further evaluated.
    With respect to the complex order process, the Exchange is 
proposing to amend Rule 6.53C, Complex Orders on the Hybrid System, to 
include a new price check parameter feature. Specifically, the Exchange 
is proposing to introduce a new price check parameter feature (the 
``buy-buy/sell-sell strategy parameter'') that the Exchange may 
determine to make available on a class-by-class basis (and announce to 
Trading Permit Holders via Regulatory Circular in accordance with Rule 
6.53C.01). In classes where the buy-buy/sell-sell strategy parameter 
feature is activated, the complex order book (``COB'') will not 
automatically execute an eligible complex order that is a limit order 
where (i) All the components of the strategy are to buy and the order 
is priced at zero, any net credit price, or a net debit price that is 
less than the number of individual option series legs in the strategy 
(or applicable ratio) multiplied by the applicable minimum net price 
increment for the complex order; or (ii) all the components of the 
strategy are to sell and the order is priced at zero, any net debit 
price, or a net credit price that is less than the number of individual 
option series legs in the strategy (or applicable ratio) multiplied by 
the applicable minimum net price increment for the complex order. Such 
a complex order under this feature will be rejected (and, thus, could 
not route to COB or the complex order RFR auction (``COA'') for 
processing). As proposed, in classes where the buy-buy/sell-sell 
strategy parameter feature is available, it will also be available for 
Stock-Option Orders (and the minimum net price increment calculation 
above would only apply to the individual option series legs). In 
addition, in classes where the buy-buy/sell-sell strategy parameter 
feature is available, it will also be available for COA responses under 
Rule 6.53C(d), complex orders and responses under Rule 6.74A, Automated 
Improvement Mechanism (``AIM''), and 6.74B, Solicitation Auction 
Mechanism (``SAM''), AIM customer-to-customer immediate crosses under 
Rule 6.74A.08 (``CTC''), or qualified contingent cross orders under 
paragraph (u) of Rule 6.53, Certain Types of Orders Defined 
(``QCC'').\8\ Such paired complex orders and responses under these 
provisions will be rejected. In this regard, if any paired order 
submitted by an order entry firm for AIM, SAM, CTC or QCC processing 
exceeds the parameters, then both the order that exceeds the parameters 
and the paired contra-side order will be rejected regardless of whether 
the contra-side order exceeds the parameters. However, to the extent 
that only the paired contra-side order submitted by an order entry firm 
for AIM or SAM processing would exceed the price check parameter, the 
paired contra-side order will be rejected while the original Agency 
Order may be rejected or, at the order entry firm's discretion, 
continue processing as an unpaired complex order (e.g., the original 
Agency Order would route to COB or COA for processing).
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    \8\ AIM, SAM, CTC and QCC are mechanisms that may be used to 
cross two paired orders. COA is a mechanism that may be used to 
expose an unpaired complex order for price improvement. Orders 
submitted for COA, AIM or SAM processing are exposed for price 
improvement through an auction (and thus other market participants 
may submit responses), whereas orders submitted for CTC or QCC 
processing are executed immediately without exposure.
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    For example, under the new buy-buy/sell-sell strategy parameter 
feature, a limit order to sell 1 Mar 45 call and sell 100 shares of 
stock where the individual option series trades in a minimum increment 
of $0.05 and the minimum net price increment for the complex order is 
$0.01 would be rejected if it has a net price of $0.00, any net debit 
price, or a net credit price that is less than $0.01 ($0.01 x (1 option 
leg)).\9\ Such an order would appear to be erroneously priced because 
normally a person selling one series would expect to receive a net 
credit price of at least $0.01 (a price of at least $0.01--the minimum 
net price trading increment for the complex order--for the series being 
sold).
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    \9\ If, for example, the individual option series trades in a 
minimum increment of $0.05 and the minimum net price increment for 
the complex order is $0.05, then the minimum net credit price 
calculation for the scenario above would be $0.05 ($0.05 x (1 
options leg)).
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    As another example, a limit order to sell 1 Mar 45 call, sell 1 Mar 
50 call and sell 100 shares of stock where the individual option series 
trade in a minimum increment of $0.05 and the minimum net price 
increment for the complex order is $0.01 would be rejected if it has a 
net price of $0.00, any net debit price, or a net credit price that is 
less than $0.02 ($0.01 x (2 options legs)).\10\ Such an order would 
appear to

[[Page 57099]]

be erroneously priced because normally a person selling two series 
would expect to receive a net credit price of at least $0.10 (a price 
of at least $0.05--the minimum net price increment for the complex 
order--for each series being sold).
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    \10\ If, for example, the individual option series trades in a 
minimum increment of $0.05 and the minimum net price increment for 
the complex order is $0.05, then the minimum net credit price 
calculation for the scenario above would be $0.10 ($0.05 x (2 
options legs)).
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    As another example, assume two paired complex orders are submitted 
to an AIM auction and the minimum net price increment for the complex 
orders is $0.01. If the original Agency Order is a market order to sell 
1 Mar 45 call and sell 1 Mar 50 call (which satisfies the price check 
parameter because the parameter is only triggered by limit prices), but 
the contra-side order to buy 1 Mar 45 call and buy 1 Mar 50 call has a 
net price of $0.00, the AIM auction will not initiate because the 
contra-side order does not satisfy the price check parameter. Such a 
contra-side order would appear to be erroneously priced because 
normally a person buying two series would expect to pay a net debit 
price of at least $0.02 (a price of at least $0.01--the minimum net 
price increment for the complex order--for each series being 
purchased). The contra-side order would be rejected. The paired 
original Agency Order would either be rejected along with the contra-
side order or, at the order entry firm's discretion, continue 
processing as an unpaired complex order.
    The Exchange believes that this new price protection feature will 
assist with the maintenance of fair and orderly markets by helping to 
mitigate the potential risks associated with complex orders that are 
entered at net limit prices that are inconsistent with the particular 
``buy-buy'' or ``sell-sell'' strategy (thereby resulting in execution 
at prices that are extreme and potentially erroneous). Rather than 
automatically execute, book or auction orders at prices inconsistent 
with the strategy, the Exchange will reject the orders back to the 
order entry firms.\11\
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    \11\ The Exchange notes that the proposed buy-buy/sell-sell 
strategy parameter feature for limit orders is very similar to the 
logic behind an existing debit-to-credit/credit-to-debit strategy 
parameter feature and an existing vertical/butterfly strategy 
parameter feature under Rule 6.53C.08(b) and (c), respectively. 
These existing price protection parameters also prevent complex 
orders from being automatically executed or booked at prices that 
would be inconsistent with the particular strategies.
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2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the Act 
\12\ in general and furthers the objectives of Section 6(b)(5) of the 
Act \13\ in particular in that it should promote just and equitable 
principles of trade, serve to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and 
protect investors and the public interest. The Exchange believes the 
proposed rule change will assist in the automatic execution and 
processing of orders that are subject to the Exchange's opening and 
complex order processing. The Exchange also believes the proposed rule 
change will enhance the existing price check parameter functionality 
and assist with the maintenance of fair and orderly markets by 
providing an automated process that helps to mitigate the potential 
risks associated with orders drilling through multiple price points on 
the opening (thereby resulting in executions at prices that are extreme 
and potentially erroneous) and complex orders trading at prices that 
are inconsistent with particular complex order strategies (thereby 
resulting in executions at prices that are extreme and potentially 
erroneous).
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    \12\ 15 U.S.C. 78f(b).
    \13\ 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

    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 does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to Section 19(b)(3)(A) of the Act \14\ and Rule 19b-4(f)(6) 
thereunder.\15\
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
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 Exchange has satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) \16\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\17\ the Commission 
may designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposal 
may become operative immediately upon filing. The Exchange notes that 
waiving the 30-day operative delay will enable the Exchange to 
implement these protection features promptly, which will allow market 
participants to benefit from these protections without delay. In 
addition, the Exchange notes that the proposed opening price check 
parameter feature is an extension of the Exchange's existing price 
check parameter feature with certain modifications (as discussed above) 
and is intended to address problematic executions that have previously 
occurred on the open. The Exchange further notes that the proposed new 
complex order price check parameter feature is similar to existing 
price check parameter features for complex orders (as discussed above) 
and is designed to address problematic executions that have previously 
occurred with complex orders. The Exchange has informed the Commission 
that it is proposing these changes in response to requests the Exchange 
received from market participants. For these reasons, the Commission 
believes that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest, and designates the 
proposed rule change to be operative upon filing with the 
Commission.\18\
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    \16\ 17 CFR 240.19b-4(f)(6).
    \17\ 17 CFR 240.19b-4(f)(6)(iii).
    \18\ For purposes only of waiving the operative delay for this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend 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 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

[[Page 57100]]

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-2011-082 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-2011-082. 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 Web site viewing and 
printing 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 Exchange. 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-2011-082 and should be 
submitted on or before October 6, 2011.

    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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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-23602 Filed 9-14-11; 8:45 am]
BILLING CODE 8011-01-P


