Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change and Amendment No. 1 Thereto Related to FLEX Options Trading, 50133-50148 [E7-17165]
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Federal Register / Vol. 72, No. 168 / Thursday, August 30, 2007 / Notices
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 inspection and copying in
III. Date of Effectiveness of the
the Commission’s Public Reference
Proposed Rule Change and Timing for
Room, 100 F Street, NE., Washington,
Commission Action
DC 20549, on official business days
between the hours of 10 a.m. and 3 p.m.
Because the foregoing rule change
Copies of such filing also will be
constitutes a stated policy, practice, or
available for inspection and copying at
interpretation with respect to the
the principal office of CBOE. All
meaning, administration, or
comments received will be posted
enforcement of an existing rule, it has
without change; the Commission does
become effective pursuant to Section
19(b)(3)(A)(i) of the Act 14 and Rule 19b– not edit personal identifying
4(f)(1) thereunder.15 At any time within information from submissions. You
60 days of the filing of the proposed rule should submit only information that
change, the Commission may summarily you wish to make available publicly. All
submissions should refer to File
abrogate such rule change if it appears
Number SR–CBOE–2007–93 andshould
to the Commission that such action is
be submitted on or before September 20,
necessary or appropriate in the public
2007.
interest, for the protection of investors,
or otherwise in furtherance of the
For the Commission, by the Division of
purposes of the Act.
Market Regulation, pursuant to delegated
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposal.
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:
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Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–CBOE–2007–93 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–CBOE–2007–93. This file
number should be included on the
subject line if e-mail 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 (https://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
14 15
15 17
U.S.C. 78s(b)(3)(A)(i).
CFR 240.19b–4(f)(1).
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authority.16
Nancy M. Morris,
Secretary.
[FR Doc. E7–17163 Filed 8–29–07; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–56311; File No. SR–CBOE–
2006–99]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing of a
Proposed Rule Change and
Amendment No. 1 Thereto Related to
FLEX Options Trading
August 23, 2007.
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
27, 2006, the Chicago Board Options
Exchange, Incorporated (‘‘Exchange’’ or
‘‘CBOE’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
the proposed rule change as described
in Items I, II, and III below, which Items
have been substantially prepared by the
Exchange. On August 17, 2007, CBOE
filed Amendment No. 1 to the proposed
rule change.3 The Commission is
publishing this notice to solicit
16 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 In Amendment No. 1, the Exchange replaced the
proposed rule change in its entirety.
1 15
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50133
comments on the proposed rule change,
as amended, from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to adopt rules
to provide for the trading of Flexible
Exchange Options (‘‘FLEX Options’’) 4
on the Exchange’s new FLEX Hybrid
Trading System platform and to make
certain corresponding revisions to its
existing open-outcry based FLEX RFQ
System platform. The text of the
proposed rule change is available on the
Exchange’s Web site (https://
www.cboe.org/legal), at CBOE, and at
the Commission’s Public Reference
Room.5
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
CBOE included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of those
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in Sections A, B, and C below, of
the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
i. Description of the FLEX Hybrid
Trading System
Currently, FLEX Options are traded
on the Exchange through an openoutcry-based, Request for Quotes
(‘‘RFQ’’) process (referred to herein as
the ‘‘FLEX RFQ System’’ platform). The
purpose of the proposed rule change is
to amend Exchange rules to provide for
an alternate framework to trade FLEX
4 FLEX Options provide investors with the ability
to customize basic option features including size,
expiration date, exercise style, and certain exercise
prices.
5 The Exchange notes that unrelated changes are
being proposed to the text of Rule 24A.7 in a
separate rule filing. See Securities Exchange Act
Release No. 56191 (August 2, 2007), 72 FR 44894
(August 9, 2007) (SR–CBOE–2007–79). If that rule
filing becomes effective before this instant rule
filing, the Exchange intends to submit an
amendment to reflect conforming changes to the
text to Rules 24A.7 and 24A.8, as well as proposed
Rules 24B.7 and 24B.8. Telephone conversation
between Jennifer Lamie, Assistant General Counsel,
CBOE, and Terri Evans, Special Counsel, Division
of Market Regulation (‘‘Division’’), Commission on
August 20, 2007.
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Options on the CBOE using a ‘‘hybrid’’
platform (referred to herein as the
‘‘FLEX Hybrid Trading System’’
platform or the ‘‘System’’), which
incorporates both open outcry and
electronic trading functionality. Some
key features of the new FLEX Hybrid
Trading System platform are the
following:
• Method of Operation: On the new
hybrid platform, FLEX Option
transactions could take place either
through use of an open outcry RFQ
process similar to the existing FLEX
RFQ System process or through use of
a new, Internet- and API-based,
electronic RFQ platform. In addition, a
new feature of the FLEX Hybrid Trading
System will allow FLEX Orders to be
entered and traded via an electronic
book (the ‘‘Book’’).
• Access: The new FLEX Hybrid
Trading System platform will be
available for the entry of RFQs, FLEX
Quotes, and FLEX Orders, and the
execution of trades resulting therefrom,
of approved members. An approved
member is any Exchange member that
has been approved by the Exchange to
use the FLEX Hybrid Trading System.
This group of FLEX-eligible members
are collectively referred to as ‘‘FLEX
Traders.’’ 6
• Market-Maker Participation: One
category of FLEX Traders are FLEX
Market-Makers, who will be appointed
to one or more classes pursuant to
proposed Rule 24B.9. As with the
existing FLEX rules, there are two types
of FLEX Market-Makers: A FLEX
Appointed Market-Maker and a FLEX
Qualified Market-Maker (unless
specified, or unless the context requires
otherwise, the term ‘‘FLEX MarketMaker’’ refers to both FLEX Appointed
Market-Makers and FLEX Qualified
Market-Makers). FLEX Market-Maker
appointments and related marketmaking obligations, and changes
proposed to the existing rule
requirements, are discussed further
below.
CBOE believes that enhancing its
FLEX trading facilities to allow for a
hybrid trading platform alternative is
important to the Exchange’s efforts to
create a market that provides members
and investors interested in FLEX-type
options with an improved but
comparable alternative to the over-thecounter (‘‘OTC’’) market in customized
options. By enhancing CBOE systems to
allow for a FLEX Hybrid Trading
System platform, market participants
6 In addition, as discussed further below, the
Exchange will permit non-member users to be
provided electronic access, through sponsoring
members, to enter and execute orders on the FLEX
Hybrid Trading System platform.
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will have greater flexibility in
determining the means with which to
execute their customized options in an
exchange environment, thus making it a
more attractive alternative to the OTC
market. CBOE believes market
participants benefit from being able to
trade customized options in an
exchange environment in several ways,
including, but not limited to the
following: (1) Enhanced efficiency in
initiating and closing out positions;
(2) increased market transparency;
and (3) heightened contra-party
creditworthiness due to the role of The
Options Clearing Corporation (‘‘OCC’’)
as issuer and guarantor of FLEX
Options.
Given the design of FLEX Options to
compete with the OTC market, the
Exchange notes that the existing user
base for trading FLEX Options includes
both institutional investors and high net
worth individuals. The Exchange also
notes that, when the existing FLEX
Rules were originally adopted in 1993,
the Exchange put in place certain FLEX
contract specification requirements that
were designed to limit participation in
FLEX Options to these types of
sophisticated investors, rather than
retail investors. These safeguards, which
relate to minimum value size
requirements, have been revised over
time and will exist for FLEX Options
traded on the proposed FLEX Hybrid
Trading System. Thus, whether
executed through the new electronic
RFQ process or open outcry RFQ
process (or through entering a FLEX
Order to hit the new FLEX Book), the
minimum value size requirements for a
resulting FLEX transaction will be the
same as currently exists today for
trading on the existing FLEX RFQ
System platform. Additionally, the
minimum value size of FLEX Quotes
that are entered by FLEX Traders in
response to an underlying RFQ (and,
correspondingly, the minimum value
size of resting FLEX Orders
(undecremented size) that are entered
by FLEX Traders to provide liquidity for
incoming FLEX Orders that hit the
Book) will be the same as currently
exists today for trading on the existing
FLEX RFQ System platform. In
maintaining these safeguards for trading
on the proposed FLEX Hybrid Trading
System, the Exchange is cognizant of the
desire to continue to provide the
requisite amount of investor protection
that the safeguards were originally
designed to achieve.
In addition, given the customized
nature of FLEX Options, the
sophistication of the target FLEX trading
community, and the desire to effectively
compete with the OTC market (which is
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not subject to the same restrictions and
requirements of exchange-based
trading), CBOE has also designed its
FLEX trading rules in a manner that is
distinct from its trading rules for
traditional options in order to create
incentives for members and
sophisticated investors to bring largersized orders to the Exchange, rather
than the OTC market, and to provide
deep liquid markets for investors in
these customized products. As
described below, these distinctions
include: (i) Allowing for certain crossing
participation entitlements and FLEX
Appointed Market-Maker participation
entitlements to be applied without
yielding to other trading interest
(including that of public customers,
broker-dealers and FLEX MarketMakers) provided certain conditions are
satisfied (including the requirements of
Section 11(a)(1) of the Act 7 and the
rules promulgated thereunder); (ii)
allowing for certain modified market
making obligations; and (iii) applying
separate position limit and exercise
limit requirements to FLEX Options.
These principles will be maintained in
the proposed FLEX Hybrid Trading
System, though certain modifications
are being proposed.
For the reasons noted herein, CBOE
believes that the proposed structure of
its FLEX Hybrid Trading System
platform is appropriate and reasonable
and that it will provide market
participants with additional flexibility
to determine choice of venue that best
comport with investors’ particular
needs.
ii. Detailed Summary of Proposed Rule
Change
As indicated above, under the
proposed rules structure, the Exchange
will have the choice to allow trading to
occur in a FLEX Option class on the
existing FLEX RFQ System platform or
the proposed FLEX Hybrid Trading
System platform. The rules governing
the trading of FLEX Options on the
existing FLEX RFQ System platform are
contained, and will continue to be
maintained, in Chapter XXIVA of the
Exchange Rules. The proposed rules
governing the trading of FLEX Options
on the FLEX Hybrid Trading System
platform will be reflected in new
Chapter XXIVB. The Exchange currently
intends to maintain and operate both
the existing FLEX RFQ System platform
and the new FLEX Hybrid Trading
System platform and will determine
which trading platform will be utilized
on a class-by-class basis. These
7 15
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U.S.C. 78k(a).
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determinations will be announced to the
membership via Regulatory Circular.
The new platform rules are generally
modeled after and correspond with the
existing FLEX RFQ System rules
contained in Chapter XXIVA.
Discussion of each of the proposed new
rules, as well as various corresponding
changes to the existing FLEX rules,
follows.
(1). Proposed FLEX Hybrid Trading
System Rules (Chapter XXIVB)
An introductory section to proposed
Chapter XXIVB provides that
transactions in FLEX Options may be
effected on the FLEX Hybrid Trading
System in accordance with the
procedures in Chapter XXIVB, or via the
existing FLEX trading platform in
accordance with the procedures in
Chapter XXIVA. As described above,
determinations as to which trading
platform and rules set will be applicable
will by made by the Exchange on a
class-by-class basis and will be
announced to the membership via
Regulatory Circular. The introductory
language further explains that the rules
in Chapters I through XIX and XXIV are
also applicable to the trading of FLEX
Options on the System, except as
indicated at the end of each rule. To the
extent the rules in Chapter XXIVB are
inconsistent with other Exchange rules,
the rules in Chapter XXIVB take
precedence in relation to the trading of
FLEX Options on the System.
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(A). FLEX Hybrid Trading System
Definitions (Proposed Rule 24B.1)
Proposed Rule 24B.1, Definitions,
corresponds with existing Rule 24A.1. It
also contains several new definitions
necessary to accommodate the
introduction of the FLEX Hybrid
Trading System. For example, the term
‘‘FLEX Hybrid Trading System’’ shall
mean the Exchange’s trading platform
that allows FLEX Traders to submit both
electronic and open outcry RFQs, FLEX
Quotes in response to such RFQs, and
FLEX Orders into an electronic FLEX
Book. The term ‘‘FLEX Trader’’ shall
mean a FLEX-participating Exchange
member who has been approved by the
Exchange to trade on the FLEX Hybrid
Trading System. The term ‘‘FLEX
Order’’ shall mean a FLEX bid or offer
entered by a FLEX Market-Maker or an
order to purchase or order to sell a FLEX
Option entered by a FLEX Trader, in
each case into the Book. With respect to
the electronic RFQ process, various
terms defining the ‘‘RFQ Market,’’ the
‘‘RFQ Response Period,’’ the ‘‘RFQ
Reaction Period,’’ and ‘‘RFQ Order’’ are
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defined.8 In addition, certain Trade
Conditions that can be placed on an
RFQ, an RFQ Order, or FLEX Order are
identified.9
(B). Terms of FLEX Options (Proposed
Rule 24B.4)
Proposed Rule 24B.4, Terms of FLEX
Options, is similar to existing Rule
24A.4. Subparagraphs (a)(1) through (2)
of Rule 24B.4, like sub-paragraphs (a)(1)
through (2) of Rule 24A.4, provide that
the variable terms of FLEX Options
(such as the underlying security or
index, put or call type, exercise-style,
expiration date, and exercise price) will
be established through the bidding and
offering mechanics applicable to RFQs
or the bidding and offer mechanics
applicable to the Book. Other terms
shall be the same as those that apply to
Non-FLEX Options.
Subparagraph (a)(3) of Rule 24B.4,
like subparagraph (a)(3) of Rule 24A.4,
lists the additional categories of
information that must be addressed by
a member that initiates an RFQ (the
‘‘Submitting Member’’), such as the type
and form of quote sought and the length
8 The term ‘‘RFQ Market’’ shall mean the FLEX
Quote bids or offers, or both, as applicable, entered
in response to an electronic Request for Quotes and
FLEX Orders resting in the electronic book, if any.
The term ‘‘RFQ Response Period’’ shall mean the
period of time during which FLEX Traders may
provide FLEX Quotes in response to a Request for
Quotes. The term ‘‘RFQ Reaction Period’’ shall
mean the period of time during which a Submitting
Member determines whether to accept or reject
FLEX Quotes submitted in response to an electronic
Request for Quotes. The term ‘‘RFQ Order’’ shall
mean an order to purchase or order to sell FLEX
Options entered by the Submitting Member during
the RFQ Reaction Period. See proposed Rule
24B.1(r)–(u).
9 The following Trade Conditions will be
available in the FLEX Hybrid Trading System for a
FLEX Trader to choose from for RFQs, RFQ Orders,
or FLEX Orders: (a) Fill-or-Kill, which is a
condition to execute an RFQ Order or FLEX Order
in its entirety as soon as it is represented or cancel
it; (b) All-or-None, which is a condition to execute
an RFQ Order or FLEX Order in its entirety or not
at all; (c) Minimum Fill, which is a condition to
execute an RFQ Order or FLEX Order in a minimum
quantity or not at all; (d) Lots Of, which is a
condition to execute an RFQ Order or FLEX Order
in minimum lot sizes or not at all; (e) Intent to
Cross, which is an RFQ condition indicating that a
Submitting Member intends to cross or act as
principal and receive a crossing participation
entitlement; and (f) Hedge, which is an RFQ or
FLEX Order condition contingent on trade
execution in Non-FLEX Options or other Non-FLEX
components (e.g., stock, futures, or other related
instruments or interests). Trade Conditions, other
than Intent to Cross or Hedge, will be inputted but
not disclosed on the System. In addition, other than
Fill-or-Kill orders, FLEX Orders will be designated
by the System as ‘‘day orders’’ and, if unexecuted,
will be cancelled at the close of each trade day. See
proposed Rule 24B.1(x). In the future, the Exchange
may determine to enable ‘‘good-’til-cancelled’’
functionality. The introduction of such
functionality would be the subject of a separate rule
filing.
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50135
of the RFQ Response Period.10
Additionally, the Submitting Member
must indicate any Trade Condition
placed on the RFQ (i.e., an Intent to
Cross or Hedge condition).11 Given the
proposed introduction of the new
concept of the FLEX Book and the new
concept of a FLEX Order that can be
entered into the Book, proposed
subparagraph (a)(4) lists the additional
categories of information that must be
included in a FLEX Order, such as the
order type and form, and any Trade
Condition, as applicable.
Subparagraph (a)(5) of Rule 24B.4 lists
additional contract and transaction
specifications that RFQs, FLEX Quotes
responsive to RFQs, RFQ Orders, and
FLEX Orders must satisfy. These
additional specifications pertain first to
maximum expiration terms and second
to minimum value size requirements.
The maximum expiration terms are the
same as in the existing FLEX rules.12
The minimum value size specifications
are substantially similar to
subparagraph (a)(4) of Rule 24A.4,
though additional language has been
added to clarify the applicability of the
minimum value size requirements to
FLEX Orders entered in the Book.13 As
with the existing FLEX rules, minimum
value size requirements for transactions
resulting from electronic and open
outcry RFQs and for responsive FLEX
Quotes will be as follows:
• Opening Transactions in a New
Series: The minimum value size for an
opening transaction resulting from an
RFQ in any FLEX series in which there
is no open interest at the time the RFQ
is submitted shall be: (i) The lesser of
250 contracts or the number of contracts
overlying $1 million in the underlying
securities in the case of FLEX Equity
10 The length of the RFQ Response Period interval
is defined by the Submitting Member, provided that
the length of the interval must fall within the time
ranges established by the appropriate Procedure
Committee on a class-by-class basis for electronic
RFQs or open outcry RFQs. Such time cannot be
less than three seconds. See proposed Rule
24B.4(a)(3)(iii).
11 At the conclusion of an RFQ, the Submitting
Member may enter an RFQ Order to buy or sell a
specified size. An RFQ Order shall contain the same
transaction specifications as the related RFQ plus
any additional Trade Condition(s), if applicable,
that relate to the particular order and its size. See
proposed Rule 24B.4(a)(3)(iv) and note 9, supra.
12 Specifically, for FLEX Equity Options, the
maximum term is three years; provided, however,
that the Submitting Member may request a longer
term to a maximum of five years. For FLEX Index
Options, the maximum term is five years; provided,
however, that a Submitting Member may request a
longer term to a maximum of ten years. See existing
Rule 24A.4(a)(4) and proposed Rule 24B.4(a)(5).
13 As discussed above, the Exchange notes that
the minimum value size requirements were put in
place to limit participation in FLEX Options to
sophisticated, high-net-worth investors, including
institutional investors, rather than retail investors.
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Options; and (ii) $10 million Underlying
Equivalent Value in the case of FLEX
Index Options.
• Transactions in Existing Series: The
minimum value size for a transaction in
any currently-opened FLEX series
resulting from an RFQ shall be: (i) 100
contracts in the case of opening
transactions in FLEX Equity Options
and 25 contracts in the case of closing
transactions in FLEX Equity Options;
and (ii) $1 million Underlying
Equivalent Value in the case of both
opening and closing transactions in
FLEX Index Options; or (iii) in either
case, the remaining underlying size or
Underlying Equivalent Value on a
closing transaction, whichever is less.
• FLEX Quote Sizes: The minimum
value size for FLEX Quotes responsive
to an RFQ shall be: (i) 25 contracts in
the case of FLEX Equity Options; and
(ii) $1 million Underlying Equivalent
Value in the case of FLEX Index
Options; or (iii) in either case, the
remaining underlying size or
Underlying Equivalent Value on a
closing transaction, whichever is less.
However, FLEX Quotes of FLEX Index
Appointed Market-Makers must be for at
least $10 million Underlying Equivalent
Value or the dollar amount indicated in
the RFQ, whichever is less.
There will be similar minimum value
size requirements that apply to
transactions that occur in the FLEX
Book. Specifically, a transaction
resulting from a FLEX Order that seeks
liquidity by trading against (‘‘hitting’’)
the Book must satisfy the same
minimum value size requirements
described above that are applicable to
RFQ transactions. Conversely, a FLEX
Order that provides liquidity by resting
in the Book must satisfy the same
minimum value size requirements
described above that are applicable to
FLEX Quotes. Thus, the minimum value
size requirements for FLEX Orders
entered into the Book will be as follows:
• Opening Transactions in a New
Series: The minimum value size for an
opening transaction resulting from a
FLEX Order entered to hit the FLEX
Book in any FLEX series in which there
is no open interest at the time the FLEX
Order is submitted shall be: (i) The
lesser of 250 contracts or the number of
contracts overlying $1 million in the
underlying securities in the case of
FLEX Equity Options; and (ii) $10
million Underlying Equivalent Value in
the case of FLEX Index Options.
• Transactions in Existing Series: The
minimum value size for a transaction in
any currently-opened FLEX series
resulting from a FLEX Order entered to
hit the FLEX Book shall be: (i) 100
contracts in the case of opening
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transactions in FLEX Equity Options
and 25 contracts in the case of closing
transactions in FLEX Equity Options;
and (ii) $1 million Underlying
Equivalent Value in the case of both
opening and closing transactions in
FLEX Index Options; or (iii) in either
case, the remaining underlying size or
Underlying Equivalent Value on a
closing transaction, whichever is less.
• Resting FLEX Order Sizes: The
minimum value size for FLEX Orders
(undecremented size) entered to rest in
the FLEX Book shall be: (i) 25 contracts
in the case of FLEX Equity Options; and
(ii) $1 million Underlying Equivalent
Value in the case of FLEX Index
Options; or (iii) in either case, the
remaining underlying size or
Underlying Equivalent Value on a
closing transaction, whichever is less.
With respect to FLEX Index Appointed
Market-Makers, FLEX Orders
(undecremented size) must be for at
least $10 million Underlying Equivalent
Value.
Subparagraph (a)(5)(iv) of the
proposed rule also includes a new
requirement that a FLEX Appointed
Market-Maker 14 has an obligation to
respond to a certain percentage of
electronic RFQs. This percentage will be
determined by the appropriate
Procedure Committee on a class-by-class
basis, but will not be less than 80%. As
with the existing FLEX rules, a FLEX
Appointed Market-Maker will continue
to be required to respond to every openoutcry RFQ in a class of FLEX Options
to which it is appointed and trading in
open outcry.
Paragraph (b), pertaining to special
terms for FLEX Index Options, and
paragraph (c), pertaining to special
terms for FLEX Equity Options, in
proposed Rule 24B.4 are the same as the
corresponding paragraphs in existing
Rule 24A.4.
(C). FLEX Trading Procedures and
Principles (Proposed Rule 24B.5)
Proposed Rule 24B.5, FLEX Trading
Procedures and Principles, prescribes in
some detail the trading procedures that
apply to the FLEX Hybrid Trading
System. It describes the RFQ processes
for electronic and open-outcry trading,
the FLEX Book, contract acceptance,
priority of bids and offers, and
applicable trading increments.
(a). Electronic and Open Outcry RFQ
Processes
Paragraph (a) describes the RFQ
process, which may be used at any time,
14 FLEX Appointed Market-Makers and their
related market-making obligations are described in
proposed Rules 24B.4(a)(5)(iv) and 24B.9.
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but is required to initiate a FLEX
transaction when there are no FLEX
Orders currently resting in the Book in
the particular FLEX Options series to be
traded. The RFQ process may be
conducted electronically through the
System or in open outcry as described
below.
(aa). Electronic RFQ Process
Subparagraph (a)(1) of proposed Rule
24B.5 describes the electronic RFQ
process. Upon receipt of an RFQ that
satisfies the requirements of proposed
Rule 24B.4, the System will cause the
terms and specifications of the RFQ to
be communicated to FLEX Traders.
FLEX Traders, including FLEX MarketMakers and the Submitting Member,
may then enter FLEX Quotes that are
responsive to the RFQ during the RFQ
Response Period.15 FLEX Quotes may be
entered, modified, or withdrawn at any
point during the RFQ Response Period;
provided, however, any FLEX
Appointed Market-Makers must meet
certain FLEX Quote maintenance
obligations. During the RFQ Response
Period, the System will intermittently
calculate and disseminate to all FLEX
Traders the aggregate depth of the
market at each price level considering
FLEX Quote responses and FLEX Orders
resting in the Book (referred to as the
expected ‘‘RFQ Market’’).
At the end of the RFQ Response
Period, the System will calculate and
disseminate to all FLEX Traders the
final RFQ Market. The Submitting
Member will then have a brief interval
of time to promptly accept or reject the
RFQ Market, provided that such
acceptance or rejection must occur
during the ‘‘RFQ Reaction Period.’’ 16
During the RFQ Reaction Period, FLEX
Quotes and FLEX Orders in the System
cannot be modified or withdrawn.17
In the scenario where a Submitting
Member has not indicated an ‘‘intent to
cross’’ in the RFQ request, the
Submitting Member can determine to do
the following during the RFQ Reaction
Period: (i) Trade against the bids and
offers (but not both) by submitting an
RFQ Order, in which case the resulting
transaction will occur at a single ‘‘BBO
15 However, FLEX Quotes may not be entered for
the account of a options market maker from another
options exchange. See proposed Rule
24B.5(a)(1)(ii)(A).
16 The length of the RFQ Reaction Period interval
will be established by the appropriate Procedure
Committee on a class-by-class basis and will not be
more than 30 seconds. Failure to promptly accept
the bids or offers equates to a rejection. See
proposed Rule 24B.5(a)(1)(iii)(A).
17 FLEX Orders can be entered during the RFQ
Reaction Period, but will not be included in the
RFQ Market calculation. See proposed Rule
24B.5(a)(1)(iii)(B)(I).
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clearing price’’ that does not violate the
RFQ Order’s limit price, if any;18 or (ii)
reject the RFQ or let it expire.19
If the Submitting Member rejects the
RFQ Market or to the extent the RFQ
Market size exceeds the Submitting
Member’s FLEX transaction size, the
System will automatically execute any
remaining FLEX Quotes and FLEX
Orders that are marketable against each
other at a single clearing price.
Thereafter: (i) If there is a Book
available, any further remaining balance
of the FLEX Quotes will be
automatically entered into the Book
unless the FLEX Trader that entered the
FLEX Quote has indicated that the FLEX
Quote is to be automatically cancelled if
not traded;20 or (ii) if there is no Book
18 If the Submitting Member chooses to trade, the
RFQ Order it sends will be eligible to trade with
the FLEX Quotes and FLEX Orders at a single price
that will leave bids and offers which cannot trade
with each other (‘‘BBO clearing price’’). In
determining the priority of FLEX Quotes and FLEX
Orders to be traded, the System gives priority to
FLEX Quotes and FLEX Orders whose price is
better than the BBO clearing price, then to FLEX
Quotes and FLEX Orders at the BBO clearing price.
The allocation among multiple FLEX Quotes and
FLEX Orders that are priced at the BBO clearing
price will be as follows: (i) Any FLEX Quotes that
are subject to a FLEX Appointed Market-Maker
participation entitlement will have priority to
participate in the execution; (ii) then FLEX Orders
resting in the electronic book based on the Book
priority algorithm; (iii) then FLEX Quotes for the
account of public customers and non-member
broker-dealers based on time priority; and (iv) then
all other FLEX Quotes based on time priority. In the
event an RFQ Market is locked or crossed (e.g., the
best bid is $1.25 and the best offer is $1.20),
allocation at the BBO clearing price on the same
side of the transaction as the RFQ Order shall be
as follows: (i) FLEX Orders resting in the electronic
book will have priority to participate in the
execution based on time priority; (ii) then, if
applicable, an RFQ Order for the account of a
public customer or non-member broker-dealer, then
any FLEX Quotes that are subject to a FLEX
Appointed Market-Maker participation entitlement;
(iii) then FLEX Quotes for the account of public
customers and non-member broker-dealers based on
time priority; (iv) then, if applicable, an RFQ Order
for the account of a member, then any FLEX Quotes
that are subject to a FLEX Appointed Market-Maker
participation entitlement; and (v) then all other
FLEX Quotes based on time priority. The System
will then enter any remaining balance of the
incoming RFQ Order in the Book (if available),
unless the Submitting Member has indicated that
the balance of the RFQ Order is to be automatically
cancelled if it is not traded. An RFQ Order that has
been decremented as part of an electronic RFQ is
eligible to be entered into the Book (if available)
even though the balance that remains may be below
the minimum size requirements for FLEX Orders
entered to rest in the Book. Once entered in the
Book, an RFQ Order will be treated the same as
other FLEX Orders. See proposed Rules
24B.4(a)(5)(iv) and 24B.5(a)(1)(iii)(C).
19 Consistent with the existing FLEX rules, a
Submitting Member has no obligation to accept any
FLEX bid or offer. See proposed Rule
24B.5(a)(1)(iii)(E) and existing Rule 24A.5(c)(iv).
20 A FLEX Quote that has been decremented as
part of an electronic RFQ is eligible to be entered
into the Book (if available) even though the balance
that remains may be below the minimum size
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available, any remaining balance of the
FLEX Quotes will be automatically
cancelled.
Once the RFQ Reaction Period
concludes and applicable allocations are
completed, FLEX Traders can enter new
FLEX Orders or cancel existing FLEX
Orders in the Book at any time. If the
Book is available, the Submitting
Member and other FLEX Traders can
also determine to enter FLEX Orders in
the Book at the conclusion of the RFQ
process.
The following examples illustrate the
process:
• Assume the RFQ Market is bid 1000
contracts at $1.00 and offered 1000
contracts at $1.20, 1200 contracts at
$1.21, and 1500 contracts at $1.23. Also
assume that the FLEX Book is not
activated in the particular class. If the
Submitting Member submits an agency
RFQ Order to buy 1500 contracts, the
order will trade at a BBO clearing price
of $1.21. The priority among the interest
represented on the offer-side of the RFQ
Market will be first to the FLEX Quotes
offered at $1.20 and second to FLEX
Quotes offered at $1.21. Allocation
among multiple FLEX Quotes
represented at $1.21 shall be first to any
FLEX Appointed Market-Maker(s) with
a participation entitlement, then to
FLEX Quotes for the account of public
customers and non-member brokerdealers based on time priority, then to
all other FLEX Quotes based on time
priority. The remaining balance of the
FLEX Quotes entered in response to the
RFQ will be automatically cancelled.
• Assume the RFQ Market is bid 1000
contracts at $1.21 and offered 1000
contracts at $1.20, 1200 contracts at
$1.21, and 1500 contracts at $1.23.
Thus, the bids and offers that make up
the RFQ Market are ‘‘crossed.’’ Also
assume that each of the FLEX Traders
that entered responses elected to have
any remaining balance on their FLEX
Quotes automatically booked. If the
Submitting Member submits an agency
RFQ Order to buy 1000 contracts, the
order will trade at a BBO clearing price
of $1.21 and the 1000 contract bid will
also trade against the offers at a BBO
clearing price of $1.21. (The particular
allocation algorithm among the interest
represented on the offer-side of the RFQ
Market is as described in the first
example, assuming there are no FLEX
Orders in the Book.) Coming out of the
RFQ auction, the Book will also display
offers of 200 contracts at $1.21 and 1500
contracts at $1.23.
• Assume the RFQ Market is bid 1000
contracts at $1.21 and offered 1000
contracts at $1.20, 500 contracts at
$1.21, and 1500 contracts at $1.23.
Thus, the bids and offers that make up
the RFQ Market are ‘‘crossed.’’ Also
assume that the bid consists in part of
a 100-contract FLEX Order that was
resting in the Book prior to the initiation
of the RFQ and that each of the FLEX
Traders that entered responses elected
to have any remaining balance on its
FLEX Quote automatically booked. If
the Submitting Member submits a
public customer RFQ Order to buy 1000
contracts at $1.21, the 100 contract
FLEX Order, the 1000 contract RFQ
Order, and 400 contracts of the
remaining 900 contract bid will trade
against the offers at a BBO clearing price
of $1.21.21 (The particular allocation
algorithm among the interest
represented on the offer-side of the RFQ
Market is as described in the first
example, assuming there are no FLEX
Orders in the Book.) Coming out of the
RFQ auction, the Book will also display
a bid of 500 contracts at $1.21 and an
offer of 1500 contracts at $1.23.
• Assume the RFQ Market is bid 1000
contracts at $1.00 and offered 1000
contracts at $1.20 and the Submitting
Member wants to trade 200 contracts in
a FLEX Equity series that has a
minimum value size requirement of 100
contracts. Also assume the FLEX Book
is activated in the particular class.
During the RFQ Reaction Period, the
Submitting Member enters an agency
RFQ Order to buy 200 contracts at
$1.15. Because the best offer is $1.20, no
trade will occur. The RFQ Order and the
FLEX Quotes entered in response to the
RFQ will be booked (assuming the
Submitting Member and each of the
FLEX Traders that entered responses
elected to have any remaining balance
on their FLEX Quotes automatically
booked). Coming out of the RFQ
auction, the Book will display a market
that is bid 200 contracts at $1.15 and
offered 1000 contracts at $1.20.
In the scenario where the Submitting
Member has indicated an ‘‘intent to
cross’’ in its RFQ request, during the
RFQ Reaction Period the Submitting
Member can determine to: (i) Enter an
RFQ Order to trade with the bids or
offers and be automatically allocated a
crossing participation entitlement to
trade with the RFQ Order at the BBO
requirements for FLEX Orders entered to rest in the
Book. Once entered in the Book, a FLEX Quote will
be treated the same as other FLEX Orders. See
proposed Rules 24B.4(a)(5)(iv) and
24B.5(a)(1)(iii)(F).
21 If the RFQ Order is submitted for the account
of a member, the RFQ Order will trade after the
FLEX Order and any FLEX Quotes for the account
of public customers and non-member brokerdealers. See note 18, supra
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clearing price;22 or (ii) reject the RFQ or
let it expire.
If the Submitting Member enters an
RFQ Order, the System will
immediately execute the RFQ Order to
the extent marketable at the BBO
clearing price, with the Submitting
Member executing an amount up to the
applicable crossing participation
entitlement at the BBO clearing price
after yielding to certain trading
interests.23 Thereafter, any remaining
balance of the RFQ Order will be
exposed in the Book 24 for at least the
minimum Crossing Exposure Period.25
During this time, other FLEX Traders
can trade against the order. At the end
of the Crossing Exposure Period, the
Submitting Member may enter a contraside order to trade any remaining
balance of the RFQ Order. The
Submitting Member must, however,
enter a contra-side order when
necessary to satisfy the minimum value
size requirements for the FLEX
transaction.26
The following examples illustrate this
process:
22 The existing FLEX rules allow for the
Submitting Member to execute a certain portion of
a FLEX Order where the Submitting Member has
indicated an intention to cross or act as principal
(the ‘‘crossing participation entitlement’’). See
existing Rule 24A.5(e). The same concept will apply
under the proposed FLEX Hybrid Rules, though
changes to the applicable participation entitlement
percentages are being proposed. In addition, the
Exchange is proposing to extend the use of crossing
participation entitlements to solicitations. See
proposed Rule 24B.5(d). The particular
participation entitlements are discussed further
below.
23 See note 18, supra, for description of the BBO
clearing price. In determining the priority of FLEX
Quotes and FLEX Orders to be traded when the
Submitting Member has indicated an ‘‘intent to
cross,’’ the System gives priority to FLEX Quotes
and FLEX Orders whose price is better than the
BBO clearing price, then to FLEX Quotes and FLEX
Orders at the BBO clearing price. The allocation
among multiple FLEX Quotes and FLEX Orders that
are priced at the BBO clearing price will be as
follows: (i) FLEX Orders resting in the electronic
book will have priority to participate in the
execution; (ii) then FLEX Quotes for the account of
public customers and non-member broker-dealers
based on time priority; (iii) then the crossing
participation entitlement; (iv) then any FLEX
Quotes that are subject to a FLEX Appointed
Market-Maker participation entitlement; and (v)
then all other FLEX Quotes based on time priority.
See proposed Rule 24B.5(a)(1)(iii)(D). The FLEX
Appointed Market-Maker participation entitlement
when combined with a crossing participation
entitlement will collectively not exceed 40% of the
incoming RFQ Order’s original size. See proposed
Rule 24B.5(d)(2).
24 If there is no Book available, the System will
expose the remaining balance of the incoming RFQ
Order, if any, so other FLEX Traders can trade
against the order. See proposed Rule
24B.5(a)(1)(iii)(D)(IV).
25 The length of this Crossing Exposure Period
shall be determined by the appropriate Procedure
Committee on a class-by-class basis and shall not
be less than three seconds. See id.
26 See proposed Rule 24B.4(a)(5)(ii) and (iii), and
proposed Rule 24B.5(a)(1)(iii)(D)(IV).
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• Assume the RFQ Market is bid 1000
contracts at $1.00 and offered 1000
contracts at $1.20, 1200 contracts at
$1.21 and 1500 contracts at $1.23. Also
assume that the Submitting Member
marked the RFQ with an ‘‘intent to
cross’’ flag, that the applicable crossing
entitlement is 40%, and that the FLEX
Book is not activated in the particular
class. If the Submitting Member submits
an agency market RFQ Order to buy 200
contracts, the order will trade at a BBO
clearing price of $1.20, with the
Submitting Member being automatically
allocated 80 contracts (40% of 200) on
the trade after yielding to any FLEX
Quotes for the account of public
customers and non-member brokerdealers. (The particular allocation
algorithm applicable to any remaining
contracts is as described in footnote 23.)
The remaining balance of the FLEX
Quotes entered in response to the RFQ
will be automatically cancelled.
• Assume the RFQ Market is bid 1000
contracts at $1.21 and offered 1000
contracts at $1.20, 1200 contracts at
$1.21, and 1500 contracts at $1.23.
Thus, the bids and offers that make up
the RFQ Market are ‘‘crossed.’’ Also
assume that the Submitting Member
marked the RFQ with an ‘‘intent to
cross’’ flag, that the applicable crossing
entitlement is 40%, that the offer
consists in part of a 100 contract FLEX
Order at $1.20 that was resting in the
Book prior to the initiation of the RFQ,
and that each of the FLEX Traders that
entered responses were FLEX MarketMakers that elected to have any
remaining balance on their FLEX Quotes
automatically booked. If the Submitting
Member submits an agency market RFQ
Order to buy 200 contracts, the order
will trade at a BBO clearing price of
$1.21, with the resting FLEX Order
trading 100 contracts, the Submitting
Member trading 80 contracts (40% of
200), and the remaining 20 trading
against the other interest represented in
the offer. The 1000 contract bid will also
trade against the offers at the BBO
clearing price of $1.21. (The particular
allocation algorithm among the
remaining interest represented in the
offer-side of the RFQ Market is as
described in footnote 23.) Coming out of
the RFQ auction, the Book will also
display offers of 1000 contracts at $1.21
and 1500 contracts at $1.23.
• Assume a scenario where there is
an RFQ Market of $1.00–$1.20, the
Submitting Member wants to trade 200
contracts in a FLEX Equity series that
has a minimum value size requirement
of 100 contracts, and a crossing
participation entitlement of 40%. Also
assume the FLEX Book is activated in
the particular class. During the RFQ
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Reaction Period, the Submitting
Member may enter an agency RFQ
Order to buy 200 contracts at $1.15. The
Submitting Member will immediately
cross 80 contracts (40% of 200) and the
balance of the order will be entered in
the Book. After waiting the required
exposure time (say three seconds), the
Submitting Member must enter a contraside order for at least 20 contracts if no
one else has traded against the
remaining balance of the RFQ Order (in
order to satisfy the minimum value size
requirement of 100 contracts).
The Exchange notes that the
Submitting Member must mark its RFQ
with an ‘‘intent to cross’’ flag at the time
the RFQ is originally submitted to be
automatically allocated the applicable
crossing participation entitlement for
facilitation and solicitation transactions.
If the RFQ is not flagged in this manner,
the Submitting Member will not be
automatically allocated the entitlement.
The Exchange notes that a Submitting
Member also has the ability to enter an
agency or proprietary FLEX Quote in
response to the Submitting Member’s
own RFQ. Such a FLEX Quote will be
treated the same as any other FLEX
Quote and subject to the priority
allocation algorithm described above.
Finally, the Exchange notes that all
electronic RFQ transactions must be in
compliance with Section 11(a)(1) of the
Act 27 and the rules promulgated
thereunder. Section 11(a)(1) prohibits a
member of a national securities
exchange from effecting transactions on
that exchange for its own account, the
account of an associated person, or an
account over which it or its associated
person exercises investment discretion
(collectively ‘‘proprietary’’ orders)
unless an exception applies. In this
regard, the Exchange is proposing that
proprietary FLEX Quotes, RFQ Orders,
and a crossing participation
entitlements may rely on the exception
found in paragraph (G) of Section
11(a)(1) of the Act 28 and Rule 11a1–1(T)
thereunder (the ‘‘G’’ exemption’’),29
because within the System such trading
interest would yield to same-priced
FLEX Orders in the Book and samepriced FLEX Quotes for the account of
public customers and non-member
broker-dealers, in compliance with the
‘‘G’’ exception requirement to yield
priority to any bid (offer) at the same
price for the account of a person who is
not, or is not associated with, a member
(a ‘‘non-member’’). A member that relies
on the ‘‘G’’ exemption would also have
27 15
U.S.C. 78k(a).
U.S.C. 78k(a)(1)(G).
29 17 CFR 240.11a1–1(T).
28 15
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‘‘G’’ exemption.
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(bb). Open Outcry RFQ Process
Subparagraph (a)(2) of proposed Rule
24B.5 describes the open outcry RFQ
process, which is similar to the process
that exists today with a few primary
distinctions.30 To initiate a FLEX
transaction using the open-outcry RFQ
process, a Submitting Member shall
submit an RFQ to the FLEX Official.31
After providing an RFQ in proper form
to the FLEX Official, the Submitting
Member shall immediately announce
the terms and specifications of the RFQ
to the trading crowd for the FLEX
Option by public outcry. FLEX Traders
present in the trading crowd may
provide the Submitting Member with
responsive FLEX Quotes by public
outcry during the RFQ Response
Period.32 These FLEX Quotes may be
entered, modified, or withdrawn at any
point during the RFQ Response Period;
provided, however, FLEX Appointed
Market-Makers must meet certain FLEX
Quote maintenance obligations.33 At the
30 The primary distinctions between the trading
mechanics applicable to the existing FLEX openoutcry RFQ process and the trading mechanics
applicable to the proposed FLEX Hybrid Trading
System open-outcry RFQ process are that, under the
latter process, the Submitting Member will be
responsible for announcing the terms and
specifications of the RFQ to the trading crowd by
public outcry, receiving FLEX Quotes responsive to
the RFQ and, at the conclusion of the RFQ
Response Period, announcing the BBO to the
trading crowd (whereas under the existing process,
the FLEX Post Official communicates the RFQ to
FLEX-participating members over facilities
maintained by the Exchange, FLEX Quotes
responsive to the RFQ may be entered at the FLEX
post, and the BBO is visibly displayed at the post
and over the network). Compare proposed Rule
24B.5(a)(2)(i)(B), (ii)(A), and (ii)(B) to existing Rule
24A.5(a)(ii), (b)(i), and (b)(iii). There are also
differences in the applicable priority provisions that
will take into consideration the priority of the
electronic book (which is not applicable under the
existing process) and the priority of two bids
submitted in open outcry at the same time and same
price (which will be apportioned equally as
compared to the existing practice of affording
priority to the FLEX Appointed or Qualified
Market-Makers) as well as modify the applicable
crossing participation entitlements. Compare
proposed Rule 24B.5(a)(2)(v) and (d) to existing
Rule 24A.5(e) and (f); see also note 22, supra.
31 Under the proposed rules, the Exchange may
designate an employee or independent contractor to
act as a FLEX Official and designate other qualified
employees or independent contractors to assist the
FLEX Official as the need arises. The FLEX Official
shall perform the functions set out in proposed Rule
24B.14, which include reviewing the conformity of
open-outcry RFQs to the terms and specifications
contained in proposed Rule 24B.4.
32 As with electronic RFQs, the length of the RFQ
Response Period interval for open-outcry
transactions is defined by the Submitting Member,
provided that the length of the interval must fall
within the time ranges established by the
appropriate Procedure Committee on a class-byclass basis and such time cannot be less than three
seconds. See proposed Rule 24B.4(a)(3)(iii).
33 See proposed Rules 24B.4(a)(5)(iv) and 24B.9.
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expiration of the RFQ Response Period,
the Submitting Member will identify the
BBO considering responsive FLEX
Quotes and, if applicable, FLEX Orders
resting in the Book. The Submitting
Member will announce the BBO to the
FLEX Traders in the trading crowd.
If the Submitting Member does not
intend to cross or act as principal with
respect to any part of the FLEX trade,
the Submitting Member shall promptly
accept or reject the BBO; provided,
however, if a Submitting Member either
rejects the BBO or is given a BBO for
less than the entire size requested, all
FLEX Traders in the trading crowd other
than the Submitting Member will have
an opportunity during the BBO
Improvement Interval in which to match
or improve, as applicable, the BBO.34 At
the expiration of any BBO Improvement
Interval, the Submitting Member must
promptly accept or reject the BBO(s).
If the Submitting Member indicates an
intention to cross or act as principal
with respect to any part of the FLEX
trade, acceptance of the displayed BBO
shall be automatically delayed until the
expiration of the BBO Improvement
Interval. Prior to the BBO Improvement
Interval, the Submitting Member must
announce to the trading crowd the price
at which the Submitting Member
expects to trade. In these circumstances,
the Submitting Member may participate
with all other FLEX Traders present in
the trading crowd in attempting to
improve or match the BBO during the
BBO Improvement Interval. At the
expiration of the BBO Improvement
Interval, the Submitting Member must
promptly accept or reject the BBO(s).
As with the existing rules, the
Submitting Member has no obligation to
accept any FLEX bid or offer. And,
whenever following the completion of
the RFQ Response Period or BBO
Improvement Interval, as applicable, the
Submitting Member rejects the BBO or
the BBO size exceeds the FLEX
transaction size indicated in the Request
for Quotes, FLEX Traders present in the
trading crowd may accept the unfilled
balance of the BBO. Such acceptance
must occur by public outcry promptly
following the Submitting Member’s
determination whether to accept or
reject the BBO or at the expiration of
any applicable BBO Improvement
Interval. Rejection of the open-outcry
BBO(s) or failure to promptly to accept
the BBO(s) by the Submitting Member
or FLEX Traders, as applicable, results
in expiration of the BBO(s) and the RFQ.
34 The ‘‘BBO Improvement Interval’’ refers to a
period of time during which FLEX Traders in the
trading crowd may submit FLEX Quotes to meet or
improve the BBO established during the RFQ
Response Period. See proposed Rule 24B.1(b).
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For open-outcry RFQs, the highest bid
(lowest offer) will have priority. Subject
to the requirements of Section 11(a)(1)
discussed below, at the same price, the
Submitting Member will allocate the
RFQ Order in accordance with the
following algorithm. First, to the extent
the Submitting Member is entitled to a
crossing participation entitlement, if
any, the Submitting Member has
priority to trade the applicable
entitlement percentage. Next, to the
extent a FLEX Appointed MarketMaker(s) is entitled to a participation
entitlement, if any, the FLEX Appointed
Market-Maker(s) has priority to trade the
applicable entitlement amount. In any
event, the FLEX Appointed MarketMaker participation entitlement when
combined with a crossing participation
entitlement will collectively not exceed
40% of the incoming order’s original
size.35 Thereafter, FLEX Quotes
submitted in open outcry in response to
the open-outcry RFQ will trade based on
time priority; provided, however, where
two or more best bid (offer) FLEX
Quotes are submitted in open outcry at
the same time and same price or in the
event the Submitting Member cannot
reasonably determine the sequence in
which the open-outcry bid (offer) FLEX
Quotes were made, priority will be
apportioned equally among the openoutcry bids (offers). Next, to the extent
there is any remaining balance, same
priced FLEX Orders resting in the Book
will trade based on the Book priority
algorithm.
If the RFQ Order being represented by
the Submitting Member in open-outcry
has an exemption from Section 11(a),
the RFQ Order will have priority over
all other same-priced bids (offers) on the
same side of the market. After executing
the RFQ Order (or if the Submitting
Member determines not to trade), any
unfilled balance of the BBO may be
executed by FLEX Traders in the trading
crowd based on the priority principles
described above.
All open-outcry RFQ transactions
must be in compliance with Section
11(a)(1) and the rules promulgated
thereunder. In this regard, a bid (offer)
submitted on behalf of the proprietary
account of a member that is relying on
the ‘‘G’’ exemption must yield priority
to any bid (offer) at the same price that
is represented in the Book (and all FLEX
Quotes that have priority over the Book)
in order to ensure that the proprietary
order yields priority to non-member
orders. A member that relies on the ‘‘G’’
exemption would also have to satisfy
the other requirements of the ‘‘G’’
exemption. In the event a Submitting
35 See
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Member is asserting a crossing
participation entitlement on behalf of a
proprietary order that must yield
priority in reliance on the ‘‘G’’
exemption and a FLEX Appointed
Market-Maker is asserting a
participation entitlement, the
Submitting Member’s crossing
participation entitlement to the
remaining balance of the original order,
when combined with the FLEX
Appointed Market-Makers guaranteed
participation, shall not exceed 40% of
the original order.36 However, provided
the ‘‘G’’ exemption requirements are
satisfied, nothing prohibits a Submitting
Member or FLEX Appointed MarketMaker from trading more than its
applicable entitlement if other FLEX
Traders in the crowd do not chose to
trade the remaining portion of the
order.37
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(b). The FLEX Book & FLEX Orders
As indicated above, the FLEX Book
and FLEX Orders are new concepts
being introduced through the FLEX
Hybrid Trading System platform.
Paragraph (b) of proposed Rule 24B.5
describes the FLEX Book. The
determination of whether to make the
FLEX Book functionality available will
be made by the Exchange on a class-byclass basis.
Utilization of the new FLEX Order
functionality is contingent upon the
FLEX Book being made available. So, if
the Book is not made available, the
FLEX Order functionality will not apply
and instead the FLEX Hybrid Trading
System platform functionality will be
limited to the electronic and openoutcry RFQ processes. If the Book is
made available, FLEX Orders that satisfy
the specification and minimum value
size requirements described above are
eligible to be entered in the Book, as
well as the remaining balance of RFQ
Orders and FLEX Quotes entered in
response to an RFQ (both of which are
treated the same as other FLEX Orders
once entered in the Book).
The System will automatically
execute incoming marketable FLEX
Orders against FLEX Orders resting in
the Book based on price-time priority,
36 In this particular scenario, at the same price,
priority is afforded first to any FLEX Appointed
Market-Maker(s) with a participation entitlement,
then to FLEX Quotes represented in the trading
crowd that are not relying on the ‘‘G’’ exemption,
then to FLEX Orders resting in the Book, then all
other interest in the trading crowd relying on the
‘‘G’’ exemption. Among those latter interests, a
Submitting Member seeking a crossing participation
entitlement would then have priority to trade an
amount that, when combined with allocated FLEX
Appointed Market-Maker participation entitlement,
does not exceed 40% of the original order size. See
proposed Rule 24B.5(a)(2)(v)(B) and (d)(2)(ii).
37 See proposed Rule 24B.5(a)(2)(v)(B).
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provided that special procedures apply
if a FLEX Appointed Market-Maker
participation entitlement has been
established for the option class and
subject to the restriction discussed in
the next paragraph. To the extent a
FLEX Appointed Market-Maker(s) is
entitled to a participation entitlement
and is quoting at the best bid (offer),
allocation among multiple bids (offers)
at the same price shall be first to all
FLEX Orders for the account of a public
customer ranked ahead of the FLEX
Appointed Market-Maker based on time
priority, then the FLEX Appointed
Market-Maker entitlement will be
applied. Thereafter, all other FLEX
Orders resting in the Book at the same
price will trade based on time priority.
To the extent there is any remaining
balance of the incoming order, the
balance will be entered in the Book or
automatically cancelled, depending on
any applicable Trade Conditions.38
Under the proposed procedures for
the FLEX Book, a Submitting Member
may not execute as principal against a
FLEX Order it represents as agent
unless: (i) The agency FLEX Order is
first subject to an RFQ, or (ii) the
Submitting Member has been bidding or
offering for at least the Crossing
Exposure Period 39 prior to receiving an
agency FLEX Order that is executable
against such bid or offer. With respect
to solicitation orders, a Submitting
Member may not execute a solicited
order against a FLEX Order it represents
as agent unless the agency order is first
subject to an RFQ.
All Book transactions must also be in
compliance with Section 11(a)(1) and
the rules promulgated thereunder. In
this regard:
• ‘‘G’’ Exemption: The Exchange is
proposing that a member may rely on
the ‘‘G’’ exemption only if the member
is ‘‘hitting’’ the Book with a proprietary
order. To the extent the proprietary
order is not executed in whole or in part
as soon as it hits the Book, the order
must be immediately cancelled by the
member. Such a member would also
have to satisfy the other requirements of
the ‘‘G’’ exemption, including the grossrevenue-related requirements of
paragraph (b) of the ‘‘G’’ exemption rule.
However, a member may not rely on the
‘‘G’’ exemption to rest a proprietary
order in the Book. This limitation is
necessary in order to ensure that the
member yields priority to any bid (offer)
38 See
note 9, supra.
length of this Crossing Exposure Period
shall be determined by the appropriate Procedure
Committee on a class-by-class basis and shall not
be less than three seconds. See proposed Rule
24B.5(b)(3)(i).
39 The
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at the same price for the account of a
non-member.
• ‘‘Effect versus Execute’’ Exemption:
The Exchange is proposing that a
member that submits a proprietary order
to rest or ‘‘hit’’ the Book from off the
floor may rely on the Exchange’s
automated System to satisfy the
requirement of the ‘‘effect versus
execute’’ exemption that the member’s
proprietary order be executed by an
exchange member that is not affiliated
with the member initiating the
proprietary order. Such a member
would also have to satisfy the other
requirements of the ‘‘effect versus
execute’’ exemption (which are
discussed in more detail below).
(c). Creation of Binding Contracts
Paragraph (c) of proposed Rule 24B.5
provides that acceptance of any bid or
offer creates a binding contract under
Rule 6.48. This provision is the same as
in existing Rule 24A.5(d) and will apply
for both RFQ and Book transactions.
(d). FLEX Priority Algorithms and
Section 11(a)(1) Requirements
Paragraph (d) of proposed Rule 24B.5
describes the general priority principles
applicable to the FLEX Hybrid System.
Subparagraph (d)(1) includes a crossreference to the priority algorithms
applicable to electronic RFQs, openoutcry RFQs, and Book transactions,
each of which is discussed above.
Subparagraph (d)(2) describes the
optional crossing and FLEX Appointed
Market-Maker participation entitlements
that may be overlaid on the general
priority principles.40 The framework for
these participation entitlements is
modeled after the existing FLEX rules.
However, the Exchange is proposing
some modifications from the existing
structure, which are discussed further
below.
With respect to the crossing
participation entitlement, a Submitting
Member that has matched or improved
the BBO or BBO clearing price, as
applicable, will have priority after
yielding to certain trading interests to
execute the contra-side of the trade to
the extent of the applicable crossing
participation entitlement.41 The
crossing participation entitlement is
intended to encourage members to bring
FLEX Option orders to CBOE and to
40 Additionally, Trade Conditions placed on a
FLEX Order may prevent a match from occurring.
See proposed Rules 24B.1(x) and 24B.5(d)(3).
41 As discussed above, the mechanics for
receiving a crossing participation entitlement and
the related priority requirements are described in
proposed Rule 24B.5(a)(1)(iii)(D) with respect to
electronic RFQs and in proposed Rule
24B.5(a)(2)(iii)(B) and (v) with respect to openoutcry RFQs.
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commit their capital to the FLEX
Options market on CBOE, and thereby
contribute to the liquidity of that
market, by guaranteeing them a
minimum right of participation in the
other side of any trade they bring to the
market if they are prepared to match or
improve the BBO.
For FLEX Equity Options, the
appropriate Procedure Committee will
determine on a class-by-class basis
whether to establish a crossing
participation entitlement for
facilitations and/or solicitations for
electronic RFQs and/or open-outcry
RFQs and the applicable entitlement
percentage, which shall not exceed 40%
of the trade.42 For FLEX Index Options,
the appropriate Procedure Committee
will determine on a class-by-class basis
whether to establish a crossing
participation entitlement for
facilitations and/or solicitations for
electronic RFQs and/or open-outcry
RFQs and the applicable entitlement,
which shall be the greater of a crossing
entitlement percentage (which shall not
exceed 40%), a proportional share of the
trade, $1 million underlying equivalent
value, or the remaining underlying
equivalent value on a closing
transaction valued at less than $1
million.43
The proposed crossing entitlement
requirements also provide that a
Submitting Member that is seeking a
crossing participation entitlement in
conjunction with an open-outcry RFQ
may not cross an order that it is holding
42 The existing FLEX rules allow for a 25%
crossing participation entitlement for FLEX Equity
Options. This entitlement generally applies before
any other trading interest represented at the
execution price, which must be the better of the
BBO or an improved price. See existing Rule
24A.5(e)(iii)(A). Providing for the flexibility to
increase the entitlement percentage to 40% is
similar to the percentage parameters that the
Exchange may apply for crosses in Non-FLEX
Options, which permit a crossing entitlement of up
to 40% after all public customer orders in the limit
order book are satisfied. See Rule 6.74(d). In
addition, allowing for a 40% entitlement percentage
is consistent with the American Stock Exchange’s
(‘‘Amex’’) FLEX trading rules, which permit a FLEX
Equity Option member firm guarantee of up to 40%.
See Securities Exchange Act Release No. 54327
(August 16, 2006), 71 FR 49492 (August 23, 2006)
(SR–Amex–2006–47).
43 The existing FLEX rules have similar
parameters for FLEX Index Options, except that the
crossing entitlement percentage is set at 20%. See
existing Rule 24A.5(e)(iii)(B). The proposed
parameter allowing for up to 40% is similar to the
parameter the Exchange applies for crosses in NonFLEX Options. See CBOE Rule 6.74(d) and note 42,
supra. The proposed rule also indicates that the
proportional share, $1 million underlying
equivalent value, and remaining underlying
equivalent value parameters will be made available
only with respect to electronic RFQ transactions to
the extent the Exchange determines to make this
functionality available in the FLEX Hybrid Trading
System. See proposed Rule 24B.5(d)(2)(i)(B).
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with a solicited order from a FLEX
Market-Maker that is then in the trading
crowd, except in accordance with CBOE
Rule 6.55, Multiple Representation
Prohibited. As such, if a FLEX MarketMaker is solicited and agrees to
participate on a cross, the FLEX MarketMaker would not be permitted to be
present in the trading crowd when such
order is represented and executed
unless an exception under Rule 6.55
applies. Similarly, the Exchange is
proposing that a Submitting Member
that is seeking a crossing participation
entitlement in conjunction with an
electronic RFQ transaction may not
cross an order with (i) A solicited order
for the individual or joint account of a
FLEX Market-Maker or (ii) a solicited
order initiated by the FLEX MarketMaker for an account in which the FLEX
Market-Maker has an interest, unless the
FLEX Market-Maker refrains from
participating on the same trade. In such
instances, it would be the responsibility
of the FLEX Market-Maker to ascertain
whether solicited orders for the FLEX
Market-Maker’s joint account are being
represented by the Submitting Member.
With respect to the FLEX Appointed
Market-Maker participation entitlement,
the existing FLEX rule provides that the
appropriate Procedure Committee may
establish a participation entitlement
from time to time. In the past, the
establishment of these entitlements and
changes thereto have been the subject of
separate rule filings.44 In lieu of
continuing the practice of submitting
separate rule filings, the Exchange is
proposing to include specific
parameters within the rule text, similar
to its rules respecting crossing
participation entitlements (discussed
above) and to its rules respecting
market-maker participation entitlements
for Non-FLEX Options.45 These
parameters will provide that the
appropriate Procedure Committee may
establish a participation entitlement
formula for FLEX Appointed MarketMakers on a class-by-class basis with
respect to open-outcry RFQs, electronic
RFQs, and/or Book transactions. Any
such FLEX Appointed Market-Maker
participation entitlement shall: (i) Be
divided equally by the number of FLEX
Appointed Market-Makers quoting at
the BBO or BBO clearing price, as
44 See existing Rule 24A.5(e)(iv) and Securities
Exchange Act Release No. 45934 (May 15, 2002), 67
FR 36276 (May 23, 2002) (SR–CBOE–2002–09)
(order approving a rule change relating to the
allocation of orders for Appointed Market-Makers
in FLEX Index Options).
45 See, e.g., Rule 8.87, Participation Entitlement of
DPMs and e-DPMs, which applies a DPM/e-DPM
participation entitlement after all public customer
orders in the limit order book are satisfied.
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50141
applicable; (ii) collectively, be no more
than: 50% of the remaining order when
there is one other FLEX Market-Maker
also quoting at the same price, 40%
when there are two other FLEX MarketMakers also quoting at the same price;
and 30% when there are three or more
FLEX Market-Makers also quoting at the
same price; and (iii) when combined
with any Submitting Member’s crossing
participation entitlement, shall not
exceed 40% of the original order.46
Capping the total FLEX Appointed
Market-Maker participation entitlement
when combined with the crossing
participation entitlement at 40% is
consistent with the existing FLEX
rules.47
The following is an example how the
allocation will operate: Assume a FLEX
Equity Option class has applied a 20%
crossing participation entitlement and a
40% FLEX Appointed Market-Maker
participation entitlement (when there
are two other FLEX Market-Makers at
the same price). At the end of an
electronic RFQ, the interest representing
the best offer of $1.20 considering the
responsive FLEX Quotes is composed of
interest received in the following order:
75 contracts from FLEX Market-Maker
A, 300 contracts from FLEX Appointed
Market-Maker B, and 50 contracts from
FLEX Market-Maker C. If the Submitting
Member submits an order to buy 100
contracts at $1.20 and intends to cross
the order, the allocation among the
contra-parties will be as follows: 20
contracts to the Submitting Member
(20% of 100),48 20 contracts to FLEX
Appointed Market-Maker B (greater of
the participation entitlement of 20
contracts 49 or the price/time allocation
of 5 contracts), and 60 contracts to FLEX
Market-Maker A (based on time
priority).
As with the existing FLEX rules, the
proposed FLEX Hybrid Trading System
rules also provide that all transactions
must be in compliance with Section
11(a) of the Act 50 and the rules
promulgated thereunder. Section
11(a)(1) prohibits a member of a
national securities exchange from
effecting transactions on that exchange
46 See
proposed Rule 24B.5(d)(2)(ii).
note 44, supra.
48 In the event there were FLEX Orders resting in
the Book at $1.20 or FLEX Quotes for the account
of public customers or non-member broker-dealers
at $1.20, such FLEX Orders and FLEX Quotes
would have priority over the Submitting Member’s
participation entitlement. See proposed Rule
24B.5(a)(1)(iii)(D).
49 The participation entitlement is the lesser of:
(a) 40% of the remaining balance, which is 32
contracts (40% of 80) and (b) 40% of the original
order minus the crossing entitlement, which is 20
contracts (40% of 100 minus 20).
50 15 U.S.C. 78k(a).
47 See
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for its own account, the account of an
associated person, or an account over
which it or its associated person
exercises investment discretion
(collectively referred to herein as
‘‘proprietary’’ orders) unless an
exception applies. First enacted as part
of the Securities Acts Amendments of
1975,51 Section 11(a) was intended by
Congress to address trading advantages
enjoyed by exchange members and
conflicts of interest in money
management.52 In particular, as noted
by the Commission, Congress was
concerned about members benefiting in
their proprietary transactions from
special trading advantages—such as the
ability to ‘‘execute decisions faster than
public investors.’’ 53
Where principal transactions
contribute to the fairness and
orderliness of exchange markets or do
not reflect any time and place trading
advantages, they are excepted from the
prohibition. Among the transactions
excepted under Section 11(a)(1) are
those by a dealer acting in the capacity
of a market maker,54 bona fide arbitrage
or hedge transactions,55 and
transactions made to offset errors.56
Rule 11a2–2(T) under the Act,
commonly referred to as the ‘‘effect
versus execute’’ exemption rule,
provides an exception in addition to
those delineated in the statute.57 Rule
11a2–2(T) permits an exchange member,
subject to certain conditions, to effect
transactions for covered accounts by
arranging for an unaffiliated member to
execute the transactions on the
exchange. To comply with the rule’s
conditions, a member (i) Must transmit
the order from off the exchange floor;
51 See Pub. L. No. 94–29, 89 Stat. 97 (June 4,
1975).
52 See Securities Reform Act of 1975, Report of
the House Comm. on Interstate and Foreign
Commerce, H.R. Rep. No. 94–123, 94th Cong., 1st
Sess. (1975) (‘‘House Report’’); Securities Acts
Amendments of 1975, Report of the Senate Comm.
on Banking, Housing and Urban Affairs, S. Rep. No.
94–75, 94th Cong., 1st Sess. (1975).
53 See Securities Exchange Act Release Nos.
14563 (March 14, 1978), 43 FR 11542, 11543 (March
17, 1978); 14713 (April 27, 1978), 43 FR 18557,
18558 (May 1, 1978) (‘‘1978 Release II’’); 15533
(January 29, 1979), 44 FR 6084, 6092 (January 31,
1979) (‘‘1979 Release’’). Telephone conversation
between Jennifer Lamie, Assistant General Counsel,
CBOE, and Terri Evans, Special Counsel, Division,
Commission, on August 22, 2007.
54 See Section 11(a)(1)(A) of the Act, 15 U.S.C.
78k(a)(1)(A).
55 See Section 11(a)(1)(D) of the Act, 15 U.S.C.
78k(a)(1)(D).
56 See Section 11(a)(1)(F) of the Act, 15 U.S.C.
78k(a)(1)(F).
57 17 CFR 240.11a2–2(T). In addition to the
application of Rule 11a2–2(T), members of the
Exchange who are registered as market makers may
also take advantage of the market-maker exemption
from Section 11(a), at least for securities in which
they make a market. See note 54, supra.
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(ii) must not participate in the execution
of the transaction once it has been
transmitted to the member performing
the execution; 58 (iii) must not be
affiliated with the executing member;
and (iv) with respect to an account over
which the member has investment
discretion, neither the member nor its
associated person may retain any
compensation in connection with
effecting the transaction excepted as
provided in the rule.
As described by the Commission,
these four requirements—off-floor
transmission, non-participation in order
execution, execution through an
unaffiliated member, and non-retention
of compensation for discretionary
accounts—were ‘‘designed to put
members and non-members on the same
footing, to the extent practicable, in
light of the purposes of Section
11(a).’’ 59 If a transaction meets the
requirements of the ‘‘effect versus
execute’’ rule, it will be deemed to be
‘‘consistent with the purpose of Section
11(a)(1) of the Act, the protection of
investors, and the maintenance of fair
and orderly markets.’’ 60
The Exchange believes that
proprietary FLEX Orders originating
from off the Exchange’s trading floor
and entered into the FLEX Book
(whether to rest or the ‘‘hit’’ the Book)
would qualify for Rule 11a2–2(T). The
electronic platform component of the
Book would place all of these users—
both members and non-members—on
the ‘‘same footing,’’ as intended by Rule
11a2–2(T). Given the Book’s automated
matching and execution services, no
Exchange member would enjoy any
special control over the time of
execution or special order handling
advantages for orders executed
electronically via the Book, because
such orders would be centrally
processed for execution by computer, as
compared to being handled by a
member through bids and offers on the
trading floor. Because the electronic
trading platform components are
designed to prevent any Exchange
members from gaining any time and
place advantages, the Exchange believes
that the electronic trading platform
component of the Book satisfies the four
requirements of the ‘‘effect versus
execute’’ rule as well as the general
policy objectives of Section 11(a).
Rule 11a2–2(T) requires proprietary
orders to be transmitted from off the
exchange floor. In considering the
58 The member may, however, participate in
clearing and settling the transaction.
59 See 1978 Release II, 43 FR at 18560.
60 Rule 11a2–2(T)(e) under the Act, 17 CFR
240.11a2–2(T)(e).
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application of this requirement to a
number of automated trading and
electronic order-handling facilities
operated by national securities
exchanges, the Commission has deemed
the off-floor requirement to be met if the
order is transmitted from off the floor
directly to the exchange floor by
electronic means.61 Because the FLEX
Hybrid Trading System permits remote
entry of trading interests, the Exchange
believes that members’ proprietary
orders that are entered from off the
Exchange’s trading floor and
electronically received by the Book
satisfy the off-floor transmission
requirement for the purposes of the
‘‘effect versus execute’’ rule.
The ‘‘effect versus execute’’ rule
further provides that the exchange
member and its associated person may
not participate in the execution of the
transaction once the order has been
transmitted. This requirement was
included to prevent members with their
own brokers on the exchange floor from
using those persons to influence or
guide their orders’ execution. This
requirement does not preclude members
from canceling or modifying orders, or
from modifying the instructions for
executing orders, after they have been
transmitted to the floor. Such
cancellations or modifications, however,
also must be transmitted from off the
exchange floor.62 The Exchange believes
that a proprietary FLEX Order entered
in the Book meets the non-participation
requirement. Upon submission to the
Book, such a proprietary order would
enter the queue and be executed against
other orders in the Book based on an
established matching algorithm. The
execution depends not on the Exchange
member, but rather, upon what other
orders are resident in the Book and
where the order is ranked based on the
price-time priority ranking algorithm
and FLEX Appointed Market-Maker
participation overlay. Therefore, at no
time following submission of an order is
an Exchange member able to acquire
control or influence over the result or
timing of orders generated. That is,
unlike a floor broker who currently may
61 Among the systems considered by the
Commission are (1) the Philadelphia Stock
Exchange’s VWAP Trading System; (2) the Pacific
Exchange’s (‘‘PCX’’) Application of OptiMark; (3)
Chicago Match; (4) the Amex’s Post Execution
Reporting System and the Amex Switching System
(see 1979 Release, 44 FR at n.25); (5) the
Intermarket Trading System; (6) the Multiple Dealer
Trading Facility of the Cincinnati Stock Exchange;
(7) the PCX’s Communications and Execution
System (‘‘COMEX’’); and (8) the Phlx’s Automated
Communications and Execution System (‘‘PACE’’)
(see 1979 Release, 44 FR at nn. 19–35).
62 See Securities Exchange Act Release No. 14563
(March 14, 1978).
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enjoy a trading advantage inherent to
being present on an exchange floor for
transactions being executed on that
floor, no Exchange member would be
permitted to take advantage of any nonmember through use of the Book. As a
result, the Exchange believes the nonparticipation requirement is met where
these types of Exchange member orders
are matched and executed automatically
through the Book.
Although Rule 11a2–2(T)
contemplates having an order executed
by an exchange member who is
unaffiliated with the member initiating
the order, the Commission has
recognized in the past that this
requirement is not applicable where
automated exchange facilities are used.
For example, in considering the
operation of COMEX and PACE, among
other systems, the Commission noted
that, while there is no independent
executing exchange member, the
execution of the order is automatic once
it has been transmitted into the
systems.63 Because the design of these
systems ensures that a member does not
possess any special or unique trading
advantages in handling its order after
transmitting it to the exchange floor, the
Commission has stated that executions
obtained through these systems satisfy
the independent execution requirement
of Rule 11a2–2(T).64 The Exchange
believes that this principle is directly
applicable to the Book; the design of the
Book ensures that an Exchange member
does not have any special or unique
trading advantages in handling its FLEX
Orders after transmission. Accordingly,
the Exchange believes that an Exchange
member effecting a transaction by
utilizing the System to enter a FLEX
Order into the Book satisfies the
requirement for execution through an
unaffiliated member.
The exemption in Rule 11a2–2(T)
states that, in the case of a transaction
effected for any account for which the
initiating member exercises investment
discretion, in general, the member may
not retain compensation for effecting the
transaction. As a prerequisite to the use
of the Book, if an Exchange member is
to rely on Rule 11a2–2(T) for a managed
account transaction, the Exchange
member must comply with the
limitations on compensation as set forth
in paragraph (a)(2)(iv) of the ‘‘effect
versus execute’’ rule.
The Exchange believes that these
types of proprietary orders, when
entered into the Book, satisfy the four
requirements of the ‘‘effect versus
execute’’ rule as well as the general
63 See
64 See
1979 Release.
id.
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policy objectives of Section 11(a) of the
Act. The proposed rule change is
beneficial because it will facilitate
transactions in securities and will
remove impediments to and perfect the
mechanism of a free and open market.
The proposed rule change will place
FLEX users, members, and nonmembers, on the ‘‘same footing,’’ as
intended by Rule 11a2–2(T). In light of
the aforementioned, CBOE believes,
under its proposal, no member that
submits a FLEX Order will be able to
engage in proprietary trading in a
manner inconsistent with Section 11(a)
of the Act.
Lastly, the Exchange notes that the
text of proposed Rule 24B.5(b)(2) would
provide that a proprietary order that is
entered on behalf of a member relying
on the ‘‘G’’ exemption 65 may not be
submitted as a FLEX Order to rest in the
Book. Instead, a priority order of a
member relying on the ‘‘G’’ exemption
may be executed only as a FLEX Order
entered to ‘‘hit’’ the Book (or as part of
an electronic or open-outcry RFQ).66 To
the extent the proprietary order is not
executed in whole or in part as soon as
it hits the Book, the order must be
immediately cancelled by the member.
A member relying on the ‘‘G’’
exemption would also have to satisfy
the other requirements of that
exemption.
The Exchange believes that members
relying on the ‘‘G’’ exemption as an
exemption to the Section 11(a)(1)
requirements must comply with the
requirements of that exemption before
executing a proprietary order, including
the requirement to yield priority to any
bid or offer at the same price for the
account of a person who is not, or is not
associated with, a member (a ‘‘nonmember’’), irrespective of the size of any
such bid or offer or the time when
entered. Because the FLEX Hybrid
Trading System will not always
distinguish between member and nonmember broker-dealer orders, the
proposed restrictions of allowing the
‘‘G’’ exemption to be utilized only in
open outcry on the physical floor of the
Exchange (where the Member can
manually yield priority), electronically
as part of an electronic RFQ (where the
System is programmed to yield to the
Book and FLEX Quotes for the account
of public customers and non-member
broker-dealers), or electronically as a
FLEX Ordered entered to ‘‘hit’’ the Book
65 17
CFR 240.11a1–1(T).
member relying on the ‘‘G’’ exemption as
part of the open-outcry RFQ mechanics must yield
priority to any bid (offer) at the same price that is
represented in the Book and all FLEX Quotes that
have priority over the Book. See note 36, supra and
related discussion.
66 Any
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provided the order is immediately
cancelled to the extent it is not executed
in whole or in part (where the Member
would be the only contra-party on that
side of the transaction) are intended to
enforce the requirement that a member
relying on the ‘‘G’’ exemption yield
priority to non-members.
(e). FLEX Standard Minimum
Increments
Subparagraph (e) of proposed Rule
24B.5 describes the proposed standard
minimum increments applicable to
FLEX bids and offers as follows.
• FLEX Index Options: The
applicable increments for FLEX Index
Options will be identical to the
increments in the existing FLEX rules,
which permit decimal bids and offers in
the designated currency that meet or
exceed certain minimum parameters.67
For example, the minimum increment
for U.S. dollars is $0.01 (or such other
minimum as the appropriate Procedure
Committee may set from time to time to
ensure fair and orderly markets). By
comparison, the standard minimum
increment applicable to Non-FLEX
Index Options is generally $0.10 for
simple bids and offers in series quoted
at or above $3 a contract and $0.05 for
simple bids and offers in series quotes
below $3 a contract.68
• FLEX Equity Options: The
applicable increments for FLEX Equity
Options will be determined by the
appropriate Procedure Committee on a
class-by-class basis, but may not be
smaller than $0.01. This represents a
change from the existing FLEX rules,
under which the trading increments
applicable to FLEX Equity Options are
the same as those that are applicable to
Non-FLEX Equity Options (i.e., $0.10 for
simple bids and offers in series quoted
at or above $3 a contract, $0.05 for
simple bids and offers in series quoted
below $3 a contract, and $0.01 for series
quoted in the penny pilot program).69
Thus, similar to the existing practice for
FLEX Index Options, FLEX Equity
Options bids and offers would now be
permitted in $0.01 increments for
simple bids and offers.
67 See existing Rule 24A.5(g), which is proposed
to be renumbered to Rule 24A.5(f), and proposed
Rule 24B.5(e).
68 See Rule 6.42, Minimum Increments for Bids
and Offers. The $0.10 and $0.05 increments are
applicable to simple orders. Under Rule 6.42(4), a
smaller increment applies with respect to multi-part
complex orders. In addition, under other CBOE
rules, a smaller increment may be applicable to
simple orders. See, e.g., Rule 6.74A, Automated
Improvement Mechanism (‘‘AIM’’), which is an
automated auction process that permits price
improvement in increments as small as $0.01.
69 See CBOE Rule 6.42(3).
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The Exchange believes this change in
the standard minimum increment
applicable to FLEX Equity Options is
consistent with the existing policy and
procedure for FLEX Index Options. The
Exchange notes that, given the unique
nature of FLEX trading occurring
primarily through the RFQ auction
process and limited amount of
secondary trading that occurs and is
anticipated to occur in FLEX Options,70
it is not expected that this change in
increment will have any detrimental
impact on system capacity or on trading
in Non-FLEX Equity Options overlying
the same classes. The Exchange also
believes that utilizing a $0.01 increment
is reasonable and appropriate and will
better accommodate trading in FLEX
Equity Options which are subject to
certain minimum value size
requirements and which, if otherwise
traded over-the-counter, would not be
subject to such restrictions on trading
increment and size. CBOE believes
market participants benefit from being
able to trade these customized options
in an exchange environment in several
ways, including, but not limited to the
following: (1) Enhanced efficiency in
initiating and closing out positions; (2)
increased market transparency; and (3)
heightened contra-party
creditworthiness due to the role of OCC
as issuer and guarantor of FLEX
Options.
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(D). FLEX Market-Maker Appointments
& Obligations (Proposed Rule 24B.9)
Proposed Rules 24B.9, FLEX MarketMaker Appointments and Obligations,
prescribes the types of FLEX MarketMakers that may be appointed and
applicable quoting obligations with
respect to the FLEX Hybrid Trading
System platform. This proposed rule
differs from Rule 24A.9, which pertains
to appointments and quoting obligations
with respect to the FLEX RFQ System
platform, in various respects including
that the applicable Market-Maker
categories and the number appointed
within each class are being revised.
As with the existing FLEX rules, the
Exchange is proposing to limit FLEX
Market-Maker appointments to CBOE
members that are registered with the
Exchange as Market-Makers. Under the
proposed appointment provisions, FLEX
Qualified Market-Makers would also be
required to maintain an appointment in
at least one Non-FLEX option class
listed on the Exchange. FLEX MarketMakers are currently, and under the
70 The Exchange also notes that, in Non-FLEX
Equity Option class, certain bids and offers are
already permitted in $0.01 increments. See notes 68
and 69, supra.
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proposed new Rules would continue to
be, designated as specialists on the
CBOE for all purposes under the Act. In
addition, with respect to the categories
of FLEX Market-Makers, there will
continue to be two categories: FLEX
Appointed Market-Makers and FLEX
Qualified Market-Makers.
Under the existing FLEX Rules, the
categories and number of FLEX MarketMakers appointed to a given class
depends on whether it is for a FLEX
Equity Option class or FLEX Index
Option class:
• For FLEX Equity Options, the
existing rules generally call for five or
more FLEX Qualified Market-Makers to
be appointed to each class; provided,
however, that the appropriate Exchange
Market Performance Committee can
determine to appoint two or more FLEX
Appointed Market-Makers to such
classes in lieu of appointing FLEX
Qualified Market-Makers.
• For FLEX Index Options, the
existing rules call for two or more FLEX
Appointed Market-Makers to be
appointed to each class and for
settlement in one or more currencies.
The proposed rule for the FLEX
Hybrid Trading System platform, as
well as corresponding changes to the
existing rule for the FLEX RFQ System
platform, would eliminate these
distinctions between equity and index
products, and will instead provide that
the Exchange will appoint two or more
FLEX Qualified Market-Makers to each
FLEX Index Option of a given class and
currency and to each FLEX Equity
Option class.71
Under the proposed appointment
procedures, a registered Market-Maker
may apply on a form prescribed by the
Exchange to be a ‘‘FLEX Qualified
Market-Maker’’ in one or more classes of
FLEX Options. From among the
applicants, the Exchange would appoint
two or more FLEX Qualified MarketMakers to each FLEX Index Option of a
given class and settlement currency, and
two or more FLEX Qualified MarketMakers to each FLEX Equity Option of
a given class. In making such
appointments and in taking other action
with respect to FLEX Qualified MarketMakers, the Exchange shall take into
account the factors enumerated in, and
shall refer to the requirements of, Rule
8.3, Appointment of Market-Makers. In
addition, as discussed above, a
71 As compared to the existing FLEX rules, the
proposal would replace various references to
‘‘appropriate Market Performance Committee’’ with
the ‘‘Exchange.’’ Certain of these changes make the
rule consistent with current practice and
procedures. Additionally, CBOE can continue to
delegate to the appropriate Market Performance
Committee various duties and responsibilities.
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proposed new requirement would be
that, as a condition to receiving and
maintaining a FLEX Qualified MarketMaker appointment in a FLEX Index
Option class (or a FLEX Equity Option
class, as applicable,) the FLEX Qualified
Market-Maker must maintain an
appointment in one or more Non-FLEX
Index Option classes (or one or more
Non-FLEX Equity Option classes, as
applicable).72 Such Non-FLEX Option
class appointment(s) need not be in a
class(es) that has the same underlying
index (or security) as the appointed
FLEX Option class.
Notwithstanding the above, under the
proposed appointment procedures, the
appropriate Market Performance
Committee may determine to solicit
applications and appoint (i) One or
more FLEX Appointed Market-Makers
in addition to appointing FLEX
Qualified Market-Makers to such classes
or (ii) two or more FLEX Appointed
Market-Makers in lieu of appointed
FLEX Qualified Market-Makers. Thus,
under this revised structure that will be
applicable to both trading platforms, a
FLEX Option class could be structured
as a FLEX Qualified Market-Maker-only
crowd with at least two participants, a
mixed FLEX Qualified/Appointed
Market-Maker crowd with at least three
participants, or a FLEX Appointed
Market-Maker-only crowd with at least
two participants. Providing for the
flexibility to determine the eligible
categories of market-maker participants
is similar to the existing rules regarding
FLEX Equity Option appointments and
other Exchange Rule regarding the
appointment of market-makers in NonFLEX Options.73
The applicable market-making
restrictions and obligations of FLEX
Market-Makers will continue to be
applied in a similar manner, except that
new obligations respecting electronic
RFQs and the Book will be specified.
Specifically: (i) A FLEX Appointed
Market-Maker will have an obligation to
respond to any open-outcry RFQ and to
a percentage of electronic RFQs 74 in the
Appointed Market-Maker’s appointed
classes in the prescribed minimum
72 Market-Makers that are registered and
appointed to trade Non-FLEX Options are subject to
certain market-making obligations, including
obligations respecting quote widths, continuous
electronic quoting obligations, and continuous
open-outcry quoting obligations. See CBOE Rule
8.7, Obligations of Market-Makers.
73 See, e.g., CBOE Rules 8.14, Index Hybrid
Trading System Classes: Market-Maker Participants,
and 8.95, Allocation of Securities and Location of
Trading Crowds and DPMs.
74 The applicable electronic RFQ response
percentage will be determined by the appropriate
Procedure Committee and will not be less than
80%. See proposed Rules 24B.4(a)(5)(iv) and
24B.9(c).
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response size; and (ii) a FLEX Qualified
Market-Maker will be permitted, but not
obligated, to respond to RFQs but, when
responding, must respond in the
prescribed minimum response size. In
addition, similar to the existing FLEX
rules, under the FLEX Hybrid Trading
System rules a FLEX Official may call
upon FLEX Market-Makers appointed in
a class of FLEX Options to submit FLEX
Quotes in response to a specific Request
for Quotes in that class of FLEX Options
whenever in the opinion of the FLEX
Official the interests of a fair, orderly,
and competitive market are best served
by such action. Similar to the existing
FLEX rules, the FLEX Official shall also
make such a call upon FLEX MarketMakers whenever no FLEX Quotes are
made in response to a specific Request
for Quotes. The ability of a FLEX
Official to call on FLEX Market-Makers
applies to both electronic and openoutcry RFQs. Also, as with the existing
FLEX rules, under the FLEX Hybrid
Trading System rules FLEX Appointed
Market-Makers and FLEX Qualified
Market-Makers need not provide
continuous FLEX Quotes or quote a
minimum bid-offer spread in FLEX
Options, except that certain maximum
bid-offer spread requirements do apply
for FLEX Market-Makers quoting in
FLEX Options with a European-style
exercise, an underlying of the S&P 100
Index or the S&P 500 Index, and two
weeks or more to expiration and two
years or less to expiration.75 FLEX
Market-Makers also need not enter
FLEX Orders into the electronic book,
but to the extent they do so, such orders
must satisfy the applicable minimum
size requirements.
These market-making restrictions and
obligations are tailored to reflect the
particular nature of FLEX Options,
which are customized to fit particular
investor needs, and the particular nature
of FLEX trading, which is anticipated to
continue to have limited secondary
trading in any series due to the diversity
inherent in FLEX Options. The
restrictions and obligations are designed
to assure that each FLEX MarketMaker’s course of dealings as a FLEX
Market-Maker will contribute
significantly and positively toward the
maintenance of fair and orderly markets
in FLEX Options on the Exchange and
will, therefore, be consistent with the
protection of investors and the purposes
of the Act and Section 11(a) thereof. As
proposed, FLEX Market-Makers will be
required to engage generally in a course
of dealings which will enhance the
Exchange market and positively
75 See existing Rule 24A.9(e) and proposed Rule
24B.9(e).
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contribute to depth and liquidity. These
objectives are basic to the major
purposes of the Act and, thus, are
consistent with the purposes of Section
11(a) and the protection of investors.
Therefore, the Exchange believes that a
FLEX Market-Maker who initiates the
purchase or sale of securities as
provided in the proposed Rules will be
‘‘acting in the capacity of market maker’’
within the meaning of Section
11(a)(1)(A) of the Act.76
(E). FLEX Officials (Proposed Rule
24B.14)
Existing FLEX Rule 24A.12 currently
provides that a FLEX Post Official is
responsible for (i) Reviewing the
conformity of FLEX Requests for Quotes
and FLEX Quotes to the terms and
specifications contained in Rule 24A.4,
(ii) posting FLEX Requests for Quotes
for dissemination, (iii) determining the
BBO, (iv) ensuring that FLEX contracts
are executed in conformance with the
priority principles set forth in Rule
24A.5(e), (v) calling for Indicative FLEX
Quotes in accordance with the
requirements of Rule 24A.12(c), and (vi)
calling upon FLEX Qualified MarketMakers to make FLEX Quotes in specific
classes of FLEX Equity Options as
provided in Rule 24A.9(c).
Proposed Rule 24B.14, FLEX Official,
corresponds with existing Rule 24A.12
and describes the functions of an
Exchange FLEX Post Official (referred to
in the proposed new rules as simply a
‘‘FLEX Official’’) for the new FLEX
Hybrid Trading System. Under
proposed Rule 24B.14, a FLEX Official
will continue to be responsible for
reviewing the conformity of open-outcry
FLEX Requests for Quotes to the
applicable terms and specifications in
proposed Rule 24B.4. However, because
open-outcry FLEX Quotes will now be
provided to the Submitting Member, the
FLEX Official will no longer be
responsible for reviewing such FLEX
Quotes for conformity to the applicable
terms and specifications or determining
the BBO.77 In addition, the proposed
76 The term ‘‘market maker’’ is defined in Section
3(a)(38) of the Act, 15 U.S.C. 78c(a)(38), to include
‘‘any dealer who, with respect to a security, holds
himself out (by entering quotations in an interdealer
communications system or otherwise) as being
willing to buy and sell such security for his own
account on a regular or continuous basis.’’
77 See existing Rule 24A.12(b)(i)—(iv) (providing
that a FLEX Post Official is responsible for
reviewing the conformity of FLEX RFQs and FLEX
Quotes to the terms and specifications contained in
existing Rule 24A.4, posting FLEX RFQs for
dissemination, determining the BBO, and ensuring
that FLEX contracts are executed in conformance
with the priority principles set forth in Rule
24A.5(e)). By comparison, to initiate the openoutcry RFQ process under the proposed FLEX
Hybrid System, a Submitting Member must submit
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rule provides that a FLEX Official may
nullify a FLEX transaction, whether
executed in open outcry or
electronically, if the transaction is
determined by the FLEX Official to not
conform to the terms and specifications
contained in Rule 24B.4 or to the
priority principles set forth in Rule
24B.5. However, a trade subject to
adjustment or nullification pursuant to
Rule 6.25, Nullification and Adjustment
of Equity Options Transactions, or Rule
24.16, Nullification and Adjustment of
Transactions in Index Options, Options
on ETFs and Options on HOLDRS, shall
be subject to the procedures set forth in
Rule 6.25 or 24.16.
Similar to the existing FLEX rules, a
FLEX Official will also be responsible
for calling upon FLEX Market-Makers,
whether Qualified or Appointed to a
given class, to make FLEX Quotes in
specific classes, as provided in
proposed Rule 24B.9.78
(F). Other FLEX Hybrid Trading System
Rules
The remaining rules that are proposed
to be included in Chapter XXIVB are the
same as, or closely modeled after, the
existing FLEX rules. For example,
proposed Rules 24B.2, Hours of
Trading; 24B.3, Trading Rotations;
24B.10, Related Securities; 24B.15,
Nonavailability of RAES; and 24B.16,
Inapplicability of Split Price and
Accommodation Liquidation Rules, are
identical to Rules 24A.2, 24A.3, 24A.11,
24A.16, and 24A.17, respectively.
Proposed Rules 24B.6, Discretionary
Transactions, and 24B.13, Letter of
Guarantee or Authorization are virtually
identical to Rules 24A.6 and 24A.15,
respectively, except for non-substantive
grammatical changes.
Proposed Rules 24B.11, FLEX Index
Appointed Market-Maker Account
Equity, and 24B.12, FLEX Index
Appointed Market-Maker Financial
Requirements, are virtually identical to
Rules 24A.13 and 24A.14, respectively,
except that revisions are being made to
clarify that these rules apply only to
a Request for Quotes to the FLEX Official. After
providing a Request for Quotes in proper form to
the FLEX Official, the Submitting Member must
immediately announce the terms and specifications
of the Request for Quotes to the trading crowd for
the FLEX Option by public outcry. See proposed
Rule 24B.5(a)(2)(i). To initiate a FLEX transaction
using the electronic RFQ process, a Submitting
Member submits a Request for Quotes to the
System, not the FLEX Official. On receipt of a
Request for Quotes in the proper form, the System
causes the terms and specifications to be
communicated to FLEX Traders. See proposed Rule
24B.5(a)(1)(i).
78 By comparison, the existing FLEX Rule 24A.12
provides for only the FLEX Official to call upon
FLEX Qualified Market-Makers. See existing Rule
24A.12(b)(vi).
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FLEX Index Appointed MarketMakers.79
Proposed Rules 24B.7, Position Limits
and Reporting Requirements, and 24B.8,
Exercise Limits, are modeled after
existing Rules 24A.7 and 24A.8.
However, the Exchange is proposing to
make certain revisions to existing Rules
24A.7 and 24A.8, and to include the
same language in proposed Rules 24B.7
and 24B.8, relating to the applicable
position and exercise limits for FLEX
Index Options and the aggregation of
certain FLEX and non-FLEX positions.
Specifically, the current text indicates
that there are no position limits for any
broad-based FLEX Index Options. The
proposed text provides that, while there
are no position limits for FLEX DJX,
NDX, OEX, or SPX options contracts,80
all other FLEX Index Options (whether
broad-based or not) will be subject to
position limits fixed by the Exchange
within prescribed parameters set forth
in existing Rule 24A.7 and proposed
Rule 24B.7. Specifically, the rules
would provide that:
• Other Broad-Based FLEX Index
Option Classes: The Exchangeestablished position limits with respect
to a broad-based FLEX Index Option
class (other than the four identified
above) shall not exceed 200,000
contracts on the same side of the
market.
• Industry-Based FLEX Index Option
Classes: The Exchange-established
position limits for an industry-based
FLEX Index Option class shall not
exceed one times the applicable number
of Non-FLEX Index Option Contracts
79 The special account equity and financial
requirements under existing Rules 24A.13 and
24A.14 only apply to ‘‘FLEX Appointed MarketMakers,’’ who currently are appointed only to FLEX
Index Option classes and currently are subject to
certain heightened FLEX Quote minimum value
size requirements under Rule 24A.4(a)(4)(iv). Given
the proposed changes to the FLEX Market-Maker
appointments discussed above, which would allow
for the appointment of a FLEX Equity Appointed
Market-Maker, proposed Rules 24B.11 and 24B.12
make clear that these special account equity and
financial requirements would apply only to FLEX
Index Appointed Market-Makers (who would
continue to be subject to the heightened FLEX
Quote, as well as FLEX Order, minimum value size
requirements under proposed Rule 24B.4(a)(5)(iv))
and not FLEX Equity Appointed Market-Makers
(who would not be subject to heightened minimum
value size requirements). Corresponding changes
are also being proposed to existing Rules 24A.13
and 24A.14.
80 The Exchange notes that these four broad-based
FLEX Index Options classes correspond with the
Non-FLEX DJX, NDX, OEX, and SPX options
classes, which currently have no position limits
under Rule 24.4, Position Limits for Broad-Based
Index Options. The Exchange also notes that FLEX
DJX, NDX, OEX, and SPX options contracts are,
however, subject to special reporting requirements
in accordance with existing Rule 24A.7(b). This
same reporting requirements are included in
proposed Rule 24B.7(b).
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(whether long or short) of the put class
and the call class on the same side of
the market, as determined on the basis
of the position limits established
pursuant to Rule 24.4A, Position Limits
for Industry Index Options; provided,
however, the position limits for an
industry-based FLEX Index Option class
shall not exceed four times the
applicable position limits established
pursuant to Rule 24.4A, instead of one
times as provided above, for: (i) The
Dow Jones Transportation Average or
the Dow Jones Utility Average; or (ii) an
underlying industry-based index that is
not a ‘‘narrow-based security index,’’ as
defined under Section 3(a)(55)(B) of the
Act.81
• Micro Narrow-Based FLEX Index
Option Classes: The Exchangeestablished position limits for a micro
narrow-based FLEX Index Option class
shall not exceed one times the
applicable number of Non-FLEX Index
Option Contracts (whether long or short)
of the put class and the call class on the
same side of the market, as determined
on the basis of the position limits
established pursuant to Rule 24.4B,
Position Limits for Options on Micro
Narrow-Based Indexes As Defined
Under Rule 24.2(d).
The rules would also provide that
FLEX Option positions shall not be
aggregated with positions in Non-FLEX
Options other than as described below,
and positions in FLEX Index Options on
a given index shall not be aggregated
with options on any stocks included in
the index or with FLEX Index Option
positions on another index.
• Comparable QIX Options:
Commencing at the close of trading two
business days prior to the last trading
day of the calendar, positions in P.M.
Settled FLEX Index Options (i.e., FLEX
Index Options having an exercise
settlement value determined by the
level of the index at the close of trading
on the last trading day before
expiration) shall be aggregated with
positions in Quarterly Index Options on
the same index with the same expiration
(‘‘comparable QIX options’’) and shall
be subject to the position limits set forth
in Rule 24.4, 24.4A, or 24.4B, as
applicable.
• Comparable Weekly Options:
Commencing at the close of trading two
business days prior to the last trading
day of the week, positions in FLEX
Options that are cash-settled 82 shall be
aggregated with positions in Short Term
81 15
U.S.C. 78c(a)(55)(B).
Index Options and FLEX Credit Default
Options are cash-settled. FLEX Equity Options are
settled by physical delivery. See existing Rules
24A.4(b)(4) and (c)(3) and 29.19; see also proposed
Rules 24B.4(b)(4) and (c)(3).
82 FLEX
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Option Series on the same underlying
(e.g. same underlying index) with the
same means for determining exercise
settlement value (e.g., opening or
closing prices of the underlying index)
and same expiration (‘‘comparable
Weekly options’’) and shall be subject to
the position limits set forth in Rule 24.4,
24.4A, 24.4B, or 29.5, as applicable.
With respect to exercise limits, the
proposed rule text clarifies that the
exercise limits for FLEX Index Options
shall be equivalent to the FLEX position
limits and that FLEX DJX, NDX, OEX,
and SPX options shall not be subject to
exercise limits.
Because the maximum FLEX Index
Option position and exercise limits will
now be specifically set out in Rules
24A.7, 24A.8, 24B.7, and 24B.8 (before
the rules simply provided that the limits
would be ‘‘fixed by the Exchange’’), the
Exchange is also proposing to eliminate
the requirement that, when CBOE files
to trade a new Non-FLEX Index Option,
it also propose the position and exercise
limits that will apply for the related
FLEX Index Option.83
*
*
*
*
*
The Exchange believes that, while
retaining the existing advantages of
exchange-traded FLEX Options, the
FLEX Hybrid Trading System will
streamline and automate the FLEX
trading process and establish increased
price transparency. The Exchange
believes that the FLEX Hybrid Trading
System will offer a legitimate alternative
for institutional sell-side firms and
potentially buy-side customers to taking
their order flow to the OTC market.
Additionally, the FLEX Hybrid Trading
System will offer the CBOE marketmaking community a channel to the
FLEX Options market.
(2). Proposed Changes to Existing FLEX
Rules (Chapter XXIVA) & Related CrossReferences
The Exchange is also proposing
certain changes to the existing FLEX
rules that correspond to the proposed
rules discussed above in order that there
be consistency between the two sets of
rules. These changes include revising
provisions pertaining to the various
categories of FLEX Market-Makers and
related obligations in Rules 24A.4,
83 See Securities Exchange Act Release No. 43108
(August 2, 2000), 65 FR 48770 (August 9, 2000)
(SR–CBOE–00–26) (immediately effective proposal
providing for the listing and trading of FLEX
Options on all of the indices on which the
Exchange lists and trades Non-FLEX Options). As
part of that rule change, CBOE represented that,
when it files a proposed rule change to list and
trade a new Non-FLEX Index Option, it will also
propose to list and trade the FLEX Index Options
in the same file and include proposed position and
exercise limits.
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24A.5, 24A.9, 24A.13, 24A.14, and
24A.15; the applicable crossing and
Appointed Market-Maker participation
entitlements and crossing procedures in
Rule 24A.5; 84 the increments applicable
to FLEX Equity Options in Rule
24A.5; 85 the position limits applicable
to FLEX Index Options in Rule 24A.7;
and the FLEX Post Official description
and responsibilities in Rules 24A.1(g)
and 24A.12. The term ‘‘FLEX Post
Official,’’ as described in Rules 24A.1(g)
and 24A.12 is being revised to reflect
that, in addition to Exchange
employees, such individuals can
include independent contractors
designated by the Exchange to perform
the FLEX post functions set out in the
rules.86 In addition, the term ‘‘Indicative
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84 In
addition, at the end of existing Rule 24A.5,
the cross-references to other Exchange rules are
proposed to be updated to clarify that paragraph (d)
of CBOE Rule 6.9, Solicited Transactions, is
superceded in those situations where a Submitting
Member representing an eligible order and a contraside order determines to take advantage of the
crossing participation entitlement provisions of
Rule 24A.5. The addition of this cross-reference is
simply a clarification of the current application of
Rule 24A.5(e)(iii). Specifically, while Rule 6.9(d)
provides that non-solicited Market-Makers and
Floor Brokers holding non-solicited discretionary
orders in the trading crowd will have priority over
the solicited person or the solicited order to trade
with an original order at the best bid or offered
price, Rule 24A.5(e)(iii) provides the solicited
person or order with priority over all other parties
for an applicable crossing participation entitlement,
which is proposed to be determined by the
appropriate Exchange Procedure Committee on a
class-by-class basis. The cross-references to other
Exchange rules at the end of proposed Rule 24B.5
will have a similar reference to paragraph (d) of
Rule 6.9. See also note 22, supra.
85 In addition, at the end of existing Rule 24A.5,
the cross-references to other Exchange rules are
proposed to be updated to reflect that the
provisions of paragraphs (1)–(3) of CBOE Rule 6.42,
as well as those in paragraph (4) of Rule 6.42
pertaining to SPX and OEX complex orders that are
not box/spread rolls, are superceded by Rule
24A.5(g). Rule 24A.5(g), which is proposed to be
renumbered to Rule 24A.5(f), sets out the minimum
incremental changes for FLEX Index Options and
proposed minimum incremental changes for FLEX
Equity Options. The addition of the cross-reference
to the various provisions of Rule 6.42 is intended
to clarify that the minimum increment for a simple
order in a FLEX Index or Equity Option class is as
specified in Rule 24A.5, but the minimum
increment for a multi-part, complex order in a FLEX
Index or Equity Option class may be expressed in
any increment, as provided in Rule 6.42(4). The
cross-references to other Exchange rules at the end
of proposed Rule 24B.5 will have a similar
reference to Rule 6.42.
86 Inclusion of independent contractors within
the category of persons eligible to be appointed to
perform the function of FLEX Post Officials is
consistent with CBOE rules pertaining to the
appointment of Exchange PAR Officials. See CBOE
Rule 7.12, PAR Official. In addition, as with the
existing PAR Official requirements, the proposed
requirements for FLEX Post Officials provide that
the FLEX Post Official and any designated
assistants may not be affiliated with any member
that is approved to act as a Market-Maker, including
a FLEX Market-Maker. The proposed requirements
also provide that the FLEX Post Official and any
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FLEX Quote’’ in Rule 24A.1 and a
related reference in Rule 24A.12 are
being removed. Indicative FLEX Quotes
were non-binding indications of the
market for particular series of FLEX
Options that were periodically supplied
by Market-Makers and displayed on the
FLEX communication network. This
functionality is no longer utilized, so
the obsolete references in Rules 24A.1
and 24A.12 are being deleted.
Finally, cross-references in the
Exchange rules are being updated to
include a corresponding reference to the
proposed FLEX Hybrid Trading System
rules, and various non-substantive
grammatical and formatting changes are
being made throughout.
(3). Sponsored Users (Proposed Rule
6.20A)
In conjunction with the introduction
of the new FLEX Hybrid Trading
System, CBOE is proposing to add the
concepts of Sponsored Users and
Sponsoring Members to its rules.
Sponsored Users would be provided
electronic access to directly enter and
execute orders through a Sponsoring
Member onto the Exchange’s FLEX
Hybrid Trading System.
CBOE is proposing to adopt Rule
6.20A, which will govern electronic
access for the entry and execution of
orders by Sponsored Users with
authorized access to the System and
outline the requirements that Sponsored
Users and Sponsoring Members would
be required to meet prior to engaging in
a Sponsoring Member/Sponsored User
relationship. A ‘‘Sponsored User’’
would be a person, such as an
institutional investor, who has entered
into a sponsorship arrangement with a
Sponsoring Member for purposes of
entering orders on the System. This
would include entering and responding
to electronic RFQs and entering FLEX
Orders into the Book. A Sponsored User
may obtain and maintain authorized
access to the System only if such access
is authorized in advance by one or more
Sponsoring Members in accordance
with the provisions of proposed Rule
6.20A, which are substantially similar to
NYSE Arca Inc. (‘‘NYSEArca’’) Rules
7.29 and 7.30.87
designated assistants shall be compensated
exclusively by the Exchange, which shall determine
the amount and form of compensation, and that no
Market-Maker, including a FLEX Market-Maker,
shall directly or indirectly compensate or provide
any other form of consideration to a FLEX Post
Official or any designated assistants.
87 In comparison to the NYSEArca rules,
proposed Rule 6.20A differs in that it will be
limited to only the FLEX Hybrid Trading System
and will also provide that, to the extent the
Sponsoring Member is not a clearing firm, the
Sponsoring Member’s clearing firm, who must be a
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50147
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
the provisions of Section 6(b) of the
Act 88 and the rules and regulations
thereunder, in general, and Section
6(b)(5) 89 in particular, in that it is
designed to promote just and equitable
principles of trade, to prevent
fraudulent and manipulative acts, to
remove impediments to and to perfect
the mechanism for a free and open
market and a national market system,
and, in general, to protect investors and
the public interest.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
CBOE does not believe that the
proposed rule change will impose any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 35 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 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:
CBOE member organization, would have to provide
CBOE with a Letter of Authorization, accepting
responsibility for the clearance of the Sponsored
User’s transactions.
88 15 U.S.C. 78f(b).
89 15 U.S.C. 78f(b)(5).
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50148
Federal Register / Vol. 72, No. 168 / Thursday, August 30, 2007 / Notices
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml ); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–CBOE–2006–99 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–CBOE–2006–99. This file
number should be included on the
subject line if e-mail 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 (https://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 inspection and copying in
the Commission’s Public Reference
Room, 100 F Street, NE., Washington,
DC 20549, on official business days
between the hours of 10 a.m. and 3 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–2006–99 and should
be submitted on or before September 20,
2007.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.90
Nancy M. Morris,
Secretary.
[FR Doc. E7–17165 Filed 8–29–07; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–56315; File No. SR–ISE–
2007–58]
Self-Regulatory Organizations;
International Securities Exchange,
LLC; Order Approving a Proposed
Rule Change Relating to ISEE Select
Market Data Fees
August 24, 2007.
On July 6, 2007, the International
Securities Exchange, LLC (‘‘ISE’’ or
‘‘Exchange’’) 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
amend its Schedule of Fees to adopt a
subscription fee for an enhanced
sentiment market data offering. The
proposed rule change was published for
comment in the Federal Register on July
25, 2007.3 The Commission received no
comments on the proposal. This order
approves the proposed rule change.
I. Description of the Proposal
The Exchange proposes to offer, to
both member and non-member
subscribers, a data feed that will provide
a bulk delivery of ISEE SelectTM (‘‘ISEE
Select’’) values.4 The existing ISEE
Select browser application allows a
subscriber to access ISEE Select values
for up to five securities simultaneously;
this proposal will allow subscribers to
access numerous ISEE Select values
simultaneously. The actual potential
number of ISEE Select values accessible
by this proposed data feed offering can
range from one to more than 1,700.
The ISEE Select data feed will have a
flat rate subscription fee based on a
fixed number of end users that each
subscriber allows to view the data, as
follows: $0.10 Per end user, per month,
for a minimum of 10,000 end users;
$0.10 for each additional end user, per
month, up to 74,999 end users, in
increments of 5,000 end users; $0.084
per end user, per month, for
redistribution from 75,000 to 199,999
end users, in increments of 5,000 end
users; and $0.0825 per end user, per
month, for redistribution to 200,000 or
more end users, in minimum
increments of 5,000 end users. An
example of the monthly subscription fee
for a subscriber with 100,000 end users
is as follows:
Monthly fee
per user
Number of users per increment
Monthly
sub-total
10,000 ..............................................................................................................................................................................
10,001–74,999 .................................................................................................................................................................
75,000–100,000 ...............................................................................................................................................................
$.10
.10
.084
$1,000
6,500
2,100
Monthly Total ............................................................................................................................................................
....................
9,600
Average Fee per User ..............................................................................................................................................
....................
.096
rfrederick on PROD1PC67 with NOTICES
II. Discussion
The Commission finds that the
proposed rule change is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to a national securities
exchange.5 Specifically, the
Commission finds that the proposal is
90 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 56093
(July 18, 2007), 72 FR 40912.
1 15
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consistent with Section 6(b)(4) of the
Act, which requires that an exchange
have an equitable allocation of
reasonable dues, fees, and other charges
among its members and other persons
using its facilities. This proposed rule
change will diversify ISEE Select
offerings by allowing members and non-
members to subscribe to a data feed of
ISEE Select values at a flat rate
subscription fee for redistribution to
their customers. Further, we note that
the fees are identical for members and
non-members. As with other ISEE Select
4 ISEE Select allows subscribers to identify
bullish and bearish investor sentiment for nearly
any issue traded on the Exchange by providing
sentiment values for particular indices, industry
sectors or individual stocks. These values are
calculated three times per hour.
5 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
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]]>Agencies
[Federal Register Volume 72, Number 168 (Thursday, August 30, 2007)]
[Notices]
[Pages 50133-50148]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-17165]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-56311; File No. SR-CBOE-2006-99]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of a Proposed Rule Change and Amendment
No. 1 Thereto Related to FLEX Options Trading
August 23, 2007.
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 27, 2006, the Chicago Board Options Exchange,
Incorporated (``Exchange'' or ``CBOE'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change as
described in Items I, II, and III below, which Items have been
substantially prepared by the Exchange. On August 17, 2007, CBOE filed
Amendment No. 1 to the proposed rule change.\3\ The Commission is
publishing this notice to solicit comments on the proposed rule change,
as amended, from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ In Amendment No. 1, the Exchange replaced the proposed rule
change in its entirety.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to adopt rules to provide for the trading of
Flexible Exchange Options (``FLEX Options'') \4\ on the Exchange's new
FLEX Hybrid Trading System platform and to make certain corresponding
revisions to its existing open-outcry based FLEX RFQ System platform.
The text of the proposed rule change is available on the Exchange's Web
site (https://www.cboe.org/legal), at CBOE, and at the Commission's
Public Reference Room.\5\
---------------------------------------------------------------------------
\4\ FLEX Options provide investors with the ability to customize
basic option features including size, expiration date, exercise
style, and certain exercise prices.
\5\ The Exchange notes that unrelated changes are being proposed
to the text of Rule 24A.7 in a separate rule filing. See Securities
Exchange Act Release No. 56191 (August 2, 2007), 72 FR 44894 (August
9, 2007) (SR-CBOE-2007-79). If that rule filing becomes effective
before this instant rule filing, the Exchange intends to submit an
amendment to reflect conforming changes to the text to Rules 24A.7
and 24A.8, as well as proposed Rules 24B.7 and 24B.8. Telephone
conversation between Jennifer Lamie, Assistant General Counsel,
CBOE, and Terri Evans, Special Counsel, Division of Market
Regulation (``Division''), Commission on August 20, 2007.
---------------------------------------------------------------------------
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, CBOE included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of those statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant parts of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
i. Description of the FLEX Hybrid Trading System
Currently, FLEX Options are traded on the Exchange through an open-
outcry-based, Request for Quotes (``RFQ'') process (referred to herein
as the ``FLEX RFQ System'' platform). The purpose of the proposed rule
change is to amend Exchange rules to provide for an alternate framework
to trade FLEX
[[Page 50134]]
Options on the CBOE using a ``hybrid'' platform (referred to herein as
the ``FLEX Hybrid Trading System'' platform or the ``System''), which
incorporates both open outcry and electronic trading functionality.
Some key features of the new FLEX Hybrid Trading System platform are
the following:
Method of Operation: On the new hybrid platform, FLEX
Option transactions could take place either through use of an open
outcry RFQ process similar to the existing FLEX RFQ System process or
through use of a new, Internet- and API-based, electronic RFQ platform.
In addition, a new feature of the FLEX Hybrid Trading System will allow
FLEX Orders to be entered and traded via an electronic book (the
``Book'').
Access: The new FLEX Hybrid Trading System platform will
be available for the entry of RFQs, FLEX Quotes, and FLEX Orders, and
the execution of trades resulting therefrom, of approved members. An
approved member is any Exchange member that has been approved by the
Exchange to use the FLEX Hybrid Trading System. This group of FLEX-
eligible members are collectively referred to as ``FLEX Traders.'' \6\
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\6\ In addition, as discussed further below, the Exchange will
permit non-member users to be provided electronic access, through
sponsoring members, to enter and execute orders on the FLEX Hybrid
Trading System platform.
---------------------------------------------------------------------------
Market-Maker Participation: One category of FLEX Traders
are FLEX Market-Makers, who will be appointed to one or more classes
pursuant to proposed Rule 24B.9. As with the existing FLEX rules, there
are two types of FLEX Market-Makers: A FLEX Appointed Market-Maker and
a FLEX Qualified Market-Maker (unless specified, or unless the context
requires otherwise, the term ``FLEX Market-Maker'' refers to both FLEX
Appointed Market-Makers and FLEX Qualified Market-Makers). FLEX Market-
Maker appointments and related market-making obligations, and changes
proposed to the existing rule requirements, are discussed further
below.
CBOE believes that enhancing its FLEX trading facilities to allow
for a hybrid trading platform alternative is important to the
Exchange's efforts to create a market that provides members and
investors interested in FLEX-type options with an improved but
comparable alternative to the over-the-counter (``OTC'') market in
customized options. By enhancing CBOE systems to allow for a FLEX
Hybrid Trading System platform, market participants will have greater
flexibility in determining the means with which to execute their
customized options in an exchange environment, thus making it a more
attractive alternative to the OTC market. CBOE believes market
participants benefit from being able to trade customized options in an
exchange environment in several ways, including, but not limited to the
following: (1) Enhanced efficiency in initiating and closing out
positions; (2) increased market transparency; and (3) heightened
contra-party creditworthiness due to the role of The Options Clearing
Corporation (``OCC'') as issuer and guarantor of FLEX Options.
Given the design of FLEX Options to compete with the OTC market,
the Exchange notes that the existing user base for trading FLEX Options
includes both institutional investors and high net worth individuals.
The Exchange also notes that, when the existing FLEX Rules were
originally adopted in 1993, the Exchange put in place certain FLEX
contract specification requirements that were designed to limit
participation in FLEX Options to these types of sophisticated
investors, rather than retail investors. These safeguards, which relate
to minimum value size requirements, have been revised over time and
will exist for FLEX Options traded on the proposed FLEX Hybrid Trading
System. Thus, whether executed through the new electronic RFQ process
or open outcry RFQ process (or through entering a FLEX Order to hit the
new FLEX Book), the minimum value size requirements for a resulting
FLEX transaction will be the same as currently exists today for trading
on the existing FLEX RFQ System platform. Additionally, the minimum
value size of FLEX Quotes that are entered by FLEX Traders in response
to an underlying RFQ (and, correspondingly, the minimum value size of
resting FLEX Orders (undecremented size) that are entered by FLEX
Traders to provide liquidity for incoming FLEX Orders that hit the
Book) will be the same as currently exists today for trading on the
existing FLEX RFQ System platform. In maintaining these safeguards for
trading on the proposed FLEX Hybrid Trading System, the Exchange is
cognizant of the desire to continue to provide the requisite amount of
investor protection that the safeguards were originally designed to
achieve.
In addition, given the customized nature of FLEX Options, the
sophistication of the target FLEX trading community, and the desire to
effectively compete with the OTC market (which is not subject to the
same restrictions and requirements of exchange-based trading), CBOE has
also designed its FLEX trading rules in a manner that is distinct from
its trading rules for traditional options in order to create incentives
for members and sophisticated investors to bring larger-sized orders to
the Exchange, rather than the OTC market, and to provide deep liquid
markets for investors in these customized products. As described below,
these distinctions include: (i) Allowing for certain crossing
participation entitlements and FLEX Appointed Market-Maker
participation entitlements to be applied without yielding to other
trading interest (including that of public customers, broker-dealers
and FLEX Market-Makers) provided certain conditions are satisfied
(including the requirements of Section 11(a)(1) of the Act \7\ and the
rules promulgated thereunder); (ii) allowing for certain modified
market making obligations; and (iii) applying separate position limit
and exercise limit requirements to FLEX Options. These principles will
be maintained in the proposed FLEX Hybrid Trading System, though
certain modifications are being proposed.
---------------------------------------------------------------------------
\7\ 15 U.S.C. 78k(a).
---------------------------------------------------------------------------
For the reasons noted herein, CBOE believes that the proposed
structure of its FLEX Hybrid Trading System platform is appropriate and
reasonable and that it will provide market participants with additional
flexibility to determine choice of venue that best comport with
investors' particular needs.
ii. Detailed Summary of Proposed Rule Change
As indicated above, under the proposed rules structure, the
Exchange will have the choice to allow trading to occur in a FLEX
Option class on the existing FLEX RFQ System platform or the proposed
FLEX Hybrid Trading System platform. The rules governing the trading of
FLEX Options on the existing FLEX RFQ System platform are contained,
and will continue to be maintained, in Chapter XXIVA of the Exchange
Rules. The proposed rules governing the trading of FLEX Options on the
FLEX Hybrid Trading System platform will be reflected in new Chapter
XXIVB. The Exchange currently intends to maintain and operate both the
existing FLEX RFQ System platform and the new FLEX Hybrid Trading
System platform and will determine which trading platform will be
utilized on a class-by-class basis. These
[[Page 50135]]
determinations will be announced to the membership via Regulatory
Circular.
The new platform rules are generally modeled after and correspond
with the existing FLEX RFQ System rules contained in Chapter XXIVA.
Discussion of each of the proposed new rules, as well as various
corresponding changes to the existing FLEX rules, follows.
(1). Proposed FLEX Hybrid Trading System Rules (Chapter XXIVB)
An introductory section to proposed Chapter XXIVB provides that
transactions in FLEX Options may be effected on the FLEX Hybrid Trading
System in accordance with the procedures in Chapter XXIVB, or via the
existing FLEX trading platform in accordance with the procedures in
Chapter XXIVA. As described above, determinations as to which trading
platform and rules set will be applicable will by made by the Exchange
on a class-by-class basis and will be announced to the membership via
Regulatory Circular. The introductory language further explains that
the rules in Chapters I through XIX and XXIV are also applicable to the
trading of FLEX Options on the System, except as indicated at the end
of each rule. To the extent the rules in Chapter XXIVB are inconsistent
with other Exchange rules, the rules in Chapter XXIVB take precedence
in relation to the trading of FLEX Options on the System.
(A). FLEX Hybrid Trading System Definitions (Proposed Rule 24B.1)
Proposed Rule 24B.1, Definitions, corresponds with existing Rule
24A.1. It also contains several new definitions necessary to
accommodate the introduction of the FLEX Hybrid Trading System. For
example, the term ``FLEX Hybrid Trading System'' shall mean the
Exchange's trading platform that allows FLEX Traders to submit both
electronic and open outcry RFQs, FLEX Quotes in response to such RFQs,
and FLEX Orders into an electronic FLEX Book. The term ``FLEX Trader''
shall mean a FLEX-participating Exchange member who has been approved
by the Exchange to trade on the FLEX Hybrid Trading System. The term
``FLEX Order'' shall mean a FLEX bid or offer entered by a FLEX Market-
Maker or an order to purchase or order to sell a FLEX Option entered by
a FLEX Trader, in each case into the Book. With respect to the
electronic RFQ process, various terms defining the ``RFQ Market,'' the
``RFQ Response Period,'' the ``RFQ Reaction Period,'' and ``RFQ Order''
are defined.\8\ In addition, certain Trade Conditions that can be
placed on an RFQ, an RFQ Order, or FLEX Order are identified.\9\
---------------------------------------------------------------------------
\8\ The term ``RFQ Market'' shall mean the FLEX Quote bids or
offers, or both, as applicable, entered in response to an electronic
Request for Quotes and FLEX Orders resting in the electronic book,
if any. The term ``RFQ Response Period'' shall mean the period of
time during which FLEX Traders may provide FLEX Quotes in response
to a Request for Quotes. The term ``RFQ Reaction Period'' shall mean
the period of time during which a Submitting Member determines
whether to accept or reject FLEX Quotes submitted in response to an
electronic Request for Quotes. The term ``RFQ Order'' shall mean an
order to purchase or order to sell FLEX Options entered by the
Submitting Member during the RFQ Reaction Period. See proposed Rule
24B.1(r)-(u).
\9\ The following Trade Conditions will be available in the FLEX
Hybrid Trading System for a FLEX Trader to choose from for RFQs, RFQ
Orders, or FLEX Orders: (a) Fill-or-Kill, which is a condition to
execute an RFQ Order or FLEX Order in its entirety as soon as it is
represented or cancel it; (b) All-or-None, which is a condition to
execute an RFQ Order or FLEX Order in its entirety or not at all;
(c) Minimum Fill, which is a condition to execute an RFQ Order or
FLEX Order in a minimum quantity or not at all; (d) Lots Of, which
is a condition to execute an RFQ Order or FLEX Order in minimum lot
sizes or not at all; (e) Intent to Cross, which is an RFQ condition
indicating that a Submitting Member intends to cross or act as
principal and receive a crossing participation entitlement; and (f)
Hedge, which is an RFQ or FLEX Order condition contingent on trade
execution in Non-FLEX Options or other Non-FLEX components (e.g.,
stock, futures, or other related instruments or interests). Trade
Conditions, other than Intent to Cross or Hedge, will be inputted
but not disclosed on the System. In addition, other than Fill-or-
Kill orders, FLEX Orders will be designated by the System as ``day
orders'' and, if unexecuted, will be cancelled at the close of each
trade day. See proposed Rule 24B.1(x). In the future, the Exchange
may determine to enable ``good-'til-cancelled'' functionality. The
introduction of such functionality would be the subject of a
separate rule filing.
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(B). Terms of FLEX Options (Proposed Rule 24B.4)
Proposed Rule 24B.4, Terms of FLEX Options, is similar to existing
Rule 24A.4. Subparagraphs (a)(1) through (2) of Rule 24B.4, like sub-
paragraphs (a)(1) through (2) of Rule 24A.4, provide that the variable
terms of FLEX Options (such as the underlying security or index, put or
call type, exercise-style, expiration date, and exercise price) will be
established through the bidding and offering mechanics applicable to
RFQs or the bidding and offer mechanics applicable to the Book. Other
terms shall be the same as those that apply to Non-FLEX Options.
Subparagraph (a)(3) of Rule 24B.4, like subparagraph (a)(3) of Rule
24A.4, lists the additional categories of information that must be
addressed by a member that initiates an RFQ (the ``Submitting
Member''), such as the type and form of quote sought and the length of
the RFQ Response Period.\10\ Additionally, the Submitting Member must
indicate any Trade Condition placed on the RFQ (i.e., an Intent to
Cross or Hedge condition).\11\ Given the proposed introduction of the
new concept of the FLEX Book and the new concept of a FLEX Order that
can be entered into the Book, proposed subparagraph (a)(4) lists the
additional categories of information that must be included in a FLEX
Order, such as the order type and form, and any Trade Condition, as
applicable.
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\10\ The length of the RFQ Response Period interval is defined
by the Submitting Member, provided that the length of the interval
must fall within the time ranges established by the appropriate
Procedure Committee on a class-by-class basis for electronic RFQs or
open outcry RFQs. Such time cannot be less than three seconds. See
proposed Rule 24B.4(a)(3)(iii).
\11\ At the conclusion of an RFQ, the Submitting Member may
enter an RFQ Order to buy or sell a specified size. An RFQ Order
shall contain the same transaction specifications as the related RFQ
plus any additional Trade Condition(s), if applicable, that relate
to the particular order and its size. See proposed Rule
24B.4(a)(3)(iv) and note 9, supra.
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Subparagraph (a)(5) of Rule 24B.4 lists additional contract and
transaction specifications that RFQs, FLEX Quotes responsive to RFQs,
RFQ Orders, and FLEX Orders must satisfy. These additional
specifications pertain first to maximum expiration terms and second to
minimum value size requirements. The maximum expiration terms are the
same as in the existing FLEX rules.\12\ The minimum value size
specifications are substantially similar to subparagraph (a)(4) of Rule
24A.4, though additional language has been added to clarify the
applicability of the minimum value size requirements to FLEX Orders
entered in the Book.\13\ As with the existing FLEX rules, minimum value
size requirements for transactions resulting from electronic and open
outcry RFQs and for responsive FLEX Quotes will be as follows:
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\12\ Specifically, for FLEX Equity Options, the maximum term is
three years; provided, however, that the Submitting Member may
request a longer term to a maximum of five years. For FLEX Index
Options, the maximum term is five years; provided, however, that a
Submitting Member may request a longer term to a maximum of ten
years. See existing Rule 24A.4(a)(4) and proposed Rule 24B.4(a)(5).
\13\ As discussed above, the Exchange notes that the minimum
value size requirements were put in place to limit participation in
FLEX Options to sophisticated, high-net-worth investors, including
institutional investors, rather than retail investors.
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Opening Transactions in a New Series: The minimum value
size for an opening transaction resulting from an RFQ in any FLEX
series in which there is no open interest at the time the RFQ is
submitted shall be: (i) The lesser of 250 contracts or the number of
contracts overlying $1 million in the underlying securities in the case
of FLEX Equity
[[Page 50136]]
Options; and (ii) $10 million Underlying Equivalent Value in the case
of FLEX Index Options.
Transactions in Existing Series: The minimum value size
for a transaction in any currently-opened FLEX series resulting from an
RFQ shall be: (i) 100 contracts in the case of opening transactions in
FLEX Equity Options and 25 contracts in the case of closing
transactions in FLEX Equity Options; and (ii) $1 million Underlying
Equivalent Value in the case of both opening and closing transactions
in FLEX Index Options; or (iii) in either case, the remaining
underlying size or Underlying Equivalent Value on a closing
transaction, whichever is less.
FLEX Quote Sizes: The minimum value size for FLEX Quotes
responsive to an RFQ shall be: (i) 25 contracts in the case of FLEX
Equity Options; and (ii) $1 million Underlying Equivalent Value in the
case of FLEX Index Options; or (iii) in either case, the remaining
underlying size or Underlying Equivalent Value on a closing
transaction, whichever is less. However, FLEX Quotes of FLEX Index
Appointed Market-Makers must be for at least $10 million Underlying
Equivalent Value or the dollar amount indicated in the RFQ, whichever
is less.
There will be similar minimum value size requirements that apply to
transactions that occur in the FLEX Book. Specifically, a transaction
resulting from a FLEX Order that seeks liquidity by trading against
(``hitting'') the Book must satisfy the same minimum value size
requirements described above that are applicable to RFQ transactions.
Conversely, a FLEX Order that provides liquidity by resting in the Book
must satisfy the same minimum value size requirements described above
that are applicable to FLEX Quotes. Thus, the minimum value size
requirements for FLEX Orders entered into the Book will be as follows:
Opening Transactions in a New Series: The minimum value
size for an opening transaction resulting from a FLEX Order entered to
hit the FLEX Book in any FLEX series in which there is no open interest
at the time the FLEX Order is submitted shall be: (i) The lesser of 250
contracts or the number of contracts overlying $1 million in the
underlying securities in the case of FLEX Equity Options; and (ii) $10
million Underlying Equivalent Value in the case of FLEX Index Options.
Transactions in Existing Series: The minimum value size
for a transaction in any currently-opened FLEX series resulting from a
FLEX Order entered to hit the FLEX Book shall be: (i) 100 contracts in
the case of opening transactions in FLEX Equity Options and 25
contracts in the case of closing transactions in FLEX Equity Options;
and (ii) $1 million Underlying Equivalent Value in the case of both
opening and closing transactions in FLEX Index Options; or (iii) in
either case, the remaining underlying size or Underlying Equivalent
Value on a closing transaction, whichever is less.
Resting FLEX Order Sizes: The minimum value size for FLEX
Orders (undecremented size) entered to rest in the FLEX Book shall be:
(i) 25 contracts in the case of FLEX Equity Options; and (ii) $1
million Underlying Equivalent Value in the case of FLEX Index Options;
or (iii) in either case, the remaining underlying size or Underlying
Equivalent Value on a closing transaction, whichever is less. With
respect to FLEX Index Appointed Market-Makers, FLEX Orders
(undecremented size) must be for at least $10 million Underlying
Equivalent Value.
Subparagraph (a)(5)(iv) of the proposed rule also includes a new
requirement that a FLEX Appointed Market-Maker \14\ has an obligation
to respond to a certain percentage of electronic RFQs. This percentage
will be determined by the appropriate Procedure Committee on a class-
by-class basis, but will not be less than 80%. As with the existing
FLEX rules, a FLEX Appointed Market-Maker will continue to be required
to respond to every open-outcry RFQ in a class of FLEX Options to which
it is appointed and trading in open outcry.
---------------------------------------------------------------------------
\14\ FLEX Appointed Market-Makers and their related market-
making obligations are described in proposed Rules 24B.4(a)(5)(iv)
and 24B.9.
---------------------------------------------------------------------------
Paragraph (b), pertaining to special terms for FLEX Index Options,
and paragraph (c), pertaining to special terms for FLEX Equity Options,
in proposed Rule 24B.4 are the same as the corresponding paragraphs in
existing Rule 24A.4.
(C). FLEX Trading Procedures and Principles (Proposed Rule 24B.5)
Proposed Rule 24B.5, FLEX Trading Procedures and Principles,
prescribes in some detail the trading procedures that apply to the FLEX
Hybrid Trading System. It describes the RFQ processes for electronic
and open-outcry trading, the FLEX Book, contract acceptance, priority
of bids and offers, and applicable trading increments.
(a). Electronic and Open Outcry RFQ Processes
Paragraph (a) describes the RFQ process, which may be used at any
time, but is required to initiate a FLEX transaction when there are no
FLEX Orders currently resting in the Book in the particular FLEX
Options series to be traded. The RFQ process may be conducted
electronically through the System or in open outcry as described below.
(aa). Electronic RFQ Process
Subparagraph (a)(1) of proposed Rule 24B.5 describes the electronic
RFQ process. Upon receipt of an RFQ that satisfies the requirements of
proposed Rule 24B.4, the System will cause the terms and specifications
of the RFQ to be communicated to FLEX Traders. FLEX Traders, including
FLEX Market-Makers and the Submitting Member, may then enter FLEX
Quotes that are responsive to the RFQ during the RFQ Response
Period.\15\ FLEX Quotes may be entered, modified, or withdrawn at any
point during the RFQ Response Period; provided, however, any FLEX
Appointed Market-Makers must meet certain FLEX Quote maintenance
obligations. During the RFQ Response Period, the System will
intermittently calculate and disseminate to all FLEX Traders the
aggregate depth of the market at each price level considering FLEX
Quote responses and FLEX Orders resting in the Book (referred to as the
expected ``RFQ Market'').
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\15\ However, FLEX Quotes may not be entered for the account of
a options market maker from another options exchange. See proposed
Rule 24B.5(a)(1)(ii)(A).
---------------------------------------------------------------------------
At the end of the RFQ Response Period, the System will calculate
and disseminate to all FLEX Traders the final RFQ Market. The
Submitting Member will then have a brief interval of time to promptly
accept or reject the RFQ Market, provided that such acceptance or
rejection must occur during the ``RFQ Reaction Period.'' \16\ During
the RFQ Reaction Period, FLEX Quotes and FLEX Orders in the System
cannot be modified or withdrawn.\17\
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\16\ The length of the RFQ Reaction Period interval will be
established by the appropriate Procedure Committee on a class-by-
class basis and will not be more than 30 seconds. Failure to
promptly accept the bids or offers equates to a rejection. See
proposed Rule 24B.5(a)(1)(iii)(A).
\17\ FLEX Orders can be entered during the RFQ Reaction Period,
but will not be included in the RFQ Market calculation. See proposed
Rule 24B.5(a)(1)(iii)(B)(I).
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In the scenario where a Submitting Member has not indicated an
``intent to cross'' in the RFQ request, the Submitting Member can
determine to do the following during the RFQ Reaction Period: (i) Trade
against the bids and offers (but not both) by submitting an RFQ Order,
in which case the resulting transaction will occur at a single ``BBO
[[Page 50137]]
clearing price'' that does not violate the RFQ Order's limit price, if
any;\18\ or (ii) reject the RFQ or let it expire.\19\
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\18\ If the Submitting Member chooses to trade, the RFQ Order it
sends will be eligible to trade with the FLEX Quotes and FLEX Orders
at a single price that will leave bids and offers which cannot trade
with each other (``BBO clearing price''). In determining the
priority of FLEX Quotes and FLEX Orders to be traded, the System
gives priority to FLEX Quotes and FLEX Orders whose price is better
than the BBO clearing price, then to FLEX Quotes and FLEX Orders at
the BBO clearing price. The allocation among multiple FLEX Quotes
and FLEX Orders that are priced at the BBO clearing price will be as
follows: (i) Any FLEX Quotes that are subject to a FLEX Appointed
Market-Maker participation entitlement will have priority to
participate in the execution; (ii) then FLEX Orders resting in the
electronic book based on the Book priority algorithm; (iii) then
FLEX Quotes for the account of public customers and non-member
broker-dealers based on time priority; and (iv) then all other FLEX
Quotes based on time priority. In the event an RFQ Market is locked
or crossed (e.g., the best bid is $1.25 and the best offer is
$1.20), allocation at the BBO clearing price on the same side of the
transaction as the RFQ Order shall be as follows: (i) FLEX Orders
resting in the electronic book will have priority to participate in
the execution based on time priority; (ii) then, if applicable, an
RFQ Order for the account of a public customer or non-member broker-
dealer, then any FLEX Quotes that are subject to a FLEX Appointed
Market-Maker participation entitlement; (iii) then FLEX Quotes for
the account of public customers and non-member broker-dealers based
on time priority; (iv) then, if applicable, an RFQ Order for the
account of a member, then any FLEX Quotes that are subject to a FLEX
Appointed Market-Maker participation entitlement; and (v) then all
other FLEX Quotes based on time priority. The System will then enter
any remaining balance of the incoming RFQ Order in the Book (if
available), unless the Submitting Member has indicated that the
balance of the RFQ Order is to be automatically cancelled if it is
not traded. An RFQ Order that has been decremented as part of an
electronic RFQ is eligible to be entered into the Book (if
available) even though the balance that remains may be below the
minimum size requirements for FLEX Orders entered to rest in the
Book. Once entered in the Book, an RFQ Order will be treated the
same as other FLEX Orders. See proposed Rules 24B.4(a)(5)(iv) and
24B.5(a)(1)(iii)(C).
\19\ Consistent with the existing FLEX rules, a Submitting
Member has no obligation to accept any FLEX bid or offer. See
proposed Rule 24B.5(a)(1)(iii)(E) and existing Rule 24A.5(c)(iv).
---------------------------------------------------------------------------
If the Submitting Member rejects the RFQ Market or to the extent
the RFQ Market size exceeds the Submitting Member's FLEX transaction
size, the System will automatically execute any remaining FLEX Quotes
and FLEX Orders that are marketable against each other at a single
clearing price. Thereafter: (i) If there is a Book available, any
further remaining balance of the FLEX Quotes will be automatically
entered into the Book unless the FLEX Trader that entered the FLEX
Quote has indicated that the FLEX Quote is to be automatically
cancelled if not traded;\20\ or (ii) if there is no Book available, any
remaining balance of the FLEX Quotes will be automatically cancelled.
---------------------------------------------------------------------------
\20\ A FLEX Quote that has been decremented as part of an
electronic RFQ is eligible to be entered into the Book (if
available) even though the balance that remains may be below the
minimum size requirements for FLEX Orders entered to rest in the
Book. Once entered in the Book, a FLEX Quote will be treated the
same as other FLEX Orders. See proposed Rules 24B.4(a)(5)(iv) and
24B.5(a)(1)(iii)(F).
---------------------------------------------------------------------------
Once the RFQ Reaction Period concludes and applicable allocations
are completed, FLEX Traders can enter new FLEX Orders or cancel
existing FLEX Orders in the Book at any time. If the Book is available,
the Submitting Member and other FLEX Traders can also determine to
enter FLEX Orders in the Book at the conclusion of the RFQ process.
The following examples illustrate the process:
Assume the RFQ Market is bid 1000 contracts at $1.00 and
offered 1000 contracts at $1.20, 1200 contracts at $1.21, and 1500
contracts at $1.23. Also assume that the FLEX Book is not activated in
the particular class. If the Submitting Member submits an agency RFQ
Order to buy 1500 contracts, the order will trade at a BBO clearing
price of $1.21. The priority among the interest represented on the
offer-side of the RFQ Market will be first to the FLEX Quotes offered
at $1.20 and second to FLEX Quotes offered at $1.21. Allocation among
multiple FLEX Quotes represented at $1.21 shall be first to any FLEX
Appointed Market-Maker(s) with a participation entitlement, then to
FLEX Quotes for the account of public customers and non-member broker-
dealers based on time priority, then to all other FLEX Quotes based on
time priority. The remaining balance of the FLEX Quotes entered in
response to the RFQ will be automatically cancelled.
Assume the RFQ Market is bid 1000 contracts at $1.21 and
offered 1000 contracts at $1.20, 1200 contracts at $1.21, and 1500
contracts at $1.23. Thus, the bids and offers that make up the RFQ
Market are ``crossed.'' Also assume that each of the FLEX Traders that
entered responses elected to have any remaining balance on their FLEX
Quotes automatically booked. If the Submitting Member submits an agency
RFQ Order to buy 1000 contracts, the order will trade at a BBO clearing
price of $1.21 and the 1000 contract bid will also trade against the
offers at a BBO clearing price of $1.21. (The particular allocation
algorithm among the interest represented on the offer-side of the RFQ
Market is as described in the first example, assuming there are no FLEX
Orders in the Book.) Coming out of the RFQ auction, the Book will also
display offers of 200 contracts at $1.21 and 1500 contracts at $1.23.
Assume the RFQ Market is bid 1000 contracts at $1.21 and
offered 1000 contracts at $1.20, 500 contracts at $1.21, and 1500
contracts at $1.23. Thus, the bids and offers that make up the RFQ
Market are ``crossed.'' Also assume that the bid consists in part of a
100-contract FLEX Order that was resting in the Book prior to the
initiation of the RFQ and that each of the FLEX Traders that entered
responses elected to have any remaining balance on its FLEX Quote
automatically booked. If the Submitting Member submits a public
customer RFQ Order to buy 1000 contracts at $1.21, the 100 contract
FLEX Order, the 1000 contract RFQ Order, and 400 contracts of the
remaining 900 contract bid will trade against the offers at a BBO
clearing price of $1.21.\21\ (The particular allocation algorithm among
the interest represented on the offer-side of the RFQ Market is as
described in the first example, assuming there are no FLEX Orders in
the Book.) Coming out of the RFQ auction, the Book will also display a
bid of 500 contracts at $1.21 and an offer of 1500 contracts at $1.23.
---------------------------------------------------------------------------
\21\ If the RFQ Order is submitted for the account of a member,
the RFQ Order will trade after the FLEX Order and any FLEX Quotes
for the account of public customers and non-member broker-dealers.
See note 18, supra
---------------------------------------------------------------------------
Assume the RFQ Market is bid 1000 contracts at $1.00 and
offered 1000 contracts at $1.20 and the Submitting Member wants to
trade 200 contracts in a FLEX Equity series that has a minimum value
size requirement of 100 contracts. Also assume the FLEX Book is
activated in the particular class. During the RFQ Reaction Period, the
Submitting Member enters an agency RFQ Order to buy 200 contracts at
$1.15. Because the best offer is $1.20, no trade will occur. The RFQ
Order and the FLEX Quotes entered in response to the RFQ will be booked
(assuming the Submitting Member and each of the FLEX Traders that
entered responses elected to have any remaining balance on their FLEX
Quotes automatically booked). Coming out of the RFQ auction, the Book
will display a market that is bid 200 contracts at $1.15 and offered
1000 contracts at $1.20.
In the scenario where the Submitting Member has indicated an
``intent to cross'' in its RFQ request, during the RFQ Reaction Period
the Submitting Member can determine to: (i) Enter an RFQ Order to trade
with the bids or offers and be automatically allocated a crossing
participation entitlement to trade with the RFQ Order at the BBO
[[Page 50138]]
clearing price;\22\ or (ii) reject the RFQ or let it expire.
---------------------------------------------------------------------------
\22\ The existing FLEX rules allow for the Submitting Member to
execute a certain portion of a FLEX Order where the Submitting
Member has indicated an intention to cross or act as principal (the
``crossing participation entitlement''). See existing Rule 24A.5(e).
The same concept will apply under the proposed FLEX Hybrid Rules,
though changes to the applicable participation entitlement
percentages are being proposed. In addition, the Exchange is
proposing to extend the use of crossing participation entitlements
to solicitations. See proposed Rule 24B.5(d). The particular
participation entitlements are discussed further below.
---------------------------------------------------------------------------
If the Submitting Member enters an RFQ Order, the System will
immediately execute the RFQ Order to the extent marketable at the BBO
clearing price, with the Submitting Member executing an amount up to
the applicable crossing participation entitlement at the BBO clearing
price after yielding to certain trading interests.\23\ Thereafter, any
remaining balance of the RFQ Order will be exposed in the Book \24\ for
at least the minimum Crossing Exposure Period.\25\ During this time,
other FLEX Traders can trade against the order. At the end of the
Crossing Exposure Period, the Submitting Member may enter a contra-side
order to trade any remaining balance of the RFQ Order. The Submitting
Member must, however, enter a contra-side order when necessary to
satisfy the minimum value size requirements for the FLEX
transaction.\26\
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\23\ See note 18, supra, for description of the BBO clearing
price. In determining the priority of FLEX Quotes and FLEX Orders to
be traded when the Submitting Member has indicated an ``intent to
cross,'' the System gives priority to FLEX Quotes and FLEX Orders
whose price is better than the BBO clearing price, then to FLEX
Quotes and FLEX Orders at the BBO clearing price. The allocation
among multiple FLEX Quotes and FLEX Orders that are priced at the
BBO clearing price will be as follows: (i) FLEX Orders resting in
the electronic book will have priority to participate in the
execution; (ii) then FLEX Quotes for the account of public customers
and non-member broker-dealers based on time priority; (iii) then the
crossing participation entitlement; (iv) then any FLEX Quotes that
are subject to a FLEX Appointed Market-Maker participation
entitlement; and (v) then all other FLEX Quotes based on time
priority. See proposed Rule 24B.5(a)(1)(iii)(D). The FLEX Appointed
Market-Maker participation entitlement when combined with a crossing
participation entitlement will collectively not exceed 40% of the
incoming RFQ Order's original size. See proposed Rule 24B.5(d)(2).
\24\ If there is no Book available, the System will expose the
remaining balance of the incoming RFQ Order, if any, so other FLEX
Traders can trade against the order. See proposed Rule
24B.5(a)(1)(iii)(D)(IV).
\25\ The length of this Crossing Exposure Period shall be
determined by the appropriate Procedure Committee on a class-by-
class basis and shall not be less than three seconds. See id.
\26\ See proposed Rule 24B.4(a)(5)(ii) and (iii), and proposed
Rule 24B.5(a)(1)(iii)(D)(IV).
---------------------------------------------------------------------------
The following examples illustrate this process:
Assume the RFQ Market is bid 1000 contracts at $1.00 and
offered 1000 contracts at $1.20, 1200 contracts at $1.21 and 1500
contracts at $1.23. Also assume that the Submitting Member marked the
RFQ with an ``intent to cross'' flag, that the applicable crossing
entitlement is 40%, and that the FLEX Book is not activated in the
particular class. If the Submitting Member submits an agency market RFQ
Order to buy 200 contracts, the order will trade at a BBO clearing
price of $1.20, with the Submitting Member being automatically
allocated 80 contracts (40% of 200) on the trade after yielding to any
FLEX Quotes for the account of public customers and non-member broker-
dealers. (The particular allocation algorithm applicable to any
remaining contracts is as described in footnote 23.) The remaining
balance of the FLEX Quotes entered in response to the RFQ will be
automatically cancelled.
Assume the RFQ Market is bid 1000 contracts at $1.21 and
offered 1000 contracts at $1.20, 1200 contracts at $1.21, and 1500
contracts at $1.23. Thus, the bids and offers that make up the RFQ
Market are ``crossed.'' Also assume that the Submitting Member marked
the RFQ with an ``intent to cross'' flag, that the applicable crossing
entitlement is 40%, that the offer consists in part of a 100 contract
FLEX Order at $1.20 that was resting in the Book prior to the
initiation of the RFQ, and that each of the FLEX Traders that entered
responses were FLEX Market-Makers that elected to have any remaining
balance on their FLEX Quotes automatically booked. If the Submitting
Member submits an agency market RFQ Order to buy 200 contracts, the
order will trade at a BBO clearing price of $1.21, with the resting
FLEX Order trading 100 contracts, the Submitting Member trading 80
contracts (40% of 200), and the remaining 20 trading against the other
interest represented in the offer. The 1000 contract bid will also
trade against the offers at the BBO clearing price of $1.21. (The
particular allocation algorithm among the remaining interest
represented in the offer-side of the RFQ Market is as described in
footnote 23.) Coming out of the RFQ auction, the Book will also display
offers of 1000 contracts at $1.21 and 1500 contracts at $1.23.
Assume a scenario where there is an RFQ Market of $1.00-
$1.20, the Submitting Member wants to trade 200 contracts in a FLEX
Equity series that has a minimum value size requirement of 100
contracts, and a crossing participation entitlement of 40%. Also assume
the FLEX Book is activated in the particular class. During the RFQ
Reaction Period, the Submitting Member may enter an agency RFQ Order to
buy 200 contracts at $1.15. The Submitting Member will immediately
cross 80 contracts (40% of 200) and the balance of the order will be
entered in the Book. After waiting the required exposure time (say
three seconds), the Submitting Member must enter a contra-side order
for at least 20 contracts if no one else has traded against the
remaining balance of the RFQ Order (in order to satisfy the minimum
value size requirement of 100 contracts).
The Exchange notes that the Submitting Member must mark its RFQ
with an ``intent to cross'' flag at the time the RFQ is originally
submitted to be automatically allocated the applicable crossing
participation entitlement for facilitation and solicitation
transactions. If the RFQ is not flagged in this manner, the Submitting
Member will not be automatically allocated the entitlement.
The Exchange notes that a Submitting Member also has the ability to
enter an agency or proprietary FLEX Quote in response to the Submitting
Member's own RFQ. Such a FLEX Quote will be treated the same as any
other FLEX Quote and subject to the priority allocation algorithm
described above.
Finally, the Exchange notes that all electronic RFQ transactions
must be in compliance with Section 11(a)(1) of the Act \27\ and the
rules promulgated thereunder. Section 11(a)(1) prohibits a member of a
national securities exchange from effecting transactions on that
exchange for its own account, the account of an associated person, or
an account over which it or its associated person exercises investment
discretion (collectively ``proprietary'' orders) unless an exception
applies. In this regard, the Exchange is proposing that proprietary
FLEX Quotes, RFQ Orders, and a crossing participation entitlements may
rely on the exception found in paragraph (G) of Section 11(a)(1) of the
Act \28\ and Rule 11a1-1(T) thereunder (the ``G'' exemption''),\29\
because within the System such trading interest would yield to same-
priced FLEX Orders in the Book and same-priced FLEX Quotes for the
account of public customers and non-member broker-dealers, in
compliance with the ``G'' exception requirement to yield priority to
any bid (offer) at the same price for the account of a person who is
not, or is not associated with, a member (a ``non-member''). A member
that relies on the ``G'' exemption would also have
[[Page 50139]]
to satisfy the other requirements of the ``G'' exemption.
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\27\ 15 U.S.C. 78k(a).
\28\ 15 U.S.C. 78k(a)(1)(G).
\29\ 17 CFR 240.11a1-1(T).
---------------------------------------------------------------------------
(bb). Open Outcry RFQ Process
Subparagraph (a)(2) of proposed Rule 24B.5 describes the open
outcry RFQ process, which is similar to the process that exists today
with a few primary distinctions.\30\ To initiate a FLEX transaction
using the open-outcry RFQ process, a Submitting Member shall submit an
RFQ to the FLEX Official.\31\ After providing an RFQ in proper form to
the FLEX Official, the Submitting Member shall immediately announce the
terms and specifications of the RFQ to the trading crowd for the FLEX
Option by public outcry. FLEX Traders present in the trading crowd may
provide the Submitting Member with responsive FLEX Quotes by public
outcry during the RFQ Response Period.\32\ These FLEX Quotes may be
entered, modified, or withdrawn at any point during the RFQ Response
Period; provided, however, FLEX Appointed Market-Makers must meet
certain FLEX Quote maintenance obligations.\33\ At the expiration of
the RFQ Response Period, the Submitting Member will identify the BBO
considering responsive FLEX Quotes and, if applicable, FLEX Orders
resting in the Book. The Submitting Member will announce the BBO to the
FLEX Traders in the trading crowd.
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\30\ The primary distinctions between the trading mechanics
applicable to the existing FLEX open-outcry RFQ process and the
trading mechanics applicable to the proposed FLEX Hybrid Trading
System open-outcry RFQ process are that, under the latter process,
the Submitting Member will be responsible for announcing the terms
and specifications of the RFQ to the trading crowd by public outcry,
receiving FLEX Quotes responsive to the RFQ and, at the conclusion
of the RFQ Response Period, announcing the BBO to the trading crowd
(whereas under the existing process, the FLEX Post Official
communicates the RFQ to FLEX-participating members over facilities
maintained by the Exchange, FLEX Quotes responsive to the RFQ may be
entered at the FLEX post, and the BBO is visibly displayed at the
post and over the network). Compare proposed Rule 24B.5(a)(2)(i)(B),
(ii)(A), and (ii)(B) to existing Rule 24A.5(a)(ii), (b)(i), and
(b)(iii). There are also differences in the applicable priority
provisions that will take into consideration the priority of the
electronic book (which is not applicable under the existing process)
and the priority of two bids submitted in open outcry at the same
time and same price (which will be apportioned equally as compared
to the existing practice of affording priority to the FLEX Appointed
or Qualified Market-Makers) as well as modify the applicable
crossing participation entitlements. Compare proposed Rule
24B.5(a)(2)(v) and (d) to existing Rule 24A.5(e) and (f); see also
note 22, supra.
\31\ Under the proposed rules, the Exchange may designate an
employee or independent contractor to act as a FLEX Official and
designate other qualified employees or independent contractors to
assist the FLEX Official as the need arises. The FLEX Official shall
perform the functions set out in proposed Rule 24B.14, which include
reviewing the conformity of open-outcry RFQs to the terms and
specifications contained in proposed Rule 24B.4.
\32\ As with electronic RFQs, the length of the RFQ Response
Period interval for open-outcry transactions is defined by the
Submitting Member, provided that the length of the interval must
fall within the time ranges established by the appropriate Procedure
Committee on a class-by-class basis and such time cannot be less
than three seconds. See proposed Rule 24B.4(a)(3)(iii).
\33\ See proposed Rules 24B.4(a)(5)(iv) and 24B.9.
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If the Submitting Member does not intend to cross or act as
principal with respect to any part of the FLEX trade, the Submitting
Member shall promptly accept or reject the BBO; provided, however, if a
Submitting Member either rejects the BBO or is given a BBO for less
than the entire size requested, all FLEX Traders in the trading crowd
other than the Submitting Member will have an opportunity during the
BBO Improvement Interval in which to match or improve, as applicable,
the BBO.\34\ At the expiration of any BBO Improvement Interval, the
Submitting Member must promptly accept or reject the BBO(s).
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\34\ The ``BBO Improvement Interval'' refers to a period of time
during which FLEX Traders in the trading crowd may submit FLEX
Quotes to meet or improve the BBO established during the RFQ
Response Period. See proposed Rule 24B.1(b).
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If the Submitting Member indicates an intention to cross or act as
principal with respect to any part of the FLEX trade, acceptance of the
displayed BBO shall be automatically delayed until the expiration of
the BBO Improvement Interval. Prior to the BBO Improvement Interval,
the Submitting Member must announce to the trading crowd the price at
which the Submitting Member expects to trade. In these circumstances,
the Submitting Member may participate with all other FLEX Traders
present in the trading crowd in attempting to improve or match the BBO
during the BBO Improvement Interval. At the expiration of the BBO
Improvement Interval, the Submitting Member must promptly accept or
reject the BBO(s).
As with the existing rules, the Submitting Member has no obligation
to accept any FLEX bid or offer. And, whenever following the completion
of the RFQ Response Period or BBO Improvement Interval, as applicable,
the Submitting Member rejects the BBO or the BBO size exceeds the FLEX
transaction size indicated in the Request for Quotes, FLEX Traders
present in the trading crowd may accept the unfilled balance of the
BBO. Such acceptance must occur by public outcry promptly following the
Submitting Member's determination whether to accept or reject the BBO
or at the expiration of any applicable BBO Improvement Interval.
Rejection of the open-outcry BBO(s) or failure to promptly to accept
the BBO(s) by the Submitting Member or FLEX Traders, as applicable,
results in expiration of the BBO(s) and the RFQ.
For open-outcry RFQs, the highest bid (lowest offer) will have
priority. Subject to the requirements of Section 11(a)(1) discussed
below, at the same price, the Submitting Member will allocate the RFQ
Order in accordance with the following algorithm. First, to the extent
the Submitting Member is entitled to a crossing participation
entitlement, if any, the Submitting Member has priority to trade the
applicable entitlement percentage. Next, to the extent a FLEX Appointed
Market-Maker(s) is entitled to a participation entitlement, if any, the
FLEX Appointed Market-Maker(s) has priority to trade the applicable
entitlement amount. In any event, the FLEX Appointed Market-Maker
participation entitlement when combined with a crossing participation
entitlement will collectively not exceed 40% of the incoming order's
original size.\35\ Thereafter, FLEX Quotes submitted in open outcry in
response to the open-outcry RFQ will trade based on time priority;
provided, however, where two or more best bid (offer) FLEX Quotes are
submitted in open outcry at the same time and same price or in the
event the Submitting Member cannot reasonably determine the sequence in
which the open-outcry bid (offer) FLEX Quotes were made, priority will
be apportioned equally among the open-outcry bids (offers). Next, to
the extent there is any remaining balance, same priced FLEX Orders
resting in the Book will trade based on the Book priority algorithm.
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\35\ See proposed Rule 24B.5(d)(2).
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If the RFQ Order being represented by the Submitting Member in
open-outcry has an exemption from Section 11(a), the RFQ Order will
have priority over all other same-priced bids (offers) on the same side
of the market. After executing the RFQ Order (or if the Submitting
Member determines not to trade), any unfilled balance of the BBO may be
executed by FLEX Traders in the trading crowd based on the priority
principles described above.
All open-outcry RFQ transactions must be in compliance with Section
11(a)(1) and the rules promulgated thereunder. In this regard, a bid
(offer) submitted on behalf of the proprietary account of a member that
is relying on the ``G'' exemption must yield priority to any bid
(offer) at the same price that is represented in the Book (and all FLEX
Quotes that have priority over the Book) in order to ensure that the
proprietary order yields priority to non-member orders. A member that
relies on the ``G'' exemption would also have to satisfy the other
requirements of the ``G'' exemption. In the event a Submitting
[[Page 50140]]
Member is asserting a crossing participation entitlement on behalf of a
proprietary order that must yield priority in reliance on the ``G''
exemption and a FLEX Appointed Market-Maker is asserting a
participation entitlement, the Submitting Member's crossing
participation entitlement to the remaining balance of the original
order, when combined with the FLEX Appointed Market-Makers guaranteed
participation, shall not exceed 40% of the original order.\36\ However,
provided the ``G'' exemption requirements are satisfied, nothing
prohibits a Submitting Member or FLEX Appointed Market-Maker from
trading more than its applicable entitlement if other FLEX Traders in
the crowd do not chose to trade the remaining portion of the order.\37\
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\36\ In this particular scenario, at the same price, priority is
afforded first to any FLEX Appointed Market-Maker(s) with a
participation entitlement, then to FLEX Quotes represented in the
trading crowd that are not relying on the ``G'' exemption, then to
FLEX Orders resting in the Book, then all other interest in the
trading crowd relying on the ``G'' exemption. Among those latter
interests, a Submitting Member seeking a crossing participation
entitlement would then have priority to trade an amount that, when
combined with allocated FLEX Appointed Market-Maker participation
entitlement, does not exceed 40% of the original order size. See
proposed Rule 24B.5(a)(2)(v)(B) and (d)(2)(ii).
\37\ See proposed Rule 24B.5(a)(2)(v)(B).
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(b). The FLEX Book & FLEX Orders
As indicated above, the FLEX Book and FLEX Orders are new concepts
being introduced through the FLEX Hybrid Trading System platform.
Paragraph (b) of proposed Rule 24B.5 describes the FLEX Book. The
determination of whether to make the FLEX Book functionality available
will be made by the Exchange on a class-by-class basis.
Utilization of the new FLEX Order functionality is contingent upon
the FLEX Book being made available. So, if the Book is not made
available, the FLEX Order functionality will not apply and instead the
FLEX Hybrid Trading System platform functionality will be limited to
the electronic and open-outcry RFQ processes. If the Book is made
available, FLEX Orders that satisfy the specification and minimum value
size requirements described above are eligible to be entered in the
Book, as well as the remaining balance of RFQ Orders and FLEX Quotes
entered in response to an RFQ (both of which are treated the same as
other FLEX Orders once entered in the Book).
The System will automatically execute incoming marketable FLEX
Orders against FLEX Orders resting in the Book based on price-time
priority, provided that special procedures apply if a FLEX Appointed
Market-Maker participation entitlement has been established for the
option class and subject to the restriction discussed in the next
paragraph. To the extent a FLEX Appointed Market-Maker(s) is entitled
to a participation entitlement and is quoting at the best bid (offer),
allocation among multiple bids (offers) at the same price shall be
first to all FLEX Orders for the account of a public customer ranked
ahead of the FLEX Appointed Market-Maker based on time priority, then
the FLEX Appointed Market-Maker entitlement will be applied.
Thereafter, all other FLEX Orders resting in the Book at the same price
will trade based on time priority. To the extent there is any remaining
balance of the incoming order, the balance will be entered in the Book
or automatically cancelled, depending on any applicable Trade
Conditions.\38\
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\38\ See note 9, supra.
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Under the proposed procedures for the FLEX Book, a Submitting
Member may not execute as principal against a FLEX Order it represents
as agent unless: (i) The agency FLEX Order is first subject to an RFQ,
or (ii) the Submitting Member has been bidding or offering for at least
the Crossing Exposure Period \39\ prior to receiving an agency FLEX
Order that is executable against such bid or offer. With respect to
solicitation orders, a Submitting Member may not execute a solicited
order against a FLEX Order it represents as agent unless the agency
order is first subject to an RFQ.
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\39\ The length of this Crossing Exposure Period shall be
determined by the appropriate Procedure Committee on a class-by-
class basis and shall not be less than three seconds. See proposed
Rule 24B.5(b)(3)(i).
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All Book transactions must also be in compliance with Section
11(a)(1) and the rules promulgated thereunder. In this regard:
``G'' Exemption: The Exchange is proposing that a member
may rely on the ``G'' exemption only if the member is ``hitting'' the
Book with a proprietary order. To the extent the proprietary order is
not executed in whole or in part as soon as it hits the Book, the order
must be immediately cancelled by the member. Such a member would also
have to satisfy the other requirements of the ``G'' exemption,
including the gross-revenue-related requirements of paragraph (b) of
the ``G'' exemption rule. However, a member may not rely on the ``G''
exemption to rest a proprietary order in the Book. This limitation is
necessary in order to ensure that the member yields priority to any bid
(offer) at the same price for the account of a non-member.
``Effect versus Execute'' Exemption: The Exchange is
proposing that a member that submits a proprietary order to rest or
``hit'' the Book from off the floor may rely on the Exchange's
automated System to satisfy the requirement of the ``effect versus
execute'' exemption that the member's proprietary order be executed by
an exchange member that is not affiliated with the member initiating
the proprietary order. Such a member would also have to satisfy the
other requirements of the ``effect versus execute'' exemption (which
are discussed in more detail below).
(c). Creation of Binding Contracts
Paragraph (c) of proposed Rule 24B.5 provides that acceptance of
any bid or offer creates a binding contract under Rule 6.48. This
provision is the same as in existing Rule 24A.5(d) and will apply for
both RFQ and Book transactions.
(d). FLEX Priority Algorithms and Section 11(a)(1) Requirements
Paragraph (d) of proposed Rule 24B.5 describes the general priority
principles applicable to the FLEX Hybrid System. Subparagraph (d)(1)
includes a cross-reference to the priority algorithms applicable to
electronic RFQs, open-outcry RFQs, and Book transactions, each of which
is discussed above. Subparagraph (d)(2) describes the optional crossing
and FLEX Appointed Market-Maker participation entitlements that may be
overlaid on the general priority principles.\40\ The framework for
these participation entitlements is modeled after the existing FLEX
rules. However, the Exchange is proposing some modifications from the
existing structure, which are discussed further below.
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\40\ Additionally, Trade Conditions placed on a FLEX Order may
prevent a match from occurring. See proposed Rules 24B.1(x) and
24B.5(d)(3).
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With respect to the crossing participation entitlement, a
Submitting Member that has matched or improved the BBO or BBO clearing
price, as applicable, will have priority after yielding to certain
trading interests to execute the contra-side of the trade to the extent
of the applicable crossing participation entitlement.\41\ The crossing
participation entitlement is intended to encourage members to bring
FLEX Option orders to CBOE and to
[[Page 50141]]
commit their capital to the FLEX Options market on CBOE, and thereby
contribute to the liquidity of that market, by guaranteeing them a
minimum right of participation in the other side of any trade they
bring to the market if they are prepared to match or improve the BBO.
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\41\ As discussed above, the mechanics for receiving a crossing
participation entitlement and the related priority requirements are
described in proposed Rule 24B.5(a)(1)(iii)(D) with respect to
electronic RFQs and in proposed Rule 24B.5(a)(2)(iii)(B) and (v)
with respect to open-outcry RFQs.
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