Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Approving a Proposed Rule Change Relating to Preferred Market Makers, 58332-58334 [E9-27258]
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Federal Register / Vol. 74, No. 217 / Thursday, November 12, 2009 / Notices
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15. Before investing in a Fund in
excess of the limits in section
12(d)(1)(A), the Investing Fund and the
Fund will execute a Participation
Agreement stating, without limitation,
that their boards of directors or trustees
and their investment advisers, and the
Trustee and Sponsor, as applicable,
understand the terms and conditions of
the order, and agree to fulfill their
responsibilities under the order. At the
time of its investment in Fund Shares in
excess of the limit in section
12(d)(1)(A)(i), an Investing Fund will
notify the Fund of the investment. At
such time, the Investing Fund will also
transmit to such Fund a list of names of
each Investing Fund Affiliate and
Underwriting Affiliate. The Investing
Fund will notify the Fund of any
changes to the list of names as soon as
reasonably practicable after a change
occurs. The Fund and the Investing
Fund will maintain and preserve a copy
of the order, the Participation
Agreement, and the list with any
updated information for the duration of
the investment and for a period of not
less than six years thereafter, the first
two years in an easily accessible place.
16. Before approving any advisory
contract under section 15 of the Act, the
board of directors or trustees of each
Investing Management Company,
including a majority of the independent
directors or trustees, will find that the
advisory fees charged under such
advisory contract are based on services
provided that will be in addition to,
rather than duplicative of, the services
provided under the advisory contract(s)
of any Fund in which the Investing
Management Company may invest.
These findings and their basis will be
recorded fully in the minute books of
the appropriate Investing Management
Company.
17. Any sales charges and/or service
fees charged with respect to shares of an
Investing Fund will not exceed the
limits applicable to a fund of funds as
set forth in Conduct Rule 2830 of the
NASD.
18. No Fund will acquire securities of
any investment company or companies
relying on sections 3(c)(1) or 3(c)(7) of
the Act in excess of the limits contained
in section 12(d)(1)(A) of the Act, except
as permitted pursuant to rule 12d1–1
under the Act.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9–27130 Filed 11–10–09; 8:45 am]
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–60957; File No. SR–CBOE–
2009–070]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Order Approving a
Proposed Rule Change Relating to
Preferred Market Makers
November 6, 2009.
I. Introduction
On September 28, 2009, the Chicago
Board Options Exchange, Incorporated
(‘‘CBOE’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (the ‘‘Act’’),1 and Rule 19b–4
thereunder,2 a proposal to amend CBOE
Rule 8.13, ‘‘Preferred Market-Maker
Program’’ to establish a participation
entitlement for complex orders
designated to Preferred Market Makers
and to clarify the operation of the
Hybrid System with respect to the
existing Preferred Market Maker
participation entitlement for individual
options orders. The proposed rule
change was published for comment in
the Federal Register on October 7,
2009.3 The Commission received no
comments regarding the proposal. This
order approves the proposed rule
change.
II. Description of the Proposal
The CBOE proposes to amend CBOE
Rule 8.13 to: (1) Establish a
participation entitlement for complex
orders entered into the Complex Order
Book (‘‘COB’’) or the complex order
RFQ auction (‘‘COA’’) that are
designated to a Preferred Market Maker;
and (2) clarify the operation of the
Hybrid System with respect to the
Preferred Market Maker participation
entitlement for individual options
orders.
A. Participation Entitlement for
Complex Orders
Under the proposal, any Designated
Primary Market Maker, Lead Market
Maker, or Market Maker with an
appointment/allocation in the relevant
options class may be designated as a
Preferred Market Maker for complex
orders.4 A Preferred Market Maker must
comply with the quoting obligations
applicable to its Market Maker type
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 60746
(September 30, 2009), 74 FR 51626 (‘‘Notice’’).
4 See CBOE Rule 8.13, Interpretation and Policy
.01(a).
2 17
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under CBOE’s rules and must provide
continuous electronic quotes (as defined
in CBOE Rule 1.1(ccc)) in at least 90%
of the series of each class for which it
receives Preferred Market Maker
orders.5 In addition, to receive a
participation entitlement for orders
entered into the COB, the Preferred
Market Maker must be quoting at the
best net priced bid/offer when the order
is received.6 For orders in a COA, the
Preferred Market Maker must: (1) At the
beginning of the auction, be quoting at
either (A) the best bid/offer on the CBOE
in at least one of the component series
of the complex order, or (B) the best net
priced bid/offer for the complex order;
and (2) be quoting at the best net priced
bid/offer at the conclusion of the
auction.7
CBOE prohibits an order flow
provider from notifying a Preferred
Market Maker of its intention to submit
a preferenced complex order so that the
Preferred Market Maker could change its
quotation to match the national best bid
or offer (‘‘NBBO’’) immediately prior to
the submission of the preferenced
order.8 CBOE states that CBOE Rule
4.18, ‘‘Prevention of the Misuse of
Material, Nonpublic Information,’’
prohibits this misuse of material nonpublic information.9 CBOE represents
that it will conduct surveillance for, and
enforce against, such violations.10
The participation entitlement for a
complex order is based on the contracts
remaining after equivalent net priced
orders and quotes on the EBook and
equivalent net priced public customer
complex orders resting in the COB that
have priority over Preferred Market
Makers have been filled.11 After these
orders have been filled, the
participation entitlement for a Preferred
Market Maker that satisfies the
requirements in CBOE Rule 8.13,
Interpretation and Policy .01 is: (1) 40%
when there are two or more Market
Makers also quoting at the best net
priced bid/offer execution price; and (2)
50% when there is one other Market
Maker quoting at the best net priced
bid/offer execution price.12 The
participation entitlement percentages
for complex orders are the same as the
5 See CBOE Rule 8.13, Interpretation and Policy
.01(c).
6 See CBOE Rule 8.13, Interpretation and Policy
.01(a)(ii).
7 See CBOE Rule 8.13, Interpretation and Policy
.01(a)(iii).
8 See Notice, supra note 3, at note 3.
9 Id.
10 Id.
11 See CBOE Rule 8.13, Interpretation and Policy
.01(b)(ii).
12 See CBOE Rule 8.13, Interpretation and Policy
.01(b).
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Federal Register / Vol. 74, No. 217 / Thursday, November 12, 2009 / Notices
participation entitlement percentages
for individual options orders currently
provided under CBOE Rule 8.13(c). If a
Preferred Market Maker receives a
participation entitlement for a complex
order in the COB or a COA, no other
participation entitlement provided in
the CBOE’s rules for complex orders
will apply to the complex order.13
B. Clarification of the Participation
Entitlement for Individual Orders
CBOE is amending CBOE Rule 8.13(b)
to more clearly reflect the operation of
the Hybrid System with respect to
Preferred Market Makers. Specifically,
CBOE is revising CBOE Rule 8.13(b) to
indicate that the Hybrid System is
programmed so that the recipient of a
Preferred Market Maker order will
receive a participation entitlement if: (1)
The Preferred Market Maker has an
appointment/allocation in the relevant
options class; and (2) the Preferred
Market Maker is quoting at the CBOE’s
best bid or offer. CBOE is adding
paragraph (d) to CBOE Rule 8.13, which
will incorporate the quoting obligations
applicable to Preferred Market Makers
that are currently set forth in CBOE Rule
8.13(b)(iii), including the requirement
that a Preferred Market Maker provide
continuous electronic quotes, as defined
in CBOE Rule 1.1(ccc), in at least 90%
of the series of each class for which it
receives Preferred Market Maker orders.
CBOE notes that this quoting obligation,
like other Market Maker quoting
obligations, is subject to CBOE market
performance, surveillance, and
disciplinary programs to assess and
enforce compliance.
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III. Discussion and Commission
Findings
The Commission finds that the
proposed rule change is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to a national securities
exchange.14 In particular, the
Commission finds that the proposal is
consistent with Section 6(b)(5) of the
Act,15 which requires, in part, that the
rules of a national securities exchange
be designed to prevent fraudulent and
13 See CBOE Rule 8.13, Interpretation and Policy
.01(b)(iii). However, if a complex order executes, in
part, against a Preferred Market Maker’s interest in
the COB or the COA and, in part, against the
Preferred Market Maker’s interest in the individual
series legs in the EBook, a Preferred Market Maker
entitlement may apply on both the individual series
legs and on the COB or COA execution. See Notice,
supra note 3, at note 5.
14 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
15 15 U.S.C. 78f(b)(5).
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manipulative acts and practices, to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest. The
proposal establishes a Preferred Market
Maker participation entitlement for
complex orders submitted to the COB
and the COA. Under the proposal, the
Preferred Market Maker participation
entitlement percentages for complex
orders are the same as the Preferred
Market Maker participation entitlement
percentages provided currently in CBOE
Rule 8.13(c) for individual options
orders.16 Because the proposal does not
provide a participation entitlement for
complex orders that is greater than the
currently acceptable participation
entitlement threshold for individual
options orders, the Commission does
not believe that the proposal will
negatively impact quote competition for
complex orders on CBOE. Under the
proposal, the remaining portion of each
complex order will still be allocated
based on the competitive bidding of
market participants.
A Preferred Market Maker must
satisfy certain requirements to be
eligible for a participation entitlement
in complex orders. Specifically, a
Preferred Market Maker must comply
with the quoting obligations applicable
to its Market Maker type under the
CBOE’s rules and must provide
continuous electronic quotes (as defined
in CBOE Rule 1.1(ccc)) in at least 90%
of the series for each class for which it
receives Preferred Market Maker
orders.17 In addition, to receive a
participation entitlement for orders
entered into the COB, the Preferred
Market Maker must be quoting at the
best net priced bid/offer when the order
16 The Commission also has approved similar
participation entitlement percentages for individual
options orders on other options exchanges. See, e.g.,
Securities Exchange Act Release Nos. 56269
(August 15, 2007), 72 FR 47086 (August 22, 2007)
(File No. SR–Amex–2007–75) (order approving an
American Stock Exchange directed order program
that provides a 40% participation entitlement on
directed orders) (‘‘Amex Order’’); 51759 (May 27,
2005), 70 FR 32860 (June 6, 2005) (File No. SR–
Phlx–2004–91) (order approving a directed order
program on the Philadelphia Stock Exchange that
allows the directed order recipient to receive a 40%
participation entitlement on designated orders)
(‘‘Phlx Order’’); and 51818 (June 10, 2005), 70 FR
35146 (June 16, 2005) (File No. ISE–2005–18) (order
approving a preferencing program on the
International Securities Exchange that allows a
preferenced market maker to receive a 40%
participation entitlement on designated orders).
17 See CBOE Rule 8.13, Interpretation and Policy
.01(c). This quoting obligation also applies
currently to the Preferred Market Maker
participation entitlement for individual options
orders.
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58333
is received.18 For orders in a COA, the
Preferred Market Maker must: (1) At the
beginning of the auction, be quoting at
either (A) the best bid/offer on the CBOE
in at least one of the component series
of the complex order, or (B) the best net
priced bid/offer for the complex order;
and (2) be quoting at the best net priced
bid/offer at the conclusion of the
auction.19 These quoting requirements
are analogous to the current requirement
in CBOE Rule 8.13(b)(ii) that a Preferred
Market Maker be quoting at the CBOE’s
best bid/offer to be eligible for a
participation entitlement for an
individual options order.
The Commission believes that it is
critical that, to be eligible for a
participation entitlement for a complex
order, a Preferred Market Maker may not
step up and match the CBOE’s best bid/
offer after it receives an order, but must
be publicly quoting at the CBOE’s best
net priced bid/offer when the order is
received (for orders in the COB), or, for
orders in a COA, quoting at either the
CBOE’s best/bid offer for a least one
component of a complex order or at the
CBOE’s best net priced bid/offer for the
complex order at the start of the
auction.20 As noted above, CBOE states
that it would be a misuse of material
non-public information in violation of
CBOE Rule 4.18 for an order flow
provider to notify a Preferred Market
Maker of its intention to submit a
preferenced complex order immediately
prior to sending the order to allow the
Preferred Market Maker to modify its
quotation.21 CBOE represents that it will
conduct surveillance for, and enforce
against, such violations of its rules.22
The Commission emphasizes that
approval of this proposal does not affect
a broker-dealer’s duty of best execution.
The Commission has discussed the duty
of best execution in previous orders
approving proposals to implement
participation entitlements,23 and hereby
incorporates those discussions by
reference into this order.
Finally, the Commission finds that the
changes to CBOE Rule 8.13(b) are
18 See CBOE Rule 8.13, Interpretation and Policy
.01(a)(ii).
19 See CBOE Rule 8.13, Interpretation and Policy
.01(a)(iii).
20 A Preferred Market Maker will not be allocated
a total quantity greater than the quantity it is
quoting at the best net priced bid/offer execution
price. See CBOE Rule 8.13, Interpretation and
Policy .01(b)(i).
21 See notes 8 and 9, supra, and accompanying
text.
22 See note 10, supra, and accompanying text.
23 See, e.g., Amex Order and Phlx Order, supra
note 16; and Securities Exchange Act Release No.
51779 (June 2, 2005), 70 FR 33564 (June 8, 2005)
(File No. SR–CBOE–2004–71) (order approving a
modification of the participation entitlement for
Preferred Designated Primary Market Makers).
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Federal Register / Vol. 74, No. 217 / Thursday, November 12, 2009 / Notices
consistent with the Act because they
clarify the operation of the Hybrid
System with respect to Preferred Market
Maker participation entitlements.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,24 that the
proposed rule change (File No. SR–
CBOE–2009–070) is approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.25
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9–27258 Filed 11–10–09; 8:45 am]
BILLING CODE 8011–01–P
II. Description of the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–60933; File No. SR–FINRA–
2008–067]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of
Amendment No. 2 and Order Granting
Accelerated Approval to a Proposed
Rule Change, as Modified by
Amendment Nos. 1 and 2, to Adopt
Rules Governing Financial
Responsibility in the Consolidated
FINRA Rulebook
November 4, 2009.
I. Introduction
On December 30, 2008, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) (f/k/a National Association
of Securities Dealers, Inc. (‘‘NASD’’))
filed with the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’),
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’)1 and Rule 19b–4 thereunder,2 a
proposed rule change to adopt a new,
consolidated set of financial
responsibility rules as part of the
process of developing a new
consolidated rulebook (‘‘Consolidated
FINRA Rulebook’’)3 without material
change. The proposed rule change was
24 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 The current FINRA rulebook includes, in
addition to FINRA Rules, (1) NASD Rules and (2)
rules incorporated from NYSE (‘‘Incorporated NYSE
Rules’’) (together, the NASD Rules and Incorporated
NYSE Rules are referred to as the ‘‘Transitional
Rulebook’’). While the NASD Rules generally apply
to all FINRA members, the Incorporated NYSE
Rules apply only to those members of FINRA that
are also members of the NYSE (‘‘Dual Members’’).
For more information about the rulebook
consolidation process, see FINRA Information
Notice, March 12, 2008 (Rulebook Consolidation
Process).
25 17
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published for comment in the Federal
Register on January 28, 2009.4 The
Commission received two comment
letters in response to the proposed rule
change,5 along with one letter from
FINRA addressing certain of the
comments.6 FINRA filed Amendment
No. 1 to the proposed rule change on
June 17, 2009.7 FINRA filed
Amendment No. 2 to the proposed rule
change on June 30, 2009.8 This Order
approves the proposed rule change, as
modified by Amendment No. 1 and
issues notice of, and solicits comments
on, Amendment No. 2, and approves the
filing, as modified by Amendment No.
2, on an accelerated basis.
The proposed rule change would
adopt FINRA Rules 4110 (Capital
Compliance), 4120 (Regulatory
Notification and Business Curtailment),
4130 (Regulation of Activities of Section
15C Members Experiencing Financial
and/or Operational Difficulties), 4140
(Audit) and 4521 (Notifications,
Questionnaires and Reports) in the
Consolidated FINRA Rulebook and
delete NASD Rules 3130 and 3131,
NASD IM–3130, Incorporated NYSE
Rules 312(h), 313(d), 325, 326, 328,
416.20, 418, 420, 421 and NYSE Rule
Interpretations 313(d)/01, 313(d)/02,
325(c)(1), 325(c)(1)/01 and 416/01.
FINRA also proposed to revise FINRA
Rule 9557 (Procedures for Regulating
Activities Under Rules 4110, 4120 and
4130 Regarding a Member Experiencing
Financial or Operational Difficulties)
and FINRA Rule 9559 (Hearing
4 See Securities Exchange Act Release No. 59273
(January 22, 2009), 74 FR 4992 (January 28, 2009)
(hereinafter the ‘‘Proposing Release’’).
5 See letters from Holly H. Smith and Eric A.
Arnold of Sutherland, Asbill & Brennan, LLP on
behalf of the Committee of Annuity Insurers dated
February 18, 2009 (the ‘‘CAI Letter’’) and Julian
Rainero of Bracewell & Guiliani, LLP dated April
17, 2009 (the ‘‘B&G Letter’’).
6 See letter from Adam H. Arkel of FINRA, dated
April 14, 2009 (the ‘‘FINRA Letter’’).
7 Amendment No. 1 is a technical amendment
designed to clarify one sentence in the rule text.
8 Amendment No. 2 adds Supplementary Material
to the proposed FINRA Rules 4110, 4120 and 4521
to clarify that, for purposes of each of those rules,
all requirements that apply to a member that clear
or carry customer accounts also shall apply to any
member that, operating pursuant to the exemptive
provisions of Rule 15c3–3(k)(2)(i), either clears
customer transactions pursuant to such exemptive
provisions or holds customer funds in a bank
account established thereunder. FINRA explained
this aspect of the rule change in its Notice to
Members 08–23, and in greater detail in its original
filing with the Commission. Further, one of the two
commenters commented on this aspect of the
proposed rule changes (See the CAI Letter). FINRA
believes that incorporating this Supplementary
Material will reduce any possible ambiguity with
respect to this issue.
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Procedures for Expedited Proceedings
Under the Rule 9550 Series). Lastly,
FINRA proposed to make conforming
revisions to Section 4(g) of Schedule A
to the FINRA By-Laws.
A. Background
Currently, both NASD and NYSE
Rules 9 contain provisions governing
financial responsibility. These
provisions have played an important
role in supporting the SEC’s minimum
net capital and other financial
responsibility requirements by
establishing criteria promoting the
permanency of member’s capital,
requiring the review and approval of
material financial transactions and
establishing criteria intended to identify
member firms approaching financial
difficulty and to monitor their financial
and operational condition. For that
reason, FINRA has placed high priority
on expeditiously developing the unified
set of proposed rules for inclusion in the
Consolidated FINRA Rulebook. FINRA
believes that the proposed rules would
incorporate many of the provisions in
the existing rules but would streamline
and reorganize the provisions. In
addition, FINRA has tiered many
provisions to apply only to those firms
that clear or carry customer accounts.10
B. Proposed FINRA Rule 4110 (Capital
Compliance)
1. Authority to Increase Capital
Requirements
Proposed FINRA Rule 4110(a), based
primarily on NYSE Rule 325(d), would
enable FINRA to prescribe greater net
capital requirements for carrying and
clearing members, or require any such
member to restore or increase its net
capital or net worth, when deemed
necessary for the protection of investors
or in the public interest. The authority
to act under the proposed rule would
reside with FINRA’s Executive Vice
President charged with oversight for
financial responsibility (or his or her
written officer delegate) (referred to as
‘‘FINRA’s EVP’’). To execute such
authority, FINRA would be required to
issue a notice pursuant to Proposed
FINRA Rule 9557 (a ‘‘Rule 9557
notice’’). FINRA believes that proposed
FINRA Rule 9557, much like the current
rule, would afford a member adequate
safeguards because, among other things,
9 For convenience, the Incorporated NYSE Rules
are referred to as the ‘‘NYSE Rules.’’
10 All requirements set forth in the proposed rules
that would apply to firms that clear or carry
customer accounts would also apply to firms that
operate pursuant to the exemptive provisions of
SEA Rule 15c3–3(k)(2)(i). For further clarification in
response to commenter concerns, see Section 2
under Item II C. See also infra note 12.
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]]>Agencies
[Federal Register Volume 74, Number 217 (Thursday, November 12, 2009)]
[Notices]
[Pages 58332-58334]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-27258]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-60957; File No. SR-CBOE-2009-070]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Approving a Proposed Rule Change Relating to
Preferred Market Makers
November 6, 2009.
I. Introduction
On September 28, 2009, the Chicago Board Options Exchange,
Incorporated (``CBOE'' or ``Exchange'') filed with the Securities and
Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposal to amend CBOE Rule 8.13, ``Preferred Market-
Maker Program'' to establish a participation entitlement for complex
orders designated to Preferred Market Makers and to clarify the
operation of the Hybrid System with respect to the existing Preferred
Market Maker participation entitlement for individual options orders.
The proposed rule change was published for comment in the Federal
Register on October 7, 2009.\3\ The Commission received no comments
regarding the proposal. This order approves the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 60746 (September 30,
2009), 74 FR 51626 (``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposal
The CBOE proposes to amend CBOE Rule 8.13 to: (1) Establish a
participation entitlement for complex orders entered into the Complex
Order Book (``COB'') or the complex order RFQ auction (``COA'') that
are designated to a Preferred Market Maker; and (2) clarify the
operation of the Hybrid System with respect to the Preferred Market
Maker participation entitlement for individual options orders.
A. Participation Entitlement for Complex Orders
Under the proposal, any Designated Primary Market Maker, Lead
Market Maker, or Market Maker with an appointment/allocation in the
relevant options class may be designated as a Preferred Market Maker
for complex orders.\4\ A Preferred Market Maker must comply with the
quoting obligations applicable to its Market Maker type under CBOE's
rules and must provide continuous electronic quotes (as defined in CBOE
Rule 1.1(ccc)) in at least 90% of the series of each class for which it
receives Preferred Market Maker orders.\5\ In addition, to receive a
participation entitlement for orders entered into the COB, the
Preferred Market Maker must be quoting at the best net priced bid/offer
when the order is received.\6\ For orders in a COA, the Preferred
Market Maker must: (1) At the beginning of the auction, be quoting at
either (A) the best bid/offer on the CBOE in at least one of the
component series of the complex order, or (B) the best net priced bid/
offer for the complex order; and (2) be quoting at the best net priced
bid/offer at the conclusion of the auction.\7\
---------------------------------------------------------------------------
\4\ See CBOE Rule 8.13, Interpretation and Policy .01(a).
\5\ See CBOE Rule 8.13, Interpretation and Policy .01(c).
\6\ See CBOE Rule 8.13, Interpretation and Policy .01(a)(ii).
\7\ See CBOE Rule 8.13, Interpretation and Policy .01(a)(iii).
---------------------------------------------------------------------------
CBOE prohibits an order flow provider from notifying a Preferred
Market Maker of its intention to submit a preferenced complex order so
that the Preferred Market Maker could change its quotation to match the
national best bid or offer (``NBBO'') immediately prior to the
submission of the preferenced order.\8\ CBOE states that CBOE Rule
4.18, ``Prevention of the Misuse of Material, Nonpublic Information,''
prohibits this misuse of material non-public information.\9\ CBOE
represents that it will conduct surveillance for, and enforce against,
such violations.\10\
---------------------------------------------------------------------------
\8\ See Notice, supra note 3, at note 3.
\9\ Id.
\10\ Id.
---------------------------------------------------------------------------
The participation entitlement for a complex order is based on the
contracts remaining after equivalent net priced orders and quotes on
the EBook and equivalent net priced public customer complex orders
resting in the COB that have priority over Preferred Market Makers have
been filled.\11\ After these orders have been filled, the participation
entitlement for a Preferred Market Maker that satisfies the
requirements in CBOE Rule 8.13, Interpretation and Policy .01 is: (1)
40% when there are two or more Market Makers also quoting at the best
net priced bid/offer execution price; and (2) 50% when there is one
other Market Maker quoting at the best net priced bid/offer execution
price.\12\ The participation entitlement percentages for complex orders
are the same as the
[[Page 58333]]
participation entitlement percentages for individual options orders
currently provided under CBOE Rule 8.13(c). If a Preferred Market Maker
receives a participation entitlement for a complex order in the COB or
a COA, no other participation entitlement provided in the CBOE's rules
for complex orders will apply to the complex order.\13\
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\11\ See CBOE Rule 8.13, Interpretation and Policy .01(b)(ii).
\12\ See CBOE Rule 8.13, Interpretation and Policy .01(b).
\13\ See CBOE Rule 8.13, Interpretation and Policy .01(b)(iii).
However, if a complex order executes, in part, against a Preferred
Market Maker's interest in the COB or the COA and, in part, against
the Preferred Market Maker's interest in the individual series legs
in the EBook, a Preferred Market Maker entitlement may apply on both
the individual series legs and on the COB or COA execution. See
Notice, supra note 3, at note 5.
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B. Clarification of the Participation Entitlement for Individual Orders
CBOE is amending CBOE Rule 8.13(b) to more clearly reflect the
operation of the Hybrid System with respect to Preferred Market Makers.
Specifically, CBOE is revising CBOE Rule 8.13(b) to indicate that the
Hybrid System is programmed so that the recipient of a Preferred Market
Maker order will receive a participation entitlement if: (1) The
Preferred Market Maker has an appointment/allocation in the relevant
options class; and (2) the Preferred Market Maker is quoting at the
CBOE's best bid or offer. CBOE is adding paragraph (d) to CBOE Rule
8.13, which will incorporate the quoting obligations applicable to
Preferred Market Makers that are currently set forth in CBOE Rule
8.13(b)(iii), including the requirement that a Preferred Market Maker
provide continuous electronic quotes, as defined in CBOE Rule 1.1(ccc),
in at least 90% of the series of each class for which it receives
Preferred Market Maker orders. CBOE notes that this quoting obligation,
like other Market Maker quoting obligations, is subject to CBOE market
performance, surveillance, and disciplinary programs to assess and
enforce compliance.
III. Discussion and Commission Findings
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange.\14\ In
particular, the Commission finds that the proposal is consistent with
Section 6(b)(5) of the Act,\15\ which requires, in part, that the rules
of a national securities exchange be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
of a free and open market and a national market system, and, in
general, to protect investors and the public interest. The proposal
establishes a Preferred Market Maker participation entitlement for
complex orders submitted to the COB and the COA. Under the proposal,
the Preferred Market Maker participation entitlement percentages for
complex orders are the same as the Preferred Market Maker participation
entitlement percentages provided currently in CBOE Rule 8.13(c) for
individual options orders.\16\ Because the proposal does not provide a
participation entitlement for complex orders that is greater than the
currently acceptable participation entitlement threshold for individual
options orders, the Commission does not believe that the proposal will
negatively impact quote competition for complex orders on CBOE. Under
the proposal, the remaining portion of each complex order will still be
allocated based on the competitive bidding of market participants.
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\14\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\15\ 15 U.S.C. 78f(b)(5).
\16\ The Commission also has approved similar participation
entitlement percentages for individual options orders on other
options exchanges. See, e.g., Securities Exchange Act Release Nos.
56269 (August 15, 2007), 72 FR 47086 (August 22, 2007) (File No. SR-
Amex-2007-75) (order approving an American Stock Exchange directed
order program that provides a 40% participation entitlement on
directed orders) (``Amex Order''); 51759 (May 27, 2005), 70 FR 32860
(June 6, 2005) (File No. SR-Phlx-2004-91) (order approving a
directed order program on the Philadelphia Stock Exchange that
allows the directed order recipient to receive a 40% participation
entitlement on designated orders) (``Phlx Order''); and 51818 (June
10, 2005), 70 FR 35146 (June 16, 2005) (File No. ISE-2005-18) (order
approving a preferencing program on the International Securities
Exchange that allows a preferenced market maker to receive a 40%
participation entitlement on designated orders).
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A Preferred Market Maker must satisfy certain requirements to be
eligible for a participation entitlement in complex orders.
Specifically, a Preferred Market Maker must comply with the quoting
obligations applicable to its Market Maker type under the CBOE's rules
and must provide continuous electronic quotes (as defined in CBOE Rule
1.1(ccc)) in at least 90% of the series for each class for which it
receives Preferred Market Maker orders.\17\ In addition, to receive a
participation entitlement for orders entered into the COB, the
Preferred Market Maker must be quoting at the best net priced bid/offer
when the order is received.\18\ For orders in a COA, the Preferred
Market Maker must: (1) At the beginning of the auction, be quoting at
either (A) the best bid/offer on the CBOE in at least one of the
component series of the complex order, or (B) the best net priced bid/
offer for the complex order; and (2) be quoting at the best net priced
bid/offer at the conclusion of the auction.\19\ These quoting
requirements are analogous to the current requirement in CBOE Rule
8.13(b)(ii) that a Preferred Market Maker be quoting at the CBOE's best
bid/offer to be eligible for a participation entitlement for an
individual options order.
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\17\ See CBOE Rule 8.13, Interpretation and Policy .01(c). This
quoting obligation also applies currently to the Preferred Market
Maker participation entitlement for individual options orders.
\18\ See CBOE Rule 8.13, Interpretation and Policy .01(a)(ii).
\19\ See CBOE Rule 8.13, Interpretation and Policy .01(a)(iii).
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The Commission believes that it is critical that, to be eligible
for a participation entitlement for a complex order, a Preferred Market
Maker may not step up and match the CBOE's best bid/offer after it
receives an order, but must be publicly quoting at the CBOE's best net
priced bid/offer when the order is received (for orders in the COB),
or, for orders in a COA, quoting at either the CBOE's best/bid offer
for a least one component of a complex order or at the CBOE's best net
priced bid/offer for the complex order at the start of the auction.\20\
As noted above, CBOE states that it would be a misuse of material non-
public information in violation of CBOE Rule 4.18 for an order flow
provider to notify a Preferred Market Maker of its intention to submit
a preferenced complex order immediately prior to sending the order to
allow the Preferred Market Maker to modify its quotation.\21\ CBOE
represents that it will conduct surveillance for, and enforce against,
such violations of its rules.\22\
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\20\ A Preferred Market Maker will not be allocated a total
quantity greater than the quantity it is quoting at the best net
priced bid/offer execution price. See CBOE Rule 8.13, Interpretation
and Policy .01(b)(i).
\21\ See notes 8 and 9, supra, and accompanying text.
\22\ See note 10, supra, and accompanying text.
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The Commission emphasizes that approval of this proposal does not
affect a broker-dealer's duty of best execution. The Commission has
discussed the duty of best execution in previous orders approving
proposals to implement participation entitlements,\23\ and hereby
incorporates those discussions by reference into this order.
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\23\ See, e.g., Amex Order and Phlx Order, supra note 16; and
Securities Exchange Act Release No. 51779 (June 2, 2005), 70 FR
33564 (June 8, 2005) (File No. SR-CBOE-2004-71) (order approving a
modification of the participation entitlement for Preferred
Designated Primary Market Makers).
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Finally, the Commission finds that the changes to CBOE Rule 8.13(b)
are
[[Page 58334]]
consistent with the Act because they clarify the operation of the
Hybrid System with respect to Preferred Market Maker participation
entitlements.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\24\ that the proposed rule change (File No. SR-CBOE-2009-070) is
approved.
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\24\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-27258 Filed 11-10-09; 8:45 am]
BILLING CODE 8011-01-P
