
[Federal Register Volume 78, Number 224 (Wednesday, November 20, 2013)]
[Notices]
[Pages 69723-69725]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-27755]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70875; File No. SR-CBOE-2013-110]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change To Eliminate 
the e-DPM Program

November 14, 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 November 1, 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to eliminate its e-DPM program. 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    In 2004, the Exchange adopted its Electronic DPM (``e-DPM'') 
Program (the ``Program''), under which the Exchange has allowed TPHs to 
remotely function as a Designated Primary Market-Maker (``DPM'').\3\ e-
DPMs act as specialists on CBOE by entering bids and offers 
electronically from locations other than the trading crowds where the 
applicable option classes are traded, and are not required to have 
traders physically present in the trading crowd. As specialists, e-DPMs 
share in the DPM participation right in their allocated classes and 
have similar rights and responsibilities to DPMs.
---------------------------------------------------------------------------

    \3\ For more information on the Program, see Securities Exchange 
Act Release Nos. 50003 (July 12, 2004) (SR-CBOE-2004-24) and 49577 
(April 19, 2004) (SR-CBOE-2004-17).
---------------------------------------------------------------------------

    The Exchange has determined that the Program is no longer 
competitively necessary; the growing prevalence of Preferred Market-
Maker (``PMM'') routing, which provides a higher participation 
entitlement on [sic] for orders on which a Market-Maker is labeled 
``preferred'', has rendered the initially-unique tenets of the Program 
less relevant and attractive to the e-DPMs. All e-DPMs are PMMs on 
orders to which the e-DPM is labeled ``preferred'', and PMMs otherwise 
have many similar characteristics as e-DPMs. e-DPMs have similar or 
greater quoting obligations as PMMs despite this lower participation 
entitlement. On most transactions to which the e-DPM entitlement 
applies (if no party is labeled ``preferred'' for that order, or the 
party labeled ``preferred'' is not at the NBBO), e-DPMs are only 
guaranteed a

[[Page 69724]]

maximum of 15% participation entitlement per order.\4\ However, PMMs 
have a maximum of 40% participation entitlement on orders that are 
preferred to them.\5\ If an e-DPM is preferred to an order, the e-DPM 
is also the PMM and receives the 40% PMM entitlement instead of just 
the 15% e-DPM entitlement.\6\ Therefore, e-DPMs only benefit in 
circumstances in which an order is not preferred to any party, or the 
preferred party is not at the NBBO. However, over 85% of orders that 
come into the Exchange are preferred orders. The much greater 
participation entitlement for a PMM (40%) provides a much stronger 
incentive to quote at the NBBO than the lower (15%) entitlement for e-
DPMs. Therefore, it is more beneficial in nearly all circumstances to 
be a PMM than to be an e-DPM.
---------------------------------------------------------------------------

    \4\ On the vast majority of transactions to which the e-DPM 
entitlement applies, there are three or more Market-Makers also 
quoting at the Exchange's best bid/offer, which sets the collective 
DPM/e-DPM entitlement at 30% (See CBOE Rule 8.87(b)(2)). One-half of 
this collective entitlement goes to the e-DPM(s) at the Exchange's 
best bid/offer (See CBOE Rule 8.87(b)(3)).
    \5\ On the vast majority of transactions to which the PMM 
entitlement applies, there are two or more Market-Makers also 
quoting at the Exchange's best bid/offer, which sets the PMM 
entitlement at 40% (See CBOE Rule 8.13(c)).
    \6\ See CBOE Rule 8.87(b)(4).
---------------------------------------------------------------------------

    The Exchange does not believe that the elimination of the Program 
will affect CBOE's market quality. This is because the Exchange does 
not expect any Market-Makers to cease doing business on the Exchange 
due to the elimination of the Program; instead, the Exchange expects 
them all to stay on as Market-Makers and, on an order-by-order basis, 
PMMs (as being a PMM is often more beneficial than being an e-DPM 
anyway). Also, the Exchange does not require DPMs in every class, but 
every class (except SPX) currently has a DPM (and SPX has LMMs instead 
of DPMs or e-DPMs). Further, other U.S. options exchanges do not have 
programs similar to the Program. As such, the Exchange now proposes to 
discontinue the Program, and delete Rules 8.92 (Electronic DPM 
Program), 8.93 (e-DPM Obligations) and 8.94 (Review of e-DPM Operations 
and Performance), along with all references to the Program, e-DPMs, and 
Rules 8.92-8.94, from the CBOE Rules.
    The Exchange proposes to eliminate the e-DPM Program because the 
Exchange believes that it is almost always redundant with the PMM 
program (but much less beneficial than the PMM program) and adds an 
unnecessary layer of complexity to CBOE rules, system processes, 
matching algorithm and trading procedures. Further, due to this 
redundancy (and programs at other exchanges that are similar to the PMM 
program \7\), the Exchange does not believe that the e-DPM Program 
provides CBOE with any competitive advantage. Moreover, the removal of 
the e-DPM complexity will provide the Exchange with more flexibility to 
consider other methods of encouraging DPM performance.
---------------------------------------------------------------------------

    \7\ See NASDAQ OMX PHLX (``PHLX'') Directed Order program, 
described in PHLX Rules 1080(l) and 1014(g)(viii).
---------------------------------------------------------------------------

    Upon approval of this proposed rule change, the Exchange will 
announce the impending elimination of the Program via a Regulatory 
Circular. This Regulatory Circular will include an end date for the 
Program that will be at least two weeks in advance in order for current 
e-DPMs to work with the Exchange to determine their preferred courses 
of action. The Exchange anticipates that most, if not all, e-DPMs will 
remain TPHs on the Exchange in a regular Market-Maker capacity (with 
the ability to act as a PMM on an order-by-order basis when they are 
preferred on an order) and will not be unduly harmed by the elimination 
of the Program (for the reasons described above). e-DPMs that desire to 
continue to act as Market-Makers (with the ability to act as a PMM on 
an order-by-order basis when they are preferred on an order) will be 
informed of the elimination of their e-DPM status and provided the 
opportunity to elect to become Market-Makers in those classes to which 
they are currently appointed as e-DPMs.
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.\8\ Specifically, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \9\ 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) \10\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers. The Exchange believes that the 
proposed elimination of the Program will not significantly harm market 
quality, as current e-DPMs will be able to act as PMMs for orders on 
which they are preferred (which is more beneficial anyway). Indeed, the 
much greater participation entitlement for a PMM provides a much 
stronger incentive to quote at the NBBO than the lower entitlement for 
e-DPMs, which provides for narrower spreads. Following the proposed 
elimination of the Program, all e-DPMs will still be Market-Makers with 
the ability to act as PMMs for orders on which they are preferred. This 
will place the former e-DPMs on the same competitive position as PMMs. 
Further, other U.S. options exchanges do not have programs similar to 
the Program, but do have programs similar to CBOE's PMM program.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ Id.
---------------------------------------------------------------------------

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 Exchange does not believe 
that the proposed elimination of the Program will impose an unnecessary 
burden on intramarket competition because e-DPMs, who are all also PMMs 
(for orders on which they are preferred), will merely be placed in the 
same competitive position as PMMs (for orders on which they are 
preferred). The Exchange does not believe that the proposed elimination 
of the Program will impose an unnecessary burden on intermarket 
competition because other U.S. options exchanges do not have programs 
similar to the Program (though they do have programs similar to CBOE's 
PMM program), and because the elimination of Program only affects e-
DPMs on CBOE.

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.

[[Page 69725]]

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 up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange 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 Number SR-CBOE-2013-110 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-2013-110. 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 20549-1090 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-2013-110, and should be 
submitted on or before December 11, 2013.
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-27755 Filed 11-19-13; 8:45 am]
BILLING CODE 8011-01-P


