Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change Relating to Its Automated Improvement Mechanism, 82336-82339 [2011-33587]
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82336
Federal Register / Vol. 76, No. 251 / Friday, December 30, 2011 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–66048; File No. SR–CBOE–
2011–116]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing of a
Proposed Rule Change Relating to Its
Automated Improvement Mechanism
December 23, 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
14, 2011, 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. 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 the Substance
of the Proposed Rule Change
The Exchange proposes to amend its
rules relating to its Automated
Improvement Mechanism (‘‘AIM’’). The
text of the proposed rule change is
available on the Exchange’s Web site
(https://www.cboe.com/AboutCBOE/
CBOELegalRegulatoryHome.aspx), at
the Exchange’s Office of the Secretary,
and at the Commission.
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of
and basis for the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of these statements may be examined at
the places specified in Item IV below.
The self-regulatory organization has
prepared summaries, set forth in
sections A, B, and C below, of the most
significant aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
3 See
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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BOX Rules Chapter V, Section 18.
ISE Rule 723.
5 AIM, PIP and PIM have certain characteristics in
common with each other. All three mechanisms (a)
provide for the opportunity for customer price
improvement, (b) have certain periods where the
initial orders are exposed for potential price
improvement, (c) have certain guidelines regarding
the types of orders that may be eligible for price
improvement, and (d) have certain defined rules
related to the allocation of trades within price
improvement auctions.
6 See CBOE Rule 6.74A(b)(1)(A).
4 See
1. Purpose
The purpose of the proposed rule
change is to amend CBOE Rule 6.74A to
(i) allow Trading Permit Holders
1 15
(‘‘TPHs’’) to enter orders they represent
as agent (‘‘Agency Orders’’) for fewer
than 50 contracts into AIM at the
national best bid or offer (‘‘NBBO’’); (ii)
eliminate the requirement that there be
at least three market-makers quoting in
the relevant series in order for an AIM
auction (‘‘Auction’’) to commence; (iii)
allow TPHs that initiate an Auction
(‘‘Initiating TPHs’’) to designate a limit
price if it elects to automatically match
the price and size of all Auction
responses (‘‘auto-match’’); and (iv)
eliminate the restriction that only
market-makers with an appointment in
the relevant option class may submit
responses to a Request for Responses
(‘‘RFR’’) for an Agency Order in an
Auction.
This proposed rule change would
make AIM more similar to current rules
of the Boston Options Exchange Group,
LLC (‘‘BOX’’) 3 and the International
Securities Exchange, LLC (‘‘ISE’’) 4
relating to the Price Improvement
Period (‘‘PIP’’) and Price Improvement
Mechanism (‘‘PIM’’), respectively,
which are automated price
improvement mechanisms.5
AIM allows a TPH to submit an
Agency Order along with a contra-side
second order (a principal order or a
solicited order for the same size as the
Agency Order) into an Auction where
other participants could compete with
the Initiating TPH’s second order to
execute against the Agency Order,
which guarantees that the Agency Order
will receive an execution. Once an
Auction commences, the Initiating TPH
cannot cancel it.6
Under this proposal, Agency Orders
of all sizes submitted to AIM will be
guaranteed execution at a price at least
as good as the NBBO while providing
the opportunity for execution at a price
better than the NBBO. The proposal will
incent more TPHs to initiate and
participate in Auctions and will allow
even broader participation in Auctions
by all types of market participants. As
a result, CBOE expects the proposal will
increase the number of and
participation in Auctions, which would
enhance competition in the Auctions.
The Exchange believes that this
proposal will ultimately provide
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additional opportunities for price
improvement over the NBBO for its
customers.
Elimination of Entry Price Restriction on
Agency Orders for Fewer Than 50
Contracts
CBOE Rule 6.74A(a)(2) and (3)
currently provides that if an Initiating
TPH submits an Agency Order to AIM
for 50 contracts or more, the Initiating
TPH must enter its contra-side second
order (or stop the Agency Order) at the
better of the NBBO or the Agency
Order’s limit price (if the order is a limit
order); however, if an Initiating TPH
submits an Agency Order to AIM for
fewer than 50 contracts, the Initiating
TPH must stop the entire Agency Order
at the better of the NBBO price
improved by one minimum price
improvement increment or the Agency
Order’s limit price (if the order is a limit
order). The Exchange is proposing to
eliminate this distinction and allow
Initiating TPHs to submit to AIM
Agency Orders of any size at the NBBO.
The Exchange believes this proposal
will increase the likelihood that TPHs
will initiate Auctions for Agency Orders
for fewer than 50 contracts because the
TPHs will only be required to guarantee
an execution at the NBBO, which will
provide additional customer orders with
an opportunity for price improvement
over the NBBO. The Exchange believes
the proposal will also encourage
increased participation in AIM by TPHs
willing to trade with an Agency Order
for fewer than 50 contracts at the NBBO
but not better than the NBBO.
In support of this proposal, the
Exchange notes that both BOX 7 and
ISE 8 allow entry of orders into PIP and
PIM, respectively, at the NBBO without
distinguishing between orders of more
than or fewer than 50 contracts. Because
BOX and ISE are currently able to offer
their customers price improvement for
orders of fewer than 50 contracts at the
NBBO in PIP and PIM, respectively, the
Exchange has determined that it is
important for competitive purposes that
it be able to offer the same opportunities
7 See supra note 3; see also Securities Exchange
Act Release No. 34–59654 (March 30, 2009), 74 FR
15551 (April 6, 2009) (SR–BX–2009–08) (order
approving proposed rule change allowing entry of
orders into PIP at the NBBO when BOX’s best bid
or offer is inferior to the NBBO with no order size
distinction).
8 See supra note 4; see also Securities Exchange
Act Release No. 34–57847 (May 21, 2008), 73 FR
30987 (May 29, 2008) (SR–ISE–2008–29) (order
approving proposed rule change allowing entry of
orders into PIM at the NBBO when ISE’s best bid
or offer is inferior to the NBBO with no order size
distinction).
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to its customers for price improvement
on CBOE through AIM.
The Exchange notes that certain
allocation differences exist between
AIM and PIM as well as AIM and PIP.
As proposed, our AIM change would
make the handling of AIM trades for 50
or more contracts consistent with AIM
trades under 50 contracts.9 However,
unlike PIM, which requires auctions to
commence at prices better than the ISE
best bid or offer and thus precludes an
auction initiator from establishing
priority ahead of any resting ISE
interest, an AIM Auction can begin and
conclude at the CBOE best bid or offer.
This means that, like for orders of 50 or
more contracts on CBOE, the Initiating
TPH can trade at a price in which
resting interest existed and can establish
priority over resting broker-dealer
interest. Although PIP allows auctions
to occur at the BOX best bid or offer, PIP
uses an order allocation structure based
on price-time priority sequence with
priority for public customer orders (like
CBOE) and secondary priority for nonBOX Participant broker-dealers. On
CBOE, when an Auction concludes at
the CBOE best bid or offer, first priority
is for public customers, second priority
is for the Initiating TPH (for 40%), third
priority is for nonpublic customer
resting orders or quotes that are
unchanged from when the Auction
began, and last priority is for RFR
responses. The Exchange references
these differences for informational
purposes but does not believe that the
differences are material to the
Exchange’s goals of handling AIM
orders of all sizes the same and allowing
Auctions of orders smaller than 50
contracts at the NBBO (like PIP and
PIM).
The Exchange further notes that
certain components of AIM were
approved on a pilot basis, including that
there is no minimum size requirement
for orders to be eligible for the
Auction.10 The Commission has
approved six one-year extensions to the
pilot programs, most recently until July
18, 2012.11 In connection with the pilot
9 PIP and PIM also do not distinguish between
orders over 50 contracts and orders under 50
contracts.
10 See Securities Exchange Act Release No. 53222
(February 3, 2006), 71 FR 7089 (February 10, 2006)
(SR–CBOE–2005–60) (order approving
implementation of AIM).
11 See Securities Exchange Act Release Nos. 34–
54147 (July 14, 2006), 71 FR 41487 (July 21, 2006)
(SR–CBOE–2006–64); 56094 (July 18, 2007), 72 FR
40910 (July 25, 2007) (SR–CBOE–2007–80); 58196
(July 18, 2008), 73 FR 43803 (July 28, 2008) (SR–
CBOE–2008–76); 60338 (July 17, 2009), 74 FR
36803 (July 24, 2009) (SR–CBOE–2009–51); 62522
(July 16, 2010), 75 FR 43596 (July 26, 2010) (SR–
CBOE–2010–67); and 34–64930 (July 20, 2011), 76
FR 44636 (July 26, 2011) (SR–CBOE–2011–66).
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programs, the Exchange has submitted,
and will continue to submit, to the
Commission reports providing detailed
AIM Auction and order execution data,
including monthly data regarding
executions through AIM of Agency
Orders for more or fewer than 50
contracts, as supporting evidence that,
among other things, there is meaningful
competition for all size orders.
Elimination of Three Market-Maker
Requirement
CBOE Rule 6.74A(a)(4) currently
requires that there be at least three
market-makers quoting in the relevant
series for an Auction to commence. The
Exchange is proposing to eliminate this
requirement. The Exchange does not
believe that customer orders should be
denied the benefits of AIM simply
because there may be less than three
market-makers quoting in a relevant
options class at a specific point in time.
Any concern regarding an Auction
starting with a lower number of marketmakers quoting in a relevant series is
offset by the broad participation and
competition that would be present once
an Auction commenced.
In support of this proposal, the
Exchange notes that both PIP 12 and
PIM 13 permit auctions to commence
without the condition that there be a
minimum number of market-makers
quoting in the particular series. The
Exchange believes that AIM, and in turn
the customers that benefit from AIM,
would be disadvantaged if the three
market-maker requirement remained as
a condition to start an Auction because
this requirement potentially reduces the
number of Auctions and, as a result,
opportunities for price improvement.
Because BOX and ISE are currently able
to offer their customers price
improvement without a minimum
quoter requirement in PIP and PIM,
respectively, the Exchange believes it is
essential for competitive purposes that
it be able to offer the same opportunities
for price improvement on CBOE through
AIM.
12 See supra note 3; see also Securities Exchange
Act Release No. 34–58999 (November 21, 2008), 73
FR 72536 (November 28, 2008) (SR–BSE–2008–54)
(order approving proposed rule change to eliminate
requirement that there be at least three marketmakers quoting in the relevant series for an auction
to commence).
13 See supra note 4; see also Securities Exchange
Act Release No. 34–58710 (October 1, 2008), 73 FR
59008 (October 8, 2008) (SR–ISE–2008–63) (order
approving proposed rule change to eliminate
requirement that there be at least three marketmakers quoting in the relevant series for an auction
to commence).
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Addition of Option To Designate AutoMatch Limit Price
CBOE Rule 6.74A(b)(1)(A) currently
allows an Initiating TPH to enter its
contra-side second order in one of two
formats: (1) A specified single price; or
(2) a non-price specific commitment to
auto-match all Auction responses
achieved during the Auction. In this
case, the Initiating TPH would have no
control over the match price. The
Exchange is proposing to provide
Initiating TPHs with the additional
option to auto-match competing prices
from other market participants up to a
designated limit price. The Initiating
TPH will still not be able to cancel the
auto-match instruction after an Auction
commences and will have no control
over the prices at which it receives an
allocation of the Auction other than the
outside boundary established by the
designated limit price.
The Exchange notes that when the
Initiating TPH selects the auto-match
feature prior to the start of an Auction
(with or without a designated limit
price), the available liquidity at
improved prices is increased and
competitive final pricing is out of the
Initiating TPH’s control. The Exchange
believes the proposal will encourage
increased participation in AIM because
it allows TPHs willing to trade with an
Agency Order at a price better than the
NBBO, but only up to a certain price, to
initiate an Auction.
In support of this proposal, the
Exchange also notes that both PIP 14 and
PIM 15 permit initiating participants to
elect to auto-match up to a designated
limit price. The Exchange believes that
AIM, and in turn the customers that
benefit from AIM, would be
disadvantaged if TPHs are not provided
with the option to auto-match up to a
designated limit price because this lack
of flexibility reduces the number of
Auctions and, as a result, opportunities
for price improvement. Because BOX
and ISE currently allow initiating
participants or members, respectively,
the option to auto-match up to the
NBBO achieved during an auction or up
to a designated limit price, the Exchange
believes it is important for competitive
purposes that it be able to offer the same
14 See supra note 3; see also Securities Exchange
Act Release No. 34–61805 (March 31, 2010), 75 FR
17454 (April 6, 2010) (SR–BX–2010–22) (order
approving implementation of auto-match feature
with the option to auto-match up to a designated
limit price).
15 See supra note 4; see also Securities Exchange
Act Release No. 34–62644 (August 4, 2010), 75 FR
48395 (August 10, 2010) (SR–ISE–2010–61) (order
approving implementation of auto-match feature
with the option to auto-match up to a designated
limit price).
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Federal Register / Vol. 76, No. 251 / Friday, December 30, 2011 / Notices
opportunities for price improvement on
CBOE through AIM.
The Exchange will provide the
Commission with the following data: (1)
The percentage of trades effected
through AIM in which the Initiating
TPH submitted an Agency Order with
an auto-match instruction that included
a designated limit price and the
percentage that did not include a
designated limit price; and (2) the
average amount of price improvement
provided to AIM Agency Orders when
the Initiating TPH submitted an automatch instruction that included a
designated limit price and the average
amount that did not include a
designated limit price, versus the
average amount of price improvement
provided to AIM Agency Orders when
the Initiating TPH submitted a single
price (no auto-match instruction).
After effectiveness of the proposal,
and at least one week prior to
implementation of the rule change,
CBOE will issue a notice to TPHs
informing them of the implementation
of the additional auto-match feature.
This will give TPHs an opportunity to
make any necessary modifications to
coincide with the implementation date.
Elimination of Relevant Option Class
Restriction
CBOE Rule 6.74A(b)(1)(D) currently
provides that only market-makers with
an appointment in the relevant option
class may submit responses to an RFR
in an Auction. The Exchange is
proposing to eliminate this restriction
and allow all TPHs that receive an RFR
to submit responses in an Auction. The
Exchange notes that the elimination of
this restriction will allow for broader
participation in Auctions by all types of
market participants (e.g., public
customers, broker-dealers and marketmakers). This broader participation will
increase competition in Auctions
because more market participants will
be able to submit responses to RFRs,
which responses may result in better
prices for customers.
In support of this proposal, the
Exchange notes both PIP 16 and PIM 17
permit all participants and members,
respectively, to submit competing prices
in an auction. The Exchange believes
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16 See
supra note 3; see also Securities Exchange
Act Release No. 34–51651 (May 3, 2005), 70 FR
24848 (May 11, 2005) (SR–BSE–2005–01) (order
approving proposed rule change to eliminate
certain restrictions on the ability of certain market
participants to participate in PIP).
17 See supra note 4; see also Securities Exchange
Act Release No. 34–50819 (December 8, 2004), 69
FR 75093 (December 15, 2004) (SR–ISE–2003–06)
(order approving proposed rule change to
implement PIM without a restriction on which
members may submit auction responses).
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that the elimination of the restriction on
which TPHs may compete in an Auction
would increase the opportunities for all
types of market participants to
participate in AIM and submit price
responses, leading to more robust
competition in AIM.
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 Act.18 Specifically, the
Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 19 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. These changes are
consistent with changes made by other
exchanges and they serve to remove
impediments to and to perfect the
mechanism for a free and open market
and a national market system.
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.
18 15
19 15
PO 00000
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.
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 rulecomments@sec.gov. Please include File
Number SR–CBOE–2011–116 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–2011–116. 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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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2011–33587 Filed 12–29–11; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–66047; File No. SR–NYSE–
2011–64]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change Amending Rule
103B, Which Governs the Allocation of
Securities to DMMs
December 23, 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 December 15,
2011, New York Stock Exchange LLC
(‘‘NYSE’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the self-regulatory organization. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
srobinson on DSK4SPTVN1PROD with NOTICES
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Rule 103B, which governs the allocation
of securities to DMMs. The text of the
proposed rule change is available at the
Exchange, the Commission’s Public
Reference Room, and www.nyse.com.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
20 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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The Exchange proposes to amend
Rule 103B, which governs the allocation
of securities to DMMs. Specifically, as
described in more detail below, the
Exchange proposes to extend the
effective period of an allocation
decision from six to twelve months, to
permit an issuer to submit a written
letter to an Exchange Selection Panel
(‘‘ESP’’) expressing a preference for a
DMM if the issuer has delegated
authority to the Exchange to select the
DMM unit, align the quiet period rule,
and to make other conforming changes.
First, the Exchange proposes to
amend Rule 103(VI)(H), the Allocation
Sunset Policy, to extend the effective
period of an allocation decision from six
to twelve months. The Exchange
believes that extending the time period
that allocation decisions remain
effective is necessary because in some
instances it is taking initial public
offerings (‘‘IPOs’’) longer than six
months to occur after the allocation
process. Extending the effective period
to twelve months will eliminate the
need for a new IPO listing to repeat the
allocation process if the six-month
effective period has lapsed and thereby
contribute to efficiency in the allocation
process.
Second, in those instances in which
an issuer has delegated authority to the
Exchange to select the DMM unit for the
issuer under Rule 103B(III)(B), the
Exchange proposes to permit the ESP to
consider, as part of the selection
process, written submissions from the
issuer that express the issuer’s
preference.3 The written submission
from the issuer would be non-binding
on the ESP. The Exchange previously
allowed a listing company to supply a
letter to an allocation committee, but
eliminated this part of the rule when the
Exchange streamlined the allocation
process.4 The Exchange believes that
allowing the issuer to provide a nonbinding, written submission would
better inform the ESP during the
allocation process.
Third, the Exchange also proposes to
align the quiet period rule text so that
the quiet period is triggered at the
appropriate point, whether the issuer
selects the DMM unit itself or delegates
authority to the Exchange to select the
DMM unit. Currently, Rule
103B(III)(A)(2) provides that, if the
issuer selects the DMM unit, no DMM
unit, or any individuals acting on its
behalf, may have any contact with any
listing company once the Exchange
provides written notice to DMM units
that the listing company is listing on the
Exchange. Rule 103B(III)(B)(1) provides
that if the DMM unit is selected by the
Exchange, then individuals associated
with the DMM units may not
communicate about the DMM unit
selection process with members of the
ESP from the time the issuer delegates
the assignment responsibility to the
Exchange until the ESP announces its
assignment decision, but doesn’t
address communication with the issuer.
To make the quiet periods more
consistent regardless of the issuer’s
election, the Exchange proposes to
amend Rule 103B(III) to provide that
after the Exchange provides written
notice to DMM units that the issuer is
listing on the Exchange, no individual
associated with a DMM unit may
contact the issuer, or the ESP if
applicable, until the allocation is made,
except as otherwise provided in the
Rule (e.g., as permitted during the
interview). The Exchange further
proposes to add that, consistent with the
manner by which the issuer selects a
DMM unit, the ESP may also interview
individuals associated with the DMM
unit. The Exchange proposes a
conforming change to delete the current
quiet period text in Rule 103B(III)(A)(2)
and Rule 103B(III)(B)(1).
Finally, the Exchange proposes to
amend Rule 103B(III)(B)(1). Currently,
the Rule provides that an ESP consist of:
(a) at least one member of the
Exchange’s Senior Management, as
designated by the Chief Executive
Officer of the Exchange or his or her
designee; (b) any combination of two
Exchange Senior Management or
Exchange Floor Operations Staff, to be
designated by the Executive VicePresident of Exchange Floor Operations
or his/her designee; and (c) any
combination of three non-DMM
3 Under Rule 103B(III), an issuer may either select
its DMM unit directly or delegate authority to the
Exchange to select its DMM unit.
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–2011–116, and
should be submitted on or before
January 20, 2012.
VerDate Mar<15>2010
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.
82339
4 See Securities Exchange Act Release No. 58857
(October 24, 2008), 73 FR 65435 (November 3, 2008)
(SR–NYSE–2008–52).
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
PO 00000
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[Federal Register Volume 76, Number 251 (Friday, December 30, 2011)]
[Notices]
[Pages 82336-82339]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-33587]
[[Page 82336]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66048; File No. SR-CBOE-2011-116]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of a Proposed Rule Change Relating to
Its Automated Improvement Mechanism
December 23, 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 14, 2011, 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. 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.
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange proposes to amend its rules relating to its Automated
Improvement Mechanism (``AIM''). The text of the proposed rule change
is available on the Exchange's Web site (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, and at the Commission.
II. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in sections A, B, and C below, of the
most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to amend CBOE Rule 6.74A
to (i) allow Trading Permit Holders (``TPHs'') to enter orders they
represent as agent (``Agency Orders'') for fewer than 50 contracts into
AIM at the national best bid or offer (``NBBO''); (ii) eliminate the
requirement that there be at least three market-makers quoting in the
relevant series in order for an AIM auction (``Auction'') to commence;
(iii) allow TPHs that initiate an Auction (``Initiating TPHs'') to
designate a limit price if it elects to automatically match the price
and size of all Auction responses (``auto-match''); and (iv) eliminate
the restriction that only market-makers with an appointment in the
relevant option class may submit responses to a Request for Responses
(``RFR'') for an Agency Order in an Auction.
This proposed rule change would make AIM more similar to current
rules of the Boston Options Exchange Group, LLC (``BOX'') \3\ and the
International Securities Exchange, LLC (``ISE'') \4\ relating to the
Price Improvement Period (``PIP'') and Price Improvement Mechanism
(``PIM''), respectively, which are automated price improvement
mechanisms.\5\
---------------------------------------------------------------------------
\3\ See BOX Rules Chapter V, Section 18.
\4\ See ISE Rule 723.
\5\ AIM, PIP and PIM have certain characteristics in common with
each other. All three mechanisms (a) provide for the opportunity for
customer price improvement, (b) have certain periods where the
initial orders are exposed for potential price improvement, (c) have
certain guidelines regarding the types of orders that may be
eligible for price improvement, and (d) have certain defined rules
related to the allocation of trades within price improvement
auctions.
---------------------------------------------------------------------------
AIM allows a TPH to submit an Agency Order along with a contra-side
second order (a principal order or a solicited order for the same size
as the Agency Order) into an Auction where other participants could
compete with the Initiating TPH's second order to execute against the
Agency Order, which guarantees that the Agency Order will receive an
execution. Once an Auction commences, the Initiating TPH cannot cancel
it.\6\
---------------------------------------------------------------------------
\6\ See CBOE Rule 6.74A(b)(1)(A).
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Under this proposal, Agency Orders of all sizes submitted to AIM
will be guaranteed execution at a price at least as good as the NBBO
while providing the opportunity for execution at a price better than
the NBBO. The proposal will incent more TPHs to initiate and
participate in Auctions and will allow even broader participation in
Auctions by all types of market participants. As a result, CBOE expects
the proposal will increase the number of and participation in Auctions,
which would enhance competition in the Auctions. The Exchange believes
that this proposal will ultimately provide additional opportunities for
price improvement over the NBBO for its customers.
Elimination of Entry Price Restriction on Agency Orders for Fewer Than
50 Contracts
CBOE Rule 6.74A(a)(2) and (3) currently provides that if an
Initiating TPH submits an Agency Order to AIM for 50 contracts or more,
the Initiating TPH must enter its contra-side second order (or stop the
Agency Order) at the better of the NBBO or the Agency Order's limit
price (if the order is a limit order); however, if an Initiating TPH
submits an Agency Order to AIM for fewer than 50 contracts, the
Initiating TPH must stop the entire Agency Order at the better of the
NBBO price improved by one minimum price improvement increment or the
Agency Order's limit price (if the order is a limit order). The
Exchange is proposing to eliminate this distinction and allow
Initiating TPHs to submit to AIM Agency Orders of any size at the NBBO.
The Exchange believes this proposal will increase the likelihood
that TPHs will initiate Auctions for Agency Orders for fewer than 50
contracts because the TPHs will only be required to guarantee an
execution at the NBBO, which will provide additional customer orders
with an opportunity for price improvement over the NBBO. The Exchange
believes the proposal will also encourage increased participation in
AIM by TPHs willing to trade with an Agency Order for fewer than 50
contracts at the NBBO but not better than the NBBO.
In support of this proposal, the Exchange notes that both BOX \7\
and ISE \8\ allow entry of orders into PIP and PIM, respectively, at
the NBBO without distinguishing between orders of more than or fewer
than 50 contracts. Because BOX and ISE are currently able to offer
their customers price improvement for orders of fewer than 50 contracts
at the NBBO in PIP and PIM, respectively, the Exchange has determined
that it is important for competitive purposes that it be able to offer
the same opportunities
[[Page 82337]]
to its customers for price improvement on CBOE through AIM.
---------------------------------------------------------------------------
\7\ See supra note 3; see also Securities Exchange Act Release
No. 34-59654 (March 30, 2009), 74 FR 15551 (April 6, 2009) (SR-BX-
2009-08) (order approving proposed rule change allowing entry of
orders into PIP at the NBBO when BOX's best bid or offer is inferior
to the NBBO with no order size distinction).
\8\ See supra note 4; see also Securities Exchange Act Release
No. 34-57847 (May 21, 2008), 73 FR 30987 (May 29, 2008) (SR-ISE-
2008-29) (order approving proposed rule change allowing entry of
orders into PIM at the NBBO when ISE's best bid or offer is inferior
to the NBBO with no order size distinction).
---------------------------------------------------------------------------
The Exchange notes that certain allocation differences exist
between AIM and PIM as well as AIM and PIP. As proposed, our AIM change
would make the handling of AIM trades for 50 or more contracts
consistent with AIM trades under 50 contracts.\9\ However, unlike PIM,
which requires auctions to commence at prices better than the ISE best
bid or offer and thus precludes an auction initiator from establishing
priority ahead of any resting ISE interest, an AIM Auction can begin
and conclude at the CBOE best bid or offer. This means that, like for
orders of 50 or more contracts on CBOE, the Initiating TPH can trade at
a price in which resting interest existed and can establish priority
over resting broker-dealer interest. Although PIP allows auctions to
occur at the BOX best bid or offer, PIP uses an order allocation
structure based on price-time priority sequence with priority for
public customer orders (like CBOE) and secondary priority for non-BOX
Participant broker-dealers. On CBOE, when an Auction concludes at the
CBOE best bid or offer, first priority is for public customers, second
priority is for the Initiating TPH (for 40%), third priority is for
nonpublic customer resting orders or quotes that are unchanged from
when the Auction began, and last priority is for RFR responses. The
Exchange references these differences for informational purposes but
does not believe that the differences are material to the Exchange's
goals of handling AIM orders of all sizes the same and allowing
Auctions of orders smaller than 50 contracts at the NBBO (like PIP and
PIM).
---------------------------------------------------------------------------
\9\ PIP and PIM also do not distinguish between orders over 50
contracts and orders under 50 contracts.
---------------------------------------------------------------------------
The Exchange further notes that certain components of AIM were
approved on a pilot basis, including that there is no minimum size
requirement for orders to be eligible for the Auction.\10\ The
Commission has approved six one-year extensions to the pilot programs,
most recently until July 18, 2012.\11\ In connection with the pilot
programs, the Exchange has submitted, and will continue to submit, to
the Commission reports providing detailed AIM Auction and order
execution data, including monthly data regarding executions through AIM
of Agency Orders for more or fewer than 50 contracts, as supporting
evidence that, among other things, there is meaningful competition for
all size orders.
---------------------------------------------------------------------------
\10\ See Securities Exchange Act Release No. 53222 (February 3,
2006), 71 FR 7089 (February 10, 2006) (SR-CBOE-2005-60) (order
approving implementation of AIM).
\11\ See Securities Exchange Act Release Nos. 34-54147 (July 14,
2006), 71 FR 41487 (July 21, 2006) (SR-CBOE-2006-64); 56094 (July
18, 2007), 72 FR 40910 (July 25, 2007) (SR-CBOE-2007-80); 58196
(July 18, 2008), 73 FR 43803 (July 28, 2008) (SR-CBOE-2008-76);
60338 (July 17, 2009), 74 FR 36803 (July 24, 2009) (SR-CBOE-2009-
51); 62522 (July 16, 2010), 75 FR 43596 (July 26, 2010) (SR-CBOE-
2010-67); and 34-64930 (July 20, 2011), 76 FR 44636 (July 26, 2011)
(SR-CBOE-2011-66).
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Elimination of Three Market-Maker Requirement
CBOE Rule 6.74A(a)(4) currently requires that there be at least
three market-makers quoting in the relevant series for an Auction to
commence. The Exchange is proposing to eliminate this requirement. The
Exchange does not believe that customer orders should be denied the
benefits of AIM simply because there may be less than three market-
makers quoting in a relevant options class at a specific point in time.
Any concern regarding an Auction starting with a lower number of
market-makers quoting in a relevant series is offset by the broad
participation and competition that would be present once an Auction
commenced.
In support of this proposal, the Exchange notes that both PIP \12\
and PIM \13\ permit auctions to commence without the condition that
there be a minimum number of market-makers quoting in the particular
series. The Exchange believes that AIM, and in turn the customers that
benefit from AIM, would be disadvantaged if the three market-maker
requirement remained as a condition to start an Auction because this
requirement potentially reduces the number of Auctions and, as a
result, opportunities for price improvement. Because BOX and ISE are
currently able to offer their customers price improvement without a
minimum quoter requirement in PIP and PIM, respectively, the Exchange
believes it is essential for competitive purposes that it be able to
offer the same opportunities for price improvement on CBOE through AIM.
---------------------------------------------------------------------------
\12\ See supra note 3; see also Securities Exchange Act Release
No. 34-58999 (November 21, 2008), 73 FR 72536 (November 28, 2008)
(SR-BSE-2008-54) (order approving proposed rule change to eliminate
requirement that there be at least three market-makers quoting in
the relevant series for an auction to commence).
\13\ See supra note 4; see also Securities Exchange Act Release
No. 34-58710 (October 1, 2008), 73 FR 59008 (October 8, 2008) (SR-
ISE-2008-63) (order approving proposed rule change to eliminate
requirement that there be at least three market-makers quoting in
the relevant series for an auction to commence).
---------------------------------------------------------------------------
Addition of Option To Designate Auto-Match Limit Price
CBOE Rule 6.74A(b)(1)(A) currently allows an Initiating TPH to
enter its contra-side second order in one of two formats: (1) A
specified single price; or (2) a non-price specific commitment to auto-
match all Auction responses achieved during the Auction. In this case,
the Initiating TPH would have no control over the match price. The
Exchange is proposing to provide Initiating TPHs with the additional
option to auto-match competing prices from other market participants up
to a designated limit price. The Initiating TPH will still not be able
to cancel the auto-match instruction after an Auction commences and
will have no control over the prices at which it receives an allocation
of the Auction other than the outside boundary established by the
designated limit price.
The Exchange notes that when the Initiating TPH selects the auto-
match feature prior to the start of an Auction (with or without a
designated limit price), the available liquidity at improved prices is
increased and competitive final pricing is out of the Initiating TPH's
control. The Exchange believes the proposal will encourage increased
participation in AIM because it allows TPHs willing to trade with an
Agency Order at a price better than the NBBO, but only up to a certain
price, to initiate an Auction.
In support of this proposal, the Exchange also notes that both PIP
\14\ and PIM \15\ permit initiating participants to elect to auto-match
up to a designated limit price. The Exchange believes that AIM, and in
turn the customers that benefit from AIM, would be disadvantaged if
TPHs are not provided with the option to auto-match up to a designated
limit price because this lack of flexibility reduces the number of
Auctions and, as a result, opportunities for price improvement. Because
BOX and ISE currently allow initiating participants or members,
respectively, the option to auto-match up to the NBBO achieved during
an auction or up to a designated limit price, the Exchange believes it
is important for competitive purposes that it be able to offer the same
[[Page 82338]]
opportunities for price improvement on CBOE through AIM.
---------------------------------------------------------------------------
\14\ See supra note 3; see also Securities Exchange Act Release
No. 34-61805 (March 31, 2010), 75 FR 17454 (April 6, 2010) (SR-BX-
2010-22) (order approving implementation of auto-match feature with
the option to auto-match up to a designated limit price).
\15\ See supra note 4; see also Securities Exchange Act Release
No. 34-62644 (August 4, 2010), 75 FR 48395 (August 10, 2010) (SR-
ISE-2010-61) (order approving implementation of auto-match feature
with the option to auto-match up to a designated limit price).
---------------------------------------------------------------------------
The Exchange will provide the Commission with the following data:
(1) The percentage of trades effected through AIM in which the
Initiating TPH submitted an Agency Order with an auto-match instruction
that included a designated limit price and the percentage that did not
include a designated limit price; and (2) the average amount of price
improvement provided to AIM Agency Orders when the Initiating TPH
submitted an auto-match instruction that included a designated limit
price and the average amount that did not include a designated limit
price, versus the average amount of price improvement provided to AIM
Agency Orders when the Initiating TPH submitted a single price (no
auto-match instruction).
After effectiveness of the proposal, and at least one week prior to
implementation of the rule change, CBOE will issue a notice to TPHs
informing them of the implementation of the additional auto-match
feature. This will give TPHs an opportunity to make any necessary
modifications to coincide with the implementation date.
Elimination of Relevant Option Class Restriction
CBOE Rule 6.74A(b)(1)(D) currently provides that only market-makers
with an appointment in the relevant option class may submit responses
to an RFR in an Auction. The Exchange is proposing to eliminate this
restriction and allow all TPHs that receive an RFR to submit responses
in an Auction. The Exchange notes that the elimination of this
restriction will allow for broader participation in Auctions by all
types of market participants (e.g., public customers, broker-dealers
and market-makers). This broader participation will increase
competition in Auctions because more market participants will be able
to submit responses to RFRs, which responses may result in better
prices for customers.
In support of this proposal, the Exchange notes both PIP \16\ and
PIM \17\ permit all participants and members, respectively, to submit
competing prices in an auction. The Exchange believes that the
elimination of the restriction on which TPHs may compete in an Auction
would increase the opportunities for all types of market participants
to participate in AIM and submit price responses, leading to more
robust competition in AIM.
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\16\ See supra note 3; see also Securities Exchange Act Release
No. 34-51651 (May 3, 2005), 70 FR 24848 (May 11, 2005) (SR-BSE-2005-
01) (order approving proposed rule change to eliminate certain
restrictions on the ability of certain market participants to
participate in PIP).
\17\ See supra note 4; see also Securities Exchange Act Release
No. 34-50819 (December 8, 2004), 69 FR 75093 (December 15, 2004)
(SR-ISE-2003-06) (order approving proposed rule change to implement
PIM without a restriction on which members may submit auction
responses).
---------------------------------------------------------------------------
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 Act.\18\ Specifically, the Exchange
believes the proposed rule change is consistent with the Section
6(b)(5) \19\ 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.
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\18\ 15 U.S.C. 78f(b).
\19\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
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. These changes are consistent with changes made
by other exchanges and they serve to remove impediments to and to
perfect the mechanism for a free and open market and a national market
system.
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 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-2011-116 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-2011-116. 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
[[Page 82339]]
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-2011-116, and should be submitted on or before January 20, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-33587 Filed 12-29-11; 8:45 am]
BILLING CODE 8011-01-P