
[Federal Register Volume 78, Number 50 (Thursday, March 14, 2013)]
[Notices]
[Pages 16351-16356]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-05884]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69082; File No. SR-CBOE-2013-030]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change Relating to the 
Regulation NMS Plan To Address Extraordinary Market Volatility

March 8, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 7, 2013, Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I and II 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 modify its rules to address certain option 
order handling procedures and quoting obligations on the Exchange after 
the implementation of the market wide equity Plan to Address 
Extraordinary Market Volatility (the ``Plan'').
    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'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 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange is proposing to update Exchange rules to correspond 
with the Plan. Specifically, the Exchange is proposing to make proposed 
changes to Exchange Rules Rule 6.2B, ``Hybrid Opening System 
(``HOSS''), 6.3A, ``Equity Market Trading Halt,'' Rule 6.14A, ``Hybrid 
Agency Liaison,'' Rule 6.25, ``Nullification and Adjustment of Options 
Transactions,'' Rule 6.53, ``Certain Types of Orders Defined,'' Rule 
6.53C, ``Complex Orders on the Hybrid System,'' Rule 8.7, ``Obligations 
of Market-Makers, Rule 8.13, ``Preferred Market-Maker Program,'' Rule 
8.15A ``Lead Market-Maker in Hybrid Classes,'' Rule 8.85, ``DPM 
Obligations,'' and Rule 8.93, ``e-DPM Obligations.'' The Exchange 
believes these modifications will protect investors because when an 
underlying security is in a limit or straddle state (collectively 
referred to in this filing as a ``limit up-limit down state''), there 
will not be a reliable price for the security to serve as a benchmark

[[Page 16352]]

for the price of the option. In addition, the width of the markets 
might be compromised and, thus, the quality of execution for retail 
customers. The Plan is more fully explained below.
    In an attempt to address extraordinary market volatility in NMS 
Stock, and, in particular, events like the severe volatility on May 6, 
2010, the Exchange, in conjunction with the other national securities 
exchanges and the Financial Industry Regulatory Authority, Inc. 
(collectively, ``Participants'') drafted the Plan pursuant to Rule 608 
of Regulation NMS and under the Securities Exchange Act of 1934 (the 
``Act'').\3\ The Plan is primarily designed to, among other things, 
address extraordinary market volatility in NMS stocks, protect 
investors, and promote fair and orderly markets. The Plan provides for 
market-wide limit up-limit down requirements that prevent trades in 
individual NMS Stocks from occurring outside of specified price bands, 
as defined in Section I(N) of the Plan. These requirements would be 
coupled with trading pauses, as defined in Section I(Y) of the Plan, to 
accommodate more fundamental price moves (as opposed to erroneous 
trades or monetary gaps of liquidity).
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    \3\ See Securities Exchange Act Release No. 64547 (May 25, 
2011), 76 FR 31647 (June 1, 2011) (File No. 4-631).
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    The Plan was filed on April 5, 2011 by the Participants for 
publication and comment.\4\ The Participants requested the Commission 
approve the Plan as a one-year pilot. On May 24, 2012, the Participants 
filed an amendment to the Plan which clarified, among other things, the 
calculation of the reference price, as defined in Section I(T) of the 
Plan, potential for order type exemption, and the creation of an 
Advisory Committee.\5\ On May 31, 2012, the Commission approved the 
Plan, as amended, on a one-year pilot basis.\6\
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    \4\ Id.
    \5\ See Securities and Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631).
    \6\ See Securities and Exchange Act Release No. 67091 (May 31, 
2012) 77 FR 33498 (June 6, 2012).
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    Under the Plan, Participants are required to adopt certain rules in 
order to comply. Specifically, Section VI of the Plan sets forth the 
limit up-limit down requirements of the Plan, and in particular, that 
all trading centers in NMS Stocks, including both those operated by the 
Participants and those operated by member of Participants, shall 
establish, maintain, and enforce written policies and procedures that 
are reasonably designed to prevent trades at prices that are below the 
lower price band or above the upper price band for an NMS Stock, 
consistent with the Plan. Price Bands will be calculated by Securities 
Information Processors (``SIPs'') responsible for consolidation of 
information for an NMS Stock pursuant to Rule 603(b) of Regulation NMS 
under the Act. As proposed, and approved, the Plan will be implemented, 
as a one year pilot program, in two phases.\7\ Phase I will become 
effective April 8, 2013 and apply to Tier I NMS Stocks per Appendix A 
of the Plan, and Phase II would become effective six months later, or 
earlier if announced by the SIPs 30 days prior, and would apply to all 
NMS Stocks.
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    \7\ Id.
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    Under the Plan, when one side of the market for an individual 
security is outside the applicable price band, the SIPs will be 
required to disseminate such National Best Bid or National Best Offer 
with an appropriate flag identifying it as non-executable. When the 
other side of the market reaches the applicable price band, the market 
for an individual security will enter a limit state. Trading for that 
security will exit the limit state if, within 15 seconds of entering 
the limit state, all limit state quotations were executed or cancelled. 
If the market does not exit a limit state within 15 seconds, then the 
primary listing exchange will declare a five-minute trading pause, 
which will be applicable to all markets trading the security.
    Though the Plan is primarily designed for equity markets, the 
Exchange believes it will, indirectly, potentially impact the options 
markets as well. Thus, as stated above, the Exchange is proposing to 
amend its rules to ensure the option markets are not harmed as a result 
of the Plan's implementation. As such, the Exchange is proposing to 
amend various rules to reflect such changes. The Exchange believes such 
changes will protect participants, the Exchange and investors in 
general.
    First, the Exchange is proposing to add Rule 6.3A to codify the 
changes throughout the Exchange's rules. Currently, Rule 6.3A is titled 
``Equity Market Trading Halts'' and has been deleted in its entirety. 
The Exchange is proposing to amend the title to ``Equity Market Plan to 
Address Extraordinary Market Volatility'' and add text. Rule 6.3A will 
define the Plan as it applies to the Exchange. In addition, the 
proposed rule change will describe the location of the other rule 
changes associated with the Plan. In essence, the proposed changes to 
Rule 6.3A will serve as a roadmap for the Exchange's universal changes 
due to the implementation of the Plan. The proposed rule changes will 
list changes to Exchange order types, order handling, obvious error, 
and market-maker quoting obligations that the Exchange is proposing to 
make in connection with the implementation of the Plan. These rule 
changes are more thoroughly described in various sections of the 
Exchange Rulebook, but having one place referencing all rules 
associated with the Plan will serve to better protect investors by 
making the other rules easily located. The Exchange believes the 
proposed changes to Rule 6.3A will describe to Trading Permit Holders 
(``TPHs''), and other participants, where to find the changes 
associated with the Plan and will, thus, attempt to maintain a more 
orderly market.
    Next, the Exchange is proposing to modify its opening procedures 
under Rule 6.2B, ``Hybrid Opening System'' (``HOSS''). The Exchange is 
proposing to add an Interpretation and Policy .07 to clarify that if 
the underlying security for a class of options enters into a limit up-
limit down state when the class moves to opening rotation, any market 
orders entered that trading day will be cancelled. The Exchange 
believes that by cancelling the market orders, it will comply with the 
Plan by not allowing orders outside of the Price Bands to execute. As 
an exception, market orders that are considered limit orders pursuant 
to Rule 6.13(b)(iv) and entered the previous trading day will remain in 
the Book. The Exchange is proposing to allow such market orders to 
remain in the Book because these essentially act as limit orders at the 
minimum increment. Cancelling such orders could potentially cause such 
orders to lose their priority with respect to other market orders in 
the Book.
    Next, the Exchange is proposing to modify Exchange Rule 6.14A, 
``Hybrid Agency Liaison--(HAL).'' Exchange Rule 6.14A currently governs 
the operation of HAL, a feature within the Hybrid System that provides 
automated order handling in designated classes trading on the Hybrid 
System for qualifying electronic orders that are not automatically 
executed by the Hybrid System. The Exchange determines the eligible 
order size, eligible order types, eligible origin code (i.e. public 
customer orders, non-Market-Maker broker-dealer orders and Market-Maker 
broker-dealer orders), and classes in which HAL is activated.\8\ When 
the Exchange receives a qualifying order that is marketable against the 
National Best Bid or Offer (``NBBO'') and/or the Exchange's best

[[Page 16353]]

bid or offer (``BBO'') \9\, HAL electronically exposes the order \10\ 
at the NBBO price to allow Market-Makers appointed in that class, as 
well as all TPHs acting as agent for orders, at the top of the 
Exchange's book in the relevant series (or all TPHs if allowed by the 
Exchange) to step-up to the NBBO price.
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    \8\ Rule 6.14A(a).
    \9\ HAL will not electronically expose the order if the 
Exchange's quotation contains resting orders and does not contain 
sufficient Market-Maker quotation interest to satisfy the entire 
order.
    \10\ The duration of the exposure period may not exceed one 
second. Rule 6.14A(c) describes the manner in which an exposed order 
is allocated under HAL, and Rule 6.14A(d) lists the circumstances in 
which an exposure period would terminate early.
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    Because the underlying security of the option in HAL affects the 
pricing of the eventually executed order, the Exchange is proposing to 
make changes to Rule 6.14A to reflect the implementation of the Plan. 
More specifically, the Exchange is proposing to amend Rule 6.14A to 
modify the behavior of HAL of a market order while the underlying 
security of the option is in a limit up-limit down state. If an 
underlying security shall enter a limit up-limit down state while a HAL 
of a market order is in process, the auction will end early, upon the 
entering of the state. Any unexecuted portion of the market order shall 
be cancelled. The Exchange believes the proposed rule changes will best 
protect the TPH by ensuring it does not receive an executed order with 
an unanticipated price due to the change in the underlying security. In 
addition, by ending the auction early, the Exchange is providing a 
better chance for the TPH to get its order executed as it is in the 
TPH's interest for an earlier execution versus a later one.
    Next, the Exchange is proposing to modify how an electronic complex 
order request for responses (``RFR'') auction (``COA'') will operate 
while the underlying security of at least one of the options has 
entered a limit state. Exchange Rule 6.53C(d) currently describes the 
general COA process. Generally, on a class-by-class basis, the Exchange 
may activate COA, which is a process by which eligible complex orders 
\11\ are given an opportunity for price improvement before being booked 
in the electronic complex order book (``COB'') or once on a PAR 
workstation. On receipt of a COA-eligible order and request from a TPH 
representing the order that it be COA'd, the Exchange will send an RFR 
message to all TPHs who have elected to receive RFR messages.\12\ Each 
Market-Maker with an appointment in the relevant option class and each 
TPH acting as agent for orders resting at the top of the COB in the 
relevant options series may then submit responses to the RFR message 
during the Response Time Interval.\13\ The Exchange is proposing to add 
to the COA rule that if, during COA of a market order, the underlying 
security of an option enters a limit up-limit down state, the COA will 
end upon the entering of that state and the remaining portion of the 
order, if a market order, will cancel. The Exchange believes this 
change will best protect investors as, must [sic] like HAL, the TPH may 
receive a skewed price of the underlying security which would impact 
the price of the option.
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    \11\ An eligible complex order, referred to in Rule 6.53C as a 
``COA-eligible order,'' means a complex order that, as determined by 
the Exchange on a class-by-class basis, is 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 type (i.e. non-broker-dealer public customer, broker-
dealers that are not Market-Makers or specialists on an options 
exchange, and/or Market-Makers or specialists on an options 
exchange). All determinations by the Exchange on COA-eligible order 
parameters are announced to Trading Permit Holders by Regulatory 
Circular. See Rule 6.53C(d)(i)(2) and Interpretation and Policy .01 
to Rule 6.53C.
    \12\ See Rule 6.53C(d)(ii). The RFR message will identify the 
component series, the size of the COA-eligible order and any 
contingencies, but will not identify the side of the market.
    \13\ See Rule 6.53C(d)(iii). A ``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 may not exceed three seconds. See Rule 
6.53C(d)(iii)(2).
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    Next, the Exchange is proposing to amend Exchange Rule 6.25 
relating to the nullification and adjustment of options transactions. 
Under the current rule, an Obvious Pricing Error occurs when the 
execution price of an electronic transaction is above or below the 
Theoretical Price for the series by a specified amount. For purpose of 
the rule, the ``Theoretical Price'' of an option series is currently 
defined, for series traded on at least one other options exchange, as 
the last national best bid price with respect to an erroneous sell 
transaction and the last national best offer price with respect to an 
erroneous buy transaction, just prior to the trade. If there are no 
quotes for comparison, Trading Officials \14\ determine the Theoretical 
Price.
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    \14\ The term ``Trading Officials'' currently means two Exchange 
members designated as Floor Officials and one member of the 
Exchange's staff designated to perform Trading Official functions. 
See Rules 6.25.02 and 24.16.02.
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    Because the theoretical price may be unreliable due to the 
underlying security entering a limit up-limit down state, the Exchange 
is proposing to amend the Exchange obvious error rules to provide that 
the Exchange may not nullify or adjust executed orders when the 
underlying security is in a limit up-limit down state. The Exchange is 
also proposing to add language specifying that transactions in options 
that overlay a security that is in a limit state may, however, be 
reviewed on an Exchange motion. The Exchange believes this will best 
protect the market because it allows limit orders to be executed on the 
Exchange while the underlying securities are in limit states regardless 
of the calculated theoretical price. Finally, the Exchange is proposing 
to add language to specify that this provision will be on a one year 
pilot basis to coincide with the Plan. The Exchange will provide the 
Commission with data and analysis during the duration of this pilot as 
requested.
    In addition, the Exchange believes the proposed rule change would 
protect against TPHs getting a potential second look at transactions 
that happened during limit states that could be unfair to other 
participants. The proposed rule change would encourage added liquidity 
on the Exchange as the proposed changes would help to ensure that limit 
orders that are filled during a limit up-limit down state would have 
certainty of execution. By allowing the Exchange to continue to review 
such transactions on their own motion, the Exchange is further 
attempting to protect investors and maintain an orderly market. The 
Exchange believes that the combination of encouraging TPHs to 
participate on the market and allowing a safeguard to erroneous trades 
will provide the best solution during the pilot of the Plan.
    Next, the Exchange is proposing to modify Rule 6.53 and 6.53C and, 
more specifically, how certain Exchange order types will be handled 
while the underlying security of such orders enters into a limit up-
limit down state. The proposed rule change will, among other things, 
address how market orders,\15\ market-on-close,\16\ stop orders,\17\ 
and stock option orders \18\ will

[[Page 16354]]

function on the Exchange upon the implementation of the Plan. More 
specifically, the Exchange is proposing to add language to clarify 
that: (a) Market orders will be returned during limit up-limit down 
states, (b) market-on-close orders will not be elected if the 
underlying security is in a limit up-limit down state,\19\ (c) stop 
orders will be held while the underlying security is in a limit up-
limit down state, and (d) stock-option orders will only execute if the 
calculated stock price is within the permissible bands.\20\ In 
addition, during a limit up-limit down state, if a message is sent to 
replace a limit order with a market order, the resting limit order will 
be cancelled and the replaced market order will also be cancelled.
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    \15\ See Exchange Rule 6.53(a) which defines a market order as 
``an order to buy or sell a stated number of options contracts at 
the best price obtainable when the order reaches the post.''
    \16\ See Exchange Rule 6.53(c)(ii) which defines a market-on-
close order designation as an order ``to be executed as close as 
possible to the closing bell, or during the closing rotation, and 
should be near to or at the closing price for the particular series 
of option contracts.''
    \17\ See Exchange Rule 6.53(c)(iii) which defines a stop order 
contingency to an order as one that ``to buy or sell when the market 
for a particular option contract reaches a specified price on the 
CBOE floor.''
    \18\ See Exchange Rule 6.53C(a)(2) which defines a stock-option 
order as ``an order to buy or sell a stated number of units of an 
underlying stock or a security convertible into the underlying stock 
* * * coupled with the purchase or sale of options contract(s) on 
the opposite side of the market.''
    \19\ During closing rotation, the Exchange will continue to re-
evaluate the state of underlying securities for which the overlying 
securities have not yet been closed. If upon re-evaluation the 
underlying security should exit a limit up-limit down state, a 
market-on-close order may be executed.
    \20\ If the calculated price of a stock-option order is not 
within the permissible Price Bands, the stock-option order will be 
routed for manual handling.
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    When a stock is in a limit or straddle state, while options trading 
will continue, there will not be a reliable price for a security to 
serve as a benchmark for the price of the option. In addition, without 
a reliable underlying stock price, there is an enhanced risk of errors 
and improper executions. With these concerns in mind, the Exchange 
believes that adding a level of certainty for TPHs will encourage 
participation on the Exchange whilst the underlying securities are in 
limit up-limit down states. Thus, the Exchange believes handling these 
certain orders in this way will best protect the investor after the 
implementation of the Plan by not allowing execution at unreasonable 
prices due to the shift in the stock prices.
    Finally, the Exchange is proposing to eliminate all market maker 
obligations for options in which the underlying security is in a limit 
up-limit down state while the underlying security in is in the limit 
state. Currently, Exchange Rules 8.7, 8.13, 8.15A, 8.85, and 8.93 
impose certain obligations on Market-Makers,\21\ PMMs,\22\ LMMs,\23\ 
DPMs,\24\ and e-DPMs,\25\ respectively, including obligations to 
provide continuous electronic quotes. Upon implementation of the recent 
rule change to Market-Maker's continuous quoting obligations,\26\ Rules 
8.7, 8.13, 8.15A, 8.85, and 8.93 will require that Market-Makers 
generally maintain continuous electronic quotes as follows:
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    \21\ See Exchange Rule 8.1, which defines a ``Market-Maker'' as 
``an individual Trading Permit Holder or a TPH organization that is 
registered with the Exchange for the purpose of making transactions 
as a dealer specialist on the Exchange * * * .''
    \22\ See Exchange Rule 8.13, which defines a ``Preferred Market-
Maker'' as a specific Market-Maker designated by a Trading Permit 
Holder to receive that Trading Permit Holder's orders in a specific 
class.
    \23\ See Exchange Rule 8.15A, which defines a ``Lead Market-
Maker'' as a Market-Maker in good standing appointed by the Exchange 
``in an option class for which a DPM has not been appointed * * * 
.''
    \24\ See Exchange Rule 8.80, which defines a ``Designated 
Primary Market-Maker'' as a ``TPH organization that is approved by 
the Exchange to function in allocated securities as a Market-Maker * 
* * and is subject to the obligations under Rule 8.85 * * * .''
    \25\ See Exchange Rule 8.92, which defines an ``Electronic DPM'' 
as a ``TPH Organization that is approved by the Exchange to remotely 
function in allocated option classes as a DPM and to fulfill certain 
obligations required of DPMs * * * .''
    \26\ The Exchange recently proposed to, among other things, (a) 
reduce to 90% the percentage of time for which a Market-Maker 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 which Lead 
Market-Makers, Designated Primary Market-Makers and Electronic 
Designated Primary Market-Makers must provide continuous electronic 
quotes in their appointed classes, which proposed rule change was 
immediately effective upon filing. See Securities Exchange Act 
Release No. 67410 (July 11, 2012), 77 FR 42040 (July 17, 2012) (SR-
CBOE-2012-064); see also Securities Exchange Act Release No. 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); see also Securities and Exchange Act 
Release No. 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). In 
addition, the Exchange recently filed an effective rule proposing to 
exclude series that have a time to expiration of nine months or more 
from Exchange Preferred Market Maker's continuous quoting 
obligation. See Securities and Exchange Act Release No. 68691 
(January 18, 2013), 78 FR 5548 (January 25, 2013) (SR-CBOE-2013-
008). Finally, the Exchange recently filed a rule proposing to 
exclude series that are added during the trading day from Exchange 
Market Maker's continuous quoting obligation. See Securities and 
Exchange Act Release No. 34-68944, 78 FR 12377. The rule text in 
this filing includes the effective (but not implemented) changes to 
the rule text made by rule filings SR-CBOE-2012-064 and SR-CBOE-
2013-008. The Exchange expects to implement the effective rule 
changes to quoting obligations in filings SR-CBOE-2012-064 and SR-
CBOE-2013-008 in conjunction with the approval of the proposed rule 
change in SR-CBOE-2013-019.
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     Rule 8.7(d)(ii)(B) will require that Market-Makers provide 
continuous electronic quotes when quoting in a particular class on a 
given trading day in 60% of the non-adjusted option series of the 
Market-Maker's appointed class that have a time to expiration of less 
than nine months;
     Rule 8.13(d) will require that PMMs provide continuous 
electronic quotes when the Exchange is open for trading in at least the 
lesser of 99% or 100% minus one call-put pair \27\ of the non-adjusted 
option series of each class for which it receives Preferred Market-
Maker orders;
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    \27\ A ``call-put pair'' is one call and one put that cover the 
same underlying instrument and have the same expiration date and 
exercise price.
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     Rule 8.15A(b)(i) will require that LMMs provide continuous 
electronic quotes when the Exchange is open for trading in at least the 
lesser of 99% or 100% minus one call-put pair of the non-adjusted 
option series within their assigned classes;
     Rule 8.85(a)(i) will require DPMs to provide continuous 
electronic quotes when the Exchange is open for trading in at least the 
lesser of 99% or 100% minus one call-put pair of the non-adjusted 
option series of each class allocated to it; and
     Rule 8.93 will require e-DPMs to provide continuous 
electronic quotes when the Exchange is open for trading in at least the 
lesser of 99% or 100% minus one call-put pair of the non-adjusted 
option series of each allocated class.
    Exchange Rules 8.13, 8.15B, and 8.87 provide that PMMs, LMMs, and 
DPMs, and e-DPMs, respectively, generally will receive the following 
participation entitlements in their assigned classes when quoting at 
the best price if they satisfy their obligations and other conditions 
set forth in the rules:
     Rule 8.13(c) provides that a PMM will receive a 
participation entitlement of 40% when there are two or more Market-
Makers quoting at the best price on the Exchange and 50% when there is 
only one other Market-Maker quoting at the best price on the Exchange;
     Rule 8.15B(c) provides that an LMM will receive a 
participation entitlement of 50% when there is one Market-Maker also 
quoting at the best price on the Exchange, 40% when there are two 
Market-Makers also quoting at the best price on the Exchange, and 30% 
when there are three or more Market-Makers

[[Page 16355]]

also quoting at the best price on the Exchange; \28\ and
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    \28\ If more than one LMM is entitled to a participation 
entitlement, the entitlement will be distributed equally among 
eligible LMMs.
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     Rule 8.87(b)(2) provides that the collective DPM/e-DPM 
participation entitlement will be 50% when there is one Market-Maker 
also quoting at the best price on the Exchange, 40% when there are two 
Market-Makers also quoting at the best price on the Exchange, and 30% 
when there are three or more Market-Makers also quoting at the best 
price on the Exchange.\29\
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    \29\ The participation entitlements of PMMs, LMMs, DPMs and e-
DPMs are based on the number of contracts remaining after all public 
customer orders in the book at the best price on the Exchange have 
been satisfied. Additionally, a PMM, LMM, DPM or e-DPM may not be 
allocated a total quantity greater than the quantity for which the 
PMM, LMM, DPM or e-DPM is quoting at the best price. See Rules 
8.13(c)(i) and (ii) (PMMs), 8.15B(b) and (c) (LMMs), and 
8.87(b)(1)(ii) and (iii) (DPMs and e-DPMs).
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    Once the Exchange implements the rule change referenced above, 
Exchange Rule 1.1(ccc) will provide that a Market-Maker who is 
obligated by CBOE Rules to provide continuous electronic quotes will be 
deemed to have provided ``continuous electronic quotes'' if the Market-
Maker provides electronic two-sided quotes for 90% of the time that the 
Market-Maker is required to provide electronic quotes in an appointed 
option class on a given trading day. The rule will still provide that 
if a technical failure or limitation of a system of the Exchange 
prevents the Market-Maker from maintaining, or from communicating to 
the Exchange, timely and accurate electronic quotes in a class, the 
duration of such failure will not be considered in determining whether 
the Market-Maker has satisfied the 90% quoting standard with respect to 
that option class. In addition, the rule will still provide that the 
Exchange may consider other exceptions to this continuous electronic 
quote obligation based on demonstrated legal or regulatory requirements 
or other mitigating circumstances.
    Because prices may be skewed due to the underlying security being 
in a limit up-limit down state, the Exchange is proposing to eliminate 
all market-maker quoting obligations in series of options that the 
underlying security is currently in a limit up-limit down state. 
Because of the direct relationship between an options price and the 
price of the associated underlying security, the Exchange believes 
eliminating all Market-Maker obligations in connection with the 
implementation of the Plan is the most effective way to ensure the 
options markets will not be compromised. Because a bid or offer of an 
underlying security may not be executable due to a limit or straddle 
state, the ability to hedge the purchase or sale of an option may not 
be possible or, in the least, is at risk. Because of this reason, the 
Exchange is anticipating that Exchange Market-Makers will be forced to 
change behaviors. In addition, the Exchange believes other options 
markets will be implementing similar changes. In an effort to protect 
the investors in the options market while the underlying security is in 
a limit up-limit down state, the Exchange believes that eliminating 
quoting obligations is the more effective way for this protection.
    The Exchange, however, is proposing that Market-Makers may still 
receive participation entitlements pursuant to the proposed rules in 
all series in their assigned classes in which they are quoting, even in 
series in which they are not required to provide continuous electronic 
quotes under the Exchange Rules. Market-Makers already receive 
participation entitlements in series they are not required to quote. 
For example, a DPM is currently required to provide continuous 
electronic quotes in at least 90% of the non-adjusted option series of 
each multiply listed option class allocated to it and in 100% of the 
non-adjusted option series of each singly listed option class allocated 
to it for 99% of the trading day.\30\ If the DPM elects to quote in 
100% of the non-adjusted series in a multiply listed option class 
allocated to it, 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 in. Thus, under the 
proposed rule change, the market would continue to function as it does 
now with respect to how entitlements are allocated to Market-Makers. 
The Exchange believes this benefit is appropriate, as it incentivizes 
Market-Makers to quote in as many series as possible in their appointed 
classes, even those series in which the underlying security has entered 
into a limit up-limit down state. The Exchange is attempting to better 
encourage Market-Makers to quote though they will not be obligated to. 
If they do choose to quote, the Exchange believes they should be 
entitled to receive the Entitlement for such quoting as appropriate.
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    \30\ As discussed above, this obligation will change upon 
implementation of a recent rule change. See supra note 26.
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    The Exchange believes the combination of these modifications will 
protect investors because when an underlying security is in a limit up-
limit down state, there will not be a reliable price for the security 
to serve as a benchmark for the price of the option. In addition, the 
width of the markets might be compromised and, thus, the quality of 
execution for retail customers. At the same time, the Exchange believes 
the proposed rule change will create more certainty on the options 
markets encouraging more investors to participate despite the changes 
associated with the Plan.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\31\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \32\ 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 facilitating 
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) \33\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \31\ 15 U.S.C. 78f(b).
    \32\ 15 U.S.C. 78f(b)(5).
    \33\ Id.
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    In particular, the Exchange believes the proposed changes will be 
in accordance with the Act as they are merely intended to ensure the 
options markets will continue to remain just and equitable with the 
implementation of the Plan which is intended to reduce the negative 
impacts of a sudden, unanticipated price movement in NMS stocks. The 
proposed rule changes would promote this intention in the options 
markets while protecting investors participating there. In addition, 
similar rule changes will be adopted by other markets in the national 
market system in a coordinated manner promoting the public interest. 
Creating a more orderly market will promote just and equitable 
principles of trade by allowing investors to feel more secure in their 
participation in the national

[[Page 16356]]

market system after the implementation of the Plan.

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. Specifically, the Exchange 
believes the proposed changes will not impose any burden on intramarket 
competition because it applies to all TPHs equally. The Exchange does 
not believe the proposed changes will impose any burden on intermarket 
competition as the changes are merely being made to protect investors 
with the implementation of the Plan. In addition, the proposed changes 
will provide certainty of treatment and execution of options orders 
during periods of extraordinary market volatility.

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

    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 No. SR-CBOE-2013-030 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 No. SR-CBOE-2013-030. 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 No. SR-CBOE-2013-030 and should be 
submitted on or before March 29, 2013.

    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. 2013-05884 Filed 3-13-13; 8:45 am]
BILLING CODE 8011-01-P


