27850 Federal Register / Vol. 75, No. 95 / Tuesday, May 18, 2010 / Notices 

9 15 U.S.C. 78s(b)(3)(A). 

10 17 CFR 240.19b–4(f)(2). 

11 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3Under the UMA algorithm, public customer 

orders in the electronic book have first priority to 

trade against incoming electronic orders, then the 

Market-Maker participation entitlement has second 

priority. Thereafter, any remaining balance of the 

incoming order, if any, is allocated among other 

market participants based on a weighting of the 

number of market participants quoting at the best 

bid or offer (Component A) and the percentage that 

the size of each market participant’s quote is at the 

best bid or offer relative to the total number of 

contracts at the disseminated quote (Component B). 

See Rules 6.45A(a)(i)(B)(2) and 6.45B(a)(ii)(B)(2) for 

a more detailed description of UMA. 

4Under the original participation entitlement, the 

Exchange may determine to grant Market-Makers 

participation entitlements pursuant to the 

provisions of Rules 8.87, Participation Entitlement 

of DPMs and e-DPMs, 8.13, Preferred Market-Maker 

Program, or 8.15B, Participation Entitlement of 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

The foregoing rule change is effective 

upon filing pursuant to Section 

19(b)(3)(A) 9 of the Act and Rule 19b– 

4(f)(2) 10 thereunder. At any time within 

60 days of the filing of the 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 

change, as amended, 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 e-mail to rule-comments@ 

Please include File Number SR–NYSE– 

2010–34 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–NYSE–2010–34. 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 Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street, NE., 

Washington, DC 20549, on official 

business days between the hours of 10 

a.m. and 3 p.m. Copies of such filing 

also will be available for inspection and 

copying at the principal office of 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–NYSE– 

2010–34 and should be submitted on or 

before June 8, 2010. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.11

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. 2010–11809 Filed 5–17–10; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–62083; File No. SR–CBOE– 

2010–038] 

Self-Regulatory Organizations; 

Chicago Board Options Exchange, 

Incorporated; Notice of Filing of a 

Proposed Rule Change, as Modified by 

Amendment No. 1 Thereto, Related to 

the Hybrid Matching Algorithms 

May 12, 2010. 

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 April 22, 

2010, the Chicago Board Options 

Exchange, Incorporated (the ‘‘Exchange’’ 

or ‘‘CBOE’’) filed with the Securities and 

Exchange Commission (the 

‘‘Commission’’) the proposed rule 

change as described in Items I, II, and 

III below, which Items have been 

prepared by the Exchange. On May 6, 

2010, CBOE filed Amendment No. 1 to 

the proposed rule change. The 

Commission is publishing this notice, as 

amended, 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 amend 

Rules 6.45A, Priority and Allocation of 

Equity Option Trades on the CBOE 

Hybrid System, and 6.45B, Priority and 

Allocation of Trades in Index Options 

and Options on ETFs on the CBOE 

Hybrid System, to revise its market 

turner and modified participation 

entitlement priority overlays. The text of 

the proposed rule change is available on 

the Exchange’s Web site (http://www.

cboe.org/Legal), at the Office of the 

Secretary, CBOE 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 

Background 

CBOE Rules 6.45A and 6.45B set 

forth, among other things, the manner in 

which incoming electronic orders in 

options are allocated on the Hybrid 

System. Paragraph (a) of each rule 

currently provides a ‘‘menu’’ of 

allocation algorithms to choose from 

when executing incoming electronic 

orders. The menu format allows the 

Exchange to utilize different allocation 

algorithms on a class-by-class basis. The 

menu includes, among other choices, 

the Ultimate Matching Algorithm 

(‘‘UMA’’),3 and price-time and pro-rata 

priority allocation algorithms. 

Additional priority overlays can be 

applied to the base allocation 

algorithms. The price-time and pro-rata 

priority overlays currently include: 

public customer priority for public 

customer orders resting on the Hybrid 

System, participation entitlements for 

certain qualifying market-makers 4 (the 

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LLMs. More than one such participation 

entitlements may be activated for an option class 

(including at different priority sequences), however 

in no case may more than one participation 

entitlement be applied on the same trade. In 

allocating the participation entitlement, all of the 

following apply: (i) To be entitled to their 

participation entitlement, the Market-Maker’s order 

and/or quote must be at the best price on the 

Exchange. (ii) The Market-Maker may not be 

allocated a total quantity greater than the quantity 

that it is quoting (including orders not part of 

quotes) at that price. If pro-rata priority is in effect, 

and Market-Maker’s allocation of an order pursuant 

to its participation entitlement is greater than its 

percentage share of quotes/orders at the best price 

at the time that the participation entitlement is 

granted, the Market-Maker shall not receive any 

further allocation of that order. (iii) In establishing 

the counterparties to a particular trade, the 

participation entitlement must first be counted 

against that Market-Maker’s highest priority bids or 

offers. (iv) The participation entitlement shall not 

be in effect unless the public customer priority is 

in effect in a priority sequence ahead of the 

participation entitlement and then the participation 

entitlement shall only apply to any remaining 

balance. See Rules 6.45A(a)(ii)(2) and 6.45B(a)(i)(2). 5The terms of the original participation 

entitlement(s) vary depending on the particular 

base allocation algorithm. For UMA classes, the 

Market-Maker receives an allocation that is either 

(i) The greater of the amount the Market-Maker 

would be entitled to pursuant to the participation 

entitlement or the amount it would otherwise 

receive pursuant to the operation of the UMA 

algorithm, (ii) the amount the Market-Maker would 

be entitled to pursuant to the participation 

entitlement or (iii) in index and ETF option classes, 

the amount the Market-Maker would be entitled to 

receive pursuant to the operation of the UMA 

algorithm. The Exchange determines which of the 

various entitlement formulas will be in effect on a 

class-by-class basis. Also, under formulas (i) and (ii) 

above, additional ‘‘Component A’’ allocations are 

provided to certain On-Floor DPMs and On-Floor 

LMMs. See Rules 6.45A(a)(i)(C) and 6.45B(a)(ii)(C). 

For pro-rata classes, the Market-Maker would 

receive a participation that is the greater of its 

participation entitlement or its pro-rata allocation 

share. For price-time classes, the Market-Maker 

would receive a participation entitlement and a 

time priority share on any remaining balance. 

Whether UMA, pro-rata, or price-time priority is in 

effect for an options class, each allocation 

calculation is based on any remaining balance of 

the incoming order after public customer priority is 

applied, as well as after any other higher ranked 

priority overlay, such as market turner priority, is 

applied. 

6 If the small order priority overlay is in effect for 

an option class, then orders for five (5) contracts or 

fewer will be executed first by the DPM or LMM, 

as applicable, appointed to the option class. This 

participation entitlement is subject to certain 

conditions, including a condition that public 

customer priority must be in effect in priority 

sequence ahead of the participation entitlement. 

See Rules 6.45A(a)(iii) and 6.45B(a)(iii). 

7Securities Exchange Act Release No. 60665 

(September 14, 2009), 74 FR 4814 [sic] (September 

21, 2009) (SR–CBOE–2009–052). 

8PAR is utilized to accommodate trading in open 

outcry, where different rules on electronic book 

priority apply. For example, in open outcry at the 

same price, public customer orders in the electronic 

book have first priority, bid (offers) of in-crowd 

market participants have second priority, and bids 

(offers) of broker-dealer orders in the electronic 

book and electronic quotes of Market-Makers have 

third priority. See, e.g., Rules 6.45A(b) and 

6.45B(b). 

9See note 10, infra. 

‘‘original participation entitlement(s)’’) 5

and a market turner priority for 

participants that are first to improve 

CBOE’s disseminated quote. In addition, 

a small order participation entitlement 

overlay for Designated Primary MarketMakers (‘‘DPMs’’) and Lead MarketMakers (‘‘LMMs’’) can be applied to each 

of the three allocation algorithms (i.e., 

price-time, pro-rata or UMA).6 These 

overlays are all optional. 

The Exchange recently adopted 

another priority overlay for the pricetime and pro-rata allocation algorithms 

that the Exchange refers to as the 

‘‘modified participation entitlement.’’ 7

The modified participation entitlement 

currently operates in the same manner 

as the original participation 

entitlement(s) with a few exceptions. In 

particular, the modified participation 

entitlement provides that, if at the time 

of execution of an inbound order there 

are no Public Customer orders resting at 

the best price or a Public Customer was 

the first to rest interest at the best price, 

then the original participation 

entitlement(s) will be applied. In all 

other cases, participation entitlement 

and public customer priority overlays 

will not be in effect. This modified 

participation entitlement overlay is only 

applicable to automatic executions and 

is not applicable for auctions. Lastly, 

like the other priority overlays, the 

modified participation entitlement is 

optional. The Exchange can determine 

whether one or more of the priority 

overlays shall apply to an option class 

and if more than one is selected, the 

sequence in which they shall apply 

(consistent with applicable rules). All 

determinations are set forth in a 

regulatory circular. 

Amendments to Market Turner and 

Modified Participation Entitlement 

Priority Overlays 

The purpose of this rule change is to 

revise the market turner and modified 

participation entitlement priority 

overlays in various respects described 

below. First, currently the rules provide 

that the market turner priority overlay is 

only available for classes utilizing the 

price-time and pro-rata algorithms. The 

Exchange is now proposing to amend 

the rules to make this entitlement 

overlay available for classes utilizing 

any of the priority methods utilized by 

the Exchange. 

Second, currently the modified 

participation entitlement overlay 

available for the price-time and pro-rata 

priority methods is only applicable to 

automatic executions of incoming 

electronic orders. It is not applicable to 

electronic auctions. The Exchange is 

also proposing to provide that the 

modified participation entitlement 

overlay would not be applicable for 

executions of incoming electronic 

orders initiated from PAR.8 Instead, as 

described in more detail below, the 

original participation entitlement 

parameters would be applied when PAR 

is used to initiate an execution of an 

electronic order.9 Thus, this outcome 

would be no change from how the 

original participation entitlement(s) 

works today when PAR is utilized. 

Third, currently the modified 

participation entitlement overlay 

available for the price-time and pro-rata 

priority methods only modifies the 

application of the original participation 

entitlement. It does not modify the 

application of the small order 

participation entitlement for DPMs and 

LMMs. The Exchange is proposing to 

provide that the modified participation 

entitlement overlay would also be 

available to modify the application of 

the small order participation 

entitlement. 

Fourth, currently under the modified 

participation entitlement overlay 

available for options classes utilizing 

the price-time or pro-rata method, a 

participation entitlement(s) is only 

applied if there are no Public Customer 

orders resting at the best price or if a 

Public Customer was the first to rest 

interest at the best price. In all other 

cases, the participation entitlement and 

public customer priority overlays are 

not in effect for the allocation of 

incoming electronic orders. 

The Exchange is proposing to replace 

this provision with what we refer to as 

the ‘‘greater than’’ provision. Under this 

provision, a Market-Maker that is the 

subject of a participation entitlement 

(including a small order participation 

entitlement) would only receive an 

entitlement if the amount the MarketMaker would be entitled to pursuant to 

the participation entitlement is greater 

than the amount the Market-Maker 

would otherwise receive pursuant to the 

operation of the algorithm. In all other 

cases, the participation entitlement and 

public customer priority would not be 

applied. This allocation would be 

subject to the following: 

• The Market-Maker’s entitlement 

share would be calculated based on any 

remaining balance after all public 

customer orders at the best price are 

satisfied. For options classes using the 

pro-rata method, the Exchange may 

determine on a class-by-class basis to 

calculate the Market-Maker’s 

entitlement share using the UMA 

methodology or the pro-rata 

methodology. For options classes using 

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27852 Federal Register / Vol. 75, No. 95 / Tuesday, May 18, 2010 / Notices 

10This modified participation entitlement overlay 

would only be applicable to automatic executions 

and would not be applicable for executions of 

incoming electronic orders initiated from PAR or 

from electronic auctions. Instead, the original 

participation entitlement parameters would be 

applied for PAR and electronic auctions. In pro-rata 

classes where the UMA method is selected to 

calculate the Market-Maker’s modified participation 

entitlement share, executions of incoming 

electronic orders initiated from PAR and electronic 

auctions would be allocated using the UMA 

method. Therefore, in such classes, the MarketMaker’s original participation entitlement share of 

a PAR or electronic auction execution would be 

calculated using the UMA method. 

11For purposes of this example, assume that the 

original DPM participation entitlement is based on 

the greater of the amount the DPM would be 

entitled to pursuant to the participation entitlement 

or the amount it would otherwise receive pursuant 

to the operation of the UMA algorithm. See note 5, 

supra. 

12As another example, assume that an incoming 

electronic order for 4 contracts is received and that 

the following trading interest is represented at the 

execution price: three Market-Makers for 10 

contracts each, the DPM for 40 contracts, and a 

public customer for 10 contracts. In a class where 

the algorithm is pro-rata with the proposed 

modified participation entitlement for small orders, 

the allocation would be simple pro-rata because the 

DPM’s pro-rata share 2 contracts (4 contracts * prorata share of 40/80) is greater than the DPM’s small 

order preference entitlement share of 0 contracts (0 

contracts remaining after the public customer order 

* 100%). 

13For example, a CBOE Market-Maker gets the 

greater of its UMA share (price-time or pro-rata 

share, if applicable) or entitlement share. See CBOE 

Rules 6.45A(a)(i) and (ii) and 6.45B(a)(i) and (ii). On 

NYSE Arca, Inc. (‘‘Arca’’), an LMM or directed 

option market maker (‘‘DOMM’’) gets the greater of 

its price-time share or, subject to public customer 

priority, entitlement share. See Arca Rule 6.76A(a). 

On the International Securities Exchange, LLC 

(‘‘ISE’’), an primary market maker or preferred 

market maker gets the greater of its pro-rata share 

or entitlement share, which is applied after priority 

customers but based on the total order size (as 

opposed to size remaining after priority customers 

are satisfied). See ISE Rule 713.01 and .03. 

the price-time method, the MarketMaker’s entitlement share would be 

calculated using the price-time 

methodology only.10

• When calculating the amount the 

Market-Maker would otherwise receive 

pursuant to the operation of the 

algorithm, the participation entitlement 

and public customer priority overlays 

would not be considered. Instead the 

calculation would be based on a pricetime or pro-rata basis, as applicable, and 

subject to any other applicable priority 

overlays, such as market turner priority. 

The following example illustrates 

some outcomes when using CBOE’s 

existing allocation algorithms and when 

using the proposed modified 

participation entitlement. Assume that 

an incoming electronic order for 24 

contracts is received and that the 

following trading interest is represented 

at the execution price: three MarketMakers for 10 contracts each, the DPM 

for 40 contracts, and a public customer 

for 10 contracts. 

• In a class where the algorithm is 

simply pro-rata, each Market-Maker is 

allocated 3 contracts, the DPM is 

allocated 12 contracts, and the public 

customer is allocated 3 contracts. 

• In a class where the algorithm is 

pro-rata with original DPM entitlement 

and public customer priority overlays, 

the public customer is allocated 10 

contracts, the DPM is allocated 8 

contracts (14 contracts remaining after 

the public customer order * greater of 

30% or 40/70), and each Market-Maker 

is allocated 2 contracts. 

• In a class where the algorithm is 

pro-rata with the proposed modified 

DPM entitlement overlay (and the DPM 

entitlement is calculated based on the 

pro-rata method), the allocation would 

be simple pro-rata because the DPM’s 

pro-rata share of 12 contracts (24 

contracts * pro-rata share of 40/80) is 

greater than the DPM’s entitlement 

share of 8 contracts (14 contracts 

remaining after the public customer 

order * greater of 30% or 40/70). 

Therefore, each Market-Maker would be 

allocated 3 contracts, the DPM would be 

allocated 12 contracts, and the public 

customer would be allocated 3 

contracts. 

• In a class where the algorithm is 

pro-rata with the proposed modified 

DPM entitlement overlay (and the DPM 

entitlement is calculated based on UMA 

using a 0% Component A weighting and 

a 100% Component B weighting),11 the 

allocation would be simple pro-rata 

because the DPM’s pro-rata share of 12 

contracts (24 contracts * pro-rata share 

of 40/80) is greater than the DPM’s UMA 

entitlement share of 8 contracts (14 

contracts remaining after the public 

customer order * greater of 30% or 40/ 

70). Therefore, each Market-Maker 

would be allocated 3 contracts, the DPM 

would be allocated 12 contracts, and the 

public customer would be allocated 3 

contracts.12

As illustrated above, the outcomes 

that would result when the modified 

participation entitlement is activated in 

a class are not novel or unique. Each 

outcome is an allocation that is 

currently permitted under CBOE’s 

existing allocation rules. Specifically: 

• For classes using a price-time 

methodology, the resulting allocation 

would be either a simple price-time 

allocation or a price-time allocation 

with a participation entitlement after 

yielding to all public customer orders at 

the best price; and 

• For classes using a pro-rata 

methodology, the resulting allocation 

would be either a simple pro-rata 

allocation, a pro-rata allocation with a 

participation entitlement after yielding 

to all public customer orders at the best 

price or, if applicable, an UMA 

allocation with a participation 

entitlement after yielding to all public 

customer orders at the best price. 

Put another way, the allocation that 

occurs when a modified participation 

entitlement is applied would be no 

change from how the allocation operates 

under the existing rules for a class 

utilizing the original participation 

entitlement (and small order 

participation entitlement). Specifically, 

if the amount the Market-Maker would 

be entitled to pursuant to the 

participation entitlement is greater than 

the amount the Market-Maker would 

otherwise receive pursuant to the 

operation of the algorithm, then the 

participation entitlement allocation 

share will continue to be calculated 

based on any remaining balance of the 

incoming order after public customer 

priority and any other priority overlay 

ranked ahead of the entitlement. When 

calculating the amount the MarketMaker would otherwise receive 

pursuant to the operation of the 

algorithm, the resulting allocation 

would be no change from how the 

allocation would operate under the 

existing rules for a class utilizing a 

simple price-time or pro-rata algorithm. 

Specifically, the Hybrid System will 

calculate the Market-Maker’s price-time 

or pro-rata share, as applicable, without 

regard to any public customer priority 

or participation entitlement priority 

(because public customer priority would 

not be applied when a participation 

entitlement is not applied). Any other 

higher ranked priority overlays, such as 

market turner priority, will be 

considered in determining the balance 

of the incoming order to be allocated 

under the price-time or pro-rata 

algorithms, as applicable. 

The notion of a ‘‘greater than’’ concept 

for determining the participation 

entitlement amount is also not novel or 

unique.13 The primary distinction with 

the instant proposal is that, under the 

original participation entitlement, 

public customer priority must be 

applied in a priority sequence ahead of 

the participation entitlement at all times 

for the entitlement to be in effect. Under 

the modified participation entitlement, 

public customer priority will not be 

‘‘hardcoded’’ into the algorithm 

methodology—instead the participation 

entitlement and public customer 

priority will only be applied if the 

entitlement share is greater than the 

price-time or pro-rata share, as 

applicable, and subject to any other 

applicable priority overlays, such as 

market turner priority. This distinction 

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14See, e.g., Arca Rule 6.76A(a). 

15See Securities Exchange Act Release No. 61198 

(December 17, 2009), 74 FR 68880 (December 29, 

2009) (SR–CBOE–2009–078). 

16See, e.g., CBOE Rules 6.45A, 6.45B, 6.74, 6.74A 

and 6.74B, and ISE Rules 713, 716 and 723. Arca 

Rule 6.76A(a) is a slight exception because it only 

requires yielding to public customers at the same 

price that have time priority over the LMM or 

DOMM. 

17Arca’s price-time and LMM/DOMM 

entitlement is one example. See, e.g., Arca Rule 

6.76A(a). CBOE’s price-time or pro-rata and existing 

modified participation entitlement are other 

examples. See CBOE Rules 6.45A(a)(ii)(3) and 

6.45B(a)(i)(3). 

18That the Exchange may use a pro-rata or UMA 

methodology to determine the Market-Maker’s 

entitlement percentage does not have any impact 

from the public customer’s perspective. The public 

customer either gets a pro-rata share or a 100% fill. 

See, e.g., notes 11 and 12, supra, and surrounding 

discussion. 

19The Exchange believes that public customers 

that are traditional retail investors do not typically 

enter resting orders based on allocation algorithms, 

so this change will not impact them. To the 

contrary, public customers actually benefit from the 

proposed allocation methodology because they get 

a minimum price-time or pro-rata share and, 

sometimes, a 100% fill before other market 

participants. Voluntary Professional and 

Professional customers are treated the same as 

broker-dealers (not public customers) under CBOE’s 

allocation rules. See Rule 1.1(fff) and (ggg). 

20For example, the impact of the proposed rule 

change would be reflected in a customer’s average 

touch rate, which the customer might then use to 

determine size and price when entering orders. 

itself is not entirely novel or unique. In 

this regard, the Exchange notes, for 

example, that the price-time algorithm 

being proposed is substantially similar 

to what currently exists on at least one 

other options exchange, except that 

CBOE would propose to yield to all 

public customer orders at the same price 

when a Market-Maker participation 

entitlement is applied (not just public 

customer orders received in time 

sequence ahead of the Market-Maker 

receiving the entitlement).14

The Exchange notes that the 

Commission has stated that priority of 

public customer orders is not an 

essential attribute of an exchange and in 

the past the Commission has approved 

trading rules at options exchanges that 

do not give priority to public customers 

that are priced no better than the orders 

of other market participants.15 Indeed, 

the Exchange’s price-time and pro-rata 

methodologies discussed above are 

examples of allocation methodologies 

that do not require public customer 

priority. However, when an entitlement 

applies (such as the Market-Maker 

participation entitlement or a crossing 

entitlement), the Commission has had a 

general policy for the options exchanges 

to require yielding to all public 

customers at the same price before the 

entitlement can be applied.16 CBOE’s 

proposed amendments to the modified 

participation entitlement are entirely 

consistent with this policy objective— 

before any entitlement can be applied, 

all public customer orders at the best 

price must be satisfied. There is no 

requirement that public customer 

priority be ‘‘hardcoded’’ on every 

allocation, only those allocations where 

an entitlement is applied.17

The Exchange believes that public 

customers will be treated equitably and 

fairly under the proposed rule change. 

We are proposing to apply a general 

allocation algorithm where all market 

participants are treated equally (i.e., 

price-time or pro-rata, as applicable, and 

subject to any other applicable priority 

overlays, such as market turner priority) 

and, to the extent a Market-Maker 

participation entitlement is applied, to 

apply the entitlement only after all 

public customer orders at the same price 

have been satisfied. The proposed 

amendments to the modified 

participation entitlement do not serve to 

in any way disadvantage public 

customers or advantage other market 

participants over public customers. In 

fact, the proposed amendments actually 

favor public customers because they 

receive an added benefit if any 

entitlement is applied (i.e., they are 

completely satisfied with a 100% fill) 

when public customers would 

otherwise only receive a price-time or 

pro-rata share like any other market 

participant. Moreover, the Exchange 

believes that the modified participation 

entitlement, as amended, would 

encourage quote competition because is 

designed to reward aggressive pricing by 

offering incentives both for MarketMakers to support and participate in the 

CBOE marketplace and for market 

participants to establish the best price or 

quote at the best price with size. In 

classes utilizing a price-time algorithm 

with a modified participation 

entitlement, all market participants 

(including public customers) are 

incented to compete by establishing the 

best price. In classes utilizing a pro-rata 

algorithm with a modified participation 

entitlement, all market participants 

(including public customers) are 

incented to compete by quoting more 

size. 

With each incoming electronic order, 

public customers can expect to receive 

their respective price-time or pro-rata 

share (same as other market 

participants) or, in some cases, a 100% 

fill.18 To the extent that public 

customers may strategically rest orders 

based on the allocation algorithm 

employed at a given exchange,19 public 

customers can adjust their ‘‘quoting’’ 

behavior accordingly, similar to how 

they and other market participants 

already would do today. Several market 

characteristics factor into a market 

participant’s quoting behavior 

including, but certainly not limited to, 

the applicable fee structure, average 

incoming order size, and the average 

touch rate (i.e., average allocation a 

market participant actually receives on 

incoming electronic orders). The 

allocation for any market participant 

(including public customers) changes 

constantly from order-to-order, secondto-second for various reasons. For 

instance on CBOE the ultimate 

allocation depends upon, among other 

things, the size of an incoming order 

and whatever trading interest happens 

to be represented at the time the order 

is received (e.g., one second only public 

customers may be represented at the 

best price, in which case the allocation 

to an individual customer is based on 

time priority; the next second there may 

be one public customer and multiple 

market makers at the best price, in 

which case the allocation to the 

customer is based on customer priority 

regardless of when the customer entered 

the order and to the other marketmakers based on a price-time (or prorata or UMA share, if applicable) and 

any applicable entitlement share; a few 

seconds later there may be a marketturner, in which case the market turner 

trades first either entirely or based on a 

percentage share, then public customers 

at the best price trade based on time 

priority; the next second there may be 

only one public customer at the best 

price and incoming order takes out the 

entire balance of the resting order). 

In determining their desired quote 

size and price, other market participants 

already account for the existence or 

non-existence of a Market-Maker 

entitlement (the entitlement may or may 

not be applied on an order-by-order 

basis and to different degrees under the 

current rules depending on, for 

example, whether a Market-Maker with 

an entitlement is actually quoting at the 

best price, the size of the MarketMaker’s quote, the number of other 

Market-Makers quoting at that price, 

and the size of the incoming order). 

Under the proposed rule change, public 

customers that may adjust their quoting 

dynamics based upon, among other 

things, the applicable allocation 

algorithm may also want to account for 

the existence or non-existence of a 

Market-Maker entitlement, similar to 

how other market participants would 

already do today.20

mstockstill on DSKH9S0YB1PROD with NOTICES

27854 Federal Register / Vol. 75, No. 95 / Tuesday, May 18, 2010 / Notices 

21 15 U.S.C. 78f(b). 

22 15 U.S.C. 78f(b)(5). 

23 15 U.S.C. 78f(b)(8). 

24The text of the proposed rule change is 

available on the Commission’s Web site at http:// 

www.sec.gov. 25 17 CFR 200.30–3(a)(12). 

2. Statutory Basis 

The Exchange believes that the 

proposed rule change is consistent with 

Section 6(b) of the Act 21 and the rules 

thereunder, and in particular with: 

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

requires that the rules of a national 

securities exchange, among other things, 

be designed to promote just and 

equitable principles of trade, to remove 

impediments to and perfect the 

mechanism for a free and open market 

and a national market system, and, in 

general, to protect investors and the 

public interest; and not be designed to 

permit unfair discrimination between 

customers, issuers, brokers, or 

dealers; 22 and Section 6(b)(8) of the Act, 

which requires the rules of an exchange 

not to impose any burden on 

competition not necessary or in 

furtherance of the Act.23 The proposed 

rule change ensures that incoming 

electronic orders are allocated in an 

equitable and fair manner and that all 

market participants (including public 

customers) have a fair and reasonable 

opportunity for allocations based on 

established criteria and procedures. 

CBOE believes that the change will 

allow the Exchange other methods to 

reward aggressive pricing in options 

trading on the Hybrid System by making 

market turner available for classes 

utilizing any of the priority methods 

utilized by the Exchange. CBOE also 

believes that the modified participation 

entitlement, as amended, would 

encourage quote competition because is 

designed to reward aggressive pricing by 

offering incentives both for MarketMakers to support and participate in the 

CBOE marketplace and for market 

participants to establish the best price or 

quote at the best price with size. In 

classes utilizing a price-time algorithm 

with a modified participation 

entitlement, all market participants 

(including public customers) are 

incented to compete by establishing the 

best price. In classes utilizing a pro-rata 

algorithm with a modified participation 

entitlement, all market participants 

(including public customers) are 

incented to compete by quoting more 

size. 

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 

No written comments were solicited 

or received with respect to the proposed 

rule change. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Within 35 days of the date of 

publication of this notice in the Federal 

Register or within such longer period (i) 

as the Commission may designate up to 

90 days of such date if it finds such 

longer period to be appropriate and 

publishes its reasons for so finding or 

(ii) as to which the self-regulatory 

organization consents, the Commission 

will: 

(A) By order approve such proposed 

rule change, or 

(B) Institute proceedings to determine 

whether the proposed rule change 

should be disapproved. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

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

No. SR–CBOE–2010–038 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 No. 

SR–CBOE–2010–038. 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,24 all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street, NE., 

Washington, DC 20549, on official 

business days between the hours of 10 

a.m. and 3 p.m. Copies of such filing 

also will be available for inspection and 

copying at the principal office of CBOE. 

All comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File No. 

SR–CBOE–2010–038 and should be 

submitted on or before June 8, 2010. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.25

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. 2010–11811 Filed 5–17–10; 8:45 am] 

BILLING CODE 8010–01–P 

DEPARTMENT OF STATE 

[Public Notice: 7012; OMB Control Number 

1405–0156] 

30–Day Notice of Proposed 

Information Collection: DS–4048, 

Projected Sales of Major Weapons in 

Support of Section 25(a)(1) of the Arms 

Export Control Act 

ACTION: Notice of request for public 

comment and submission to OMB of 

proposed collections of information. 

SUMMARY: The Department of State has 

submitted the following information 

collection request to the Office of 

Management and Budget (OMB) for 

approval in accordance with the 

Paperwork Reduction Act of 1995. 

• Title of Information Collection: 

Projected Sales of Major Weapons in 

Support of Section 25(a)(1) of the Arms 

Export Control Act. 

• OMB Control Number: 1405–0156. 

• Type of Request: Extension of 

Currently Approved Collection. 

• Originating Office: Bureau of 

Political Military Affairs, Directorate of 

Defense Trade Controls, PM/DDTC. 

• Form Number: DS–4048. 

• Respondents: Business 

Organizations. 

mstockstill on DSKH9S0YB1PROD with NOTICES