Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Related to the Hybrid Matching Algorithms, 41766-41769 [E9-19734]

Download as PDF 41766 Federal Register / Vol. 74, No. 158 / Tuesday, August 18, 2009 / Notices All submissions should refer to File Number SR–BX–2009–041. 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 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–BX–2009–041 and should be submitted on or before September 8, 2009. matched automatically with quotes on the other side of the market according to time priority, and executed immediately.4 Because there is no trading floor and all orders are received and managed electronically, all orders on BOX are executed with matching contra orders within a fraction of a second after the matching quote is received.5 Any backlog in processing orders would be a result of a systems malfunction rather than from fast market conditions. Should any such backlog occur, the Exchange would halt trading on BOX until the issue could be resolved.6 Accordingly, the Exchange believes Chapter V, Section 13 is unnecessary in the BOX Rules and should be removed. In addition to removing Chapter V, Section 13, the proposed rule change would also remove certain rules related to fast markets. The Exchange proposes to modify Chapter VI, Section 6(a) to remove a fast market rule exception to the general rule that all Market Maker bids or offers must be of a size of at least ten (10) contracts. The Exchange also proposes to amend Section 6(c). First, Section 6(c)(ii)(2) will be removed to reflect the previously described removal of Chapter V, Section 13. Second, references to Rule 11Ac1–1 will be replaced with Rule 602 of Regulation NMS under the Exchange Act (‘‘Rule 602’’). With the implementation of Regulation NMS, Rule 11Ac1–1, in pertinent part, has been incorporated into Rule 602. The proposed rule change would also modify Chapter XIV (Index Rules), Section 9(b) (Trading Sessions) by eliminating the declaration of a fast market as a factor in determining whether to delay the opening of the index options market. mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. Specifically, the proposal will align the BOX Rules to more accurately reflect the circumstances surrounding trading on an electronic exchange and promote transparency. 2. Statutory Basis The Exchange believes that the proposal is consistent with the requirements of Section 6(b) of the Act,7 in general, and Section 6(b)(5) of the Act,8 in particular, in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, to remove impediments to and perfect the Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Exchange Act. Comments may be submitted by any of the following methods: BILLING CODE 8010–01–P Electronic Comments Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Related to the Hybrid Matching Algorithms jlentini on DSKJ8SOYB1PROD with NOTICES 4 See BOX Trading Rules, Chapter V, Section 16. to certain exceptions written into the BOX Trading Rules, such as Directed Orders (Chapter VI, Section 5(b)–(c)), and other exposure periods (See generally Chapter V, Section 16 (Execution and Price/Time Priority). 6 See BOX Trading Rules, Chapter V, Section 10(a). 7 15 U.S.C. 78f(b). 8 15 U.S.C. 78f(b)(5). 5 Subject VerDate Nov<24>2008 16:30 Aug 17, 2009 Jkt 217001 B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will result in 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 The Exchange has neither solicited nor received comments on the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 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 the proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of 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–BX–2009–041 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. PO 00000 Frm 00093 Fmt 4703 Sfmt 4703 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.9 Florence E. Harmon, Deputy Secretary. [FR Doc. E9–19732 Filed 8–17–09; 8:45 am] SECURITIES AND EXCHANGE COMMISSION [Release No. 34–60476; File No. SR–CBOE– 2009–056] August 11, 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 July 31, 9 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\18AUN1.SGM 18AUN1 Federal Register / Vol. 74, No. 158 / Tuesday, August 18, 2009 / Notices 2009, the Chicago Board Options Exchange, Incorporated (‘‘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 substantially prepared by the Exchange. The Exchange filed the proposal as a ‘‘non-controversial’’ proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 3 and Rule 19b–4(f)(6) thereunder.4 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 Exchange is proposing to amend Rules 6.45A, Priority and Allocation of Equity Option Trades on the CBOE Hybrid System, and 6.45B, Priority and Allocation of Trades in Index Options and Options on ETFs on the CBOE Hybrid System, to include an additional priority overlay. The text of the proposed rule change is available on the Exchange’s Web site (https:// www.cboe.org/Legal), at the Exchange’s Office of the Secretary and at the Commission. 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. jlentini on DSKJ8SOYB1PROD with NOTICES A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose CBOE Rules 6.45A and 6.45B set forth, among other things, the manner in which electronic Hybrid System trades in options are allocated. Paragraph (a) of each rule essentially governs how incoming orders received electronically by the Exchange are electronically executed against interest in the CBOE quote. Paragraph (a) of each rule currently provides a ‘‘menu’’ of 3 15 4 17 U.S.C. 78s(b)(3)(A)(iii). CFR 240.19b–4(f)(6). VerDate Nov<24>2008 16:30 Aug 17, 2009 Jkt 217001 matching algorithms to choose from when executing incoming electronic orders. The menu format allows the Exchange to utilize different matching algorithms on a class-by-class basis. The menu includes, among other choices, the ultimate matching algorithm (‘‘UMA’’), as well as price-time and prorata priority matching algorithms with additional priority overlays. The priority overlays for price-time and prorata currently include: public customer priority for public customer orders resting on the Hybrid System, participation entitlements for certain qualifying market-makers, and a market turner priority for participants that are first to improve CBOE’s disseminated quote. These overlays are optional. The purpose of this rule filing is to adopt an additional priority overlay for small orders that can be applied to each of the three matching algorithms. In particular, if the small order priority overlay is in effect for an option class, then the following would apply: • Orders for five (5) contracts or fewer will be executed first by the Designated Primary Market-Maker (‘‘DPM’’) or Lead Market-Maker (‘‘LMM’’), as applicable, that is appointed to the option class; provided however, that on a quarterly basis the Exchange will evaluate what percentage of the volume executed on the Exchange (excluding volume resulting from the execution of orders in AIM (see CBOE Rule 6.74A, Automated Improvement Mechanism (‘‘AIM’’)) is comprised of orders for five (5) contracts or fewer executed by DPMs and LMMs, and will reduce the size of the orders included in this provision if such percentage is over forty percent (40%). • This procedure only applies to the allocation of executions among noncustomer orders and market maker quotes existing in the EBook at the time the order is received by the Exchange. No market participant is allocated any portion of an execution unless it has an existing interest at the execution price. Moreover, no market participant can execute a greater number of contracts than is associated with the price of its existing interest. Accordingly, the small order preference contained in this allocation procedure is not a guarantee; the DPM or LMM, as applicable, (i) must be quoting at the execution price to receive an allocation of any size, and (ii) cannot execute a greater number of contracts than the size that is associated with its quote. • If a Preferred Market-Maker (see CBOE Rule 8.13, Preferred MarketMaker Program) is not quoting at a price equal to the national best bid or offer (‘‘NBBO’’) at the time a preferred order is received, the allocation procedure for PO 00000 Frm 00094 Fmt 4703 Sfmt 4703 41767 small orders described above shall be applied to the execution of the preferred order. If a Preferred Market Maker is quoting at the NBBO at the time the preferred order is received, the allocation procedure for all other sized orders, shall be applied to the execution of the preferred order (e.g., if the default matching algorithm is pro-rata with a public customer and participation entitlement overlay, the order will execution first against any public customer orders, then the Preferred Market-Maker would receive its participation entitlement, then the remaining balance would be allocated on a pro-rata basis). • The small order priority overlay will only be applicable to automatic executions and will not be applicable to any electronic auctions.5 Lastly, it should be noted that, like the existing priority overlays, the small order priority overlay is optional. All determinations would be set forth in a regulatory circular. According to the Exchange, because DPMs and LMMs have unique obligations to the CBOE market,6 they are provided with certain participation rights. Under the current rule, if the DPM or LMM, as applicable, is one of the participants with a quote at the best price, the participation entitlement is generally equal to 50% when there is one Market-Maker also quoting at the best bid/offer on the Exchange, 40% when there are two Market-Makers also quoting at the best bid/offer on the Exchange, and 30% when there are three or more Market-Makers also quoting at the best bid/offer on the Exchange.7 The Exchange is now seeking to expand these programs to make available an allocation procedure 5 In addition to AIM, CBOE has various electronic auctions that are described under Rules 6.13A, Simple Auction Liaison (‘‘SAL’’), 6.14, Hybrid Agency Liaison (HAL), and 6.74B, Solicitation Auction Mechanism (‘‘AIM SAM’’). Each of these auctions generally allocates executions pursuant to the matching algorithm in effect for the options class with certain exceptions noted in the respective rules. 6 For example DPMs must, among other things, (i) provide continuous electronic quotes in at least 90% of the series of each multiply-listed option classed allocated to it and in 100% of the series of each singly-listed option class allocated to it, and assure that its disseminated market quotes are accurate; (ii) comply with bid/ask differential requirements; (iii) ensure that a trading rotation is initiated promptly following the opening of the underlying security (or promptly after 8:30 am Central Time in an index class) in 100% of the series of each allocated class by entering opening quotes as necessary. See CBOE Rule 8.85, DPM Obligations; see also CBOE Rule 8.15A, Lead Market-Makers in Hybrid Classes. 7 See CBOE Rules 6.45A(a)(i)(C) and (ii)(2), 6.45B(a)(i)(2) and (ii)(C), 8.15B, Participation Entitlement for LMMs, and 8.87, Participation Entitlement of DPMs and e-DPMs. E:\FR\FM\18AUN1.SGM 18AUN1 41768 Federal Register / Vol. 74, No. 158 / Tuesday, August 18, 2009 / Notices jlentini on DSKJ8SOYB1PROD with NOTICES that provides that the DPM or LMM, as applicable, has precedence to execute orders of five (5) contracts or fewer. The Exchange believes that this small order priority overlay will not necessarily result in a significant portion of the Exchange’s volume being executed by the DPM or LMM, as applicable. As stated above, the DPM or LMM would execute against such orders only if it is quoting at the best price, and only for the number of contracts associated with its quotation. Nevertheless, the Exchange will evaluate what percentage of the volume executed on the Exchange is comprised of orders for five (5) contracts or fewer executed by DPMs and LMMs, and will reduce the size of the orders included in this provision if such percentage is over forty percent (40%). The small order priority overlay described above is part of CBOE’s careful balancing of the rewards and obligations that pertain to each of the Exchange’s classes of memberships. This balancing is part of the overall market structure that is designed to encourage vigorous price competition between Market-Makers on the Exchange, as well as maximize the benefits of price competition resulting from the entry of customer and noncustomer orders, while encouraging participants to provide market depth. The Exchange believes the proposed small order priority overlay, which includes participation rights for DPMs and LMMs only when they are quoting at the best price, strikes the appropriate balance within its market and maximizes the benefits of an electronic market for all participants. 2. Statutory Basis The Exchange believes the proposed rule change is consistent with the Act 8 and the rules and regulations thereunder and, in particular, the requirements of Section 6(b) of the Act.9 Specifically, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) 10 requirements that the rules of an exchange be 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. In particular, as described further above, the Exchange believes the proposed rule change is part of the balancing of CBOE’s overall 8 15 U.S.C. 78s(b)(1). U.S.C. 78f(b). 10 15 U.S.C. 78f(b)(5). 9 15 VerDate Nov<24>2008 16:30 Aug 17, 2009 Jkt 217001 market structure, which is designed to encourage vigorous price competition between Market-Makers on the Exchange, as well as maximize the benefits of price competition resulting from the entry of customer and noncustomer orders, while encouraging participants to provide market depth. 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 The Exchange neither solicited nor received comments on the proposal. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the foregoing rule does not (i) significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest, provided that the selfregulatory organization has given the Commission written notice of its intent to file 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, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act 11 and Rule 19b–4(f)(6) thereunder.12 At any time within 60 days of the filing of such 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 11 15 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). Rule 19b–4(f)(6)(iii) requires a self-regulatory organization to provide the Commission with written 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. The Commission deems this requirement to have been met. 12 17 PO 00000 Frm 00095 Fmt 4703 Sfmt 4703 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 rulecomments@sec.gov. Please include File Number SR–CBOE–2009–056 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–2009–056. 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 CBOE. 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–2009–056 and should be submitted on or before September 8, 2009. E:\FR\FM\18AUN1.SGM 18AUN1 Federal Register / Vol. 74, No. 158 / Tuesday, August 18, 2009 / Notices For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.13 Florence E. Harmon, Deputy Secretary. [FR Doc. E9–19734 Filed 8–17–09; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–60478; File No. SR–NYSE– 2009–81] Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by New York Stock Exchange LLC Extending Until August 21, 2009, the Operation of Interim NYSE Rule 128 Which Permits the Exchange To Cancel or Adjust Clearly Erroneous Executions If They Arise Out of the Use or Operation of Any Quotation, Execution or Communication System Owned or Operated by the Exchange, Including Those Executions That Occur in the Event of a System Disruption or System Malfunction August 11, 2009. jlentini on DSKJ8SOYB1PROD with NOTICES Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (the ‘‘Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that, on August 10, 2009, New York Stock Exchange LLC (‘‘NYSE’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the self-regulatory organization. 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 Exchange proposes to extend until August 21, 2009, the operation of interim NYSE Rule 128 (‘‘Clearly Erroneous Executions for NYSE Equities’’) which permits the Exchange to cancel or adjust clearly erroneous executions if they arise out of the use or operation of any quotation, execution or communication system owned or operated by the Exchange, including those executions that occur in the event of a system disruption or system malfunction. The text of the proposed rule change is available at the Exchange, 13 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 15 U.S.C. 78a. 3 17 CFR 240.19b–4. 1 15 VerDate Nov<24>2008 16:30 Aug 17, 2009 Jkt 217001 the Commission’s Public Reference Room, and https://www.nyse.com. 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 The Exchange proposes to extend until August 21, 2009, the operation of interim NYSE Rule 128 (‘‘Clearly Erroneous Executions for NYSE Equities’’) which permits the Exchange to cancel or adjust clearly erroneous executions if they arise out of the use or operation of any quotation, execution or communication system owned or operated by the Exchange, including those executions that occur in the event of a system disruption or system malfunction. Prior to the implementation of NYSE Rule 128 on January 28, 2008,4 the NYSE did not have a rule providing the Exchange with the authority to cancel or adjust clearly erroneous trades of securities executed on or through the systems and facilities of the NYSE. In order for the NYSE to be consistent with other national securities exchanges which have some version of a clearly erroneous execution rule, the Exchange is drafting an amended clearly erroneous rule which will accommodate such other exchanges but will be appropriate for the NYSE market model. The NYSE notes that the Commission approved an amended clearly erroneous execution rule for Nasdaq in May 2008.5 On July 28, 2008, the Exchange filed with the SEC a request to extend the operation of interim Rule 128 until October 1, 2008 6 in order to review the 4 See Securities Exchange Act Release No. 57323 (February 13, 2008), 73 FR 9371 (February 20, 2008) (SR–NYSE–2008–09). 5 See Securities Exchange Act Release No. 57826 (May 15, 2008), 73 FR 29802 (May 22, 2008) (SR– NASDAQ–2007–001). 6 See Securities Exchange Act Release No. 58328 (August 8, 2008), 73 FR 47247 (August 13, 2008) (SR–NYSE–2008–63). PO 00000 Frm 00096 Fmt 4703 Sfmt 4703 41769 provisions of Nasdaq’s clearly erroneous rule and to consider integrating similar standards into its own amendment to Rule 128. On October 1, 2008,7 the Exchange filed with the SEC a further request to extend the operation of interim Rule 128 until January 9, 2009 in order to consider integrating similar standards into the amendment to Rule 128. On January 9, 2009,8 the Exchange filed with the SEC a request to extend the operation of interim Rule 128 until March 9, 2009, indicating that the Exchange was still in the process of reviewing the Nasdaq rule with a view towards incorporating certain provisions into the amendment of interim Rule 128. On February 10, 2009, NYSE Arca submitted a proposal to the SEC to amend its clearly erroneous rule. The NYSE Arca proposed rule differed in certain respects from the Nasdaq clearly erroneous rule. On March 9, 2009, the Exchange filed with the SEC a request to extend the operation of interim Rule 128 until June 9, 2009 9 to finalize review of NYSE Arca’s proposed amended CEE rule, which included market wide CEE initiatives, to determine if it was appropriate to incorporate such provisions into the Rule 128 amendment. Thereafter, on April 24, 2009, NYSE Arca filed a revised rule change with the Commission to amend its clearly erroneous rule (NYSE Arca Rule 7.10).10 The Exchange was in the process of finalizing its review of NYSE Arca’s revised CEE rule change, which also included market wide CEE initiatives, to determine if it was appropriate to incorporate all such provisions into NYSE’s interim Rule 128 amendment. On June 9, 2009, the Exchange filed with the SEC a request to extend the operation of interim Rule 128 until July 15, 2009 11 to finalize review of NYSE Arca’s proposed amended CEE rule. On July 15, 2009 12 the Exchange filed with the SEC a request to extend the operation of interim Rule 128 until August 1, 2009 to finalize review of 7 See Securities Exchange Act Release No. 58732 (October 3, 2008), 73 FR 61183 (October 15, 2008) (SR–NYSE–2008–99). 8 See Securities Exchange Act Release No. 59255 (January 15, 2009) 74 FR 4496 (January 26, 2009) (SR–NYSE–2009–02). 9 See Securities Exchange Act Release No. 59581 (March 9, 2009) 74 FR 12431 (March 24, 2009) (SR– NYSE–2009–26). 10 See Securities Exchange Act Release No. 59838 (April 28, 2009) 74 FR 20767 (May 5, 2009) (SR– NYSEArca–2009–36) (See NYSE Arca Rule 7.10). 11 See Securities Exchange Act Release No. 60131 (June 17, 2009) 74 FR 30196 (June 24, 2009) (SR– NYSEArca–2009–57). [sic] 12 See Securities Exchange Act Release No. 60312 (July 15, 2009) 74 FR 36298 (July 22, 2009) (SR– NYSE–2009–70). E:\FR\FM\18AUN1.SGM 18AUN1

Agencies

[Federal Register Volume 74, Number 158 (Tuesday, August 18, 2009)]
[Notices]
[Pages 41766-41769]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-19734]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60476; File No. SR-CBOE-2009-056]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Related to the Hybrid Matching Algorithms

August 11, 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 July 31,

[[Page 41767]]

2009, the Chicago Board Options Exchange, Incorporated (``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 substantially prepared by the 
Exchange. The Exchange filed the proposal as a ``non-controversial'' 
proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 
\3\ and Rule 19b-4(f)(6) thereunder.\4\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to amend Rules 6.45A, Priority and 
Allocation of Equity Option Trades on the CBOE Hybrid System, and 
6.45B, Priority and Allocation of Trades in Index Options and Options 
on ETFs on the CBOE Hybrid System, to include an additional priority 
overlay. The text of the proposed rule change is available on the 
Exchange's Web site (https://www.cboe.org/Legal), at the Exchange's 
Office of the Secretary and at the Commission.

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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    CBOE Rules 6.45A and 6.45B set forth, among other things, the 
manner in which electronic Hybrid System trades in options are 
allocated. Paragraph (a) of each rule essentially governs how incoming 
orders received electronically by the Exchange are electronically 
executed against interest in the CBOE quote. Paragraph (a) of each rule 
currently provides a ``menu'' of matching algorithms to choose from 
when executing incoming electronic orders. The menu format allows the 
Exchange to utilize different matching algorithms on a class-by-class 
basis. The menu includes, among other choices, the ultimate matching 
algorithm (``UMA''), as well as price-time and pro-rata priority 
matching algorithms with additional priority overlays. The priority 
overlays for price-time and pro-rata currently include: public customer 
priority for public customer orders resting on the Hybrid System, 
participation entitlements for certain qualifying market-makers, and a 
market turner priority for participants that are first to improve 
CBOE's disseminated quote. These overlays are optional.
    The purpose of this rule filing is to adopt an additional priority 
overlay for small orders that can be applied to each of the three 
matching algorithms. In particular, if the small order priority overlay 
is in effect for an option class, then the following would apply:
     Orders for five (5) contracts or fewer will be executed 
first by the Designated Primary Market-Maker (``DPM'') or Lead Market-
Maker (``LMM''), as applicable, that is appointed to the option class; 
provided however, that on a quarterly basis the Exchange will evaluate 
what percentage of the volume executed on the Exchange (excluding 
volume resulting from the execution of orders in AIM (see CBOE Rule 
6.74A, Automated Improvement Mechanism (``AIM'')) is comprised of 
orders for five (5) contracts or fewer executed by DPMs and LMMs, and 
will reduce the size of the orders included in this provision if such 
percentage is over forty percent (40%).
     This procedure only applies to the allocation of 
executions among non-customer orders and market maker quotes existing 
in the EBook at the time the order is received by the Exchange. No 
market participant is allocated any portion of an execution unless it 
has an existing interest at the execution price. Moreover, no market 
participant can execute a greater number of contracts than is 
associated with the price of its existing interest. Accordingly, the 
small order preference contained in this allocation procedure is not a 
guarantee; the DPM or LMM, as applicable, (i) must be quoting at the 
execution price to receive an allocation of any size, and (ii) cannot 
execute a greater number of contracts than the size that is associated 
with its quote.
     If a Preferred Market-Maker (see CBOE Rule 8.13, Preferred 
Market-Maker Program) is not quoting at a price equal to the national 
best bid or offer (``NBBO'') at the time a preferred order is received, 
the allocation procedure for small orders described above shall be 
applied to the execution of the preferred order. If a Preferred Market 
Maker is quoting at the NBBO at the time the preferred order is 
received, the allocation procedure for all other sized orders, shall be 
applied to the execution of the preferred order (e.g., if the default 
matching algorithm is pro-rata with a public customer and participation 
entitlement overlay, the order will execution first against any public 
customer orders, then the Preferred Market-Maker would receive its 
participation entitlement, then the remaining balance would be 
allocated on a pro-rata basis).
     The small order priority overlay will only be applicable 
to automatic executions and will not be applicable to any electronic 
auctions.\5\
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    \5\ In addition to AIM, CBOE has various electronic auctions 
that are described under Rules 6.13A, Simple Auction Liaison 
(``SAL''), 6.14, Hybrid Agency Liaison (HAL), and 6.74B, 
Solicitation Auction Mechanism (``AIM SAM''). Each of these auctions 
generally allocates executions pursuant to the matching algorithm in 
effect for the options class with certain exceptions noted in the 
respective rules.
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    Lastly, it should be noted that, like the existing priority 
overlays, the small order priority overlay is optional. All 
determinations would be set forth in a regulatory circular.
    According to the Exchange, because DPMs and LMMs have unique 
obligations to the CBOE market,\6\ they are provided with certain 
participation rights. Under the current rule, if the DPM or LMM, as 
applicable, is one of the participants with a quote at the best price, 
the participation entitlement is generally equal to 50% when there is 
one Market-Maker also quoting at the best bid/offer on the Exchange, 
40% when there are two Market-Makers also quoting at the best bid/offer 
on the Exchange, and 30% when there are three or more Market-Makers 
also quoting at the best bid/offer on the Exchange.\7\ The Exchange is 
now seeking to expand these programs to make available an allocation 
procedure

[[Page 41768]]

that provides that the DPM or LMM, as applicable, has precedence to 
execute orders of five (5) contracts or fewer. The Exchange believes 
that this small order priority overlay will not necessarily result in a 
significant portion of the Exchange's volume being executed by the DPM 
or LMM, as applicable. As stated above, the DPM or LMM would execute 
against such orders only if it is quoting at the best price, and only 
for the number of contracts associated with its quotation. 
Nevertheless, the Exchange will evaluate what percentage of the volume 
executed on the Exchange is comprised of orders for five (5) contracts 
or fewer executed by DPMs and LMMs, and will reduce the size of the 
orders included in this provision if such percentage is over forty 
percent (40%).
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    \6\ For example DPMs must, among other things, (i) provide 
continuous electronic quotes in at least 90% of the series of each 
multiply-listed option classed allocated to it and in 100% of the 
series of each singly-listed option class allocated to it, and 
assure that its disseminated market quotes are accurate; (ii) comply 
with bid/ask differential requirements; (iii) ensure that a trading 
rotation is initiated promptly following the opening of the 
underlying security (or promptly after 8:30 am Central Time in an 
index class) in 100% of the series of each allocated class by 
entering opening quotes as necessary. See CBOE Rule 8.85, DPM 
Obligations; see also CBOE Rule 8.15A, Lead Market-Makers in Hybrid 
Classes.
    \7\ See CBOE Rules 6.45A(a)(i)(C) and (ii)(2), 6.45B(a)(i)(2) 
and (ii)(C), 8.15B, Participation Entitlement for LMMs, and 8.87, 
Participation Entitlement of DPMs and e-DPMs.
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    The small order priority overlay described above is part of CBOE's 
careful balancing of the rewards and obligations that pertain to each 
of the Exchange's classes of memberships. This balancing is part of the 
overall market structure that is designed to encourage vigorous price 
competition between Market-Makers on the Exchange, as well as maximize 
the benefits of price competition resulting from the entry of customer 
and non-customer orders, while encouraging participants to provide 
market depth. The Exchange believes the proposed small order priority 
overlay, which includes participation rights for DPMs and LMMs only 
when they are quoting at the best price, strikes the appropriate 
balance within its market and maximizes the benefits of an electronic 
market for all participants.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act \8\ and the rules and regulations thereunder and, in 
particular, the requirements of Section 6(b) of the Act.\9\ 
Specifically, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \10\ requirements that the rules of 
an exchange be 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. In particular, as described further above, the 
Exchange believes the proposed rule change is part of the balancing of 
CBOE's overall market structure, which is designed to encourage 
vigorous price competition between Market-Makers on the Exchange, as 
well as maximize the benefits of price competition resulting from the 
entry of customer and non-customer orders, while encouraging 
participants to provide market depth.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78s(b)(1).
    \9\ 15 U.S.C. 78f(b).
    \10\ 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

    The Exchange neither solicited nor received comments on the 
proposal.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing rule does not (i) significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate if consistent with the protection of investors 
and the public interest, provided that the self-regulatory organization 
has given the Commission written notice of its intent to file 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, the proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \11\ and Rule 19b-4(f)(6) 
thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6). Rule 19b-4(f)(6)(iii) requires a 
self-regulatory organization to provide the Commission with written 
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. The 
Commission deems this requirement to have been met.
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    At any time within 60 days of the filing of such 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
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2009-056 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-2009-056. 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 CBOE. 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-2009-056 and should be submitted on 
or before September 8, 2009.


[[Page 41769]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-19734 Filed 8-17-09; 8:45 am]
BILLING CODE 8010-01-P
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