Document ID: SEC-2007-0903-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Chicago Board Options Exchange, Inc.
Posted Date: 2007-07-05T04:00Z

[Federal Register: July 5, 2007 (Volume 72, Number 128)]
[Notices]               
[Page 36744-36746]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05jy07-140]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55971; File No. SR-CBOE-2007-66]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Regarding Its Open Outcry Allocation Rules

June 28, 2007.
    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 June 18, 2007, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') 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 substantially 
prepared by CBOE. The Exchange filed the proposal as a ``non-
controversial'' proposed rule change pursuant to section 
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ 
which renders it effective upon filing with the Commission. The 
Commission is publishing this notice 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to amend its open outcry allocation rules for classes 
trading on the Hybrid Trading System (``Hybrid''). The text of the 
proposed rule change is available at CBOE, the Commission's Public 
Reference Room, and (http://www.cboe.org/Legal).

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 CBOE included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any

[[Page 36745]]

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
    The Exchange is proposing to modify its open outcry allocation 
rules for Hybrid classes, which are contained in paragraph (b) of 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, as applicable. 
Under the existing allocation rules, at the same execution price: (i) 
Public customer orders in the electronic book have first priority, with 
multiple public customer orders prioritized based on time priority; 
(ii) in-crowd market participants and broker-dealer orders resting in 
the electronic book collectively have second priority, with the broker-
dealer orders getting a ``book market participant'' share;\5\ and (iii) 
electronic quotes of Market-Makers have third priority, with multiple 
bids or offers prioritized based on the electronic allocation algorithm 
in effect for the option class.\6\
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    \5\ Under the existing allocation rules, the cumulative number 
of broker-dealer orders in the electronic book at the best price are 
deemed to be one ``book market participant'' regardless of the 
number of broker-dealer orders in the book. Also under the existing 
rules, the allocation due the broker-dealer orders in the electronic 
book by virtue of their being deemed a ``book market participant'' 
is as follows: If two or more bids (offers) represent the best 
price, one of which represents a book market participant, priority 
is afforded to the in-crowd market participants in the sequence in 
which their bids (offers) were made; provided, however, that (i) the 
first in-crowd market participant to respond is entitled to 70% of 
the order; (ii) the second in-crowd market participant to respond 
(if ascertainable) is entitled to 70% of the remainder of the order 
(i.e., 70% of 30%); and (iii) the balance of the order is 
apportioned equally among the remaining in-crowd market participants 
bidding (offering) at the same price and the book market participant 
share. If it is not possible to determine the order in which in-
crowd market participants responded, the balance of the order shall 
be apportioned equally among the remaining market participants 
bidding (offering) at the same price and, if applicable, the book 
market participant. If two or more bids (offers) represent the best 
price, each of which is NOT a book market participant, priority is 
afforded to the in-crowd market participants in accordance with the 
allocation principles contained in CBOE Rule 6.45(a) or (b), which 
generally provide that priority is afforded to such bids (offers) in 
the sequence in which they are made or, if the bids were made at the 
same time or in the event the sequence cannot be reasonably 
determined, priority is apportioned equally. See existing CBOE Rules 
6.45A(b) and 6.45B(b).
    \6\ The particular algorithm is determined on a class-by- class 
basis and can be based on either price-time priority, pro-rata 
priority or the Ultimate Match Algorithm (``UMA''). The UMA 
allocation formula has a component based on the number of market 
participants quoting at the best price (``Component A'') and a 
component based on the size of market participant quotes. Depending 
on the particular algorithm and class, additional priority overlays 
pertaining to public customer orders, Market-Maker participation 
entitlements and market turner may also apply. See CBOE Rule 
6.45A(a) or 6.45B(a), as applicable.
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    The Exchange is proposing to revise the priority levels so that, at 
the same execution price: (i) Public customer orders in the electronic 
book would continue to have first priority, with multiple public 
customer orders prioritized based on time priority; (ii) in-crowd 
market participants would have second priority, with multiple bids or 
offers prioritized based on the allocation algorithm provided in Rule 
6.45(A) or (B);\7\ and (iii) broker-dealer orders resting in the 
electronic book and electronic quotes of Market-Makers would 
collectively have third priority, with multiple bids or offers 
prioritized based on the electronic allocation algorithm in effect for 
the option class.\8\
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    \7\ Allocation among the in-crowd market participants in this 
manner is consistent with the existing CBOE Rule 6.45A(b) and 
6.45B(b) allocation procedures that apply when there is NOT a book 
market participant. See note 5, supra.
    \8\ If the UMA algorithm is in effect, the cumulative number of 
broker-dealer orders in the electronic book at the best price are 
deemed one ``market participant'' for purposes of calculating 
Component A. See note 6, supra. In revising the priority algorithm 
to provide that in-crowd market participants have priority over the 
trading interests of both broker-dealer orders resting in the 
electronic and electronic quotes of Market-Makers, the Exchange 
notes that at least one other options exchange already has in place 
rules that afford in-crowd participants priority over electronic 
trading interests. See Rule 6.76(d) of NYSE Arca Inc. In addition, 
this change in the priority algorithm will make the open outcry 
priority rules for non-crossing transactions more consistent with 
the Exchange's open outcry priority rules for crossing transactions, 
which currently provide for in-crowd market participants to have 
priority over the trading interests of both broker-dealer orders 
resting in the electronic book and electronic quotes of Market-
Makers. See CBOE Rule 6.74, Crossing Orders.
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    In addition, in order to transact proprietary orders \9\ on the 
floor of the Exchange pursuant to Rule 6.45A(b) or 6.45B(b), members 
must also ensure that they qualify for an exemption from section 
11(a)(1) of the Act.\10\ Members relying on section 11(a)(1)(G) of the 
Act \11\ and Rule 11a1-1(T) thereunder (commonly known as the ``G 
exemption rule'') \12\ as an exemption must comply with the 
requirements of that exemption before executing a proprietary order, 
including the requirement to yield priority to any bid or offer at the 
same price for the account of a person who is not, or is not associated 
with, a member (a ``non-member''), irrespective of the size of any such 
bid or offer or the time when entered. Because CBOE's electronic book 
does not distinguish between member and non-member broker-dealer 
orders, the revised priority provisions would further provide that 
members relying on the G exemption rule must yield priority to any bid 
(offer) at the same price of public customer orders and broker-dealer 
orders (whether non-member or member) resting in the electronic book, 
as well as any other bids and offers that would otherwise have priority 
over such broker-dealer orders under Rule 6.45A(b) or 6.45B(b).\13\
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    \9\ For purposes of CBOE Rule 6.45A(b) or 6.45B(b), a 
``proprietary order'' will mean an order for a member's own account, 
the account of an associated person, or an account with respect to 
which it or an associated person thereof exercises investment 
discretion.
    \10\ 15 U.S.C. 78k(a)(1).
    \11\ 15 U.S.C. 78k(a)(1)(G).
    \12\ 17 CFR 240.11a1-1(T).
    \13\ Thus, for example, a Floor Broker that is relying on the G 
exemption rule must first yield priority to any same priced public 
customer orders and broker-dealer orders resting in the electronic 
book, as well as any in-crowd market participants that would 
otherwise have priority over those broker-dealer orders, before 
executing a proprietary order. In such a scenario, the Rule 6.45A(b) 
or Rule 6.45B(b) priority sequence described above is modified so 
that, at the same price, public customer orders resting in the book 
would have first priority, then the in-crowd market participants (to 
the extent each such market participant also qualifies for an 
exemption from Section 11(a)(1) but is not relying on the G 
exemption rule), then broker-dealer orders resting in the book, then 
the Floor Broker's proprietary order (along with any other in-crowd 
market participants also relying on the G exemption rule). To the 
extent there may be any further remaining balance, same priced 
electronic quotes of Market-Makers would have priority to trade 
next.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
section 6(b) of the Act \14\ in general and furthers the objectives of 
section 6(b)(5) of the Act \15\ in particular in that it is designed to 
promote just and equitable principles of trade, serve to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and protect investors and the public 
interest.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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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 that is not necessary or appropriate in 
furtherance of the purposes of the Act.

[[Page 36746]]

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposal.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (1) 
Significantly affect the protection of investors or the public 
interest; (2) impose any significant burden on competition; and (3) 
become operative for thirty days from the date on which it was filed, 
or such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest, it has become 
effective pursuant to section 19(b)(3)(A) of the Act \16\ and Rule 19b-
4(f)(6) \17\ thereunder.\18\
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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(6).
    \18\ Pursuant to Rule 19b-4(f)(6)(iii), the Exchange has given 
the Commission written notice of its intent to file the proposed 
rule change, along with a brief description and text of the proposed 
rule change, at least five business days prior to the date on which 
the Exchange filed the proposed rule change. See 17 CFR 240.19b-
4(f)(6)(iii).
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in the 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 e-mail to rule-comments@sec.gov. Please include 

File Number SR-CBOE-2007-66 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-CBOE-2007-66. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, 

all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Room, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of CBOE. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly.
    All submissions should refer to File Number SR-CBOE-2007-66 and 
should be submitted on or before July 26, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-12940 Filed 7-3-07; 8:45 am]

BILLING CODE 8010-01-P