
[Federal Register Volume 76, Number 232 (Friday, December 2, 2011)]
[Notices]
[Pages 75575-75577]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-30996]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65835; File No. SR-CBOE-2011-105]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to Market-Makers' Continuous Electronic 
Quoting Obligations and Adjusted Option Series

November 28, 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 November 18, 2011, the Chicago Board Options Exchange, 
Incorporated (the ``Exchange'' or ``CBOE'') filed with the Securities 
and Exchange Commission (the ``Commission'') the proposed rule change 
as described in Items I, II and III 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) \4\ thereunder. 
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 proposes to amend its rules to indicate that Market-
Makers will not be obligated to maintain continuous electronic quotes 
in adjusted option series and to define the term adjusted option 
series. The text of the proposed rule change is available on the 
Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    CBOE proposes to amend its rules to indicate that Market-Makers 
will not be obligated to maintain continuous electronic quotes in 
adjusted option series and to define the term adjusted option series. 
The proposal is based on recent rule changes of NYSE Amex LLC (``NYSE 
Amex''), NYSE Arca, Inc. (``NYSE Arca'') and NASDAQ OMX PHLX, Inc. 
(``PHLX'').\5\
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    \5\ See Securities Exchange Act Release Nos. 65572 (October 14, 
2011), 76 FR 65310 (October 20, 2011) (SR-NYSEAmex-2011-61) (order 
granting approval of proposed rule change concerning market maker 
continuous quoting obligations and adjusted option series); 65573 
(October 14, 2011), 76 FR 65305 (October 20, 2011) (SR-NYSEArca-
2011-59) (order granting approval of proposed rule change concerning 
market maker continuous quoting obligations and adjusted option 
series); and 61095 (December 2, 2009), 74 FR 64786 (December 8, 2009 
(SR-PHLX-2009-99).
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    Rules 8.7, 8.13, 8.15A, 8.85, and 8.93 impose certain obligations 
on Market-Makers, Preferred Market-Makers, Lead Market-Makers 
(``LMMs''), Designated Primary Market-Makers (``DPMs''), and 
electronic-DPMs (``e-DPMs''), respectively (collectively, ``Market-
Makers'').
    These rules require that Market-Makers maintain continuous 
electronic quotes \6\ as follows:
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    \6\ Rule 1.1(ccc) provides that a Market-Maker who is obligated 
to provide continuous electronic quotes on CBOE's Hybrid Trading 
System will be deemed to have provided ``continuous electronic 
quotes'' if the Market-Maker provides electronic two-sided quotes 
for 99% of the time that the Market-Maker is required to provide 
electronic quotes in an appointed option class on a given trading 
day. The rule also provides that if a technical failure or 
limitation of a system of the Exchange prevents the Market-Maker 
from maintaining, or prevents the Market-Maker from communicating to 
the Exchange, timely and accurate electronic quotes in a class, the 
duration of such failure will not be considered in determining 
whether the Market-Maker has satisfied the 99% quoting standard with 
respect to that option class. The Exchange may consider other 
exceptions to this continuous electronic quote obligation based on 
demonstrated legal or regulatory requirements or other mitigating 
circumstances.
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     Rule 8.7(d)(ii)(B) requires that Market-Makers maintain 
continuous electronic quotes in 60% of the series of the Market-Maker's 
appointed class that have a time to expiration of less than nine 
months;
     Rule 8.13(d) requires that Preferred Market-Makers, among 
other things, provide continuous electronic quotes in at least 90% of 
the series of each class for which it receives Preferred Market-Maker 
orders;
     Rule 8.15A(b)(i) requires that LMMs provide continuous 
electronic quotes that comply with the bid/ask differential 
requirements determined by the Exchange on a class-by-class basis in 
90% of the option series within their assigned classes;\7\
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    \7\ This rule also provides that in option classes in which both 
an on-floor LMM and an off-floor LMM have been appointed, the on-
floor LMM will only be obligated to comply with obligations of 
Market-Makers in hybrid classes set forth in Rule 8.7(d).
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     Rule 8.85(a)(i) requires DPMs to provide continuous 
electronic quotes in at least 90% of the series of each multiply listed 
option class allocated to it and in 100% of the series of each singly 
listed option class allocated to it; and
     Rule 8.93 requires that e-DPMs provide continuous 
electronic quotes in at least 90% of the series of each allocated 
class.\8\
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    \8\ Alternatively, an e-DPM must provide continuous electronic 
quotes in at least 98% of requests for quotes if such functionality 
is enabled as determined by the Exchange.
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    The Exchange proposes to relieve Market-Makers of the obligation to

[[Page 75576]]

maintain continuous electronic quotes in adjusted option series. The 
proposal adds Rule 1.1(lll) to define ``adjusted option series'' as an 
option series for which, as a result of a corporate action by the 
issuer of the security underlying such option series, one option 
contract in the series represents the delivery of other than 100 shares 
of underlying stock or Units.\9\ The proposal also amends the rules 
discussed above that impose continuous electronic quoting obligations 
on Market-Makers to provide that such quoting obligations only apply to 
non-adjusted option series.
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    \9\ ``Units'' are securities other than shares that are traded 
on a national securities exchange and are defined as an ``NMS 
stock'' under Rule 600 of Regulation NMS and that meet the other 
requirements set forth in Rule 5.3, Interpretation and Policy .06.
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    After a corporate action and a subsequent adjustment to the 
existing options, the series in question are identified by the Options 
Price Reporting Authority and at the Options Clearing Corporation with 
a separate symbol consisting of the underlying symbol and a numerical 
appendage. As a standard procedure, exchanges listing options on an 
underlying security that undergoes a corporate action resulting in 
adjusted series will list new standard option series across all 
appropriate expiration months the day after the existing series are 
adjusted. The adjusted series are generally actively traded for a short 
period of time following adjustment, but orders to open options 
positions in the underlying security are almost exclusively placed in 
the new standard option series contracts. Although the adjusted series 
may not expire for a long period of time, in a short time the adjusted 
series are no longer actively traded. Thus, the burden of quoting these 
series generally outweighs the benefit of being appointed in the class 
because of the lack of interest in the series by various market 
participants.
    The Exchange notes that other options exchanges have indicated that 
market-makers have recently withdrawn from assignments in classes that 
include adjusted series, resulting in a reduction in liquidity in these 
classes. These market-makers informed the exchanges that the 
withdrawals were based in part on their obligation to continuously 
quote adjusted option series, and the quoting obligations on these 
often less frequently traded option series impacted the risk parameters 
acceptable to the market-makers. These options exchanges also noted 
that market-makers also expressed concern that the adjusted nature of 
these series complicates the calculation of an appropriate quote. As a 
result of withdrawals from such assignments by market-makers, these 
options exchanges stated that liquidity, as well as volume, had been 
negatively impacted in the affected options classes listed on the 
exchanges.\10\ The Exchange believes that this proposal will prevent 
any similar withdrawals by CBOE Market-Makers from assignments in 
classes that include adjusted option series on the Exchange, and thus 
any potential reduction in liquidity and volume related to the 
withdrawals, and encourage Market-Makers to continue their appointments 
in these option classes.
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    \10\ See supra note 5.
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    In support of this proposal, the Exchange notes that this proposed 
rule change is similar to recent rule changes of NYSE Amex, NYSE Arca 
and PHLX.\11\ The Exchange is merely proposing to exclude adjusted 
option series from Market-Makers' continuous electronic quoting 
obligations, but not from other obligations imposed on Market-Makers 
pursuant to Rules 8.7, 8.13, 8.15A, 8.85, and 8.93. In particular, the 
proposed rule change would not excuse a Market-Maker from its 
obligation to provide a two-sided market complying with the bid/ask 
differential requirements in response to any request for quote by a 
floor broker, Trading Permit Holder or PAR Official.\12\ The proposed 
rule change would also not excuse a Market-Maker from its obligation to 
provide an open outcry two-sided market complying with the bid/ask 
differential requirements in response to a request for a quote by a 
Trading Permit Holder or PAR Official directed at that Market-Maker or 
when, in response to a general request for a quote by a Trading Permit 
Holder or PAR Official, a market is not then being vocalized by a 
reasonable number of Market-Makers.\13\ Further, the proposed rule 
change would not excuse a Market-Maker from its obligation to submit a 
single quote or maintain continuous quotes in one or more series of a 
class to which the Market-Maker is appointed when called upon by an 
Exchange official if, in the judgment of such official, it is necessary 
to do so in the interest of maintaining a fair and orderly market.\14\
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    \11\ Id.
    \12\ See Rule 8.7(d)(i)(C) (relating to a request for quote by a 
floor broker) and (ii)(C) (relating to a request for a quote by a 
Trading Permit Holder or PAR Official).
    \13\ See Rule 8.7(d)(iv).
    \14\ Id.
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    The current quoting obligation in these illiquid adjusted option 
series is a minor part of a Market-Maker's overall obligation, and the 
proposed relief is mitigated by a Market-Maker's obligation to respond 
to a request for quote by a floor broker, Trading Permit Holder or PAR 
Official. Because of the lack of interest in these adjusted option 
series, there is little demonstrable benefit to being a Market-Maker in 
them other than the ability to maintain Market-Maker margins for what 
little activity may occur. In addition, the burden of continuous 
electronic quoting in these series is counter to the Exchange's efforts 
to mitigate the number of quotes collected and disseminated.
    The Exchange believes that the proposed rule change should incent 
Market-Makers to continue appointments, and as a result expand 
liquidity, in options classes listed on the Exchange to the benefit of 
the Exchange and its Trading Permit Holders and public customers. The 
Exchange believes that its Market-Makers would be disadvantaged if they 
are required to continuously electronically quote in these illiquid 
adjusted option series, and the Exchange's Trading Permit Holders and 
public customers would also be disadvantaged if Market-Makers withdrew 
from appointments in options classes that include adjusted option 
series, resulting in reduced liquidity and volume in these classes.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6 of the Act \15\ and the rules and regulations thereunder and, 
in particular, the requirements of Section 6(b) of the Act.\16\ 
Specifically, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \17\ 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.
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    \15\ 15 U.S.C. 78f.
    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
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    In particular, the Exchange believes this proposed rule change is 
consistent with the Act because, on balance, the elimination of the 
continuous electronic quoting obligations in adjusted option series is 
a minor change and should not impact the quality of CBOE's trading 
markets. Among other things, adjusted option series are not common, and 
trading interest is often very low after the corporate event has 
passed. Consequently, continuous electronic

[[Page 75577]]

quotes in these series increase quote traffic and burdens systems 
without a corresponding benefit. By not requiring Market-Makers to 
provide continuous electronic quotes in these series, the Exchange's 
proposal would further its goal of measured quote mitigation. Further, 
while they will not be tasked with providing continuous electronic 
quotes in these series, Market-Makers must still quote these series 
when requested by a floor broker, Trading Permit Holder or PAR 
Official. Accordingly, the proposal supports the quality of CBOE's 
trading markets by helping to ensure that Market-Makers will continue 
to be obligated to quote in adjusted option series if and when the need 
arises.
    These changes are consistent with the rules of competing options 
exchanges, and they serve to remove impediments to and to perfect the 
mechanism for a free and open market and a national market system.

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. In this regard, and as indicated above, the 
Exchange notes that the rule change is being proposed as a competitive 
response to recent rule changes of NYSE Amex, NYSE Arca and PHLX.\18\ 
CBOE believes this proposed rule change is necessary to permit fair 
competition among the options exchanges with respect to Market-Makers' 
continuous electronic quoting obligations.
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    \18\ See supra note 5.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    Because the 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 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, provided that the self-regulatory organization 
has given 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 proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \19\ and Rule 19b-4(f)(6) 
\20\ thereunder.
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    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 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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    At any time within 60 days of the filing of such 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:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2011-105 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-2011-105. This file 
number should be included on the subject line if email 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 the 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-2011-105 and should be 
submitted on or before December 23, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-30996 Filed 12-1-11; 8:45 am]
BILLING CODE 8011-01-P


