
[Federal Register Volume 77, Number 20 (Tuesday, January 31, 2012)]
[Notices]
[Pages 4844-4845]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-1987]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66235; File No. SR-CBOE-2011-114]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving a Proposed Rule Change Relating to 
Complex Order Processing in Hybrid 3.0 Classes

January 25, 2012.

I. Introduction

    On November 29, 2011, the Chicago Board Options Exchange, 
Incorporated (``Exchange'' or ``CBOE'') 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 proposal to revise the rules governing the execution 
of complex orders in options classes trading on CBOE's Hybrid 3.0 
trading platform. The proposed rule change was published for comment in 
the Federal Register on December 14, 2011.\3\ The Commission received 
no comments regarding the proposal. This order approves the proposed 
rule change.
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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. 65914 (December 8, 
2011), 76 FR 77878.
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II. Description of the Proposal

    CBOE proposes to add new Interpretation and Policy .10 to CBOE Rule 
6.53C, ``Complex Orders on the Hybrid System,'' to revise the operation 
of the complex order book (``COB'') and the complex order request for 
responses auction process (``COA'') for complex orders in options 
classes traded on CBOE's Hybrid 3.0 trading platform. The Hybrid 3.0 
platform is an electronic trading platform that allows one or more 
quoters to submit electronic quotes that represent the aggregate market 
maker quoting interest in a series for the trading crowd. Certain 
designated Lead Market Makers currently generate the aggregate trading 
crowd quote. S&P 500 Index options (``SPX'') are the only options that 
currently trade on the Hybrid 3.0 trading platform.
    Currently, complex orders submitted to COB or COA may execute 
automatically against (i) individual orders and quotes residing in the 
CBOE's electronic book (``EBook''), provided that the complex order can 
be executed in full or in a permissible ratio; and (ii) against other 
complex orders represented in COB or COA, as applicable.\4\
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    \4\ See CBOE Rules 6.53C(c), ``Complex Order Book,'' and 
6.53C(d), ``Process for Complex Order RFR Auction.''
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    New CBOE Rule 6.53C, Interpretation and Policy .10 provides that, 
for Hybrid 3.0 classes, CBOE may determine not to allow marketable 
complex orders entered into COB and/or COA to execute automatically 
against individual quotes residing in the EBook. A marketable complex 
order would be able to execute automatically against other complex 
orders or against individual orders in the EBook, provided that 
conditions in CBOE Rule 6.53C, Interpretation and Policy .10 are 
satisfied. In particular, a marketable complex order will execute 
automatically against individual orders in the EBook, provided that the 
complex order can be executed in full, or in a permissible ratio, 
against the individual orders in the EBook and the individual orders in 
the EBook are priced equal to, or better than, the quotes residing in 
the EBook.\5\ Complex orders that are marketable against each other 
will execute automatically, provided that the execution is at a net 
price that has priority over the individual orders and quotes in the 
EBook.\6\
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    \5\ See CBOE Rule 6.53C, Interpretation and Policy .10(a).
    \6\ See CBOE Rule 6.53C, Interpretation and Policy .10(b).
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    The allocation of marketable complex orders against individual 
orders in the EBook and against other complex orders will be based on 
the best net price(s).\7\ At the same net price, multiple orders will 
be allocated as provided in CBOE Rule 6.53C(c) and/or (d), as 
applicable.\8\
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    \7\ CBOE Rule 6.53C, Interpretation and Policy .10.
    \8\ CBOE Rule 6.53C, Interpretation and Policy .10.
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    To the extent that a marketable complex order cannot execute 
automatically in full or in a permissible ratio when it is routed to 
COB or after being subject to a COA, any part of the order that may be 
executed will be executed automatically and the part of the order that 
cannot execute automatically will route to PAR or, at the order entry 
firm's discretion, to the order entry firm's booth.\9\ If an order is 
not eligible to route to PAR, the remaining balance will be 
cancelled.\10\
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    \9\ CBOE Rule 6.53C, Interpretation and Policy .10(c).
    \10\ CBOE Rule 6.53C, Interpretation and Policy .10(c).
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    In addition, to the extent that a complex order resting in COB 
becomes marketable and cannot execute automatically in full or in a 
permissible ratio, the full order will be subject to a COA and the 
processing described in CBOE Rule 6.53C, Interpretation and Policy 
.10(c).\11\ CBOE believes that automatically initiating a COA when a 
resting complex order becomes marketable will provide an opportunity 
for market participants to match or improve the net price and provide 
an opportunity for automatic execution before a marketable complex 
order is routed for manual handling to PAR or a booth.
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    \11\ CBOE Rule 6.53C, Interpretation and Policy .10(d).
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    CBOE believes that revising its rules to prevent complex orders in 
Hybrid 3.0 classes from executing automatically against individual 
quotes in the EBook will help to prevent complex orders from executing 
automatically at potentially erroneous prices. CBOE notes that a market 
maker must send updates for all of its quotes in the individual series 
legs in response to a change in the price of the underlying security or 
index. For SPX options, the only options class currently traded on the 
Hybrid 3.0 platform, this may include thousands of series. CBOE states 
that it would be possible for a market maker to trade unintentionally 
with another market maker or market participant via COB or COA before 
the market maker's quote update(s) in the individual series leg is 
processed, which could result in an execution at price(s) that were not 
intended and that could be extreme or potentially erroneous.\12\ CBOE 
believes that the limitation on complex order executions against a 
market maker's quotations in Hybrid 3.0 classes will address an 
operational issue that could discourage market makers, particularly 
Lead Market Makers, from offering additional liquidity in individual 
series legs.\13\
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    \12\ According to CBOE, the Exchange has recognized the need to 
ameliorate small timing differences in processing market maker 
quotation updates by delaying market maker quotations from executing 
against each other for up to one second. See, e.g., CBOE Rule 
6.45B(d).
    \13\ CBOE notes that on the Hybrid 3.0 platform, the quotes 
represent aggregate market maker quoting interest in a series for 
the trading crowd, but the Lead Market Maker is responsible for 
generating the quotes and satisfying trades against those quotes in 
relation to executions occurring through COB or COA.
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III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\14\ In particular, the Commission finds that the proposed

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rule change is consistent with Section 6(b)(5) of the Act,\15\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to 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.
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    \14\ 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).
    \15\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the limitation on automatic executions 
of marketable complex orders against individual leg market quotations 
for options classes traded on CBOE's Hybrid 3.0 trading platform is 
consistent with the Act. According to CBOE, the limitation is designed 
to address an operational issue that CBOE believes could discourage 
market makers, particularly Lead Market Makers, from offering 
additional liquidity in the individual series legs. This operational 
issue may arise when a market maker unintentionally trades with another 
market maker or market participant via COB or COA before the market 
maker's quote update(s) in the individual series leg(s) is processed. 
By addressing an operational issue that might discourage market makers 
from offering additional liquidity in the individual series legs, the 
Commission believes that the limitation on automatic executions of 
marketable complex orders against market makers' quotations in the 
individual series legs could benefit investors by helping to increase 
liquidity in the individual series legs. In addition, the Commission 
notes that it approved a proposal by the International Securities 
Exchange, LLC (``ISE'') that limits the automatic execution of market 
makers' complex order quotations against bids and offers in the 
individual series legs.\16\
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    \16\ See Securities Exchange Act Release No. 65548 (October 13, 
2011), 76 FR 64980 (October 19, 2011) (order approving File No. SR-
ISE-2011-39).
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    Under CBOE Rule 6.53C, Interpretation and Policy .10, a marketable 
complex order may execute automatically against individual orders in 
the EBook, provided that the complex order can be executed in full or 
in a permissible ratio and the orders in the EBook are priced equal to 
or better than the individual quotes in the EBook.\17\ The Commission 
believes that this requirement will prevent any leg of a complex order 
from trading at a price that is inferior to the best quote for the 
series in the EBook. CBOE Rule 6.53, Interpretation and Policy .01 
provides, further, that complex orders that are marketable against each 
other will execute automatically only if the execution is at a net 
price that has priority over the individual orders and quotes in the 
EBook.\18\ The Commission believes that this provision will maintain 
the current requirements for a complex order to obtain priority over 
individual orders and quotes in the EBook.
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    \17\ See CBOE Rule 6.53C, Interpretation and Policy .10(b).
    \18\ See CBOE Rule 6.53C, Interpretation and Policy .10(b).
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    Under CBOE Rule 6.53C, Interpretation and Policy .10, the 
allocation of marketable complex orders against orders in the EBook and 
against other complex orders will be based on the best net price(s), 
and multiple orders at the same net price will be allocated as provided 
in CBOE Rules 6.53C(c) and/or (d), as applicable.\19\ Accordingly, the 
proposal applies the requirements of the existing COB and COA 
allocation frameworks to determine how a marketable complex order would 
be allocated against individual orders in the EBook and other complex 
orders at the same net price.
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    \19\ See CBOE Rule 6.53C, Interpretation and Policy .10. CBOE 
Rule 6.53C(c) describes the operation of the COB, and CBOE Rule 
6.53C(d) describes the operation of the COA.
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    Any part of a marketable complex order that can be executed in full 
or in a permissible ratio when it is routed to COB or after being 
subject to a COA will be executed automatically, and the part of the 
order that cannot execute automatically will route to PAR or to the 
order entry firm's booth.\20\ If the order is not eligible to route to 
PAR, the remaining balance will be cancelled.\21\ The Commission 
believes that these provisions will advise market participants of the 
treatment of marketable complex orders that cannot be executed in full 
or in a permissible ratio by clearly describing the processing of these 
orders.
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    \20\ See CBOE Rule 6.53C, Interpretation and Policy .10(c).
    \21\ See CBOE Rule 6.53C, Interpretation and Policy .10(c).
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    A complex order resting in COB that becomes marketable but cannot 
be executed automatically in full or in a permissible ratio will be 
subject to a COA.\22\ The Commission believes that subjecting such 
orders to a COA could provide an opportunity for price improvement and 
facilitate the execution of marketable complex orders.
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    \22\ See CBOE Rule 6.53C, Interpretation and Policy .10(d).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\23\ that the proposed rule change (SR-CBOE-2011-114) is approved.
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    \23\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-1987 Filed 1-30-12; 8:45 am]
BILLING CODE 8011-01-P


