
[Federal Register Volume 76, Number 251 (Friday, December 30, 2011)]
[Notices]
[Pages 82336-82339]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-33587]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66048; File No. SR-CBOE-2011-116]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change Relating to 
Its Automated Improvement Mechanism

December 23, 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 14, 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 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.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend its rules relating to its Automated 
Improvement Mechanism (``AIM''). 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.

II. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
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 these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth in sections A, B, and C below, of the 
most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to amend CBOE Rule 6.74A 
to (i) allow Trading Permit Holders (``TPHs'') to enter orders they 
represent as agent (``Agency Orders'') for fewer than 50 contracts into 
AIM at the national best bid or offer (``NBBO''); (ii) eliminate the 
requirement that there be at least three market-makers quoting in the 
relevant series in order for an AIM auction (``Auction'') to commence; 
(iii) allow TPHs that initiate an Auction (``Initiating TPHs'') to 
designate a limit price if it elects to automatically match the price 
and size of all Auction responses (``auto-match''); and (iv) eliminate 
the restriction that only market-makers with an appointment in the 
relevant option class may submit responses to a Request for Responses 
(``RFR'') for an Agency Order in an Auction.
    This proposed rule change would make AIM more similar to current 
rules of the Boston Options Exchange Group, LLC (``BOX'') \3\ and the 
International Securities Exchange, LLC (``ISE'') \4\ relating to the 
Price Improvement Period (``PIP'') and Price Improvement Mechanism 
(``PIM''), respectively, which are automated price improvement 
mechanisms.\5\
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    \3\ See BOX Rules Chapter V, Section 18.
    \4\ See ISE Rule 723.
    \5\ AIM, PIP and PIM have certain characteristics in common with 
each other. All three mechanisms (a) provide for the opportunity for 
customer price improvement, (b) have certain periods where the 
initial orders are exposed for potential price improvement, (c) have 
certain guidelines regarding the types of orders that may be 
eligible for price improvement, and (d) have certain defined rules 
related to the allocation of trades within price improvement 
auctions.
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    AIM allows a TPH to submit an Agency Order along with a contra-side 
second order (a principal order or a solicited order for the same size 
as the Agency Order) into an Auction where other participants could 
compete with the Initiating TPH's second order to execute against the 
Agency Order, which guarantees that the Agency Order will receive an 
execution. Once an Auction commences, the Initiating TPH cannot cancel 
it.\6\
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    \6\ See CBOE Rule 6.74A(b)(1)(A).
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    Under this proposal, Agency Orders of all sizes submitted to AIM 
will be guaranteed execution at a price at least as good as the NBBO 
while providing the opportunity for execution at a price better than 
the NBBO. The proposal will incent more TPHs to initiate and 
participate in Auctions and will allow even broader participation in 
Auctions by all types of market participants. As a result, CBOE expects 
the proposal will increase the number of and participation in Auctions, 
which would enhance competition in the Auctions. The Exchange believes 
that this proposal will ultimately provide additional opportunities for 
price improvement over the NBBO for its customers.

Elimination of Entry Price Restriction on Agency Orders for Fewer Than 
50 Contracts

    CBOE Rule 6.74A(a)(2) and (3) currently provides that if an 
Initiating TPH submits an Agency Order to AIM for 50 contracts or more, 
the Initiating TPH must enter its contra-side second order (or stop the 
Agency Order) at the better of the NBBO or the Agency Order's limit 
price (if the order is a limit order); however, if an Initiating TPH 
submits an Agency Order to AIM for fewer than 50 contracts, the 
Initiating TPH must stop the entire Agency Order at the better of the 
NBBO price improved by one minimum price improvement increment or the 
Agency Order's limit price (if the order is a limit order). The 
Exchange is proposing to eliminate this distinction and allow 
Initiating TPHs to submit to AIM Agency Orders of any size at the NBBO.
    The Exchange believes this proposal will increase the likelihood 
that TPHs will initiate Auctions for Agency Orders for fewer than 50 
contracts because the TPHs will only be required to guarantee an 
execution at the NBBO, which will provide additional customer orders 
with an opportunity for price improvement over the NBBO. The Exchange 
believes the proposal will also encourage increased participation in 
AIM by TPHs willing to trade with an Agency Order for fewer than 50 
contracts at the NBBO but not better than the NBBO.
    In support of this proposal, the Exchange notes that both BOX \7\ 
and ISE \8\ allow entry of orders into PIP and PIM, respectively, at 
the NBBO without distinguishing between orders of more than or fewer 
than 50 contracts. Because BOX and ISE are currently able to offer 
their customers price improvement for orders of fewer than 50 contracts 
at the NBBO in PIP and PIM, respectively, the Exchange has determined 
that it is important for competitive purposes that it be able to offer 
the same opportunities

[[Page 82337]]

to its customers for price improvement on CBOE through AIM.
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    \7\ See supra note 3; see also Securities Exchange Act Release 
No. 34-59654 (March 30, 2009), 74 FR 15551 (April 6, 2009) (SR-BX-
2009-08) (order approving proposed rule change allowing entry of 
orders into PIP at the NBBO when BOX's best bid or offer is inferior 
to the NBBO with no order size distinction).
    \8\ See supra note 4; see also Securities Exchange Act Release 
No. 34-57847 (May 21, 2008), 73 FR 30987 (May 29, 2008) (SR-ISE-
2008-29) (order approving proposed rule change allowing entry of 
orders into PIM at the NBBO when ISE's best bid or offer is inferior 
to the NBBO with no order size distinction).
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    The Exchange notes that certain allocation differences exist 
between AIM and PIM as well as AIM and PIP. As proposed, our AIM change 
would make the handling of AIM trades for 50 or more contracts 
consistent with AIM trades under 50 contracts.\9\ However, unlike PIM, 
which requires auctions to commence at prices better than the ISE best 
bid or offer and thus precludes an auction initiator from establishing 
priority ahead of any resting ISE interest, an AIM Auction can begin 
and conclude at the CBOE best bid or offer. This means that, like for 
orders of 50 or more contracts on CBOE, the Initiating TPH can trade at 
a price in which resting interest existed and can establish priority 
over resting broker-dealer interest. Although PIP allows auctions to 
occur at the BOX best bid or offer, PIP uses an order allocation 
structure based on price-time priority sequence with priority for 
public customer orders (like CBOE) and secondary priority for non-BOX 
Participant broker-dealers. On CBOE, when an Auction concludes at the 
CBOE best bid or offer, first priority is for public customers, second 
priority is for the Initiating TPH (for 40%), third priority is for 
nonpublic customer resting orders or quotes that are unchanged from 
when the Auction began, and last priority is for RFR responses. The 
Exchange references these differences for informational purposes but 
does not believe that the differences are material to the Exchange's 
goals of handling AIM orders of all sizes the same and allowing 
Auctions of orders smaller than 50 contracts at the NBBO (like PIP and 
PIM).
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    \9\ PIP and PIM also do not distinguish between orders over 50 
contracts and orders under 50 contracts.
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    The Exchange further notes that certain components of AIM were 
approved on a pilot basis, including that there is no minimum size 
requirement for orders to be eligible for the Auction.\10\ The 
Commission has approved six one-year extensions to the pilot programs, 
most recently until July 18, 2012.\11\ In connection with the pilot 
programs, the Exchange has submitted, and will continue to submit, to 
the Commission reports providing detailed AIM Auction and order 
execution data, including monthly data regarding executions through AIM 
of Agency Orders for more or fewer than 50 contracts, as supporting 
evidence that, among other things, there is meaningful competition for 
all size orders.
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    \10\ See Securities Exchange Act Release No. 53222 (February 3, 
2006), 71 FR 7089 (February 10, 2006) (SR-CBOE-2005-60) (order 
approving implementation of AIM).
    \11\ See Securities Exchange Act Release Nos. 34-54147 (July 14, 
2006), 71 FR 41487 (July 21, 2006) (SR-CBOE-2006-64); 56094 (July 
18, 2007), 72 FR 40910 (July 25, 2007) (SR-CBOE-2007-80); 58196 
(July 18, 2008), 73 FR 43803 (July 28, 2008) (SR-CBOE-2008-76); 
60338 (July 17, 2009), 74 FR 36803 (July 24, 2009) (SR-CBOE-2009-
51); 62522 (July 16, 2010), 75 FR 43596 (July 26, 2010) (SR-CBOE-
2010-67); and 34-64930 (July 20, 2011), 76 FR 44636 (July 26, 2011) 
(SR-CBOE-2011-66).
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Elimination of Three Market-Maker Requirement

    CBOE Rule 6.74A(a)(4) currently requires that there be at least 
three market-makers quoting in the relevant series for an Auction to 
commence. The Exchange is proposing to eliminate this requirement. The 
Exchange does not believe that customer orders should be denied the 
benefits of AIM simply because there may be less than three market-
makers quoting in a relevant options class at a specific point in time. 
Any concern regarding an Auction starting with a lower number of 
market-makers quoting in a relevant series is offset by the broad 
participation and competition that would be present once an Auction 
commenced.
    In support of this proposal, the Exchange notes that both PIP \12\ 
and PIM \13\ permit auctions to commence without the condition that 
there be a minimum number of market-makers quoting in the particular 
series. The Exchange believes that AIM, and in turn the customers that 
benefit from AIM, would be disadvantaged if the three market-maker 
requirement remained as a condition to start an Auction because this 
requirement potentially reduces the number of Auctions and, as a 
result, opportunities for price improvement. Because BOX and ISE are 
currently able to offer their customers price improvement without a 
minimum quoter requirement in PIP and PIM, respectively, the Exchange 
believes it is essential for competitive purposes that it be able to 
offer the same opportunities for price improvement on CBOE through AIM.
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    \12\ See supra note 3; see also Securities Exchange Act Release 
No. 34-58999 (November 21, 2008), 73 FR 72536 (November 28, 2008) 
(SR-BSE-2008-54) (order approving proposed rule change to eliminate 
requirement that there be at least three market-makers quoting in 
the relevant series for an auction to commence).
    \13\ See supra note 4; see also Securities Exchange Act Release 
No. 34-58710 (October 1, 2008), 73 FR 59008 (October 8, 2008) (SR-
ISE-2008-63) (order approving proposed rule change to eliminate 
requirement that there be at least three market-makers quoting in 
the relevant series for an auction to commence).
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Addition of Option To Designate Auto-Match Limit Price

    CBOE Rule 6.74A(b)(1)(A) currently allows an Initiating TPH to 
enter its contra-side second order in one of two formats: (1) A 
specified single price; or (2) a non-price specific commitment to auto-
match all Auction responses achieved during the Auction. In this case, 
the Initiating TPH would have no control over the match price. The 
Exchange is proposing to provide Initiating TPHs with the additional 
option to auto-match competing prices from other market participants up 
to a designated limit price. The Initiating TPH will still not be able 
to cancel the auto-match instruction after an Auction commences and 
will have no control over the prices at which it receives an allocation 
of the Auction other than the outside boundary established by the 
designated limit price.
    The Exchange notes that when the Initiating TPH selects the auto-
match feature prior to the start of an Auction (with or without a 
designated limit price), the available liquidity at improved prices is 
increased and competitive final pricing is out of the Initiating TPH's 
control. The Exchange believes the proposal will encourage increased 
participation in AIM because it allows TPHs willing to trade with an 
Agency Order at a price better than the NBBO, but only up to a certain 
price, to initiate an Auction.
    In support of this proposal, the Exchange also notes that both PIP 
\14\ and PIM \15\ permit initiating participants to elect to auto-match 
up to a designated limit price. The Exchange believes that AIM, and in 
turn the customers that benefit from AIM, would be disadvantaged if 
TPHs are not provided with the option to auto-match up to a designated 
limit price because this lack of flexibility reduces the number of 
Auctions and, as a result, opportunities for price improvement. Because 
BOX and ISE currently allow initiating participants or members, 
respectively, the option to auto-match up to the NBBO achieved during 
an auction or up to a designated limit price, the Exchange believes it 
is important for competitive purposes that it be able to offer the same

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opportunities for price improvement on CBOE through AIM.
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    \14\ See supra note 3; see also Securities Exchange Act Release 
No. 34-61805 (March 31, 2010), 75 FR 17454 (April 6, 2010) (SR-BX-
2010-22) (order approving implementation of auto-match feature with 
the option to auto-match up to a designated limit price).
    \15\ See supra note 4; see also Securities Exchange Act Release 
No. 34-62644 (August 4, 2010), 75 FR 48395 (August 10, 2010) (SR-
ISE-2010-61) (order approving implementation of auto-match feature 
with the option to auto-match up to a designated limit price).
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    The Exchange will provide the Commission with the following data: 
(1) The percentage of trades effected through AIM in which the 
Initiating TPH submitted an Agency Order with an auto-match instruction 
that included a designated limit price and the percentage that did not 
include a designated limit price; and (2) the average amount of price 
improvement provided to AIM Agency Orders when the Initiating TPH 
submitted an auto-match instruction that included a designated limit 
price and the average amount that did not include a designated limit 
price, versus the average amount of price improvement provided to AIM 
Agency Orders when the Initiating TPH submitted a single price (no 
auto-match instruction).
    After effectiveness of the proposal, and at least one week prior to 
implementation of the rule change, CBOE will issue a notice to TPHs 
informing them of the implementation of the additional auto-match 
feature. This will give TPHs an opportunity to make any necessary 
modifications to coincide with the implementation date.

Elimination of Relevant Option Class Restriction

    CBOE Rule 6.74A(b)(1)(D) currently provides that only market-makers 
with an appointment in the relevant option class may submit responses 
to an RFR in an Auction. The Exchange is proposing to eliminate this 
restriction and allow all TPHs that receive an RFR to submit responses 
in an Auction. The Exchange notes that the elimination of this 
restriction will allow for broader participation in Auctions by all 
types of market participants (e.g., public customers, broker-dealers 
and market-makers). This broader participation will increase 
competition in Auctions because more market participants will be able 
to submit responses to RFRs, which responses may result in better 
prices for customers.
    In support of this proposal, the Exchange notes both PIP \16\ and 
PIM \17\ permit all participants and members, respectively, to submit 
competing prices in an auction. The Exchange believes that the 
elimination of the restriction on which TPHs may compete in an Auction 
would increase the opportunities for all types of market participants 
to participate in AIM and submit price responses, leading to more 
robust competition in AIM.
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    \16\ See supra note 3; see also Securities Exchange Act Release 
No. 34-51651 (May 3, 2005), 70 FR 24848 (May 11, 2005) (SR-BSE-2005-
01) (order approving proposed rule change to eliminate certain 
restrictions on the ability of certain market participants to 
participate in PIP).
    \17\ See supra note 4; see also Securities Exchange Act Release 
No. 34-50819 (December 8, 2004), 69 FR 75093 (December 15, 2004) 
(SR-ISE-2003-06) (order approving proposed rule change to implement 
PIM without a restriction on which members may submit auction 
responses).
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange and, in particular, the 
requirements of Section 6(b) of the Act.\18\ Specifically, the Exchange 
believes the proposed rule change is consistent with the Section 
6(b)(5) \19\ 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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    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(5).
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    In particular, the Exchange believes this proposed rule change is a 
reasonable modification designed to provide additional flexibility for 
TPHs to obtain executions on behalf of their customers while continuing 
to provide meaningful, competitive Auctions. The Exchange also believes 
that the proposed rule change will increase the number of and 
participation in Auctions, which will ultimately enhance competition in 
the AIM Auctions and provide customers with additional opportunities 
for price improvement. These changes are consistent with changes made 
by other 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.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will: 
(A) by order approve or disapprove such proposed rule change, or (B) 
institute proceedings to determine whether the proposed rule change 
should be disapproved.

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-2011-116 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-2011-116. 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 on 
official business days between the hours of 10 a.m. and 3 p.m. Copies 
of such filing also will be

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available for inspection and copying at the principal office of the 
CBOE. 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-2011-116, and should be submitted on or before January 20, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-33587 Filed 12-29-11; 8:45 am]
BILLING CODE 8011-01-P


