
[Federal Register Volume 78, Number 17 (Friday, January 25, 2013)]
[Notices]
[Pages 5544-5548]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-01485]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68691; File No. SR-CBOE-2013-008]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Amend Its Rules Relating to Preferred Market-
Makers' Continuous Quoting Obligation

January 18, 2013.
    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 January 11, 2013, 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 Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its rules relating to Preferred 
Market-Makers' (``PMMs'') continuous quoting obligations. The text of 
the proposed rule change is provided below.\3\
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    \3\ The Exchange recently proposed to, among other things, (a) 
reduce to 90% the percentage of time for which a PMM is required to 
provide electronic quotes in an appointed option class on a given 
trading day and (b) to increase to the lesser of 99% or 100% minus 
one call-put pair the percentage of series in each class in which a 
PMM must provide continuous electronic quotes in classes in which it 
receives PMM orders, which proposed rule change was immediately 
effective upon filing. Securities Exchange Act Release No. 34-67410 
(July 11, 2012), 77 FR 42040 (July 17, 2012) (SR-CBOE-2012-064); see 
also Securities Exchange Act Release No. 34-67644 (August 13, 2012), 
77 FR 49846 (August 17, 2012) (SR-CBOE-2012-077) (immediately 
effective rule change to delay the implementation date of the 
proposed rule change in rule filing SR-CBOE-2012-064 and to indicate 
that the Exchange will announce the new implementation date by 
Regulatory Circular); and Securities Exchange Act Release No. 34-
68218 (November 13, 2012), 77 FR 69667 (November 20, 2012) (SR-CBOE-
2012-106) (immediately effective rule change to further delay the 
implementation date of the proposed rule change in rule filing SR-
CBOE-2012-064 and to indicate that the Exchange will announce the 
new implement date by Regulatory Circular). The rule text in this 
filing includes the effective (but not implemented) changes to the 
rule text made by rule filing SR-CBOE-2012-064. The Exchange expects 
to implement the effective rule changes to quoting obligations in 
filing SR-CBOE-2012-064 in conjunction with the implementation of 
the proposed rule change in this filing.
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(additions are italicized; deletions are [bracketed])
* * * * *

Chicago Board Options Exchange, Incorporated Rules

* * * * *

Rule 8.13. Preferred Market-Maker Program

    (a) Generally. The Exchange may allow, on a class-by-class basis, 
for the receipt of marketable orders, through the Exchange's Order 
Routing System when the Exchange's disseminated quote is the NBBO, that 
carry a designation from the Trading Permit Holder transmitting the 
order that specifies a Market-Maker in that class as the ``Preferred 
Market-Maker'' for that order. A qualifying recipient of a

[[Page 5545]]

Preferred Market-Maker order shall be afforded a participation 
entitlement as set forth in subparagraph (c) below.
    (b) Eligibility. No change.
    (c) Entitlement Rate. No change.
    (d) Quoting Obligations: The Preferred Market-Maker must comply 
with the quoting obligations applicable to its Market-Maker type under 
Exchange rules and must provide continuous electronic quotes (as 
defined in Rule 1.1(ccc)) in at least the lesser of 99% of the non-
adjusted option series that have a time to expiration of less than nine 
months or 100% of the non-adjusted option series that have a time to 
expiration of less than nine months minus one call-put pair of each 
class for which it receives Preferred Market-Maker orders, with the 
term ``call-put pair'' referring to one call and one put that cover the 
same underlying instrument and have the same expiration date and 
exercise price.
    * * * Interpretations and Policies:
    .01 No change.
    .02 Rule 8.13(d) does not require a Preferred Market-Maker to 
provide continuous electronic quotes in series that have a time to 
expiration of nine months or more in the classes for which it receives 
Preferred Market-Maker orders. However, a Preferred Market-Maker may 
still receive a participation entitlement in such series if it elects 
to quote in such series and otherwise satisfies the requirements set 
forth in Rule 8.13(b).
* * * * *
    The text of the proposed rule change is also 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 
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 these 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 aspects of such 
statements.

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

1. Purpose
    Rule 8.13(d) currently requires that PMMs provide continuous 
electronic quotes when the Exchange is open for trading in at least 90% 
of the non-adjusted option series of each class for which it receives 
PMM orders.\4\ Rule 1.1(ccc) currently provides that a PMM will be 
deemed to have provided ``continuous electronic quotes'' if the PMM 
provides electronic two-sided quotes for 99% of the time.\5\
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    \4\ See supra note 3 for a discussion regarding the 
implementation of a change to increase PMMs' continuous quoting 
obligations to require continuous electronic quotes in the lesser of 
99% of the non-adjusted option series or 100% of the non-adjusted 
option series minus one put-class pair of each appointed class.
    \5\ See Rule 1.1(ccc), which provides that a Hybrid Market-Maker 
will be deemed to have provided ``continuous electronic quotes'' if 
the Hybrid Market-Maker provides electronic two-sided quotes for 99% 
of the time that the Hybrid Market-Maker is required to provide 
electronic quotes in an appointed option class on a given trading 
day. As discussed above, rule filing SR-CBOE-2012-064 reduced this 
percentage of time from 99% to 90% (which change is effective but 
not yet operative, and the Exchange expects to implement in 
conjunction with this proposed rule change). See supra note 3. The 
Rule also provides that if a technical failure or limitation of a 
system of the Exchange prevents the Hybrid Market-Maker from 
maintaining, or prevents the Hybrid Market-Maker from communicating 
to the Exchange, timely and accurate electronic quotes in a class, 
the duration of the failure will not be considered in determining 
whether the Hybrid Market-Maker has satisfied the 99% (and soon to 
be 90%) quoting standard with respect to that option class. The 
Exchange may consider other exceptions to this continuous electronic 
quote obligation based on demonstrated legal or regulatory 
requirements or other mitigating circumstances.
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    The Exchange proposes to exclude series that have a time to 
expiration of nine months or more (i.e., Long-Term Equity Options 
Series, or ``LEAPS'') from PMMs' continuous quoting obligation. As a 
result, PMMs' continuous quoting obligation will not apply to options 
series with a time to expiration of nine months or more.\6\ Exchange 
Rule 8.7(d)(ii)(B) currently excludes series that have a time to 
expiration of nine months or more from the quoting obligations of 
Market-Makers.
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    \6\ As set forth in Rule 8.13(d), PMMs also have no quoting 
obligations in adjusted option series, which are option series for 
which, as a result of a corporate action by the issuer of the 
underlying security, one option contract in the series represents 
the delivery of other than 100 shares of underlying stock or Units.
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    The Exchange is proposing this rule change for competitive reasons. 
NASDAQ OMX PHLX LLC (``PHLX'') excludes, among other series, option 
series with a time to expiration of nine months or more from the 
quoting obligations of its streaming quote traders (``SQTs), remote 
SQTs (``RSQTs''), directed SQTs (``DSQTs'') and directed RSQTs 
(``DRSQTs''), the PHLX market participants generally equivalent to 
Market-Makers (SQTs and RSQTs) and PMMs (DSQTs and DRSQTs).\7\ The 
Exchange believes this proposal changes the continuous quoting 
obligation of PMMs so that PMMs are required to quote in substantially 
similar types of series as equivalent market participants at another 
options exchange and is therefore essential for competitive 
purposes.\8\ CBOE believes it is disadvantageous to PMMs if they are 
subject to stricter quoting requirements with respect to their 
continuous quoting obligations than equivalent market participants at a 
competing options exchange.
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    \7\ See PHLX Rule 1014(b)(ii)(D)(4). Additionally, while not 
specified in its rules, International Securities Exchange (``ISE'') 
Regulatory Information Circular 2009-248 similarly excludes these 
option series from the quoting obligations of competitive market-
makers, including competitive market-makers that receive preferenced 
orders, the ISE market participants generally equivalent to PMMs. 
The Exchange notes that other exchanges exclude these long-term 
options from the quoting obligations of market participants that are 
equivalent to Lead Market-Makers (``LMMs'') or Designated Primary 
Market-Makers (``DPMs''), but not PMMs. See, e.g., NYSE MKT Options 
Rule 925.1NY, Commentary .01; and NYSE Arca Options Rule 6.37B, 
Commentary .01.
    \8\ As noted below, PMMs will still be required to quote in 
quarterly options series, which DSQTs and DRSQTs are not.
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    The Exchange also notes that this proposed rule change is 
consistent with the approach in current Rule 5.8, which states that 
strike price interval, bid/ask differential and continuity rules will 
not apply to equity LEAPS until the time to expiration is less than 
nine months.\9\
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    \9\ Similarly, Rule 24.9(b)(1)(A) states that strike price 
interval, bid/ask differential and continuity rules will not apply 
to index LEAPS until the time to expiration is less than twelve 
months.
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    The Exchange believes the proposed rule change will continue to 
ensure that PMMs create a fair and orderly market in classes in which 
they receive PMM orders, as it does not absolve PMMs from providing 
continuous electronic quotes in a significant percentage of series of 
each class for a substantial portion of the trading day. PMMs must 
engage in activities that constitute a course of dealings reasonably 
calculated to contribute to the maintenance of a fair and orderly 
market, including (1) Competing with other Market-Makers to improve 
markets in all series of options classes comprising their appointments, 
(2) making markets that, absent changed market conditions, will be 
honored in accordance with firm quote rules, and (3) updating market 
quotations in

[[Page 5546]]

response to changed market conditions in their appointed options 
classes and to assure that any market quote it causes to be 
disseminated is accurate.\10\
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    \10\ See Rule 8.7(a) and (b).
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    The relief proposed in this filing is mitigated by a PMM's other 
obligations. The proposed rule change would not excuse a PMM that is 
present on the trading floor from its obligation to provide a two-sided 
market complying with the bid/ask differential requirements in response 
to any request for quote by a floor broker, Trading Permit Holder or 
PAR Official.\11\ The proposed rule change would also not excuse a PMM 
that is present on the trading floor from its obligation to provide an 
open outcry two-sided market complying with the bid/ask differential 
requirements in response to a request for a quote by a Trading Permit 
Holder or PAR Official directed at that Market-Maker or when, in 
response to a general request for a quote by a Trading Permit Holder or 
PAR Official, a market is not then being vocalized by a reasonable 
number of Market-Makers.\12\ Further, the proposed rule change would 
not excuse a PMM from its obligation to submit a single quote or 
maintain continuous quotes in one or more series of a class to which 
the PMM is appointed when called upon by an Exchange official if, in 
the judgment of such official, it is necessary to do so in the interest 
of maintaining a fair and orderly market.\13\
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    \11\ See Rule 8.7(d)(i)(C) (relating to a request for quote by a 
floor broker) and (ii)(C) (relating to a request for a quote by a 
Trading Permit Holder or PAR Official).
    \12\ See Rule 8.7(d)(iv).
    \13\ Id.
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    The proposed rule change also adds Interpretation and Policy .02 to 
Rule 8.13 to clarify that while Rule 8.13(d) does not require a PMM to 
provide continuous electronic quotes in LEAPS in the classes for which 
it receives Preferred Market-Maker orders, a PMM may still receive a 
participation entitlement in a LEAPS series if it elects to quote in 
that series and otherwise satisfies the requirements set forth in Rule 
8.13(b). If a PMM elects to quote in a LEAPS series in one of its 
preferred classes, in order to receive the participation entitlement in 
that series, the PMM must still be quoting at the best bid or offer on 
the Exchange and satisfying its other obligations set forth in Rule 
8.13(b). PMMs already receive participation entitlements in series they 
are not required to quote. As discussed above, a PMM is currently 
required to provide continuous electronic quotes in at least 90% of the 
non-adjusted option series of each class for which it receives PMM 
orders.\14\ If the PMM elects to quote in 100% of the non-adjusted 
series in the class, it will receive a participation entitlement in all 
of those series when quoting at the best price, including the 10% of 
the series in which it is not required to quote. Thus, under the 
proposed rule change, the market would continue to function as it does 
now. The Exchange believes this benefit is appropriate, as it 
incentivizes PMMs to quote in as many series as possible in the classes 
in which it receives PMM orders, even LEAPS, which Rule 8.13 does not 
require them to continuously quote.
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    \14\ As discussed above, this obligation will change upon 
implementation of a recent rule change. See supra note 3.
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    The Exchange does not believe that the proposed rule change would 
adversely affect the quality of the Exchange's markets or lead to a 
material decrease in liquidity. Rather, the Exchange believes that its 
current market structure with its high rate of participation by Market-
Makers permits the proposed rule change without fear of losing 
liquidity. This is especially true given that the quoting obligations 
of LMMs, DPMs, and electronic DPMs (``e-DPMs'') in Hybrid option 
classes set forth in Rules 8.15A, 8.85, and 8.93, respectively, will 
still apply to LEAPS, so the Exchange may still have a disseminated 
continuous two-sided market in LEAPS. Further, the Exchange believes 
that the current quoting obligation in LEAPS is a minor part of PMMs' 
overall obligations, so the burden of continuous quoting in these 
series by PMMs while DPMs and LMMs are also required to continuously 
quote in those series is counter to efforts to mitigate the number of 
quotes collected and disseminated. The Exchange also believes that 
market-making activity may increase as a result of adopting a provision 
that is already in place at another options exchange. Additionally, the 
Exchange believes that the proposed rule change to clarify that PMMs 
may still receive participation entitlements in LEAPS in the classes 
for which they received PMM orders in which they are quoting, even 
though Rule 8.13(d) does not require the PMMs to continuously quote in 
LEAPS, will incent PMMs to quote in LEAPS, which may increase liquidity 
in those classes.
    The Exchange will announce the implementation date of the proposed 
rule change in a Regulatory Circular to be published no later than 90 
days following the effective date. The implementation date will be no 
later than 150 days following the effective date.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\15\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \16\ requirements that the rules 
of an exchange be designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitation transactions in securities, 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. 
Additionally, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \17\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
    \17\ Id.
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    In particular, the Exchange believes the proposed rule change 
promotes just and equitable principles of trade because it reduces 
burdens and unnecessary restrictiveness on PMMs. The quoting 
obligations of LMMs, DPMs, and e-DPMS will still apply to LEAPS, which 
the Exchange believes eliminates the risk of a material decrease in 
liquidity of LEAPS. The Exchange still imposes many obligations on PMMs 
to maintain a fair and orderly market in their appointed classes, 
including obligations to provide continuous electronic quotes for a 
significant part of the trading day in a substantial number of series 
of each appointed class. Further, the elimination of PMMs' continuous 
quoting obligations in LEAPS is a minor change and should not impact 
the quality of CBOE's market. Consequently, continuous quotes in these 
series by PMMs, in addition to DPMs and LMMs, increases quote traffic 
and burdens systems without a corresponding benefit. Thus, by not 
requiring PMMs to continuously quote in LEAPS, the Exchange's proposed 
rule change would further the Exchange's goal of measured quote 
mitigation. Additionally, PMMs will continue to be obligated to quote 
the series when requested by a floor broker, Trading Permit Holder, or 
PAR Official, or if the need otherwise arises.

[[Page 5547]]

Accordingly, the proposal supports the quality of CBOE's markets by 
helping to ensure that PMMs will continue to be obligated to quote in 
series when necessary. The Exchange believes these changes are 
reasonable and are offset by PMMs' continued responsibilities to 
provide significant liquidity to the market to the benefit of market 
participants. In addition, the proposed rule change removes impediments 
to and allows for a free and open market, while protecting investors, 
by promoting additional transparency regarding PMMs' obligations and 
benefits in the Exchange Rules. In addition, the Exchange believes that 
the proposed rule change is designed to not permit unfair 
discrimination, as the proposed rule change provides the proposed 
relief for all PMMs.
    The proposed rule change to clarify that PMMs may still receive 
participation entitlements in LEAPS in the classes for which they 
received PMM orders in which they are quoting, even though Rule 8.13(d) 
does not require the PMMs to continuously quote in LEAPS, further 
supports the quality of the Exchange's trading markets because it 
encourages PMMs to quote in LEAPS, which ultimately benefits all 
investors. This benefit is offset by the PMMs' continued quoting 
obligations and the fact that they must still satisfy all of their 
other obligations in order to receive the entitlement in these ``non-
required'' series. The Exchange also believes that this proposed change 
is consistent with its current practice, pursuant to which PMMs receive 
participation entitlements in additional series in which they elect to 
quote above the minimum percentage of series in which they are required 
to continuously quote under Rule 8.13.
    The proposed rule change is also consistent with the rules of 
another options exchange.\18\ The proposed rule change requires its 
PMMs to provide continuous quotes in the same types of series as 
equivalent market participants at a competing options exchange, which 
the Exchange believes could increase market-making activity on the 
Exchange.
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    \18\ See supra note 7.
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    For the foregoing reasons, the Exchange believes that the balance 
between the benefits provided to and the obligations imposed upon PMMs 
by the proposed rule change is appropriate.

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. The proposed rule change 
provides the same relief to a group of similarly situated market 
participants--PMMs. While other types of Market-Makers will still be 
required to continuously quote in LEAPS, the Exchange believes this is 
not unfairly discriminatory, as its Rules already impose different 
obligations on each type of Market-Maker based on the purposes and 
functions of, and benefits received by, that type of Market-Maker (e.g. 
Market-Makers are already not required to continuously quote in LEAPS, 
while LMMs, DPMs, and e-DPMs are, and will continue to be).
    CBOE believes that the proposed rule change will in fact relieve 
any burden on, or otherwise promote, competition. The Exchange believes 
the proposed rule change is procompetitive because it would enable the 
Exchange to provide its PMMs with rules that are similar to those of 
another options exchange applicable to equivalent market participants 
at that exchange. The Exchange believes this will promote trading 
activity on the Exchange to the benefit of the Exchange, its Trading 
Permit Holders, and market participants.

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 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not:
    A. Significantly affect the protection of investors or the public 
interest;
    B. Impose any significant burden on competition; and
    C. Become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \19\ and 
Rule 19b-4(f)(6) \20\ thereunder. At any time within 60 days of the 
filing of the 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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    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 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-2013-008 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-2013-008. 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 
10:00 a.m. and 3:00 p.m. Copies of such 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-2013-008 and should be 
submitted on or before February 15, 2013.


[[Page 5548]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-01485 Filed 1-24-13; 8:45 am]
BILLING CODE 8011-01-P


