Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Approving Proposed Rule Change To Establish an Automated Improvement Mechanism and a Solicitation Auction Mechanism for FLEX Options, 20675-20680 [2012-8171]
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Federal Register / Vol. 77, No. 66 / Thursday, April 5, 2012 / Notices
of FLEX Options. Further, the Exchange
notes that it has not experienced any
adverse effects from the operation of the
pilot programs. The Exchange also
believes that the extension of the
exercise settlement values pilot and
minimum value size pilot does not raise
any unique regulatory concerns. In
particular, although p.m. settlements
may raise questions with the
Commission, the Exchange believes
that, based on the Exchange’s
experience in trading FLEX Options to
date and over the pilot period, market
impact and investor protection concerns
will not be raised by this rule change.
The Exchange also believes that the
proposed rule change would continue to
provide Trading Permit Holders and
investors with additional opportunities
to trade customized options in an
exchange environment (which offers the
added benefits of transparency, price
discovery, liquidity, and financial
stability as compared to the over-thecounter market) and subject to
exchange-based rules, and investors
would benefit as a result.
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.
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III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the proposed rule change
does not: (i) Significantly affect the
protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative prior to 30 days from the date
on which it was filed, or such shorter
time as the Commission may designate,
the proposed rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 15 and Rule 19b–4(f)(6)
thereunder.16
A proposed rule change filed
pursuant to Rule 19b–4(f)(6) under the
15 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). In addition, Rule 19b4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
the proposed rule change at least five business days
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
requirement.
16 17
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Act 17 normally does not become
operative for 30 days after the date of its
filing. However, Rule 19b–4(f)(6) 18
permits the Commission to designate a
shorter time if such action is consistent
with the protection of investors and the
public interest. The Exchange has asked
the Commission to waive the 30-day
operative delay so that the proposal may
become operative immediately upon
filing. The Commission notes that
waiving the 30-day operative delay
would prevent the expiration of the
pilot programs on March 30, 2012, prior
to the extension of the pilot programs
taking effect, and believes that waiving
the 30-day operative delay is consistent
with the protection of investors and the
public interest.19 Therefore, the
Commission designates the proposal
operative upon filing.
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
20675
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 the filing also
will be available for inspection and
copying at the principal office of the
Exchange. All comments received will
be posted without change; the
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly.
All submissions should refer to File
Number SR–CBOE–2012–027 and
should be submitted on or before April
26, 2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–8170 Filed 4–4–12; 8:45 am]
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–2012–027 on the
subject line.
BILLING CODE 8011–01–P
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–2012–027. 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
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Order Approving
Proposed Rule Change To Establish an
Automated Improvement Mechanism
and a Solicitation Auction Mechanism
for FLEX Options
17 17
CFR 240.19b–4(f)(6).
CFR 240.19b–4(f)(6).
19 For purposes only of waiving the 30-day
operative delay, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
18 17
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–66702; File No. SR–CBOE–
2011–123]
March 30, 2012.
I. Introduction
On December 20, 2011, the Chicago
Board Options Exchange, Incorporated
(‘‘Exchange’’ or ‘‘CBOE’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
20 17
1 15
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CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
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Federal Register / Vol. 77, No. 66 / Thursday, April 5, 2012 / Notices
thereunder,2 a proposed rule change to
establish an Automated Improvement
Mechanism (‘‘AIM’’) and Solicitation
Auction Mechanism (‘‘SAM’’) for FLEX
Options. The proposed rule change was
published for comment in the Federal
Register on January 4, 2012.3 The
Commission received two comment
letters regarding the proposal.4 The
Exchange submitted a response on
March 20, 2012.5 This order approves
the proposed rule change.
II. Description of the Proposal
The Exchange is proposing new Rules
24B.5A and 24B.5B to establish an AIM
and SAM for FLEX Options. Currently,
the AIM and SAM are available for nonFLEX Options under Rules 6.74A and
6.74B. The FLEX versions of the AIM
and SAM mechanisms are described
below.
A. Automated Improvement Mechanism
The Exchange is proposing to
establish an AIM mechanism for FLEX
Options. Under the AIM process, a
FLEX Trader 6 (‘‘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) 7 into the AIM mechanism 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. The
Exchange will announce such classes
and size parameters via circular to FLEX
Traders. In addition, an Initiating TPH
must stop the entire Agency Order as
principal and/or with a solicited
order(s) at the better of the best bid or
2 17
CFR 240.19b–4.
Securities Exchange Act Release No. 66052
(January 4, 2012), 77 FR 306.
4 See Letters to Elizabeth M. Murphy, Secretary,
Commission from Todd Weingart, Spot On
Brokerage Services, Division of Trading Block,
William O’Keefe, Spot On Brokerage Services,
Division of Trading Block, and Steve Stepanek, The
SJS Group, Inc., dated January 20, 2012 (‘‘Spot
Letter’’) and from Jonathan Grodnick, Chicago
Trading Company, dated February 7, 2012 (‘‘CTC
Letter’’).
5 See Letter to Elizabeth M. Murphy, Secretary,
Commission from Jennifer M. Lamie, CBOE dated
March 20, 2012 (‘‘CBOE Response’’).
6 A ‘‘FLEX Trader’’ means a FLEX-participating
Trading Permit Holder (‘‘TPH’’) who has been
approved by the Exchange to trade on the System.
See Rule 24B.1(l).
7 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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3 See
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offer (‘‘BBO’’) or the Agency Order’s
limit price.8
Only one AIM may be ongoing at any
given time in a series and AIM auctions
in the same series may not queue or
overlap. In addition, unrelated FLEX
Orders may not be submitted to the
electronic book for the duration of an
AIM auction.9 To initiate an AIM
auction, the Initiating TPH must mark
the Agency Order for AIM processing
and 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 ‘‘singlepriced 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.10
Upon receipt of an Agency Order (and
second order), the Exchange will issue
a request for responses (‘‘RFR’’),
detailing the side and size of the Agency
Order.11 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. 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. RFR
responses are not visible to any other
participants and shall not be
disseminated to the Options Price
Reporting Authority (‘‘OPRA’’). 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.12
Normally, an AIM Auction ends at the
conclusion of the RFR response period
(which will be no less than three
8 See
proposed Rule 24B.5A(a).
proposed Rule 24B.5A(b).
10 See proposed Rule 24B.5A(b)(1)(i).
11 Each RFR will 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.
12 See proposed Rule 24B.5A(b)(1)(ii)–(ix).
9 See
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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.13 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, subject to the following:
• Such best prices may include nonAIM Auction FLEX Orders (to the extent
the Exchange has determined to make
available an electronic book).
• Public customers and non-TPH
broker-dealers RFR responses and FLEX
Orders would have priority.
• No FLEX Appointed Market-Maker
participation entitlement would apply
with respect to the AIM Auction.
• 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.
• 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%.
• Any remaining RFR responses and
FLEX Orders will be allocated based on
time priority. The Initiating TPH would
not participate on any such balance
unless the Agency Order would
otherwise go unfilled.
• If the final AIM Auction price locks
a public customer or non-TPH brokerdealer 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-TPH 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
13 See
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Auction participants that submitted the
final AIM Auction price and any
balance shall trade against the public
customer or non-TPH broker-dealer
order in the book at such order’s limit
price.14
The Exchange proposes that the AIM
may only be used where there is a
genuine intention to execute a bona fide
transaction.15 In addition, 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 pattern 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.
The Exchange also 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, class, and
marketability as determined by the
Exchange. Complex orders will only be
eligible to trade with other complex
orders through the AIM Auction.16
Initially, 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.17
Any determinations made by the
Exchange pursuant to the proposed rule,
such as eligible classes, order size
14 See
proposed Rule 24B.5A(b)(3).
proposed Rule 24B.5A.01.
16 See proposed Rule 24B.5A.05. 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. 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-TPH broker-dealers in
the electronic book.
17 See proposed Rule 24B.5A.03.
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15 See
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parameters and the minimum price
increment, would be communicated in
a circular.18
B. Solicitation Auction Mechanism
The Exchange also proposes to
establish a SAM mechanism for FLEX
Options. The SAM permits a FLEX
Trader to electronically execute largersized Agency Orders against solicited
orders.19 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. Each order
entered into the SAM would be
designated all-or-none (i.e., an order
will be executed in its entirety or not at
all).20
Once the Initiating TPH has submitted
an Agency Order for SAM processing,
such submission cannot be cancelled by
the Initiating TPH. To initiate the SAM,
the Initiating TPH must mark the
Agency Order for SAM processing, and
specify a single price at which it seeks
to cross the Agency Order with a
solicited order. Upon receipt of an
Agency Order (and second order), an
RFR message will be sent to all FLEX
Traders that have elected to receive
such messages, detailing the price and
size of the Agency Order. 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. During that period, RFR
responses may be submitted by FLEX
Traders (specifying prices and sizes),
except that responses may not be
entered for the account of an options
Market-Maker from another options
exchange. Responses shall not be visible
for other SAM participants and shall not
be disseminated to OPRA. RFR
responses may be modified or cancelled
so long as they are modified or
cancelled before the conclusion of the
RFR response period.21 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.22
18 See
proposed Rule 24B.5A.06.
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.
20 See proposed Rule 24B.5B(a).
21 See proposed Rule 24B.5B(b)(1).
22 See proposed Rule 24B.5B(a)(3) and (b)(1)(v).
19 Any
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20677
Normally, a SAM ends at the
conclusion of the RFR response period.
However, as with AIM, the proposal
provides that the SAM 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.23
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
are one or more public customers or
non-TPH 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
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.24
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 priority at a given price
would be as follows: (i) RFR responses
and FLEX Orders for the account of
public customers and non-TPH brokerdealers, based on time priority; (ii) any
RFR responses and FLEX Orders that are
subject to a FLEX Appointed MarketMaker participation entitlement, based
on a participation entitlement formula
specified in Rule 24B.5(d)(2)(ii); then
(iii) all other RFR responses and FLEX
Orders, based on time priority.25
The Exchange proposes to apply the
SAM mechanism to complex orders, on
a class-by-class basis. In such classes,
complex orders may be executed
through the SAM at a net debit or net
credit price provided the SAM
eligibility requirements are satisfied and
the Agency Order is eligible for the
SAM considering its complex order
type, order origin code, class, and
23 See
proposed Rule 24B.5B(b)(2).
proposed Rule 24B.5B(b)(3).
25 See proposed Rule 24B.5B(b)(3)(i)(D).
24 See
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marketability as determined by the
Exchange. Complex orders will only be
eligible to trade with other complex
orders through the SAM.26
The proposed rule also requires TPHs
to deliver to customers a written
document, in a form approved by the
Exchange, describing the terms and
conditions of the SAM mechanism prior
to executing Agency Orders using the
SAM mechanism.27 The proposed rule
further specifies that TPHs may not use
the SAM mechanism to circumvent the
Exchange’s rules limiting principal
order transactions.28 The Exchange also
proposes that 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.29
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III. Discussion and Commission
Findings
After careful consideration, the
Commission finds that the proposed
rule change is consistent with the
requirements of the Act and the rules
and regulations thereunder applicable to
a national securities exchange 30 and, in
particular, the requirements of Section 6
of the Act.31 Specifically, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Act,32 which requires,
among other things, that the rules of a
national securities exchange be
designed to promote just and equitable
principles of trade, remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest. The Commission
believes that approving the Exchange’s
proposal to establish the AIM and SAM
for FLEX Options should confer benefits
to the public by increasing competition
between and among the options
26 See proposed Rule 24B.5B.01. 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. 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-TPH broker-dealers in
the electronic book.
27 See proposed Rule 24B.5B.02.
28 See proposed Rule 24B.5B.03
29 See proposed Rule 24B.5B.04.
30 In approving the proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
31 15 U.S.C. 78f.
32 15 U.S.C. 78f(b)(5).
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exchanges, resulting in better prices and
executions for investors.33 The
Commission therefore finds that for the
reasons discussed below, the Exchange’s
proposal is consistent with the Act.
A. Automated Improvement Mechanism
The Exchange proposes that the
Initiating TPH must stop the Agency
Order at the better of the BBO or the
Agency Order’s limit price. The
Commission believes that the proposed
stop price should provide customers
with an opportunity for price
improvement over the Exchange’s BBO.
The Commission believes that it is
reasonable to stop the Agency Order at
the better of the BBO or the Agency
Order’s limit price, versus the National
Best Bid or Offer, because FLEX options
are generally not multiply-listed and are
not subject to a consolidated quotation
reporting program. In addition, the
FLEX AIM will only process Agency
Orders with limit prices, not market
orders. The Commission also believes
that the proposal should provide FLEX
Traders with incentives to compete in
AIM auctions. The Commission notes
that once an Agency Order is submitted
into the AIM, the submission may not
be modified or cancelled. Therefore, the
Agency Order submitted to the AIM will
be guaranteed an execution price of at
least the BBO and, moreover, will be
given an opportunity for execution at a
price better than the BBO.
The Exchange also proposes to send
an RFR to all FLEX Traders that have
elected to receive RFRs, and RFR
responses may be submitted by FLEX
Traders. The Commission believes that
permitting access to the AIM auction for
all FLEX Traders who may wish to
compete for an Agency Order should be
sufficient to provide opportunities for a
meaningful, competitive auction.
With respect to the RFR period, the
Exchange proposes that the duration of
the RFR response period will be
established by the Exchange on a classby-class basis and shall not be less than
three seconds. One commenter argued
that the proposed three second RFR
period for a new FLEX strike and cross
would present an exceptional
technological challenge to market
making firms attempting to provide
liquidity in FLEX Options. The
commenter suggested that the response
time in the AIM and SAM for newly
33 The Commission notes, that it previously found
the non-FLEX AIM and SAM mechanisms
consistent with the Act. See, e.g., Securities
Exchange Act Release Nos. 53222 (February 3,
2006), 71 FR 7089 (February 10, 2006) (SR–CBOE–
2005–60) (Order Approving AIM) and 57610 (April
3, 2008), 73 FR 19535 (April 10, 2008) (SR–CBOE–
2008–14) (Order Approving SAM).
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added flex strikes be increased from
three seconds to one minute.34 CBOE
disagreed, stating that in today’s market,
a one-minute timer far exceeds the
standards that have been set for any
other exchange timer. CBOE notes that
while the FLEX market may be thinly
traded or a bit more complex given its
customized nature; however, this does
not mean that the AIM or SAM should
be subject to unnecessarily lengthy
timers. According to CBOE, FLEX AIM
and SAM are intended to be automated
and FLEX Traders desiring to
participate in the FLEX AIM and SAM
need to dedicate resources to program to
the auctions. Assuming a FLEX Trader
develops the technology to
electronically trade, CBOE believes the
three second interval is sufficient to
electronically process and respond to an
auction in today’s markets.35
The Commission agrees that the threesecond electronic auction proposed by
the Exchange should provide sufficient
time for an electronic crowd to compete
for an Agency Order. The Commission
notes that the RFR response period of
three seconds is consistent with the
existing minimum exposure period for
FLEX Option crossing pursuant to the
existing FLEX crossing procedures.36
Under the proposal, allocation will be
based on price-time priority, subject to
public customer and non-TPH brokerdealer priority. No FLEX Appointed
Market-Maker participation entitlement
shall apply. 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 up to 40% of
the order.37 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 up to 40% of
34 See CTC Letter, supra note 4, at 1. The
Commission also received another comment letter
regarding the proposed rule change. See Spot Letter,
supra note 4. The Spot Letter suggested that there
be an additional phase, the Decision Phase, in the
RFQ process. During this Decision Phase, the
initiator of an RFQ would have a brief period of
time, during which no changes of any type to
market quotes would be permitted, in order to
decide to trade or cancel their RFQ. The
Commission notes that the subject of the comment
letter (the RFQ process for FLEX Options) is not
related to the CBOE’s proposal to establish a
separate AIM and SAM for FLEX Options.
35 See CBOE Response, supra note 5, at 3.
36 See Rule 24B.5(b)(3)(iii).
37 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.
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the remainder of the Agency Order. Any
remaining RFR responses and FLEX
Orders will be allocated based on time
priority. In addition, it will be deemed
conduct inconsistent with just and
equitable principles of trade and a
violation of Rule 4.1 to engage in a
pattern of conduct where the Initiating
TPH breaks-up an Agency Order into
separate orders for 2 or fewer contracts
for the purpose of gaining a higher
allocation percentage than the Initiating
TPH would have otherwise received in
the AIM.
The Commission believes that the
priority and allocation rules are
reasonable and consistent with the
Act.38 The Commission believes that the
matching algorithm set forth in the
FLEX AIM rule is sufficiently clear
regarding how orders are allocated in
the AIM auction. The Commission notes
that the proposal to provide both public
customers and non-TPH broker-dealers
with first priority in the FLEX AIM
auction is consistent with how other
FLEX allocation algorithms currently
operate.39 In addition, the Commission
notes that public customer priority/nonTPH broker-dealer priority and pricetime priority have previously been
found consistent with the Act.40
Like the Exchange’s AIM for nonFLEX options, the FLEX AIM auction
would be available for orders of fewer
than 50 contracts. Under the Exchange’s
proposal, there would be no minimum
size requirement for orders entered into
the AIM, for a pilot period expiring on
July 18, 2012. The Commission believes
that the Exchange’s proposal should
provide small customer orders with the
opportunity for price improvement, and
is consistent with the Act. In particular,
any Agency Order for less than 50
contracts that is entered into the AIM is
38 The Commission also believes that the
proposed priority and allocation rules for electronic
FLEX trading in the AIM are consistent with
Section 11(a) of the Act. 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. FLEX Market-Makers qualify for
the market-maker exception. With respect to nonmarket-maker members, the auction appears
reasonably designed to cause RFR Quotes
constituting the RFR Market and the RFR Order that
trades against the RFR Market to yield to nonmember interest, consistent with the ‘‘G’’ exception.
See 15 U.S.C. 78k(a)(1)(G) (setting forth all
requirements for the ‘‘G’’ exception).
39 See, e.g., Rule 24B.5(a)(1)(iii)(C) and (D).
40 See, e.g., Securities Exchange Act Release Nos.
51822 (June 10, 2005), 70 FR 35321 (June 17, 2005)
(SR–CBOE–2004–87) (Adopting rules pertaining to
priority and allocation of trades for index options)
and 56792 (November 15, 2007), 72 FR 65776
(November 23, 2007) (SR–CBOE–2006–99)
(Adopting rules providing for the trading of FLEX
Options on an electronic platform).
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16:20 Apr 04, 2012
Jkt 226001
guaranteed an execution at the end of
the auction at a price at least the BBO.
The Commission will evaluate the AIM
auction during the Pilot Period to
determine whether it would be
beneficial to customers and to the
options market as a whole to approve
any proposal requesting permanent
approval to permit orders of fewer than
50 contracts to be submitted to the AIM
auction. In addition, the Commission
will examine the data submitted by the
Exchange with respect to situations in
which the AIM auction is terminated
prematurely by an RFR response. To aid
the Commission in its evaluation, the
CBOE represents that it will provide the
following information each month:
(1) The number of orders of fewer than 50
contracts entered into the FLEX AIM auction;
(2) The percentage of all orders of fewer
than 50 contracts sent to CBOE that are
entered into CBOE’s FLEX AIM auction;
(3) The percentage of all CBOE FLEX trades
represented by orders of fewer than 50
contracts;
(4) The percentage of all CBOE FLEX trades
effected through the FLEX AIM auction
represented by orders of fewer than 50
contracts;
(5) The percentage of all FLEX contracts
traded on CBOE represented by orders of
fewer than 50 contracts;
(6) The percentage of all FLEX contracts
effected through the FLEX AIM auction
represented by orders of fewer than 50
contracts;
(7) The spread in the option, at the time
an order of fewer than 50 contracts is
submitted to the FLEX AIM auction;
(8) The number of orders of 50 contracts or
greater entered into the FLEX AIM auction;
(9) The percentage of all FLEX orders of 50
contracts or greater sent to CBOE that are
entered into CBOE’s FLEX AIM auction;
(10) The spread in the option, at the time
an order of 50 contracts or greater is
submitted to the FLEX AIM auction;
(11) Of FLEX AIM trades for orders of
fewer than 50 contracts, the percentage done
at the BBO, BBO plus $.01, BBO plus $.02,
BBO plus $.03, etc.;
(12) Of FLEX AIM trades for orders of 50
contracts or greater, the percentage done at
the BBO, BBO plus $.01, BBO plus $.02, BBO
plus $.03, etc.;
(13) The number of orders submitted by
FLEX Traders when the spread was $.05,
$.10, $.15, etc. For each spread, specify the
percentage of contracts in orders of fewer
than 50 contracts submitted to CBOE’s FLEX
AIM that were traded by:
(a) The Initiating TPH that submitted the
order to the FLEX AIM;
(b) CBOE Market Makers assigned to the
class;
(c) Other FLEX Traders;
(d) Public Customer Orders;
(e) Non-TPH broker-dealers; and
(f) Other non-AIM FLEX Orders.
For each spread, also specify the
percentage of contracts in orders of 50
PO 00000
Frm 00070
Fmt 4703
Sfmt 4703
20679
contracts or greater submitted to CBOE’s
FLEX AIM that were traded by:
(a) The Initiating TPH that submitted the
order to the FLEX AIM;
(b) CBOE Market Makers assigned to the
class;
(c) Other FLEX Traders;
(d) Public Customer Orders;
(e) Non-Trading Permit Holder brokerdealers; and
(f) Other non-AIM FLEX Orders.
(14) The number of times that an RFR
response matching the BBO on the opposite
side of the market from the RFR responses
prematurely ended the FLEX AIM auction,
and the number of times such orders were
entered by the same (or affiliated) firm that
initiated the FLEX AIM auction that was
terminated;
(15) The percentage of FLEX AIM early
terminations due to the receipt of an RFR
response matching the BBO on the opposite
side of the market from the RFR responses
that occurred within a c second of the start
of the AIM auction; the percentage that
occurred within one second of the start of the
AIM auction; the percentage that occurred
within one and c second of the start of the
AIM auction; the percentage that occurred
within 2 seconds of the start of the AIM
auction; the percentage that occurred within
2 and c seconds of the AIM auction; and the
average amount of price improvement
provided to the Agency Order where the AIM
auction is terminated early at each of these
time periods;
(16) The average amount of price
improvement provided to the Agency Order
when the FLEX AIM auction is not
terminated early (i.e., runs the full three
seconds);
(17) The percentage of all CBOE FLEX
trades effected through the FLEX AIM
auction in which the Initiating TPH has
chosen the Auto-Match feature, and the
average amount of price improvement
provided to the Agency Order when the
Initiating TPH has chosen the Auto-Match
feature vs. the average amount of price
improvement provided to the Agency Order
when the Initiating TPH has chosen a singleprice submission;
(18) For the first Wednesday of each
month:
(a) The total number of FLEX AIM auctions
on that date;
(b) The number of FLEX AIM auctions
where the order submitted to the AIM was
fewer than 50 contracts;
(c) The number of FLEX AIM auctions
where the order submitted to the AIM was 50
contracts or greater;
(d) The number of FLEX AIM auctions (for
orders of fewer than 50 contracts) with 0
participants (excluding the initiating
participant), 1 participant (excluding the
initiating participant), 2 participants
(excluding the initiating participant), 3
participants (excluding the initiating
participant), 4 participants (excluding the
initiating participant), etc., and
(e) The number of FLEX AIM auctions (for
orders of 50 contracts or greater) with 0
participants (excluding the initiating
participant), 1 participant (excluding the
initiating participant), 2 participants
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(excluding the initiating participant), 3
participants (excluding the initiating
participant), 4 participants (excluding the
initiating participant), etc.; and
(19) For the third Wednesday of each
month:
(a) The total number of FLEX AIM auctions
on that date;
(b) The number of FLEX AIM auctions
where the order submitted to the AIM was
fewer than 50 contracts;
(c) The number of FLEX AIM auctions
where the order submitted to the AIM was 50
contracts or greater;
(d) The number of FLEX AIM auctions (for
orders of fewer than 50 contracts) with 0
participants (excluding the initiating
participant), 1 participant (excluding the
initiating participant), 2 participants
(excluding the initiating participant), 3
participants (excluding the initiating
participant), 4 participants (excluding the
initiating participant), etc., and
(e) The number of FLEX AIM auctions (for
orders of 50 contracts or greater) with 0
participants (excluding the initiating
participant), 1 participant (excluding the
initiating participant), 2 participants
(excluding the initiating participant), 3
participants (excluding the initiating
participant), 4 participants (excluding the
initiating participant), etc.
B. Solicitation Auction Mechanism
The Exchange is also proposing a
SAM Auction for FLEX Options. The
Commission believes that the proposal
should allow for greater flexibility in
pricing large-sized orders. The
Commission further believes that the
proposal includes appropriate terms and
conditions to assure that the Agency
Order is first exposed to FLEX Traders
by RFR for the possibility of price
improvement and that public customer
orders on the Exchange are protected.
The Commission also notes that the
proposal is similar to requirements set
forth in the CBOE SAM for non-FLEX
Options.41
The Exchange proposes that the
duration of the RFR response period
would be established by the Exchange
on a class-by-class basis and shall not be
less than three seconds. As with the
AIM, one commenter suggested that the
response time in the SAM for newly
added flex strikes be increased from
three seconds to one minute.42 The
Commission believes that the threesecond electronic auction proposed by
the Exchange should provide sufficient
time for an electronic crowd to compete
for an Agency Order. The Commission
notes that the RFR response period of
three seconds is consistent with the
existing minimum exposure period for
FLEX Option crossing pursuant to the
41 See
Rule 6.74B.
CTC Letter, supra note 4, at 1. See also
discussion at Section III.A regarding the threesecond RFR period for the AIM.
42 See
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16:20 Apr 04, 2012
Jkt 226001
existing FLEX crossing procedures.43
The Commission believes that using the
same period of time to respond to RFRs
in SAM auctions should be appropriate
for FLEX Traders.
Under the proposal, at the conclusion
of the SAM, 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(s) that improves the proposed
crossing price. In the case where there
are one or more public customers or
non-TPH 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
against other bids (offers) if there is
sufficient size at the bid (offer) to
execute the Agency Order entirely. If
there is not sufficient size to execute the
entire Agency Order, or if the execution
price would be inferior to the BBO, then
the proposed cross would not be
executed, and both the Agency Order
and second/solicited order would be
cancelled. 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, priority would first go to RFR
responses and FLEX Orders for the
account of public customers and nonTPH broker-dealers based on time
priority, then any RFR responses and
FLEX Orders that are subject to a FLEX
Appointed Market-Maker participation
entitlement, and finally all other RFR
responses and FLEX Orders. The
Commission believes that the priority
and allocation rules are reasonable and
consistent with the Act.44
The Commission also notes that the
Exchange has included a provision
stating that FLEX Traders may not use
the SAM auction to circumvent Rule
24B.5 limiting principal transactions.
The Exchange will also require written
notification to customers prior to
entering Agency Orders into the SAM
on behalf of the customer and will
require that determinations made by the
Exchange regarding eligible classes,
order size parameters, and the minimum
price increment shall be communicated
in a Regulatory Circular. The Exchange
also proposes to permit the processing
of complex orders. The Commission
believes that the provisions help to
clarify application of the SAM rule and
may encourage further use of FLEX
Options.
43 See
Rule 24B.5(b)(3)(iii).
Commission also believes, for the same
reasons described above for the AIM, that the
proposed priority and allocation rules for electronic
FLEX trading in the SAM are consistent with
Section 11(a) of the Act. See supra note 38.
44 The
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Frm 00071
Fmt 4703
Sfmt 4703
One commenter asserted that the
current FLEX auction mechanism
should not be allowed to migrate to the
CBOE Hybrid platform, arguing that
participants that submit RFQs can
receive quote responses that lock and/or
cross markets.45 In response, CBOE
stated that the comments have no
relevance to the instant proposed rule
change, which simply seeks to
implement the two new FLEX AIM and
SAM auctions and which does not
propose any changes to the existing
electronic RFQ auction mechanism.46
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,47 that the
proposed rule change (File No. SR–
CBOE–2011–123), be, and hereby is,
approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.48
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–8171 Filed 4–4–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–66704; File No. SR–CBOE–
2012–030]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change Relating to FLEX
Transaction Fees
March 30, 2012.
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 March 29,
2012, Chicago Board Options Exchange,
Incorporated (the ‘‘Exchange’’ or
‘‘CBOE’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
the proposed rule change as described
in Items I, II, and III below, which items
have been prepared by the selfregulatory organization. The
Commission is publishing this notice to
45 See
CTC Letter, supra note 4, at 2.
CBOE Response, supra note 5, at 4. CBOE,
however, notes that with respect to the FLEX SAM
auction, the mechanism uses an all-or-none type
allocation methodology and, by design it is possible
for an agency order to receive an execution at a
price that is through a response price. This is
consistent with how the existing SAM auction for
non-FLEX Options currently operates. Id.
47 15 U.S.C. 78s(b)(2).
48 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
46 See
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]]>Agencies
[Federal Register Volume 77, Number 66 (Thursday, April 5, 2012)]
[Notices]
[Pages 20675-20680]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-8171]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66702; File No. SR-CBOE-2011-123]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Approving Proposed Rule Change To Establish an
Automated Improvement Mechanism and a Solicitation Auction Mechanism
for FLEX Options
March 30, 2012.
I. Introduction
On December 20, 2011, the Chicago Board Options Exchange,
Incorporated (``Exchange'' or ``CBOE'') filed with the Securities and
Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
[[Page 20676]]
thereunder,\2\ a proposed rule change to establish an Automated
Improvement Mechanism (``AIM'') and Solicitation Auction Mechanism
(``SAM'') for FLEX Options. The proposed rule change was published for
comment in the Federal Register on January 4, 2012.\3\ The Commission
received two comment letters regarding the proposal.\4\ The Exchange
submitted a response on March 20, 2012.\5\ This order approves the
proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 66052 (January 4,
2012), 77 FR 306.
\4\ See Letters to Elizabeth M. Murphy, Secretary, Commission
from Todd Weingart, Spot On Brokerage Services, Division of Trading
Block, William O'Keefe, Spot On Brokerage Services, Division of
Trading Block, and Steve Stepanek, The SJS Group, Inc., dated
January 20, 2012 (``Spot Letter'') and from Jonathan Grodnick,
Chicago Trading Company, dated February 7, 2012 (``CTC Letter'').
\5\ See Letter to Elizabeth M. Murphy, Secretary, Commission
from Jennifer M. Lamie, CBOE dated March 20, 2012 (``CBOE
Response'').
---------------------------------------------------------------------------
II. Description of the Proposal
The Exchange is proposing new Rules 24B.5A and 24B.5B to establish
an AIM and SAM for FLEX Options. Currently, the AIM and SAM are
available for non-FLEX Options under Rules 6.74A and 6.74B. The FLEX
versions of the AIM and SAM mechanisms are described below.
A. Automated Improvement Mechanism
The Exchange is proposing to establish an AIM mechanism for FLEX
Options. Under the AIM process, a FLEX Trader \6\ (``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) \7\ into the AIM mechanism where other FLEX Trader participants
could compete with the Initiating TPH's second order to execute against
the Agency Order.
---------------------------------------------------------------------------
\6\ A ``FLEX Trader'' means a FLEX-participating Trading Permit
Holder (``TPH'') who has been approved by the Exchange to trade on
the System. See Rule 24B.1(l).
\7\ 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.
---------------------------------------------------------------------------
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. The Exchange will announce such
classes and size parameters via circular to FLEX Traders. In addition,
an Initiating TPH must stop the entire Agency Order as principal and/or
with a solicited order(s) at the better of the best bid or offer
(``BBO'') or the Agency Order's limit price.\8\
---------------------------------------------------------------------------
\8\ See proposed Rule 24B.5A(a).
---------------------------------------------------------------------------
Only one AIM may be ongoing at any given time in a series and AIM
auctions in the same series may not queue or overlap. In addition,
unrelated FLEX Orders may not be submitted to the electronic book for
the duration of an AIM auction.\9\ To initiate an AIM auction, the
Initiating TPH must mark the Agency Order for AIM processing and 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.\10\
---------------------------------------------------------------------------
\9\ See proposed Rule 24B.5A(b).
\10\ See proposed Rule 24B.5A(b)(1)(i).
---------------------------------------------------------------------------
Upon receipt of an Agency Order (and second order), the Exchange
will issue a request for responses (``RFR''), detailing the side and
size of the Agency Order.\11\ 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.
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. RFR responses are
not visible to any other participants and shall not be disseminated to
the Options Price Reporting Authority (``OPRA''). 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.\12\
---------------------------------------------------------------------------
\11\ Each RFR will 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.
\12\ See proposed Rule 24B.5A(b)(1)(ii)-(ix).
---------------------------------------------------------------------------
Normally, an AIM Auction ends at the conclusion of the RFR response
period (which will be no less than three 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.\13\
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, subject to the following:
---------------------------------------------------------------------------
\13\ See proposed Rule 24B.5A(b)(2).
---------------------------------------------------------------------------
Such best prices may include non-AIM Auction FLEX Orders
(to the extent the Exchange has determined to make available an
electronic book).
Public customers and non-TPH broker-dealers RFR responses
and FLEX Orders would have priority.
No FLEX Appointed Market-Maker participation entitlement
would apply with respect to the AIM Auction.
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.
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%.
Any remaining RFR responses and FLEX Orders will be
allocated based on time priority. The Initiating TPH would not
participate on any such balance unless the Agency Order would otherwise
go unfilled.
If the final AIM Auction price locks a public customer or
non-TPH 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-TPH 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
[[Page 20677]]
Auction participants that submitted the final AIM Auction price and any
balance shall trade against the public customer or non-TPH broker-
dealer order in the book at such order's limit price.\14\
---------------------------------------------------------------------------
\14\ See proposed Rule 24B.5A(b)(3).
---------------------------------------------------------------------------
The Exchange proposes that the AIM may only be used where there is
a genuine intention to execute a bona fide transaction.\15\ In
addition, 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 pattern 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.
---------------------------------------------------------------------------
\15\ See proposed Rule 24B.5A.01.
---------------------------------------------------------------------------
The Exchange also 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, class, and
marketability as determined by the Exchange. Complex orders will only
be eligible to trade with other complex orders through the AIM
Auction.\16\
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\16\ See proposed Rule 24B.5A.05. 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. 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-TPH broker-
dealers in the electronic book.
---------------------------------------------------------------------------
Initially, 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.\17\
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\17\ See proposed Rule 24B.5A.03.
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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.\18\
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\18\ See proposed Rule 24B.5A.06.
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B. Solicitation Auction Mechanism
The Exchange also proposes to establish a SAM mechanism for FLEX
Options. The SAM permits a FLEX Trader to electronically execute
larger-sized Agency Orders against solicited orders.\19\ 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. Each order entered into the SAM would be
designated all-or-none (i.e., an order will be executed in its entirety
or not at all).\20\
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\19\ 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.
\20\ See proposed Rule 24B.5B(a).
---------------------------------------------------------------------------
Once the Initiating TPH has submitted an Agency Order for SAM
processing, such submission cannot be cancelled by the Initiating TPH.
To initiate the SAM, the Initiating TPH must mark the Agency Order for
SAM processing, and specify a single price at which it seeks to cross
the Agency Order with a solicited order. Upon receipt of an Agency
Order (and second order), an RFR message will be sent to all FLEX
Traders that have elected to receive such messages, detailing the price
and size of the Agency Order. 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.
During that period, RFR responses may be submitted by FLEX Traders
(specifying prices and sizes), except that responses may not be entered
for the account of an options Market-Maker from another options
exchange. Responses shall not be visible for other SAM participants and
shall not be disseminated to OPRA. RFR responses may be modified or
cancelled so long as they are modified or cancelled before the
conclusion of the RFR response period.\21\ 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.\22\
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\21\ See proposed Rule 24B.5B(b)(1).
\22\ See proposed Rule 24B.5B(a)(3) and (b)(1)(v).
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Normally, a SAM ends at the conclusion of the RFR response period.
However, as with AIM, the proposal provides that the SAM 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.\23\ 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 are one or more public customers or non-TPH 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 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.\24\
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\23\ See proposed Rule 24B.5B(b)(2).
\24\ See proposed Rule 24B.5B(b)(3).
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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 priority at a given price would be as follows:
(i) RFR responses and FLEX Orders for the account of public customers
and non-TPH broker-dealers, based on time priority; (ii) any RFR
responses and FLEX Orders that are subject to a FLEX Appointed Market-
Maker participation entitlement, based on a participation entitlement
formula specified in Rule 24B.5(d)(2)(ii); then (iii) all other RFR
responses and FLEX Orders, based on time priority.\25\
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\25\ See proposed Rule 24B.5B(b)(3)(i)(D).
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The Exchange proposes to apply the SAM mechanism to complex orders,
on a class-by-class basis. In such classes, complex orders may be
executed through the SAM at a net debit or net credit price provided
the SAM eligibility requirements are satisfied and the Agency Order is
eligible for the SAM considering its complex order type, order origin
code, class, and
[[Page 20678]]
marketability as determined by the Exchange. Complex orders will only
be eligible to trade with other complex orders through the SAM.\26\
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\26\ See proposed Rule 24B.5B.01. 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. 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-TPH broker-
dealers in the electronic book.
---------------------------------------------------------------------------
The proposed rule also requires TPHs to deliver to customers a
written document, in a form approved by the Exchange, describing the
terms and conditions of the SAM mechanism prior to executing Agency
Orders using the SAM mechanism.\27\ The proposed rule further specifies
that TPHs may not use the SAM mechanism to circumvent the Exchange's
rules limiting principal order transactions.\28\ The Exchange also
proposes that 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.\29\
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\27\ See proposed Rule 24B.5B.02.
\28\ See proposed Rule 24B.5B.03
\29\ See proposed Rule 24B.5B.04.
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III. Discussion and Commission Findings
After careful consideration, the Commission finds that the proposed
rule change is consistent with the requirements of the Act and the
rules and regulations thereunder applicable to a national securities
exchange \30\ and, in particular, the requirements of Section 6 of the
Act.\31\ Specifically, the Commission finds that the proposed rule
change is consistent with Section 6(b)(5) of the Act,\32\ which
requires, among other things, that the rules of a national securities
exchange be designed to promote just and equitable principles of trade,
remove impediments to and perfect the mechanism of a free and open
market and a national market system, and, in general, to protect
investors and the public interest. The Commission believes that
approving the Exchange's proposal to establish the AIM and SAM for FLEX
Options should confer benefits to the public by increasing competition
between and among the options exchanges, resulting in better prices and
executions for investors.\33\ The Commission therefore finds that for
the reasons discussed below, the Exchange's proposal is consistent with
the Act.
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\30\ In approving the proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\31\ 15 U.S.C. 78f.
\32\ 15 U.S.C. 78f(b)(5).
\33\ The Commission notes, that it previously found the non-FLEX
AIM and SAM mechanisms consistent with the Act. See, e.g.,
Securities Exchange Act Release Nos. 53222 (February 3, 2006), 71 FR
7089 (February 10, 2006) (SR-CBOE-2005-60) (Order Approving AIM) and
57610 (April 3, 2008), 73 FR 19535 (April 10, 2008) (SR-CBOE-2008-
14) (Order Approving SAM).
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A. Automated Improvement Mechanism
The Exchange proposes that the Initiating TPH must stop the Agency
Order at the better of the BBO or the Agency Order's limit price. The
Commission believes that the proposed stop price should provide
customers with an opportunity for price improvement over the Exchange's
BBO. The Commission believes that it is reasonable to stop the Agency
Order at the better of the BBO or the Agency Order's limit price,
versus the National Best Bid or Offer, because FLEX options are
generally not multiply-listed and are not subject to a consolidated
quotation reporting program. In addition, the FLEX AIM will only
process Agency Orders with limit prices, not market orders. The
Commission also believes that the proposal should provide FLEX Traders
with incentives to compete in AIM auctions. The Commission notes that
once an Agency Order is submitted into the AIM, the submission may not
be modified or cancelled. Therefore, the Agency Order submitted to the
AIM will be guaranteed an execution price of at least the BBO and,
moreover, will be given an opportunity for execution at a price better
than the BBO.
The Exchange also proposes to send an RFR to all FLEX Traders that
have elected to receive RFRs, and RFR responses may be submitted by
FLEX Traders. The Commission believes that permitting access to the AIM
auction for all FLEX Traders who may wish to compete for an Agency
Order should be sufficient to provide opportunities for a meaningful,
competitive auction.
With respect to the RFR period, the Exchange proposes that the
duration of the RFR response period will be established by the Exchange
on a class-by-class basis and shall not be less than three seconds. One
commenter argued that the proposed three second RFR period for a new
FLEX strike and cross would present an exceptional technological
challenge to market making firms attempting to provide liquidity in
FLEX Options. The commenter suggested that the response time in the AIM
and SAM for newly added flex strikes be increased from three seconds to
one minute.\34\ CBOE disagreed, stating that in today's market, a one-
minute timer far exceeds the standards that have been set for any other
exchange timer. CBOE notes that while the FLEX market may be thinly
traded or a bit more complex given its customized nature; however, this
does not mean that the AIM or SAM should be subject to unnecessarily
lengthy timers. According to CBOE, FLEX AIM and SAM are intended to be
automated and FLEX Traders desiring to participate in the FLEX AIM and
SAM need to dedicate resources to program to the auctions. Assuming a
FLEX Trader develops the technology to electronically trade, CBOE
believes the three second interval is sufficient to electronically
process and respond to an auction in today's markets.\35\
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\34\ See CTC Letter, supra note 4, at 1. The Commission also
received another comment letter regarding the proposed rule change.
See Spot Letter, supra note 4. The Spot Letter suggested that there
be an additional phase, the Decision Phase, in the RFQ process.
During this Decision Phase, the initiator of an RFQ would have a
brief period of time, during which no changes of any type to market
quotes would be permitted, in order to decide to trade or cancel
their RFQ. The Commission notes that the subject of the comment
letter (the RFQ process for FLEX Options) is not related to the
CBOE's proposal to establish a separate AIM and SAM for FLEX
Options.
\35\ See CBOE Response, supra note 5, at 3.
---------------------------------------------------------------------------
The Commission agrees that the three-second electronic auction
proposed by the Exchange should provide sufficient time for an
electronic crowd to compete for an Agency Order. The Commission notes
that the RFR response period of three seconds is consistent with the
existing minimum exposure period for FLEX Option crossing pursuant to
the existing FLEX crossing procedures.\36\
---------------------------------------------------------------------------
\36\ See Rule 24B.5(b)(3)(iii).
---------------------------------------------------------------------------
Under the proposal, allocation will be based on price-time
priority, subject to public customer and non-TPH broker-dealer
priority. No FLEX Appointed Market-Maker participation entitlement
shall apply. 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 up to 40% of the order.\37\ 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 up to 40% of
[[Page 20679]]
the remainder of the Agency Order. Any remaining RFR responses and FLEX
Orders will be allocated based on time priority. In addition, it will
be deemed conduct inconsistent with just and equitable principles of
trade and a violation of Rule 4.1 to engage in a pattern of conduct
where the Initiating TPH breaks-up an Agency Order into separate orders
for 2 or fewer contracts for the purpose of gaining a higher allocation
percentage than the Initiating TPH would have otherwise received in the
AIM.
---------------------------------------------------------------------------
\37\ 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.
---------------------------------------------------------------------------
The Commission believes that the priority and allocation rules are
reasonable and consistent with the Act.\38\ The Commission believes
that the matching algorithm set forth in the FLEX AIM rule is
sufficiently clear regarding how orders are allocated in the AIM
auction. The Commission notes that the proposal to provide both public
customers and non-TPH broker-dealers with first priority in the FLEX
AIM auction is consistent with how other FLEX allocation algorithms
currently operate.\39\ In addition, the Commission notes that public
customer priority/non-TPH broker-dealer priority and price-time
priority have previously been found consistent with the Act.\40\
---------------------------------------------------------------------------
\38\ The Commission also believes that the proposed priority and
allocation rules for electronic FLEX trading in the AIM are
consistent with Section 11(a) of the Act. 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.
FLEX Market-Makers qualify for the market-maker exception. With
respect to non-market-maker members, the auction appears reasonably
designed to cause RFR Quotes constituting the RFR Market and the RFR
Order that trades against the RFR Market to yield to non-member
interest, consistent with the ``G'' exception. See 15 U.S.C.
78k(a)(1)(G) (setting forth all requirements for the ``G''
exception).
\39\ See, e.g., Rule 24B.5(a)(1)(iii)(C) and (D).
\40\ See, e.g., Securities Exchange Act Release Nos. 51822 (June
10, 2005), 70 FR 35321 (June 17, 2005) (SR-CBOE-2004-87) (Adopting
rules pertaining to priority and allocation of trades for index
options) and 56792 (November 15, 2007), 72 FR 65776 (November 23,
2007) (SR-CBOE-2006-99) (Adopting rules providing for the trading of
FLEX Options on an electronic platform).
---------------------------------------------------------------------------
Like the Exchange's AIM for non-FLEX options, the FLEX AIM auction
would be available for orders of fewer than 50 contracts. Under the
Exchange's proposal, there would be no minimum size requirement for
orders entered into the AIM, for a pilot period expiring on July 18,
2012. The Commission believes that the Exchange's proposal should
provide small customer orders with the opportunity for price
improvement, and is consistent with the Act. In particular, any Agency
Order for less than 50 contracts that is entered into the AIM is
guaranteed an execution at the end of the auction at a price at least
the BBO. The Commission will evaluate the AIM auction during the Pilot
Period to determine whether it would be beneficial to customers and to
the options market as a whole to approve any proposal requesting
permanent approval to permit orders of fewer than 50 contracts to be
submitted to the AIM auction. In addition, the Commission will examine
the data submitted by the Exchange with respect to situations in which
the AIM auction is terminated prematurely by an RFR response. To aid
the Commission in its evaluation, the CBOE represents that it will
provide the following information each month:
(1) The number of orders of fewer than 50 contracts entered into
the FLEX AIM auction;
(2) The percentage of all orders of fewer than 50 contracts sent
to CBOE that are entered into CBOE's FLEX AIM auction;
(3) The percentage of all CBOE FLEX trades represented by orders
of fewer than 50 contracts;
(4) The percentage of all CBOE FLEX trades effected through the
FLEX AIM auction represented by orders of fewer than 50 contracts;
(5) The percentage of all FLEX contracts traded on CBOE
represented by orders of fewer than 50 contracts;
(6) The percentage of all FLEX contracts effected through the
FLEX AIM auction represented by orders of fewer than 50 contracts;
(7) The spread in the option, at the time an order of fewer than
50 contracts is submitted to the FLEX AIM auction;
(8) The number of orders of 50 contracts or greater entered into
the FLEX AIM auction;
(9) The percentage of all FLEX orders of 50 contracts or greater
sent to CBOE that are entered into CBOE's FLEX AIM auction;
(10) The spread in the option, at the time an order of 50
contracts or greater is submitted to the FLEX AIM auction;
(11) Of FLEX AIM trades for orders of fewer than 50 contracts,
the percentage done at the BBO, BBO plus $.01, BBO plus $.02, BBO
plus $.03, etc.;
(12) Of FLEX AIM trades for orders of 50 contracts or greater,
the percentage done at the BBO, BBO plus $.01, BBO plus $.02, BBO
plus $.03, etc.;
(13) The number of orders submitted by FLEX Traders when the
spread was $.05, $.10, $.15, etc. For each spread, specify the
percentage of contracts in orders of fewer than 50 contracts
submitted to CBOE's FLEX AIM that were traded by:
(a) The Initiating TPH that submitted the order to the FLEX AIM;
(b) CBOE Market Makers assigned to the class;
(c) Other FLEX Traders;
(d) Public Customer Orders;
(e) Non-TPH broker-dealers; and
(f) Other non-AIM FLEX Orders.
For each spread, also specify the percentage of contracts in orders
of 50 contracts or greater submitted to CBOE's FLEX AIM that were
traded by:
(a) The Initiating TPH that submitted the order to the FLEX AIM;
(b) CBOE Market Makers assigned to the class;
(c) Other FLEX Traders;
(d) Public Customer Orders;
(e) Non-Trading Permit Holder broker-dealers; and
(f) Other non-AIM FLEX Orders.
(14) The number of times that an RFR response matching the BBO
on the opposite side of the market from the RFR responses
prematurely ended the FLEX AIM auction, and the number of times such
orders were entered by the same (or affiliated) firm that initiated
the FLEX AIM auction that was terminated;
(15) The percentage of FLEX AIM early terminations due to the
receipt of an RFR response matching the BBO on the opposite side of
the market from the RFR responses that occurred within a [frac12]
second of the start of the AIM auction; the percentage that occurred
within one second of the start of the AIM auction; the percentage
that occurred within one and [frac12] second of the start of the AIM
auction; the percentage that occurred within 2 seconds of the start
of the AIM auction; the percentage that occurred within 2 and
[frac12] seconds of the AIM auction; and the average amount of price
improvement provided to the Agency Order where the AIM auction is
terminated early at each of these time periods;
(16) The average amount of price improvement provided to the
Agency Order when the FLEX AIM auction is not terminated early
(i.e., runs the full three seconds);
(17) The percentage of all CBOE FLEX trades effected through the
FLEX AIM auction in which the Initiating TPH has chosen the Auto-
Match feature, and the average amount of price improvement provided
to the Agency Order when the Initiating TPH has chosen the Auto-
Match feature vs. the average amount of price improvement provided
to the Agency Order when the Initiating TPH has chosen a single-
price submission;
(18) For the first Wednesday of each month:
(a) The total number of FLEX AIM auctions on that date;
(b) The number of FLEX AIM auctions where the order submitted to
the AIM was fewer than 50 contracts;
(c) The number of FLEX AIM auctions where the order submitted to
the AIM was 50 contracts or greater;
(d) The number of FLEX AIM auctions (for orders of fewer than 50
contracts) with 0 participants (excluding the initiating
participant), 1 participant (excluding the initiating participant),
2 participants (excluding the initiating participant), 3
participants (excluding the initiating participant), 4 participants
(excluding the initiating participant), etc., and
(e) The number of FLEX AIM auctions (for orders of 50 contracts
or greater) with 0 participants (excluding the initiating
participant), 1 participant (excluding the initiating participant),
2 participants
[[Page 20680]]
(excluding the initiating participant), 3 participants (excluding
the initiating participant), 4 participants (excluding the
initiating participant), etc.; and
(19) For the third Wednesday of each month:
(a) The total number of FLEX AIM auctions on that date;
(b) The number of FLEX AIM auctions where the order submitted to
the AIM was fewer than 50 contracts;
(c) The number of FLEX AIM auctions where the order submitted to
the AIM was 50 contracts or greater;
(d) The number of FLEX AIM auctions (for orders of fewer than 50
contracts) with 0 participants (excluding the initiating
participant), 1 participant (excluding the initiating participant),
2 participants (excluding the initiating participant), 3
participants (excluding the initiating participant), 4 participants
(excluding the initiating participant), etc., and
(e) The number of FLEX AIM auctions (for orders of 50 contracts
or greater) with 0 participants (excluding the initiating
participant), 1 participant (excluding the initiating participant),
2 participants (excluding the initiating participant), 3
participants (excluding the initiating participant), 4 participants
(excluding the initiating participant), etc.
B. Solicitation Auction Mechanism
The Exchange is also proposing a SAM Auction for FLEX Options. The
Commission believes that the proposal should allow for greater
flexibility in pricing large-sized orders. The Commission further
believes that the proposal includes appropriate terms and conditions to
assure that the Agency Order is first exposed to FLEX Traders by RFR
for the possibility of price improvement and that public customer
orders on the Exchange are protected. The Commission also notes that
the proposal is similar to requirements set forth in the CBOE SAM for
non-FLEX Options.\41\
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\41\ See Rule 6.74B.
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The Exchange proposes that the duration of the RFR response period
would be established by the Exchange on a class-by-class basis and
shall not be less than three seconds. As with the AIM, one commenter
suggested that the response time in the SAM for newly added flex
strikes be increased from three seconds to one minute.\42\ The
Commission believes that the three-second electronic auction proposed
by the Exchange should provide sufficient time for an electronic crowd
to compete for an Agency Order. The Commission notes that the RFR
response period of three seconds is consistent with the existing
minimum exposure period for FLEX Option crossing pursuant to the
existing FLEX crossing procedures.\43\ The Commission believes that
using the same period of time to respond to RFRs in SAM auctions should
be appropriate for FLEX Traders.
---------------------------------------------------------------------------
\42\ See CTC Letter, supra note 4, at 1. See also discussion at
Section III.A regarding the three-second RFR period for the AIM.
\43\ See Rule 24B.5(b)(3)(iii).
---------------------------------------------------------------------------
Under the proposal, at the conclusion of the SAM, 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(s) that
improves the proposed crossing price. In the case where there are one
or more public customers or non-TPH 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 against other bids (offers) if there is sufficient size at the
bid (offer) to execute the Agency Order entirely. If there is not
sufficient size to execute the entire Agency Order, or if the execution
price would be inferior to the BBO, then the proposed cross would not
be executed, and both the Agency Order and second/solicited order would
be cancelled. 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, priority would first go to RFR responses and FLEX Orders
for the account of public customers and non-TPH broker-dealers based on
time priority, then any RFR responses and FLEX Orders that are subject
to a FLEX Appointed Market-Maker participation entitlement, and finally
all other RFR responses and FLEX Orders. The Commission believes that
the priority and allocation rules are reasonable and consistent with
the Act.\44\
---------------------------------------------------------------------------
\44\ The Commission also believes, for the same reasons
described above for the AIM, that the proposed priority and
allocation rules for electronic FLEX trading in the SAM are
consistent with Section 11(a) of the Act. See supra note 38.
---------------------------------------------------------------------------
The Commission also notes that the Exchange has included a
provision stating that FLEX Traders may not use the SAM auction to
circumvent Rule 24B.5 limiting principal transactions. The Exchange
will also require written notification to customers prior to entering
Agency Orders into the SAM on behalf of the customer and will require
that determinations made by the Exchange regarding eligible classes,
order size parameters, and the minimum price increment shall be
communicated in a Regulatory Circular. The Exchange also proposes to
permit the processing of complex orders. The Commission believes that
the provisions help to clarify application of the SAM rule and may
encourage further use of FLEX Options.
One commenter asserted that the current FLEX auction mechanism
should not be allowed to migrate to the CBOE Hybrid platform, arguing
that participants that submit RFQs can receive quote responses that
lock and/or cross markets.\45\ In response, CBOE stated that the
comments have no relevance to the instant proposed rule change, which
simply seeks to implement the two new FLEX AIM and SAM auctions and
which does not propose any changes to the existing electronic RFQ
auction mechanism.\46\
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\45\ See CTC Letter, supra note 4, at 2.
\46\ See CBOE Response, supra note 5, at 4. CBOE, however, notes
that with respect to the FLEX SAM auction, the mechanism uses an
all-or-none type allocation methodology and, by design it is
possible for an agency order to receive an execution at a price that
is through a response price. This is consistent with how the
existing SAM auction for non-FLEX Options currently operates. Id.
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\47\ that the proposed rule change (File No. SR-CBOE-2011-123), be,
and hereby is, approved.
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\47\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\48\
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\48\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-8171 Filed 4-4-12; 8:45 am]
BILLING CODE 8011-01-P
