Document ID: SEC-2010-0732-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2010-05-18T04:00Z

[Federal Register: May 18, 2010 (Volume 75, Number 95)]
[Notices]               
[Page 27850-27854]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18my10-136]                         

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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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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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

[[Page 27851]]

``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 Market-Makers (``DPMs'') and Lead Market-Makers 
(``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.
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    \3\ Under 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.
    \4\ Under 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 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).
    \5\ The 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).
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    The Exchange recently adopted another priority overlay for the 
price-time 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.
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    \7\ Securities Exchange Act Release No. 60665 (September 14, 
2009), 74 FR 4814 [sic] (September 21, 2009) (SR-CBOE-2009-052).
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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.
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    \8\ PAR 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).
    \9\ See note 10, infra.
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    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 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. 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

[[Page 27852]]

the price-time method, the Market-Maker's entitlement share would be 
calculated using the price-time methodology only.\10\
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    \10\ This 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 Market-Maker's original 
participation entitlement share of a PAR or electronic auction 
execution would be calculated using the UMA method.
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     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 price-
time 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 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 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\
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    \11\ For 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.
    \12\ As 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 * pro-rata 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%).
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    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 Market-Maker 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

[[Page 27853]]

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\
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    \13\ For 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.
    \14\ See, e.g., Arca Rule 6.76A(a).
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    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\
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    \15\ See Securities Exchange Act Release No. 61198 (December 17, 
2009), 74 FR 68880 (December 29, 2009) (SR-CBOE-2009-078).
    \16\ See, 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.
    \17\ Arca'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).
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    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 
Market-Makers 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, 
second-to-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 market-makers based on a price-time (or pro-rata or UMA 
share, if applicable) and any applicable entitlement share; a few 
seconds later there may be a market-turner, 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).
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    \18\ That 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.
    \19\ The 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).
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    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 
Market-Maker'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\
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    \20\ For 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.

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[[Page 27854]]

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 Market-Makers 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.
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    \21\ 15 U.S.C. 78f(b).
    \22\ 15 U.S.C. 78f(b)(5).
    \23\ 15 U.S.C. 78f(b)(8).
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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 rule-comments@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.
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    \24\ The text of the proposed rule change is available on the 
Commission's Web site at http://www.sec.gov.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-11811 Filed 5-17-10; 8:45 am]
BILLING CODE 8010-01-P