Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change, as Modified by Amendment No. 1 Thereto, Related to the Hybrid Matching Algorithms, 27850-27854 [2010-11811]
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III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change is effective
upon filing pursuant to Section
19(b)(3)(A) 9 of the Act and Rule 19b–
4(f)(2) 10 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
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change, as amended, is consistent with
the Act. Comments may be submitted by
any of the following methods:
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Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send e-mail to rule-comments@
Please include File Number SR–NYSE–
2010–34 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–NYSE–2010–34. 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 Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of such filing
also will be available for inspection and
copying at the principal office of the
Exchange. All comments received will
be posted without change; the
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File number SR–NYSE–
2010–34 and should be submitted on or
before June 8, 2010.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.11
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010–11809 Filed 5–17–10; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–62083; File No. SR–CBOE–
2010–038]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing of a
Proposed Rule Change, as Modified by
Amendment No. 1 Thereto, Related to
the Hybrid Matching Algorithms
May 12, 2010.
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 April 22,
2010, 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 May 6,
2010, CBOE filed Amendment No. 1 to
the proposed rule change. The
Commission is publishing this notice, as
amended, 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
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 revise its market
turner and modified participation
entitlement priority overlays. The text of
11 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
9 15
U.S.C. 78s(b)(3)(A).
10 17 CFR 240.19b–4(f)(2).
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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.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Background
CBOE Rules 6.45A and 6.45B set
forth, among other things, the manner in
which incoming electronic orders in
options are allocated on the Hybrid
System. Paragraph (a) of each rule
currently provides a ‘‘menu’’ of
allocation algorithms to choose from
when executing incoming electronic
orders. The menu format allows the
Exchange to utilize different allocation
algorithms on a class-by-class basis. The
menu includes, among other choices,
the Ultimate Matching Algorithm
(‘‘UMA’’),3 and price-time and pro-rata
priority allocation algorithms.
Additional priority overlays can be
applied to the base allocation
algorithms. The price-time and pro-rata
priority overlays currently include:
public customer priority for public
customer orders resting on the Hybrid
System, participation entitlements for
certain qualifying market-makers 4 (the
3 Under the UMA algorithm, public customer
orders in the electronic book have first priority to
trade against incoming electronic orders, then the
Market-Maker participation entitlement has second
priority. Thereafter, any remaining balance of the
incoming order, if any, is allocated among other
market participants based on a weighting of the
number of market participants quoting at the best
bid or offer (Component A) and the percentage that
the size of each market participant’s quote is at the
best bid or offer relative to the total number of
contracts at the disseminated quote (Component B).
See Rules 6.45A(a)(i)(B)(2) and 6.45B(a)(ii)(B)(2) for
a more detailed description of UMA.
4 Under the original participation entitlement, the
Exchange may determine to grant Market-Makers
participation entitlements pursuant to the
provisions of Rules 8.87, Participation Entitlement
of DPMs and e-DPMs, 8.13, Preferred Market-Maker
Program, or 8.15B, Participation Entitlement of
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‘‘original participation entitlement(s)’’) 5
and a market turner priority for
participants that are first to improve
CBOE’s disseminated quote. In addition,
a small order participation entitlement
overlay for Designated Primary MarketMakers (‘‘DPMs’’) and Lead MarketMakers (‘‘LMMs’’) can be applied to each
of the three allocation algorithms (i.e.,
price-time, pro-rata or UMA).6 These
overlays are all optional.
The Exchange recently adopted
another priority overlay for the priceLLMs. More than one such participation
entitlements may be activated for an option class
(including at different priority sequences), however
in no case may more than one participation
entitlement be applied on the same trade. In
allocating the participation entitlement, all of the
following apply: (i) To be entitled to their
participation entitlement, the Market-Maker’s order
and/or quote must be at the best price on the
Exchange. (ii) The Market-Maker may not be
allocated a total quantity greater than the quantity
that it is quoting (including orders not part of
quotes) at that price. If pro-rata priority is in effect,
and Market-Maker’s allocation of an order pursuant
to its participation entitlement is greater than its
percentage share of quotes/orders at the best price
at the time that the participation entitlement is
granted, the Market-Maker shall not receive any
further allocation of that order. (iii) In establishing
the counterparties to a particular trade, the
participation entitlement must first be counted
against that Market-Maker’s highest priority bids or
offers. (iv) The participation entitlement shall not
be in effect unless the public customer priority is
in effect in a priority sequence ahead of the
participation entitlement and then the participation
entitlement shall only apply to any remaining
balance. See Rules 6.45A(a)(ii)(2) and 6.45B(a)(i)(2).
5 The terms of the original participation
entitlement(s) vary depending on the particular
base allocation algorithm. For UMA classes, the
Market-Maker receives an allocation that is either
(i) The greater of the amount the Market-Maker
would be entitled to pursuant to the participation
entitlement or the amount it would otherwise
receive pursuant to the operation of the UMA
algorithm, (ii) the amount the Market-Maker would
be entitled to pursuant to the participation
entitlement or (iii) in index and ETF option classes,
the amount the Market-Maker would be entitled to
receive pursuant to the operation of the UMA
algorithm. The Exchange determines which of the
various entitlement formulas will be in effect on a
class-by-class basis. Also, under formulas (i) and (ii)
above, additional ‘‘Component A’’ allocations are
provided to certain On-Floor DPMs and On-Floor
LMMs. See Rules 6.45A(a)(i)(C) and 6.45B(a)(ii)(C).
For pro-rata classes, the Market-Maker would
receive a participation that is the greater of its
participation entitlement or its pro-rata allocation
share. For price-time classes, the Market-Maker
would receive a participation entitlement and a
time priority share on any remaining balance.
Whether UMA, pro-rata, or price-time priority is in
effect for an options class, each allocation
calculation is based on any remaining balance of
the incoming order after public customer priority is
applied, as well as after any other higher ranked
priority overlay, such as market turner priority, is
applied.
6 If the small order priority overlay is in effect for
an option class, then orders for five (5) contracts or
fewer will be executed first by the DPM or LMM,
as applicable, appointed to the option class. This
participation entitlement is subject to certain
conditions, including a condition that public
customer priority must be in effect in priority
sequence ahead of the participation entitlement.
See Rules 6.45A(a)(iii) and 6.45B(a)(iii).
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time and pro-rata allocation algorithms
that the Exchange refers to as the
‘‘modified participation entitlement.’’ 7
The modified participation entitlement
currently operates in the same manner
as the original participation
entitlement(s) with a few exceptions. In
particular, the modified participation
entitlement provides that, if at the time
of execution of an inbound order there
are no Public Customer orders resting at
the best price or a Public Customer was
the first to rest interest at the best price,
then the original participation
entitlement(s) will be applied. In all
other cases, participation entitlement
and public customer priority overlays
will not be in effect. This modified
participation entitlement overlay is only
applicable to automatic executions and
is not applicable for auctions. Lastly,
like the other priority overlays, the
modified participation entitlement is
optional. The Exchange can determine
whether one or more of the priority
overlays shall apply to an option class
and if more than one is selected, the
sequence in which they shall apply
(consistent with applicable rules). All
determinations are set forth in a
regulatory circular.
Amendments to Market Turner and
Modified Participation Entitlement
Priority Overlays
The purpose of this rule change is to
revise the market turner and modified
participation entitlement priority
overlays in various respects described
below. First, currently the rules provide
that the market turner priority overlay is
only available for classes utilizing the
price-time and pro-rata algorithms. The
Exchange is now proposing to amend
the rules to make this entitlement
overlay available for classes utilizing
any of the priority methods utilized by
the Exchange.
Second, currently the modified
participation entitlement overlay
available for the price-time and pro-rata
priority methods is only applicable to
automatic executions of incoming
electronic orders. It is not applicable to
electronic auctions. The Exchange is
also proposing to provide that the
modified participation entitlement
overlay would not be applicable for
executions of incoming electronic
orders initiated from PAR.8 Instead, as
7 Securities Exchange Act Release No. 60665
(September 14, 2009), 74 FR 4814 [sic] (September
21, 2009) (SR–CBOE–2009–052).
8 PAR is utilized to accommodate trading in open
outcry, where different rules on electronic book
priority apply. For example, in open outcry at the
same price, public customer orders in the electronic
book have first priority, bid (offers) of in-crowd
market participants have second priority, and bids
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27851
described in more detail below, the
original participation entitlement
parameters would be applied when PAR
is used to initiate an execution of an
electronic order.9 Thus, this outcome
would be no change from how the
original participation entitlement(s)
works today when PAR is utilized.
Third, currently the modified
participation entitlement overlay
available for the price-time and pro-rata
priority methods only modifies the
application of the original participation
entitlement. It does not modify the
application of the small order
participation entitlement for DPMs and
LMMs. The Exchange is proposing to
provide that the modified participation
entitlement overlay would also be
available to modify the application of
the small order participation
entitlement.
Fourth, currently under the modified
participation entitlement overlay
available for options classes utilizing
the price-time or pro-rata method, a
participation entitlement(s) is only
applied if there are no Public Customer
orders resting at the best price or if a
Public Customer was the first to rest
interest at the best price. In all other
cases, the participation entitlement and
public customer priority overlays are
not in effect for the allocation of
incoming electronic orders.
The Exchange is proposing to replace
this provision with what we refer to as
the ‘‘greater than’’ provision. Under this
provision, a Market-Maker that is the
subject of a participation entitlement
(including a small order participation
entitlement) would only receive an
entitlement if the amount the MarketMaker would be entitled to pursuant to
the participation entitlement is greater
than the amount the Market-Maker
would otherwise receive pursuant to the
operation of the algorithm. In all other
cases, the participation entitlement and
public customer priority would not be
applied. This allocation would be
subject to the following:
• The Market-Maker’s entitlement
share would be calculated based on any
remaining balance after all public
customer orders at the best price are
satisfied. For options classes using the
pro-rata method, the Exchange may
determine on a class-by-class basis to
calculate the Market-Maker’s
entitlement share using the UMA
methodology or the pro-rata
methodology. For options classes using
(offers) of broker-dealer orders in the electronic
book and electronic quotes of Market-Makers have
third priority. See, e.g., Rules 6.45A(b) and
6.45B(b).
9 See note 10, infra.
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the price-time method, the MarketMaker’s entitlement share would be
calculated using the price-time
methodology only.10
• When calculating the amount the
Market-Maker would otherwise receive
pursuant to the operation of the
algorithm, the participation entitlement
and public customer priority overlays
would not be considered. Instead the
calculation would be based on a pricetime or pro-rata basis, as applicable, and
subject to any other applicable priority
overlays, such as market turner priority.
The following example illustrates
some outcomes when using CBOE’s
existing allocation algorithms and when
using the proposed modified
participation entitlement. Assume that
an incoming electronic order for 24
contracts is received and that the
following trading interest is represented
at the execution price: three MarketMakers for 10 contracts each, the DPM
for 40 contracts, and a public customer
for 10 contracts.
• In a class where the algorithm is
simply pro-rata, each Market-Maker is
allocated 3 contracts, the DPM is
allocated 12 contracts, and the public
customer is allocated 3 contracts.
• In a class where the algorithm is
pro-rata with original DPM entitlement
and public customer priority overlays,
the public customer is allocated 10
contracts, the DPM is allocated 8
contracts (14 contracts remaining after
the public customer order * greater of
30% or 40/70), and each Market-Maker
is allocated 2 contracts.
• In a class where the algorithm is
pro-rata with the proposed modified
DPM entitlement overlay (and the DPM
entitlement is calculated based on the
pro-rata method), the allocation would
be simple pro-rata because the DPM’s
pro-rata share of 12 contracts (24
contracts * pro-rata share of 40/80) is
greater than the DPM’s entitlement
share of 8 contracts (14 contracts
remaining after the public customer
order * greater of 30% or 40/70).
Therefore, each Market-Maker would be
allocated 3 contracts, the DPM would be
allocated 12 contracts, and the public
10 This modified participation entitlement overlay
would only be applicable to automatic executions
and would not be applicable for executions of
incoming electronic orders initiated from PAR or
from electronic auctions. Instead, the original
participation entitlement parameters would be
applied for PAR and electronic auctions. In pro-rata
classes where the UMA method is selected to
calculate the Market-Maker’s modified participation
entitlement share, executions of incoming
electronic orders initiated from PAR and electronic
auctions would be allocated using the UMA
method. Therefore, in such classes, the MarketMaker’s original participation entitlement share of
a PAR or electronic auction execution would be
calculated using the UMA method.
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customer would be allocated 3
contracts.
• In a class where the algorithm is
pro-rata with the proposed modified
DPM entitlement overlay (and the DPM
entitlement is calculated based on UMA
using a 0% Component A weighting and
a 100% Component B weighting),11 the
allocation would be simple pro-rata
because the DPM’s pro-rata share of 12
contracts (24 contracts * pro-rata share
of 40/80) is greater than the DPM’s UMA
entitlement share of 8 contracts (14
contracts remaining after the public
customer order * greater of 30% or 40/
70). Therefore, each Market-Maker
would be allocated 3 contracts, the DPM
would be allocated 12 contracts, and the
public customer would be allocated 3
contracts.12
As illustrated above, the outcomes
that would result when the modified
participation entitlement is activated in
a class are not novel or unique. Each
outcome is an allocation that is
currently permitted under CBOE’s
existing allocation rules. Specifically:
• For classes using a price-time
methodology, the resulting allocation
would be either a simple price-time
allocation or a price-time allocation
with a participation entitlement after
yielding to all public customer orders at
the best price; and
• For classes using a pro-rata
methodology, the resulting allocation
would be either a simple pro-rata
allocation, a pro-rata allocation with a
participation entitlement after yielding
to all public customer orders at the best
price or, if applicable, an UMA
allocation with a participation
entitlement after yielding to all public
customer orders at the best price.
Put another way, the allocation that
occurs when a modified participation
entitlement is applied would be no
change from how the allocation operates
under the existing rules for a class
utilizing the original participation
entitlement (and small order
11 For purposes of this example, assume that the
original DPM participation entitlement is based on
the greater of the amount the DPM would be
entitled to pursuant to the participation entitlement
or the amount it would otherwise receive pursuant
to the operation of the UMA algorithm. See note 5,
supra.
12 As another example, assume that an incoming
electronic order for 4 contracts is received and that
the following trading interest is represented at the
execution price: three Market-Makers for 10
contracts each, the DPM for 40 contracts, and a
public customer for 10 contracts. In a class where
the algorithm is pro-rata with the proposed
modified participation entitlement for small orders,
the allocation would be simple pro-rata because the
DPM’s pro-rata share 2 contracts (4 contracts * prorata share of 40/80) is greater than the DPM’s small
order preference entitlement share of 0 contracts (0
contracts remaining after the public customer order
* 100%).
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participation entitlement). Specifically,
if the amount the Market-Maker would
be entitled to pursuant to the
participation entitlement is greater than
the amount the Market-Maker would
otherwise receive pursuant to the
operation of the algorithm, then the
participation entitlement allocation
share will continue to be calculated
based on any remaining balance of the
incoming order after public customer
priority and any other priority overlay
ranked ahead of the entitlement. When
calculating the amount the MarketMaker would otherwise receive
pursuant to the operation of the
algorithm, the resulting allocation
would be no change from how the
allocation would operate under the
existing rules for a class utilizing a
simple price-time or pro-rata algorithm.
Specifically, the Hybrid System will
calculate the Market-Maker’s price-time
or pro-rata share, as applicable, without
regard to any public customer priority
or participation entitlement priority
(because public customer priority would
not be applied when a participation
entitlement is not applied). Any other
higher ranked priority overlays, such as
market turner priority, will be
considered in determining the balance
of the incoming order to be allocated
under the price-time or pro-rata
algorithms, as applicable.
The notion of a ‘‘greater than’’ concept
for determining the participation
entitlement amount is also not novel or
unique.13 The primary distinction with
the instant proposal is that, under the
original participation entitlement,
public customer priority must be
applied in a priority sequence ahead of
the participation entitlement at all times
for the entitlement to be in effect. Under
the modified participation entitlement,
public customer priority will not be
‘‘hardcoded’’ into the algorithm
methodology—instead the participation
entitlement and public customer
priority will only be applied if the
entitlement share is greater than the
price-time or pro-rata share, as
applicable, and subject to any other
applicable priority overlays, such as
market turner priority. This distinction
13 For example, a CBOE Market-Maker gets the
greater of its UMA share (price-time or pro-rata
share, if applicable) or entitlement share. See CBOE
Rules 6.45A(a)(i) and (ii) and 6.45B(a)(i) and (ii). On
NYSE Arca, Inc. (‘‘Arca’’), an LMM or directed
option market maker (‘‘DOMM’’) gets the greater of
its price-time share or, subject to public customer
priority, entitlement share. See Arca Rule 6.76A(a).
On the International Securities Exchange, LLC
(‘‘ISE’’), an primary market maker or preferred
market maker gets the greater of its pro-rata share
or entitlement share, which is applied after priority
customers but based on the total order size (as
opposed to size remaining after priority customers
are satisfied). See ISE Rule 713.01 and .03.
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itself is not entirely novel or unique. In
this regard, the Exchange notes, for
example, that the price-time algorithm
being proposed is substantially similar
to what currently exists on at least one
other options exchange, except that
CBOE would propose to yield to all
public customer orders at the same price
when a Market-Maker participation
entitlement is applied (not just public
customer orders received in time
sequence ahead of the Market-Maker
receiving the entitlement).14
The Exchange notes that the
Commission has stated that priority of
public customer orders is not an
essential attribute of an exchange and in
the past the Commission has approved
trading rules at options exchanges that
do not give priority to public customers
that are priced no better than the orders
of other market participants.15 Indeed,
the Exchange’s price-time and pro-rata
methodologies discussed above are
examples of allocation methodologies
that do not require public customer
priority. However, when an entitlement
applies (such as the Market-Maker
participation entitlement or a crossing
entitlement), the Commission has had a
general policy for the options exchanges
to require yielding to all public
customers at the same price before the
entitlement can be applied.16 CBOE’s
proposed amendments to the modified
participation entitlement are entirely
consistent with this policy objective—
before any entitlement can be applied,
all public customer orders at the best
price must be satisfied. There is no
requirement that public customer
priority be ‘‘hardcoded’’ on every
allocation, only those allocations where
an entitlement is applied.17
The Exchange believes that public
customers will be treated equitably and
fairly under the proposed rule change.
We are proposing to apply a general
allocation algorithm where all market
participants are treated equally (i.e.,
price-time or pro-rata, as applicable, and
subject to any other applicable priority
overlays, such as market turner priority)
and, to the extent a Market-Maker
14 See,
e.g., Arca Rule 6.76A(a).
Securities Exchange Act Release No. 61198
(December 17, 2009), 74 FR 68880 (December 29,
2009) (SR–CBOE–2009–078).
16 See, e.g., CBOE Rules 6.45A, 6.45B, 6.74, 6.74A
and 6.74B, and ISE Rules 713, 716 and 723. Arca
Rule 6.76A(a) is a slight exception because it only
requires yielding to public customers at the same
price that have time priority over the LMM or
DOMM.
17 Arca’s price-time and LMM/DOMM
entitlement is one example. See, e.g., Arca Rule
6.76A(a). CBOE’s price-time or pro-rata and existing
modified participation entitlement are other
examples. See CBOE Rules 6.45A(a)(ii)(3) and
6.45B(a)(i)(3).
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15 See
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participation entitlement is applied, to
apply the entitlement only after all
public customer orders at the same price
have been satisfied. The proposed
amendments to the modified
participation entitlement do not serve to
in any way disadvantage public
customers or advantage other market
participants over public customers. In
fact, the proposed amendments actually
favor public customers because they
receive an added benefit if any
entitlement is applied (i.e., they are
completely satisfied with a 100% fill)
when public customers would
otherwise only receive a price-time or
pro-rata share like any other market
participant. Moreover, the Exchange
believes that the modified participation
entitlement, as amended, would
encourage quote competition because is
designed to reward aggressive pricing by
offering incentives both for MarketMakers to support and participate in the
CBOE marketplace and for market
participants to establish the best price or
quote at the best price with size. In
classes utilizing a price-time algorithm
with a modified participation
entitlement, all market participants
(including public customers) are
incented to compete by establishing the
best price. In classes utilizing a pro-rata
algorithm with a modified participation
entitlement, all market participants
(including public customers) are
incented to compete by quoting more
size.
With each incoming electronic order,
public customers can expect to receive
their respective price-time or pro-rata
share (same as other market
participants) or, in some cases, a 100%
fill.18 To the extent that public
customers may strategically rest orders
based on the allocation algorithm
employed at a given exchange,19 public
customers can adjust their ‘‘quoting’’
behavior accordingly, similar to how
they and other market participants
already would do today. Several market
characteristics factor into a market
18 That the Exchange may use a pro-rata or UMA
methodology to determine the Market-Maker’s
entitlement percentage does not have any impact
from the public customer’s perspective. The public
customer either gets a pro-rata share or a 100% fill.
See, e.g., notes 11 and 12, supra, and surrounding
discussion.
19 The Exchange believes that public customers
that are traditional retail investors do not typically
enter resting orders based on allocation algorithms,
so this change will not impact them. To the
contrary, public customers actually benefit from the
proposed allocation methodology because they get
a minimum price-time or pro-rata share and,
sometimes, a 100% fill before other market
participants. Voluntary Professional and
Professional customers are treated the same as
broker-dealers (not public customers) under CBOE’s
allocation rules. See Rule 1.1(fff) and (ggg).
PO 00000
Frm 00153
Fmt 4703
Sfmt 4703
27853
participant’s quoting behavior
including, but certainly not limited to,
the applicable fee structure, average
incoming order size, and the average
touch rate (i.e., average allocation a
market participant actually receives on
incoming electronic orders). The
allocation for any market participant
(including public customers) changes
constantly from order-to-order, secondto-second for various reasons. For
instance on CBOE the ultimate
allocation depends upon, among other
things, the size of an incoming order
and whatever trading interest happens
to be represented at the time the order
is received (e.g., one second only public
customers may be represented at the
best price, in which case the allocation
to an individual customer is based on
time priority; the next second there may
be one public customer and multiple
market makers at the best price, in
which case the allocation to the
customer is based on customer priority
regardless of when the customer entered
the order and to the other marketmakers based on a price-time (or prorata or UMA share, if applicable) and
any applicable entitlement share; a few
seconds later there may be a marketturner, in which case the market turner
trades first either entirely or based on a
percentage share, then public customers
at the best price trade based on time
priority; the next second there may be
only one public customer at the best
price and incoming order takes out the
entire balance of the resting order).
In determining their desired quote
size and price, other market participants
already account for the existence or
non-existence of a Market-Maker
entitlement (the entitlement may or may
not be applied on an order-by-order
basis and to different degrees under the
current rules depending on, for
example, whether a Market-Maker with
an entitlement is actually quoting at the
best price, the size of the MarketMaker’s quote, the number of other
Market-Makers quoting at that price,
and the size of the incoming order).
Under the proposed rule change, public
customers that may adjust their quoting
dynamics based upon, among other
things, the applicable allocation
algorithm may also want to account for
the existence or non-existence of a
Market-Maker entitlement, similar to
how other market participants would
already do today.20
20 For example, the impact of the proposed rule
change would be reflected in a customer’s average
touch rate, which the customer might then use to
determine size and price when entering orders.
E:\FR\FM\18MYN1.SGM
18MYN1
27854
Federal Register / Vol. 75, No. 95 / Tuesday, May 18, 2010 / Notices
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
Section 6(b) of the Act 21 and the rules
thereunder, and in particular with:
Section 6(b)(5) of the Act, which
requires that the rules of a national
securities exchange, among other things,
be designed 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; and not be designed to
permit unfair discrimination between
customers, issuers, brokers, or
dealers; 22 and Section 6(b)(8) of the Act,
which requires the rules of an exchange
not to impose any burden on
competition not necessary or in
furtherance of the Act.23 The proposed
rule change ensures that incoming
electronic orders are allocated in an
equitable and fair manner and that all
market participants (including public
customers) have a fair and reasonable
opportunity for allocations based on
established criteria and procedures.
CBOE believes that the change will
allow the Exchange other methods to
reward aggressive pricing in options
trading on the Hybrid System by making
market turner available for classes
utilizing any of the priority methods
utilized by the Exchange. CBOE also
believes that the modified participation
entitlement, as amended, would
encourage quote competition because is
designed to reward aggressive pricing by
offering incentives both for MarketMakers to support and participate in the
CBOE marketplace and for market
participants to establish the best price or
quote at the best price with size. In
classes utilizing a price-time algorithm
with a modified participation
entitlement, all market participants
(including public customers) are
incented to compete by establishing the
best price. In classes utilizing a pro-rata
algorithm with a modified participation
entitlement, all market participants
(including public customers) are
incented to compete by quoting more
size.
mstockstill on DSKH9S0YB1PROD with NOTICES
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.
21 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
23 15 U.S.C. 78f(b)(8).
17:22 May 17, 2010
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve such proposed
rule change, or
(B) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form
(https://www.sec.gov/rules/sro.shtml);
or
• Send an e-mail to rulecomments@sec.gov. Please include File
No. SR–CBOE–2010–038 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 No.
SR–CBOE–2010–038. 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,24 all subsequent
amendments, all written statements
with respect to the proposed rule
24 The text of the proposed rule change is
available on the Commission’s Web site at https://
www.sec.gov.
22 15
VerDate Mar<15>2010
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.
Jkt 220001
PO 00000
Frm 00154
Fmt 4703
Sfmt 4703
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 Web site viewing and
printing 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 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 No.
SR–CBOE–2010–038 and should be
submitted on or before June 8, 2010.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.25
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010–11811 Filed 5–17–10; 8:45 am]
BILLING CODE 8010–01–P
DEPARTMENT OF STATE
[Public Notice: 7012; OMB Control Number
1405–0156]
30–Day Notice of Proposed
Information Collection: DS–4048,
Projected Sales of Major Weapons in
Support of Section 25(a)(1) of the Arms
Export Control Act
ACTION: Notice of request for public
comment and submission to OMB of
proposed collections of information.
SUMMARY: The Department of State has
submitted the following information
collection request to the Office of
Management and Budget (OMB) for
approval in accordance with the
Paperwork Reduction Act of 1995.
• Title of Information Collection:
Projected Sales of Major Weapons in
Support of Section 25(a)(1) of the Arms
Export Control Act.
• OMB Control Number: 1405–0156.
• Type of Request: Extension of
Currently Approved Collection.
• Originating Office: Bureau of
Political Military Affairs, Directorate of
Defense Trade Controls, PM/DDTC.
• Form Number: DS–4048.
• Respondents: Business
Organizations.
25 17
E:\FR\FM\18MYN1.SGM
CFR 200.30–3(a)(12).
18MYN1
]]>Agencies
[Federal Register Volume 75, Number 95 (Tuesday, May 18, 2010)]
[Notices]
[Pages 27850-27854]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-11811]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62083; File No. SR-CBOE-2010-038]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of a Proposed Rule Change, as Modified
by Amendment No. 1 Thereto, Related to the Hybrid Matching Algorithms
May 12, 2010.
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 April 22, 2010, 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 May 6, 2010, CBOE filed Amendment No. 1 to the proposed
rule change. The Commission is publishing this notice, as amended, to
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes 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 revise its market turner and modified
participation entitlement priority overlays. 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.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
CBOE Rules 6.45A and 6.45B set forth, among other things, the
manner in which incoming electronic orders in options are allocated on
the Hybrid System. Paragraph (a) of each rule currently provides a
``menu'' of allocation algorithms to choose from when executing
incoming electronic orders. The menu format allows the Exchange to
utilize different allocation algorithms on a class-by-class basis. The
menu includes, among other choices, the Ultimate Matching Algorithm
(``UMA''),\3\ and price-time and pro-rata priority allocation
algorithms. Additional priority overlays can be applied to the base
allocation algorithms. The price-time and pro-rata priority overlays
currently include: public customer priority for public customer orders
resting on the Hybrid System, participation entitlements for certain
qualifying market-makers \4\ (the
[[Page 27851]]
``original participation entitlement(s)'') \5\ and a market turner
priority for participants that are first to improve CBOE's disseminated
quote. In addition, a small order participation entitlement overlay for
Designated Primary Market-Makers (``DPMs'') and Lead Market-Makers
(``LMMs'') can be applied to each of the three allocation algorithms
(i.e., price-time, pro-rata or UMA).\6\ These overlays are all
optional.
---------------------------------------------------------------------------
\3\ Under the UMA algorithm, public customer orders in the
electronic book have first priority to trade against incoming
electronic orders, then the Market-Maker participation entitlement
has second priority. Thereafter, any remaining balance of the
incoming order, if any, is allocated among other market participants
based on a weighting of the number of market participants quoting at
the best bid or offer (Component A) and the percentage that the size
of each market participant's quote is at the best bid or offer
relative to the total number of contracts at the disseminated quote
(Component B). See Rules 6.45A(a)(i)(B)(2) and 6.45B(a)(ii)(B)(2)
for a more detailed description of UMA.
\4\ Under the original participation entitlement, the Exchange
may determine to grant Market-Makers participation entitlements
pursuant to the provisions of Rules 8.87, Participation Entitlement
of DPMs and e-DPMs, 8.13, Preferred Market-Maker Program, or 8.15B,
Participation Entitlement of LLMs. More than one such participation
entitlements may be activated for an option class (including at
different priority sequences), however in no case may more than one
participation entitlement be applied on the same trade. In
allocating the participation entitlement, all of the following
apply: (i) To be entitled to their participation entitlement, the
Market-Maker's order and/or quote must be at the best price on the
Exchange. (ii) The Market-Maker may not be allocated a total
quantity greater than the quantity that it is quoting (including
orders not part of quotes) at that price. If pro-rata priority is in
effect, and Market-Maker's allocation of an order pursuant to its
participation entitlement is greater than its percentage share of
quotes/orders at the best price at the time that the participation
entitlement is granted, the Market-Maker shall not receive any
further allocation of that order. (iii) In establishing the
counterparties to a particular trade, the participation entitlement
must first be counted against that Market-Maker's highest priority
bids or offers. (iv) The participation entitlement shall not be in
effect unless the public customer priority is in effect in a
priority sequence ahead of the participation entitlement and then
the participation entitlement shall only apply to any remaining
balance. See Rules 6.45A(a)(ii)(2) and 6.45B(a)(i)(2).
\5\ The terms of the original participation entitlement(s) vary
depending on the particular base allocation algorithm. For UMA
classes, the Market-Maker receives an allocation that is either (i)
The greater of the amount the Market-Maker would be entitled to
pursuant to the participation entitlement or the amount it would
otherwise receive pursuant to the operation of the UMA algorithm,
(ii) the amount the Market-Maker would be entitled to pursuant to
the participation entitlement or (iii) in index and ETF option
classes, the amount the Market-Maker would be entitled to receive
pursuant to the operation of the UMA algorithm. The Exchange
determines which of the various entitlement formulas will be in
effect on a class-by-class basis. Also, under formulas (i) and (ii)
above, additional ``Component A'' allocations are provided to
certain On-Floor DPMs and On-Floor LMMs. See Rules 6.45A(a)(i)(C)
and 6.45B(a)(ii)(C). For pro-rata classes, the Market-Maker would
receive a participation that is the greater of its participation
entitlement or its pro-rata allocation share. For price-time
classes, the Market-Maker would receive a participation entitlement
and a time priority share on any remaining balance. Whether UMA,
pro-rata, or price-time priority is in effect for an options class,
each allocation calculation is based on any remaining balance of the
incoming order after public customer priority is applied, as well as
after any other higher ranked priority overlay, such as market
turner priority, is applied.
\6\ If the small order priority overlay is in effect for an
option class, then orders for five (5) contracts or fewer will be
executed first by the DPM or LMM, as applicable, appointed to the
option class. This participation entitlement is subject to certain
conditions, including a condition that public customer priority must
be in effect in priority sequence ahead of the participation
entitlement. See Rules 6.45A(a)(iii) and 6.45B(a)(iii).
---------------------------------------------------------------------------
The Exchange recently adopted another priority overlay for the
price-time and pro-rata allocation algorithms that the Exchange refers
to as the ``modified participation entitlement.'' \7\ The modified
participation entitlement currently operates in the same manner as the
original participation entitlement(s) with a few exceptions. In
particular, the modified participation entitlement provides that, if at
the time of execution of an inbound order there are no Public Customer
orders resting at the best price or a Public Customer was the first to
rest interest at the best price, then the original participation
entitlement(s) will be applied. In all other cases, participation
entitlement and public customer priority overlays will not be in
effect. This modified participation entitlement overlay is only
applicable to automatic executions and is not applicable for auctions.
Lastly, like the other priority overlays, the modified participation
entitlement is optional. The Exchange can determine whether one or more
of the priority overlays shall apply to an option class and if more
than one is selected, the sequence in which they shall apply
(consistent with applicable rules). All determinations are set forth in
a regulatory circular.
---------------------------------------------------------------------------
\7\ Securities Exchange Act Release No. 60665 (September 14,
2009), 74 FR 4814 [sic] (September 21, 2009) (SR-CBOE-2009-052).
---------------------------------------------------------------------------
Amendments to Market Turner and Modified Participation Entitlement
Priority Overlays
The purpose of this rule change is to revise the market turner and
modified participation entitlement priority overlays in various
respects described below. First, currently the rules provide that the
market turner priority overlay is only available for classes utilizing
the price-time and pro-rata algorithms. The Exchange is now proposing
to amend the rules to make this entitlement overlay available for
classes utilizing any of the priority methods utilized by the Exchange.
Second, currently the modified participation entitlement overlay
available for the price-time and pro-rata priority methods is only
applicable to automatic executions of incoming electronic orders. It is
not applicable to electronic auctions. The Exchange is also proposing
to provide that the modified participation entitlement overlay would
not be applicable for executions of incoming electronic orders
initiated from PAR.\8\ Instead, as described in more detail below, the
original participation entitlement parameters would be applied when PAR
is used to initiate an execution of an electronic order.\9\ Thus, this
outcome would be no change from how the original participation
entitlement(s) works today when PAR is utilized.
---------------------------------------------------------------------------
\8\ PAR is utilized to accommodate trading in open outcry, where
different rules on electronic book priority apply. For example, in
open outcry at the same price, public customer orders in the
electronic book have first priority, bid (offers) of in-crowd market
participants have second priority, and bids (offers) of broker-
dealer orders in the electronic book and electronic quotes of
Market-Makers have third priority. See, e.g., Rules 6.45A(b) and
6.45B(b).
\9\ See note 10, infra.
---------------------------------------------------------------------------
Third, currently the modified participation entitlement overlay
available for the price-time and pro-rata priority methods only
modifies the application of the original participation entitlement. It
does not modify the application of the small order participation
entitlement for DPMs and LMMs. The Exchange is proposing to provide
that the modified participation entitlement overlay would also be
available to modify the application of the small order participation
entitlement.
Fourth, currently under the modified participation entitlement
overlay available for options classes utilizing the price-time or pro-
rata method, a participation entitlement(s) is only applied if there
are no Public Customer orders resting at the best price or if a Public
Customer was the first to rest interest at the best price. In all other
cases, the participation entitlement and public customer priority
overlays are not in effect for the allocation of incoming electronic
orders.
The Exchange is proposing to replace this provision with what we
refer to as the ``greater than'' provision. Under this provision, a
Market-Maker that is the subject of a participation entitlement
(including a small order participation entitlement) would only receive
an entitlement if the amount the Market-Maker would be entitled to
pursuant to the participation entitlement is greater than the amount
the Market-Maker would otherwise receive pursuant to the operation of
the algorithm. In all other cases, the participation entitlement and
public customer priority would not be applied. This allocation would be
subject to the following:
The Market-Maker's entitlement share would be calculated
based on any remaining balance after all public customer orders at the
best price are satisfied. For options classes using the pro-rata
method, the Exchange may determine on a class-by-class basis to
calculate the Market-Maker's entitlement share using the UMA
methodology or the pro-rata methodology. For options classes using
[[Page 27852]]
the price-time method, the Market-Maker's entitlement share would be
calculated using the price-time methodology only.\10\
---------------------------------------------------------------------------
\10\ This modified participation entitlement overlay would only
be applicable to automatic executions and would not be applicable
for executions of incoming electronic orders initiated from PAR or
from electronic auctions. Instead, the original participation
entitlement parameters would be applied for PAR and electronic
auctions. In pro-rata classes where the UMA method is selected to
calculate the Market-Maker's modified participation entitlement
share, executions of incoming electronic orders initiated from PAR
and electronic auctions would be allocated using the UMA method.
Therefore, in such classes, the Market-Maker's original
participation entitlement share of a PAR or electronic auction
execution would be calculated using the UMA method.
---------------------------------------------------------------------------
When calculating the amount the Market-Maker would
otherwise receive pursuant to the operation of the algorithm, the
participation entitlement and public customer priority overlays would
not be considered. Instead the calculation would be based on a price-
time or pro-rata basis, as applicable, and subject to any other
applicable priority overlays, such as market turner priority.
The following example illustrates some outcomes when using CBOE's
existing allocation algorithms and when using the proposed modified
participation entitlement. Assume that an incoming electronic order for
24 contracts is received and that the following trading interest is
represented at the execution price: three Market-Makers for 10
contracts each, the DPM for 40 contracts, and a public customer for 10
contracts.
In a class where the algorithm is simply pro-rata, each
Market-Maker is allocated 3 contracts, the DPM is allocated 12
contracts, and the public customer is allocated 3 contracts.
In a class where the algorithm is pro-rata with original
DPM entitlement and public customer priority overlays, the public
customer is allocated 10 contracts, the DPM is allocated 8 contracts
(14 contracts remaining after the public customer order * greater of
30% or 40/70), and each Market-Maker is allocated 2 contracts.
In a class where the algorithm is pro-rata with the
proposed modified DPM entitlement overlay (and the DPM entitlement is
calculated based on the pro-rata method), the allocation would be
simple pro-rata because the DPM's pro-rata share of 12 contracts (24
contracts * pro-rata share of 40/80) is greater than the DPM's
entitlement share of 8 contracts (14 contracts remaining after the
public customer order * greater of 30% or 40/70). Therefore, each
Market-Maker would be allocated 3 contracts, the DPM would be allocated
12 contracts, and the public customer would be allocated 3 contracts.
In a class where the algorithm is pro-rata with the
proposed modified DPM entitlement overlay (and the DPM entitlement is
calculated based on UMA using a 0% Component A weighting and a 100%
Component B weighting),\11\ the allocation would be simple pro-rata
because the DPM's pro-rata share of 12 contracts (24 contracts * pro-
rata share of 40/80) is greater than the DPM's UMA entitlement share of
8 contracts (14 contracts remaining after the public customer order *
greater of 30% or 40/70). Therefore, each Market-Maker would be
allocated 3 contracts, the DPM would be allocated 12 contracts, and the
public customer would be allocated 3 contracts.\12\
---------------------------------------------------------------------------
\11\ For purposes of this example, assume that the original DPM
participation entitlement is based on the greater of the amount the
DPM would be entitled to pursuant to the participation entitlement
or the amount it would otherwise receive pursuant to the operation
of the UMA algorithm. See note 5, supra.
\12\ As another example, assume that an incoming electronic
order for 4 contracts is received and that the following trading
interest is represented at the execution price: three Market-Makers
for 10 contracts each, the DPM for 40 contracts, and a public
customer for 10 contracts. In a class where the algorithm is pro-
rata with the proposed modified participation entitlement for small
orders, the allocation would be simple pro-rata because the DPM's
pro-rata share 2 contracts (4 contracts * pro-rata share of 40/80)
is greater than the DPM's small order preference entitlement share
of 0 contracts (0 contracts remaining after the public customer
order * 100%).
---------------------------------------------------------------------------
As illustrated above, the outcomes that would result when the
modified participation entitlement is activated in a class are not
novel or unique. Each outcome is an allocation that is currently
permitted under CBOE's existing allocation rules. Specifically:
For classes using a price-time methodology, the resulting
allocation would be either a simple price-time allocation or a price-
time allocation with a participation entitlement after yielding to all
public customer orders at the best price; and
For classes using a pro-rata methodology, the resulting
allocation would be either a simple pro-rata allocation, a pro-rata
allocation with a participation entitlement after yielding to all
public customer orders at the best price or, if applicable, an UMA
allocation with a participation entitlement after yielding to all
public customer orders at the best price.
Put another way, the allocation that occurs when a modified
participation entitlement is applied would be no change from how the
allocation operates under the existing rules for a class utilizing the
original participation entitlement (and small order participation
entitlement). Specifically, if the amount the Market-Maker would be
entitled to pursuant to the participation entitlement is greater than
the amount the Market-Maker would otherwise receive pursuant to the
operation of the algorithm, then the participation entitlement
allocation share will continue to be calculated based on any remaining
balance of the incoming order after public customer priority and any
other priority overlay ranked ahead of the entitlement. When
calculating the amount the Market-Maker would otherwise receive
pursuant to the operation of the algorithm, the resulting allocation
would be no change from how the allocation would operate under the
existing rules for a class utilizing a simple price-time or pro-rata
algorithm. Specifically, the Hybrid System will calculate the Market-
Maker's price-time or pro-rata share, as applicable, without regard to
any public customer priority or participation entitlement priority
(because public customer priority would not be applied when a
participation entitlement is not applied). Any other higher ranked
priority overlays, such as market turner priority, will be considered
in determining the balance of the incoming order to be allocated under
the price-time or pro-rata algorithms, as applicable.
The notion of a ``greater than'' concept for determining the
participation entitlement amount is also not novel or unique.\13\ The
primary distinction with the instant proposal is that, under the
original participation entitlement, public customer priority must be
applied in a priority sequence ahead of the participation entitlement
at all times for the entitlement to be in effect. Under the modified
participation entitlement, public customer priority will not be
``hardcoded'' into the algorithm methodology--instead the participation
entitlement and public customer priority will only be applied if the
entitlement share is greater than the price-time or pro-rata share, as
applicable, and subject to any other applicable priority overlays, such
as market turner priority. This distinction
[[Page 27853]]
itself is not entirely novel or unique. In this regard, the Exchange
notes, for example, that the price-time algorithm being proposed is
substantially similar to what currently exists on at least one other
options exchange, except that CBOE would propose to yield to all public
customer orders at the same price when a Market-Maker participation
entitlement is applied (not just public customer orders received in
time sequence ahead of the Market-Maker receiving the entitlement).\14\
---------------------------------------------------------------------------
\13\ For example, a CBOE Market-Maker gets the greater of its
UMA share (price-time or pro-rata share, if applicable) or
entitlement share. See CBOE Rules 6.45A(a)(i) and (ii) and
6.45B(a)(i) and (ii). On NYSE Arca, Inc. (``Arca''), an LMM or
directed option market maker (``DOMM'') gets the greater of its
price-time share or, subject to public customer priority,
entitlement share. See Arca Rule 6.76A(a). On the International
Securities Exchange, LLC (``ISE''), an primary market maker or
preferred market maker gets the greater of its pro-rata share or
entitlement share, which is applied after priority customers but
based on the total order size (as opposed to size remaining after
priority customers are satisfied). See ISE Rule 713.01 and .03.
\14\ See, e.g., Arca Rule 6.76A(a).
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The Exchange notes that the Commission has stated that priority of
public customer orders is not an essential attribute of an exchange and
in the past the Commission has approved trading rules at options
exchanges that do not give priority to public customers that are priced
no better than the orders of other market participants.\15\ Indeed, the
Exchange's price-time and pro-rata methodologies discussed above are
examples of allocation methodologies that do not require public
customer priority. However, when an entitlement applies (such as the
Market-Maker participation entitlement or a crossing entitlement), the
Commission has had a general policy for the options exchanges to
require yielding to all public customers at the same price before the
entitlement can be applied.\16\ CBOE's proposed amendments to the
modified participation entitlement are entirely consistent with this
policy objective--before any entitlement can be applied, all public
customer orders at the best price must be satisfied. There is no
requirement that public customer priority be ``hardcoded'' on every
allocation, only those allocations where an entitlement is applied.\17\
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\15\ See Securities Exchange Act Release No. 61198 (December 17,
2009), 74 FR 68880 (December 29, 2009) (SR-CBOE-2009-078).
\16\ See, e.g., CBOE Rules 6.45A, 6.45B, 6.74, 6.74A and 6.74B,
and ISE Rules 713, 716 and 723. Arca Rule 6.76A(a) is a slight
exception because it only requires yielding to public customers at
the same price that have time priority over the LMM or DOMM.
\17\ Arca's price-time and LMM/DOMM entitlement is one example.
See, e.g., Arca Rule 6.76A(a). CBOE's price-time or pro-rata and
existing modified participation entitlement are other examples. See
CBOE Rules 6.45A(a)(ii)(3) and 6.45B(a)(i)(3).
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The Exchange believes that public customers will be treated
equitably and fairly under the proposed rule change. We are proposing
to apply a general allocation algorithm where all market participants
are treated equally (i.e., price-time or pro-rata, as applicable, and
subject to any other applicable priority overlays, such as market
turner priority) and, to the extent a Market-Maker participation
entitlement is applied, to apply the entitlement only after all public
customer orders at the same price have been satisfied. The proposed
amendments to the modified participation entitlement do not serve to in
any way disadvantage public customers or advantage other market
participants over public customers. In fact, the proposed amendments
actually favor public customers because they receive an added benefit
if any entitlement is applied (i.e., they are completely satisfied with
a 100% fill) when public customers would otherwise only receive a
price-time or pro-rata share like any other market participant.
Moreover, the Exchange believes that the modified participation
entitlement, as amended, would encourage quote competition because is
designed to reward aggressive pricing by offering incentives both for
Market-Makers to support and participate in the CBOE marketplace and
for market participants to establish the best price or quote at the
best price with size. In classes utilizing a price-time algorithm with
a modified participation entitlement, all market participants
(including public customers) are incented to compete by establishing
the best price. In classes utilizing a pro-rata algorithm with a
modified participation entitlement, all market participants (including
public customers) are incented to compete by quoting more size.
With each incoming electronic order, public customers can expect to
receive their respective price-time or pro-rata share (same as other
market participants) or, in some cases, a 100% fill.\18\ To the extent
that public customers may strategically rest orders based on the
allocation algorithm employed at a given exchange,\19\ public customers
can adjust their ``quoting'' behavior accordingly, similar to how they
and other market participants already would do today. Several market
characteristics factor into a market participant's quoting behavior
including, but certainly not limited to, the applicable fee structure,
average incoming order size, and the average touch rate (i.e., average
allocation a market participant actually receives on incoming
electronic orders). The allocation for any market participant
(including public customers) changes constantly from order-to-order,
second-to-second for various reasons. For instance on CBOE the ultimate
allocation depends upon, among other things, the size of an incoming
order and whatever trading interest happens to be represented at the
time the order is received (e.g., one second only public customers may
be represented at the best price, in which case the allocation to an
individual customer is based on time priority; the next second there
may be one public customer and multiple market makers at the best
price, in which case the allocation to the customer is based on
customer priority regardless of when the customer entered the order and
to the other market-makers based on a price-time (or pro-rata or UMA
share, if applicable) and any applicable entitlement share; a few
seconds later there may be a market-turner, in which case the market
turner trades first either entirely or based on a percentage share,
then public customers at the best price trade based on time priority;
the next second there may be only one public customer at the best price
and incoming order takes out the entire balance of the resting order).
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\18\ That the Exchange may use a pro-rata or UMA methodology to
determine the Market-Maker's entitlement percentage does not have
any impact from the public customer's perspective. The public
customer either gets a pro-rata share or a 100% fill. See, e.g.,
notes 11 and 12, supra, and surrounding discussion.
\19\ The Exchange believes that public customers that are
traditional retail investors do not typically enter resting orders
based on allocation algorithms, so this change will not impact them.
To the contrary, public customers actually benefit from the proposed
allocation methodology because they get a minimum price-time or pro-
rata share and, sometimes, a 100% fill before other market
participants. Voluntary Professional and Professional customers are
treated the same as broker-dealers (not public customers) under
CBOE's allocation rules. See Rule 1.1(fff) and (ggg).
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In determining their desired quote size and price, other market
participants already account for the existence or non-existence of a
Market-Maker entitlement (the entitlement may or may not be applied on
an order-by-order basis and to different degrees under the current
rules depending on, for example, whether a Market-Maker with an
entitlement is actually quoting at the best price, the size of the
Market-Maker's quote, the number of other Market-Makers quoting at that
price, and the size of the incoming order). Under the proposed rule
change, public customers that may adjust their quoting dynamics based
upon, among other things, the applicable allocation algorithm may also
want to account for the existence or non-existence of a Market-Maker
entitlement, similar to how other market participants would already do
today.\20\
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\20\ For example, the impact of the proposed rule change would
be reflected in a customer's average touch rate, which the customer
might then use to determine size and price when entering orders.
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[[Page 27854]]
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act \21\ and the rules thereunder, and in
particular with: Section 6(b)(5) of the Act, which requires that the
rules of a national securities exchange, among other things, be
designed 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; and not be designed to permit unfair discrimination
between customers, issuers, brokers, or dealers; \22\ and Section
6(b)(8) of the Act, which requires the rules of an exchange not to
impose any burden on competition not necessary or in furtherance of the
Act.\23\ The proposed rule change ensures that incoming electronic
orders are allocated in an equitable and fair manner and that all
market participants (including public customers) have a fair and
reasonable opportunity for allocations based on established criteria
and procedures. CBOE believes that the change will allow the Exchange
other methods to reward aggressive pricing in options trading on the
Hybrid System by making market turner available for classes utilizing
any of the priority methods utilized by the Exchange. CBOE also
believes that the modified participation entitlement, as amended, would
encourage quote competition because is designed to reward aggressive
pricing by offering incentives both for Market-Makers to support and
participate in the CBOE marketplace and for market participants to
establish the best price or quote at the best price with size. In
classes utilizing a price-time algorithm with a modified participation
entitlement, all market participants (including public customers) are
incented to compete by establishing the best price. In classes
utilizing a pro-rata algorithm with a modified participation
entitlement, all market participants (including public customers) are
incented to compete by quoting more size.
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\21\ 15 U.S.C. 78f(b).
\22\ 15 U.S.C. 78f(b)(5).
\23\ 15 U.S.C. 78f(b)(8).
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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 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 No. SR-CBOE-2010-038 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 No. SR-CBOE-2010-038. 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,\24\ 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 Web site
viewing and printing 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 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 No. SR-CBOE-2010-038 and
should be submitted on or before June 8, 2010.
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\24\ The text of the proposed rule change is available on the
Commission's Web site at https://www.sec.gov.
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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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-11811 Filed 5-17-10; 8:45 am]
BILLING CODE 8010-01-P
