Federal Register / Vol. 77, No. 66 / Thursday, April 5, 2012 / Notices 20675 

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

16 17 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. 

17 17 CFR 240.19b–4(f)(6). 

18 17 CFR 240.19b–4(f)(6). 

19For 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). 

20 17 CFR 200.30–3(a)(12). 

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

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. 

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 

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: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://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. 

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 

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 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] 

BILLING CODE 8011–01–P 

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 


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2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 66052 

(January 4, 2012), 77 FR 306. 

4See 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’’). 

5See Letter to Elizabeth M. Murphy, Secretary, 

Commission from Jennifer M. Lamie, CBOE dated 

March 20, 2012 (‘‘CBOE Response’’). 

6A ‘‘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). 

7Any 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. 

8See proposed Rule 24B.5A(a). 

9See proposed Rule 24B.5A(b). 

10See proposed Rule 24B.5A(b)(1)(i). 

11Each 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. 

12See proposed Rule 24B.5A(b)(1)(ii)–(ix). 13See proposed Rule 24B.5A(b)(2). 

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 

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 

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 


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14See proposed Rule 24B.5A(b)(3). 

15See proposed Rule 24B.5A.01. 

16See 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. 

17See proposed Rule 24B.5A.03. 

18See proposed Rule 24B.5A.06. 

19Any 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. 

20See proposed Rule 24B.5B(a). 

21See proposed Rule 24B.5B(b)(1). 

22See proposed Rule 24B.5B(a)(3) and (b)(1)(v). 

23See proposed Rule 24B.5B(b)(2). 

24See proposed Rule 24B.5B(b)(3). 

25See proposed Rule 24B.5B(b)(3)(i)(D). 

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 

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

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 


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26See 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. 

27See proposed Rule 24B.5B.02. 

28See proposed Rule 24B.5B.03 

29See 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). 

33The 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). 

34See 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. 

35See CBOE Response, supra note 5, at 3. 

36See Rule 24B.5(b)(3)(iii). 

37However, 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. 

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

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. 

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 

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 


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Federal Register / Vol. 77, No. 66 / Thursday, April 5, 2012 / Notices 20679 

38The 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). 

39See, e.g., Rule 24B.5(a)(1)(iii)(C) and (D). 

40See, 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). 

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 

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 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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41See Rule 6.74B. 

42See CTC Letter, supra note 4, at 1. See also 

discussion at Section III.A regarding the threesecond RFR period for the AIM. 

43See Rule 24B.5(b)(3)(iii). 44The 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. 

45See CTC Letter, supra note 4, at 2. 

46See 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. 

(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 

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. 

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 


Tkelley on DSK3SPTVN1PROD with NOTICES