Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change Related to FLEX Options, 82017-82022 [2011-33449]
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Federal Register / Vol. 76, No. 250 / Thursday, December 29, 2011 / Notices
not at a price better than the NBBO and
by TPHs willing to facilitate and stop a
customer order at a particular price even
when there is not a desire to trade
against any or all of the customer order.
Additionally, this proposal provides the
possibility that other TPHs may receive
increased order allocations through
AIM, which the Exchange believes
could increase participation in
Auctions. The Exchange believes that
this proposal may ultimately provide
additional opportunities for price
improvement over the NBBO for its
customers.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the
requirements of the Act and the rules
and regulations thereunder applicable to
a national securities exchange and, in
particular, the requirements of Section
6(b) of the Act8. Specifically, the
Exchange believes the proposed rule
change is consistent with the Section
6(b)(5)9 requirements that the rules of an
exchange be designed to promote just
and equitable principles of trade, to
prevent fraudulent and manipulative
acts, to remove impediments to and to
perfect the mechanism for a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
In particular, the Exchange believes
this proposed rule change is a
reasonable modification designed to
provide additional flexibility for TPHs
to obtain executions on behalf of their
customers while continuing to provide
meaningful, competitive Auctions. The
Exchange also believes that the
proposed rule change will increase the
number of and participation in
Auctions, which will ultimately
enhance competition in the AIM
Auctions and provide customers with
additional opportunities for price
improvement.
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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.
8 15
9 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
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III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 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 or disapprove
such proposed rule change, or (B)
institute proceedings to determine
whether the proposed rule change
should be disapproved.
82017
available for inspection and copying at
the principal office of the CBOE. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–CBOE–2011–117, and
should be submitted on or before
January 19, 2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.10
Kevin M. O’Neill,
Deputy Secretary.
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:
[FR Doc. 2011–33450 Filed 12–28–11; 8:45 am]
Electronic Comments
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing of a
Proposed Rule Change Related to
FLEX Options
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml ); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–CBOE–2011–117 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–CBOE–2011–117. This file
number should be included on the
subject line if email 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 on official business
days between the hours of 10 a.m. and
3 p.m. Copies of such filing also will be
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BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–66035; File No. SR–CBOE–
2011–122]
December 22, 2011.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on December
12, 2011, the Chicago Board Options
Exchange, Incorporated (‘‘Exchange’’ or
‘‘CBOE’’) filed with the Securities and
Exchange Commission (the
‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is proposing to amend
certain rules pertaining to the electronic
trading of Flexible Exchange Options
(‘‘FLEX Options’’) on the Exchange’s
FLEX Hybrid Trading System platform.3
10 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 FLEX Options provide investors with the ability
to customize basic option features including size,
expiration date, exercise style, and certain exercise
prices. FLEX Options can be FLEX Index Options
or FLEX Equity Options. In addition, other products
are permitted to be traded pursuant to the FLEX
trading procedures. For example, credit options are
eligible for trading as FLEX Options pursuant to the
1 15
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The Exchange is also proposing an
amendment to eliminate certain
European-Capped style settlement and
currency provisions within the FLEX
rules that pertain to both electronic and
open outcry trading. The text of the rule
proposal is available on the Exchange’s
Web site (https://www.cboe.org/legal), at
the Exchange’s Office of the Secretary
and at the Commission.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of
and basis for the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, Proposed Rule
Change
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1. Purpose
The Exchange is in the process of
enhancing the FLEX Hybrid Trading
System platform (referred to herein as
the ‘‘FLEX System’’ or the ‘‘System’’) in
order to further integrate it with the
Exchange’s existing technology platform
utilized for non-FLEX trading. In
conjunction with the enhancement, the
Exchange is proposing to make some
modifications to the existing electronic
trading processes utilized on the FLEX
System platform.4 In particular, as
discussed in more detail below, the
Exchange is proposing to (i) revise and
enhance the process for opening FLEX
Option series with existing open
interest, (ii) eliminate certain Trade
Conditions that will no longer be
supported in the new system and to add
a new Trade Condition, (iii) eliminate
European-Capped exercise style and
FLEX rules in Chapters XXIVA and XXIVB. See
CBOE Rules 24A.1(e) and (f), 24A.4(b)(1) and (c)(1),
24B.1(f) and (g), 24B.4(b)(1) and (c)(1), and 28.17.
The rules governing the trading of FLEX Options on
the FLEX Request for Quote (‘‘RFQ’’) System
platform are contained in Chapter XXIVA. The rules
governing the trading of FLEX Options on the FLEX
Hybrid Trading System platform are contained in
Chapter XXIVB.
4 The Exchange notes that is [sic] rule change
filing is primarily seeking to propose changes to the
electronic trading processes utilized on the FLEX
System platform. The Exchange is not proposing
any changes to the open outcry trading processes
for FLEX options, except for the proposed changes
pertaining to foreign currencies.
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foreign currency provisions that will no
longer be supported in the new system,
(iv) modify and simplify the allocation
algorithms applicable to the FLEX
electronic book and to the FLEX
electronic RFQ process, and (v) include
a description of complex order handling
under the electronic RFQ process.5
Opening Trading in Existing Series
The first purpose of this proposed
rule change is to revise and enhance the
process for opening electronic trading in
FLEX Option series with existing open
interest. Under the current FLEX trading
procedures, there are no trading
rotations conducted at the opening of
trading.6 Instead, to begin trading on a
given day, a FLEX RFQ process is
required to initiate a transaction when
there are no FLEX Orders 7 currently
resting in the electronic book in the
particular series to be traded.8 Resting
FLEX Orders may only be entered in the
electronic book as ‘‘day orders’’ and are
cancelled at the close of each trade day
if unexecuted. Therefore, there would
be no orders resting in the book from the
prior day.9 As a result, under the current
process, an initial RFQ is needed to
open a particular series for trading each
day. Once an RFQ is completed, the
series is established in the FLEX System
5 The FLEX System currently utilizes server
software (residing on CBOE’s servers) and client
software (installed on Trading Permit Holder and
Sponsored User workstations) that CBOE has
licensed from Cinnober Financial Technology AB
(‘‘Cinnober’’). In conjunction with the
enhancements to the FLEX System, the Exchange
will no longer utilize the Cinnober software and, as
a result, the Exchange will no longer utilize the
related Trading Permit Holder/Sponsored User
software sublicense, which is part of the Sponsored
User Agreement form that was put in place when
the FLEX Hybrid Trading System was established.
See Securities Exchange Act Release 56792
(November 15, 2007), 72 FR 65776 (November 23,
2007) (SR–CBOE–2006–99) (the ‘‘Original FLEX
System Approval Order’’). The Exchange also notes
that, in conjunction with the enhancements to the
FLEX System, the Exchange intends to make
available certain risk management application tools
that CBOE Trading Permit Holders may determine
to use to assist with mitigating potential risks
associated with orders that exceed certain pre-trade
thresholds.
6 See Rule 24B.3.
7 A ‘‘FLEX Order’’ refers to (i) FLEX bids and
offers entered by FLEX Market-Makers and (ii)
orders to purchase and orders to sell FLEX Options
entered by FLEX Traders, in each case into the
electronic book. A ‘‘FLEX Market-Maker’’ means a
FLEX Trader that is appointed as a FLEX Appointed
Market-Maker or a FLEX Qualified Market-Maker,
each as described in Rule 24B.9. A ‘‘FLEX Trader’’
means a FLEX-participating Trading Permit Holder
who has been approved by the Exchange to trade
on the System. See Rule 24B.1(h), (j) and (l).
8 The Exchange may determine in a class-by-class
basis to make an electronic book available in the
FLEX System. See Rule 24B.5(b).
9 In the future, the Exchange may determine to
enable ‘‘good-til-cancelled’’ functionality for FLEX
Options. The introduction of such functionality
would be the subject of a separate rule filing.
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for the day and FLEX Orders may be
entered directly into the FLEX
electronic book throughout the day.
To make the process more efficient
and useful for FLEX users, the Exchange
is proposing to revise the procedure to
provide that FLEX Option series with
existing open interest will be
automatically opened by the Exchange
at a randomly selected time within a
number of seconds after 8:30 a.m. (all
times noted herein are Central Time), at
which point in time FLEX Orders may
be entered directly into the electronic
book (if available) and/or FLEX RFQ
auctions may be initiated pursuant to
Rule 24B.5 As revised, it will no longer
be necessary for there to be an initial
RFQ each day before entering a FLEX
Order in the electronic book in series
with existing open interest. New FLEX
Option series will continue to be subject
to the existing requirement that there be
an initial RFQ to initiate trading in the
FLEX series on a given trading day.
Trade Conditions
The second purpose of this proposed
rule change is to eliminate certain Trade
Conditions that will no longer be
supported for electronic trading in the
new system and to add a new Trade
Condition. Currently, under Rule 24B.1,
a ‘‘Trade Condition’’ means a
contingency that has been placed on an
RFQ, RFQ Order 10 or FLEX Order. The
following Trade Conditions are
available in the System for a FLEX
Trader to choose from: (i) Fill-or-Kill,
which is a condition to execute an RFQ
Order or FLEX Order in its entirety as
soon as it is represented or canceled it;
(ii) All-or-None, which is a condition to
execute an RFQ Order or FLEX Order in
its entirety or not at all; (iii) Minimum
Fill, which is a condition to execute an
RFQ Order or a FLEX Order in a
minimum quantity or not at all; (iv) Lots
Of, which is a condition to execute an
RFQ Order or a FLEX Order in
minimum lot sizes or not at all; (v)
Intent to Cross, which is an RFQ
condition indicating that the Submitting
Trading Permit Holder intends to cross
or act as principal and receive a crossing
participation entitlement; and (vi)
10 An ‘‘RFQ Order’’ is an order to purchase or
order to sell FLEX Options entered by the
Submitting Trading Permit Holder during the RFQ
Reaction Period. The ‘‘RFQ Reaction Period’’ means
the period of time during which a Submitting
Trading Permit Holder determined whether to
accept or reject the RFQ Market. A ‘‘Submitting
Trading Permit Holder’’ means the FLEX Trader
that (i) initiates FLEX bidding and offering by
submitting an RFQ or (ii) enters a FLEX Order into
the electronic book. An ‘‘RFQ Market’’ means the
bids or offers, or both, as applicable, entered in
response to an electronic RFQ and FLEX Orders
resting in the electronic book. See Rule 24B.1(s), (t),
(v) and (x), and Rule 24B.5(a)(1)(iii).
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Hedge, which is a RFQ or FLEX Order
condition contingent on trade execution
in Non-FLEX Options or other NonFLEX components (e.g., stock, futures,
or other related instruments or
interests). Trade Conditions, other than
Intent to Cross or Hedge, are inputted
but not disclosed on the System. FLEX
Orders, other than those designated as
Fill-or-Kill, are designated as day orders
and, if unexecuted, are automatically
cancelled at the close of each trade
day.11
The Exchange is now proposing to
eliminate the Fill-or-Kill, Minimum Fill,
Lots Of, and Intent to Cross Trade
Conditions, as these functions will not
be supported under the FLEX System
enhancements. The Fill-or-Kill,
Minimum Fill, Lots Of 12 and Intent to
Cross 13 Trade Conditions have
11 See
Rule 24B.1(y).
proposed changes to Rule 24B.1(y). The
Fill-or-Kill, Minimum Fill and Lots Of Trade
Conditions were originally designed, in part, as an
additional tool to assist FLEX Traders that are
electronically trading in meeting certain minimum
value size requirements applicable to the trading of
FLEX Options; however, the minimum size
requirements have been eliminated on a pilot basis
(which the Exchange believes is one of the reasons
why the Trade Conditions are largely not used).
See, e.g., Rule 24B.4(a)(5) and .01(b). The minimum
value size pilot is currently set to expire on March
30, 2012, unless otherwise extended or made
permanent. It is the Exchange’s intention to submit
a separate rule change filing proposing to make the
pilot permanent. In addition, if for some reason the
minimum value size pilot is not extended or
otherwise made permanent, FLEX Traders have
other means to satisfy the minimum value size
requirements (e.g., utilizing the All-or-None Trade
Condition, or entering RFQ Orders or FLEX Orders
that would trade against the electronic book with
value sizes that would result in transaction sizes
sufficient to meet the minimum value size
requirement).
13 See proposed changes to Rules 24B.1(y) and
24B.5(a)(1)(iii)(D) and (d)(1)(i). The Exchange notes
that the Intent to Cross Trade Condition is an
optional feature that the Exchange may determine
to make available electronically on a class-by-class
basis in accordance with Rule 24B.5(d). The Intent
to Cross Trade Condition was originally designed to
allow for an electronic crossing participation
entitlement for executions resulting from the
electronic RFQ process. (To use the feature, the
Submitting Trading Permit Holder must mark its
RFQ with an ‘‘intent to cross’’ flag at the time the
RFQ is originally submitted to be automatically
allocated the applicable crossing participation
entitlement for facilitation and solicitation
transactions. If the RFQ is not flagged in this
manner, the Submitting Member will not be
automatically allocated the entitlement.) The
Exchange notes that this crossing participation
entitlement functionality has generally not been
actively used by FLEX Traders. (The Exchange also
notes that, apart from the Intent to Cross feature, a
Submitting Trading Permit Holder also has (and
will continue to have) the ability to enter an agency
or proprietary FLEX Quote in response to the
Submitting Member’s own electronic RFQ in
accordance with the provisions contained in Rule
24B.5(a)(1)(ii) and/or to cross FLEX Orders in
accordance with the provisions contained in Rule
24B.5(b)(3). However, no crossing participation
entitlement applies when these procedures are
used.) In order to make a more efficient and
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12 See
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generally not been actively used by
FLEX Traders. Given the lack of use, the
Exchange no longer plans to support
these Trade Conditions under the new
FLEX System enhancements.
The Exchange is also proposing to
adopt an Immediate-or-Cancel Trade
Condition. ‘‘Immediate-or-Cancel’’ will
be defined as a condition to execute an
RFQ Order or FLEX Order in its entirety
or in part as soon as it is represented or
cancel it. Thus, as proposed to be
revised, there will be three Trade
Conditions: Immediate-or-Cancel, Allor-None, and Hedge. Trade Conditions,
other than Hedge, will be inputted but
not disclosed on the System. In
addition, FLEX Orders, other than those
designated as Immediate-or-Cancel, will
be designated as day orders and, if
unexecuted, will be automatically
cancelled at the close of each trade
day.14
Foreign Currency Provisions
The third purpose of the proposed
rule change is to eliminate certain
provisions in the FLEX Rules that
permit (i) FLEX Options to be
designated with a European-Capped
style exercise and (ii) FLEX Index
Options to be designated for settlement
in foreign currencies (and related index
multiplier provisions for such
currencies).15 These European-Capped
style and foreign currency provisions
have generally not been actively
utilized.16 The Exchange no longer
plans to support foreign currency
settlements in the new FLEX System, so
the Exchange is proposing to eliminate
the provision within the rules and limit
the [sic] currently for FLEX Index
Options to U.S. dollars. These changes
will apply to all FLEX trading on the
Exchange, whether electronic or open
outcry.17
effective trading platform offering available for
FLEX Traders that includes a crossing participation
entitlement feature, the Exchange has submitted a
separate rule change filing proposing to make
modified versions of the Automated Improvement
Mechanism (‘‘AIM’’) and Solicitation Auction
Mechanism (‘‘SAM’’)—which are currently
available for non-FLEX Options under Rule 6.74A
and 6.74B, respectively—available for FLEX
Options. See SR–CBOE–2011–123.
14 See note 9, supra.
15 See proposed changes to Rules 24A.1(c) and (i),
24A.4(a)(2)(iii) and (b)(4), 24A.5(f), 24B.1(c) and
(m), 24B.4(a)(2)(iii) and (b)(4), and 24B.5(e).
16 The Exchange notes that there is currently no
open interest in any FLEX Option series with a
European-Capped style exercise and currently no
open interest [sic] any FLEX Index Option series
that is designated for settlement in a foreign
currency.
17 In the future, the Exchange may determine to
re-enable the capability for settlement of FLEX
Index Options in a foreign currency, such foreign
currency settlement provisions would be the subject
of a separate rule filing.
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Electronic Allocation Algorithms
The fourth purpose of the proposed
rule change is to modify and simplify
the allocation algorithms applicable to
the FLEX electronic book and to the
FLEX electronic RFQ process.
Generally, and as discussed in more
detail below, the algorithms are
proposed to be simplified to be pricetime priority, subject to public customer
and non-Trading Permit Holder brokerdealer (‘‘non-TPH broker-dealer’’)
priority and, if applicable, any
applicable entitlement priority. In
particular, the existing algorithms and
proposed modifications are as follows:
FLEX Electronic Book: Currently, for
the FLEX electronic book, all FLEX
Orders are ranked and matched based
on price-time priority, unless a FLEX
Appointed Market-Maker is quoting at
the best bid (offer) and a FLEX
Appointed Market-Maker participation
entitlement has been established.18 If a
FLEX Appointed Market-Maker
participation entitlement has been
established, allocation among multiple
bids (offers) at the same price is as
follows: (i) All FLEX Orders for the
account of a public customer ranked
ahead of the FLEX Appointed MarketMaker will participate in the execution
based on time priority; (ii) any FLEX
Orders that are subject to the FLEX
Appointed Market-Maker participation
entitlement will participate in the
execution based on a participation
entitlement formula specified in Rule
24B.5(d)(2)(ii); then (iii) all other FLEX
Orders will participate based on time
priority.
As proposed to be revised and
simplified, allocation among multiple
bids (offers) at the same price in the
FLEX electronic book would be as
follows: (i) Public customer and nonTPH broker-dealers will participate in
the execution based on time priority; (ii)
if applicable, any FLEX Orders that are
subject to the FLEX Appointed MarketMaker participation entitlement will
participate in the execution based on a
18 The Exchange may establish from time to time
a participation entitlement formula that is
applicable to FLEX Appointed Market Makers on a
class-by-class basis with respect to open outcry
RFQs, electronic RFQs and/or electronic book
transactions. Any such FLEX Appointed MarketMaker participation entitlement shall: (i) Be divided
equally by the number of FLEX Appointed MarketMakers quoting at the BBO or BBO clearing price,
as applicable; (ii) collectively be no more than: 50%
of the amount remaining in the order when there
is one other FLEX Market-Maker also quoting at the
same price, 40% when there are two other FLEX
Market-Makers also quoting at the same price; and
30% when there are three or more FLEX MarketMakers also quoting at the same price; and (iii)
when combined with any crossing participation
entitlement, shall not exceed 40% of the original
order. See Rule 24B.5(d)(2)(ii).
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participation entitlement formula
specified in Rule 24B.5(d)(2)(ii);19 then
(iii) all other FLEX Orders will
participate in the execution based on
time priority.
FLEX Electronic RFQs: Currently, for
the electronic RFQ process, executions
of RFQ Orders occur at a single price
that will leave bids and offers which
cannot trade with each other (referred to
as the ‘‘BBO clearing price’’). In
determining the priority of bids and
offers, the FLEX System gives priority to
FLEX Quotes 20 and FLEX Orders whose
price is better than the BBO clearing
price, then to FLEX Quotes and FLEX
Orders at the BBO clearing price.
Currently, the allocation among
multiple FLEX Quotes and FLEX Orders
priced at the BBO clearing price is as
follows:
• General: The allocation among
multiple FLEX Quotes and FLEX Orders
priced at the BBO clearing price is
generally as follows: (i) Any FLEX
Quotes subject to a FLEX Appointed
Market-Maker participation entitlement
will participate in the execution based
on a participation entitlement formula
(as described above); (ii) FLEX Orders
resting in the electronic book will
participate in the execution pursuant to
the current book priority algorithm
(discussed above); (iii) FLEX Quotes for
the account of public customers and
non-TPH broker-dealers will participate
in the execution based on time priority;
then (iv) all other FLEX Quotes will
participate in the execution based on
time priority.
• Lock/Crossed Markets: In the event
the RFQ Market 21 is locked or crossed
(e.g., $1.25-$1.20), allocation among
multiple FLEX Quotes and FLEX Orders
that are priced at the BBO clearing price
and are on the same side of the market
as the RFQ Order is as follows: (i) FLEX
Orders resting in the electronic book
will participate in the execution
pursuant to the current book priority
algorithm (discussed above); (ii) if
applicable, an RFQ Order for the
account of a public customer or nonTPH broker-dealer will participate in
the execution, then any FLEX Quotes
subject to a FLEX Appointed MarketMaker participation entitlement will
participate in the execution based on a
participation entitlement formula
19 Id.
20 A ‘‘FLEX Quote’’ refers to (i) FLEX bids and
offers entered by FLEX Market-Makers and (ii)
orders to purchase and orders to sell FLEX Options
entered by FLEX Traders, in each case in response
to an RFQ. See Rule 24B.1(k).
21 The ‘‘RFQ Market’’ means the bids or offers, or
both, as applicable, entered in response to an
electronic Request for Quotes and FLEX Orders
resting in the electronic book. See Rule 24B.1(s).
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(discussed above); (iii) FLEX Quotes for
the account of public customers and
non-TPH broker-dealers will participate
in the execution based on time priority;
(iv) if applicable, an RFQ Order for the
account of a Trading Permit Holder will
participate in the execution, then any
FLEX Quotes that are subject to a FLEX
Appointed Market-Maker participation
entitlement will participate in the
execution based on a participation
entitlement formula (discussed above);
then (v) all other FLEX Quotes will
participate in the execution based on
time priority.
• Intent to Cross Trade Condition/
Crossing Participation Entitlement: In
the event the Submitting Trading Permit
Holder has indicated an intention to
cross with respect to any part of the
FLEX trade, the Submitting Trading
Permit Holder may obtain a crossing
participation entitlement if a crossing
participation entitlement has been
established by the Exchange pursuant to
Rule 24B.5(d), the Submitting Trading
Permit Holder has indicated an
intention to cross as part of the RFQ,
and the RFQ Order submitted during the
RFQ Reaction Period matches or
improves the BBO clearing price. In
such an event, the incoming RFQ Order
will be eligible to trade with the FLEX
Quotes and FLEX Orders at the BBO
clearing price as discussed above. The
allocation among multiple FLEX Quotes
and FLEX Orders that are priced at the
BBO clearing price and on the same side
of the market as the crossing
participation entitlement is as follows:
(i) FLEX Orders resting in the electronic
book will participate in the execution
pursuant to the current book priority
algorithm (discussed above); (ii) FLEX
Quotes for the account of public
customers and non-TPH broker-dealers
will participate in the execution based
on time priority; (iii) the crossing
participation entitlement will
participate in the execution pursuant to
the crossing participation entitlement
formula discussed in Rule 24B.5(d)(2)(i);
(iv) any FLEX Quotes subject to a FLEX
Appointed Market-Maker participation
entitlement will participate in the
execution pursuant to the participation
entitlement formula (discussed above);
then (v) all other FLEX Quotes will
participate in the execution based on
time priority.
As proposed to be revised and
simplified, first, as discussed above, the
Exchange would eliminate the ‘‘Intent to
Cross’’ Trade Condition. As a result, the
Intent to Cross/Crossing Participation
Entitlement scenario under the
electronic RFQ process described above
PO 00000
Frm 00112
Fmt 4703
Sfmt 4703
would no longer be applicable.22
Second, the Exchange would eliminate
the concept of a ‘‘BBO clearing price’’
(except in the limited scenario noted
below where the RFQ Market is locked
or crossed). Thus, an incoming RFQ
Order would be eligible to trade with
FLEX Quotes and FLEX Orders at the
best price(s) (i.e., an incoming RFQ
Order could trade at multiple price
points). Third, at a given price point,
allocation among multiple FLEX Quotes
and FLEX Orders at the same price
would be as follows:
• General: The allocation among
multiple FLEX Quotes and FLEX Orders
priced at the same price would be as
follows: (i) FLEX Quotes and FLEX
Orders for the account of public
customers and non-TPH broker-dealers
will participate in the execution based
on time priority; (ii) any FLEX Quotes
and FLEX Orders subject to a FLEX
Appointed Market-Maker participation
entitlement will participate in the
execution (as described above); then (iii)
all other FLEX Quotes and FLEX Orders
will participate in the execution based
on time priority.
• Lock/Crossed Markets: In the event
the RFQ Market is locked or crossed
(e.g., $1.25-$1.20), FLEX Quotes and
FLEX Orders would be eligible to trade
at a single BBO clearing price pursuant
to the existing BBO clearing price
process (i.e., (i) the BBO clearing price
will leave bids and offers which cannot
trade with each other; and (ii) in
determining priority of FLEX Quotes
and FLEX Orders to be traded, the
System gives priority to FLEX Quotes
and FLEX Orders whose price is better
than the BBO clearing price, then to
FLEX Quotes and FLEX Orders at the
BBO clearing price based on the general
allocation algorithm noted above). The
allocation among multiple FLEX Quotes
and FLEX Orders that are priced at the
same price and are on the same side of
the market as the RFQ Order would be
as follows: (i) FLEX Quotes and FLEX
Orders for the account of public
customers and non-TPH broker-dealers
will participate in the execution based
on time priority; (ii) an RFQ Order will
participate in the execution, then any
FLEX Quotes and FLEX Orders that are
subject to a FLEX Appointed MarketMaker participation entitlement will
participate in the execution (as
described above); then (iii) all other
FLEX Quotes and FLEX Orders will
participate in the execution based on
time priority.
All other provisions of Rule 24B.5
will apply unchanged. As noted above,
22 See proposed changes to Rule
24B.5(a)(1)(iii)(D) and (d)(2)(i).
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these changes re [sic] intended to
simplify the allocation algorithms. The
Exchange believes these changes will
make the applicable programming for
FLEX allocation algorithms less
complicated, which should make for
efficient and effective processing of
complex orders (and also make it easier
for users to understand) if there is a
more consistent allocation algorithm
applied across the various FLEX
electronic processes described above
(i.e., for FLEX electronic book priority
and for FLEX RFQ priority generally
and in locked or crossed and crossing
participation entitlement scenarios).
The Exchange notes that the proposed
changes to the existing series opening
process and allocation algorithms are
similar to other existing opening
processes and allocation algorithms.23
As such, the Exchange believes that the
proposed rule change does not present
any new, unique or substantive issues.
Electronic RFQ Processing of Complex
Orders
wreier-aviles on DSK3TPTVN1PROD with NOTICES
The fifth purpose of the proposed rule
change is to amend the FLEX System
rules to describe certain complex order
handling procedures. Under the current
FLEX electronic trading procedures,
multi-legged RFQs and FLEX Orders are
permitted. However, there is no
provision for an electronic complex
order book for multi-legged, complex
orders to rest. The electronic book, to
the extent the Exchange determines to
make it available for a given class, is
only available for simple orders.
To more fully describe the electronic
processing of complex orders, the
Exchange is proposing to adopt
Interpretation and Policy .01 under Rule
23 With respect to the existing series opening
process, the Exchange notes that various exchanges’
rules provide for automatic openings of existing
series. See, e.g., CBOE Rule 6.2B (which, among
other things, provides for an opening rotation to
automatically begin in index options at a randomly
selected time within a number of seconds after 8:30
a.m. for index options). A distinction with FLEX
Options is that an existing series will move
immediately to an opening state (there is no
rotation). The Exchange has designed the system
this way for simplicity and due to the customized
nature of FLEX Options, which has no or very
limited secondary trading and no need for daily
opening rotations. This aspect of the existing
opening series process is not new or unique. In fact,
CBOE Rule 24B.3 already provides that there shall
be no trading rotations in FLEX Options, either at
the opening or at the close of trading. With respect
to the allocation algorithm, the Exchange notes that
various exchanges’ rules provide for executions at
best price(s) and the use of price-time priority with
public customer and participation entitlement
priority overlays. See, e.g., CBOE Rules 6.45A(a)
and 6.45B(a) (which, among various allocation
algorithm alternatives, may permit an executions
[sic] at best price(s) using price-time priority with
public customer and participation entitlements
priority overlays).
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24B.5. This Interpretation and Policy
will provide that there is no electronic
complex order book for multi-legged,
complex orders. To trade electronically,
complex orders will only be eligible to
trade with other complex orders through
the electronic RFQ process described in
Rule 24B.5(a)(1). The order allocation
for such complex orders executed
through the RFQ process will [sic] the
same as is applicable to simple orders
(which is proposed to be amended as
described above under the ‘‘FLEX
Electronic RFQ [sic] heading). To the
extent the Exchange determines to make
an electronic book available for simple,
resting FLEX Orders, there will be no
‘‘legging’’ of complex orders represented
in the electronic RFQ process with
FLEX Orders that may be represented in
the individual series legs represented in
the electronic book. In the event there
are bids (offers) in any of the individual
component series legs represented in
the electronic book when an electronic
RFQ for a complex order strategy is
submitted to the System, the electronic
RFQ will not commence. In the event an
unrelated FLEX Order in any of the
individual series legs is received during
the duration of an electronic RFQ, such
FLEX Order will not be considered in
the electronic RFQ allocation. Further,
to the extent that a complex RFQ Order
or responsive FLEX Quote is not
executed, any remaining balance of the
complex order or FLEX Quote will be
automated [sic] cancelled if not traded
at the conclusion of the electronic RFQ
process.
Section 11(a)(1) of the Act
Finally, the Exchange believes the
proposed changes to the priority and
allocation rules for electronic FLEX
trading are consistent with Section
11(a)(1) of the Act 24 and the rules
promulgated thereunder. By way of
background, when the FLEX Hybrid
Trading System was originally
approved, the Commission believed that
the priority and allocation rules for
electronic FLEX trading were consistent
with Section 11(a) of the Act.25 The
Commission believed, however, that
neither a Submitting Trading Permit
24 15 U.S.C. 78k(a). Section 11(a)(1) prohibits a
member of a national securities exchange from
effecting transactions on that exchange for its own
account, the account of an associated person, or an
account over which it or its associated person
exercises discretion unless an exception applies.
25 See Original FLEX System Approval Order,
note 5, supra; see also Securities Exchange Act
Release No. 56311 (August 23, 2007), 72 FR 50133
(August 30, 2007) (SR–CBOE–2006–99) (notice of
filing of the proposed FLEX System), which
includes a more detailed discussion of the priority
and allocation rules and section 11(a) and existing
Rule 24B.5(b)(2)(ii) and (d)(4).
PO 00000
Frm 00113
Fmt 4703
Sfmt 4703
82021
Holder 26 who trades against an
electronic RFQ Market nor any other
FLEX Trader who itself submits an RFQ
Quote electronically qualifies for the
‘‘effect-versus-execute’’ exception to
[sic] section 11(a).27 Nevertheless, the
Commission believed that other
exceptions may apply. For example,
FLEX Market-Makers qualify for the
market-maker exception. The
Commission also noted that, with
respect to non-market-maker Trading
Permit Holders, the FLEX Hybrid
Trading System appeared reasonably
designed to cause RFQ Quotes
constituting the RFQ Market and the
RFQ Order that trades against the RFQ
Market to yield to non-member interest,
consistent with the ‘‘G’’ exception.28
The Exchange believes the proposed
changes [sic] the electronic RFQ process
and allocation algorithms are consistent
with the Original FLEX System
Approval Order because the System will
continue to be designed to cause RFQ
Quotes constituting the RFQ Market and
the RFQ Order that trades against the
RFQ Market to yield to non-member
interest (i.e., public customers and nonTPH broker-dealers continue to have
priority).
With respect to the electronic book, in
the Original FLEX System Approval
Order the Commission noted that, if the
Exchange enables an electronic book in
a FLEX Option class, any transaction
involving a booked order must comply
with Section 11(a) of the Act. If a FLEX
Trader cannot avail itself of any other
exception, it must rely on the ‘‘G’’
exception, which requires, among other
things, that a member order yield to a
non-member order at the same price,
even if the member order has time
priority. It was noted that the FLEX
System has not been programmed to
cause a member order on the electronic
book to yield to a later-arriving nonmember order at the same price,
although Rule 24B.5(b)(2)(ii) prohibits a
member order that is relying on the ‘‘G’’
exemption from resting on the
electronic book. The Commission
believed that a member may rely on the
‘‘G’’ exemption if it sends an order to
the electronic book and then cancels it
immediately if it is not executed in full.
The Exchange notes that the proposed
changes to the electronic book
26 The Exchange notes that, under the Original
FLEX Approval Order, the term ‘‘Submitting
Member’’ is used instead of ‘‘Submitting Trading
Permit Holder.’’ The Exchange subsequently revised
its rules to replace the term ‘‘Member’’ with
‘‘Trading Permit Holder.’’ See Securities Exchange
Act Release No. 62382 (June 25, 2010), 75 FR 38164
(July 1, 2010) (SR–CBOE–2010–058).
27 17 CFR 240.11a2–2(T).
28 See 15 U.S.C. 78k(a)(1)(G) (setting forth all
requirements for the ‘‘G’’ exemption).
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Federal Register / Vol. 76, No. 250 / Thursday, December 29, 2011 / Notices
allocation algorithm are consistent with
the Original FLEX System Approval
Order and Trading Permit Holders and
Rule 24B.5(b)(2)(ii), a Trading Permit
Holder order that is relying on the ‘‘G’’
exemption continues to be prohibited
from resting on the electronic book and
such a Trading Permit Holder may rely
on the ‘‘G’’ exemption if it sends an
order to the electronic book and then
cancels it immediately if it is not
executed in full.
2. Statutory Basis
The proposed rule change is
consistent with Section 6(b) of the Act 29
in general and furthers the objectives of
Section 6(b)(5) of the Act 30 in particular
in that it should promote just and
equitable principles of trade, serve to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and
protect investors and the public interest.
In particular, the Exchange believes that
the use of FLEX Options provide CBOE
Trading Permit Holders and investors
with additional tools to trade
customized options in an exchange
environment 31 and greater
opportunities to manage risk. The
proposed changes to the existing series
opening process and the allocation
algorithms should serve to further those
objectives and encourage use of FLEX
Options by enhancing and simplifying
the existing processes, which should
make the system more efficient and
effective and easier for users to
understand.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
CBOE does not believe that the
proposed rule change will impose any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
29 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
31 FLEX Options provide Trading Permit Holders
and investors with an improved but comparable
alternative to the over-the-counter (‘‘OTC’’) market
in customized options, which can take on contract
characteristics similar to FLEX Options but are not
subject to the same restrictions. The Exchange
believes that making these changes will make the
FLEX Hybrid Trading System an even more
attractive alternative when market participants
consider whether to execute their customized
options in an exchange environment or in the OTC
market. CBOE believes market participants benefit
from being able to trade customized options in an
exchange environment in several ways, including,
but not limited to the following: (1) Enhanced
efficiency in initiating and closing out positions; (2)
increased market transparency; and (3) heightened
contra-party creditworthiness due to the role of The
Options Clearing Corporation as issuer and
guarantor of FLEX Options.
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30 15
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposal.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 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 or disapprove
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
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
Number SR–CBOE–2011–122 and
should be submitted on or before
January 19, 2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.32
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2011–33449 Filed 12–28–11; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–66033; File No. SR–FINRA–
2011–074]
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml ); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–CBOE–2011–122 on the
subject line.
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Extending the Pilot
Period Regarding the Use of Multiple
MPIDs on FINRA Facilities
Paper Comments
December 22, 2011.
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–CBOE–2011–122. This file
number should be included on the
subject line if email 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
PO 00000
Frm 00114
Fmt 4703
Sfmt 4703
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’) 1 and Rule 19b–4
thereunder,2 notice is hereby given that
on December 21, 2011, Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by FINRA. FINRA has designated the
proposed rule change as constituting a
‘‘non-controversial’’ rule change under
paragraph (f)(6) of Rule 19b–4 under the
Exchange Act,3 which renders the
proposal effective upon receipt of this
filing by the Commission. The
Commission is publishing this notice to
32 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 17 CFR 240.19b–4(f)(6).
1 15
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]]>Agencies
[Federal Register Volume 76, Number 250 (Thursday, December 29, 2011)]
[Notices]
[Pages 82017-82022]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-33449]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66035; File No. SR-CBOE-2011-122]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of a Proposed Rule Change Related to
FLEX Options
December 22, 2011.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on December 12, 2011, the Chicago Board Options Exchange,
Incorporated (``Exchange'' or ``CBOE'') filed with the Securities and
Exchange Commission (the ``Commission'') the proposed rule change as
described in Items I and II below, which Items have been prepared by
the Exchange. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is proposing to amend certain rules pertaining to the
electronic trading of Flexible Exchange Options (``FLEX Options'') on
the Exchange's FLEX Hybrid Trading System platform.\3\
[[Page 82018]]
The Exchange is also proposing an amendment to eliminate certain
European-Capped style settlement and currency provisions within the
FLEX rules that pertain to both electronic and open outcry trading. The
text of the rule proposal is available on the Exchange's Web site
(https://www.cboe.org/legal), at the Exchange's Office of the Secretary
and at the Commission.
---------------------------------------------------------------------------
\3\ FLEX Options provide investors with the ability to customize
basic option features including size, expiration date, exercise
style, and certain exercise prices. FLEX Options can be FLEX Index
Options or FLEX Equity Options. In addition, other products are
permitted to be traded pursuant to the FLEX trading procedures. For
example, credit options are eligible for trading as FLEX Options
pursuant to the FLEX rules in Chapters XXIVA and XXIVB. See CBOE
Rules 24A.1(e) and (f), 24A.4(b)(1) and (c)(1), 24B.1(f) and (g),
24B.4(b)(1) and (c)(1), and 28.17. The rules governing the trading
of FLEX Options on the FLEX Request for Quote (``RFQ'') System
platform are contained in Chapter XXIVA. The rules governing the
trading of FLEX Options on the FLEX Hybrid Trading System platform
are contained in Chapter XXIVB.
---------------------------------------------------------------------------
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, Proposed Rule Change
1. Purpose
The Exchange is in the process of enhancing the FLEX Hybrid Trading
System platform (referred to herein as the ``FLEX System'' or the
``System'') in order to further integrate it with the Exchange's
existing technology platform utilized for non-FLEX trading. In
conjunction with the enhancement, the Exchange is proposing to make
some modifications to the existing electronic trading processes
utilized on the FLEX System platform.\4\ In particular, as discussed in
more detail below, the Exchange is proposing to (i) revise and enhance
the process for opening FLEX Option series with existing open interest,
(ii) eliminate certain Trade Conditions that will no longer be
supported in the new system and to add a new Trade Condition, (iii)
eliminate European-Capped exercise style and foreign currency
provisions that will no longer be supported in the new system, (iv)
modify and simplify the allocation algorithms applicable to the FLEX
electronic book and to the FLEX electronic RFQ process, and (v) include
a description of complex order handling under the electronic RFQ
process.\5\
---------------------------------------------------------------------------
\4\ The Exchange notes that is [sic] rule change filing is
primarily seeking to propose changes to the electronic trading
processes utilized on the FLEX System platform. The Exchange is not
proposing any changes to the open outcry trading processes for FLEX
options, except for the proposed changes pertaining to foreign
currencies.
\5\ The FLEX System currently utilizes server software (residing
on CBOE's servers) and client software (installed on Trading Permit
Holder and Sponsored User workstations) that CBOE has licensed from
Cinnober Financial Technology AB (``Cinnober''). In conjunction with
the enhancements to the FLEX System, the Exchange will no longer
utilize the Cinnober software and, as a result, the Exchange will no
longer utilize the related Trading Permit Holder/Sponsored User
software sublicense, which is part of the Sponsored User Agreement
form that was put in place when the FLEX Hybrid Trading System was
established. See Securities Exchange Act Release 56792 (November 15,
2007), 72 FR 65776 (November 23, 2007) (SR-CBOE-2006-99) (the
``Original FLEX System Approval Order''). The Exchange also notes
that, in conjunction with the enhancements to the FLEX System, the
Exchange intends to make available certain risk management
application tools that CBOE Trading Permit Holders may determine to
use to assist with mitigating potential risks associated with orders
that exceed certain pre-trade thresholds.
---------------------------------------------------------------------------
Opening Trading in Existing Series
The first purpose of this proposed rule change is to revise and
enhance the process for opening electronic trading in FLEX Option
series with existing open interest. Under the current FLEX trading
procedures, there are no trading rotations conducted at the opening of
trading.\6\ Instead, to begin trading on a given day, a FLEX RFQ
process is required to initiate a transaction when there are no FLEX
Orders \7\ currently resting in the electronic book in the particular
series to be traded.\8\ Resting FLEX Orders may only be entered in the
electronic book as ``day orders'' and are cancelled at the close of
each trade day if unexecuted. Therefore, there would be no orders
resting in the book from the prior day.\9\ As a result, under the
current process, an initial RFQ is needed to open a particular series
for trading each day. Once an RFQ is completed, the series is
established in the FLEX System for the day and FLEX Orders may be
entered directly into the FLEX electronic book throughout the day.
---------------------------------------------------------------------------
\6\ See Rule 24B.3.
\7\ A ``FLEX Order'' refers to (i) FLEX bids and offers entered
by FLEX Market-Makers and (ii) orders to purchase and orders to sell
FLEX Options entered by FLEX Traders, in each case into the
electronic book. A ``FLEX Market-Maker'' means a FLEX Trader that is
appointed as a FLEX Appointed Market-Maker or a FLEX Qualified
Market-Maker, each as described in Rule 24B.9. A ``FLEX Trader''
means a FLEX-participating Trading Permit Holder who has been
approved by the Exchange to trade on the System. See Rule 24B.1(h),
(j) and (l).
\8\ The Exchange may determine in a class-by-class basis to make
an electronic book available in the FLEX System. See Rule 24B.5(b).
\9\ In the future, the Exchange may determine to enable ``good-
til-cancelled'' functionality for FLEX Options. The introduction of
such functionality would be the subject of a separate rule filing.
---------------------------------------------------------------------------
To make the process more efficient and useful for FLEX users, the
Exchange is proposing to revise the procedure to provide that FLEX
Option series with existing open interest will be automatically opened
by the Exchange at a randomly selected time within a number of seconds
after 8:30 a.m. (all times noted herein are Central Time), at which
point in time FLEX Orders may be entered directly into the electronic
book (if available) and/or FLEX RFQ auctions may be initiated pursuant
to Rule 24B.5 As revised, it will no longer be necessary for there to
be an initial RFQ each day before entering a FLEX Order in the
electronic book in series with existing open interest. New FLEX Option
series will continue to be subject to the existing requirement that
there be an initial RFQ to initiate trading in the FLEX series on a
given trading day.
Trade Conditions
The second purpose of this proposed rule change is to eliminate
certain Trade Conditions that will no longer be supported for
electronic trading in the new system and to add a new Trade Condition.
Currently, under Rule 24B.1, a ``Trade Condition'' means a contingency
that has been placed on an RFQ, RFQ Order \10\ or FLEX Order. The
following Trade Conditions are available in the System for a FLEX
Trader to choose from: (i) Fill-or-Kill, which is a condition to
execute an RFQ Order or FLEX Order in its entirety as soon as it is
represented or canceled it; (ii) All-or-None, which is a condition to
execute an RFQ Order or FLEX Order in its entirety or not at all; (iii)
Minimum Fill, which is a condition to execute an RFQ Order or a FLEX
Order in a minimum quantity or not at all; (iv) Lots Of, which is a
condition to execute an RFQ Order or a FLEX Order in minimum lot sizes
or not at all; (v) Intent to Cross, which is an RFQ condition
indicating that the Submitting Trading Permit Holder intends to cross
or act as principal and receive a crossing participation entitlement;
and (vi)
[[Page 82019]]
Hedge, which is a RFQ or FLEX Order condition contingent on trade
execution in Non-FLEX Options or other Non-FLEX components (e.g.,
stock, futures, or other related instruments or interests). Trade
Conditions, other than Intent to Cross or Hedge, are inputted but not
disclosed on the System. FLEX Orders, other than those designated as
Fill-or-Kill, are designated as day orders and, if unexecuted, are
automatically cancelled at the close of each trade day.\11\
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\10\ An ``RFQ Order'' is an order to purchase or order to sell
FLEX Options entered by the Submitting Trading Permit Holder during
the RFQ Reaction Period. The ``RFQ Reaction Period'' means the
period of time during which a Submitting Trading Permit Holder
determined whether to accept or reject the RFQ Market. A
``Submitting Trading Permit Holder'' means the FLEX Trader that (i)
initiates FLEX bidding and offering by submitting an RFQ or (ii)
enters a FLEX Order into the electronic book. An ``RFQ Market''
means the bids or offers, or both, as applicable, entered in
response to an electronic RFQ and FLEX Orders resting in the
electronic book. See Rule 24B.1(s), (t), (v) and (x), and Rule
24B.5(a)(1)(iii).
\11\ See Rule 24B.1(y).
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The Exchange is now proposing to eliminate the Fill-or-Kill,
Minimum Fill, Lots Of, and Intent to Cross Trade Conditions, as these
functions will not be supported under the FLEX System enhancements. The
Fill-or-Kill, Minimum Fill, Lots Of \12\ and Intent to Cross \13\ Trade
Conditions have generally not been actively used by FLEX Traders. Given
the lack of use, the Exchange no longer plans to support these Trade
Conditions under the new FLEX System enhancements.
---------------------------------------------------------------------------
\12\ See proposed changes to Rule 24B.1(y). The Fill-or-Kill,
Minimum Fill and Lots Of Trade Conditions were originally designed,
in part, as an additional tool to assist FLEX Traders that are
electronically trading in meeting certain minimum value size
requirements applicable to the trading of FLEX Options; however, the
minimum size requirements have been eliminated on a pilot basis
(which the Exchange believes is one of the reasons why the Trade
Conditions are largely not used). See, e.g., Rule 24B.4(a)(5) and
.01(b). The minimum value size pilot is currently set to expire on
March 30, 2012, unless otherwise extended or made permanent. It is
the Exchange's intention to submit a separate rule change filing
proposing to make the pilot permanent. In addition, if for some
reason the minimum value size pilot is not extended or otherwise
made permanent, FLEX Traders have other means to satisfy the minimum
value size requirements (e.g., utilizing the All-or-None Trade
Condition, or entering RFQ Orders or FLEX Orders that would trade
against the electronic book with value sizes that would result in
transaction sizes sufficient to meet the minimum value size
requirement).
\13\ See proposed changes to Rules 24B.1(y) and
24B.5(a)(1)(iii)(D) and (d)(1)(i). The Exchange notes that the
Intent to Cross Trade Condition is an optional feature that the
Exchange may determine to make available electronically on a class-
by-class basis in accordance with Rule 24B.5(d). The Intent to Cross
Trade Condition was originally designed to allow for an electronic
crossing participation entitlement for executions resulting from the
electronic RFQ process. (To use the feature, the Submitting Trading
Permit Holder must mark its RFQ with an ``intent to cross'' flag at
the time the RFQ is originally submitted to be automatically
allocated the applicable crossing participation entitlement for
facilitation and solicitation transactions. If the RFQ is not
flagged in this manner, the Submitting Member will not be
automatically allocated the entitlement.) The Exchange notes that
this crossing participation entitlement functionality has generally
not been actively used by FLEX Traders. (The Exchange also notes
that, apart from the Intent to Cross feature, a Submitting Trading
Permit Holder also has (and will continue to have) the ability to
enter an agency or proprietary FLEX Quote in response to the
Submitting Member's own electronic RFQ in accordance with the
provisions contained in Rule 24B.5(a)(1)(ii) and/or to cross FLEX
Orders in accordance with the provisions contained in Rule
24B.5(b)(3). However, no crossing participation entitlement applies
when these procedures are used.) In order to make a more efficient
and effective trading platform offering available for FLEX Traders
that includes a crossing participation entitlement feature, the
Exchange has submitted a separate rule change filing proposing to
make modified versions of the Automated Improvement Mechanism
(``AIM'') and Solicitation Auction Mechanism (``SAM'')--which are
currently available for non-FLEX Options under Rule 6.74A and 6.74B,
respectively--available for FLEX Options. See SR-CBOE-2011-123.
---------------------------------------------------------------------------
The Exchange is also proposing to adopt an Immediate-or-Cancel
Trade Condition. ``Immediate-or-Cancel'' will be defined as a condition
to execute an RFQ Order or FLEX Order in its entirety or in part as
soon as it is represented or cancel it. Thus, as proposed to be
revised, there will be three Trade Conditions: Immediate-or-Cancel,
All-or-None, and Hedge. Trade Conditions, other than Hedge, will be
inputted but not disclosed on the System. In addition, FLEX Orders,
other than those designated as Immediate-or-Cancel, will be designated
as day orders and, if unexecuted, will be automatically cancelled at
the close of each trade day.\14\
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\14\ See note 9, supra.
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Foreign Currency Provisions
The third purpose of the proposed rule change is to eliminate
certain provisions in the FLEX Rules that permit (i) FLEX Options to be
designated with a European-Capped style exercise and (ii) FLEX Index
Options to be designated for settlement in foreign currencies (and
related index multiplier provisions for such currencies).\15\ These
European-Capped style and foreign currency provisions have generally
not been actively utilized.\16\ The Exchange no longer plans to support
foreign currency settlements in the new FLEX System, so the Exchange is
proposing to eliminate the provision within the rules and limit the
[sic] currently for FLEX Index Options to U.S. dollars. These changes
will apply to all FLEX trading on the Exchange, whether electronic or
open outcry.\17\
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\15\ See proposed changes to Rules 24A.1(c) and (i),
24A.4(a)(2)(iii) and (b)(4), 24A.5(f), 24B.1(c) and (m),
24B.4(a)(2)(iii) and (b)(4), and 24B.5(e).
\16\ The Exchange notes that there is currently no open interest
in any FLEX Option series with a European-Capped style exercise and
currently no open interest [sic] any FLEX Index Option series that
is designated for settlement in a foreign currency.
\17\ In the future, the Exchange may determine to re-enable the
capability for settlement of FLEX Index Options in a foreign
currency, such foreign currency settlement provisions would be the
subject of a separate rule filing.
---------------------------------------------------------------------------
Electronic Allocation Algorithms
The fourth purpose of the proposed rule change is to modify and
simplify the allocation algorithms applicable to the FLEX electronic
book and to the FLEX electronic RFQ process. Generally, and as
discussed in more detail below, the algorithms are proposed to be
simplified to be price-time priority, subject to public customer and
non-Trading Permit Holder broker-dealer (``non-TPH broker-dealer'')
priority and, if applicable, any applicable entitlement priority. In
particular, the existing algorithms and proposed modifications are as
follows:
FLEX Electronic Book: Currently, for the FLEX electronic book, all
FLEX Orders are ranked and matched based on price-time priority, unless
a FLEX Appointed Market-Maker is quoting at the best bid (offer) and a
FLEX Appointed Market-Maker participation entitlement has been
established.\18\ If a FLEX Appointed Market-Maker participation
entitlement has been established, allocation among multiple bids
(offers) at the same price is as follows: (i) All FLEX Orders for the
account of a public customer ranked ahead of the FLEX Appointed Market-
Maker will participate in the execution based on time priority; (ii)
any FLEX Orders that are subject to the FLEX Appointed Market-Maker
participation entitlement will participate in the execution based on a
participation entitlement formula specified in Rule 24B.5(d)(2)(ii);
then (iii) all other FLEX Orders will participate based on time
priority.
---------------------------------------------------------------------------
\18\ The Exchange may establish from time to time a
participation entitlement formula that is applicable to FLEX
Appointed Market Makers on a class-by-class basis with respect to
open outcry RFQs, electronic RFQs and/or electronic book
transactions. Any such FLEX Appointed Market-Maker participation
entitlement shall: (i) Be divided equally by the number of FLEX
Appointed Market-Makers quoting at the BBO or BBO clearing price, as
applicable; (ii) collectively be no more than: 50% of the amount
remaining in the order when there is one other FLEX Market-Maker
also quoting at the same price, 40% when there are two other FLEX
Market-Makers also quoting at the same price; and 30% when there are
three or more FLEX Market-Makers also quoting at the same price; and
(iii) when combined with any crossing participation entitlement,
shall not exceed 40% of the original order. See Rule
24B.5(d)(2)(ii).
---------------------------------------------------------------------------
As proposed to be revised and simplified, allocation among multiple
bids (offers) at the same price in the FLEX electronic book would be as
follows: (i) Public customer and non-TPH broker-dealers will
participate in the execution based on time priority; (ii) if
applicable, any FLEX Orders that are subject to the FLEX Appointed
Market-Maker participation entitlement will participate in the
execution based on a
[[Page 82020]]
participation entitlement formula specified in Rule
24B.5(d)(2)(ii);\19\ then (iii) all other FLEX Orders will participate
in the execution based on time priority.
---------------------------------------------------------------------------
\19\ Id.
---------------------------------------------------------------------------
FLEX Electronic RFQs: Currently, for the electronic RFQ process,
executions of RFQ Orders occur at a single price that will leave bids
and offers which cannot trade with each other (referred to as the ``BBO
clearing price''). In determining the priority of bids and offers, the
FLEX System gives priority to FLEX Quotes \20\ and FLEX Orders whose
price is better than the BBO clearing price, then to FLEX Quotes and
FLEX Orders at the BBO clearing price. Currently, the allocation among
multiple FLEX Quotes and FLEX Orders priced at the BBO clearing price
is as follows:
---------------------------------------------------------------------------
\20\ A ``FLEX Quote'' refers to (i) FLEX bids and offers entered
by FLEX Market-Makers and (ii) orders to purchase and orders to sell
FLEX Options entered by FLEX Traders, in each case in response to an
RFQ. See Rule 24B.1(k).
---------------------------------------------------------------------------
General: The allocation among multiple FLEX Quotes and
FLEX Orders priced at the BBO clearing price is generally as follows:
(i) Any FLEX Quotes subject to a FLEX Appointed Market-Maker
participation entitlement will participate in the execution based on a
participation entitlement formula (as described above); (ii) FLEX
Orders resting in the electronic book will participate in the execution
pursuant to the current book priority algorithm (discussed above);
(iii) FLEX Quotes for the account of public customers and non-TPH
broker-dealers will participate in the execution based on time
priority; then (iv) all other FLEX Quotes will participate in the
execution based on time priority.
Lock/Crossed Markets: In the event the RFQ Market \21\ is
locked or crossed (e.g., $1.25-$1.20), allocation among multiple FLEX
Quotes and FLEX Orders that are priced at the BBO clearing price and
are on the same side of the market as the RFQ Order is as follows: (i)
FLEX Orders resting in the electronic book will participate in the
execution pursuant to the current book priority algorithm (discussed
above); (ii) if applicable, an RFQ Order for the account of a public
customer or non-TPH broker-dealer will participate in the execution,
then any FLEX Quotes subject to a FLEX Appointed Market-Maker
participation entitlement will participate in the execution based on a
participation entitlement formula (discussed above); (iii) FLEX Quotes
for the account of public customers and non-TPH broker-dealers will
participate in the execution based on time priority; (iv) if
applicable, an RFQ Order for the account of a Trading Permit Holder
will participate in the execution, then any FLEX Quotes that are
subject to a FLEX Appointed Market-Maker participation entitlement will
participate in the execution based on a participation entitlement
formula (discussed above); then (v) all other FLEX Quotes will
participate in the execution based on time priority.
---------------------------------------------------------------------------
\21\ The ``RFQ Market'' means the bids or offers, or both, as
applicable, entered in response to an electronic Request for Quotes
and FLEX Orders resting in the electronic book. See Rule 24B.1(s).
---------------------------------------------------------------------------
Intent to Cross Trade Condition/Crossing Participation
Entitlement: In the event the Submitting Trading Permit Holder has
indicated an intention to cross with respect to any part of the FLEX
trade, the Submitting Trading Permit Holder may obtain a crossing
participation entitlement if a crossing participation entitlement has
been established by the Exchange pursuant to Rule 24B.5(d), the
Submitting Trading Permit Holder has indicated an intention to cross as
part of the RFQ, and the RFQ Order submitted during the RFQ Reaction
Period matches or improves the BBO clearing price. In such an event,
the incoming RFQ Order will be eligible to trade with the FLEX Quotes
and FLEX Orders at the BBO clearing price as discussed above. The
allocation among multiple FLEX Quotes and FLEX Orders that are priced
at the BBO clearing price and on the same side of the market as the
crossing participation entitlement is as follows: (i) FLEX Orders
resting in the electronic book will participate in the execution
pursuant to the current book priority algorithm (discussed above); (ii)
FLEX Quotes for the account of public customers and non-TPH broker-
dealers will participate in the execution based on time priority; (iii)
the crossing participation entitlement will participate in the
execution pursuant to the crossing participation entitlement formula
discussed in Rule 24B.5(d)(2)(i); (iv) any FLEX Quotes subject to a
FLEX Appointed Market-Maker participation entitlement will participate
in the execution pursuant to the participation entitlement formula
(discussed above); then (v) all other FLEX Quotes will participate in
the execution based on time priority.
As proposed to be revised and simplified, first, as discussed
above, the Exchange would eliminate the ``Intent to Cross'' Trade
Condition. As a result, the Intent to Cross/Crossing Participation
Entitlement scenario under the electronic RFQ process described above
would no longer be applicable.\22\ Second, the Exchange would eliminate
the concept of a ``BBO clearing price'' (except in the limited scenario
noted below where the RFQ Market is locked or crossed). Thus, an
incoming RFQ Order would be eligible to trade with FLEX Quotes and FLEX
Orders at the best price(s) (i.e., an incoming RFQ Order could trade at
multiple price points). Third, at a given price point, allocation among
multiple FLEX Quotes and FLEX Orders at the same price would be as
follows:
---------------------------------------------------------------------------
\22\ See proposed changes to Rule 24B.5(a)(1)(iii)(D) and
(d)(2)(i).
---------------------------------------------------------------------------
General: The allocation among multiple FLEX Quotes and
FLEX Orders priced at the same price would be as follows: (i) FLEX
Quotes and FLEX Orders for the account of public customers and non-TPH
broker-dealers will participate in the execution based on time
priority; (ii) any FLEX Quotes and FLEX Orders subject to a FLEX
Appointed Market-Maker participation entitlement will participate in
the execution (as described above); then (iii) all other FLEX Quotes
and FLEX Orders will participate in the execution based on time
priority.
Lock/Crossed Markets: In the event the RFQ Market is
locked or crossed (e.g., $1.25-$1.20), FLEX Quotes and FLEX Orders
would be eligible to trade at a single BBO clearing price pursuant to
the existing BBO clearing price process (i.e., (i) the BBO clearing
price will leave bids and offers which cannot trade with each other;
and (ii) in determining priority of FLEX Quotes and FLEX Orders to be
traded, the System gives priority to FLEX Quotes and FLEX Orders whose
price is better than the BBO clearing price, then to FLEX Quotes and
FLEX Orders at the BBO clearing price based on the general allocation
algorithm noted above). The allocation among multiple FLEX Quotes and
FLEX Orders that are priced at the same price and are on the same side
of the market as the RFQ Order would be as follows: (i) FLEX Quotes and
FLEX Orders for the account of public customers and non-TPH broker-
dealers will participate in the execution based on time priority; (ii)
an RFQ Order will participate in the execution, then any FLEX Quotes
and FLEX Orders that are subject to a FLEX Appointed Market-Maker
participation entitlement will participate in the execution (as
described above); then (iii) all other FLEX Quotes and FLEX Orders will
participate in the execution based on time priority.
All other provisions of Rule 24B.5 will apply unchanged. As noted
above,
[[Page 82021]]
these changes re [sic] intended to simplify the allocation algorithms.
The Exchange believes these changes will make the applicable
programming for FLEX allocation algorithms less complicated, which
should make for efficient and effective processing of complex orders
(and also make it easier for users to understand) if there is a more
consistent allocation algorithm applied across the various FLEX
electronic processes described above (i.e., for FLEX electronic book
priority and for FLEX RFQ priority generally and in locked or crossed
and crossing participation entitlement scenarios).
The Exchange notes that the proposed changes to the existing series
opening process and allocation algorithms are similar to other existing
opening processes and allocation algorithms.\23\ As such, the Exchange
believes that the proposed rule change does not present any new, unique
or substantive issues.
---------------------------------------------------------------------------
\23\ With respect to the existing series opening process, the
Exchange notes that various exchanges' rules provide for automatic
openings of existing series. See, e.g., CBOE Rule 6.2B (which, among
other things, provides for an opening rotation to automatically
begin in index options at a randomly selected time within a number
of seconds after 8:30 a.m. for index options). A distinction with
FLEX Options is that an existing series will move immediately to an
opening state (there is no rotation). The Exchange has designed the
system this way for simplicity and due to the customized nature of
FLEX Options, which has no or very limited secondary trading and no
need for daily opening rotations. This aspect of the existing
opening series process is not new or unique. In fact, CBOE Rule
24B.3 already provides that there shall be no trading rotations in
FLEX Options, either at the opening or at the close of trading. With
respect to the allocation algorithm, the Exchange notes that various
exchanges' rules provide for executions at best price(s) and the use
of price-time priority with public customer and participation
entitlement priority overlays. See, e.g., CBOE Rules 6.45A(a) and
6.45B(a) (which, among various allocation algorithm alternatives,
may permit an executions [sic] at best price(s) using price-time
priority with public customer and participation entitlements
priority overlays).
---------------------------------------------------------------------------
Electronic RFQ Processing of Complex Orders
The fifth purpose of the proposed rule change is to amend the FLEX
System rules to describe certain complex order handling procedures.
Under the current FLEX electronic trading procedures, multi-legged RFQs
and FLEX Orders are permitted. However, there is no provision for an
electronic complex order book for multi-legged, complex orders to rest.
The electronic book, to the extent the Exchange determines to make it
available for a given class, is only available for simple orders.
To more fully describe the electronic processing of complex orders,
the Exchange is proposing to adopt Interpretation and Policy .01 under
Rule 24B.5. This Interpretation and Policy will provide that there is
no electronic complex order book for multi-legged, complex orders. To
trade electronically, complex orders will only be eligible to trade
with other complex orders through the electronic RFQ process described
in Rule 24B.5(a)(1). The order allocation for such complex orders
executed through the RFQ process will [sic] the same as is applicable
to simple orders (which is proposed to be amended as described above
under the ``FLEX Electronic RFQ [sic] heading). To the extent the
Exchange determines to make an electronic book available for simple,
resting FLEX Orders, there will be no ``legging'' of complex orders
represented in the electronic RFQ process with FLEX Orders that may be
represented in the individual series legs represented in the electronic
book. In the event there are bids (offers) in any of the individual
component series legs represented in the electronic book when an
electronic RFQ for a complex order strategy is submitted to the System,
the electronic RFQ will not commence. In the event an unrelated FLEX
Order in any of the individual series legs is received during the
duration of an electronic RFQ, such FLEX Order will not be considered
in the electronic RFQ allocation. Further, to the extent that a complex
RFQ Order or responsive FLEX Quote is not executed, any remaining
balance of the complex order or FLEX Quote will be automated [sic]
cancelled if not traded at the conclusion of the electronic RFQ
process.
Section 11(a)(1) of the Act
Finally, the Exchange believes the proposed changes to the priority
and allocation rules for electronic FLEX trading are consistent with
Section 11(a)(1) of the Act \24\ and the rules promulgated thereunder.
By way of background, when the FLEX Hybrid Trading System was
originally approved, the Commission believed that the priority and
allocation rules for electronic FLEX trading were consistent with
Section 11(a) of the Act.\25\ The Commission believed, however, that
neither a Submitting Trading Permit Holder \26\ who trades against an
electronic RFQ Market nor any other FLEX Trader who itself submits an
RFQ Quote electronically qualifies for the ``effect-versus-execute''
exception to [sic] section 11(a).\27\ Nevertheless, the Commission
believed that other exceptions may apply. For example, FLEX Market-
Makers qualify for the market-maker exception. The Commission also
noted that, with respect to non-market-maker Trading Permit Holders,
the FLEX Hybrid Trading System appeared reasonably designed to cause
RFQ Quotes constituting the RFQ Market and the RFQ Order that trades
against the RFQ Market to yield to non-member interest, consistent with
the ``G'' exception.\28\ The Exchange believes the proposed changes
[sic] the electronic RFQ process and allocation algorithms are
consistent with the Original FLEX System Approval Order because the
System will continue to be designed to cause RFQ Quotes constituting
the RFQ Market and the RFQ Order that trades against the RFQ Market to
yield to non-member interest (i.e., public customers and non-TPH
broker-dealers continue to have priority).
---------------------------------------------------------------------------
\24\ 15 U.S.C. 78k(a). Section 11(a)(1) prohibits a member of a
national securities exchange from effecting transactions on that
exchange for its own account, the account of an associated person,
or an account over which it or its associated person exercises
discretion unless an exception applies.
\25\ See Original FLEX System Approval Order, note 5, supra; see
also Securities Exchange Act Release No. 56311 (August 23, 2007), 72
FR 50133 (August 30, 2007) (SR-CBOE-2006-99) (notice of filing of
the proposed FLEX System), which includes a more detailed discussion
of the priority and allocation rules and section 11(a) and existing
Rule 24B.5(b)(2)(ii) and (d)(4).
\26\ The Exchange notes that, under the Original FLEX Approval
Order, the term ``Submitting Member'' is used instead of
``Submitting Trading Permit Holder.'' The Exchange subsequently
revised its rules to replace the term ``Member'' with ``Trading
Permit Holder.'' See Securities Exchange Act Release No. 62382 (June
25, 2010), 75 FR 38164 (July 1, 2010) (SR-CBOE-2010-058).
\27\ 17 CFR 240.11a2-2(T).
\28\ See 15 U.S.C. 78k(a)(1)(G) (setting forth all requirements
for the ``G'' exemption).
---------------------------------------------------------------------------
With respect to the electronic book, in the Original FLEX System
Approval Order the Commission noted that, if the Exchange enables an
electronic book in a FLEX Option class, any transaction involving a
booked order must comply with Section 11(a) of the Act. If a FLEX
Trader cannot avail itself of any other exception, it must rely on the
``G'' exception, which requires, among other things, that a member
order yield to a non-member order at the same price, even if the member
order has time priority. It was noted that the FLEX System has not been
programmed to cause a member order on the electronic book to yield to a
later-arriving non-member order at the same price, although Rule
24B.5(b)(2)(ii) prohibits a member order that is relying on the ``G''
exemption from resting on the electronic book. The Commission believed
that a member may rely on the ``G'' exemption if it sends an order to
the electronic book and then cancels it immediately if it is not
executed in full. The Exchange notes that the proposed changes to the
electronic book
[[Page 82022]]
allocation algorithm are consistent with the Original FLEX System
Approval Order and Trading Permit Holders and Rule 24B.5(b)(2)(ii), a
Trading Permit Holder order that is relying on the ``G'' exemption
continues to be prohibited from resting on the electronic book and such
a Trading Permit Holder may rely on the ``G'' exemption if it sends an
order to the electronic book and then cancels it immediately if it is
not executed in full.
2. Statutory Basis
The proposed rule change is consistent with Section 6(b) of the Act
\29\ in general and furthers the objectives of Section 6(b)(5) of the
Act \30\ in particular in that it should promote just and equitable
principles of trade, serve to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and
protect investors and the public interest. In particular, the Exchange
believes that the use of FLEX Options provide CBOE Trading Permit
Holders and investors with additional tools to trade customized options
in an exchange environment \31\ and greater opportunities to manage
risk. The proposed changes to the existing series opening process and
the allocation algorithms should serve to further those objectives and
encourage use of FLEX Options by enhancing and simplifying the existing
processes, which should make the system more efficient and effective
and easier for users to understand.
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\29\ 15 U.S.C. 78f(b).
\30\ 15 U.S.C. 78f(b)(5).
\31\ FLEX Options provide Trading Permit Holders and investors
with an improved but comparable alternative to the over-the-counter
(``OTC'') market in customized options, which can take on contract
characteristics similar to FLEX Options but are not subject to the
same restrictions. The Exchange believes that making these changes
will make the FLEX Hybrid Trading System an even more attractive
alternative when market participants consider whether to execute
their customized options in an exchange environment or in the OTC
market. CBOE believes market participants benefit from being able to
trade customized options in an exchange environment in several ways,
including, but not limited to the following: (1) Enhanced efficiency
in initiating and closing out positions; (2) increased market
transparency; and (3) heightened contra-party creditworthiness due
to the role of The Options Clearing Corporation as issuer and
guarantor of FLEX Options.
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
CBOE does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposal.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 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 or disapprove 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 email to rule-comments@sec.gov. Please include
File Number SR-CBOE-2011-122 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2011-122. This file
number should be included on the subject line if email 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 CBOE. All comments
received will be posted without change; the Commission does not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly. All
submissions should refer to File Number SR-CBOE-2011-122 and should be
submitted on or before January 19, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
---------------------------------------------------------------------------
\32\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-33449 Filed 12-28-11; 8:45 am]
BILLING CODE 8011-01-P
