Federal Register / Vol. 74, No. 158 / Tuesday, August 18, 2009 / Notices 41761 

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

2 17 CFR 240.19b–4. 

3 15 U.S.C. 78s(b)(3)(A)(iii). 

4 17 CFR 240.19b–4(f)(6). 

5The Exchange has submitted a separate rule 

change filing to adopt the small order priority 

overlay on a permanent basis, SR–CBOE–2009–056. 

That rule change is currently effective and, 

pursuant to Section 19(b)(3)(A) of the Act, 15 U.S.C. 

78s(b)(3)(A), and Rule 19b–4(6), 17 CFR 240.19b– 

4(f)(6) thereunder, will become operative on or 

about August 31, 2009. 

6 In addition to AIM, CBOE has various electronic 

auctions that are described under Rules 6.13A, 

Simple Auction Liaison (‘‘SAL’’), 6.14, Hybrid 

Agency Liaison (HAL), and 6.74B, Solicitation 

Auction Mechanism (‘‘AIM SAM’’). Each of these 

auctions generally allocates executions pursuant to 

the matching algorithm in effect for the options 

class with certain exceptions noted in the 

respective rules. 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–60479; File No. SR–CBOE– 

2009–058] 

Self-Regulatory Organizations; 

Chicago Board Options Exchange, 

Incorporated; Notice of Filing and 

Immediate Effectiveness of Proposed 

Rule Change Related to the Hybrid 

Matching Algorithms 

August 11, 2009. 

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 August 6, 

2009, the Chicago Board Options 

Exchange, Incorporated (‘‘Exchange’’ or 

‘‘CBOE’’) filed with the Securities and 

Exchange Commission (the 

‘‘Commission’’) the proposed rule 

change as described in Items I and II 

below, which Items have been prepared 

by the Exchange. The Exchange filed the 

proposal as a ‘‘non-controversial’’ 

proposed rule change pursuant to 

Section 19(b)(3)(A)(iii) of the Act 3 and 

Rule 19b–4(f)(6) thereunder.4 The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange is proposing to 

introduce an additional priority overlay 

related to small orders executed on its 

Hybrid System on a pilot basis until 

August 31, 2009. The text of the 

proposed rule change is available on the 

Exchange’s Web site (http:// 

www.cboe.org/Legal), at the Exchange’s 

Office of the Secretary and at the 

Commission. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, the 

self-regulatory organization included 

statements concerning the purpose of 

and basis for the proposed rule change 

and discussed any comments it received 

on the proposed rule change. The text 

of those statements may be examined at 

the places specified in Item IV below. 

The Exchange has prepared summaries, 

set forth in sections A, B, and C below, 

of the most significant parts of such 

statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and the 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

CBOE Rules 6.45A and 6.45B set 

forth, among other things, the manner in 

which electronic Hybrid System trades 

in options are allocated. Paragraph (a) of 

each rule essentially governs how 

incoming orders received electronically 

by the Exchange are electronically 

executed against interest in the CBOE 

quote. Paragraph (a) of each rule 

currently provides a ‘‘menu’’ of 

matching algorithms to choose from 

when executing incoming electronic 

orders. The menu format allows the 

Exchange to utilize different matching 

algorithms on a class-by-class basis. The 

menu includes, among other choices, 

the ultimate matching algorithm 

(‘‘UMA’’), as well as price-time and prorata priority matching algorithms with 

additional priority overlays. The 

priority overlays for price-time and prorata currently include: public customer 

priority for public customer orders 

resting on the Hybrid System, 

participation entitlements for certain 

qualifying market-makers, and a market 

turner priority for participants that are 

first to improve CBOE’s disseminated 

quote. These overlays are optional. 

The purpose of this rule filing is to 

adopt an additional priority overlay for 

small orders that can be applied to each 

of the three matching algorithms. The 

Exchange proposes to adopt the small 

order priority overlay on a pilot basis 

expiring on August 31, 2009, at which 

point the Exchange anticipates that this 

priority overlay will become operative 

on a permanent basis through a separate 

rule change.5

If the small order priority overlay is 

in effect for an option class, then the 

following would apply: 

• Orders for five (5) contracts or fewer 

will be executed first by the Designated 

Primary Market-Maker (‘‘DPM’’) or Lead 

Market-Maker (‘‘LMM’’), as applicable, 

that is appointed to the option class; 

provided however, that on a quarterly 

basis the Exchange will evaluate what 

percentage of the volume executed on 

the Exchange (excluding volume 

resulting from the execution of orders in 

AIM (see CBOE Rule 6.74A, Automated 

Improvement Mechanism (‘‘AIM’’)) is 

comprised of orders for five (5) contracts 

or fewer executed by DPMs and LMMs, 

and will reduce the size of the orders 

included in this provision if such 

percentage is over forty percent (40%). 

• This procedure only applies to the 

allocation of executions among noncustomer orders and market maker 

quotes existing in the EBook at the time 

the order is received by the Exchange. 

No market participant is allocated any 

portion of an execution unless it has an 

existing interest at the execution price. 

Moreover, no market participant can 

execute a greater number of contracts 

than is associated with the price of its 

existing interest. Accordingly, the small 

order preference contained in this 

allocation procedure is not a guarantee; 

the DPM or LMM, as applicable, (i) must 

be quoting at the execution price to 

receive an allocation of any size, and (ii) 

cannot execute a greater number of 

contracts than the size that is associated 

with its quote. 

• If a Preferred Market-Maker (see 

CBOE Rule 8.13, Preferred MarketMaker Program) is not quoting at a price 

equal to the national best bid or offer 

(‘‘NBBO’’) at the time a preferred order 

is received, the allocation procedure for 

small orders described above shall be 

applied to the execution of the preferred 

order. If a Preferred Market Maker is 

quoting at the NBBO at the time the 

preferred order is received, the 

allocation procedure for all other sized 

orders, shall be applied to the execution 

of the preferred order (e.g., if the default 

matching algorithm is pro-rata with a 

public customer and participation 

entitlement overlay, the order will 

execute first against any public 

customer orders, then the Preferred 

Market-Maker would receive its 

participation entitlement, then the 

remaining balance would be allocated 

on a pro-rata basis). 

• The small order priority overlay 

will only be applicable to automatic 

executions and will not be applicable to 

any electronic auctions.6

Lastly, like the existing priority 

overlays, the small order priority 

overlay is optional. All determinations 

would be set forth in a regulatory 

circular. 

According to the Exchange, because 

DPMs and LMMs have unique 


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41762 Federal Register / Vol. 74, No. 158 / Tuesday, August 18, 2009 / Notices 

7For example DPMs must, among other things, (i) 

provide continuous electronic quotes in at least 

90% of the series of each multiply-listed option 

classed allocated to it and in 100% of the series of 

each singly-listed option class allocated to it, and 

assure that its disseminated market quotes are 

accurate; (ii) comply with bid/ask differential 

requirements; (iii) ensure that a trading rotation is 

initiated promptly following the opening of the 

underlying security (or promptly after 8:30 am 

Central Time in an index class) in 100% of the 

series of each allocated class by entering opening 

quotes as necessary. See CBOE Rule 8.85, DPM 

Obligations; see also CBOE Rule 8.15A, Lead 

Market-Makers in Hybrid Classes. 

8See CBOE Rules 6.45A(a)(i)(C) and (ii)(2), 

6.45B(a)(i)(2) and (ii)(C), 8.15B, Participation 

Entitlement for LMMs, and 8.87, Participation 

Entitlement of DPMs and e-DPMs. 

9 15 U.S.C. 78s(b)(1). 

10 15 U.S.C. 78f(b). 

11 15 U.S.C. 78f(b)(5). 

12 15 U.S.C. 78s(b)(3)(A). 

13 17 CFR 240.19b–4(f)(6). 

14 17 CFR 240.19b–4(f)(6). In addition, Rule 19b– 

4(f)(6)(iii) 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 Commission deems this 

requirement to be met. 

15 17 CFR 240.19b–4(f)(6)(iii). 

16For purposes only of waiving the 30-day 

operative delay of this proposal, the Commission 

has considered the proposed rule’s impact on 

efficiency, competition, and capital formation. See 

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

17See SR–CBOE–2009–056. 

18See, e.g., ISE Rule 713.01 and 713.03. 

obligations to the CBOE market,7 they 

are provided with certain participation 

rights. Under the current rule, if the 

DPM or LMM, as applicable, is one of 

the participants with a quote at the best 

price, the participation entitlement is 

generally equal to 50% when there is 

one Market-Maker also quoting at the 

best bid/offer on the Exchange, 40% 

when there are two Market-Makers also 

quoting at the best bid/offer on the 

Exchange, and 30% when there are 

three or more Market-Makers also 

quoting at the best bid/offer on the 

Exchange.8 The Exchange is now 

seeking to expand these programs to 

make available an allocation procedure 

on a pilot basis that provides that the 

DPM or LMM, as applicable, has 

precedence to execute orders of five (5) 

contracts or fewer. The Exchange 

believes that this small order priority 

overlay will not necessarily result in a 

significant portion of the Exchange’s 

volume being executed by the DPM or 

LMM, as applicable. As stated above, 

the DPM or LMM would execute against 

such orders only if it is quoting at the 

best price, and only for the number of 

contracts associated with its quotation. 

Nevertheless, the Exchange will 

evaluate what percentage of the volume 

executed on the Exchange is comprised 

of orders for five (5) contracts or fewer 

executed by DPMs and LMMs, and will 

reduce the size of the orders included in 

this provision if such percentage is over 

forty percent (40%). 

The small order priority overlay 

described above is part of CBOE’s 

careful balancing of the rewards and 

obligations that pertain to each of the 

Exchange’s classes of memberships. 

This balancing is part of the overall 

market structure that is designed to 

encourage vigorous price competition 

between Market-Makers on the 

Exchange, as well as maximize the 

benefits of price competition resulting 

from the entry of customer and noncustomer orders, while encouraging 

participants to provide market depth. 

The Exchange believes the proposed 

small order priority overlay, which 

includes participation rights for DPMs 

and LMMs only when they are quoting 

at the best price, strikes the appropriate 

balance within its market and 

maximizes the benefits of an electronic 

market for all participants. 

2. Statutory Basis 

The Exchange believes the proposed 

rule change is consistent with the Act 9

and the rules and regulations 

thereunder and, in particular, the 

requirements of Section 6(b) of the 

Act.10 Specifically, the Exchange 

believes the proposed rule change is 

consistent with the Section 6(b)(5) 11

requirements that the rules of an 

exchange be designed to promote just 

and equitable principles of trade, to 

prevent fraudulent and manipulative 

acts, to remove impediments to and to 

perfect the mechanism for a free and 

open market and a national market 

system, and, in general, to protect 

investors and the public interest. In 

particular, as described further above, 

the Exchange believes the proposed rule 

change is part of the balancing of 

CBOE’s overall market structure, which 

is designed to encourage vigorous price 

competition between Market-Makers on 

the Exchange, as well as maximize the 

benefits of price competition resulting 

from the entry of customer and noncustomer orders, while encouraging 

participants to provide market depth. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

CBOE does not believe that the 

proposed rule change will impose any 

burden on competition not necessary or 

appropriate in furtherance of the 

purposes of the Act. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

The Exchange neither solicited nor 

received comments on the proposal. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Because the foregoing proposed rule 

change: (i) Does not significantly affect 

the protection of investors or the public 

interest; (ii) impose any significant 

burden on competition; and (iii) by its 

terms, does not become operative for 30 

days from the date on which it was 

filed, or such shorter time as the 

Commission may designate, if 

consistent with the protection of 

investors and the public interest, it has 

become effective pursuant to Section 

19(b)(3)(A) of the Act 12 and Rule 19b– 

4(f)(6) thereunder.13

A proposed rule change filed under 

Rule 19b–4(f)(6) normally may not 

become operative prior to 30 days after 

the date of filing.14 However, Rule 19b– 

4(f)(6)(iii) 15 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 requested that the 

Commission waive the 30-day operative 

delay to encourage fair competition 

among brokers and dealers and the 

exchanges by allowing the CBOE to 

effectively compete with options 

exchanges that offer a similar program. 

The Commission believes that waiving 

the 30-day operative delay is consistent 

with the protection of investors and the 

public interest because such waiver 

would allow the pilot to be 

implemented immediately.16 In 

addition, the Commission notes that the 

Exchange has filed the proposed rule 

change that permanently adopts the 

small order priority overlay,17 based on 

substantially similar rules already in 

place at other national securities 

exchanges.18 Accordingly, the 

Commission designates the proposed 

rule change, to adopt the small order 

priority overly on a pilot basis until 

August 31, 2009, operative upon filing. 

At any time within 60 days of the 

filing of such proposed rule change, the 

Commission may summarily abrogate 

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 


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Federal Register / Vol. 74, No. 158 / Tuesday, August 18, 2009 / Notices 41763 

19 17 CFR 200.30–3(a)(12). 

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

2 15 U.S.C. 78a. 

3 17 CFR 240.19b–4. 

4See Securities Exchange Act Release No. 59987 

(May 27, 2009), 74 FR 26902 (June 4, 2009) (order 

approving FINRA 2009–016). 

5See Securities Exchange Act Release No. 56148 

(July 26, 2007), 72 FR 42146 (August 1, 2007) (order 

approving the Agreement) and Securities Exchange 

Act Release No. 56147 (July 26, 2007), 72 FR 42166 

(August 1, 2007) (SR–NASD–2007–054) (order 

approving the incorporation of certain NYSE Rules 

as ‘‘Common Rules’’). Paragraph 2(b) of the 17d–2 

Agreement sets forth procedures regarding 

proposed changes by either NYSE or FINRA to the 

substance of any of the Common Rules. 

6FINRA’s rulebook currently has three sets of 

rules: (1) NASD Rules, (2) FINRA Incorporated 

NYSE Rules, and (3) consolidated FINRA Rules. 

The FINRA Incorporated NYSE Rules apply only to 

those members of FINRA that are also members of 

the NYSE (‘‘Dual Members’’), while the 

consolidated FINRA Rules apply to all FINRA 

members. For more information about the FINRA 

rulebook consolidation process, see FINRA 

Information Notice, March 12, 2008. 

7NYSE Amex LLC has submitted a companion 

rule filing to conform its corresponding NYSE 

Continued 

change is consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number SR–CBOE–2009–058 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number SR–CBOE–2009–058. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site http://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 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 the CBOE. All 

comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR–CBOE–2009–058 and 

should be submitted on or before 

September 8, 2009. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.19

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–19692 Filed 8–17–09; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–60457; File No. SR–NYSE– 

2009–76] 

Self-Regulatory Organizations; Notice 

of Filing and Immediate Effectiveness 

of Proposed Rule Change by New York 

Stock Exchange LLC Deleting NYSE 

Rule 409A and Adopting New Rule 

2266 To Correspond With Rule 

Changes Recently Filed by the 

Financial Industry Regulatory 

Authority, Inc. 

August 7, 2009. 

Pursuant to Section 19(b)(1)1 of the 

Securities Exchange Act of 1934 (the 

‘‘Act’’)2 and Rule 19b–4 thereunder,3

notice is hereby given that, on July 28, 

2009, New York Stock Exchange LLC 

(‘‘NYSE’’ or the ‘‘Exchange’’) filed with 

the Securities and Exchange 

Commission (the ‘‘Commission’’) the 

proposed rule change as described in 

Items I and II below, which Items have 

been prepared by the self-regulatory 

organization. The Commission is 

publishing this notice to solicit 

comments on the proposed rule change 

from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange proposes to proposes to 

[sic] delete NYSE Rule 409A and to 

adopt new Rule 2266 to correspond 

with rule changes recently filed by the 

Financial Industry Regulatory 

Authority, Inc. (‘‘FINRA’’) and approved 

by the Commission.4 The text of the 

proposed rule change is available at the 

Exchange, the Commission’s Public 

Reference Room, and http:// 

www.nyse.com. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, the 

self-regulatory organization included 

statements concerning the purpose of, 

and basis for, the proposed rule change 

and discussed any comments it received 

on the proposed rule change. The text 

of those statements may be examined at 

the places specified in Item IV below. 

The Exchange has prepared summaries, 

set forth in sections A, B, and C below, 

of the most significant parts of such 

statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

The purpose of the proposed rule 

change is to delete NYSE Rule 409A and 

to adopt new Rule 2266 to correspond 

with rule changes recently filed by 

FINRA and approved by the 

Commission. 

Background 

On July 30, 2007, FINRA’s 

predecessor, the National Association of 

Securities Dealers, Inc. (‘‘NASD’’), and 

NYSE Regulation, Inc. (‘‘NYSER’’) 

consolidated their member firm 

regulation operations into a combined 

organization, FINRA. Pursuant to Rule 

17d–2 under the Act, NYSE, NYSER and 

FINRA entered into an agreement (the 

‘‘Agreement’’) to reduce regulatory 

duplication for their members by 

allocating to FINRA certain regulatory 

responsibilities for certain NYSE rules 

and rule interpretations (‘‘FINRA 

Incorporated NYSE Rules’’).5 As part of 

its effort to reduce regulatory 

duplication and relieve firms that are 

members of both FINRA and the 

Exchange of conflicting or unnecessary 

regulatory burdens, FINRA is now 

engaged in the process of reviewing and 

amending the NASD and FINRA 

Incorporated NYSE Rules in order to 

create a consolidated FINRA rulebook.6

Proposed Conforming Amendments to 

NYSE Rules 

As discussed in more detail below, 

FINRA amended certain NASD and 

FINRA Incorporated NYSE Rules and 

adopted consolidated FINRA Rules to 

replace them. The NYSE hereby 

proposes to delete NYSE Rule 409A and 

to adopt new Rule 2266 to conform to 

the changes adopted by FINRA.7


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