
[Federal Register Volume 79, Number 5 (Wednesday, January 8, 2014)]
[Notices]
[Pages 1398-1399]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-00071]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71227; File No. SR-CBOE-2013-110]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving a Proposed Rule Change To Eliminate the 
e-DPM Program January 2, 2014.

I. Introduction

    On November 1, 2013, Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (``Commission'') pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to eliminate the Electronic DPM 
(``e-DPM'') Program (the ``e-DPM Program'' or ``Program''). The 
proposed rule change was published for comment in the Federal Register 
on November 20, 2013.\3\ The Commission received no comments on the 
proposal. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 70875 (November 14, 
2013), 78 FR 69723 (``Notice'').
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II. Description of the Proposal

    The Exchange proposes to eliminate the e-DPM Program by deleting 
Exchange rules that exclusively govern the Program and by removing all 
references to either the Program or e-DPMs throughout the remainder of 
its rulebook. Originally adopted in 2004, the e-DPM Program allows 
Trading Permit Holders (``TPHs'') to remotely function as a Designated 
Primary Market-Maker (``DPM'').\4\ An e-DPM acts as a specialist on 
CBOE by entering bids and offers electronically from locations other 
than the floor-based trading crowds where applicable option classes are 
traded, and are not required to have traders physically present in the 
trading crowd.\5\
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    \4\ See id. at 69723. CBOE Rule 8.80(a) defines as a DPM as a 
``TPH organization that is approved by the Exchange to function in 
allocated securities as a Market-Maker'' and is subject to certain 
obligations as provided in CBOE's rules. A DPM generally will 
operate on CBOE's trading floor, but can function remotely away from 
CBOE's trading floor in certain classes, subject to approval by the 
Exchange. See CBOE Rule 8.80(a).
    \5\ CBOE Rule 8.92, which the Exchange proposes to delete, 
defined an e-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 except for Floor 
Broker and Order Book Official obligations.''
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    The Exchange proposes to eliminate the Program because it believes 
the Program is no longer competitively necessary given the growing 
prevalence of Preferred Market-Maker \6\ (``PMM'') routing, which the 
Exchange believes has rendered the initially unique tenets of the 
Program less relevant and attractive to broker-dealers that might 
otherwise consider becoming or remaining an e-DPM.\7\ In particular, 
the Exchange noted in its filing that while e-DPMs have similar or 
greater quoting obligations than PMMs, CBOE's rules provide a smaller 
participation entitlement to e-DPMs as compared to the participation 
entitlement that CBOE provides to PMMs.\8\ The Exchange further 
represented that all e-DPMs that receive preferred orders on CBOE are 
also registered as PMMs.\9\ The Exchange explained that the only 
circumstance in which it is a benefit to act as an e-DPM from the 
perspective of increasing a TPH's participation entitlement is where an 
order is not preferred to any party or the recipient of the preferred 
order is not at the NBBO when the order is received.\10\ To place this 
attribute in context, the Exchange noted that 85% of orders that come 
into the Exchange are preferred orders.\11\
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    \6\ Pursuant to CBOE Rule 8.13, the PMM program permits the 
Exchange to ``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 Preferred 
Market-Maker order shall be afforded a participation entitlement'' 
as set forth in CBOE Rule 8.13.
    \7\ See Notice, supra note 3, at 69723.
    \8\ See id. The Exchange stated that 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 maximum of 15% 
participation entitlement per order, whereas PMMs have a maximum 40% 
participation entitlement on orders that are preferred to them. See 
Notice, supra note 3, at 69723-69724.
    \9\ See id. at 69723.
    \10\ See id. at 69724.
    \11\ See id.
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    The Exchange stated that it does not believe that the elimination 
of the e-DPM Program will affect CBOE's market quality because the 
Exchange does not expect any Market-Makers to cease doing business on 
the Exchange due to

[[Page 1399]]

the elimination of the Program; instead, the Exchange anticipates that 
all e-DPMs will stay on as Market-Makers and, on an order-by-order 
basis, as PMMs.\12\ The Exchange believes that the greater 
participation entitlement under the PMM program when an order is 
preferred provides a stronger incentive for TPHs to quote at the NBBO 
than the lower participation entitlement for e-DPMs, which, according 
to the Exchange, helps to encourage narrower spreads.\13\
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    \12\ See id.
    \13\ See id.
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    In support of its proposal to discontinue the e-DPM program, the 
Exchange further represented that it believes that the Program adds an 
unnecessary layer of complexity to CBOE rules, system processes, 
matching algorithms, and trading procedures.\14\ The Exchange does not 
believe that the e-DPM Program provides CBOE with any competitive 
advantage, and believes that the elimination of the Program will 
provide the Exchange with more flexibility to consider other methods of 
encouraging DPM performance.\15\
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    \14\ See id.
    \15\ See id.
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    In its filing, the Exchange represented that, if its proposal is 
approved by the Commission, CBOE would announce the elimination of the 
Program via a Regulatory Circular, which will include an end date for 
the Program that will be at least two weeks in advance in order for 
current e-DPMs to determine their course of action following 
elimination of the Program.\16\
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    \16\ See id.
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III. Discussion and Commission Findings

    After careful review of the proposal, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
the rules and regulations thereunder that are applicable to a national 
securities exchange.\17\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(1) of the Act,\18\ 
which requires, among other things, that the Exchange be so organized 
and have the capacity to carry out the purposes of the Act. The 
Commission also finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\19\ which requires, among other things, 
that the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest.
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    \17\ In approving the proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \18\ 15 U.S.C. 78f(b)(1).
    \19\ 15 U.S.C. 78f(b)(5).
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    As noted above, CBOE represents that all e-DPMs are also registered 
as PMMs. Accordingly, CBOE does not believe that elimination of the 
Program will harm CBOE's market quality as it anticipates current e-
DPMs will continue to serve as market-makers on the Exchange and as 
PMMs on orders that are preferred to them.
    Further, because such a high percentage of CBOE's order-flow is 
preferenced (85% as indicated by CBOE), and because PMM status provides 
a comparably larger entitlement for preferred orders compared to e-DPM 
status, CBOE believes that the e-DPM program does not provide an 
incentive great enough to warrant the complexity the e-DPM program 
brings to the Exchange's rules, systems, and processes. CBOE also noted 
that other options exchanges do not have programs similar to the e-DPM 
program.\20\
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    \20\ See Notice, supra note 3, at 69724.
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    Based on CBOE's representations, discussed above, the Commission 
believes that elimination of the e-DPM Program should not hinder the 
Exchange's capacity to carry out the purposes of the Act nor should it 
impede CBOE's ability to remove impediments to and perfect the 
mechanism of a free and open market and a national market system.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\21\ that the proposed rule change (SR-CBOE-2013-110) be, and 
hereby is, approved.
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    \21\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-00071 Filed 1-7-14; 8:45 am]
BILLING CODE 8011-01-P


