Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change Related to FLEX Options, 306-312 [2011-33713]
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Federal Register / Vol. 77, No. 2 / Wednesday, January 4, 2012 / Notices
Service states that the addition is
necessary due to changes in the nondiscounted published postage for
Express Mail International (EMI),
Priority Mail International (PMI), and
Global Express Guaranteed (GXG), as
well as a new GEPS–NPR 3 model
contract and accompanying financial
model that differ from the GEPS–NPR 2
model contract and financial model.
Request at 2–3. The Request has been
assigned Docket No. MC2012–4.
The Postal Service
contemporaneously filed a redacted
version of the GEPS–NPR 3 model
contract related to the proposed new
product under 39 U.S.C. 3632(b)(3) and
39 CFR 3015.5. Id. Attachment B. The
instant contract has been assigned
Docket No. CP2012–8.
Request. To support its Request, the
Postal Service filed six attachments as
follows:
• Attachment 1—an application for
non-public treatment of materials filed
under seal;
• Attachment 2A—a redacted version
of Governors’ Decision No. 11–6;
• Attachment 2B—a revised version
of MCS 2510.8 GEPS–NPR;
• Attachment 2C—a redacted version
of Management’s Analysis of the Prices
and Methodology for Determining Prices
For Negotiated Service Agreements
Under Global Expedited Package
Services—Non-Published Rates 3;
• Attachment 2D—a list of Maximum
and Minimum Prices for EMI, PMI, and
GXG under GEPS–NPR 3 Contracts;
• Attachment 2E—a certified
statement concerning prices for
applicable negotiated service
agreements under GEPS–NPR 3 rates, as
required by 39 CFR 3015(c)(2);
• Attachment 3—a Statement of
Supporting Justification similar to the
Statement of Supporting Justification
used to support the classification of
GEPS–NPR 1, and as required by 39 CFR
3020.32;
• Attachment 4—a redacted version
of the GEPS–NPR 3 model contract.
In the Statement of Supporting
Justification, Frank Cebello, Executive
Director, Global Business Management,
asserts that the product is designed to
increase the efficiency of the Postal
Service’s process, as well as enhance its
ability to compete in the marketplace.
Id., Attachment 3 at 1. Mr. Cebello states
that the product is designed to enable
the Postal Service’s Global Business
sales force to rapidly establish, based on
various factors, whether a GEPS-type
agreement will be profitable enough to
Model Contract and Application for Non-Public
Treatment of Materials Filed Under Seal, December
20, 2011 (Request).
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justify establishing an incentive-based
mailing plan with the customer for EMI,
PMI, and GXG if the customer uses
Global Shipping Software. Id.,
Attachment 3 at 2. In order to
accomplish this, the product revises the
product designs for GEPS–NPR 1 and
GEPS–NPR 2 to include actual rates that
will cover their costs, and will eliminate
the need for each customer agreement to
be added to the competitive products
list individually. Id. Attachment 3 at 2,
5. Mr. Cebello contends that the product
is not subsidized by market dominant
products, it covers costs attributable to
it, and it does not cause competitive
products as a whole to fail to make the
appropriate contribution to institutional
costs. Id. The Postal Service asserts that
the model contract is supported by
Governors’ Decision No. 11–6, which
authorizes management to prepare any
necessary product description of nonpublished competitive services,
including text for inclusion in the MCS,
and to present the matter to the
Commission for review. Id. at 3.
Related contract. The Postal Service
included a redacted version of the
related model contract with the Request.
Id. Attachment 4. The Postal Service
will notify the customer of the effective
date no later than 30 days after receiving
the signed agreement from the mailer.
Id, Attachment 4 at 6. The contract will
expire 1 year from the effective date
unless terminated sooner. Id. The Postal
Service represents that the contract is
consistent with 39 U.S.C. 3633(a). Id.
Attachment 4.
The Postal Service filed much of the
supporting materials, including the
related model contract, under seal. Id.
Attachment 1. It maintains that the
redacted portions of the materials
should remain confidential as sensitive
business information. Id. at 4. This
information includes sensitive
commercial information concerning the
incentive discounts and their
formulation, applicable cost-coverage,
non-published rates, as well as some
customer-identifying information. Id.
The Postal Service asks the Commission
to protect customer-identifying
information from public disclosure for
ten years after the date of filing with the
Commission, unless an order is entered
to extend the duration of that status. Id.
at 9.
II. Notice of Filings
The Commission establishes Docket
Nos. MC2012–4 and CP2012–8 to
consider the Request pertaining to the
proposed Priority Mail Contract 37
product and the related model contract,
respectively.
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Interested persons may submit
comments on whether the Postal
Service’s filings in the captioned
dockets are consistent with the policies
of 39 U.S.C. 3632, 3633, or 3642, 39 CFR
3015.5, and 39 CFR part 3020, subpart
B. Comments are due no later than
January 6, 2012. The public portions of
these filings can be accessed via the
Commission’s Web site (https://
www.prc.gov).
The Commission appoints Natalie Rea
Ward to serve as Public Representative
in these dockets.
III. Ordering Paragraphs
It is ordered:
1. The Commission establishes Docket
Nos. MC2012–4 and CP2012–8 to
consider the matters raised in each
docket.
2. Pursuant to 39 U.S.C. 505, Natalie
Rea Ward is appointed to serve as
officer of the Commission (Public
Representative) to represent the
interests of the general public in these
proceedings.
3. Comments by interested persons in
these proceedings are due no later than
January 6, 2012.
4. The Secretary shall arrange for
publication of this order in the Federal
Register.
By the Commission.
Shoshana M. Grove,
Secretary.
[FR Doc. 2011–33712 Filed 1–3–12; 8:45 am]
BILLING CODE 7710–FW–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–66052; File No. SR–CBOE–
2011–123]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing of a
Proposed Rule Change Related to
FLEX Options
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
20, 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
1 15
2 17
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
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comments on the proposed rule change
from interested persons.
Significant distinctions are described
below.4
Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Automated Improvement Mechanism
The Exchange is proposing to
establish an AIM mechanism for FLEX
Options, which mechanism will
electronically auction certain orders for
price improvement. Under the AIM
process, a FLEX Trader 5 (referred to as
an ‘‘Initiating Trading Permit Holder’’ or
‘‘Initiating TPH’’) that represents agency
orders may submit an order it represents
as agent (an ‘‘Agency Order’’) along with
a second order (a principal order and/
or solicited order(s) for the same amount
as the Agency Order) 6 into the AIM
Auction where other FLEX Trader
participants could compete with the
Initiating TPH’s second order to execute
against the Agency Order.
To be eligible, the Agency Order must
be in a FLEX class designated as eligible
for AIM Auctions and within the
designated AIM Auction order
eligibility size parameters. Such classes
and size parameters will be determined
by the Exchange and announced via
circular to FLEX Traders. When
submitting an Agency Order, an
Initiating TPH must mark the Agency
Order for AIM Auction processing and
must also submit a contra-side second
order for the same size as the Agency
Order. This second order guarantees
that the Agency Order will receive an
execution (i.e., it acts as a stop). In
connection with the stop of the Agency
Order, the Initiating TPH must stop the
entire Agency Order with the second
order at the better of the best bid or offer
(‘‘BBO’’) or the Agency Order’s limit
price.7 The Initiating TPH may enter the
The Exchange is proposing to adopt
certain rules pertaining to the electronic
auction trading of Flexible Exchange
Options (‘‘FLEX Options’’) on the
Exchange’s FLEX Hybrid Trading
System platform.3 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
1. Purpose
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The Exchange is 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 Rules
6.74A and 6.74B, respectively—
available for FLEX Options. The FLEX
versions of the AIM and SAM
mechanisms will operate substantially
similar to the AIM and SAM
mechanisms for non-FLEX Options.
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 (referred to as the
‘‘FLEX System’’ or the ‘‘System’’) are contained in
Chapter XXIVB.
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4 These
distinctions are noted as compared to the
existing AIM and SAM auction processes for nonFLEX options under Rules 6.74A and 6.74B,
respectively. The Exchange notes that it currently
has two separate rule change filings pending that
would make amendments to Rule 6.74A (AIM). See
SR–CBOE–2011–116 and SR–CBOE–2011–117.
5 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(l).
6 Any solicited orders submitted by the Initiating
TPH to trade against the Agency Order may not be
for the account of a FLEX Market-Maker assigned
to the option class. See proposed Rule 24B.5A.04.
7 By comparison, the AIM Auction for non-FLEX
Options currently provides for a stop of Agency
Orders for 50 contracts or more at the better of the
national best bid or offer (‘‘NBBO’’) or the Agency
Order’s limit price (if the order is a limit order), and
a stop of Agency Orders for less than 50 contracts
at the NBBO improved by one minimum price
increment (which is determined by the Exchange
and may not be smaller than $0.01) or the Agency
Order’s limit price (if the order is a limit). See Rule
6.74A(a)(2)—(3). The FLEX provision differs in that
orders of any size would be treated the same for
purposes of the stop (i.e., there would be no small
order provision), the stop is based on the BBO
(FLEX options are generally not multiply-listed and
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307
second order in one of two formats: (i)
A specified single price at which it
seeks to cross the Agency Order with
the second order (a ‘‘single-priced
submission’’), or (ii) a non-price specific
commitment for the second order to
automatically match the price and size
of all auction responses that are
received during the auction (an ‘‘automatch’’), in which case the Agency
Order will be stopped at the better of the
BBO or the Agency Order’s limit price.
When using the auto-match feature, the
Initiating TPH would have no control
over the ultimate match price. Once the
Initiating TPH has submitted an Agency
Order for AIM processing, such
submission cannot be cancelled by the
Initiating TPH.
Upon receipt of an Agency Order (and
second order), the Exchange would
commence the AIM Auction by issuing
a request for responses (‘‘RFR’’),
detailing the side and size of the Agency
Order.8 The duration of the RFR
response period (i.e., the auction period)
would be established by the Exchange
on a class-by-class basis and shall not be
less than three (3) seconds.9 During that
period, RFR responses may be
submitted by FLEX Traders. These
responses must specify price and size
and may not cross the Exchange’s BBO
on the opposite side of the market. All
RFR responses are ‘‘blind,’’ that is they
are not visible to any other
participants.10 CBOE believes this
aspect of the AIM Auction will
encourage more aggressive quoting and
superior price improvement. RFR
responses may be modified or cancelled
so long as they are modified or
are not subject to a consolidated quotation reporting
program), and the FLEX AIM Auction will only
process Agency Orders with limit prices (no market
orders).
8 Each RFR would be sent to those FLEX Traders
electing to receive RFRs (i.e., those FLEX Traders
who have established the necessary systems
connectivity to receive RFRs). Thus, such election
to receive RFRs would not be on a case-by-case
basis.
9 The Exchange is proposing that the minimum
RFR exposure period for AIM be three (3) seconds,
which is consistent with the existing minimum
exposure period for FLEX Option crossing pursuant
to the existing FLEX crossing procedures. See Rule
24B.5(b)(3)(iii). By comparison, for non-FLEX
Options, the minimum RFR exposure period for
non-FLEX Options is one (1) second. See, e.g., Rule
6.45A.01 and .02, and Rule 6.74A(b)(1)(C).
10 RFR responses will not be disseminated via the
Options Price Reporting Authority (‘‘OPRA’’). This
is consistent with the operation of AIM (and SAM)
for non-FLEX Options. See Rules 6.74A(b)(1)(F) and
6.74B(b)(1)(D). In addition, it is consistent with the
operation of FLEX generally. In that regard, the
Exchange notes that the Exchange currently
disseminates via OPRA information regarding
executed FLEX transactions. However, the
Exchange currently does not disseminate via OPRA
information respecting pending electronic and open
outcry RFQs, or information on resting orders in the
FLEX electronic book.
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cancelled before the conclusion of the
RFR response period. Lastly, the
minimum price increment for RFR
responses and for an Initiating TPH’s
single price submission shall be set by
the Exchange at no less than one cent.
Normally, an AIM Auction ends at the
conclusion of the RFR response period
(which will be no less than 3 seconds).
However, the proposal provides that the
AIM Auction would end prior to the
conclusion of the RFR response period
any time an RFR response matches the
BBO on the opposite side of the market
from the RFR responses.11
At the conclusion of the AIM Auction,
the Agency Order would be allocated at
the best price(s) and contra-side interest
will be ranked and matched based on
price-time priority,12 subject to the
following: First, such best prices may
include non-AIM Auction FLEX Orders
(to the extent the Exchange has
determined to make available an
electronic book).13 Second, public
customers and non-Trading Permit
Holder broker-dealers RFR responses
and FLEX Orders would have priority.14
11 This early termination provision for FLEX
Options is consistent with the operation of AIM
(and SAM) for non-FLEX Options. See Rules
6.74A(b)(2)(D) and 6.74B(b)(2). The Exchange notes
that, for non-FLEX Options, additional early
termination provisions apply that would not be
applicable to FLEX Options. In particular, for nonFLEX Options an auction may terminate early: (i)
Upon receipt by the Hybrid System of an unrelated
order (in the same series as the Agency Order) that
is marketable against either Exchange’s
disseminated quote (when such quote is the NBBO)
or the RFR responses; (ii) upon receipt by the
Hybrid System of an unrelated limit order (in the
same series as the Agency Order and on the
opposite side of the market as the Agency Order)
that improves the RFR responses; (iii) pursuant to
a pilot program, any time there is a quote lock on
the Exchange pursuant to Rule 6.45A(d) and .06.
Provisions (i) and (ii) above would not be
applicable to FLEX Options because unrelated
FLEX Orders may not be submitted to the electronic
book for the duration of an AIM Auction. See
proposed Rule 24B.5A(b). Provision (iii) above (and
related pilot program data reporting requirements)
would not be applicable to FLEX Options because
there is no quote lock provision for FLEX Options
that is similar to the quote lock provision applicable
to non-FLEX Options under Rule 6.45A(d).
12 The FLEX version of the AIM Auction would
only utilize a price-time priority allocation
algorithm, subject to the conditions noted above. By
comparison, the allocation algorithm for the nonFLEX version of the AIM Auction is the algorithm
that is in effect for the option class, subject to
certain conditions. See Rule 6.74A(b)(3).
13 The Exchange may determine in a class-byclass basis to make an electronic book available in
the FLEX System. See Rule 24B.5(b). The term
‘‘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. See Rule 24B.1(j).
14 For the non-FLEX Option version of AIM, only
public customers have priority. See Rule
6.74A(b)(3)(B). The Exchange is proposing to
provide both public customers and non-Trading
Permit Holder broker-dealers with the same priority
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Third, no FLEX Appointed MarketMaker participation entitlement 15
would apply with respect to the AIM
Auction. Fourth, if the best price equals
the Initiating TPH’s single-price
submission, the Initiating TPH’s singleprice submission shall be allocated the
greater of one contract or a certain
percentage of the order, which
percentage would be determined by the
Exchange and may not be larger than
40%. However, if only one other FLEX
Trader matches the Initiating TPH’s
single price submission, then the
Initiating TPH may be allocated up to
50% of the order. Fifth, if the Initiating
TPH selected the auto-match option of
the AIM Auction, the Initiating TPH
shall be allocated its full size at each
price point until a price point is reached
where the balance of the order can be
fully executed. At such price point, the
Initiating TPH shall be allocated the
greater of one contract or a certain
percentage of the remainder of the
Agency Order, which percentage would
be determined by the Exchange and may
not be larger than 40%. Sixth, any
remaining RFR responses and FLEX
Orders will be allocated based on time
priority.16 The Initiating TPH would not
participate on any such balance unless
the Agency Order would otherwise go
unfilled. Finally, seventh, if the final
AIM Auction price locks a public
customer or non-Trading Permit Holder
broker-dealer order in the electronic
book on the same side of the market as
the Agency Order, then, unless there is
sufficient size in the AIM Auction
responses to execute both the Agency
Order and the booked public customer
or non-Trading Permit Holder brokerfor the FLEX AIM Auction for simplicity to be
consistent with how other FLEX allocation
algorithms currently operate. See, e.g., Rule
24B.5(a)(1)(iii)(C) and (D). In the future, the
Exchange may determine to modify the FLEX
Option version of AIM so that only public
customers have priority. Such a modification would
be the subject of a separate rule filing.
15 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).
16 For the non-FLEX Option version of AIM, the
allocation is based on the algorithm in effect for the
option class. See note 12, supra.
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dealer order (in which case they will
both execute at the final AIM Auction
price), the Agency Order will execute
against RFR responses at one minimum
RFR response increment worse than the
final AIM Auction price against the AIM
Auction participants that submitted the
final AIM Auction price and any
balance shall trade against the public
customer or non-Trading Permit Holder
broker-dealer order in the book at such
order’s limit price.17
Lastly, the Exchange proposes certain
interpretation and policy provisions
applicable to the AIM Auction
mechanism. First, the AIM Auction may
only be used where there is a genuine
intention to execute a bona fide
transaction. Second, it would be
deemed conduct inconsistent with just
and equitable principles of trade and a
violation of CBOE Rule 4.1 to engage in
a patter [sic] of conduct where the
Initiating TPH breaks-up an Agency
Order into separate orders for two (2) or
few contracts for the purpose of gaining
a higher allocation percentage than the
Initiating TPH would have otherwise
received in accordance with the
allocation procedures.18 Third, initially,
17 For the non-FLEX Option version of AIM, this
book locking provision is only applicable to public
customer orders resting in the book. The Exchange
is proposing to provide both public customers and
non-Trading Permit Holder broker-dealers with the
same priority for the FLEX AIM Auction for
simplicity to be consistent with how other FLEX
allocation algorithms currently operate. See note 12,
supra. The Exchange notes that, for non-FLEX
Options, additional conditions apply that will not
be applicable to FLEX Options. Those conditions
relate to scenarios involving the following: (i)
Unrelated orders that cause early terminations of
AIM Auctions; and (ii) auctions that do not result
in price improvement over the Exchange’s
disseminated price at the time the Auction began
(in which case resting unchanged quotes or orders
that were disseminated at the best price before the
auction began have priority after any public
customer order priority and the Initiating TPH’s
priority (40%) have been satisfied; any unexecuted
balance on the Agency Order is allocated to RFR
responses provided those RFR responses will be
capped to the size of the unexecuted balance and
the Initiating TPH may not participate on any such
balance unless the Agency Order would otherwise
go unfilled). See Rule 6.74A(b)(3)(D), (E) and (H).
Provision (i) above would not be applicable to FLEX
Options because unrelated FLEX Orders may not be
submitted to the electronic book for the duration of
an AIM Auction. See proposed Rule 24B.5A(b).
Provision (ii) above is not necessary for FLEX
Options because FLEX Options will utilize a pricetime allocation algorithm (and, as a result, resting
FLEX Orders that are disseminated at the best price
before an AIM Auction begins will have priority
after public customer and non-Trading Permit
Holder broker-dealer priority and the Initiating
TPH’s priority (40%) have been satisfied by virtue
of the resting FLEX Orders having time priority).
18 The non-FLEX version of AIM contains the
same prohibition. In addition, the non-FLEX
version of AIM provides that a pattern or practice
of submitting unrelated orders that cause an auction
to conclude before the end of the RFR period will
be deemed conduct inconsistent with just and
equitable principles of trade and a violation of Rule
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and for at least a pilot period expiring
on July 18, 2012, there will be no
minimum size requirement for orders to
be eligible for the AIM Auction. During
this Pilot Period, the Exchange will
submit certain data, periodically as
required by the Commission, to provide
supporting evidence that, among other
things, there is a meaningful
competition for all size orders and that
there is an active and liquid market
functioning on the Exchange outside of
the AIM Auction. Any data which is
submitted to the Commission will be
provided on a confidential basis.19
Fourth, any solicited orders submitted
by the Initiating TPH to trade against the
Agency Order may not be for the
account of a FLEX Market-Maker
assigned to the option class.20 Fifth, the
Exchange may determine on a class-byclass basis to make the AIM Auction
available for complex orders. In such
classes, complex orders may be
executed through the AIM Auction at a
net debit or net credit price provided
the AIM Auction eligibility
requirements are satisfied and the
Agency Order is eligible for the AIM
Auction considering its complex order
type, order origin code (i.e., non-brokerdealer public customer, broker-dealers
that are not Market-Makers or specialists
on an options exchange, and/or MarketMakers or specialists on an options
exchange), class, and marketability as
determined by the Exchange. Complex
orders will only be eligible to trade with
other complex orders through the AIM
Auction. To the extent the Exchange
determines to make an electronic book
available for resting FLEX Orders, there
will be no ‘‘legging’’ of complex orders
with FLEX Orders that may be
represented in the individual series legs
represented in the electronic book.21
Order allocation shall be the same as
would be applicable for simple orders.
In addition, the individual series legs of
a complex order would not trade
through equivalent bids (offers) in the
individual series legs represented in the
electronic book and at least one leg must
better the corresponding bid (offer) of
4.1. See Rule 6.74A.02. This ‘‘unrelated orders’’
provision would not be applicable to FLEX Options
because unrelated FLEX Orders may not be
submitted to the electronic book for the duration of
an AIM Auction. See proposed Rule 24B.5A(b).
19 This proposed pilot is modeled after an existing
pilot for non-FLEX Options. The July 18, 2012 date
is proposed so that the FLEX pilot will coincide
with an existing pilot for non-FLEX Options. See
Rule 6.74A.03.
20 See note 6, supra.
21 By comparison, for complex orders in nonFLEX Options classes, the AIM (and SAM)
mechanisms permit complex orders to trade with
the individuals series legs in the electronic book.
See Rules 6.74A.07 and 6.74B.01.
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public customers and non-Trading
Permit Holder broker-dealers in the
electronic book. Sixth, any
determinations made by the Exchange
pursuant to the proposed rule, such as
eligible classes, order size parameters
and the minimum price increment,
would be communicated in a circular.22
Solicitation Auction Mechanism
The Exchange is also proposing to
establish a SAM mechanism for FLEX
Options, which is another mechanism
that will electronically auction certain
orders for price improvement. Under the
SAM process, an Initiating TPH that
represents agency orders may submit an
Agency Order along with a second order
(a solicited order(s) for the same amount
as the Agency Order) 23 into the SAM
Auction where other FLEX Trader
participants could compete with the
Initiating TPH’s second order to execute
against the Agency Order. As explained
in more detail below, the SAM
mechanism is to be used for larger-sized
Agency Orders that are to be executed
against solicited orders.
To be eligible, the Agency Order must
be in a FLEX class designated as eligible
for SAM Auctions and within the
designated SAM Auction order
eligibility size parameters determined
by the Exchange (however, the eligible
order size would not be less than 500
contracts). Such classes and size
parameters will be determined by the
Exchange and announced via circular to
FLEX Traders. As explained in more
detail below, each order entered into the
SAM Auction would also be designated
in the System as all-or-none (i.e., an
order will be executed in its entirety or
not at all). In addition, the second order
may only be entered in a single-priced
submission format (i.e., unlike AIM
Auctions, there is no ‘‘auto-match’’
feature for SAM Auctions). Once the
Initiating TPH has submitted an Agency
Order for SAM processing, such
submission cannot be cancelled by the
Initiating TPH.
Upon receipt of an Agency Order (and
second order), the Exchange would
commence the SAM Auction by issuing
an RFR, detailing the price and size [sic]
22 The non-FLEX Option version of AIM also
contains a provision for the automated customer-tocustomer immediate crosses. See Rule 6.74A.08.
The Exchange does not intend to make this
automated crossing functionality available at this
time for FLEX Options. If in the future the Exchange
would determine to do so, it would be the subject
of a separate rule filing.
23 Any solicited orders submitted by the Initiating
TPH to trade against the Agency Order may not be
for the account of a FLEX Market-Maker assigned
to the option class. See proposed Rule 24B.5B.03.
PO 00000
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309
the Agency Order.24 The duration of the
RFR response period (i.e., the auction
period) would be established by the
Exchange on a class-by-class basis and
shall not be less than three (3)
seconds.25 During that period, RFR
responses may be submitted by FLEX
Traders. These responses must specify
price and size. Responses may not be
entered for the account of an options
Market-Maker from another options
exchange. As with AIM Auctions, for
SAM Auctions all RFR responses are
‘‘blind.’’ 26 CBOE believes this aspect of
the SAM Auction will encourage more
aggressive quoting and superior price
improvement. RFR responses may be
modified or cancelled so long as they
are modified or cancelled before the
conclusion of the RFR response period.
Lastly, the minimum price increment
for RFR responses and for an Initiating
TPH’s single price submission shall be
set by the Exchange at no less than one
cent.
Normally, a SAM Auction ends at the
conclusion of the RFR response period
(which will be no less than 3 seconds).
However, as with AIM Auctions, the
proposal provides that the SAM Auction
would end prior to the conclusion of the
RFR response period any time an RFR
response matches the BBO on the
opposite side of the market from the
RFR responses.27
At the conclusion of the SAM
Auction, the Agency Order would be
executed against the second/solicited
order unless there is sufficient size to
execute the entire Agency Order at a
price (or prices) that improves the
proposed crossing price. In the case
where there is one or more public
customers or non-Trading Permit Holder
broker-dealers at the proposed
execution price on the opposite side of
the Agency Order, the second/solicited
order would be cancelled and the
Agency Order would be executed
24 As with AIM Auctions, for SAM Auctions each
RFR would be sent to those FLEX Traders electing
to receive RFRs (i.e., those FLEX Traders who have
established the necessary systems connectivity to
receive RFRs). Thus, such election to receive RFRs
would not be on a case-by-case basis.
25 As with AIM Auctions, the Exchange is
proposing that the minimum RFR exposure period
for SAM be three (3) seconds, which is also
consistent with the existing minimum exposure
period for FLEX Option crossing pursuant to the
existing FLEX crossing procedures. See Rule
24B.5(b)(3)(iii). By comparison, for non-FLEX
Options, the minimum RFR exposure period for
non-FLEX Options is one (1) second. See, e.g., Rule
6.45A.02, and Rule 6.74B(b)(1)(C).
26 See note 10, supra.
27 This early termination provision for FLEX
Options is consistent with the operation of AIM and
SAM for non-FLEX Options. As noted above, for
non-FLEX Options, additional early termination
provisions apply that would not be applicable to
FLEX Options. See note 11, supra.
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against other bids (offers) if there is
sufficient size at the bid (offer) to
execute the entire size of the Agency
Order (size would be measured
considering RFR responses and resting
FLEX Orders, to the extent the Exchange
has determined to make available an
electronic book)). If there is not
sufficient size to execute the entire
Agency Order, the proposed cross
would not be executed and both the
Agency Order and second/solicited
order would be cancelled. Additionally,
the proposed cross would not be
executed and both the Agency Order
and second/solicited order would be
cancelled if the execution price would
be inferior to the BBO.
In the event the Agency Order is
executed at an improved price(s) or at
the proposed execution price against
RFR responses and FLEX Orders, the
allocation at a given price would be as
follows: (i) RFR responses and FLEX
Orders for the account of public
customers and non-Trading Permit
Holder broker-dealers will participate in
the execution based on time priority; (ii)
any RFR responses and FLEX Orders
that are subject to a 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); 28 then
(iii) all other RFR responses and FLEX
Orders will participate in the execution
based on time priority.
Lastly, the Exchange proposes certain
interpretation and policy provisions
applicable to the SAM Auction
mechanism. First, the Exchange is also
proposing to apply the SAM Auction
mechanism to complex orders. As
proposed, the Exchange may determine
on a class-by-class basis to make the
SAM Auction available for complex
orders. In such classes, complex orders
may be executed through the SAM
Auction at a net debit or net credit price
provided the SAM Auction eligibility
requirements are satisfied and the
Agency Order is eligible for the SAM
Auction considering its complex order
type, order origin code (i.e., non-brokerdealer public customer, broker-dealers
that are not Market-Makers or specialists
on an options exchange, and/or MarketMakers or specialists on an options
exchange), class, and marketability as
determined by the Exchange. Complex
orders will only be eligible to trade with
other complex orders through the SAM
Auction. To the extent the Exchange
determines to make an electronic book
available for resting FLEX Orders, there
will be no ‘‘legging’’ of complex orders
with FLEX Orders that may be
28 See
note 15, supra.
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represented in the individual series legs
represented in the electronic book.29
Order allocation shall be the same as
would be applicable for simple orders.
In addition, the individual series legs of
a complex order would not trade
through equivalent bids (offers) in the
individual series legs represented in the
electronic book and at least one leg must
better the corresponding bid (offer) of
public customers and non-Trading
Permit Holder broker-dealers in the
electronic book. Second, the proposed
rule would also require Trading Permit
Holders to deliver to customers a
written document describing the terms
and conditions of the SAM Auction
mechanism prior to executing Agency
Orders using the SAM Auction
mechanism. Such written document
would be required to be in a form
approved by the Exchange.30 Third, the
proposed rule would also specify that
Trading Permit Holders may not use the
SAM Auction mechanism to circumvent
the Exchange’s rules limiting principal
order transactions.31 Additionally, the
Exchange notes that for purposes of
paragraph (e) to Rule 6.9, which
paragraph prohibits anticipatory
hedging activities prior to the entry of
an order on the Exchange, the terms of
an order would be considered
‘‘disclosed’’ to the trading crowd on the
Exchange when the order is entered into
the SAM Auction mechanism. Finally,
fourth, any determinations made by the
Exchange pursuant to the proposed
SAM Auction rule, such as eligible
classes, order size parameters and the
minimum price increment, would be
communicated in a circular.
Section 11(a)(1) of the Act
Finally, the Exchange believes the
proposed AIM and SAM Auctions for
FLEX Options are consistent with
Section 11(a)(1) of the Act 32 and the
rules promulgated thereunder.
Generally, Section 11(a)(1) of the Act
restricts any member of a national
securities exchange from effecting any
transaction on such exchange for (i) the
member’s own account, (ii) the account
of a person associated with the member,
or (iii) an account over which the
29 See
note 21, supra.
provision is the same as a provision in the
SAM rule for non-FLEX Options. See Rule 6.74B.02.
The Exchange proposes that the same notification
used for Rule 6.74B may be used to satisfy the
notification required under proposed Rule
24B.5B.02.
31 See Rule 24B.5.
32 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.
30 This
PO 00000
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Sfmt 4703
member or a person associated with the
member exercises discretion, unless a
specific exemption is available.
Examples of common exemptions
include the exemption for transactions
by broker dealers acting in the capacity
of a market maker under Section
11(a)(1)(A),33 the ‘‘G’’ exemption for
yielding priority to non-members under
Section 11(a)(1)(G) of the Act and Rule
11a1–1(T) thereunder,34 and ‘‘Effect vs.
Execute’’ exemption under Rule 11a2–
2(T) under the Act.35 In this regard, we
note that, Trading Permit Holders
effecting transactions through the AIM
and SAM Auctions and relying on the
G exemption would yield priority to any
public customer and non-TPH brokerdealer interest pursuant to the
applicable allocation algorithms.
The Exchange also believes the
proposed AIM and SAM Auctions meet
the requirements of the Effect vs.
Execution exemption under Rule 11A2–
2(T). Rule 11a2–2(T) permits an
exchange member, subject to certain
conditions, to effect transactions for
covered accounts by arranging for an
unaffiliated member to execute the
transactions directly on the exchange
floor. To comply with the rule’s
conditions, a member (i) must transmit
the order from off the exchange floor,
(ii) may not participate in the execution
of the transaction once it has been
transmitted to the member performing
the execution,36 (iii) may not be
affiliated with the executing member,
and (iv) with respect to an account over
which the member or an associated
person has investment discretion,
neither the member nor its associated
person may retain any compensation in
connection with effecting the
transaction without express written
consent from the person authorized to
transact business for the account in
accordance with the rule.
Off-Floor Transmission: The
requirement in Rule 11a2–2(T) for
orders to be transmitted from off the
exchange floor reflects Congress’ intent
that Section 11(a) should operate to put
member money managers and nonmember money managers on the same
footing for purposes of their transactions
for covered accounts. In considering
other automated systems, the
Commission and the staff have stated
that the off-floor transmission
requirement would be met if a covered
account order is transmitted from off the
33 15
34 15
U.S.C. 78k(a)(1)(A).
U.S.C. 78k(a)(1)(G) and 17 CFR 240.11a1–
1(T).
35 17 CFR 240.11a2–2(T).
36 The member may, however, participate in
clearing and settling the transaction.
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floor directly to the exchange floor by
electronic means.37 To the extent that
orders and responses to AIM and SAM
Auctions will be electronically
submitted directly to the FLEX System
from remote terminals, the Exchange
believes the orders and responses
transmitted for execution through AIM
and SAM Auctions satisfy the off-floor
transmission requirement.
Non-Participation in Order Execution
and Execution Through Unaffiliated
Member: Rule 11a2–2(T) further
provides that the exchange member and
its associated persons may not
participate in the execution of a
transaction once the order has been
transmitted to the exchange floor. This
requirement was included to prevent
members with their own brokers on the
exchange floor from using those persons
to influence or guide their orders’
execution. This requirement does not
preclude members from canceling or
modifying orders, or from modifying the
instructions for executing orders, after
they have been transmitted to the floor.
Such cancellations or modifications,
however, also must be transmitted from
off the exchange floor.38
In a release discussing both the
COMEX and the PACE systems, the
Commission noted that a member
relinquishes any ability to influence or
guide the execution of its order at the
time the order is transmitted into the
systems and, although the execution is
automatic, the design of these systems
insures that members do not posses any
special or unique trading advantages in
handling orders after transmission to the
trading floor.39 Similarly, orders and
responses submitted to AIM and SAM
Auctions will enter the FLEX System
and be executed based on an established
matching algorithm. To the extent that
37 See, e.g., Securities Exchange Act Release Nos.
29237 (May 31, 1991) (regarding NYSE’s Off-Hours
Trading Facility); Securities Exchange Act Release
No. 15533 (January 29, 1979) (regarding the Amex
Post Execution Reporting System, the Amex
Switching System, the Intermarket Trading System,
the Multiple Dealer Trading Facility of the
Cincinnati Stock Exchange, the PCX’s
Communications and Execution System, and the
Phlx’s Automated Communications and Execution
System) and 14563 (March 14, 1978) (regarding the
NYSE’s Designated Order Turnaround System); see
also Letter from Larry E. Bergmann, Senior
Associate Director, Division of Market Regulation,
SEC, to Edith Hallahan, Associate General Counsel,
Phlx (March 24, 1999) (regarding Phlx’s VWAP
Trading System); Letter from Catherine McGuire,
Chief Counsel, Division of Market Regulation, SEC,
to David E. Rosedahl, PCX (November 30, 1998)
(regarding OptiMark); Letter from Brandon Becker,
Director, Division of Market Regulation, SEC, to
George T. Simon, Foley & Lardner (November 30,
1994) (regarding Chicago Match).
38 Securities Exchange Act Release No. 14563
(March 14, 1978).
39 Securities Exchange Act Release No. 15533
(January 29, 1979) at n. 25.
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users of the AIM and SAM Auctions
will relinquish control of their orders
and responses upon transmission to the
FLEX System, and will not be able to
influence or guide the execution of their
orders, the Exchange believes that this
requirement is met with respect to
orders and responses that are executed
automatically through the AIM and
SAM Auctions.
Furthermore, although Rule 11a2–2(T)
contemplates having an order executed
by an exchange member who is
unaffiliated with the member initiating
the order, the Commission has
recognized that this requirement is not
applicable when automated exchange
facilities are used. For example, in
considering the operation of COMEX
and PACE, the Commission noted that
while there is no independent executing
exchange member, the execution of an
order is automatic once it has been
transmitted into the systems. Because
the design of these systems ensures that
members do not possess any special or
unique trading advantages in handling
their orders after transmitting them to
the exchange floors, the Commission
has stated that executions obtained
through these systems satisfy the
independent execution requirement of
Rule 11a2–2(T).40 Similarly, to the
extent that the design of the AIM and
SAM Auctions ensure that members do
not possess any special or unique
trading advantages in the handling of
their orders after transmission, a
member effecting a transaction through
the AIM and SAM Auctions satisfies the
requirement for execution through an
unaffiliated member.
Non-Retention of Compensation for
Discretionary Accounts: The Exchange
notes that members who intend to rely
on Rule 11a2–2(T) in connection with
transactions using the AIM and SAM
Auctions must comply with the
requirements of Section (a)(2)(iv) of the
rule.
2. Statutory Basis
The proposed rule change is
consistent with Section 6(b) of the
Act,41 in general, and furthers the
objectives of Section 6(b)(5) of the Act,42
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
40 Id.
41 15
42 15
PO 00000
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
Frm 00052
Fmt 4703
Sfmt 4703
311
Holders and investors with additional
tools to trade customized options in an
exchange environment 43 and greater
opportunities to manage risk. The
Exchange believes that making modified
versions of the AIM and SAM
mechanisms available for FLEX Options
should serve to further those objectives
and encourage use of FLEX Options by
enhancing the existing processes for
auctioning FLEX Orders, which should
make the system more efficient and
effective for the FLEX Option investor
community.
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
43 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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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:
SECURITIES AND EXCHANGE
COMMISSION
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–2011–123 on the
subject line.
Self-Regulatory Organizations;
Chicago Stock Exchange, Inc.; Notice
of Filing of Proposed Rule Change
Regarding Suspension of a
Participant’s Trading Privileges on the
Exchange
wreier-aviles on DSK3TPTVN1PROD with NOTICES
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–2011–123. 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–2011–123 and
should be submitted on or before
January 25, 2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.44
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2011–33713 Filed 1–3–12; 8:45 am]
[Release No. 34–66061; File No. SR–CHX–
2011–34]
December 28, 2011.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that, on December
16, 2011, the Chicago Stock Exchange,
Inc. (‘‘CHX’’ or the ‘‘Exchange’’) 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
CHX proposes to add Interpretation
and Policy .01 to Article 13, Rule 2
(Emergency Suspension) regarding the
suspension of a Participant’s trading
privileges on the Exchange. The text of
this proposed rule change is available
on the Exchange’s Web site at
(www.chx.com) and in the
Commission’s Public Reference Room.
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
CHX included statements concerning
the purpose of and basis for the
proposed rule changes and discussed
any comments it received regarding the
proposal. The text of these statements
may be examined at the places specified
in Item IV below. The CHX has prepared
summaries, set forth in sections A, B
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to add
Interpretation and Policy .01 to Article
13, Rule 2 (Emergency Suspension)
thereunder (‘‘Rule 2’’) regarding the
BILLING CODE P
1 15
44 17
CFR 200.30–3(a)(12).
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2 17
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
Frm 00053
Fmt 4703
Sfmt 4703
suspension of a Participant’s trading
privileges on the Exchange. Currently,
this Rule authorizes the Exchange’s
Chief Regulatory Officer (‘‘CRO’’) to
suspend a Participant’s membership
with the Exchange or place other
limitations on its activities if various
circumstances occur, such as
insolvency, failure to perform its
contracts or obligations, expulsion or
suspension by another self-regulatory
organization or where it reasonably
appears that the Participant is violating
and will continue to violate any
provision of the Rules of the Exchange
or the federal securities laws (or rules
promulgated thereunder). The Exchange
proposes to permit any Officer of the
Exchange designated by the CRO to
suspend the trading privileges of a
Participant on the Exchange’s facilities
pursuant to the provisions of Rule 2 if
a Qualified Clearing Agency refuses to
act to clear and settle the trades of that
Participant. The CRO must approve any
such suspensions within two (2) days of
the action. If the Chief Regulatory
Officer does not approve the action
taken, the suspension shall be
immediately lifted as of the time of his
or her decision or after the expiration of
two days, whichever is earlier.
Suspensions pursuant to these
provisions, including the appeal thereof,
would otherwise be governed by the
provisions of Article 13, Rule 2.
The recent actions taken with respect
to MF Global, Inc. (‘‘MF Global’’)
illustrate the need for a limited
expansion of the emergency suspension
authority of Rule 2 in the situation
where the Qualified Clearing Agency is
considering whether to continue to act
for a Participant in the clearance and
settlement of trades.3 On October 31,
2011, there were public news reports
that MF Global was in financial
difficulties and might be insolvent. On
that day, NSCC stated that it would
continue to honor the transactions of
MF Global presented to it for clearance
and settlement. After the close of
trading that day, however, NSCC stated
that it would cease to act for MF Global
and the Exchange’s CRO suspended the
trading privileges of the firm pursuant
to Article 13, Rule 2 effective November
1, 2011.4
3 Currently, there is only one Qualified Clearing
Agency, the National Securities Clearing Corp.
(‘‘NSCC’’), for cash equities securities.
4 See CHX Market Regulation Department
Information Memorandum MR–11–19 (Nov. 1,
2011), available on CHX public Web site, https://
www.chx.com. See also NSCC Notice A#7314, Re:
MF Global, Inc. (Nov. 1, 2011), available on its
public Web site at https://www.dtcc.com/downloads/
legal/imp_notices/2011/nscc/a7314.pdf.
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]]>Agencies
[Federal Register Volume 77, Number 2 (Wednesday, January 4, 2012)]
[Notices]
[Pages 306-312]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-33713]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66052; File No. SR-CBOE-2011-123]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of a Proposed Rule Change Related to
FLEX Options
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 20, 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
[[Page 307]]
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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Self-Regulatory Organization's Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is proposing to adopt certain rules pertaining to the
electronic auction trading of Flexible Exchange Options (``FLEX
Options'') on the Exchange's FLEX Hybrid Trading System platform.\3\
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.
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\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
(referred to as the ``FLEX System'' or the ``System'') are contained
in Chapter XXIVB.
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II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of 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 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 Rules 6.74A and 6.74B, respectively--available for FLEX Options.
The FLEX versions of the AIM and SAM mechanisms will operate
substantially similar to the AIM and SAM mechanisms for non-FLEX
Options. Significant distinctions are described below.\4\
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\4\ These distinctions are noted as compared to the existing AIM
and SAM auction processes for non-FLEX options under Rules 6.74A and
6.74B, respectively. The Exchange notes that it currently has two
separate rule change filings pending that would make amendments to
Rule 6.74A (AIM). See SR-CBOE-2011-116 and SR-CBOE-2011-117.
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Automated Improvement Mechanism
The Exchange is proposing to establish an AIM mechanism for FLEX
Options, which mechanism will electronically auction certain orders for
price improvement. Under the AIM process, a FLEX Trader \5\ (referred
to as an ``Initiating Trading Permit Holder'' or ``Initiating TPH'')
that represents agency orders may submit an order it represents as
agent (an ``Agency Order'') along with a second order (a principal
order and/or solicited order(s) for the same amount as the Agency
Order) \6\ into the AIM Auction where other FLEX Trader participants
could compete with the Initiating TPH's second order to execute against
the Agency Order.
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\5\ 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(l).
\6\ Any solicited orders submitted by the Initiating TPH to
trade against the Agency Order may not be for the account of a FLEX
Market-Maker assigned to the option class. See proposed Rule
24B.5A.04.
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To be eligible, the Agency Order must be in a FLEX class designated
as eligible for AIM Auctions and within the designated AIM Auction
order eligibility size parameters. Such classes and size parameters
will be determined by the Exchange and announced via circular to FLEX
Traders. When submitting an Agency Order, an Initiating TPH must mark
the Agency Order for AIM Auction processing and must also submit a
contra-side second order for the same size as the Agency Order. This
second order guarantees that the Agency Order will receive an execution
(i.e., it acts as a stop). In connection with the stop of the Agency
Order, the Initiating TPH must stop the entire Agency Order with the
second order at the better of the best bid or offer (``BBO'') or the
Agency Order's limit price.\7\ The Initiating TPH may enter the second
order in one of two formats: (i) A specified single price at which it
seeks to cross the Agency Order with the second order (a ``single-
priced submission''), or (ii) a non-price specific commitment for the
second order to automatically match the price and size of all auction
responses that are received during the auction (an ``auto-match''), in
which case the Agency Order will be stopped at the better of the BBO or
the Agency Order's limit price. When using the auto-match feature, the
Initiating TPH would have no control over the ultimate match price.
Once the Initiating TPH has submitted an Agency Order for AIM
processing, such submission cannot be cancelled by the Initiating TPH.
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\7\ By comparison, the AIM Auction for non-FLEX Options
currently provides for a stop of Agency Orders for 50 contracts or
more at the better of the national best bid or offer (``NBBO'') or
the Agency Order's limit price (if the order is a limit order), and
a stop of Agency Orders for less than 50 contracts at the NBBO
improved by one minimum price increment (which is determined by the
Exchange and may not be smaller than $0.01) or the Agency Order's
limit price (if the order is a limit). See Rule 6.74A(a)(2)--(3).
The FLEX provision differs in that orders of any size would be
treated the same for purposes of the stop (i.e., there would be no
small order provision), the stop is based on the BBO (FLEX options
are generally not multiply-listed and are not subject to a
consolidated quotation reporting program), and the FLEX AIM Auction
will only process Agency Orders with limit prices (no market
orders).
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Upon receipt of an Agency Order (and second order), the Exchange
would commence the AIM Auction by issuing a request for responses
(``RFR''), detailing the side and size of the Agency Order.\8\ The
duration of the RFR response period (i.e., the auction period) would be
established by the Exchange on a class-by-class basis and shall not be
less than three (3) seconds.\9\ During that period, RFR responses may
be submitted by FLEX Traders. These responses must specify price and
size and may not cross the Exchange's BBO on the opposite side of the
market. All RFR responses are ``blind,'' that is they are not visible
to any other participants.\10\ CBOE believes this aspect of the AIM
Auction will encourage more aggressive quoting and superior price
improvement. RFR responses may be modified or cancelled so long as they
are modified or
[[Page 308]]
cancelled before the conclusion of the RFR response period. Lastly, the
minimum price increment for RFR responses and for an Initiating TPH's
single price submission shall be set by the Exchange at no less than
one cent.
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\8\ Each RFR would be sent to those FLEX Traders electing to
receive RFRs (i.e., those FLEX Traders who have established the
necessary systems connectivity to receive RFRs). Thus, such election
to receive RFRs would not be on a case-by-case basis.
\9\ The Exchange is proposing that the minimum RFR exposure
period for AIM be three (3) seconds, which is consistent with the
existing minimum exposure period for FLEX Option crossing pursuant
to the existing FLEX crossing procedures. See Rule 24B.5(b)(3)(iii).
By comparison, for non-FLEX Options, the minimum RFR exposure period
for non-FLEX Options is one (1) second. See, e.g., Rule 6.45A.01 and
.02, and Rule 6.74A(b)(1)(C).
\10\ RFR responses will not be disseminated via the Options
Price Reporting Authority (``OPRA''). This is consistent with the
operation of AIM (and SAM) for non-FLEX Options. See Rules
6.74A(b)(1)(F) and 6.74B(b)(1)(D). In addition, it is consistent
with the operation of FLEX generally. In that regard, the Exchange
notes that the Exchange currently disseminates via OPRA information
regarding executed FLEX transactions. However, the Exchange
currently does not disseminate via OPRA information respecting
pending electronic and open outcry RFQs, or information on resting
orders in the FLEX electronic book.
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Normally, an AIM Auction ends at the conclusion of the RFR response
period (which will be no less than 3 seconds). However, the proposal
provides that the AIM Auction would end prior to the conclusion of the
RFR response period any time an RFR response matches the BBO on the
opposite side of the market from the RFR responses.\11\
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\11\ This early termination provision for FLEX Options is
consistent with the operation of AIM (and SAM) for non-FLEX Options.
See Rules 6.74A(b)(2)(D) and 6.74B(b)(2). The Exchange notes that,
for non-FLEX Options, additional early termination provisions apply
that would not be applicable to FLEX Options. In particular, for
non-FLEX Options an auction may terminate early: (i) Upon receipt by
the Hybrid System of an unrelated order (in the same series as the
Agency Order) that is marketable against either Exchange's
disseminated quote (when such quote is the NBBO) or the RFR
responses; (ii) upon receipt by the Hybrid System of an unrelated
limit order (in the same series as the Agency Order and on the
opposite side of the market as the Agency Order) that improves the
RFR responses; (iii) pursuant to a pilot program, any time there is
a quote lock on the Exchange pursuant to Rule 6.45A(d) and .06.
Provisions (i) and (ii) above would not be applicable to FLEX
Options because unrelated FLEX Orders may not be submitted to the
electronic book for the duration of an AIM Auction. See proposed
Rule 24B.5A(b). Provision (iii) above (and related pilot program
data reporting requirements) would not be applicable to FLEX Options
because there is no quote lock provision for FLEX Options that is
similar to the quote lock provision applicable to non-FLEX Options
under Rule 6.45A(d).
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At the conclusion of the AIM Auction, the Agency Order would be
allocated at the best price(s) and contra-side interest will be ranked
and matched based on price-time priority,\12\ subject to the following:
First, such best prices may include non-AIM Auction FLEX Orders (to the
extent the Exchange has determined to make available an electronic
book).\13\ Second, public customers and non-Trading Permit Holder
broker-dealers RFR responses and FLEX Orders would have priority.\14\
Third, no FLEX Appointed Market-Maker participation entitlement \15\
would apply with respect to the AIM Auction. Fourth, if the best price
equals the Initiating TPH's single-price submission, the Initiating
TPH's single-price submission shall be allocated the greater of one
contract or a certain percentage of the order, which percentage would
be determined by the Exchange and may not be larger than 40%. However,
if only one other FLEX Trader matches the Initiating TPH's single price
submission, then the Initiating TPH may be allocated up to 50% of the
order. Fifth, if the Initiating TPH selected the auto-match option of
the AIM Auction, the Initiating TPH shall be allocated its full size at
each price point until a price point is reached where the balance of
the order can be fully executed. At such price point, the Initiating
TPH shall be allocated the greater of one contract or a certain
percentage of the remainder of the Agency Order, which percentage would
be determined by the Exchange and may not be larger than 40%. Sixth,
any remaining RFR responses and FLEX Orders will be allocated based on
time priority.\16\ The Initiating TPH would not participate on any such
balance unless the Agency Order would otherwise go unfilled. Finally,
seventh, if the final AIM Auction price locks a public customer or non-
Trading Permit Holder broker-dealer order in the electronic book on the
same side of the market as the Agency Order, then, unless there is
sufficient size in the AIM Auction responses to execute both the Agency
Order and the booked public customer or non-Trading Permit Holder
broker-dealer order (in which case they will both execute at the final
AIM Auction price), the Agency Order will execute against RFR responses
at one minimum RFR response increment worse than the final AIM Auction
price against the AIM Auction participants that submitted the final AIM
Auction price and any balance shall trade against the public customer
or non-Trading Permit Holder broker-dealer order in the book at such
order's limit price.\17\
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\12\ The FLEX version of the AIM Auction would only utilize a
price-time priority allocation algorithm, subject to the conditions
noted above. By comparison, the allocation algorithm for the non-
FLEX version of the AIM Auction is the algorithm that is in effect
for the option class, subject to certain conditions. See Rule
6.74A(b)(3).
\13\ 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). The term ``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. See Rule 24B.1(j).
\14\ For the non-FLEX Option version of AIM, only public
customers have priority. See Rule 6.74A(b)(3)(B). The Exchange is
proposing to provide both public customers and non-Trading Permit
Holder broker-dealers with the same priority for the FLEX AIM
Auction for simplicity to be consistent with how other FLEX
allocation algorithms currently operate. See, e.g., Rule
24B.5(a)(1)(iii)(C) and (D). In the future, the Exchange may
determine to modify the FLEX Option version of AIM so that only
public customers have priority. Such a modification would be the
subject of a separate rule filing.
\15\ 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).
\16\ For the non-FLEX Option version of AIM, the allocation is
based on the algorithm in effect for the option class. See note 12,
supra.
\17\ For the non-FLEX Option version of AIM, this book locking
provision is only applicable to public customer orders resting in
the book. The Exchange is proposing to provide both public customers
and non-Trading Permit Holder broker-dealers with the same priority
for the FLEX AIM Auction for simplicity to be consistent with how
other FLEX allocation algorithms currently operate. See note 12,
supra. The Exchange notes that, for non-FLEX Options, additional
conditions apply that will not be applicable to FLEX Options. Those
conditions relate to scenarios involving the following: (i)
Unrelated orders that cause early terminations of AIM Auctions; and
(ii) auctions that do not result in price improvement over the
Exchange's disseminated price at the time the Auction began (in
which case resting unchanged quotes or orders that were disseminated
at the best price before the auction began have priority after any
public customer order priority and the Initiating TPH's priority
(40%) have been satisfied; any unexecuted balance on the Agency
Order is allocated to RFR responses provided those RFR responses
will be capped to the size of the unexecuted balance and the
Initiating TPH may not participate on any such balance unless the
Agency Order would otherwise go unfilled). See Rule 6.74A(b)(3)(D),
(E) and (H). Provision (i) above would not be applicable to FLEX
Options because unrelated FLEX Orders may not be submitted to the
electronic book for the duration of an AIM Auction. See proposed
Rule 24B.5A(b). Provision (ii) above is not necessary for FLEX
Options because FLEX Options will utilize a price-time allocation
algorithm (and, as a result, resting FLEX Orders that are
disseminated at the best price before an AIM Auction begins will
have priority after public customer and non-Trading Permit Holder
broker-dealer priority and the Initiating TPH's priority (40%) have
been satisfied by virtue of the resting FLEX Orders having time
priority).
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Lastly, the Exchange proposes certain interpretation and policy
provisions applicable to the AIM Auction mechanism. First, the AIM
Auction may only be used where there is a genuine intention to execute
a bona fide transaction. Second, it would be deemed conduct
inconsistent with just and equitable principles of trade and a
violation of CBOE Rule 4.1 to engage in a patter [sic] of conduct where
the Initiating TPH breaks-up an Agency Order into separate orders for
two (2) or few contracts for the purpose of gaining a higher allocation
percentage than the Initiating TPH would have otherwise received in
accordance with the allocation procedures.\18\ Third, initially,
[[Page 309]]
and for at least a pilot period expiring on July 18, 2012, there will
be no minimum size requirement for orders to be eligible for the AIM
Auction. During this Pilot Period, the Exchange will submit certain
data, periodically as required by the Commission, to provide supporting
evidence that, among other things, there is a meaningful competition
for all size orders and that there is an active and liquid market
functioning on the Exchange outside of the AIM Auction. Any data which
is submitted to the Commission will be provided on a confidential
basis.\19\ Fourth, any solicited orders submitted by the Initiating TPH
to trade against the Agency Order may not be for the account of a FLEX
Market-Maker assigned to the option class.\20\ Fifth, the Exchange may
determine on a class-by-class basis to make the AIM Auction available
for complex orders. In such classes, complex orders may be executed
through the AIM Auction at a net debit or net credit price provided the
AIM Auction eligibility requirements are satisfied and the Agency Order
is eligible for the AIM Auction considering its complex order type,
order origin code (i.e., non-broker-dealer public customer, broker-
dealers that are not Market-Makers or specialists on an options
exchange, and/or Market-Makers or specialists on an options exchange),
class, and marketability as determined by the Exchange. Complex orders
will only be eligible to trade with other complex orders through the
AIM Auction. To the extent the Exchange determines to make an
electronic book available for resting FLEX Orders, there will be no
``legging'' of complex orders with FLEX Orders that may be represented
in the individual series legs represented in the electronic book.\21\
Order allocation shall be the same as would be applicable for simple
orders. In addition, the individual series legs of a complex order
would not trade through equivalent bids (offers) in the individual
series legs represented in the electronic book and at least one leg
must better the corresponding bid (offer) of public customers and non-
Trading Permit Holder broker-dealers in the electronic book. Sixth, any
determinations made by the Exchange pursuant to the proposed rule, such
as eligible classes, order size parameters and the minimum price
increment, would be communicated in a circular.\22\
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\18\ The non-FLEX version of AIM contains the same prohibition.
In addition, the non-FLEX version of AIM provides that a pattern or
practice of submitting unrelated orders that cause an auction to
conclude before the end of the RFR period will be deemed conduct
inconsistent with just and equitable principles of trade and a
violation of Rule 4.1. See Rule 6.74A.02. This ``unrelated orders''
provision would not be applicable to FLEX Options because unrelated
FLEX Orders may not be submitted to the electronic book for the
duration of an AIM Auction. See proposed Rule 24B.5A(b).
\19\ This proposed pilot is modeled after an existing pilot for
non-FLEX Options. The July 18, 2012 date is proposed so that the
FLEX pilot will coincide with an existing pilot for non-FLEX
Options. See Rule 6.74A.03.
\20\ See note 6, supra.
\21\ By comparison, for complex orders in non-FLEX Options
classes, the AIM (and SAM) mechanisms permit complex orders to trade
with the individuals series legs in the electronic book. See Rules
6.74A.07 and 6.74B.01.
\22\ The non-FLEX Option version of AIM also contains a
provision for the automated customer-to-customer immediate crosses.
See Rule 6.74A.08. The Exchange does not intend to make this
automated crossing functionality available at this time for FLEX
Options. If in the future the Exchange would determine to do so, it
would be the subject of a separate rule filing.
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Solicitation Auction Mechanism
The Exchange is also proposing to establish a SAM mechanism for
FLEX Options, which is another mechanism that will electronically
auction certain orders for price improvement. Under the SAM process, an
Initiating TPH that represents agency orders may submit an Agency Order
along with a second order (a solicited order(s) for the same amount as
the Agency Order) \23\ into the SAM Auction where other FLEX Trader
participants could compete with the Initiating TPH's second order to
execute against the Agency Order. As explained in more detail below,
the SAM mechanism is to be used for larger-sized Agency Orders that are
to be executed against solicited orders.
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\23\ Any solicited orders submitted by the Initiating TPH to
trade against the Agency Order may not be for the account of a FLEX
Market-Maker assigned to the option class. See proposed Rule
24B.5B.03.
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To be eligible, the Agency Order must be in a FLEX class designated
as eligible for SAM Auctions and within the designated SAM Auction
order eligibility size parameters determined by the Exchange (however,
the eligible order size would not be less than 500 contracts). Such
classes and size parameters will be determined by the Exchange and
announced via circular to FLEX Traders. As explained in more detail
below, each order entered into the SAM Auction would also be designated
in the System as all-or-none (i.e., an order will be executed in its
entirety or not at all). In addition, the second order may only be
entered in a single-priced submission format (i.e., unlike AIM
Auctions, there is no ``auto-match'' feature for SAM Auctions). Once
the Initiating TPH has submitted an Agency Order for SAM processing,
such submission cannot be cancelled by the Initiating TPH.
Upon receipt of an Agency Order (and second order), the Exchange
would commence the SAM Auction by issuing an RFR, detailing the price
and size [sic] the Agency Order.\24\ The duration of the RFR response
period (i.e., the auction period) would be established by the Exchange
on a class-by-class basis and shall not be less than three (3)
seconds.\25\ During that period, RFR responses may be submitted by FLEX
Traders. These responses must specify price and size. Responses may not
be entered for the account of an options Market-Maker from another
options exchange. As with AIM Auctions, for SAM Auctions all RFR
responses are ``blind.'' \26\ CBOE believes this aspect of the SAM
Auction will encourage more aggressive quoting and superior price
improvement. RFR responses may be modified or cancelled so long as they
are modified or cancelled before the conclusion of the RFR response
period. Lastly, the minimum price increment for RFR responses and for
an Initiating TPH's single price submission shall be set by the
Exchange at no less than one cent.
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\24\ As with AIM Auctions, for SAM Auctions each RFR would be
sent to those FLEX Traders electing to receive RFRs (i.e., those
FLEX Traders who have established the necessary systems connectivity
to receive RFRs). Thus, such election to receive RFRs would not be
on a case-by-case basis.
\25\ As with AIM Auctions, the Exchange is proposing that the
minimum RFR exposure period for SAM be three (3) seconds, which is
also consistent with the existing minimum exposure period for FLEX
Option crossing pursuant to the existing FLEX crossing procedures.
See Rule 24B.5(b)(3)(iii). By comparison, for non-FLEX Options, the
minimum RFR exposure period for non-FLEX Options is one (1) second.
See, e.g., Rule 6.45A.02, and Rule 6.74B(b)(1)(C).
\26\ See note 10, supra.
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Normally, a SAM Auction ends at the conclusion of the RFR response
period (which will be no less than 3 seconds). However, as with AIM
Auctions, the proposal provides that the SAM Auction would end prior to
the conclusion of the RFR response period any time an RFR response
matches the BBO on the opposite side of the market from the RFR
responses.\27\
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\27\ This early termination provision for FLEX Options is
consistent with the operation of AIM and SAM for non-FLEX Options.
As noted above, for non-FLEX Options, additional early termination
provisions apply that would not be applicable to FLEX Options. See
note 11, supra.
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At the conclusion of the SAM Auction, the Agency Order would be
executed against the second/solicited order unless there is sufficient
size to execute the entire Agency Order at a price (or prices) that
improves the proposed crossing price. In the case where there is one or
more public customers or non-Trading Permit Holder broker-dealers at
the proposed execution price on the opposite side of the Agency Order,
the second/solicited order would be cancelled and the Agency Order
would be executed
[[Page 310]]
against other bids (offers) if there is sufficient size at the bid
(offer) to execute the entire size of the Agency Order (size would be
measured considering RFR responses and resting FLEX Orders, to the
extent the Exchange has determined to make available an electronic
book)). If there is not sufficient size to execute the entire Agency
Order, the proposed cross would not be executed and both the Agency
Order and second/solicited order would be cancelled. Additionally, the
proposed cross would not be executed and both the Agency Order and
second/solicited order would be cancelled if the execution price would
be inferior to the BBO.
In the event the Agency Order is executed at an improved price(s)
or at the proposed execution price against RFR responses and FLEX
Orders, the allocation at a given price would be as follows: (i) RFR
responses and FLEX Orders for the account of public customers and non-
Trading Permit Holder broker-dealers will participate in the execution
based on time priority; (ii) any RFR responses and FLEX Orders that are
subject to a 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); \28\ then (iii) all other
RFR responses and FLEX Orders will participate in the execution based
on time priority.
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\28\ See note 15, supra.
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Lastly, the Exchange proposes certain interpretation and policy
provisions applicable to the SAM Auction mechanism. First, the Exchange
is also proposing to apply the SAM Auction mechanism to complex orders.
As proposed, the Exchange may determine on a class-by-class basis to
make the SAM Auction available for complex orders. In such classes,
complex orders may be executed through the SAM Auction at a net debit
or net credit price provided the SAM Auction eligibility requirements
are satisfied and the Agency Order is eligible for the SAM Auction
considering its complex order type, order origin code (i.e., non-
broker-dealer public customer, broker-dealers that are not Market-
Makers or specialists on an options exchange, and/or Market-Makers or
specialists on an options exchange), class, and marketability as
determined by the Exchange. Complex orders will only be eligible to
trade with other complex orders through the SAM Auction. To the extent
the Exchange determines to make an electronic book available for
resting FLEX Orders, there will be no ``legging'' of complex orders
with FLEX Orders that may be represented in the individual series legs
represented in the electronic book.\29\ Order allocation shall be the
same as would be applicable for simple orders. In addition, the
individual series legs of a complex order would not trade through
equivalent bids (offers) in the individual series legs represented in
the electronic book and at least one leg must better the corresponding
bid (offer) of public customers and non-Trading Permit Holder broker-
dealers in the electronic book. Second, the proposed rule would also
require Trading Permit Holders to deliver to customers a written
document describing the terms and conditions of the SAM Auction
mechanism prior to executing Agency Orders using the SAM Auction
mechanism. Such written document would be required to be in a form
approved by the Exchange.\30\ Third, the proposed rule would also
specify that Trading Permit Holders may not use the SAM Auction
mechanism to circumvent the Exchange's rules limiting principal order
transactions.\31\ Additionally, the Exchange notes that for purposes of
paragraph (e) to Rule 6.9, which paragraph prohibits anticipatory
hedging activities prior to the entry of an order on the Exchange, the
terms of an order would be considered ``disclosed'' to the trading
crowd on the Exchange when the order is entered into the SAM Auction
mechanism. Finally, fourth, any determinations made by the Exchange
pursuant to the proposed SAM Auction rule, such as eligible classes,
order size parameters and the minimum price increment, would be
communicated in a circular.
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\29\ See note 21, supra.
\30\ This provision is the same as a provision in the SAM rule
for non-FLEX Options. See Rule 6.74B.02. The Exchange proposes that
the same notification used for Rule 6.74B may be used to satisfy the
notification required under proposed Rule 24B.5B.02.
\31\ See Rule 24B.5.
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Section 11(a)(1) of the Act
Finally, the Exchange believes the proposed AIM and SAM Auctions
for FLEX Options are consistent with Section 11(a)(1) of the Act \32\
and the rules promulgated thereunder. Generally, Section 11(a)(1) of
the Act restricts any member of a national securities exchange from
effecting any transaction on such exchange for (i) the member's own
account, (ii) the account of a person associated with the member, or
(iii) an account over which the member or a person associated with the
member exercises discretion, unless a specific exemption is available.
Examples of common exemptions include the exemption for transactions by
broker dealers acting in the capacity of a market maker under Section
11(a)(1)(A),\33\ the ``G'' exemption for yielding priority to non-
members under Section 11(a)(1)(G) of the Act and Rule 11a1-1(T)
thereunder,\34\ and ``Effect vs. Execute'' exemption under Rule 11a2-
2(T) under the Act.\35\ In this regard, we note that, Trading Permit
Holders effecting transactions through the AIM and SAM Auctions and
relying on the G exemption would yield priority to any public customer
and non-TPH broker-dealer interest pursuant to the applicable
allocation algorithms.
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\32\ 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.
\33\ 15 U.S.C. 78k(a)(1)(A).
\34\ 15 U.S.C. 78k(a)(1)(G) and 17 CFR 240.11a1-1(T).
\35\ 17 CFR 240.11a2-2(T).
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The Exchange also believes the proposed AIM and SAM Auctions meet
the requirements of the Effect vs. Execution exemption under Rule 11A2-
2(T). Rule 11a2-2(T) permits an exchange member, subject to certain
conditions, to effect transactions for covered accounts by arranging
for an unaffiliated member to execute the transactions directly on the
exchange floor. To comply with the rule's conditions, a member (i) must
transmit the order from off the exchange floor, (ii) may not
participate in the execution of the transaction once it has been
transmitted to the member performing the execution,\36\ (iii) may not
be affiliated with the executing member, and (iv) with respect to an
account over which the member or an associated person has investment
discretion, neither the member nor its associated person may retain any
compensation in connection with effecting the transaction without
express written consent from the person authorized to transact business
for the account in accordance with the rule.
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\36\ The member may, however, participate in clearing and
settling the transaction.
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Off-Floor Transmission: The requirement in Rule 11a2-2(T) for
orders to be transmitted from off the exchange floor reflects Congress'
intent that Section 11(a) should operate to put member money managers
and non-member money managers on the same footing for purposes of their
transactions for covered accounts. In considering other automated
systems, the Commission and the staff have stated that the off-floor
transmission requirement would be met if a covered account order is
transmitted from off the
[[Page 311]]
floor directly to the exchange floor by electronic means.\37\ To the
extent that orders and responses to AIM and SAM Auctions will be
electronically submitted directly to the FLEX System from remote
terminals, the Exchange believes the orders and responses transmitted
for execution through AIM and SAM Auctions satisfy the off-floor
transmission requirement.
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\37\ See, e.g., Securities Exchange Act Release Nos. 29237 (May
31, 1991) (regarding NYSE's Off-Hours Trading Facility); Securities
Exchange Act Release No. 15533 (January 29, 1979) (regarding the
Amex Post Execution Reporting System, the Amex Switching System, the
Intermarket Trading System, the Multiple Dealer Trading Facility of
the Cincinnati Stock Exchange, the PCX's Communications and
Execution System, and the Phlx's Automated Communications and
Execution System) and 14563 (March 14, 1978) (regarding the NYSE's
Designated Order Turnaround System); see also Letter from Larry E.
Bergmann, Senior Associate Director, Division of Market Regulation,
SEC, to Edith Hallahan, Associate General Counsel, Phlx (March 24,
1999) (regarding Phlx's VWAP Trading System); Letter from Catherine
McGuire, Chief Counsel, Division of Market Regulation, SEC, to David
E. Rosedahl, PCX (November 30, 1998) (regarding OptiMark); Letter
from Brandon Becker, Director, Division of Market Regulation, SEC,
to George T. Simon, Foley & Lardner (November 30, 1994) (regarding
Chicago Match).
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Non-Participation in Order Execution and Execution Through
Unaffiliated Member: Rule 11a2-2(T) further provides that the exchange
member and its associated persons may not participate in the execution
of a transaction once the order has been transmitted to the exchange
floor. This requirement was included to prevent members with their own
brokers on the exchange floor from using those persons to influence or
guide their orders' execution. This requirement does not preclude
members from canceling or modifying orders, or from modifying the
instructions for executing orders, after they have been transmitted to
the floor. Such cancellations or modifications, however, also must be
transmitted from off the exchange floor.\38\
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\38\ Securities Exchange Act Release No. 14563 (March 14, 1978).
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In a release discussing both the COMEX and the PACE systems, the
Commission noted that a member relinquishes any ability to influence or
guide the execution of its order at the time the order is transmitted
into the systems and, although the execution is automatic, the design
of these systems insures that members do not posses any special or
unique trading advantages in handling orders after transmission to the
trading floor.\39\ Similarly, orders and responses submitted to AIM and
SAM Auctions will enter the FLEX System and be executed based on an
established matching algorithm. To the extent that users of the AIM and
SAM Auctions will relinquish control of their orders and responses upon
transmission to the FLEX System, and will not be able to influence or
guide the execution of their orders, the Exchange believes that this
requirement is met with respect to orders and responses that are
executed automatically through the AIM and SAM Auctions.
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\39\ Securities Exchange Act Release No. 15533 (January 29,
1979) at n. 25.
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Furthermore, although Rule 11a2-2(T) contemplates having an order
executed by an exchange member who is unaffiliated with the member
initiating the order, the Commission has recognized that this
requirement is not applicable when automated exchange facilities are
used. For example, in considering the operation of COMEX and PACE, the
Commission noted that while there is no independent executing exchange
member, the execution of an order is automatic once it has been
transmitted into the systems. Because the design of these systems
ensures that members do not possess any special or unique trading
advantages in handling their orders after transmitting them to the
exchange floors, the Commission has stated that executions obtained
through these systems satisfy the independent execution requirement of
Rule 11a2-2(T).\40\ Similarly, to the extent that the design of the AIM
and SAM Auctions ensure that members do not possess any special or
unique trading advantages in the handling of their orders after
transmission, a member effecting a transaction through the AIM and SAM
Auctions satisfies the requirement for execution through an
unaffiliated member.
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\40\ Id.
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Non-Retention of Compensation for Discretionary Accounts: The
Exchange notes that members who intend to rely on Rule 11a2-2(T) in
connection with transactions using the AIM and SAM Auctions must comply
with the requirements of Section (a)(2)(iv) of the rule.
2. Statutory Basis
The proposed rule change is consistent with Section 6(b) of the
Act,\41\ in general, and furthers the objectives of Section 6(b)(5) of
the Act,\42\ 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 \43\ and greater opportunities to
manage risk. The Exchange believes that making modified versions of the
AIM and SAM mechanisms available for FLEX Options should serve to
further those objectives and encourage use of FLEX Options by enhancing
the existing processes for auctioning FLEX Orders, which should make
the system more efficient and effective for the FLEX Option investor
community.
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\41\ 15 U.S.C. 78f(b).
\42\ 15 U.S.C. 78f(b)(5).
\43\ 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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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
[[Page 312]]
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-2011-123 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-2011-123. 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-2011-123 and should be
submitted on or before January 25, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\44\
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\44\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-33713 Filed 1-3-12; 8:45 am]
BILLING CODE P
