
[Federal Register Volume 76, Number 243 (Monday, December 19, 2011)]
[Notices]
[Pages 78708-78710]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-32344]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65939; File No. SR-CBOE-2011-119]


 Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Related to a Complex Order Auction Feature

December 12, 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 December 6, 2011, the 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) of 
the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\

[[Page 78709]]

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).
    \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 amend its electronic complex order 
rules. 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.

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
    On a class-by-class basis, the Exchange may determine to activate 
the electronic complex order RFR auction (``COA''), which is a process 
by which eligible complex orders \5\ are given an opportunity for price 
improvement before being booked in the electronic complex order book 
(``COB'') or once on a PAR workstation. Paragraph (d) of Rule 6.53C 
describes the COA process. Interpretation and Policy .04 of the Rule 
also provides that, with respect to the initiation of a COA, Trading 
Permit Holders routing complex orders directly to COB may request that 
the complex orders be COA'd on a class-by-class basis and Trading 
Permit Holders with resting complex orders on PAR may request that 
complex orders be COA'd on an order-by-order basis.
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    \5\ An eligible complex order, referred to in Rule 6.53C as a 
``COA-eligible order,'' means a complex order that, as determined by 
the Exchange on a class-by-class basis, is eligible for a COA 
considering the order's marketability (defined as a number of ticks 
away from the current market), size, complex order type and complex 
order origin type (i.e., non-broker-dealer public customer, broker-
dealers that are not Market-Makers or specialists on an options 
exchange, and/or Market-Makers or specialists on an options 
exchange). All determinations by the Exchange on COA-eligible order 
parameters are announced to Trading Permit Holders by Regulatory 
Circular. See Rule 6.53C(d)(i)(2) and Interpretation and Policy .01 
to Rule 6.53C.
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    The Exchange is proposing to amend the rule to describe a COA 
feature for complex orders resting in COB (referred to herein as the 
``re-COA'' feature), which is currently in use but not expressly 
covered in the rules. In particular, the Exchange is proposing to 
provide that, for each class where COA is activated, the Exchange may 
also determine to activate the re-COA feature for complex orders 
resting in COB. For such classes, any non-marketable order resting at 
the top of the COB (regardless of whether it was subject to COA before 
it was booked in COB) \6\ will be automatically subject to the re-COA 
feature if the order is within a number of ticks away from the current 
market (calculated based on the derived net price of the individual 
series legs). The Exchange notes that this re-COA feature for resting 
orders is only applicable to resting non-marketable orders that move 
close to the current market price calculated based on the individual 
series legs. This feature is not applicable to resting orders that 
become marketable. The Exchange may also determine on a class-by-class 
and strategy basis to limit the frequency of re-COA auctions initiated 
for complex orders resting in COB. For example, the Exchange might 
determine to limit the frequency of re-COA auctions to once every ``X'' 
seconds (the ``interval timer'') for a total of ``Y'' intervals. Once 
this cycle is complete, the Exchange may determine to wait for a period 
of time ``Z'' (the ``sleep timer'') and then reactivate the re-COA 
feature.\7\ All timers will be reset if a new complex order improves 
the top of the COB (i.e., improves the best net price bid or offer of 
the complex orders resting in COB). These limitations on the frequency 
of COA auctions due to the re-COA feature are intended to address 
system efficiency and effectiveness considerations, such as limiting 
repeated initiations of COA auctions (and related messaging) when there 
are flickering quotes. Once the re-COA feature is initiated for a 
resting order, all other aspects of the COA process described in Rule 
6.53C will apply unchanged. The Exchange believes this re-COA feature 
facilitates the orderly execution of complex orders by providing an 
automated opportunity for price improvement to (and execution of) 
resting orders priced near the current market, similar to what a 
Trading Permit Holder might seek to do if the Trading Permit Holder 
were representing a complex order in open outcry (or just entering an 
order initially into COB).
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    \6\ In this regard, the Exchange notes that, currently, all of 
its Trading Permit Holders have elected to have their COA-eligible 
orders COA'd. In addition, the Exchange notes that other markets 
have programs in place that provide for the automatic auctioning of 
complex orders. See, e.g., NASDAQ OMX PHLX LLC (``Phlx'') Rule 
1080(e)(i)(A) which, among other things, provides that a complex 
order live auction (``COLA'') will initiate if the Phlx system 
receives a complex order that improves the Phlx complex order best 
debit or credit price respecting the specific complex order strategy 
that is the subject of the complex order. During a COLA, Phlx market 
participants may bid and offer against the COLA-eligible order 
pursuant to the Phlx Rule.
    \7\ Determinations by the Exchange regarding the classes where 
the re-COA feature is activated and related tick distance and 
frequency parameters will be announced to Trading Permit Holders via 
Regulatory Circular.
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    The following example illustrates the operation of this re-COA 
feature: Assume the feature is activated for complex orders resting in 
COB that are within 2 ticks of the current market ($0.02 in a class 
where complex orders trade in $0.01 net price increments). Assume the 
frequency is limited to once every 15 seconds (the interval timer) for 
1 interval. Under this setting, a total of 2 re-COA auctions could be 
triggered-the original re-COA auction and a second re-COA auction after 
the expiration of the 15-second interval timer. Assume the sleep timer 
is set at 60 minutes. Assume the current market calculated based on the 
derived net price of the individual series legs in the CBOE electronic 
book for a given strategy is at a net price of $0.80-$1.01. If a 
complex order resting in the COB to buy the strategy is priced at a net 
debit price of $0.98, the complex order is not marketable (as the order 
is away from the current market by $0.03 (or 3 ticks)). If subsequently 
the individual series legs prices are updated such that the current 
market for the strategy moves to a net price of $0.80-$1.00, the 
resting complex order to buy at $0.98 would trigger the re-COA feature 
and initiate the re-COA auction process (as the order is within $0.02 
(or 2 ticks) of the current market). If there are no responses, the 
order would be placed back in COB. The resting order would not initiate 
the re-COA feature again until the 15-second interval timer has 
expired. When the 15-second interval timer expires, the order would be 
eligible to initiate the re-COA feature again if the current market 
moves after the expiration of the timer and the order meets the tick 
distance parameter (the order would not automatically initiate the re-
COA feature after the expiration of the interval timer; instead there 
must be an update to the current market after the expiration of the 
interval timer and the order must meet the tick distance

[[Page 78710]]

parameter for the system to re-COA again). For example, if after the 
end of the 15-second interval timer the current market moves to $0.80-
$0.99 (or, for example, if the current market moves back to $0.80-$1.01 
and then, after the end of the 15-second interval timer moves back 
again to $0.80-$1.00), then the resting complex order would again 
initiate the re-COA feature. If there are no responses, the order would 
be placed back in COB. The cycle is complete. Now that the resting 
order has been subject to COA 2 times since it was booked in COB, the 
60 minute sleep timer will begin and the resting order will not be 
eligible for the re-COA feature again until the sleep timer expires and 
there is a quote update after that timer expires that is within the 
tick distance parameter. All timers would be reset anytime there is a 
price change at the top of the COB. For example, if five minutes into 
the sleep interval a second complex order is entered to rest in COB at 
a price of $0.99 ($0.01 better than the original resting order priced 
at $0.98), the original resting order would no longer be at the top of 
the COB and subject to the re-COA feature. The timers would reset and 
the second complex order (which now represents the top of the COB) 
would be subject to the re-COA process. If, for example, the second 
order subsequently trades (constituting a price change at the top of 
the COB), the original order would be at the top of the COB again and 
could become subject to the re-COA feature again.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the Act 
\8\ in general and furthers the objectives of Section 6(b)(5) of the 
Act \9\ 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 that 
the proposed rule change facilitates the orderly execution of complex 
orders by providing an automated opportunity for price improvement to 
(and execution of) resting orders priced near the current market.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 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 rule 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 \10\ and Rule 19b-4(f)(6) 
thereunder.\11 \ 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.
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
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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-2011-119 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-2011-119. 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-2011-119 and 
should be submitted on or before January 9, 2012.

    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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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-32344 Filed 12-16-11; 8:45 am]
BILLING CODE 8011-01-P


