Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change Regarding a New Options Market Linkage Structure, 32664-32667 [E9-15992]
Download as PDF
<![CDATA[
32664
Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Notices
thereunder 11 because the foregoing
proposed rule: (i) Does not significantly
affect the protection of investors or the
public interest; (ii) does not impose any
significant burden on competition; and
(iii) does not become operative for 30
days after the date of filing, or such
shorter time as the Commission may
designate if consistent with the
protection of investors and the public
interest.12
A proposed rule change filed
pursuant to Rule 19b–4(f)(6) under the
Act 13 normally does not become
operative for 30 days after the date of its
filing. However, Rule 19b–4(f)(6)(iii) 14
permits the Commission to designate a
shorter time if such action is consistent
with the protection of investors and the
public interest. The NYSE has requested
that the Commission waive the 30-day
operative delay. The Commission
believes that waiving the 30-day
operative delay is consistent with the
protection of investors and the public
interest because it would allow the
Moratorium to continue without
interruption while awaiting the
completion of the rule filing process
with respect to SR–NYSE–2009–08.
Therefore, the Commission designates
that the proposed rule change become
operative immediately.15
At any time within 60 days of the
filing of the proposed rule change, the
Commission may summarily abrogate
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
11 17
CFR 240.19b–4(f)(6).
addition, Rule 19b–4(f)(6)(iii) requires the
self-regulatory organization to give the Commission
notice of its intent to file the proposed rule change,
along with a brief description and text of the
proposed rule change, at least five business days
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. NYSE has satisfied this requirement.
13 17 CFR 240.19b–4(f)(6).
14 17 CFR 240.19b–4(f)(6)(iii).
15 For purposes only of waiving the 30-day
operative delay, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
mstockstill on DSKH9S0YB1PROD with NOTICES
12 In
VerDate Nov<24>2008
17:23 Jul 07, 2009
Jkt 217001
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–NYSE–2009–62 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–NYSE–2009–62. 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 the filing will also be available
for inspection and copying at the
principal office of the self-regulatory
organization. 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–NYSE–
2009–62 and should be submitted on or
before July 29, 2009.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.16
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9–15994 Filed 7–7–09; 8:45 am]
BILLING CODE 8010–01–P
PO 00000
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–60187; File No. SR–CBOE–
2009–040]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing of a
Proposed Rule Change Regarding a
New Options Market Linkage Structure
June 29, 2009.
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 June 24,
2009, the Chicago Board Options
Exchange, Incorporated (the ‘‘Exchange’’
or ‘‘CBOE’’) filed with the Securities
and Exchange Commission (the
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The filing proposes to adopt certain
new order handling rules in connection
with a new options industry linkage
structure. The text of the proposed rule
change is available on the Exchange’s
Web site (https://www.cboe.org/legal), at
the Exchange’s Principal office, and at
the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization 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
Statutory Basis for, the Proposed Rule
Change
1. Purpose
This filing proposes to adopt rules to
facilitate the Exchange’s transition to a
new intermarket linkage structure. Since
1 15
16 17
CFR 200.30–3(a)(12).
Frm 00136
Fmt 4703
Sfmt 4703
2 17
E:\FR\FM\08JYN1.SGM
U.S.C. 78s(b)(1).
CFR 240.19b–4.
08JYN1
Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Notices
mstockstill on DSKH9S0YB1PROD with NOTICES
2000, the Exchange has been a
participant in the Plan for the Purpose
of Creating and Operating an
Intermarket Option Linkage (the ‘‘Old
Plan’’). That plan achieved intermarket
order protection via a spoke-and-hub
connectivity structure between options
exchanges. The Options Clearing
Corporation acted as the hub and
provided connectivity between
exchanges. This connectivity, which did
not require the transmission of orders to
an exchange through a member of that
exchange, allowed for the sending of
three order types: P/A orders (which are
for the principal account of a marketmaker on behalf of a non-broker-dealer
customer), P Orders (orders for the
proprietary account of a market-maker),
and Satisfaction Orders (orders
reflecting the terms of a non-brokerdealer customer order resting on an
exchange that was traded-through by
another market).
The Participants of the Old Plan have
established a new plan to provide a
more modern framework for options
market order protection and locked/
crossed markets. The new plan is called
the Options Order Protection and
Locked/Crossed Market Plan (the ‘‘Plan’’
or ‘‘New Plan’’). The New Plan does not
route orders through a hub. Instead it
requires Participants to access betterpriced quotations on another market
through a member of that market and
via the transmission of a new ordertype: The Intermarket Sweep Order
(‘‘ISO’’). The New Plan’s order
protection provisions are modeled after
Regulation NMS Rule 611.
As described below, this filing adopts
rules that correspond to the order
protection provisions of the New Plan
(these rules will generally be uniform
with the rules of the other Participants).
It also modifies certain Exchange order
handling rules to facilitate
implementation of the New Plan.
New Plan Rules
The filing proposes to eliminate all of
the language in the rules relating to the
Old Plan (Rules 6.80 through 6.85) and
replace that language with rules
mirroring the terms of the New Plan.
The new Section E of Chapter 6 would
contain a rule providing applicable
definitions (Rule 6.80), a rule governing
order protection (Rule 6.81), a rule
governing locked and crossed markets
(Rule 6.82), and a temporary rule
regarding the transition from the Old
Plan framework to the New Plan (Rule
6.83).
Revised Rule 6.81 provides that
members shall not effect trade-throughs.
It also lists the various exceptions to
trade-through liability. These are: (1) If
VerDate Nov<24>2008
17:23 Jul 07, 2009
Jkt 217001
an Eligible Exchange repeatedly fails to
respond within one second to incoming
orders attempting to access its Protected
Quotations (provided certain
notification, assessment, and
documentation requirements are met);
(2) a transaction effected during a
trading rotation; (3) a transaction during
a Crossed Market; (4) the execution of
an order identified as an ISO, or an
execution effected on the Exchange
while it simultaneously routs an ISO to
execute against the full displayed size of
any better-priced Protected Quotation;
(5) the Eligible Exchange displaying the
Protected Quotation that was traded
through had displayed, within one
second prior to execution of the TradeThrough, a Best bid or Best offer, as
applicable, for the options series with a
price that was equal or inferior to the
price of the Trade-Through transaction;
(6) the Protected Quotation traded
through was being disseminated from an
Eligible Exchange whose Quotations
were Non-Firm with respect to such
options series; (7) the execution of a
Complex Trade; (8) the execution of an
order for which, at the time of receipt
of the order, a Member had guaranteed
an execution at no worse than a
specified price, where (i) the stopped
order was for the account of a Customer,
(ii) the Customer agreed to the specified
price on an order-by-order basis, and
(iii) the price of the Trade-Through was,
for a stopped buy (sell) order, lower
(higher) than the national Best Bid
(Offer) in the options series at the time
of execution; (9) the execution of an
order that was stopped at a price that
did not Trade-Through an Eligible
Exchange at the time of the stop; and
(10) the execution of an order at a price
that was not based, directly or
indirectly, on the quoted price of the
options series at the time of execution
and for which the material terms were
not reasonably determinable at the time
the commitment to execute the order
was made.
Proposed Rule 6.82 provides that
members shall reasonably avoid (and
shall not engage in a pattern of) locking
and crossing Protected Quotations. The
Rule contains the following exceptions:
(1) The locking or crossing quotation
was displayed at a time when the
Exchange was experiencing a failure,
material delay, or malfunction of its
systems or equipment; (2) The locking
or crossing quotation was displayed at
a time when there is a Crossed Market;
(3) The Member simultaneously routed
an ISO to execute against the full
displayed size of any locked or crossed
Protected Bid or Protected Offer; and (4)
The locking quotation is permissible
PO 00000
Frm 00137
Fmt 4703
Sfmt 4703
32665
pursuant to Rules 6.45A(d) and
6.45B(d).3
Temporary Rule 6.83 provides that
during the transition to the New Plan,
the Exchange will continue to receive
and execute (and may send) P/A and P
orders if the Exchange is the NBBO.
Once all Participants have completely
migrated to the New Plan structure, this
Rule would cease to be necessary. In
connection with the transition, CBOE
intends to access other Participants via
the use of P/A and P orders on a
temporary basis pursuant to exemptive
relief we are requesting from the
Commission until the Exchange’s rollout of the new functionality is complete
(once ISO outbound routing is available
for a class, the Exchange will cease
using P and P/A orders as well as ‘‘old’’
HAL functionality for that class). The
Exchange anticipates that the migration
to the New Plan functionality will take
several weeks. The Exchange will keep
members informed of the rollout
schedule via circular and will identify
on a class-by-class basis which classes
are trading pursuant to the temporary
rule and utilizing ‘‘old’’ HAL as well as
which classes are trading pursuant to
the ‘‘new’’ linkage rules and HAL2.
HAL2
The Exchange proposes to adopt a
new Hybrid Agency Liaison System
(‘‘HAL2’’) in proposed Rule 6.14A. The
Exchange will determine the eligible
order size, eligible order type, eligible
order origin code (i.e., public customer
orders, non-Market Maker broker-dealer
orders, and Market Maker broker-dealer
orders), and classes for HAL2.4 When
the Exchange receives a qualifying order
that is marketable against the NBBO
and/or the Exchange’s BBO,5 HAL2 will
‘‘flash’’ the order at the NBBO price to
allow CBOE Market-Makers appointed
in that class as well as all members
acting as agent for orders at the top of
the Exchange’s book in the relevant
series (and other members if allowed by
the Exchange) to step-up to the NBBO
price. The duration of the flash period
shall not exceed 1 second. The first
responder to indicate an interest to trade
at the NBBO price will trade against the
flashed order up to the size of the
response (the flash period will continue
3 CBOE Rules 6.45A(d) and 6.45B(d) allow the
Exchange to temporarily disseminate a lock
between Exchange Market-Makers. This lock is firm
for all buy and sell orders.
4 As classes migrate to the New Plan on CBOE,
the Exchange will be able to utilize HAL2 for those
classes (i.e. HAL2 will only be available for classes
trading pursuant to the New Plan).
5 Unless the Exchange’s quotation contains
resting orders and does not contain sufficient
Market-Maker quotation interest to satisfy the entire
order.
E:\FR\FM\08JYN1.SGM
08JYN1
mstockstill on DSKH9S0YB1PROD with NOTICES
32666
Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Notices
for any unexecuted balance).
Responders will also be allowed to
respond at prices worse than the NBBO
but equal to or better than the
Exchange’s BBO. At the end of the
response period (if no responders have
matched the NBBO price or if there is
a remainder on the flashed order) the
HAL2 system will ascertain the best
available price(s) between all pending
responses and the best disseminated
prices on other exchanges, and then
execute the flashed order at the best
price(s) by trading it against flash
responses first and transmitting ISOs to
other exchanges second.
For example, CBOE’s best offer is 1.22
for 200 contracts, and the NBBO is 1.19
for 10 contracts with one other market
disseminating a 1.20 offer for 20
contracts. An order to buy 100 contracts
at 1.22 is received. The order will be
flashed at 1.19. Market-Maker A
immediately submits a response to trade
10 contracts at 1.19. As a result 10
contracts trade against Market-Maker A
at 1.19 (leaving 90 contracts on the
order). During the remaining flash
period Market-Maker B submits a
response to trade 20 contracts at 1.21.
As soon as the flash period concludes
(assuming the away market prices have
not changed), the system will
simultaneously: Route an ISO to buy 10
contracts at 1.19 to the NBBO market,
route an ISO to buy 20 contracts at 1.20
to the market displaying the 1.20 offer,
execute 20 at 1.21 against Market-Maker
B, and execute the remaining 40 against
the Exchange’s 1.22 offer using the
matching algorithm in effect for the
class.
If any portion of an order that is
routed away returns unfilled, the
Exchange will deem it a ‘‘new’’ order for
processing purposes and trade it against
the best bid/offer on the Exchange
unless another exchange is quoting a
better price in which case the Exchange
will attempt to access such better price
with a new ISO order. Any executions
at the Exchange’s best bid/offer will be
handled in two batches: First against all
interest resting at that price at the time
the flashed order was received, and
second against any interest that joined
at that price after the flash process
commenced (in both cases the matching
algorithm in effect for that class will be
used). The Exchange also notes that
order senders can bypass HAL2
processing by submitting Immediate or
Cancel Orders.
Paragraph (d) of proposed Rule 6.14A
lists the circumstances in which a flash
period would terminate early. Those
are: (1) If the Exchange receives an
unrelated order on the same side of the
market as the flashed order that is
VerDate Nov<24>2008
17:23 Jul 07, 2009
Jkt 217001
priced equal to or better than the flashed
order; (2) if, in the case of an exposed
order that is marketable against the
Exchange’s BBO, Market-Maker interest
at the BBO decrements to a size that
would be equal to or smaller than the
size of the exposed order; and (3) if an
unrelated order or quote on the opposite
side of the market from the exposed
order is received that could trade
against the exposed order at the
prevailing NBBO or better in which case
the orders would trade at the NBBO
unless the unrelated order is a customer
order in which case the orders would
trade at the midpoint of the unrelated
order’s limit price and the NBBO (e.g.
the NBBO/flash price for a buy order is
1.15, during the exposure period a
customer limit order to sell at 1.13 is
received, the orders will be matched to
the greatest extent possible at 1.14
providing price improvement to both
orders).6
Lastly, Interpretation and Policy .01 to
Rule 6.14A provides that the Exchange
will limit redistribution of exposed
order messages to third parties.
Essentially, the purpose of this
provision is to provide the Exchange
with flexibility to restrict members from
passing on or redistributing flash
messages to others. Of course, the
provisions of Exchange Rule 4.1 (Just
and Equitable Principles of Trade) and
4.18 (Prevention of the Misuse of
Material, Nonpublic Information) apply
to all HAL2 trading.
Price Check Parameter
A new price check parameter is also
being adopted in connection with the
new HAL2 process (this new parameter
is in Rule 6.13(vi)). For classes in which
HAL2 is activated, the Exchange will
not automatically execute orders that
are marketable if the NBBO width is not
within an acceptable price range
established by the Exchange (APR), or if
an execution would follow an initial
partial execution and occur at a price
that is not within an acceptable tick
distance from the initial execution as
established by the Exchange (ATD). If an
execution is suspended because of the
APR, the order will route to PAR for
handling. If an execution is suspended
because of the ATD, the order will be
exposed pursuant to the HAL2 process
using the ATD as the exposure price. If
a quantity remains after the HAL2
process, the balance will route to PAR
(in this regard, the HAL2 processing for
these orders is different that normal
HAL2 processing). The Exchange notes
6 If the unrelated order was smaller than the
exposed order, then the flash would continue for
the unexecuted balance of the exposed order.
PO 00000
Frm 00138
Fmt 4703
Sfmt 4703
that users may bypass this processing by
submitting orders with an immediate or
cancel designation.
New Order Routing Rule
The Exchange proposes to adopt new
Rule 6.14B which would govern the
Exchange’s process for routing sweep
orders to other markets. The Exchange
intends to contract with one or more
routing brokers that are not affiliated
with the Exchange to route sweep orders
to other exchanges. Any such contract
will restrict the use of any confidential
and proprietary information that the
routing broker receives to legitimate
business purposes necessary for routing
orders at the direction of the Exchange.
Routing services would be available to
members only and are optional.
Members that do not want orders routed
can use the Immediate or Cancel
designation to avoid routing.
The rule also provides that (1) the
Exchange shall establish and maintain
procedures and internal controls
reasonably designed to adequately
restrict the flow of confidential and
proprietary information between the
Exchange and the routing broker, and
any other entity, including any affiliate
of the routing broker, and, if the routing
broker or any of its affiliates engages in
any other business activities other than
providing routing services to the
Exchange, between the segment of the
routing broker or affiliate that provides
the other business activities and the
segment of the routing broker that
provides the routing services; (2) the
Exchange may not use a routing broker
for which the Exchange or any affiliate
of the Exchange is the designated
examining authority; (3) the Exchange
will provide its Routing Services in
compliance with the provisions of the
Act and the rules thereunder, including,
but not limited to, the requirements in
Section 6(b)(4) and (5) of the Act that
the rules of a national securities
exchange provide for the equitable
allocation of reasonable dues, fees, and
other charges among its members and
issuers and other persons using its
facilities, and not be designed to permit
unfair discrimination between
customers, issuers, brokers, or dealers;
(4) the Exchange will determine the
logic that provides when, how, and
where orders are routed away to other
exchanges; (5) the routing broker cannot
change the terms of an order or the
routing instructions, nor does the
routing broker have any discretion about
where to route an order; and, (6) any bid
or offer entered on the Exchange routed
to another exchange via a routing broker
that results in an execution shall be
E:\FR\FM\08JYN1.SGM
08JYN1
Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Notices
operative until the Exchange has
withdrawn from the Old Plan.
New Order Types
The filing proposes to adopt several
new order types that would be added to
Rule 6.53: (1) AIM Sweep Order. An
AIM sweep order (AIM ISO) is the
transmission of two orders for crossing
pursuant to Rule 6.74A without regard
for better priced Protected Bids/Offers
because the member transmitting the
AIM ISO to the Exchange has,
simultaneously with the routing of the
AIM ISO, routed one or more ISOs, as
necessary, to execute against the full
displayed size of any Protected Bid/
Offer that is superior to the starting AIM
auction price and has swept all interest
in the Exchange’s book priced better
than the proposed auction starting price
(with any execution(s) resulting from
such sweeps shall accrue to the AIM
Agency Order); (2) Sweep and AIM
Order. A sweep and AIM order is the
transmission of two orders for crossing
pursuant to Rule 6.74A with an auction
starting price that does not need to be
within the Exchange’s best bid and offer
and where the Exchange will ‘‘sweep’’
all Protected Bids/Offers by routing one
or more ISOs, as necessary, to execute
against the full displayed size of any
Protected Bid/Offer that is superior to
the starting AIM auction price, as well
as sweep all interest in the Exchange’s
book priced better than the proposed
auction starting price concurrent with
the commencement of the AIM auction
with any execution(s) resulting from
such sweeps accruing to the AIM
Agency Order; and, (3) CBOE-Only
Order. A CBOE-only order is an order to
buy or sell that is to be executed in
whole or in part on the Exchange
without routing the order to another
market center and that is to be cancelled
if routing would be required under the
Exchange’s Rules.
mstockstill on DSKH9S0YB1PROD with NOTICES
binding on the member that entered
such bid/offer.
2. Statutory Basis
Other Changes
In connection with the new linkage
structure and the adoption of the rules
described above, the Exchange is also
making minor changes to other
Exchange rules including adding
reference to HAL2 to Rule 6.2B,
eliminating The ‘‘Removal of Unreliable
Quotes’’ provision of Rule 6.13,
eliminating references in the Exchanges
crossing mechanisms (6.74A and 6.74B)
to the block trade exemption of the Old
Plan, and deletion of Rule 8.52 relating
to the now defunct Pilot Program for
Away Market Maker Access.
Implementation
The Exchange represents that the
proposed rules will not become
VerDate Nov<24>2008
17:23 Jul 07, 2009
Jkt 217001
The Exchange believes the proposed
rule change is consistent with Section
6(b) of the Act7 in general and furthers
the objectives of Section 6(b)(5) of the
Act8 in particular in that, by making the
linkage process more efficient and
offering users greater control over order
routing, it is designed to promote just
and equitable principles of trade, serve
to remove impediments to and perfect
the mechanism of a free and open
market and a national market system.
Moreover, the Exchange believes that
adopting rules that implement the Plan
will facilitate the trading of options in
a national market system by establishing
more efficient protection against tradethroughs.
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 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:
7 15
8 15
PO 00000
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
Frm 00139
Fmt 4703
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–2009–040 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–CBOE–2009–040. 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 the filing will also be available
for inspection and copying at the
principal office of the self-regulatory
organization. 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–
2009–040 and should be submitted on
or before July 29, 2009.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.9
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9–15992 Filed 7–7–09; 8:45 am]
BILLING CODE 8010–01–P
9 17
Sfmt 4703
32667
E:\FR\FM\08JYN1.SGM
CFR 200.30–3(a)(12).
08JYN1
]]>Agencies
[Federal Register Volume 74, Number 129 (Wednesday, July 8, 2009)]
[Notices]
[Pages 32664-32667]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-15992]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-60187; File No. SR-CBOE-2009-040]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of a Proposed Rule Change Regarding a
New Options Market Linkage Structure
June 29, 2009.
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 June 24, 2009, the Chicago Board Options Exchange, Incorporated
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange
Commission (the ``Commission'') the proposed rule change as described
in Items I, II, and III below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The filing proposes to adopt certain new order handling rules in
connection with a new options industry linkage structure. The text of
the proposed rule change is available on the Exchange's Web site
(https://www.cboe.org/legal), at the Exchange's Principal office, and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
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
Statutory Basis for, the Proposed Rule Change
1. Purpose
This filing proposes to adopt rules to facilitate the Exchange's
transition to a new intermarket linkage structure. Since
[[Page 32665]]
2000, the Exchange has been a participant in the Plan for the Purpose
of Creating and Operating an Intermarket Option Linkage (the ``Old
Plan''). That plan achieved intermarket order protection via a spoke-
and-hub connectivity structure between options exchanges. The Options
Clearing Corporation acted as the hub and provided connectivity between
exchanges. This connectivity, which did not require the transmission of
orders to an exchange through a member of that exchange, allowed for
the sending of three order types: P/A orders (which are for the
principal account of a market-maker on behalf of a non-broker-dealer
customer), P Orders (orders for the proprietary account of a market-
maker), and Satisfaction Orders (orders reflecting the terms of a non-
broker-dealer customer order resting on an exchange that was traded-
through by another market).
The Participants of the Old Plan have established a new plan to
provide a more modern framework for options market order protection and
locked/crossed markets. The new plan is called the Options Order
Protection and Locked/Crossed Market Plan (the ``Plan'' or ``New
Plan''). The New Plan does not route orders through a hub. Instead it
requires Participants to access better-priced quotations on another
market through a member of that market and via the transmission of a
new order-type: The Intermarket Sweep Order (``ISO''). The New Plan's
order protection provisions are modeled after Regulation NMS Rule 611.
As described below, this filing adopts rules that correspond to the
order protection provisions of the New Plan (these rules will generally
be uniform with the rules of the other Participants). It also modifies
certain Exchange order handling rules to facilitate implementation of
the New Plan.
New Plan Rules
The filing proposes to eliminate all of the language in the rules
relating to the Old Plan (Rules 6.80 through 6.85) and replace that
language with rules mirroring the terms of the New Plan. The new
Section E of Chapter 6 would contain a rule providing applicable
definitions (Rule 6.80), a rule governing order protection (Rule 6.81),
a rule governing locked and crossed markets (Rule 6.82), and a
temporary rule regarding the transition from the Old Plan framework to
the New Plan (Rule 6.83).
Revised Rule 6.81 provides that members shall not effect trade-
throughs. It also lists the various exceptions to trade-through
liability. These are: (1) If an Eligible Exchange repeatedly fails to
respond within one second to incoming orders attempting to access its
Protected Quotations (provided certain notification, assessment, and
documentation requirements are met); (2) a transaction effected during
a trading rotation; (3) a transaction during a Crossed Market; (4) the
execution of an order identified as an ISO, or an execution effected on
the Exchange while it simultaneously routs an ISO to execute against
the full displayed size of any better-priced Protected Quotation; (5)
the Eligible Exchange displaying the Protected Quotation that was
traded through had displayed, within one second prior to execution of
the Trade-Through, a Best bid or Best offer, as applicable, for the
options series with a price that was equal or inferior to the price of
the Trade-Through transaction; (6) the Protected Quotation traded
through was being disseminated from an Eligible Exchange whose
Quotations were Non-Firm with respect to such options series; (7) the
execution of a Complex Trade; (8) the execution of an order for which,
at the time of receipt of the order, a Member had guaranteed an
execution at no worse than a specified price, where (i) the stopped
order was for the account of a Customer, (ii) the Customer agreed to
the specified price on an order-by-order basis, and (iii) the price of
the Trade-Through was, for a stopped buy (sell) order, lower (higher)
than the national Best Bid (Offer) in the options series at the time of
execution; (9) the execution of an order that was stopped at a price
that did not Trade-Through an Eligible Exchange at the time of the
stop; and (10) the execution of an order at a price that was not based,
directly or indirectly, on the quoted price of the options series at
the time of execution and for which the material terms were not
reasonably determinable at the time the commitment to execute the order
was made.
Proposed Rule 6.82 provides that members shall reasonably avoid
(and shall not engage in a pattern of) locking and crossing Protected
Quotations. The Rule contains the following exceptions: (1) The locking
or crossing quotation was displayed at a time when the Exchange was
experiencing a failure, material delay, or malfunction of its systems
or equipment; (2) The locking or crossing quotation was displayed at a
time when there is a Crossed Market; (3) The Member simultaneously
routed an ISO to execute against the full displayed size of any locked
or crossed Protected Bid or Protected Offer; and (4) The locking
quotation is permissible pursuant to Rules 6.45A(d) and 6.45B(d).\3\
---------------------------------------------------------------------------
\3\ CBOE Rules 6.45A(d) and 6.45B(d) allow the Exchange to
temporarily disseminate a lock between Exchange Market-Makers. This
lock is firm for all buy and sell orders.
---------------------------------------------------------------------------
Temporary Rule 6.83 provides that during the transition to the New
Plan, the Exchange will continue to receive and execute (and may send)
P/A and P orders if the Exchange is the NBBO. Once all Participants
have completely migrated to the New Plan structure, this Rule would
cease to be necessary. In connection with the transition, CBOE intends
to access other Participants via the use of P/A and P orders on a
temporary basis pursuant to exemptive relief we are requesting from the
Commission until the Exchange's roll-out of the new functionality is
complete (once ISO outbound routing is available for a class, the
Exchange will cease using P and P/A orders as well as ``old'' HAL
functionality for that class). The Exchange anticipates that the
migration to the New Plan functionality will take several weeks. The
Exchange will keep members informed of the rollout schedule via
circular and will identify on a class-by-class basis which classes are
trading pursuant to the temporary rule and utilizing ``old'' HAL as
well as which classes are trading pursuant to the ``new'' linkage rules
and HAL2.
HAL2
The Exchange proposes to adopt a new Hybrid Agency Liaison System
(``HAL2'') in proposed Rule 6.14A. The Exchange will determine the
eligible order size, eligible order type, eligible order origin code
(i.e., public customer orders, non-Market Maker broker-dealer orders,
and Market Maker broker-dealer orders), and classes for HAL2.\4\ When
the Exchange receives a qualifying order that is marketable against the
NBBO and/or the Exchange's BBO,\5\ HAL2 will ``flash'' the order at the
NBBO price to allow CBOE Market-Makers appointed in that class as well
as all members acting as agent for orders at the top of the Exchange's
book in the relevant series (and other members if allowed by the
Exchange) to step-up to the NBBO price. The duration of the flash
period shall not exceed 1 second. The first responder to indicate an
interest to trade at the NBBO price will trade against the flashed
order up to the size of the response (the flash period will continue
[[Page 32666]]
for any unexecuted balance). Responders will also be allowed to respond
at prices worse than the NBBO but equal to or better than the
Exchange's BBO. At the end of the response period (if no responders
have matched the NBBO price or if there is a remainder on the flashed
order) the HAL2 system will ascertain the best available price(s)
between all pending responses and the best disseminated prices on other
exchanges, and then execute the flashed order at the best price(s) by
trading it against flash responses first and transmitting ISOs to other
exchanges second.
---------------------------------------------------------------------------
\4\ As classes migrate to the New Plan on CBOE, the Exchange
will be able to utilize HAL2 for those classes (i.e. HAL2 will only
be available for classes trading pursuant to the New Plan).
\5\ Unless the Exchange's quotation contains resting orders and
does not contain sufficient Market-Maker quotation interest to
satisfy the entire order.
---------------------------------------------------------------------------
For example, CBOE's best offer is 1.22 for 200 contracts, and the
NBBO is 1.19 for 10 contracts with one other market disseminating a
1.20 offer for 20 contracts. An order to buy 100 contracts at 1.22 is
received. The order will be flashed at 1.19. Market-Maker A immediately
submits a response to trade 10 contracts at 1.19. As a result 10
contracts trade against Market-Maker A at 1.19 (leaving 90 contracts on
the order). During the remaining flash period Market-Maker B submits a
response to trade 20 contracts at 1.21. As soon as the flash period
concludes (assuming the away market prices have not changed), the
system will simultaneously: Route an ISO to buy 10 contracts at 1.19 to
the NBBO market, route an ISO to buy 20 contracts at 1.20 to the market
displaying the 1.20 offer, execute 20 at 1.21 against Market-Maker B,
and execute the remaining 40 against the Exchange's 1.22 offer using
the matching algorithm in effect for the class.
If any portion of an order that is routed away returns unfilled,
the Exchange will deem it a ``new'' order for processing purposes and
trade it against the best bid/offer on the Exchange unless another
exchange is quoting a better price in which case the Exchange will
attempt to access such better price with a new ISO order. Any
executions at the Exchange's best bid/offer will be handled in two
batches: First against all interest resting at that price at the time
the flashed order was received, and second against any interest that
joined at that price after the flash process commenced (in both cases
the matching algorithm in effect for that class will be used). The
Exchange also notes that order senders can bypass HAL2 processing by
submitting Immediate or Cancel Orders.
Paragraph (d) of proposed Rule 6.14A lists the circumstances in
which a flash period would terminate early. Those are: (1) If the
Exchange receives an unrelated order on the same side of the market as
the flashed order that is priced equal to or better than the flashed
order; (2) if, in the case of an exposed order that is marketable
against the Exchange's BBO, Market-Maker interest at the BBO decrements
to a size that would be equal to or smaller than the size of the
exposed order; and (3) if an unrelated order or quote on the opposite
side of the market from the exposed order is received that could trade
against the exposed order at the prevailing NBBO or better in which
case the orders would trade at the NBBO unless the unrelated order is a
customer order in which case the orders would trade at the midpoint of
the unrelated order's limit price and the NBBO (e.g. the NBBO/flash
price for a buy order is 1.15, during the exposure period a customer
limit order to sell at 1.13 is received, the orders will be matched to
the greatest extent possible at 1.14 providing price improvement to
both orders).\6\
---------------------------------------------------------------------------
\6\ If the unrelated order was smaller than the exposed order,
then the flash would continue for the unexecuted balance of the
exposed order.
---------------------------------------------------------------------------
Lastly, Interpretation and Policy .01 to Rule 6.14A provides that
the Exchange will limit redistribution of exposed order messages to
third parties. Essentially, the purpose of this provision is to provide
the Exchange with flexibility to restrict members from passing on or
redistributing flash messages to others. Of course, the provisions of
Exchange Rule 4.1 (Just and Equitable Principles of Trade) and 4.18
(Prevention of the Misuse of Material, Nonpublic Information) apply to
all HAL2 trading.
Price Check Parameter
A new price check parameter is also being adopted in connection
with the new HAL2 process (this new parameter is in Rule 6.13(vi)). For
classes in which HAL2 is activated, the Exchange will not automatically
execute orders that are marketable if the NBBO width is not within an
acceptable price range established by the Exchange (APR), or if an
execution would follow an initial partial execution and occur at a
price that is not within an acceptable tick distance from the initial
execution as established by the Exchange (ATD). If an execution is
suspended because of the APR, the order will route to PAR for handling.
If an execution is suspended because of the ATD, the order will be
exposed pursuant to the HAL2 process using the ATD as the exposure
price. If a quantity remains after the HAL2 process, the balance will
route to PAR (in this regard, the HAL2 processing for these orders is
different that normal HAL2 processing). The Exchange notes that users
may bypass this processing by submitting orders with an immediate or
cancel designation.
New Order Routing Rule
The Exchange proposes to adopt new Rule 6.14B which would govern
the Exchange's process for routing sweep orders to other markets. The
Exchange intends to contract with one or more routing brokers that are
not affiliated with the Exchange to route sweep orders to other
exchanges. Any such contract will restrict the use of any confidential
and proprietary information that the routing broker receives to
legitimate business purposes necessary for routing orders at the
direction of the Exchange. Routing services would be available to
members only and are optional. Members that do not want orders routed
can use the Immediate or Cancel designation to avoid routing.
The rule also provides that (1) the Exchange shall establish and
maintain procedures and internal controls reasonably designed to
adequately restrict the flow of confidential and proprietary
information between the Exchange and the routing broker, and any other
entity, including any affiliate of the routing broker, and, if the
routing broker or any of its affiliates engages in any other business
activities other than providing routing services to the Exchange,
between the segment of the routing broker or affiliate that provides
the other business activities and the segment of the routing broker
that provides the routing services; (2) the Exchange may not use a
routing broker for which the Exchange or any affiliate of the Exchange
is the designated examining authority; (3) the Exchange will provide
its Routing Services in compliance with the provisions of the Act and
the rules thereunder, including, but not limited to, the requirements
in Section 6(b)(4) and (5) of the Act that the rules of a national
securities exchange provide for the equitable allocation of reasonable
dues, fees, and other charges among its members and issuers and other
persons using its facilities, and not be designed to permit unfair
discrimination between customers, issuers, brokers, or dealers; (4) the
Exchange will determine the logic that provides when, how, and where
orders are routed away to other exchanges; (5) the routing broker
cannot change the terms of an order or the routing instructions, nor
does the routing broker have any discretion about where to route an
order; and, (6) any bid or offer entered on the Exchange routed to
another exchange via a routing broker that results in an execution
shall be
[[Page 32667]]
binding on the member that entered such bid/offer.
New Order Types
The filing proposes to adopt several new order types that would be
added to Rule 6.53: (1) AIM Sweep Order. An AIM sweep order (AIM ISO)
is the transmission of two orders for crossing pursuant to Rule 6.74A
without regard for better priced Protected Bids/Offers because the
member transmitting the AIM ISO to the Exchange has, simultaneously
with the routing of the AIM ISO, routed one or more ISOs, as necessary,
to execute against the full displayed size of any Protected Bid/Offer
that is superior to the starting AIM auction price and has swept all
interest in the Exchange's book priced better than the proposed auction
starting price (with any execution(s) resulting from such sweeps shall
accrue to the AIM Agency Order); (2) Sweep and AIM Order. A sweep and
AIM order is the transmission of two orders for crossing pursuant to
Rule 6.74A with an auction starting price that does not need to be
within the Exchange's best bid and offer and where the Exchange will
``sweep'' all Protected Bids/Offers by routing one or more ISOs, as
necessary, to execute against the full displayed size of any Protected
Bid/Offer that is superior to the starting AIM auction price, as well
as sweep all interest in the Exchange's book priced better than the
proposed auction starting price concurrent with the commencement of the
AIM auction with any execution(s) resulting from such sweeps accruing
to the AIM Agency Order; and, (3) CBOE-Only Order. A CBOE-only order is
an order to buy or sell that is to be executed in whole or in part on
the Exchange without routing the order to another market center and
that is to be cancelled if routing would be required under the
Exchange's Rules.
Other Changes
In connection with the new linkage structure and the adoption of
the rules described above, the Exchange is also making minor changes to
other Exchange rules including adding reference to HAL2 to Rule 6.2B,
eliminating The ``Removal of Unreliable Quotes'' provision of Rule
6.13, eliminating references in the Exchanges crossing mechanisms
(6.74A and 6.74B) to the block trade exemption of the Old Plan, and
deletion of Rule 8.52 relating to the now defunct Pilot Program for
Away Market Maker Access.
Implementation
The Exchange represents that the proposed rules will not become
operative until the Exchange has withdrawn from the Old Plan.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
Section 6(b) of the Act\7\ in general and furthers the objectives of
Section 6(b)(5) of the Act\8\ in particular in that, by making the
linkage process more efficient and offering users greater control over
order routing, it is designed to promote just and equitable principles
of trade, serve to remove impediments to and perfect the mechanism of a
free and open market and a national market system. Moreover, the
Exchange believes that adopting rules that implement the Plan will
facilitate the trading of options in a national market system by
establishing more efficient protection against trade-throughs.
---------------------------------------------------------------------------
\7\ 15 U.S.C. 78f(b).
\8\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
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 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:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-CBOE-2009-040 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2009-040. 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 the filing will also be available for
inspection and copying at the principal office of the self-regulatory
organization. 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-2009-040 and should be submitted on or before July 29, 2009.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\9\
---------------------------------------------------------------------------
\9\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-15992 Filed 7-7-09; 8:45 am]
BILLING CODE 8010-01-P
