
[Federal Register Volume 77, Number 151 (Monday, August 6, 2012)]
[Notices]
[Pages 46781-46783]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-19145]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67547; File No. SR-CBOE-2012-048]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving a Proposed Rule Change Relating to 
Distribution of Auction Messages

July 31, 2012.

I. Introduction

    On June 6, 2012, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or the ``Exchange''), 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 proposed rule change to amend rules regarding the 
universe of eligible responders to certain Exchange auctions and the 
redistribution of auction messages. The proposed rule change was 
published for comment in the Federal Register on June 22, 2012.\3\ The 
Commission received no comment letters regarding the proposed rule 
change. 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. 67209 (June 18, 
2012), 77 FR 37724 (``Notice'').
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II. Description

    The Exchange proposes to amend several rules that govern its 
auction mechanisms to, among other things, permit it to broaden the 
class of persons that may respond to auction messages as well as 
specifically allow such participants to rebroadcast auction messages in 
options classes that have been opened to such responders. The proposed 
changes would amend Rule 6.13A, relating to the Simple Auction Liaison 
(``SAL''); Rule 6.14A, relating to the Hybrid Agency Liaison 2 system 
(``HAL2''); and Rule 6.53C, relating to Complex Orders on the Hybrid 
System, each of which are described in more detail below. In addition, 
CBOE also proposes to delete Rule 6.14, relating to the Hybrid Agency 
Liaison system (``HAL''), because, since the rollout of HAL2 in 2009, 
the Exchange has phased out HAL and no longer uses it for any 
classes.\4\
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    \4\ See id. at 37725. Further, the Exchange proposes to rename 
``HAL2'' as ``HAL'' in the CBOE Rules to eliminate any potential 
confusion investors may have if there was a HAL2 but no HAL. For 
purposes of this order, however, the Commission is using the current 
terms to distinguish between ``HAL2'' and ``HAL.'' In addition, the 
Exchange proposes to amend Rules 6.2B, 6.13, 6.14A, 6.25, and 6.53 
to delete cross-references to Rule 6.14 and HAL and to correct other 
cross-references to conform to numbering changes in this proposal 
throughout the rules. See id.
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A. SAL

    SAL is a feature within CBOE's Hybrid System designed to provide 
price improvement over the national best bid or offer (``NBBO'') by 
automatically initiating an auction process for an order that is 
eligible for automatic execution by the Hybrid System (``Agency 
Order'').\5\ Currently, to the extent CBOE has activated SAL for a 
particular class, Market-Makers with an appointment in the relevant 
option class and Trading Permit Holders acting as agent for orders 
resting at the top of the Exchange's book opposite the Agency Order 
(``Qualifying Trading Permit Holders'') are permitted to submit auction 
responses.\6\ However, the Exchange may determine, on a class-by-class 
basis, to permit SAL responses by all CBOE Market-Makers in addition to 
Qualifying Trading Permit Holders.\7\
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    \5\ See id. at 37724. The Exchange determines the eligible order 
size, eligible order types, eligible order origin code (i.e., public 
customer orders, non-Market-Maker broker-dealer orders, and Market-
Maker broker-dealer orders), and classes in which SAL is activated. 
See CBOE Rule 6.13A(a).
    \6\ See CBOE Rule 6.13A(b).
    \7\ See CBOE Rule 6.13A, Interpretation and Policy .05.
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    CBOE now proposes to eliminate the concept of Qualifying Trading 
Permit Holders under Interpretation and Policy .05 to Rule 6.13A, and 
instead provide more broadly that it may determine on a class-by-class 
basis to permit all Trading Permit Holders,\8\ rather than just CBOE 
Market-Makers and Qualifying Trading Permit Holders, to respond to SAL 
auction messages.\9\ The Exchange also proposes to amend Interpretation 
and Policy .02 to Rule 6.13A to allow Trading Permit Holders to 
redistribute auction messages in classes in which the Exchange allows 
all Trading Permit Holders to submit SAL auction responses.\10\ 
Finally, CBOE proposes a new Interpretation and Policy .05 to Rule 
6.13A to provide that all pronouncements regarding determinations by 
the Exchange pursuant to Rule 6.13A and the Interpretations and 
Policies thereunder will be announced to Trading Permit Holders via 
Regulatory Circular.\11\
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    \8\ According to CBOE, by definition, all Market-Makers are 
Trading Permit Holders; therefore, references to ``Trading Permit 
Holders'' include all Market-Makers. See Notice, supra note 3, at 
37724 n. 3.
    \9\ See id. at 37724. The Exchange also proposes to move this 
language from Interpretation and Policy .05 to Rule 6.13A to 
paragraph (b) of Rule 6.13A.
    \10\ See id.
    \11\ See id. at 37725.
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B. HAL2

    HAL2 is a feature within CBOE's Hybrid System that provides 
automated order handling in designated classes trading on Hybrid for 
qualifying electronic orders that are not automatically executed by the 
Hybrid System.\12\ For those classes, HAL2 will process (1) an eligible 
order that is marketable against the Exchange's disseminated quotation 
while that quotation is not the NBBO; \13\ (2) an eligible order that 
would improve the Exchange's disseminated quotation and that is 
marketable against quotations by other exchanges that are participants 
in the Options Order Protection and Locked/Crossed Plan; (3) for Hybrid 
3.0 classes, an eligible order that would improve the Exchange's 
disseminated quotation; and (4) an order submitted to HAL2 as a result 
of the price check parameters of Rule 6.13(b)(v).\14\ HAL2 
electronically exposes these orders at the NBBO price to allow Market-
Makers appointed in that class as well as Trading Permit Holders acting 
as agent for orders at the top of the Exchange's book in the relevant 
series to step-up to the NBBO price.\15\ Alternatively, the Exchange 
may determine on a class-by-class basis to make the exposure

[[Page 46782]]

message available to all Market-Makers or to all Trading Permit 
Holders.\16\
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    \12\ See CBOE Rule 6.14A. The Exchange determines the eligible 
order size, eligible order types, eligible order origin code (i.e., 
public customer orders, non-Market-Maker broker-dealer orders, and 
Market-Maker broker-dealer orders), and classes in which HAL2 is 
activated. See CBOE Rule 6.14A(a).
    \13\ Except that HAL2 will not be used to process such an order 
when the Exchange's quotation contains resting orders and does not 
contain sufficient Market-Maker quotation interest to satisfy the 
entire order. See CBOE Rule 6.14A(a)(i).
    \14\ See CBOE Rule 6.14A(a)(i)-(iv).
    \15\ See Notice, supra note 3, at 37725; CBOE Rule 6.14A(b). The 
duration of the exposure period may not exceed one second. See CBOE 
Rule 6.14A(b).
    \16\ See CBOE Rule 6.14A(b).
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    Without making a substantive change to this provision, the Exchange 
now proposes to amend the HAL2 rule to conform the language to the new 
SAL and COA provisions that it has proposed in this filing. In other 
words, CBOE would continue to be able to allow all Trading Permit 
Holders to submit responses to the HAL2 exposure message.\17\ CBOE also 
proposes to amend Interpretation and Policy .01 to Rule 6.14A to allow 
Trading Permit Holders to redistribute HAL2 exposure messages in 
classes in which the Exchange allows all Trading Permit Holders to 
submit HAL2 auction responses.\18\
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    \17\ See id.
    \18\ See Notice, supra note 3, at 37725.
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    In addition, the Exchange proposes a new Interpretation and Policy 
.03 to Rule 6.14A to provide that all pronouncements regarding 
determinations by the Exchange pursuant to Rule 6.14A and the 
Interpretations and Policies thereunder will be announced via 
Regulatory Circular.\19\ Further, CBOE proposes to clarify that the 
existing provision that allows Trading Permit Holders acting as agent 
for orders at the top of the Exchange's book in the relevant option 
series to respond to exposure messages applies to such Trading Permit 
Holders that are representing orders on the opposite side of the order 
submitted to HAL. According to CBOE, the Hybrid System currently only 
accepts responses that are on the opposite side of the exposed order, 
and the proposed rule change amends Rule 6.14A to reflect this current 
practice.\20\ Finally, the Exchange proposes to amend Rule 6.14A(b) to 
change the word ``flashed'' to ``exposed'' to create consistency of 
terminology in the Rule.
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    \19\ See id.
    \20\ See id.
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C. COA

    COA is the automated complex order request for responses (``RFR'') 
auction process by which eligible complex orders \21\ may be given an 
opportunity for price improvement before being booked in the electronic 
complex order book (``COB'') or on a PAR workstation.\22\ To the extent 
COA is activated in a particular class, Market-Makers with an 
appointment in the relevant option class and Trading Permit Holders 
acting as agent for orders resting at the top of the COB in the 
relevant option series may submit responses to the RFR messages during 
the Response Time Interval.\23\ The Exchange may determine on a class-
by-class basis to permit COA responses by all CBOE Market-Makers in 
addition to Qualifying Trading Permit Holders.\24\
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    \21\ The Exchange determines, on a class-by-class-basis, complex 
orders 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 types (i.e., non-
broker-dealer public customer; broker-dealers that are not Market-
Makers or specialists on an options exchange; and Market-Makers or 
specialists on an options exchange). See CBOE Rule 6.53C(d)(i)(2).
    \22\ See Notice, supra note 3, at 37725-26; CBOE Rule 6.53C(d). 
CBOE determines whether to activate COA on a class-by-class basis. 
See Notice, supra note 3, at 37725.
    \23\ See CBOE Rule 6.53C(d)(iii). ``Response Time Interval'' 
means the period of time during which responses to the RFR may be 
entered, the length of which is determined by the Exchange on a 
class-by-class basis, but which shall not exceed three seconds. See 
CBOE Rule 6.53C(d)(ii).
    \24\ See CBOE Rule 6.53C, Interpretation and Policy .07.
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    CBOE now proposes changes to the COA rules that mirror the changes, 
discussed above, that it is proposing for SAL. Specifically, CBOE now 
proposes to eliminate the concept of Qualifying Trading Permit Holders 
under Interpretation and Policy .07 to Rule 6.53C, and instead allow 
the Exchange to determine on a class-by-class basis to permit all 
Trading Permit Holders to respond to RFR messages.\25\ In addition, the 
proposed rule change clarifies that only Trading Permit Holders acting 
as agent for orders at the top of the Exchange's book in the relevant 
option series may respond to RFR messages if they represent orders on 
the opposite side of the order submitted to COA.\26\ Finally, the 
Exchange proposes to amend Interpretation and Policy .05 to Rule 6.53C 
to allow Trading Permit Holders to redistribute RFR messages in classes 
in which the Exchange allows all Trading Permit Holders to submit RFR 
responses.\27\
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    \25\ See Notice, supra note 3, at 37726. The Exchange also 
proposes to move this language from Interpretation and Policy .07 to 
Rule 6.53C to paragraph (d)(iii) of Rule 6.53C.
    \26\ According to the Exchange, the CBOE Hybrid System currently 
only accepts responses that are on the opposite side of the Agency 
Order, and the proposed rule change amends Rule 6.53C to reflect 
this current practice. See id.
    \27\ See id.
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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.\28\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\29\ 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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    \28\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \29\ 15 U.S.C. 78f(b)(5).
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    In particular, the Commission believes the Exchange's proposal to 
permit it to open up SAL and COA auctions in specified classes to all 
Trading Permit Holders and allow redistribution of SAL, HAL2, and COA 
auction messages in those classes where the Exchange has broadened the 
universe of participation could protect investors and the public 
interest by enhancing competition in these auctions. CBOE's stated 
purpose in opening these auctions is to allow a greater number of 
market participants to submit responses to SAL auctions and COA RFRs, 
which CBOE believes has the potential to result in better prices for 
customers as responses to exposure or RFR messages could be at prices 
better than the NBBO.\30\ The Commission agrees that broadening the 
universe of participants that receive these auction messages and that 
may respond to those messages is consistent with the protection of 
investors and the public interest. Among other things, if CBOE takes 
advantage of these new provisions to open up the SAL and COA auctions 
to more participants, these changes should promote broader awareness 
of, and provide increased opportunities for greater participation in, 
these auctions and, consequentially, facilitate the ability of CBOE to 
bring together participants and encourage more robust competition for 
price improvement in these auctions. Consistent with the protection of 
investors and the public interest, increased opportunities for 
participation and competition in these auctions could result in better 
prices for customers and participants
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    \30\ See Notice, supra note 3, at 37726.
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    In addition, CBOE proposes to reorganize provisions of Rules 6.13A, 
6.14A, and 6.53C regarding which Trading Permit Holders are eligible to 
respond to auction messages so that the requirements related to auction 
responses for SAL auctions, HAL2 auctions, and COAs all use similar 
language. These changes should make

[[Page 46783]]

these substantially similar provisions easier to understand. CBOE also 
proposes to delete Rule 6.14, relating to HAL, while renaming ``HAL2'' 
as ``HAL.'' The Exchange has indicated that HAL is outdated and no 
longer in use.\31\ The Commission believes that the deletion of the 
obsolete HAL rule and the renaming of ``HAL2'' as ``HAL'' should 
alleviate any potential confusion by CBOE Trading Permit Holders as 
well as investors.
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    \31\ See id. at 37725.
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    For the reasons stated above, the Commission believes that the 
proposed changes to the SAL, COA, HAL, and HAL2 rules, discussed above, 
are consistent with Section 6(b)(5) of the Act.\32\
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    \32\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\33\ that the proposed rule change (SR-CBOE-2012-048) is approved.
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    \33\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
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    \34\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-19145 Filed 8-3-12; 8:45 am]
BILLING CODE 8011-01-P


