43196 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Notices 

12 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 60187 

(June 29, 2009), 74 FR 32664 (‘‘Notice’’). 

4The Plan is a national market system plan 

proposed by the seven existing options exchanges 

and approved by the Commission. See Securities 

Exchange Act Release No. 59647 (March 30, 2009), 

74 FR 15010 (April 2, 2009) (File No. 4–546) (‘‘Plan 

Notice’’) and 60405 (July 30, 2009), 74 FR 39362 

(August 6, 2009) (File No. 4–546) (‘‘Plan 

Approval’’). The seven options exchanges are: 

International Securities Exchange LLC (‘‘ISE’’); The 

NASDAQ Stock Market LLC (‘‘NASDAQ’’); 

NASDAQ OMX BX, Inc. (‘‘BOX’’); NASDAQ OMX 

PHLX, Inc. (‘‘Phlx’’); NYSE Amex LLC (‘‘NYSE 

Amex’’); NYSE Arca, Inc. (‘‘NYSE Arca’’); and 

CBOE (each exchange individually a ‘‘Participant’’ 

and, together, the ‘‘Participating Options 

Exchanges’’). 

5On July 28, 2000, the Commission approved the 

Old Plan as a national market system plan for the 

purpose of creating and operating an intermarket 

options market linkage proposed by the American 

Stock Exchange LLC (n/k/a NYSE Amex), CBOE, 

and ISE. See Securities Exchange Act Release No. 

43086 (July 28, 2000), 65 FR 48023 (August 4, 

2000). Subsequently, Philadelphia Stock Exchange, 

Inc. (n/k/a Phlx), Pacific Exchange, Inc. (n/k/a 

NYSE Arca), Boston Stock Exchange, Inc. (n/k/a 

BOX), and Nasdaq joined the Linkage Plan. See 

Securities Exchange Act Release Nos. 43573 

(November 16, 2000), 65 FR 70851 (November 28, 

2000); 43574 (November 16, 2000), 65 FR 70850 

(November 28, 2000); 49198 (February 5, 2004), 69 

FR 7029 (February 12, 2004); and 57545 (March 21, 

2008), 73 FR 16394 (March 27, 2008). 

6Section 8(c) of the Old Plan. 

7The Linkage Hub is a centralized data 

communications network that electronically links 

the Participating Options Exchanges to one another. 

The Options Clearing Corporation (‘‘OCC’’) operates 

the Linkage Hub. 

8Section 2(16) of the Old Plan. 

9Section 7(a)(i)(C) of the Old Plan. 

10See Securities Exchange Act Release No. 60360 

(July 21, 2009) 74 FR 37265 (July 28, 2009) (File No. 

4–429). 

11 17 CFR 242.608. 

12See Securities Exchange Act Release No. 51808 

(June 9, 2005), 70 FR 37496 (June 29, 2005) (File 

No. S7–10–04); 17 CFR 242.600 et seq. For 

discussions of the similarities between the 

provisions of Regulation NMS and the provisions in 

the Plan, see the Plan Notice and Plan Approval, 

supra note 4. 

13Under the Plan, a ‘‘Trade-Through’’ is generally 

defined as a transaction in an option series, either 

as principal or agent, at a price that is lower than 

a Protected Bid or higher than a Protected Offer.’’ 

See Section 2(21) of the Plan. A ‘‘Protected Bid’’ 

and ‘‘Protected Offer’’ generally means a bid or offer 

in an option series, respectively, that is displayed 

by a Participant, is disseminated pursuant to the 

Options Price Reporting Authority (‘‘OPRA’’) Plan, 

and is the Best Bid or Best Offer. See Section 2(17) 

of the Plan. A ‘‘Best Bid’’ or ‘‘Best Offer’’ means the 

highest bid price and the lowest offer price. Section 

(2)(1) of the Plan. ‘‘Protected Bid’’ and ‘‘Protected 

Offer,’’ together are referred to herein as ‘‘Protected 

Quotation.’’ See Section 2(18) of the Plan. 

14Section 5(a)(ii) of the Plan. 

15Section 5(b) of the Plan. 

16Subparagraphs (ii), (vii), and (viii), 

respectively, of Section 5(b) of the Plan. 

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 inspection and copying 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 ISE. 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–ISE–2009–63 and should be 

submitted on or before September 16, 

2009. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.12

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–20543 Filed 8–25–09; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–60551; File No. SR–CBOE– 

2009–040] 

Self-Regulatory Organizations; 

Chicago Board Options Exchange, 

Incorporated; Order Granting Approval 

of a Proposed Rule Change To Adopt 

Rules Implementing the Options Order 

Protection and Locked/Crossed Market 

Plan 

August 20, 2009. 

I. Introduction 

On June 24, 2009, the Chicago Board 

Options Exchange, Incorporated 

(‘‘CBOE’’ or ‘‘Exchange’’) 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 

thereunder,2 a proposed rule change to 

amend and adopt rules to implement 

the Options Order Protection and 

Locked/Crossed Market Plan. The 

proposed rule change was published for 

comment in the Federal Register on July 

8, 2009.3 The Commission received no 

comments on the proposal. This order 

approves the proposed rule change. 

II. Description of the Proposal 

The Exchange proposes to amend and 

adopt new CBOE rules to implement the 

Options Order Protection and Locked/ 

Crossed Market Plan (‘‘Plan’’).4

Specifically, the Exchange proposes to 

completely replace its current 

Intermarket Linkage Rules (Rules 6.80— 

6.85) with new rules implementing the 

Plan, amend other Exchange rules to 

reflect the Plan, and delete rules 

rendered unnecessary by the Plan. 

The Old Plan 

Each of the Participating Options 

Exchanges are signatories to the Plan for 

the Purpose of Creating and Operating 

an Intermarket Option Linkage (‘‘Old 

Plan’’).5 In pertinent part, the Old Plan 

generally requires its participants to 

avoid trading at a price inferior to the 

national best bid or offer (‘‘tradethrough’’), although it provides for a 

number of exceptions to trade-through 

liability.6 The Participating Options 

Exchanges comply with this 

requirement of the Old Plan by utilizing 

a stand alone system (‘‘Linkage Hub’’) to 

send and receive specific order types,7

namely Principal Acting as Agent 

Orders (‘‘P/A Orders’’), Principal 

Orders, and Satisfaction Orders.8 The 

Old Plan also provided that 

dissemination of ‘‘locked’’ or ‘‘crossed’’ 

markets should be avoided, and 

remedial actions that should be taken to 

unlock or uncross such market.9 Each of 

the Participating Options Exchanges, 

including the Exchange, has submitted 

an amendment to the Old Plan to 

withdraw from such Plan.10 The 

withdrawals will be effective upon 

approval by the Commission of such 

amendments pursuant to Rule 608 of 

Regulation NMS under the Act 

(‘‘Regulation NMS’’).11

The Plan 

The Plan does not require a central 

linkage mechanism akin to the Old 

Plan’s Linkage Hub. Instead, the Plan 

includes the framework for routing 

orders via private linkages that exist for 

NMS stocks under Regulation NMS.12

The Plan requires the Participating 

Options Exchanges to adopt rules 

‘‘reasonably designed to prevent TradeThroughs.’’ 13 Participating Options 

Exchanges are also required to conduct 

surveillance of their respective markets 

on a regular basis to ascertain the 

effectiveness of the policies and 

procedures to prevent Trade-Throughs 

and to take prompt action to remedy 

deficiencies in such policies and 

procedures.14 As further described 

below, the Plan incorporates a number 

of exceptions to trade-through 

liability.15 Some of these exceptions are 

carried over from the Old Plan, 

including exceptions for trading 

rotations, non-firm quotes, and complex 

trades.16 Others are substantially similar 

to exceptions available for NMS stocks 


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17Subparagraphs (i), (iii), (vi), (ix), (xi), and (iv)– 

(v), respectively, of Section 5(b) of the Plan. 

18Subparagraph (x) of Section 5(b) of the Plan. 

19Section 6 of the Plan. The Plan also contains 

provisions relating to the operation of the Plan 

including, for example, provisions relating to the 

entry of new parties to the Plan; withdrawal from 

the Plan; and amendments to the Plan. 

20A more detailed description of the Exchange’s 

proposed rule change may be found in the Notice, 

supra, note 3. 

21Proposed CBOE Rule 6.80. 

22Proposed CBOE Rule 6.81(a). 

23Proposed CBOE Rule 6.81(b)(1)–(10). In 

addition, the Exchange proposes to add ISOs as a 

new type of order under proposed CBOE Rule 

6.53(p). 

24A ‘‘locked market’’ is defined as a quoted 

market in which a Protected Bid is equal to a 

Protected Offer. Proposed CBOE Rule 6.80(9). A 

‘‘crossed market’’ is defined as a quoted market in 

which a Protected Bid is higher than a Protected 

Offer. Proposed CBOE Rule 6.80(5). 

25Proposed CBOE Rule 6.82(a). 26Proposed CBOE Temporary Rule 6.83. 27The Exchange has stated that it intends to 

request exemptive relief from the Plan for a 

temporary period to accommodate the use of P/A 

Orders and P Orders until the Exchange’s roll-out 

of its ISO functionality is complete. 

28See CBOE Rules 6.14A and 6.13. 

29Unless the Exchange’s quotation contains 

resting orders and does not contain sufficient 

Market-Maker quotation interest to satisfy the entire 

order. 

30The qualifying order may also be exposed to 

other members, if permitted by the Exchange. 

under Regulation NMS, such as 

exceptions for systems issues, crossed 

markets, quote flickering, customer 

stopped orders, benchmark trades and, 

notably, intermarket sweep orders 

(‘‘ISOs’’).17 In addition, the Plan 

contains a new exception for stopped 

orders and price improvement.18

The Plan also requires each 

Participant to establish, maintain, and 

enforce written rules that: require its 

members reasonably to avoid displaying 

locked and crossed markets; assure the 

reconciliation of locked and crossed 

markets; and prohibit its members from 

engaging in a pattern or practice of 

displaying locked and crossed markets; 

subject to exceptions as may be 

contained in the rules of the Participant, 

as approved by the Commission.19

The Exchange’s Proposal 

To implement the Plan, the Exchange 

proposes to replace its current rules 

relating to the Old Plan with new rules 

relating to the Plan, and makes 

amendments to other rules as necessary 

to conform to the requirements of the 

Plan.20 As such, the Exchange proposes 

to adopt all applicable definitions from 

the Plan into the Exchange’s rules.21

In addition, the Exchange proposes to 

prohibit its members from effecting 

Trade-Throughs, unless an exception 

applies.22 Consistent with the Plan, the 

Exchange also proposes exceptions to 

the prohibition on trade throughs 

relating to: System issues; trading 

rotations; crossed markets; intermarket 

sweep orders; quote flickering; non-firm 

quotes; complex trades; customer 

stopped orders; stopped orders and 

price improvement; and benchmark 

trades.23

The Exchange also proposes a rule to 

address locked and crossed markets, as 

required by the Plan.24 Specifically, the 

Exchange proposes that, except for 

quotations that fall within a stated 

exception, members shall reasonably 

avoid displaying, and shall not engage 

in a pattern or practice of displaying, 

any quotations that lock or cross a 

Protected Quote.25

The Exchange proposes four 

exceptions to the prohibition against 

locked and crossed markets: when the 

Exchange is experiencing a failure, 

material delay, or malfunction of its 

systems or equipment; when the locking 

or crossing quotation was displayed at 

a time where there is a crossed market; 

when an Exchange member 

simultaneously routes an ISO to execute 

against the full displayed size of any 

locked or crossed Protected Bid or 

Protected Offer; and, when the locking 

quotation is otherwise permissible 

pursuant to Rules CBOE 6.45A(d) and 

6.45B(d). 

The Exchange also proposes rules that 

would permit it to continue to send and 

accept P/A Orders and Principal Orders 

from Participating Options Exchanges.26

The Exchange noted that, during the 

transition to operation under the Plan, 

it will continue to receive and execute 

P/A and Principal Orders if the 

Exchange is the NBBO. Thus, the 

Exchange has proposed to retain certain 

rules governing the receipt of P/A 

Orders and Principal Orders until such 

time that all Participating Options 

Exchanges are operating pursuant to the 

Plan. Further, the Exchange intends to 

access other Participants using P/A 

Orders and Principal Orders on a 

temporary basis and proposes to retain 

rules governing the transmission of P/A 

Orders and Principal Orders.27

The Exchange has also proposed to 

amend to its rules relating to its Hybrid 

Agency Liaison System and Price Check 

Parameters.28 First, the Exchange 

proposes to adopt rules governing a new 

Hybrid Agency Liaison System 

(‘‘HAL2’’). Under these proposed rules, 

the Exchange would determine the 

eligible order size, eligible order type, 

eligible order origin code (i.e., public 

customer orders, non-Market Maker 

broker-dealer orders, and Market Maker 

broker-dealer orders), and classes for 

HAL2. When the Exchange receives a 

qualifying order that is marketable 

against the NBBO and/or the Exchange’s 

BBO,29 HAL2 would expose the order at 

the NBBO price to allow CBOE MarketMakers appointed in that class as well 

as all members acting as agent for orders 

at the top of the Exchange’s book in the 

relevant series to step-up to the NBBO 

price.30 The duration of the exposure 

period would not exceed one second. 

The first responder to indicate an 

interest to trade at the NBBO price 

would trade against the exposed order 

up to the size of the response (the 

exposure period would continue for any 

unexecuted balance). Responders would 

also be allowed to respond at prices 

worse than the NBBO but equal to or 

better than the Exchange’s BBO. At the 

end of the response period (if no 

responders have matched the NBBO 

price or if there is a remainder on the 

exposed order) the HAL2 system would 

ascertain the best available price(s) 

between all pending responses and the 

best disseminated prices on other 

exchanges, and then execute the 

exposed order at the best price(s) by 

trading it against exposed responses first 

and transmitting ISOs to other 

exchanges second. All resulting 

executions would be in compliance 

with the prohibition against tradethroughs. 

If any portion of an order that is 

routed away returns unfilled, the 

Exchange would deem it a ‘‘new’’ order 

for processing purposes and trade it 

against the best bid or offer on the 

Exchange unless another exchange is 

quoting a better price in which case the 

Exchange would attempt to access such 

better price with a new ISO order. Any 

executions at the Exchange’s best bid or 

offer would be handled in two batches: 

first against all interest resting at that 

price at the time the exposed order was 

received; and second against any 

interest that joined at that price after the 

exposure process commenced (in both 

cases the matching algorithm in effect 

for that class will be used). Order 

senders could bypass HAL2 processing 

by submitting Immediate or Cancel 

Orders. 

Paragraph (d) of proposed Rule 6.14A 

lists the circumstances in which an 

exposure period would terminate early. 

Those are: (1) If the Exchange receives 

an unrelated order on the same side of 

the market as the exposed order that is 

priced equal to or better than the 

exposed order; (2) if, in the case of an 

exposed order that is marketable against 

the Exchange’s BBO, Market-Maker 

interest at the BBO decrements to a size 

that would be equal to or smaller than 

the size of the exposed order; and (3) if 

an unrelated order or quote on the 


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31E.g., the NBBO/exposure price for a buy order 

is 1.15, during the exposure period a customer limit 

order to sell at 1.13 is received, the orders would 

be matched to the greatest extent possible at 1.14 

providing price improvement to both orders. If the 

unrelated order was smaller than the exposed order, 

then the exposure period would continue for the 

unexecuted balance of the exposed order. 

32Proposed CBOE Rule 6.13(b)(vi). 

33 In this regard, the HAL2 processing for these 

orders would be different that normal HAL2 

processing. 

34Exchange Rules 6.74A and 6.74B. 

35 In approving this proposed rule change, the 

Commission has considered the proposed rule’s 

impact on efficiency, competition, and capital 

formation. See 15 U.S.C. 78c(f). 

36 15 U.S.C. 78f(b)(5). 

opposite side of the market from the 

exposed order is received that could 

trade against the exposed order at the 

prevailing NBBO or better in which case 

the orders would trade at the NBBO 

unless the unrelated order is a customer 

order, in which case the orders would 

trade at the midpoint of the unrelated 

order’s limit price and the NBBO.31

Lastly, Interpretation and Policy .01 to 

CBOE Rule 6.14A provides that the 

Exchange would limit redistribution of 

exposed order messages to third parties. 

The Exchange has also proposed a 

new price check parameter in 

connection with the new HAL2 

process.32 For classes in which HAL2 is 

activated, the Exchange would not 

automatically execute orders that are 

marketable if the NBBO width is not 

within an acceptable price range 

established by the Exchange (‘‘APR’’), or 

if an execution would follow an initial 

partial execution and occur at a price 

that is not within an acceptable tick 

distance from the initial execution as 

established by the Exchange (‘‘ATD’’). If 

an execution is suspended because of 

the APR, the order would route to PAR 

for handling. If an execution is 

suspended because of the ATD, the 

order would be exposed pursuant to the 

HAL2 process using the ATD as the 

exposure price. If a quantity remains 

after the HAL2 process, the balance 

would route to PAR.33 Users could 

bypass this processing by submitting 

orders with an immediate or cancel 

designation. 

The Exchange has also proposed to 

adopt new CBOE Rule 6.14B which 

would govern the Exchange’s process 

for routing sweep orders to other 

markets. The Exchange has represented 

that it intends to contract with one or 

more routing brokers that are not 

affiliated with the Exchange to route 

sweep orders to other exchanges. Any 

such contract would restrict the use of 

any confidential and proprietary 

information that the routing broker 

receives to legitimate business purposes 

necessary for routing orders at the 

direction of the Exchange. Routing 

services would be available to members 

only and are optional. Members that do 

not want orders routed could use the 

Immediate or Cancel designation to 

avoid routing. 

The proposed rule also provides that: 

(1) The Exchange shall establish and 

maintain procedures and internal 

controls reasonably designed to 

adequately restrict the flow of 

confidential and proprietary 

information between the Exchange and 

the routing broker, and any other entity, 

including any affiliate of the routing 

broker, and, if the routing broker or any 

of its affiliates engages in any other 

business activities other than providing 

routing services to the Exchange, 

between the segment of the routing 

broker or affiliate that provides the other 

business activities and the segment of 

the routing broker that provides the 

routing services; (2) the Exchange may 

not use a routing broker for which the 

Exchange or any affiliate of the 

Exchange is the designated examining 

authority; (3) the Exchange will provide 

its routing services in compliance with 

the provisions of the Act and the rules 

thereunder, including, but not limited 

to, the requirements in Section 6(b)(4) 

and (5) of the Act that the rules of a 

national securities exchange provide for 

the equitable allocation of reasonable 

dues, fees, and other charges among its 

members and issuers and other persons 

using its facilities, and not be designed 

to permit unfair discrimination between 

customers, issuers, brokers, or dealers; 

(4) the Exchange will determine the 

logic that provides when, how, and 

where orders are routed away to other 

exchanges; (5) the routing broker cannot 

change the terms of an order or the 

routing instructions, nor does the 

routing broker have any discretion about 

where to route an order; and (6) any bid 

or offer entered on the Exchange routed 

to another exchange via a routing broker 

that results in an execution shall be 

binding on the member that entered 

such bid/offer. 

The Exchange has also proposed to 

adopt several new order types that 

would be added to CBOE Rule 6.53 in 

addition to the ISO. The first is the AIM 

sweep order (‘‘AIM ISO’’). The AIM ISO 

would require the transmission of two 

orders for crossing pursuant to CBOE 

Rule 6.74A without regard for better 

priced Protected Bids or Protected 

Offers because the member transmitting 

the AIM ISO to the Exchange has, 

simultaneously with the routing of the 

AIM ISO, routed one or more ISOs, as 

necessary, to execute against the full 

displayed size of any Protected Bid/ 

Offer that is superior to the starting AIM 

auction price and has swept all interest 

in the Exchange’s book priced better 

than the proposed auction starting price 

(with any execution(s) resulting from 

such sweeps shall accrue to the AIM 

Agency Order). The second proposed 

order type is the Sweep and AIM Order. 

A sweep and AIM order would require 

the transmission of two orders for 

crossing pursuant to CBOE Rule 6.74A 

with an auction starting price that does 

not need to be within the Exchange’s 

best bid and offer and where the 

Exchange will ‘‘sweep’’ all Protected 

Bids and Protected Offers by routing one 

or more ISOs, as necessary, to execute 

against the full displayed size of any 

Protected Bid or Protected Offer that is 

superior to the starting AIM auction 

price, as well as sweep all interest in the 

Exchange’s book priced better than the 

proposed auction starting price 

concurrent with the commencement of 

the AIM auction with any execution(s) 

resulting from such sweeps accruing to 

the AIM Agency Order. The final 

proposed order type is the CBOE-Only 

Order. A CBOE-only order would be an 

order to buy or sell that is to be 

executed in whole or in part on the 

Exchange without routing the order to 

another market center. A CBOE-only 

order would be cancelled if routing 

would be required under the Exchange’s 

rules. 

Finally, the Exchange proposes to 

amend certain other rules to reflect the 

Plan and changes to other Exchange 

rules as described above. In particular, 

the Exchange proposes to add a 

reference to HAL2 to CBOE Rule 6.2B, 

eliminate the ‘‘Removal of Unreliable 

Quotes’’ provision of CBOE Rule 6.13, 

eliminate references in the Exchange’s 

crossing mechanisms to the block trade 

exemption of the Old Plan,34 and delete 

CBOE Rule 8.52 relating to the now 

defunct Pilot Program for Away Market 

Maker Access. 

The Exchange also represented that 

the proposed rules would not become 

operative until the Exchange has 

withdrawn from the Old Plan. 

II. Discussion and Commission’s 

Findings 

After careful review, the Commission 

finds that the proposed rule change, as 

amended, is consistent with the 

requirements of the Act and the rules 

and regulations thereunder applicable to 

a national securities exchange.35 In 

particular, the Commission finds that 

the proposal is consistent with Section 

6(b)(5) of the Act 36 which requires, 

among other things, that the rules of a 

national securities exchange be 


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37 17 CFR 242.608(c). Section 1 of the Plan 

provides in pertinent part that, ‘‘The Participants 

will submit to the [Commission] for approval their 

respective rules that will implement the framework 

of the Plan.’’ 

38See supra note 5. 

39Proposed CBOE Rule 6.81(b)(1)–(10). 

40Proposed CBOE Rule 6.81(b)(4). 

41 15 U.S.C. 78f(b)(5). 

42Section 6 of the Plan permits exceptions to the 

Plan’s locked and crossed market rules as may be 

contained in the rules of a Participant approved by 

the Commission. 

43 15 U.S.C. 78f(b)(5). 

designed to promote just and equitable 

principles of trade, to 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 also 

finds that the proposal is consistent 

with Rule 608(c) of Regulation NMS 

under the Act, which requires that each 

exchange comply with the terms of any 

effective national market system plan of 

which it is a participant.37 Finally, the 

Commission finds that the proposed 

rule change is consistent with the 

requirements of the Plan.38

Proposed CBOE Rule 6.80 would 

define applicable terms in a manner that 

are substantively identical to the 

defined terms of the Plan. As such, the 

Commission finds that proposed CBOE 

Rule 6.80 is consistent with the Act and 

the Plan. 

Proposed CBOE Rule 6.81(a) would 

prohibit members from effecting TradeThroughs unless an exception applies. 

Proposed CBOE Rule 6.81(b) would 

provide for ten exceptions to the general 

Trade-Through prohibition, relating to 

systems issues, trading rotations, 

crossed markets, ISOs, quote flickering, 

non-firm quotes, complex trades, 

customer stopped orders, stopped 

orders and price improvement, and 

benchmark trades.39 Aside from the 

proposed exception relating to systems 

issues, each proposed exception would 

be substantively identical to the parallel 

exception under Section 5(b) of the 

Plan. 

The systems issues exception under 

proposed CBOE Rule 6.81(b)(1) would 

implement the parallel exception 

available under Section 5(b)(i) of the 

Plan and would permit the Exchange to 

bypass the Protected Quotation of 

another Participant if such other 

Participant repeatedly fails to respond 

within one second to incoming orders 

attempting to access its Protected 

Quotations. The Exchange’s rule would 

require the Exchange to notify such nonresponding Participant immediately 

after (or at the same time as) electing 

self-help, and assess whether the cause 

of the problem lies with the Exchange’s 

own systems and, if so, take immediate 

steps to resolve the problem. Finally, 

the Exchange would be required to 

promptly document its reasons 

supporting any such determination to 

bypass a Protected Quotation. The 

Commission believes that this exception 

should provide the Exchange with the 

necessary flexibility for dealing with 

problems that occur on an away market 

during the trading day. At the same 

time, the exception’s requirements to 

immediately notify such away market of 

its determination and also assess its 

own system should help prevent the use 

of this exception when there in fact is 

a problem with the Exchange’s own 

systems, rather than those of an away 

market. 

The Commission notes that included 

among the exception in proposed CBOE 

Rule 1901(b) would be an exception for 

certain transactions involving ISOs.40

An order identified as an ISO would be 

immediately executable by the 

Exchange (or any other Plan Participant 

that received such an order) based on 

the premise that the market participant 

sending the ISO has already attempted 

to access all better-priced Protected 

Quotations up to their displayed size. 

The Commission believes that this 

exception should help ensure more 

efficient and faster executions in the 

options markets. 

The Commission notes that, in 

addition to these rules regarding TradeThroughs, the Plan requires that each 

Participant establish, maintain and 

enforce written policies and procedures 

that are reasonably designed to prevent 

Trade-Throughs in that Participant’s 

market that do not fall within an 

applicable exception and, if relying on 

such exception, that are reasonably 

designed to assure compliance with the 

terms of the exception. In addition, the 

Commission notes that the Plan requires 

each Participant to conduct surveillance 

of its market on a regular basis to 

ascertain the effectiveness of such 

policies and procedures and to take 

prompt action to remedy any 

deficiencies in such policies and 

procedures. 

Accordingly, the Commission finds 

that proposed CBOE Rule 6.81 is 

consistent with Section 5 of the Plan 

and Section 6(b)(5) of the Act 41 which 

requires, among other things, that the 

rules of a national securities exchange 

be designed to promote just and 

equitable principles of trade, to 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. 

Proposed CBOE Rule 6.82(a) would 

require Exchange members to 

reasonably avoid displaying, and not 

engage in a pattern or practice of 

displaying, any quotation that locks or 

crosses a Protected Quotation, subject to 

certain exceptions delineated in 

proposed CBOE Rule 6.82(b). The 

Commission recognizes that locked and 

crossed markets may occur accidentally 

and cannot always be avoided. 

However, the Commission believes that 

giving priority to the first-displayed 

Protected Bid or Protected Offer, 

particularly when it includes a public 

customer’s order, will encourage price 

discovery and contribute to fair and 

orderly markets. Therefore, the 

Commission believes that the proposed 

rule, which corresponds to the Plan’s 

language, to require members to 

reasonably avoid displaying, and not 

engaging in a pattern or practice of, 

locks and crosses is appropriate. 

Proposed CBOE Rule 6.82(b) would 

permit four exceptions to the 

Exchange’s general rule relating to 

locked and crossed markets.42 The first 

three would be similar to analogous 

trade-through exceptions under 

proposed CBOE Rule 6.81(b), and relate 

to when the Exchange is experiencing 

systems issues, when there is a crossed 

market, and when a member 

simultaneously routes ISOs against the 

full displayed size of any locked or 

crossed Protected Bid or Protected Offer. 

The fourth exception would permit a 

locking quotation if it is otherwise 

permissible pursuant to CBOE Rules 

6.45A(d) and 6.45B(d). 

The Commission believes that the 

Exchange’s proposed rules relating to 

locked and crossed markets are 

consistent with the Plan and the Act 

and should help ensure that the display 

of locked or crossed markets will be 

limited and that any such display will 

be promptly reconciled. The 

Commission also believes that each of 

the proposed exceptions to locked and 

crossed markets relate to circumstances 

when it is appropriate to permit a 

limited, narrow exception to the general 

locked and crossed market rule. 

Therefore, the Commission finds that 

Exchange’s rule regarding locked and 

crossed markets appropriately 

implements Section 6 of the Plan, and 

is consistent with Section 6(b)(5) of the 

Act 43 which requires, among other 

things, that the rules of a national 

securities exchange be designed to 

promote just and equitable principles of 

trade, to remove impediments to and 

perfect the mechanism of a free and 

open market and a national market 


jlentini on DSKJ8SOYB1PROD with NOTICES
43200 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Notices 

44See Plan Approval, supra, note 5. 45The Commission notes that any Participating 

Options Exchange that wishes to utilize such order 

types in a manner that would result in a TradeThrough would need to separately request an 

exemption from the Plan for such use. See, supra, 

note 27. 46The Commission notes that the rules contained 

in CBOE Temporary Rule 6.83 are not required by 

the Plan, but rather are rules proposed by the 

Exchange in order to facilitate the participation in 

the Plan of certain exchanges, including CBOE, 

during an initial transition period. 47See also, supra, note 27. 48 15 U.S.C. 78f(b)(5). 49Members may choose to avoid routing by using 

the Immediate or Cancel designation. See Notice. 

50See proposed CBOE Rule 6.14B(c). 

51 15 U.S.C. 78f(b)(4) and (5). 

52See proposed CBOE Rule 6.14B(c). 

53 15 U.S.C. 78f(b)(5). 

54See notes 28–32, infra, and accompanying text. 

55 15 U.S.C. 78s(b)(2). 

56 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 60158 

(June 22, 2009), 74 FR 31081 (‘‘Notice’’). 

4The Plan is a national market system plan 

proposed by the seven existing options exchanges 

and approved by the Commission. See Securities 

Exchange Act Release No. 59647 (March 30, 2009), 

74 FR 15010 (April 2, 2009) (File No. 4–546) (‘‘Plan 

system, and, in general, to protect 

investors and the public interest. 

The Commission also finds that 

proposed CBOE Temporary Rule 6.83, 

which facilitates the participation of 

certain Participating Options Exchanges, 

including CBOE, who may require the 

use of P/A Orders and Principal Orders 

after implementation of the Plan, and 

would permit CBOE to transmit P/A 

Orders and Principal Orders, is 

consistent with the Act. Although the 

Commission has already approved the 

Plan,44 the Commission also recognizes 

that the Exchange and other Plan 

Participants may require a temporary 

transition period during which they 

may want to utilize these order types 

that exist currently under the Old 

Plan.45 The Exchange and each of the 

other Participating Options Exchanges 

have proposed substantially identical 

temporary provisions to accommodate 

this.46 Further, because the Exchange 

intends also to send P/A Orders and 

Principal Orders for a temporary period, 

the Exchange has proposed temporary 

rules to permit this.47 The Commission 

finds that the proposed rule relating to 

the Exchange’s receipt and handling, 

and transmission of P/A Orders and 

Principal Orders, and imposing certain 

obligations on the Exchange with 

respect to such orders that are similar to 

those that exist under the Old Plan, is 

appropriate and consistent with Section 

6(b)(5) of the Act 48 which requires, 

among other things, that the rules of a 

national securities exchange be 

designed to promote just and equitable 

principles of trade, to 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 further finds that 

CBOE’s proposed rule governing routing 

of sweep orders is consistent with the 

Act. As described above, the Exchange 

would enter into agreements that govern 

the routing of orders to away markets. 

Further, the routing of sweep orders 

would be optional; 49 and the Exchange 

would be responsible for routing 

decisions and would retain control of 

the routing logic. Neither the Exchange, 

nor any affiliate of the Exchange, may be 

the designated examining authority for 

the routing service provider.50 The 

Commission also notes that the rule 

contemplates procedures and internal 

controls designed to protect confidential 

and proprietary information, which 

should help ensure that the routing 

service provider does not misuse 

routing information obtained from the 

Exchange. In addition, the Exchange 

would provide its routing services in 

compliance with the Act and the rules 

thereunder, including but not limited to, 

the requirements in Sections 6(b)(4) and 

(5) of the Act 51 that the rules of a 

national securities exchange provide for 

the equitable allocation of reasonable 

dues, fees, and other charges among 

Exchange members and other persons 

using the Exchange’s facilities, and not 

be designed to permit unfair 

discrimination between customers, 

issuers, brokers, or dealers.52

Proposed CBOE Rule 6.53 proposes 

four new order types: ISO, AIM ISO, 

Sweep and AIM Order, and CBOE-only 

Order. The Commission believes that 

the design of each of these order types 

should ensure that Protected Bids and 

Protected Orders are not traded-through 

in violation of the Plan while also 

providing market participants with 

flexibility in executing transactions that 

meet the specific requirements of the 

order type. Therefore, the Commission 

finds that Exchange’s rule permitting 

these new order types is consistent with 

Section 6(b)(5) of the Act 53 which 

requires, among other things, that the 

rules of a national securities exchange 

be designed to promote just and 

equitable principles of trade, to 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 Exchange is also proposing to 

introduce an updated HAL process (i.e., 

HAL2) and revise its rule governing 

automatic executions.54 The 

Commission finds that such changes are 

appropriate and consistent with the Act 

and the Plan. 

Finally, the Commission finds that 

CBOE’s proposed amendments to 

certain other CBOE rules to reflect the 

provisions of the Plan, and to delete 

provisions of CBOE’s rules rendered 

unnecessary due to the Plan, are 

appropriate and consistent with the Act 

and the Plan. 

IV. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,55 that the 

proposed rule change (SR–CBOE–2009– 

040), be, and it hereby is, approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.56

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–20542 Filed 8–25–09; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–60530; File No. SR–BX– 

2009–028] 

Self-Regulatory Organizations; 

NASDAQ OMX BX, Inc.; Order Granting 

Approval of a Proposed Rule Change 

To Adopt Rules To Implement the 

Options Order Protection and Locked/ 

Crossed Market Plan 

August 18, 2009. 

I. Introduction 

On June 16, 2009, the NASDAQ OMX 

BX, Inc. (‘‘BX’’ or ‘‘Exchange’’) 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 thereunder,2 a proposed rule 

change to amend and adopt rules to 

implement the Options Order Protection 

and Locked/Crossed Market Plan. The 

proposed rule change was published for 

comment in the Federal Register on 

June 29, 2009.3 The Commission 

received no comments on the proposal. 

This order approves the proposed rule 

change. 

II. Description of the Proposal 

The Exchange proposes to amend and 

adopt new rules of the Boston Options 

Exchange Group, LLC (‘‘BOX’’) to 

implement the Options Order Protection 

and Locked/Crossed Market 

Plan (‘‘Plan’’).4 Specifically, the 

Exchange proposes to replace current 


jlentini on DSKJ8SOYB1PROD with NOTICES