
[Federal Register Volume 77, Number 188 (Thursday, September 27, 2012)]
[Notices]
[Pages 59444-59446]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-23764]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67903; File No. SR-CBOE-2012-082]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Related to Small Order Preference Priority Overlay

September 21, 2012.
    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 September 12, 2012, 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, II, and III 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\ 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 the 
Substance of the Proposed Rule Change

    The Exchange is proposing to amend Rules 6.45A, Priority and 
Allocation of Equity Option Trades on the CBOE Hybrid System, and 
6.45B, Priority and Allocation of Trades in Index Options and Options 
on ETFs on the CBOE Hybrid System, to expand on the description of the 
existing operation of the small order preference priority overlay. The 
text of the proposed rule change is available on the Exchange's Web 
site (www.cboe.org/Legal), 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

[[Page 59445]]

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
    CBOE Rules 6.45A and 6.45B set forth, among other things, the 
manner in which electronic Hybrid System trades in options are 
allocated. Paragraph (a) of each rule essentially governs how incoming 
orders received electronically by the Exchange are electronically 
executed against interest in the CBOE quote. Paragraph (a) of each rule 
currently provides a ``menu'' of matching algorithms to choose from 
when executing incoming electronic orders. The menu format allows the 
Exchange to utilize different matching algorithms on a class-by-class 
basis. The menu includes, among other choices, the ultimate matching 
algorithm (``UMA''), as well as price-time and pro-rata priority 
matching algorithms with additional priority overlays. The priority 
overlays for price-time and pro-rata currently include: public customer 
priority for public customer orders resting on the Hybrid System, 
participation entitlements for certain qualifying market-makers. 
Additional priority overlays for UMA, price-time and pro-rata include 
the small order preference and a market turner priority (for 
participants that are first to improve CBOE's disseminated quote). 
These overlays are optional.
    If the small order priority overlay is in effect for an option 
class, then the following applies:
     Orders for five (5) contracts or fewer will be executed 
first by the Designated Primary Market-Maker (``DPM'') or Lead Market-
Maker (``LMM''), as applicable, that is appointed to the option class; 
provided however, that on a quarterly basis the Exchange evaluates what 
percentage of the volume executed on the Exchange (excluding volume 
resulting from the execution of orders in AIM (see CBOE Rule 6.74A, 
Automated Improvement Mechanism (``AIM'')) is comprised of orders for 
five (5) contracts or fewer executed by DPMs and LMMs, and will reduce 
the size of the orders included in this provision if such percentage is 
over forty percent (40%).
     This procedure only applies to the allocation of 
executions among non-customer orders and market maker quotes existing 
in the EBook at the time the order is received by the Exchange. No 
market participant is allocated any portion of an execution unless it 
has an existing interest at the execution price. Moreover, no market 
participant can execute a greater number of contracts than is 
associated with the price of its existing interest. Accordingly, the 
small order preference contained in this allocation procedure is not a 
guarantee; the DPM or LMM, as applicable, (i) must be quoting at the 
execution price to receive an allocation of any size, and (ii) cannot 
execute a greater number of contracts than the size that is associated 
with its quote.
     If a Preferred Market-Maker (see CBOE Rule 8.13, Preferred 
Market-Maker Program) is not quoting at a price equal to the national 
best bid or offer (``NBBO'') at the time a preferred order is received, 
the allocation procedure for small orders described above shall be 
applied to the execution of the preferred order. If a Preferred Market 
Maker is quoting at the NBBO at the time the preferred order is 
received, the allocation procedure that is generally applicable for all 
other sized orders contained in subparagraphs (a)(i) and (ii) of Rules 
6.45A or 6.45B, as applicable, is applied to the execution of the 
preferred order (e.g., if the default matching algorithm is price-time 
with a public customer and participation entitlement overlay, the order 
will execution [sic] first against any public customer orders, then the 
Preferred Market-Maker would receive its participation entitlement, 
then the remaining balance would be allocated on a price-time basis).
     The small order priority overlay is only be [sic] 
applicable to automatic executions and is not be [sic] applicable to 
any electronic auctions.\5\
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    \5\ In addition to AIM, CBOE has various electronic auctions 
that are described under Rules 6.13A, Simple Auction Liaison 
(``SAL''), 6.14A, Hybrid Agency Liaison (HAL), and 6.74B, 
Solicitation Auction Mechanism (``AIM SAM''). Each of these auctions 
generally allocates executions pursuant to the matching algorithm in 
effect for the options class with certain exceptions noted in the 
respective rules.
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    The purpose of the proposed rule change is to expand on the text 
contained in subparagraphs (a)(iii) of Rules 6.45A and 6.45B to simply 
make it clearer that, in the event an order for five contracts or fewer 
is received when there is a Preferred Market-Maker quoting at a price 
equal to the NBBO at the time a preferred order is received, any Market 
Turner priority overlay status would not be applied. Currently the rule 
text does not include this level of detail,\6\ so the Exchange is 
proposing to include this information within the rule to provide 
additional clarity on the existing operation of the small order 
preference overlay. Specifically, as revised, the text would provide 
that, in the event an order for five contracts or fewer is received 
when there is a Preferred Market-Maker quoting at a price equal to the 
NBBO at the time a preferred order is received, the allocation 
procedure contained in subparagraphs (a)(i) and (ii) of Rules 6.45A or 
6.45B, as applicable, orders shall be applied to the execution of the 
preferred order (as the rule text already provides) and that any Market 
Turner priority overlay status (which is described in subparagraph 
(a)(iii)(2) of Rules 6.45A or 6.45B, as applicable) shall not be 
applied to that execution.
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    \6\ The rule text currently indicates that, ``[i]f a Preferred 
Market Maker is quoting at the NBBO at the time the preferred order 
is received, the allocation procedure contained in subparagraphs (i) 
or (ii), as applicable, shall be applied.'' Subparagraphs (i) and 
(ii) of Rules 6.45A and 6.45B describe the UMA, price-time, and pro-
rata priority allocation algorithms (as well as the additional 
priority overlays applicable to the respective allocation 
algorithms). Subparagraph (iii) of Rules 6.45A and 6.45B describe 
the additional priority overlays applicable to all allocation 
methodologies, which overlays include the small order preference 
overlay and the Market Turner overlay.
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    The operation of the small order priority overlay described above 
is part of CBOE's careful balancing of the rewards and obligations that 
pertain to each of the Exchange's classes of memberships. This 
balancing is part of the overall market structure that is designed to 
encourage vigorous price competition between Market-Makers (including 
DPMs, LMMs and Preferred Market-Makers) on the Exchange, as well as 
maximize the benefits of price competition resulting from the entry of 
customer and non-customer orders, while encouraging participants to 
provide market depth. The Exchange believes the small order priority 
overlay, which includes priority participation rights for DPMs and LMMs 
or Preferred Market-Makers (as applicable) over non-customer orders and 
market maker quotes only when the DPM/LMM or Preferred Market-Maker (as 
applicable) is quoting at the best price, strikes the appropriate 
balance within its market and maximizes the benefits of an electronic 
market for all participants. In that regard, the Exchange believes that 
allowing the Preferred Market-Maker participation entitlement to take 
precedence over any otherwise applicable Market Turner allocation (in 
the limited scenario where a preferred order for five contracts or 
fewer is received when there is a Preferred Market-Maker quoting at a 
price equal to the NBBO at the time the preferred order is received) 
strikes the appropriate balance within its market and

[[Page 59446]]

maximizes the benefits of an electronic market for all participants. In 
particular, the application of the Preferred Market-Maker participation 
entitlement under the small order preference priority overlay can 
contribute to market quality to the extent that it acts as an incentive 
to attract and retain Market-Maker participation on CBOE and, given the 
small order size and NBBO quoting requirement that are conditions to 
receiving the preference, CBOE believes that applying small order 
preference over Market Turner priority for these types of small orders 
is appropriate and consistent [sic] the protection of investors and the 
public interest.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act \7\ in general and furthers the objectives of 
Section 6(b)(5) of the Act \8\ 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. In 
particular, the Exchange believes that including the additional detail 
within the rules should provide additional clarity and avoid any 
confusion on the operation of the small order preference priority 
overlay in a class where the Market Turner priority overlay is also in 
effect. The Exchange also believes that the provision allowing the 
Preferred Market-Maker participation entitlement to take precedence 
over any otherwise applicable Market Turner allocation (in the limited 
scenario where a preferred order for five contracts or fewer is 
received when there is a Preferred Market-Maker quoting at a price 
equal to the NBBO at the time a preferred order is received) strikes 
the appropriate balance within its market and maximizes the benefits of 
an electronic market for all participants. In particular, the 
application of the Preferred Market-Maker participation entitlement 
under the small order preference priority overlay can contribute to 
market quality to the extent that it acts as an incentive to attract 
and retain Market-Maker participation on CBOE and, given the small 
order size and NBBO quoting requirement that are conditions to 
receiving the preference, CBOE believes that applying small order 
preference over Market Turner priority for these types of small orders 
is appropriate and consistent [sic] the protection of investors and the 
public interest.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 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 \9\ and Rule 19b-4(f)(6) 
thereunder.\10\ 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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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change along with a 
brief description and the text of 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.
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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-2012-082 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-2012-082. 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 10:00 a.m. and 3:00 p.m. Copies of such 
filing also will be available for inspection and copying at the 
principal offices 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-2012-082, and should be submitted on or before 
October 18, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-23764 Filed 9-26-12; 8:45 am]
BILLING CODE 8011-01-P


