Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 1, Related to Professional Orders, 58355-58358 [E9-27087]
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Federal Register / Vol. 74, No. 217 / Thursday, November 12, 2009 / Notices
2. Statutory Basis
Paper Comments
The Exchange believes that the
proposed rule change is consistent with
Section 6(b) of the Act,9 in general, and
furthers the objectives of Section 6(b)(4)
of the Act,10 in particular, in that it is
designed to provide for the equitable
allocation of reasonable dues, fees, and
other charges among persons using its
facilities.
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
CBOE does not believe that the
proposed rule change will impose any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing rule change
establishes or changes a due, fee, or
other charge imposed by the Exchange,
it has become effective pursuant to
Section 19(b)(3)(A) of the Act 11 and
subparagraph (f)(2) of Rule 19b–4 12
thereunder. 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
All submissions should refer to File
Number SR–CBOE–2009–082. This file
number should be included on the
subject line if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for inspection and copying in
the Commission’s Public Reference
Room, 100 F Street, NE., Washington,
DC 20549, on official business days
between the hours of 10 a.m. and 3 p.m.
Copies of such filing also will be
available for inspection and copying at
the principal office of the Exchange. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File No.
SR–CBOE–2009–082 and should be
submitted on or before December 3,
2009.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.13
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9–27088 Filed 11–10–09; 8:45 am]
Electronic Comments
jlentini on DSKJ8SOYB1PROD with NOTICES
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:
BILLING CODE 8011–01–P
• 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–2009–082 on the
subject line.
16:12 Nov 10, 2009
[Release No. 34–60931; File No. SR–CBOE–
2009–078]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing of
Proposed Rule Change, as Modified by
Amendment No. 1, Related to
Professional Orders
November 4, 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 October
20, 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. On
November 3, 2009, the Exchange filed
Amendment No. 1 to the proposal.3 The
Commission is publishing this notice to
solicit comments on the proposed rule
change, as modified by Amendment No.
1, 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
its priority rules to give certain nonbroker-dealer orders the same priority as
broker-dealer orders. The text of the
proposed rule change is available on the
Exchange’s Web site (https://
www.cboe.org/Legal), at the Office of the
Secretary, CBOE 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.
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Amendment No. 1 proposed to revise a
paragraph in the purpose section of the Form 19b–
4 and in the Exhibit 1 thereto relating to the
application of Section 11(a) of the Act.
2 17
U.S.C. 78f(b).
10 15 U.S.C. 78f(b)(4).
11 15 U.S.C. 78s(b)(3)(A).
12 17 CFR 240.19b–4(f)(2).
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Federal Register / Vol. 74, No. 217 / Thursday, November 12, 2009 / Notices
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
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1. Purpose
Under CBOE rules, a ‘‘public
customer’’ or ‘‘customer’’ is a person or
entity that is neither a member nor a
broker/dealer. Each term is used in
specific CBOE rules that provide certain
marketplace advantages to public
customer orders over non-customer
orders (e.g., orders for the account of
members or broker/dealers). In
particular, under CBOE rules, subject to
certain exceptions, (i) public customer
orders are given priority over noncustomer orders and Market-Maker
quotes at the same price,4 and (ii)
members are generally not charged a
transaction fee for the execution of
public customer orders. The purpose of
providing these marketplace advantages
to public customer orders is to attract
retail investor order flow to the
Exchange by leveling the playing field
for retail investors over market
professionals 5 and providing
competitive pricing.
With respect to these CBOE
marketplace advantages, the Exchange
does not believe the definition of public
customer versus a non-customer
properly distinguishes between nonprofessional retail investors and certain
professionals. According to the
Exchange, providing marketplace
advantages based upon whether the
order is for the account of a participant
that is a registered broker-dealer is no
longer appropriate in today’s
marketplace because some non-brokerdealer individuals and entities have
access to information and technology
that enables them to professionally trade
listed options in the same manner as a
broker or dealer in securities.6 These
4 See, e.g., CBOE Rules 6.45, Priority of Bids and
Offers—Allocation of Trades, 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.
5 Market professionals have access to
sophisticated trading systems that contain
functionality not available to retail customers,
including things such as continuously updated
pricing models based upon real-time streaming
data, access to multiple markets simultaneously,
and order and risk management tools.
6 For example, some broker-dealers provide their
professional customers with multi-screened trading
stations equipped with trading technology that
allows the trader to monitor and place orders on all
six options exchanges simultaneously. These
trading stations also provide compliance filters,
order management tools, the ability to place orders
in the underlying securities, and market data feeds.
See Securities Exchange Act Releases 59287
(January 23, 2009), 74 FR 5694 (January 30, 2009)
(SR–ISE–2006–26)(order approving International
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individual traders and entities
(collectively, ‘‘Professionals’’) have the
same technological and informational
advantages over retail investors as
broker-dealers trading for their own
account, which enables them to
compete effectively with broker-dealer
orders and market maker quotes for
execution opportunities in the CBOE
marketplace.7
The Exchange therefore does not
believe that it is consistent with fair
competition for these professional
account holders to continue to receive
the same marketplace advantages as
retail investors over broker-dealers
trading on the CBOE. Moreover, because
public customer orders at the same price
are executed in time priority, retail
investors are prevented from fully
benefiting from the priority advantage
when Professionals are afforded public
customer order priority.
Accordingly, the Exchange is seeking
to adopt a new term that will be used
to more appropriately provide CBOE
marketplace advantages to retail
investors on the CBOE. Under the
proposal, a ‘‘Professional’’ will be
defined in proposed Rule 1.1 as a
person or entity that (i) is not a broker
or dealer in securities, and (ii) places
more than 390 orders in listed options
per day on average during a calendar
month for its own beneficial account(s).
Under the proposal, a Professional will
be treated in the same manner as a
broker or dealer in securities for
purposes of CBOE Rules 6.2A (Rapid
Opening System), 6.2B (Hybrid Opening
System), 6.8C (Prohibition Against
Members Functioning as MarketMakers), 6.9 (Solicited Transactions),
6.13A (Simple Auction Liaison), 6.45
(Priority of bids and Offers—Allocation
of Trades), 6.13B (Penny Price
Improvement), 6.45A (Priority and
Allocation of Equity Option Trades on
the CBOE Hybrid System) (except that
Professional orders may be considered
public customer orders, and therefore
Securities Exchange (‘‘ISE’’) proposal to introduce
priority customer and professional orders) and
57254 (February 1, 2008), 73 FR 7345 (February 7,
2008) (SR–ISE–2006–26)(notice of ISE proposal to
introduce priority customer and professional
orders) at note 8.
7 Market-Makers enter quotes based upon the
theoretical value of the option, which moves with
various factors in their pricing models, such as the
value of the underlying security. Professional
customers place and cancel orders in relation to an
option’s theoretical value in much the same manner
as a Market-Maker. This is evidenced by the entry
of limit orders that join the best bid or offer and
by a very high rate of orders that are cancelled. In
contrast, retail customers who enter orders as part
of an investment strategy (such as a covered write
or directional trade) most frequently enter
marketable orders or limit orders that they do not
cancel and replace. See, e.g., Securities Exchange
Act Release 57254 at note 9.
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not be subject to the exposure
requirements for solicited broker-dealer
orders, under Interpretation and Policy
.02), 6.45B (Priority and Allocation of
Trades in Index Options and Options on
ETFs on the CBOE Hybrid System)
(except that Professional orders may be
considered public customer orders, and
therefore not be subject to the exposure
requirements for solicited broker-dealer
orders, under Interpretation and Policy
.02), 6.53C(c)(ii) and (d)(v) and
6.53C.06(b) and (c) (Complex Orders on
the Hybrid System), 6.74 (Crossing
Orders) (except that Professional orders
may be considered public customer
orders subject to facilitation under
paragraphs (b) and (d)), 6.74A
(Automated Improvement Mechanism)
(except Professional orders may be
considered customer Agency Orders or
solicited orders eligible for customer-tocustomer immediate crosses under
Interpretation and Policy .09), 6.74B
(Solicitation Auction Mechanism), 8.13
(Preferred Market-Maker Program),
8.15B (Participation Entitlement of
LMMs), 8.87 (Participation Entitlement
of DPMs and e-DPMs), 24.19 (MultiClass Broad-Based Index Option Spread
Orders), 43.1 (Matching Algorithm/
Priority), 44.4 (Obligations of SBT
Market-Makers), and 44.14 (SBT DPM
Obligations). In addition, the
Professional designation is not available
in Hybrid 3.0 classes.
The use of this new term for purposes
of the above-referenced execution rules
will result in Professional account
holders participating in CBOE’s
allocation process on equal terms with
broker-dealer orders. The proposal will
not otherwise affect non-broker-dealer
individuals or entities under CBOE
rules, and in particular, all public
customer orders will continue to be
treated equally for purposes of the
linkage-related rules. For example,
CBOE will provide the same awaymarket protection for all public
customer orders, including non-brokerdealer orders that are included in the
definition of ‘‘Professional’’ orders.
In order to properly represent orders
entered on the Exchange according to
the new definitions, members will be
required to indicate whether public
customer orders are ‘‘Professional’’
orders.8 To comply with this
requirement, members will be required
to review their customers’ activity on at
least a quarterly basis to determine
whether orders that are not for the
account of a broker or dealer should be
8 The Exchange intends to utilize a special order
origin code for Professional orders.
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Federal Register / Vol. 74, No. 217 / Thursday, November 12, 2009 / Notices
jlentini on DSKJ8SOYB1PROD with NOTICES
represented as customer orders or
Professional orders.9
Lastly, the Exchange intends to
establish, via a separate rule filing,
transaction fees applicable to
Professionals and the Exchange would
not commence the Professional program
until such fees are in place.
*
*
*
*
*
Section 11(a) of the Act prohibits any
member of a national securities
exchange from effecting transactions on
that exchange for its own account, the
account of an associated person, or an
account over which it or its associated
persons exercises discretion unless an
exception applies.10 Section 11(a)(1)
contains a number of exceptions for
principal transactions by members and
their associated persons. One such
exception, set forth in subparagraph (G)
of Section 11(a)(1) and in Rule 11a1–
1(T),11 permits any transaction for a
member’s own account provided, among
other things, that the transaction yields
priority, parity, and precedence to
orders for the account of persons who
are not members or associated with
members of the exchange. Exchange
rules, therefore, may require members to
yield priority to the orders of nonmembers, including public customers,
to satisfy this exception to Section
11(a).12 Another exception permits
market makers to effect transactions on
exchanges in which they are members.13
In addition to the exceptions noted
above, Rule 11a2–2(T) under the Act 14
provides exchange members with an
exception from the prohibitions in
Section 11(a). Rule 11a2–2(T), known as
the ‘‘effect versus execute’’ rule, permits
9 Orders for any customer that had an average of
more than 390 orders per day during any month of
a calendar quarter must be represented as
Professional orders for the next calendar quarter.
Members will be required to conduct a quarterly
review and make any appropriate changes to the
way in which they are representing orders within
five days after the end of each calendar quarter.
While members only will be required to review
their accounts on a quarterly basis, if during a
quarter the Exchange identifies a customer for
which orders are being represented as public
customer orders but that has averaged more than
390 orders per day during a month, the Exchange
will notify the member and the member will be
required to change the manner in which it is
representing the customer’s orders within five days.
10 15 U.S.C. 78k(a).
11 17 CFR 240.11a1–1(T).
12 See, e.g., CBOE Rule 6.45A(b)(i)(D), which
pertains to the allocation of orders in open outcry
and provides that members relying on the Section
11(a)(1)(G) and Rule 11a1–1(T) thereunder as an
exemption must yield priority to any bid (offer) at
the same price of public customer orders and
broker-dealer orders resting in the electronic book,
as well as any other bids and offers that have
priority over such broker-dealer orders under that
rule.
13 Section 11(a)(1)(A).
14 17 CFR 240.11a2–2(T).
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an exchange member, subject to certain
conditions, to effect transactions for its
own account, the account of an
associated person, or an account with
respect to which it or an associated
person thereof exercises investment
discretion (collectively ‘‘covered
accounts’’) by arranging for an
unaffiliated member to execute the
transaction on the exchange.
To comply with the ‘‘effect versus
execute’’ rule’s conditions, a member: (i)
Must transmit the order from off the
exchange floor; (ii) may not participate
in the execution of the transaction once
it has been transmitted to the member
performing the execution; 15 (iii) may
not be affiliated with the executing
member; and (iv) with respect to an
account over which the member has
investment discretion, neither the
member nor its associated person may
retain any compensation in connection
with effecting the transaction except as
provided in the rule.16
The Exchange does not believe that its
proposal relating to Professional orders
would affect the availability of the
exceptions to Section 11(a) of the Act,
including the exceptions in
subparagraph (G) of Section 11(a) and in
Rules 11a1–1(T) and 11a2–2(T), as are
currently available.17
*
*
*
*
*
The Exchange believes that
identifying Professional account holders
based upon the average number of
orders entered for a beneficial account
is an appropriately objective approach
that will reasonably distinguish such
persons and entities from retail
investors. The Exchange proposes the
threshold of 390 orders per day on
average over a calendar month because
it believes it far exceeds the number of
orders that are entered by retail
investors in a single day,18 while being
15 The member, however, may participate in
clearing and settling the transaction. See Securities
Exchange Act Release No. 14563 (March 14, 1978),
43 FR 11542 (March 17, 1978).
16 17 CFR 240.11a2–2(T).
17 See Securities Exchange Act Release No. 59546
(March 10, 2009), 74 FR 11144 (March 16, 2009)
(SR–CBOE–2009–016) and related regulatory
circular, RG09–35.
18 Three hundred ninety orders is equal to the
total number of orders that a person would place
in a day if that person entered one order every
minute from market open to close. Many of the
largest retail-oriented electronic brokers offer lower
commission rates to customers they define as
‘‘active traders.’’ Publicly available information
from the websites for Charles Schwab, Fidelity, TD
Ameritrade and optionsXpress all define an ‘‘active
trader’’ as someone who executes only a few
options trades per month. The highest required
trading activity to qualify as an active trader among
these four firms was 35 trades per quarter. See
Securities Exchange Act Release 57254 at note 11
(which also notes that a study of one of the largest
retail-oriented options brokerage firms indicated
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58357
a sufficiently low number of orders to
cover the Professional account holders
that are competing with broker-dealers
in the CBOE marketplace. In addition,
basing the standard on the number of
orders that are entered in listed options
for a beneficial account(s) assures that
Professional account holders cannot
inappropriately avoid the purpose of the
rule by spreading their trading activity
over multiple exchanges, and using an
average number over a calendar month
will prevent gaming of the 390 order
threshold.
2. Statutory Basis
The basis under the Act for this
proposed rule change is the requirement
under Section 6(b)(5)19 that an exchange
have rules that are designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to remove
impediments to and perfect the
mechanism for a free and open market
and a national market system, and, in
general, to protect investors and the
public interest. In particular, the
proposal will assure that retail investors
continue to receive the appropriate
marketplace advantages in the CBOE
marketplace, while furthering fair
competition among marketplace
professionals by treating them equally
within the CBOE marketplace.
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
that on a typical trading day, options orders were
entered with respect to 5922 different customer
accounts. There was only one order entered with
respect to 3765 of the 5922 different customer
accounts on this day, and there were only 17
customer accounts with respect to which more than
10 orders were entered. The highest number of
orders entered with respect to any one account over
the course of an entire week was 27).
19 15 U.S.C. 78f(b)(5).
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Federal Register / Vol. 74, No. 217 / Thursday, November 12, 2009 / Notices
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:
jlentini on DSKJ8SOYB1PROD with NOTICES
Electronic Comments:
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–CBOE–2009–078 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–2009–078. 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
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16:12 Nov 10, 2009
Jkt 220001
you wish to make available publicly. All
submissions should refer to File
Number SR–CBOE–2009–078 and
should be submitted on or before
December 3, 2009.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9–27087 Filed 11–10–09; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–60934; File No. SR–BX–
2009–071]
Self-Regulatory Organizations;
NASDAQ OMX BX, Inc.; Notice of Filing
and Immediate Effectiveness of
Proposed Rule Change Amending the
Fee Schedule of the Boston Options
Exchange Facility
November 4, 2009.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on October
30, 2009, NASDAQ OMX BX, Inc. (the
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Exchange filed the proposed rule change
pursuant to Section 19(b)(3)(A)(ii) of the
Act 3 and Rule 19b–4(f)(2) thereunder,4
which renders the proposal effective
upon filing with the Commission. 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 amend the
Fee Schedule of the Boston Options
Exchange Group, LLC (‘‘BOX’’). The text
of the proposed rule change is available
from the principal office of the
Exchange, at the Commission’s Public
Reference Room and also on the
Exchange’s Internet Web site at https://
nasdaqomxbx.cchwallstreet.com/
NASDAQOMXBX/Filings/.
20 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(ii).
4 17 CFR 240.19b–4(f)(2).
1 15
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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 these statements may be examined at
the places specified in Item IV below.
The self-regulatory organization has
prepared summaries, set forth in
Sections A, B, and C below, of the most
significant aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Section 7 of the BOX Fee Schedule
currently applies to all classes listed for
trading on BOX that are not included in
the Penny Pilot Program, as referenced
in Chapter V, Section 33 of the BOX
Rules (‘‘Non-Penny Pilot Classes’’). The
Exchange proposes to amend Section 7
to make the following changes.5
Extend Section 7 Fees and Credits to
Penny Pilot Classes
The Exchange proposes to extend the
applicability of Section 7 of the Fee
Schedule to also include Penny Pilot
Classes.6 The Exchange proposes that
the applicability of this pricing will
apply to Penny Pilot Classes and NonPenny Pilot Classes alike, whereby
transactions that remove liquidity from
the BOX Book will receive a ‘removal’
credit and transactions that add
liquidity will be charged an ‘add’ fee.
However, the Exchange proposes that
the level of credits and fees differ for
Penny Pilot Classes as compared to
Non-Penny Pilot Classes. Specifically,
the Exchange proposes that both the fees
and credits for Penny Pilot Classes be
$0.20, in addition to the ‘standard’ fees.7
The proposed lower fees and credits for
Penny Pilot Classes, as compared to
Non-Penny Pilot Classes, is based on the
5 Changes to other sections of the Fee Schedule
other than Section 7 are required for conformity
purposes.
6 Except for transactions within the PIP, as
discussed below, SPY, QQQQ and IWM will remain
subject only to ‘standard’ fees.
7 The next 300 most actively traded classes, as per
Options Clearing Corporation volume data, will be
added to the Penny Pilot Program. See Securities
Exchange Act Release No. 60886 (October 27, 2009)
(SR–BX–2009–067). The first tranche of 75 classes
will be eligible for quoting and trading in $0.01
increments on November 2, 2009.
E:\FR\FM\12NON1.SGM
12NON1
]]>Agencies
[Federal Register Volume 74, Number 217 (Thursday, November 12, 2009)]
[Notices]
[Pages 58355-58358]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-27087]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-60931; File No. SR-CBOE-2009-078]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of Proposed Rule Change, as Modified by
Amendment No. 1, Related to Professional Orders
November 4, 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 October 20, 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. On November 3, 2009, the Exchange filed
Amendment No. 1 to the proposal.\3\ The Commission is publishing this
notice to solicit comments on the proposed rule change, as modified by
Amendment No. 1, from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 proposed to revise a paragraph in the
purpose section of the Form 19b-4 and in the Exhibit 1 thereto
relating to the application of Section 11(a) of the Act.
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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 its priority rules to give
certain non-broker-dealer orders the same priority as broker-dealer
orders. The text of the proposed rule change is available on the
Exchange's Web site (https://www.cboe.org/Legal), at the Office of the
Secretary, CBOE 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.
[[Page 58356]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Under CBOE rules, a ``public customer'' or ``customer'' is a person
or entity that is neither a member nor a broker/dealer. Each term is
used in specific CBOE rules that provide certain marketplace advantages
to public customer orders over non-customer orders (e.g., orders for
the account of members or broker/dealers). In particular, under CBOE
rules, subject to certain exceptions, (i) public customer orders are
given priority over non-customer orders and Market-Maker quotes at the
same price,\4\ and (ii) members are generally not charged a transaction
fee for the execution of public customer orders. The purpose of
providing these marketplace advantages to public customer orders is to
attract retail investor order flow to the Exchange by leveling the
playing field for retail investors over market professionals \5\ and
providing competitive pricing.
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\4\ See, e.g., CBOE Rules 6.45, Priority of Bids and Offers--
Allocation of Trades, 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.
\5\ Market professionals have access to sophisticated trading
systems that contain functionality not available to retail
customers, including things such as continuously updated pricing
models based upon real-time streaming data, access to multiple
markets simultaneously, and order and risk management tools.
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With respect to these CBOE marketplace advantages, the Exchange
does not believe the definition of public customer versus a non-
customer properly distinguishes between non-professional retail
investors and certain professionals. According to the Exchange,
providing marketplace advantages based upon whether the order is for
the account of a participant that is a registered broker-dealer is no
longer appropriate in today's marketplace because some non-broker-
dealer individuals and entities have access to information and
technology that enables them to professionally trade listed options in
the same manner as a broker or dealer in securities.\6\ These
individual traders and entities (collectively, ``Professionals'') have
the same technological and informational advantages over retail
investors as broker-dealers trading for their own account, which
enables them to compete effectively with broker-dealer orders and
market maker quotes for execution opportunities in the CBOE
marketplace.\7\
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\6\ For example, some broker-dealers provide their professional
customers with multi-screened trading stations equipped with trading
technology that allows the trader to monitor and place orders on all
six options exchanges simultaneously. These trading stations also
provide compliance filters, order management tools, the ability to
place orders in the underlying securities, and market data feeds.
See Securities Exchange Act Releases 59287 (January 23, 2009), 74 FR
5694 (January 30, 2009) (SR-ISE-2006-26)(order approving
International Securities Exchange (``ISE'') proposal to introduce
priority customer and professional orders) and 57254 (February 1,
2008), 73 FR 7345 (February 7, 2008) (SR-ISE-2006-26)(notice of ISE
proposal to introduce priority customer and professional orders) at
note 8.
\7\ Market-Makers enter quotes based upon the theoretical value
of the option, which moves with various factors in their pricing
models, such as the value of the underlying security. Professional
customers place and cancel orders in relation to an option's
theoretical value in much the same manner as a Market-Maker. This is
evidenced by the entry of limit orders that join the best bid or
offer and by a very high rate of orders that are cancelled. In
contrast, retail customers who enter orders as part of an investment
strategy (such as a covered write or directional trade) most
frequently enter marketable orders or limit orders that they do not
cancel and replace. See, e.g., Securities Exchange Act Release 57254
at note 9.
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The Exchange therefore does not believe that it is consistent with
fair competition for these professional account holders to continue to
receive the same marketplace advantages as retail investors over
broker-dealers trading on the CBOE. Moreover, because public customer
orders at the same price are executed in time priority, retail
investors are prevented from fully benefiting from the priority
advantage when Professionals are afforded public customer order
priority.
Accordingly, the Exchange is seeking to adopt a new term that will
be used to more appropriately provide CBOE marketplace advantages to
retail investors on the CBOE. Under the proposal, a ``Professional''
will be defined in proposed Rule 1.1 as a person or entity that (i) is
not a broker or dealer in securities, and (ii) places more than 390
orders in listed options per day on average during a calendar month for
its own beneficial account(s). Under the proposal, a Professional will
be treated in the same manner as a broker or dealer in securities for
purposes of CBOE Rules 6.2A (Rapid Opening System), 6.2B (Hybrid
Opening System), 6.8C (Prohibition Against Members Functioning as
Market-Makers), 6.9 (Solicited Transactions), 6.13A (Simple Auction
Liaison), 6.45 (Priority of bids and Offers--Allocation of Trades),
6.13B (Penny Price Improvement), 6.45A (Priority and Allocation of
Equity Option Trades on the CBOE Hybrid System) (except that
Professional orders may be considered public customer orders, and
therefore not be subject to the exposure requirements for solicited
broker-dealer orders, under Interpretation and Policy .02), 6.45B
(Priority and Allocation of Trades in Index Options and Options on ETFs
on the CBOE Hybrid System) (except that Professional orders may be
considered public customer orders, and therefore not be subject to the
exposure requirements for solicited broker-dealer orders, under
Interpretation and Policy .02), 6.53C(c)(ii) and (d)(v) and 6.53C.06(b)
and (c) (Complex Orders on the Hybrid System), 6.74 (Crossing Orders)
(except that Professional orders may be considered public customer
orders subject to facilitation under paragraphs (b) and (d)), 6.74A
(Automated Improvement Mechanism) (except Professional orders may be
considered customer Agency Orders or solicited orders eligible for
customer-to-customer immediate crosses under Interpretation and Policy
.09), 6.74B (Solicitation Auction Mechanism), 8.13 (Preferred Market-
Maker Program), 8.15B (Participation Entitlement of LMMs), 8.87
(Participation Entitlement of DPMs and e-DPMs), 24.19 (Multi-Class
Broad-Based Index Option Spread Orders), 43.1 (Matching Algorithm/
Priority), 44.4 (Obligations of SBT Market-Makers), and 44.14 (SBT DPM
Obligations). In addition, the Professional designation is not
available in Hybrid 3.0 classes.
The use of this new term for purposes of the above-referenced
execution rules will result in Professional account holders
participating in CBOE's allocation process on equal terms with broker-
dealer orders. The proposal will not otherwise affect non-broker-dealer
individuals or entities under CBOE rules, and in particular, all public
customer orders will continue to be treated equally for purposes of the
linkage-related rules. For example, CBOE will provide the same away-
market protection for all public customer orders, including non-broker-
dealer orders that are included in the definition of ``Professional''
orders.
In order to properly represent orders entered on the Exchange
according to the new definitions, members will be required to indicate
whether public customer orders are ``Professional'' orders.\8\ To
comply with this requirement, members will be required to review their
customers' activity on at least a quarterly basis to determine whether
orders that are not for the account of a broker or dealer should be
[[Page 58357]]
represented as customer orders or Professional orders.\9\
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\8\ The Exchange intends to utilize a special order origin code
for Professional orders.
\9\ Orders for any customer that had an average of more than 390
orders per day during any month of a calendar quarter must be
represented as Professional orders for the next calendar quarter.
Members will be required to conduct a quarterly review and make any
appropriate changes to the way in which they are representing orders
within five days after the end of each calendar quarter. While
members only will be required to review their accounts on a
quarterly basis, if during a quarter the Exchange identifies a
customer for which orders are being represented as public customer
orders but that has averaged more than 390 orders per day during a
month, the Exchange will notify the member and the member will be
required to change the manner in which it is representing the
customer's orders within five days.
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Lastly, the Exchange intends to establish, via a separate rule
filing, transaction fees applicable to Professionals and the Exchange
would not commence the Professional program until such fees are in
place.
* * * * *
Section 11(a) of the Act prohibits any member of a national
securities exchange from effecting transactions on that exchange for
its own account, the account of an associated person, or an account
over which it or its associated persons exercises discretion unless an
exception applies.\10\ Section 11(a)(1) contains a number of exceptions
for principal transactions by members and their associated persons. One
such exception, set forth in subparagraph (G) of Section 11(a)(1) and
in Rule 11a1-1(T),\11\ permits any transaction for a member's own
account provided, among other things, that the transaction yields
priority, parity, and precedence to orders for the account of persons
who are not members or associated with members of the exchange.
Exchange rules, therefore, may require members to yield priority to the
orders of non-members, including public customers, to satisfy this
exception to Section 11(a).\12\ Another exception permits market makers
to effect transactions on exchanges in which they are members.\13\
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\10\ 15 U.S.C. 78k(a).
\11\ 17 CFR 240.11a1-1(T).
\12\ See, e.g., CBOE Rule 6.45A(b)(i)(D), which pertains to the
allocation of orders in open outcry and provides that members
relying on the Section 11(a)(1)(G) and Rule 11a1-1(T) thereunder as
an exemption must yield priority to any bid (offer) at the same
price of public customer orders and broker-dealer orders resting in
the electronic book, as well as any other bids and offers that have
priority over such broker-dealer orders under that rule.
\13\ Section 11(a)(1)(A).
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In addition to the exceptions noted above, Rule 11a2-2(T) under the
Act \14\ provides exchange members with an exception from the
prohibitions in Section 11(a). Rule 11a2-2(T), known as the ``effect
versus execute'' rule, permits an exchange member, subject to certain
conditions, to effect transactions for its own account, the account of
an associated person, or an account with respect to which it or an
associated person thereof exercises investment discretion (collectively
``covered accounts'') by arranging for an unaffiliated member to
execute the transaction on the exchange.
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\14\ 17 CFR 240.11a2-2(T).
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To comply with the ``effect versus execute'' rule's conditions, a
member: (i) Must transmit the order from off the exchange floor; (ii)
may not participate in the execution of the transaction once it has
been transmitted to the member performing the execution; \15\ (iii) may
not be affiliated with the executing member; and (iv) with respect to
an account over which the member has investment discretion, neither the
member nor its associated person may retain any compensation in
connection with effecting the transaction except as provided in the
rule.\16\
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\15\ The member, however, may participate in clearing and
settling the transaction. See Securities Exchange Act Release No.
14563 (March 14, 1978), 43 FR 11542 (March 17, 1978).
\16\ 17 CFR 240.11a2-2(T).
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The Exchange does not believe that its proposal relating to
Professional orders would affect the availability of the exceptions to
Section 11(a) of the Act, including the exceptions in subparagraph (G)
of Section 11(a) and in Rules 11a1-1(T) and 11a2-2(T), as are currently
available.\17\
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\17\ See Securities Exchange Act Release No. 59546 (March 10,
2009), 74 FR 11144 (March 16, 2009) (SR-CBOE-2009-016) and related
regulatory circular, RG09-35.
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* * * * *
The Exchange believes that identifying Professional account holders
based upon the average number of orders entered for a beneficial
account is an appropriately objective approach that will reasonably
distinguish such persons and entities from retail investors. The
Exchange proposes the threshold of 390 orders per day on average over a
calendar month because it believes it far exceeds the number of orders
that are entered by retail investors in a single day,\18\ while being a
sufficiently low number of orders to cover the Professional account
holders that are competing with broker-dealers in the CBOE marketplace.
In addition, basing the standard on the number of orders that are
entered in listed options for a beneficial account(s) assures that
Professional account holders cannot inappropriately avoid the purpose
of the rule by spreading their trading activity over multiple
exchanges, and using an average number over a calendar month will
prevent gaming of the 390 order threshold.
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\18\ Three hundred ninety orders is equal to the total number of
orders that a person would place in a day if that person entered one
order every minute from market open to close. Many of the largest
retail-oriented electronic brokers offer lower commission rates to
customers they define as ``active traders.'' Publicly available
information from the websites for Charles Schwab, Fidelity, TD
Ameritrade and optionsXpress all define an ``active trader'' as
someone who executes only a few options trades per month. The
highest required trading activity to qualify as an active trader
among these four firms was 35 trades per quarter. See Securities
Exchange Act Release 57254 at note 11 (which also notes that a study
of one of the largest retail-oriented options brokerage firms
indicated that on a typical trading day, options orders were entered
with respect to 5922 different customer accounts. There was only one
order entered with respect to 3765 of the 5922 different customer
accounts on this day, and there were only 17 customer accounts with
respect to which more than 10 orders were entered. The highest
number of orders entered with respect to any one account over the
course of an entire week was 27).
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2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5)\19\ that an exchange have rules that
are designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism for a free and open market and
a national market system, and, in general, to protect investors and the
public interest. In particular, the proposal will assure that retail
investors continue to receive the appropriate marketplace advantages in
the CBOE marketplace, while furthering fair competition among
marketplace professionals by treating them equally within the CBOE
marketplace.
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\19\ 15 U.S.C. 78f(b)(5).
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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
[[Page 58358]]
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-2009-078 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-2009-078. 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-2009-078 and should be
submitted on or before December 3, 2009.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-27087 Filed 11-10-09; 8:45 am]
BILLING CODE 8011-01-P
