Document ID: SEC-2017-0225-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2017-02-13T05:00Z

[Federal Register Volume 82, Number 28 (Monday, February 13, 2017)]
[Notices]
[Pages 10524-10533]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-02836]

[[Page 10524]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79981; File No. SR-CBOE-2017-009]

Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to Allocation and Priority Rules

February 7, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on January 24, 2017, Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. The Exchange filed the proposal as a ``non-controversial'' 
proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 
\3\ and Rule 19b-4(f)(6) thereunder.\4\ The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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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). See also Item 7(b) of the Exchange's 
Form 19b-4 filing, in which the Exchange provides additional support 
for the basis for summary effectiveness of its proposal under Rule 
19b-4(f)(6). Specifically, the Exchange states: ``The proposed rule 
change is amending its allocation and priority rules to: (1) Combine 
rule provisions in Rules 6.45, 6.45A and 6.45B regarding allocation 
and priority into a single rule; (2) more accurately reflect and add 
detail regarding current System functionality; (3) eliminate 
duplicative rule provisions; (4) delete obsolete rules the Exchange 
no longer uses; and (5) make other nonsubstantive and technical 
changes, including to make the language describing the allocation 
principles consistent throughout, to make the rule text plain 
English, to use defined terms, to clarify rules that apply to orders 
and quotes (when in the context, it is apparent the rule should not 
apply to just orders), and to use consistent lettering and numbering 
for subparagraphs within the rules. The Exchange notes current Rules 
6.45A and 6.45B are nearly identical, and the proposed rule change 
merely moves current Rule 6.45 into the proposed combined Rule 6.45, 
where it is already incorporated by reference in current rules. As 
discussed below, the substantive changes, including proposed 
provisions regarding (1) pro-rata and rounding, (2) the 
participation entitlements being based on quotes and broker-dealer 
orders and being the greater of the percentage or one contract, (3) 
decrementation, (4) contingency order priority, and (5) the impact 
of order and quote modification on priority, are substantially 
similar to the rules of another exchange and consistent with System 
functionality. The System will continue to allocate and prioritize 
orders and quotes under the proposed rule change as it does today. 
The Exchange believes the proposed rule change simplifies the 
allocation and priority rule provisions and provides additional 
transparency to investors regarding the allocation of orders and 
quotes. With respect to the proposed rule change regarding the 
distribution of contracts when they cannot be allocated 
proportionally in whole numbers pursuant to pro-rata algorithm, the 
Exchange notes the additional detail included in the proposed rule 
change is consistent with current rule text (which provides they are 
distributed in time priority). The proposed rule change regarding 
the distribution of contracts when they cannot be allocated 
proportionally in whole numbers pursuant to UMA (proposed to be 
renamed the aggregated pro-rata algorithm) is fair, reasonable and 
nondiscriminatory. The proposed rule change regarding the quote lock 
timer counting period is consistent with previous rule filings 
regarding that functionality, and the proposed rule change regarding 
capping orders and auction responses that trade with an auctioned 
order following a COA is consistent with other auction functionality 
on the Exchange. Additionally, as discussed above, certain 
provisions of the proposed rule change, including those regarding 
the decrementation of an order or quote after partial execution, the 
priority of modified orders and quotes, and the priority of 
contingency orders, are substantially similar to those of another 
options exchange.''
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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 rules related to the allocation and 
priority of orders and quotes. The text of the proposed rule change is 
available on the Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

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 Exchange 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 these 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 aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    CBOE proposes to amend its rules related to the allocation and 
priority of orders and quotes to combine the rules related to 
allocation and priority into a single rule. Additionally, the proposed 
rule change deletes obsolete and duplicative rule text and adds detail 
to certain provisions regarding current System functionality. The 
proposed rule change also makes technical and nonsubstantive changes.
    Currently, there are three separate rules that describe the general 
allocation and priority principles for trading on CBOE:
     Rule 6.45, which describes the priority and allocation of 
trades classes that do not trade on the Hybrid System (open outcry 
only);
     Rule 6.45A, which describes the priority and allocation of 
trades in equity classes that trade on the Hybrid System; and
     Rule 6.45B, which describes the priority and allocation of 
trades in index and exchange-traded fund (``ETF'') classes that trade 
on the Hybrid System.
    The proposed rule change combines these three rules into a single 
proposed Rule 6.45 to create a single rule regarding allocation and 
priority for all classes. Currently, all classes trade on either the 
Hybrid or Hybrid 3.0 System, so it is no longer necessary to have a 
separate rule (current Rule 6.45) for non-Hybrid classes. Additionally, 
current Rules 6.45A and 6.45B include provisions related to the 
priority and allocation rules for open outcry trading and refer back to 
current Rule 6.45 for a description of other priority and allocation 
rules for open outcry trading. The proposed rule change deletes current 
Rule 6.45 and moves the applicable provisions regarding the priority of 
bids and offers in open outcry referenced in current Rules 6.45A and 
6.45B to proposed Rule 6.45(b). Current Rules 6.45A and 6.45B are 
nearly identical, as priority and allocation rules for all classes that 
trade on the Hybrid System are the same (with a couple of minor 
differences for classes that trade on the Hybrid 3.0 System).\5\ As 
there is no longer a distinction between priority and allocation of 
equity, index and ETF options, the Exchange does not believe it is 
necessary to maintain separate rules. The proposed rule change combines 
these rules into a single proposed Rule 6.45 entitled ``Order and Quote 
Priority and Allocation'' and deletes any rule text that relates to the 
separate rules.\6\ The Exchange believes

[[Page 10525]]

this simplifies the priority and allocation rules applicable to trading 
on the Exchange and will reduce any confusion regarding which priority 
and allocation rules apply.
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    \5\ These differences are noted below and are included in the 
proposed rule. Currently, only options on the S&P 500 Index (SPX) 
trade on the Hybrid 3.0 platform.
    \6\ The proposed rule change amends cross-references to current 
Rules 6.45, 6.45A and 6.45B in Rules 1.1(fff) and (ggg); 6.1A; 
6.2B(c)(i)(C) and Interpretation and Policy .04; 6.8(f); 6.13(a) and 
(b); 6.13A(c) and (d) and Interpretation and Policy .04(ii); 
6.14(c)(2); 6.20, Interpretation and Policy .05; 6.42(4)(b); 6.49A, 
Interpretation and Policy .02; 6.53B(c); 6.53C(c)(ii) and (d)(v), 
and Interpretations and Policies .06(c) and .11; 6.74A(b)(2)(E) and 
Interpretation and Policy .08; 6.74B, Interpretation and Policy .03; 
6.82(b)(4); 7.4(f) and Interpretation and Policy .06; 22.13(b) and 
(d); 24.19(c)(iv); and 29.14 to reflect proposed Rule 6.45. The 
proposed rule change also deletes the introductory language in each 
of current Rules 6.45A and 6.45B that indicate that the rule applies 
to equity options and index and ETF options, respectively. 
Additionally, the proposed rule change deletes the names of cross-
referenced rules and instead includes numbers only in Rules 6.8(f); 
6.9, Interpretation and Policy .05; 6.13(a); 6.20, Interpretation 
and Policy .05; and 6.49A, Interpretation and Policy .02. Names of 
rules are not consistently included in cross-references throughout 
the rules, and CBOE believes cross-referencing the appropriate rule 
number is sufficient.
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    The following table identifies the location of the priority and 
allocation rule provisions in current Rules 6.45, 6.45A and 6.45B and 
the location in the proposed combined Rule 6.45:

------------------------------------------------------------------------
     General Rule provision         Current Rule(s)      Proposed Rule
------------------------------------------------------------------------
Highest bids and lowest offers    Rules 6.45(a)(i)    Rule 6.45(b)(i).
 have priority in open outcry.     and (b),
                                   6.45A(b)(i) and
                                   6.45B(b)(i).
Public \7\ customer orders in     Rules 6.45(a)(i)    Rule
 the book have first priority in   and (b),            6.45(b)(i)(A).
 open outcry trading, and if two   6.45A(b)(i)(A)
 or more public customer orders    and
 are at the same price, priority   6.45B(b)(i)(A).
 is afforded according to time.
Open outcry priority of bids and  Rules 6.45(a)(ii)   Rule 6.45(b).
 offers applies to orders being    and (b), 6.45A(b)
 represented by a Floor Broker     and 6.45B(b).
 or PAR Official or to bids made
 in response to a specific
 request from a Market-Maker \8\.
Bids and offers of in-crowd       Rules 6.45(a)(ii)   Rule
 market participants made at the   and (b),            6.45(b)(i)(B).
 time the market is established    6.45A(b)(i)(B)
 have second priority in open      and
 outcry trading, and if two or     6.45B(b)(i)(B).
 more bids and offers are at the
 same price at the time the
 market was established,
 priority is afforded in the
 sequence in which they were
 made (or equally if sequence
 cannot be determined), which
 sequence is determined by the
 floor broker or PAR official
 representing the order, the
 Designated Primary Market-Maker
 (``DPM'') or Lead Market-Maker
 (``LMM''),\9\ or the Market-
 Maker requesting the bid
 (offer); if the sequence cannot
 be determined beyond a certain
 number of market participants,
 any remaining contracts will be
 apportioned equally among those
 market participants who bid at
 the best price at the time the
 market was established; if a
 market participant declines to
 accept any portion of the
 available contracts, any
 remaining contracts will be
 apportioned equally among the
 other market participants who
 bid at the best price at the
 time the market was established
 until all contracts have been
 apportioned; if any contracts
 remain in an order and the
 remainder is not cancelled, and
 in-crowd market participants
 subsequently make bids (offers)
 in a reasonably prompt manner,
 the remainder is apportioned
 equally between the in-crowd
 market participants who bid
 (offered) the best price.
Broker-dealer orders and Market-  Rules               Rule
 Maker quotes in the book have     6.45A(b)(i)(C)      6.45(b)(i)(C).
 third priority in open outcry     and
 trading, and if two or more       6.45B(b)(i)(C).
 orders or quotes are at the
 same price, priority is
 afforded in accordance with the
 applicable electronic algorithm.
``G-exemption'' rule with         Rules               Rule
 respect to open outcry trading.   6.45A(b)(i)(D)      6.45(b)(i)(D).
                                   and
                                   6.45B(b)(i)(D).
Complex order priority exception  Rules 6.45(e),      Rule 6.45(ii).
                                   6.45A(b)(ii) and
                                   6.45B(b)(ii).
Open outcry priority and          Rule 6.45,          Rule 6.45(b)(iii).
 allocation provisions are         Interpretation
 subject to Rule 8.7,              and Policy .02.
 Interpretation and Policy .02
 and Rule 8.51.
Definition of ``in-crowd market   Rules 6.13B(b),     Rule 1.1(uuu).
 participant'' or ``ICMP'' as an   6.45A
 in-crowd Market-Maker, DPM or     (introductory
 LMM with an allocation or         paragraph), 6.45B
 appointment, respectively, in     (introductory
 the class, and a Floor Broker     paragraph) and
 or PAR Official representing      6.74
 orders in the trading crowd..     (introductory
                                   paragraph).
Price-time priority.............  Rules 6.45A(a)(ii)  Rule
                                   and 6.45B(a)(i).    6.45(a)(i)(A).
Pro-rata priority...............  Rules 6.45A(a)(ii)  Rule
                                   and 6.45B(a)(i).    6.45(a)(i)(B).
Ultimate matching algorithm       Rules 6.45A(a)(i)   Rule
 (``UMA'') \10\.                   and 6.45B(a)(ii).   6.45(a)(i)(C).
Public customer priority overlay  Rules               Rule
 \11\.                             6.45A(a)(i)(A)(1)   6.45(a)(ii)(A).
                                   and (a)(ii)(1),
                                   and
                                   6.45B(a)(i)(1)
                                   and (a)(ii)(A)(1).
Participation entitlement         Rules               Rule
 priority overlay.                 6.45A(a)(i)(C)      6.45(a)(ii)(B).
                                   and (a)(ii)(2),
                                   and
                                   6.45B(a)(i)(2)
                                   and (a)(ii)(C).
Small order preference priority   Rules               Rule
 overlay.                          6.45A(a)(iii)(1)    6.45(a)(ii)(C).
                                   and
                                   6.45B(a)(iii)(1).
Market turner priority overlay..  Rules               Rule
                                   6.45A(a)(iii)(2)    6.45(a)(ii)(D).
                                   and
                                   6.45B(a)(iii)(2).
Handling of locked and inverted   Rules 6.45A(d) and  Rule 6.45(c).
 electronic quotes.                6.45B(d).
Restriction on execution by       Rules 6.45A,        Rule 6.45,
 order entry firms as principal    Interpretation      Interpretation
 against orders they represent,    and Policy .01      and Policy .01.
 including requirement to expose   and 6.45B,
 the orders for a specified        Interpretation
 period of time.                   and Policy .01.
Requirement of order entry firms  Rules 6.45A,        Rule 6.45,
 to expose orders they represent   Interpretation      Interpretation
 as agent for a specified period   and Policy .02      and Policy .02.
 of time prior to executing the    and 6.45B,
 orders against solicited orders.  Interpretation
                                   and Policy .02.

[[Page 10526]]

 
Exposure counting period for      Rule 6.45B,         Rule 6.45,
 executions of principal           Interpretation      Interpretations
 transactions and solicited        and Policy .03.     and Policies .01
 orders in Hybrid 3.0 classes.                         and .02.
Applicability of allocation and   Rules 6.45A,        Rule 6.45(a)(v)(B)
 priority rules to the displayed   Interpretation      and
 and non-displayed portions of     and Policy .03      Interpretation
 reserve orders.                   and 6.45B,          and Policy .03.
                                   Interpretation
                                   and Policy .04.
Order or quote may not be         Rules 6.45A(a)(i),  Rule 6.45(a)(i),
 allocated a total quantity        (a)(ii)(2) and      8.13(c)(i),
 greater than the order or quote   (a)(iii);           8.15(d)(i), and
 at the execution price.           6.45B(a)(i)(2),     8.87(b)(1)(ii).
                                   (a)(ii) and
                                   (a)(iii);
                                   8.13(c)(i);
                                   8.15(d)(i); and
                                   8.87(b)(1)(ii).
The Exchange will announce any    Rules 6.45          Rule 6.45,
 determinations made by            (introductory       Interpretation
 Regulatory Circular.              paragraph),         and Policy .04.
                                   6.45A(a)(i)(C),
                                   (a)(ii),
                                   (a)(iii), and
                                   (c), 6.45B(a)(i),
                                   (a)(ii)(C),
                                   (a)(iii), and (c).
To be eligible for a              Rules               Rules 8.13(b)(ii),
 participation entitlement, a      6.45A(a)(ii)(2)(A   8.15(d)(i), and
 Market-Maker must be quoting at   ),                  8.87(b)(1)(i).
 the BBO.                          6.45B(a)(i)(2)(A)
                                   , 8.13(b)(ii),
                                   8.15(d)(i), and
                                   8.87(b)(1)(i).
The Exchange may apply a          Rules               Rules
 participation entitlement only    6.45A(a)(i)(C)      6.45(a)(ii)(B)(2)
 if it has applied the public      and                 , 8.13(c)(ii),
 customer priority overlay, and    (ii)(2)(2)(D),      8.15(d)(i), and
 the participation entitlement     6.45B(a)(i)(2)(D)   8.87(b)(1)(iii).
 is based on the number of         and (a)(ii)(C).
 contracts remaining after all
 public customer orders at the
 same price have been filled.
The Exchange may apply more than  Rules               Rule
 one participation entitlement     6.45A(a)(ii)(2)     6.45A(a)(ii)(B)(3
 for a class (in different         and                 ).
 sequences), but no more than      6.45B(a)(i)(2).
 one participation entitlement
 may apply on the same trade.
------------------------------------------------------------------------

    As the table demonstrates, numerous allocation and priority rule 
provisions are included in multiple places within the rules. The 
proposed rule change eliminates this duplication within the proposed 
Rule 6.45.\12\
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    \7\ As discussed below, the proposed rule change uses the term 
``priority customer'' rather than ``public customer.''
    \8\ The current rule text includes references to Order Book 
Officials having the same obligation. The Exchange no longer uses 
Order Book Officials, so the proposed rule change omits the Order 
Book Official references from this provision.
    \9\ The Exchange notes current Rule 6.45(a)(ii) does not include 
a reference to LMM. Some classes have DPMs, while others have LMMs. 
This is consistent with the definition of in-crowd market 
participant in current Rule 6.45B, which includes the LMM in the 
class. Proposed Rule 6.45(b)(i)(B) thus includes a reference to LMM 
in addition to DPM to allow for an LMM to determine sequence in 
classes with an LMM rather than a DPM.
    \10\ The proposed rule change renames UMA as the ``aggregated 
pro-rata'' allocation algorithm.
    \11\ The proposed rule change renames the public customer 
priority as the priority customer priority.
    \12\ The proposed rule change makes certain, nonsubstantive 
changes to some of these provisions, such as making the language 
consistent with other provisions, making the language plain English, 
and conforming lettering and numbering. Except as otherwise 
described in this rule filing, the proposed provisions apply in the 
same manner as the current provisions.
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    The proposed Rule 6.45 simplifies the electronic allocation and 
priority rules by reorganizing them to first describe the three base 
electronic allocation algorithms and then describe the four priority 
overlays that may apply to the base electronic allocation algorithms. 
Currently, and as proposed, there are three base electronic allocation 
algorithms: Price-time,\13\ pro-rata,\14\ and UMA (proposed to be 
renamed aggregated pro-rata).\15\ With respect to price-time and pro-
rata, currently and as proposed, the Exchange may apply public customer 
(proposed to be renamed priority customer) \16\ and participation 
entitlement \17\ overlays on a class-by-class basis; with respect to 
UMA, public customer and participation entitlement overlays currently 
automatically apply.\18\ The Exchange believes it is simpler to have a 
structure of three base algorithms and optional overlays (currently 
four) that may be applied in the same manner to the base algorithms. 
The proposed aggregated pro-rata allocation will be subject to the 
restriction described in the table above that provides if the Exchange 
applies a participation entitlement to a class, it must also apply the 
public customer priority in the priority sequence ahead of the 
participation entitlement, which is consistent with how UMA functions 
today. While the proposed rule change makes nonsubstantive changes to 
the description of the price-time and pro-rata base electronic 
allocation algorithms (for example, to make the language describing the 
allocation principles consistent throughout the Rules and plain 
English), the proposed rule change does not amend how these algorithms 
apply to trading on the Exchange.
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    \13\ See current Rules 6.45A(a)(ii) and 6.45B(a)(i) and proposed 
Rule 6.45(a)(i)(A).
    \14\ See current Rules 6.45A(a)(ii) and 6.45B(a)(i) and proposed 
Rule 6.45(a)(i)(B).
    \15\ See current Rules 6.45A(a)(i) and 6.45B(a)(ii) and proposed 
Rule 6.45(a)(i)(C). Because the Exchange applies UMA (proposed to be 
renamed aggregated pro-rata) to most classes, the proposed rule 
change states proposed Rule 6.45(a)(i)(C) will apply to all classes, 
except to classes to which the Exchange determines to apply the base 
electronic allocation algorithm in proposed subparagraph (A) or (B).
    \16\ See current Rules 6.45A(a)(ii)(1) and 6.45B(a)(i)(1) and 
proposed Rule 6.45(a)(ii)(A).
    \17\ See current Rules 6.45A(a)(ii)(2) and 6.45B(a)(i)(2) and 
proposed Rule 6.45(a)(ii)(B).
    \18\ See current Rules 6.45A(a)(i)(A)(1) and (a)(i)(C) and 
6.45B(a)(ii)(A)(1) and (a)(ii)(C) and proposed Rule 6.45(a)(ii)(A) 
and (B).
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    The proposed rule change adds detail to how the System distributes 
contracts pursuant to the pro-rata algorithm and rounds fractions of 
contracts. Current Rules 6.45A(a)(ii) and 6.45B(a)(i) state executable 
quantity is allocated to the nearest whole number, with fractions \1/2\ 
or greater rounded up and fractions less than \1/2\ rounded down. Those 
rules also state if there are two market participants both are entitled 
to an additional \1/2\ contract and there is only one contract 
remaining to be distributed, the additional contract will be 
distributed to the market participant(s) whose quote or order has time 
priority. This is consistent with System functionality; however, it 
represents only one example (a situation in which there are two market 
participants and only one remaining contract) rather than a general 
rule regarding allocations of contracts that cannot be allocated 
proportionally in whole numbers. For example, three market participants 
may be entitled to an additional fraction of a contract.
    The proposed rule change amends this provision to state if there 
are two or more resting orders or quotes at the best price, then the 
System allocates contracts from an incoming order or

[[Page 10527]]

quote to resting orders and quotes sequentially in the order in which 
the System received them (i.e., according to time) proportionally 
according to size (i.e., on a pro rata basis). The System allocates 
contracts to the first resting order or quote proportionally according 
to size (based on the number of contracts to be allocated and the size 
of the resting orders and quotes). Then, the System recalculates the 
number of contracts to which each remaining resting order and quote is 
afforded proportionally according to size (based on the number of 
remaining contracts to be allocated and the size of the remaining 
resting quotes and orders) and allocates contracts to the next resting 
order or quote. The System repeats this process until it allocates all 
contracts from the incoming order or quote. The System rounds fractions 
\1/2\ or greater up and fractions less than \1/2\ down prior to each 
allocation. This proposed provision is consistent with the current rule 
that states contracts are distributed to quotes and orders in time 
priority. It adds detail regarding the sequential nature of the 
allocation process and applies the provision to situations in which any 
number of orders or quotes may be entitled to non-whole numbers of 
contracts. The Exchange believes this is a fair, objective process and 
simple systematic process to allocate ``extra'' contracts when more 
than one market participant may be entitled to those extra contracts 
after rounding.
    The following examples demonstrate this process:
     Example 1: Suppose there are three resting orders at the 
same price with sizes of 30 (Order A), 20 (Order B) and 10 (Order C) 
(received by the System in that order), and an incoming order with size 
of 15 is marketable against those three orders. The System first 
allocates 8 contracts to Order A (\1/2\ of 15 is 7.5, which rounds to 
8). After this allocation, the System allocates 5 of the 7 remaining 
contracts to Order B (\2/3\ of 7 is 4.7, which rounds to 5), and then 
allocates the remaining 2 contracts to Order C.
     Example 2: Suppose there are three resting orders at the 
same price with sizes of 10 (Order A), 20 (Order B) and 30 (Order C) 
(received by the System in that order), and an incoming order with size 
of 15 is marketable against those three orders. The System first 
allocates 3 contracts to Order A (\1/6\ of 15 is 2.5, which rounds to 
3). After this allocation, the System allocates 5 of the 12 remaining 
contracts to Order B (\2/5\ of 12 is 4.8, which rounds to 5), and then 
allocates the remaining 7 contracts to Order C.
     Example 3: Suppose there are three resting orders A, B and 
C (received by the System in that order) at the same price, each with a 
size of 50, and an incoming order with size of 100 is marketable 
against those three orders. The System first allocates 33 contracts to 
Order A (\1/3\ of 100 is 33.3, which rounds to 33). After this 
allocation, the System allocates 34 of the 67 remaining contracts to 
Order B (\1/2\ of 67 is 33.5, which rounds to 34), and then allocates 
the remaining 33 contracts to Order C.
    The proposed rule change amends and redefines UMA as aggregated 
pro-rata. Current Rules 6.45A(a)(i) and 6.45B(a)(ii) provide, when 
there is more than one order or quote at the same price, the allocation 
will be based on two components (which will be a weighted average of 
the percentages established by the Exchange for each component): 
Component A is based on the number of market participants quoting at 
the Exchange's best bid or offer (``BBO'') and Component B (also known 
as the size pro-rata allocation) is based on the size of each market 
participant's quote or order at the BBO relative to the total size at 
the BBO. Currently, in any class in which UMA applies, the Exchange has 
established a 0% weight to Component A and 100% weight to Component B. 
Thus, orders and quotes are allocated pursuant to the size pro-rata 
allocation of Component B (Component B includes the process of 
aggregating broker-dealer interest, as further described below). The 
Exchange does not intend to factor in Component A to UMA. Therefore, 
the proposed rule change deletes Component A and redefines UMA as 
aggregated pro-rata allocation (which is current Component B). Proposed 
Rule 6.45(a)(i)(C) states resting quotes and orders in the book are 
prioritized according to price. If there are two or more quotes or 
orders at the same price, then priority is afforded among these quotes 
and orders based on the percentage that the size of each quote and 
order at that price represents relative to the total number of 
contracts at that price. For purposes of this provision, all broker-
dealer orders at the same price will be treated as one broker-dealer 
order, with size consisting of the cumulative number of contracts in 
those broker-dealer orders at that price. After the ``one'' broker-
dealer order is allocated a certain number of contracts pursuant to 
this subparagraph, those contracts are allocated proportionally 
according to size to each broker-dealer order comprising the ``one'' 
broker-dealer order. The proposed rule change is merely deleting the 
part of UMA that is no longer used and any related rule text, such as 
the provisions related to weighting of two components and the equations 
demonstrating how UMA applies when both components are in effect.\19\ 
Proposed Rule 6.45(a)(i)(C) incorporates the provisions in current 
Rules 6.45A(i) and (i)(A)(2) and 6.45B(ii) and (ii)(A)(2) that describe 
the operation of this algorithm, which will continue to remain in 
place. Allocation pursuant to aggregated pro-rata will be the same as 
it is today, although the proposed rule change simplifies the 
description (for example, the proposed rule change revises the first 
part of this provision to use language consistent with that used in the 
pro-rata description; unlike in the standard pro-rata allocation, 
broker-dealer orders are aggregated prior to the pro-rata 
distribution).
---------------------------------------------------------------------------

    \19\ The proposed rule change amends Rule 6.53C(d) to change the 
term UMA to aggregated pro-rata with customer priority (which 
applies to the allocation of complex orders following a complex 
order auction in certain circumstances in that provision) to conform 
to the new terms (as well as to make other nonsubstantive changes, 
including making the language plain English). Similarly, the 
proposed rule change deletes part of Rules 6.45A(a)(i)(C)(1) and 
6.45B(a)(ii)(C)(1) and Rule 6.45B(a)(ii)(C)(3), which provide for an 
On-Floor DPM or LMM to be entitled to receive a different amount 
under the participation entitlement overlay for purposes of 
Component A of UMA than it would otherwise receive pursuant to UMA, 
and 8.3(c)(vi), which relates to a restriction imposed when UMA with 
a Component A percentage applies to a class.
---------------------------------------------------------------------------

    The proposed rule change adds detail to how the System distributes 
contracts pursuant to the proposed aggregated pro-rata algorithm and 
rounds fractions of contracts. If the number of contracts cannot be 
allocated proportionally in whole numbers, the System randomly 
allocates extra contracts to resting orders and quotes. The Exchange 
believes this is a fair, objective process and simple systematic 
process to allocate ``extra'' contracts when more than one market 
participant may be entitled to those extra contracts after rounding.
    The four electronic priority overlays are public customer, 
participation entitlement, small order and market turner.\20\ Current 
Rules 6.45A(a)(ii)(1) and 6.45B(a)(i)(1) provide when the public 
customer priority overlay is in effect, public customer orders have 
priority over non-public customer orders at the same price and that 
priority is afforded among public customer orders at the same price 
according to time. The proposed rule change includes this provision in 
proposed Rule 6.45(a)(ii)(A) and makes nonsubstantive changes to the 
public

[[Page 10528]]

customer priority, including to make the language consistent with other 
allocation and priority provisions. Additionally, proposed Rule 
6.45(a)(ii)(A) clarifies that public customer orders in the book have 
priority over non-public customer orders and quotes, which is the 
intent of the provision and consistent with the other priority 
provisions that reference orders and quotes.
---------------------------------------------------------------------------

    \20\ As described in current Rules 6.45, 6.45A(b) and 6.45B(b) 
and proposed Rule 6.45(b), customer orders in the electronic book 
receive priority in open outcry trading.
---------------------------------------------------------------------------

    The proposed rule change amends the rules related to PMM, LMM and 
DPM participation entitlements (in addition to the elimination of 
duplicative language as described in the table above and other 
nonsubstantive changes to, for example, make the language consistent 
with other rule provisions regarding priority, add defined terms and 
make the language more plain English). Current Rule 8.13 provides a 
Preferred Market-Maker (``PMM'') participation entitlement is 50% if 
there is one other Market-Maker also quoting at the Exchange's best bid 
or offer (``BBO'') and 40% if there are two or more Market-Makers also 
quoting at the BBO, and Rules 8.15 and 8.87 provide that a LMM or DPM 
participation entitlement, respectively, is 50% if there is one Market-
Maker also quoting at the BBO, 40% if there are two Market-Makers also 
quoting at the BBO and 30% if there are three or more Market-Makers 
quoting at the BBO. The proposed rule change provides each of the PMM, 
LMM and DPM participation entitlement is based on both the number of 
other Market-Maker quotes and broker-dealer orders at the BBO.\21\ This 
is consistent with current System functionality. Additionally, the 
current rules consider whether other Market-Makers are quoting at the 
best price, because Market-Makers provide liquidity to CBOE's market 
and are encouraged to do so if they have the opportunity to participate 
in a larger portion of a trade in which a PMM, LMM or DPM has a 
participation right. Other Trading Permit Holders besides Market-Makers 
provide liquidity to CBOE's market through orders, and the Exchange 
believes those Trading Permit Holders, like Market-Makers, should have 
the same opportunity with respect to broker-dealer orders.
---------------------------------------------------------------------------

    \21\ The proposed rule change makes a corresponding change to 
Rule 8.13, Interpretation and Policy .01(b) related to the PMM 
participation entitlement with respect to complex orders.
---------------------------------------------------------------------------

    The proposed rule change also provides the participation 
entitlement will be the greater of the above percentages or one 
contract. This change is consistent with current System functionality 
as well as the intent of the participation entitlement, which is to 
provide PMMs, LMMs and DPMs with a benefit for their heightened quoting 
obligations.\22\ Because fractions of contracts of less than \1/2\ are 
rounded down, as discussed above, a transaction involving a small 
number of contracts may result in zero contracts being allocated to a 
PMM, LMM or DPM who should otherwise have priority. For example, if 
there is one contract left after an order trades with a public customer 
order, and there is a DPM and two other Market-Makers quoting at the 
BBO, 40% of one would give the DPM zero contracts, as .4 would round 
down to zero.\23\ Thus, this proposed rule change is intended to ensure 
that a PMM, LMM or DPM would receive a contract in this situation to 
continue to encourage PMMs, LMMs or DPMs to provide liquidity on the 
Exchange.
---------------------------------------------------------------------------

    \22\ See proposed Rules 8.13, 8.15 and 8.87.
    \23\ The contract would ultimately go to the Market-Maker who 
entered its quote first, as discussed above.
---------------------------------------------------------------------------

    The proposed rule change also provides, for purposes of determining 
the applicable PMM, LMM or DPM participation entitlement percentage 
(with respect to an electronic execution), broker-dealer orders at the 
same price will be treated as one broker-dealer order with size 
consisting of the cumulative number of contracts in those broker-dealer 
orders. This is also consistent with current System functionality and 
UMA (proposed to be renamed aggregated pro-rata allocation algorithm), 
to which these participation entitlements generally apply. For example, 
if the market is $1.00-$1.20, with the DPM's quote bid at $1.00 and 
three broker-dealer orders to buy at $1.00, a trade at $1.00 will 
allocate 50% to the DPM and 50% among the three broker-dealer 
orders.\24\ The System considers those three orders as one ``order,'' 
and thus there was one other ``broker-dealer order'') at the BBO with 
the DPM, which results in a 50% participation entitlement for the DPM 
for trades at that price.
---------------------------------------------------------------------------

    \24\ The 50% is allocated among the three broker-dealer orders 
in accordance with the applicable allocation algorithm to that 
class.
---------------------------------------------------------------------------

    The second change to the participation entitlement overlay is to 
delete the provisions that allow the Exchange to determine which 
entitlement formula will apply to the overlay. Currently, the rules 
provide, with respect to UMA, the Exchange determines on a class-by-
class basis whether a participation entitlement will equal either (1) 
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 UMA or (2) the amount the Market-Maker 
would be entitled to pursuant to the participation entitlement.\25\ 
With respect to price-time and pro-rata, the rules currently provide 
the Exchange with the ability to apply a modified participation 
entitlement, pursuant to which a Market-Maker will only receive a 
participation entitlement if the entitlement amount is greater than the 
amount the Market-Maker would otherwise receive pursuant to the 
allocation algorithm (if it was not, there would be no participation 
entitlement).\26\ When the Exchange applies the participation 
entitlement to a class (with any base allocation algorithm), a Market-
Maker receives the greater of the participation entitlement amount or 
the amount it would otherwise receive pursuant to the applicable 
allocation algorithm. Therefore, the proposed rule change deletes the 
other participation entitlement options. The participation entitlement 
in proposed Rule 6.45(a)(ii)(B) includes the following provisions 
included in the current rules: (1) The Exchange may apply more than one 
participation entitlement for a class (including at different priority 
sequences); (2) only one participation entitlement may apply to the 
same trade; (3) the Exchange may apply a participation entitlement only 
if it has applied the priority customer overlay in a priority sequence 
ahead of the participation entitlement; (4) the PMM, LMM or DPM must 
satisfy the conditions in Rule 8.13, 8.15 or 8.87, respectively; and 
(5) the participation entitlement is based on the number of contracts 
remaining after all priority customer orders in the book at the same 
price have been filled.\27\ Ultimately, the participation entitlement 
priority overlay will continue to be applied in the same manner as it 
is today.
---------------------------------------------------------------------------

    \25\ See current Rules 6.45A(a)(i)(C)(1) and (2) and 
6.45B(a)(ii)(C)(1) and (2).
    \26\ See current Rules 6.45A(a)(ii)(3) and 6.45B(a)(i)(3). As 
discussed above, there is a third alternative in Rule 
6.45B(a)(ii)(C)(3) related to Component A of UMA, which the proposed 
rule change deletes. See supra note 15.
    \27\ See current Rules 6.45A(a)(ii)(2), 6.45B(a)(i)(2), 8.13(c), 
8.15(d), and 8.87(b).
---------------------------------------------------------------------------

    The Exchange makes nonsubstantive and technical changes to the 
small preference and market turner priority overlays (in addition to 
the deletion of duplicative language as described in the table above), 
such as to make the language consistent with other allocation and 
priority rule provisions (including changing NBBO to BBO, which is 
consistent with the participation entitlement language in

[[Page 10529]]

Rules 8.13(c), 8.15(d), and 8.87(b) and the fact that allocation and 
priority principles are applied to orders and quotes at CBOE's bid or 
offer),\28\ make the language more plain English and use consistent 
lettering and numbering. However, the manner in which the System 
applies to these priority overlays remains unchanged.
---------------------------------------------------------------------------

    \28\ The Exchange notes, pursuant to Rule 6.81, trades may not 
constitute trade-throughs.
---------------------------------------------------------------------------

    The proposed rule change adds the following definitions related to 
the allocation of orders: \29\
---------------------------------------------------------------------------

    \29\ As noted above, the proposed rule change also moves the 
definition of an in-crowd market participant from Rules 6.13B(b), 
6.45A (introductory paragraph), 6.45B (introductory paragraph) and 
6.74 (introductory paragraph) to proposed Rule 1.1(uuu). An ``in-
crowd market participant'' or ``ICMP'' is an in-crowd Market-Maker, 
an on-floor DPM or LMM with an allocation or appointment, 
respectively, in the class, or a floor broker or PAR Official 
representing orders in the trading crowd.
---------------------------------------------------------------------------

     A ``broker-dealer order'' is an order for an account in 
which a Trading Permit Holder, a non-Trading Permit Holder broker or 
dealer in securities (including a foreign broker-dealer), a joint 
venture with Trading Permit Holder and non-Trading Permit Holder 
participants, or, in Hybrid classes for purposes of the Rules listed in 
paragraphs (fff) and (ggg) of this Rule 1.1, a Voluntary Professional 
or Professional has an interest; \30\
---------------------------------------------------------------------------

    \30\ See proposed Rule 1.1(ttt). This definition is consistent 
with those of a Trading Permit Holder (which must be a registered 
U.S. broker-dealer under the Rules) (see Rules 3.2 and 3.3), a 
Foreign Broker-Dealer (see Rule 1.1(xx)), a Voluntary Professional 
(see Rule 1.1(fff)), and a Professional (see Rule 1.1(ggg)), as well 
as the current description of who does not qualify as a public 
customer (see Rules 6.45A(a)(ii)(1) and 6.45B(a)(i)(1)).
---------------------------------------------------------------------------

     a ``public customer'' means a person or entity that is not 
a broker or dealer in securities; \31\
---------------------------------------------------------------------------

    \31\ See proposed Rule 1.1(xxx). This definition is consistent 
with the definition in Rule 6.74, Interpretation and Policy .01 and 
merely extends the definition to apply to all rules.
---------------------------------------------------------------------------

     a ``public customer order'' means an order for the account 
of a public customer; \32\
---------------------------------------------------------------------------

    \32\ See proposed Rule 1.1(yyy).
---------------------------------------------------------------------------

     a ``priority customer'' means, in Hybrid classes, a person 
or entity that is a public customer and is not a Professional or 
Voluntary Professional, and, in Hybrid 3.0 classes, a person or entity 
that is a public customer; \33\ and
---------------------------------------------------------------------------

    \33\ See proposed Rule 1.1(vvv). As set forth in Rule 1.1(fff) 
and (ggg), the Voluntary Professional and Professional designations 
are not available in Hybrid 3.0 classes. Thus, defining a ``priority 
customer'' as a ``public customer'' with respect to Hybrid 3.0 
classes is consistent with the current definitions of Voluntary 
Professional and Professional.
---------------------------------------------------------------------------

     a ``priority customer order'' is an order for the account 
of a priority customer.\34\
---------------------------------------------------------------------------

    \34\ See proposed Rule 1.1(uuu).
---------------------------------------------------------------------------

    For purposes of allocation and priority, public customers that are 
Professionals or Voluntary Professionals (in Hybrid classes) are 
treated as broker-dealers.\35\ The proposed rule change adds the 
concept of a priority customer, which is a public customer that 
receives priority when the public customer overlay is in effect. The 
priority customer definition is consistent with how priority rules 
currently apply, and the same customers that currently receive priority 
pursuant to that overlay will continue to receive the same priority 
under the proposed rule change. The Exchange believes adding the 
concept of a priority customer provides more clarity in the allocation 
and priority rules regarding which customers receive priority. 
Similarly, the definition of a broker-dealer order clarifies that the 
term includes orders of Professionals and Voluntary Professionals for 
purposes of the Rules set forth in the definitions of those terms. The 
proposed rule change amends Rules 6.2A(a)(i) and (ii); 6.8C(a); 6.9 
(introductory paragraph) and Interpretation and Policy .01; 
6.13A(d)(v); 6.45, 6.45A and 6.45B (current) and Rule 6.45 (proposed); 
6.53C(d)(v) and Interpretation and Policy .06(b); 6.74; 6.74A(b)(3) and 
Interpretations and Policies .07 an .08; 6.74B(b)(2)(A)(II) and 
Interpretation and Policy .01; 7.4(a)(1); 8.13(c) and Interpretation 
and Policy .01(b); 8.15(d); 8.87(b); and 17.50(g)(5) to incorporate 
this concept of priority customer, as well as the related concept of 
broker-dealer orders, by updating references to customer or public 
customer and adding references to broker-dealer orders, when necessary, 
throughout the rules in which Voluntary Professionals and Professionals 
are treated as broker-dealers rather than public customers pursuant to 
Rule 1.1(fff) and (ggg).\36\
---------------------------------------------------------------------------

    \35\ See Rule 1.1(fff) and (ggg) (definitions of Voluntary 
Professional and Professional, respectively). Pursuant to the CBOE 
Fees Schedule, the classification of an order as that of a 
Professional or Voluntary Professional impacts fees due with respect 
to that order. As noted in the definitions of Voluntary Professional 
and Professional, these designations are not available in Hybrid 3.0 
classes.
    \36\ The proposed rule change also amends Rule 6.13(b)(i)(C) to 
eliminate the phrase ``non-broker-dealer'' before public customer, 
as the fact that a public customer is not a broker-dealer is 
included in the proposed definition of public customer in proposed 
Rule 1.1(xxx).
---------------------------------------------------------------------------

    Currently, Rules 6.45A and 6.45B define market participants as 
Market-Makers, DPMs (or LMMs in Rule 6.45B) with an appointment in the 
subject class, and floor brokers and PAR officials representing orders 
in the trading crowd. The allocation and priority rules generally 
indicate they apply to orders and quotes of market participants. 
However, the current definition of market participants does not include 
broker-dealers that are not Market-Makers or floor brokers (and thus 
does not include all Trading Permit Holders). While allocation and 
priority rules may depend on the order origin types (i.e., priority 
customers, Professionals and Voluntary Professionals, Market-Makers, 
broker-dealers), the allocation and priority rules apply to all orders 
and quotes submitted by all Trading Permit Holders,\37\ as well as 
orders represented by PAR Officials, which proposed Rule 6.45, 
Interpretation and Policy .05 explicitly states. The proposed rule 
change eliminates the term market participants from current Rules 6.45A 
and 6.45B (and proposed Rule 6.45) and updates these allocation and 
priority rules to indicate that the rules apply to all orders and 
quotes on the Exchange.\38\
---------------------------------------------------------------------------

    \37\ The Exchange notes only Market-Makers may submit quotes. 
See Rule 8.7.
    \38\ The proposed rule change makes corresponding changes to 
eliminate the definition of market participants in Rules 6.13(b), 
6.43(b)(i), 7.4(a)(1) and (b)(iv), and Rule 8.51, Interpretation and 
Policy .02, generally replacing the term with Trading Permit Holders 
or Trading Permit Holders and PAR Officials, as applicable. The 
proposed rule change also amends the name of Rule 8.3A to change the 
term market participants to Trading Permit Holders, which is 
consistent with the term used in the rule text of Rule 8.3A. 
Similarly, the proposed rule change amends Rule 6.13B to replace the 
terms ``users'' in the introductory paragraph and ``public customers 
and all other users'' in paragraph (a)(2) with Trading Permit 
Holders, as Trading Permit Holders are the market participants that 
may submit orders subject to the penny price improvement program 
under that rule.
---------------------------------------------------------------------------

    The Exchange adds three new provisions to add detail regarding 
current System functionality. Proposed Rule 6.45(a)(iii) states, upon 
execution of an order or quote, the System decrements the order or 
quote by an amount equal to the size of that execution. The remaining 
size of the order or quote retains its position with respect to 
priority for subsequent executions. Partial executions may occur under 
the current rules, and if an order or quote may not be completely 
filled by one execution, the Exchange believes it is appropriate for 
the remaining size to retain priority.\39\
---------------------------------------------------------------------------

    \39\ Proposed Rule 6.45(a)(iii) is substantially similar to C2 
Options Exchange, Incorporated (``C2'') Rule 6.12(d).
---------------------------------------------------------------------------

    Proposed Rule 6.45(a)(iv) adds how modifications to an order or 
quote's price or size impacts priority. If a Trading Permit Holder 
modifies the price of an order or quote or increases

[[Page 10530]]

the size of an order or quote, those orders and quotes lose priority 
and are treated as new orders or quotes. The Exchange believes these 
changes are equivalent to entering new orders or quotes, as they could 
impact the priority of an order or quote or potentially be allocated 
larger portions of a trade. The Exchange believes decreasing the size 
of an order or quote (similar to decrementation of an order or quote 
after partial execution), should not impact priority, as such a 
modification would potentially decrease the allocation to that order or 
quote.\40\ These proposed provisions are consistent with current System 
functionality, as well as industry practices, and are merely adding 
detail to the rules.
---------------------------------------------------------------------------

    \40\ The proposed rule change indicates modifications to a quote 
only impact the changed side of a two-sided quote; the other side 
retains priority. Proposed Rule 6.45(a)(iv) is substantially similar 
to C2 Rule 6.12(e).
---------------------------------------------------------------------------

    Proposed Rule 6.45(a)(v) adds detail regarding the prioritization 
of contingency orders.\41\ The proposed rule change states once a 
certain event or trading condition satisfies an order's contingency, an 
order is no longer a contingency order and is treated as a market or 
limit order (as applicable), prioritized in the same manner as any 
other market or limit order based on the time it enters the book 
following satisfaction of the contingency (i.e., last in time priority 
with respect to other orders and quotes resting in the book at that 
time).\42\ If contingencies of multiple orders are satisfied at the 
same time, the System sends them to the book in the order in which the 
System initially received them.
---------------------------------------------------------------------------

    \41\ Rule 6.53(c) defines a contingency order as a limit or 
market order to buy or sell that is contingent upon a condition 
being satisfied while the order is at the post.
    \42\ The System generally bases priority of a non-contingency 
order on the time the System receives it.
---------------------------------------------------------------------------

    Notwithstanding the foregoing, under any algorithm in Rule 
6.45(a):\43\
---------------------------------------------------------------------------

    \43\ This is consistent with the definition of reserve orders in 
current Rule 6.53(t) and current Rules 6.45A, Interpretation and 
Policy .03 and 6.45B, Interpretation and Policy .04. The proposed 
rule change moves this provision to proposed subparagraph (v)(A) so 
all provisions of this rule regarding priority of contingency orders 
are included in the same paragraph. The proposed rule change also 
adds all-or-none orders to this provision, as those are also not 
displayed until their contingencies are triggered, similar to the 
non-displayed portions of reserve orders.
---------------------------------------------------------------------------

    (1) All displayed orders and quotes at a given price have priority 
over all-or-none order.
    (2) Upon receipt of a reserve order, the System displays in the 
book any initially display-eligible portion of the reserve order, which 
is prioritized in the same manner as any other order (i.e., based on 
the time the System receives it). Once any non-displayed portion of a 
reserve order becomes eligible for display, the System displays in the 
book that portion of the order and prioritizes it based on the time it 
becomes displayed in the book (i.e., last in time priority with respect 
to other orders and quotes resting in the book at that time).
    (3) Immediate-or-cancel and fill-or-kill orders are not placed in 
the book and thus are not prioritized with respect to other resting 
orders and quotes in the book (by definition, those types of orders are 
cancelled if they do not execute as soon as they are represented on the 
Exchange so have no opportunity to rest in the book). These orders 
execute against resting orders and quotes in the book based on the time 
the System receives them (i.e., the System processes these orders in 
the time sequence in which it receives them).
    (4) All-or-none orders are always last in priority (including after 
the undisplayed portions of reserve orders). If the Exchange applies 
priority customer overlay to a class, orders trade in the following 
order: (A) Priority customer orders other than all-or-none, (B) non-
priority customer orders other than all-or-none and quotes, (C) 
priority customer all-or-none orders (in time sequence), and (D) non-
priority customer all-or-none orders (in time sequence). If the 
Exchange applies pro-rata with no priority customer overlay or price-
time to a class, orders trade in the following order: (A) Orders other 
than all-or-none and quotes, and (B) all-or-none orders (in time 
sequence).\44\
---------------------------------------------------------------------------

    \44\ Note other priorities may be applied to the class as well 
and would function as set forth in the rules.
---------------------------------------------------------------------------

    The Exchange believes this provision is consistent with the 
definitions of these order types, pursuant to which most contingency 
orders become market or limit orders once the contingency is satisfied. 
All-or-none orders must always be last in priority to ensure that there 
is sufficient size to satisfy the condition of such an order to trade 
in its entirety after all other orders at the same price have executed. 
Additionally, the Exchange believes it is reasonable for orders not 
displayed in the book to not receive priority over orders that are 
displayed, as they are not yet eligible for execution until they become 
displayed. These provisions are consistent with current System 
functionality and are merely adding more detail to the rules to provide 
additional transparency regarding allocation and priority principles 
for investors. These provisions are also consistent with the non-
inclusion of all-or-none orders and non-displayed portions of reserve 
orders in the NBBO.\45\
---------------------------------------------------------------------------

    \45\ Proposed Rule 6.45(a)(v) is substantially similar to C2 
Rule 6.12(c).
---------------------------------------------------------------------------

    Next, current Rules 6.45A(d)(i) and 6.45B(d)(i) state the length of 
the counting period for the quote lock functionality described in each 
of those paragraphs will be established by the Exchange, may vary by 
product (i.e., on a class-by-class basis) and will not exceed one 
second. The proposed rule change adds to proposed Rule 6.45(d)(i) the 
Exchange may determine on a class-by-class basis whether to apply a 
counting period, and if so, the length of the counting period, which 
may not exceed one second. Setting a counting period to zero is 
consistent with the current rule requiring the time period not exceed 
one second. Additionally, the rule filing adopting Rule 6.45B, 
including the quote lock provision in substantially similar form as the 
current version, indicated the counting period may not exceed one 
second. In the discussion of this proposed rule provision, it was 
contemplated the Exchange (at the time through a committee, which 
committee structure no longer exists on the Exchange), may eliminate 
the timer (i.e., set it to zero seconds). Additionally, the rule 
previously required a notification be sent to Market-Makers advising 
their quotes were locked, unless the counting period was set to zero 
seconds (this provision was later deleted from the Rules).\46\ It was 
understood the counting period could be set to zero, and the proposed 
rule change merely clarifies this in proposed Rule 6.45(d)(i).
---------------------------------------------------------------------------

    \46\ See Securities Exchange Act Release No. 34-51822 (June 10, 
2005), 70 FR 35321 (June 17, 2005) (SR-CBOE-2004-087) (order 
approving rules relating to the trading of index options and options 
on ETFs on the Hybrid Trading System, including the quote lock 
rule).
---------------------------------------------------------------------------

    To further simplify the priority and allocation rules, the proposed 
rule change deletes the following obsolete and duplicative rule 
provisions:
     Rule 6.13A, Interpretation and Policy .04(ii): The 
proposed rule change deletes a provision related to a pilot program 
related to DPM and LMM participation entitlements applicable to 
executions pursuant to the simple auction liaison (SAL) for classes in 
which pro-rata was the applicable allocation algorithm. The pilot 
program expired on December 30, 2010 and was not renewed, and therefore 
the Exchange believes it is appropriate to delete from the rules.
     Rule 6.45(a)(ii)(4)(ii): This provision relates to bids 
and offers in excess of an eligibility size for the Exchange's Retail 
Automatic Execution System

[[Page 10531]]

(``RAES'').\47\ The Exchange no longer uses RAES and thus did not 
include this provision in proposed Rule 6.45(b).
---------------------------------------------------------------------------

    \47\ See Rule 6.8 regarding RAES operations.
---------------------------------------------------------------------------

     Rule 6.45(c): This provision relates to priority 
principles that apply during opening rotations with respect to orders 
on the book. Rule 6.2B describes the Exchange's opening process for the 
Hybrid System (``HOSS'') applicable to orders and quotes in the book 
and includes a provision that market orders have first priority and 
limit orders and quotes have second priority when clearing bids and 
offers to determine the opening price.\48\ The Exchange no longer uses 
current Rule 6.45(c) for opening rotations with respect to orders on 
the book, and only uses the process described in Rule 6.2B and thus 
proposes to delete Rule 6.45(c).\49\
---------------------------------------------------------------------------

    \48\ See Rule 6.2B(c)(iv). The Exchange notes current Rule 
6.45(c) applies to public customer orders while Rule 6.2B(c)(iv) 
does not. However, the distinction relates to the fact that the 
electronic book used to be fo r public customer orders, while the 
electronic book now contains all orders, including public customer 
orders, and thus Rule 6.2B does not include this distinction. To the 
extent the Exchange applies the public customer priority overlay to 
the electronic allocation algorithm for a class, the priority in 
this provision will apply to public customer orders.
    \49\ The proposed rule change deletes a corresponding reference 
to this provision in Rule 6.53(c)(ii)(3).
---------------------------------------------------------------------------

     Rule 6.45(d): This provision includes an allocation 
provision that applies only when the Rapid Opening System (``ROS'') is 
used to open a class.\50\ The Exchange no longer uses ROS to open 
classes and only uses HOSS. Therefore, the Exchange believes this 
provision is no longer necessary and thus did not include it in 
proposed Rule 6.45.\51\
---------------------------------------------------------------------------

    \50\ See Rule 6.2A for a description of ROS.
    \51\ The proposed rule change makes a corresponding change to 
Rule 6.2A(a)(ii) to delete the reference to Rule 6.45(d).
---------------------------------------------------------------------------

     Rule 6.45, Interpretation and Policy .01: This provision 
relates to holding a market order to sell on the floor when there is a 
customer order in the book at the minimum increment. By definition, the 
market order would sell at the best bid. Additionally, pursuant to Rule 
6.53(g), orders entrusted to a floor broker are considered not held 
unless otherwise specified. The customer order in the book would have 
priority to sell against a bid of the minimum increment. If there was a 
remainder of that bid at the minimum increment after execution against 
the customer order, the market order would sell at the minimum 
increment as well, as that is the best (lowest) price at which it could 
trade. Therefore, this provision is no longer necessary, the Exchange 
proposes to delete it.
     Rules 6.45A(a)(ii)(2)(C) and 6.45B(a)(i)(2)(C): This 
provision states, in establishing the counterparties to a particular 
trade, the participation entitlement must first be counted against the 
Market-Maker's highest priority bids or offers. For a Market-Maker to 
receive an entitlement, it must have a quote at the BBO. It is common 
for a Market-Maker firm to have multiple individual Market-Makers 
submitting quotes within a class.\52\ If a Market-Maker firm has 
multiple quotes at the BBO, those quotes are treated as separate 
individual quotes (and are not aggregated for the firm), and those 
quotes are subject to the same priority principles as all other quotes, 
and thus an entitlement will apply to the quotes with highest priority. 
Therefore, the Exchange believes the general allocation and priority 
rules provide that contracts are allocated to quotes with the highest 
priority and thus believes this provision is redundant.
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    \52\ Pursuant to the CBOE Fees Schedule, a Market-Maker Trading 
Permit provides up to three logins.
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     Rules 6.45A(c) and 6.45B(c): This provision relates to the 
interaction of market participants' quotes and orders with electronic 
orders, including an allocation based on orders or quotes submitted 
within a period of time not to exceed five seconds of the first market 
participant to submit an order (the ``N-second group''). This was part 
of the allocation process upon initial implementation of the Hybrid 
System on the Exchange, pursuant to which the System managed orders and 
quotes for a period prior to their interaction and execution. The 
Exchange no longer uses this delay and instead applies the allocation 
and priority rules in proposed Rule 6.45(a) and (b) apply to all quotes 
and orders submitted on the Exchange. Because the Exchange no longer 
uses the concept of the N-second group, this provision is not included 
in proposed Rule 6.45.\53\
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    \53\ The proposed rule change makes a corresponding change to 
Rule 6.53C, Interpretation and Policy .06(c) to delete a reference 
to the inapplicability of the N-second group timer to stock-option 
orders.
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     Rule 6.45A(e): This provision states the Exchange intends 
to implement Hybrid floorwide in all other equity classes by the fourth 
quarter of 2006. This transition occurred numerous year ago, and all 
classes currently trade on the Hybrid or Hybrid 3.0 system, rendering 
this provision no longer necessary.
    The proposed rule change amends Rule 6.53C(d)(v)(1), (3) and (4) 
regarding the execution of complex order auction (``COA'')-eligible 
orders by indicating order and response sizes will be capped for 
allocation purposes. A similar requirement exists for other auctions, 
such as SAL,\54\ to prevent a Trading Permit Holder submitting an order 
or auction response from submitting such an order or response with an 
extremely large size in order to obtain a larger pro-rata share of the 
auctioned order. The Exchange believes it is appropriate to similarly 
cap the size of orders and responses for allocation purposes for COA.
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    \54\ See, e.g., Rule 6.13A(c)(ii).
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    The proposed rule change makes additional technical and 
nonsubstantive changes in various rules amended by this rule filing, 
including to make the language describing the allocation principles 
consistent throughout, to make the rule text plain English, to use 
defined terms, to clarify rules that apply to orders and quotes (when 
in the context, it is apparent the rule should not apply to just 
orders), and to use consistent lettering and numbering for 
subparagraphs within the rules.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\55\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \56\ requirements that the rules 
of an exchange be designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest. 
Additionally, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \57\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \55\ 15 U.S.C. 78f(b).
    \56\ 15 U.S.C. 78f(b)(5).
    \57\ Id.
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    In particular, the proposed rule change amends allocation and 
priority rules (including the addition of defined terms) to condense 
and simplify the allocation and priority rules, delete obsolete and 
duplicative rule text, add detail to certain provisions regarding 
current System functionality, and make technical and nonsubstantive 
changes

[[Page 10532]]

(such as conform language, make language more plain English and use 
consistent lettering and numbering), which transparency and 
simplification protects investors and perfects the mechanism of a free 
and open market. The changes to UMA, which is proposed to be called 
aggregated pro-rata, are intended to delete the various components of 
that algorithm that are no longer in use. UMA with 100% weighted to 
Component B with the standard participation entitlement (rather than 
modified participation entitlement) applies to numerous classes today. 
The Exchange has not applied Component A or the modified participation 
entitlement in years, and has no intention of doing so, and thus 
believes it will benefit investors to simplify the rules to include 
only the components of the algorithm that are in use. The proposed 
change regarding how the System rounds the number of contracts when 
they cannot be allocated proportionally in whole numbers pursuant to 
the pro-rata algorithm (which previously only addressed the situation 
if there one additional contract for two market participants) and 
proposed aggregated pro-rata algorithm (which previously was silent on 
this matter) adds detail to the rules regarding the allocation process 
and provides a fair, objective manner for rounding and distribution in 
all situations in which the number of contracts many not be allocated 
proportionally in whole numbers. Distributing contracts to resting 
orders and quotes in time priority when they cannot be allocated 
proportionally in whole numbers is also consistent with the rules of 
another options exchange.\58\ The Exchange believes adding these 
details while simplifying the rules, as well as the technical and 
nonsubstantive changes to the rules, will better enable investors to 
understand how the System allocates trades and affords priority. The 
proposed rule change does not change how the System allocates and 
prioritizes orders and quotes; thus, orders and quotes will be subject 
to the same priority principles as they are today.
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    \58\ See C2 Rule 6.12(a)(2).
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    The proposed rule changes providing a PMM's, LMM's or DPM's 
participation right is determined in part by how many Market-Maker 
quotes and non-public customer orders are at the BBO, and that broker-
dealer orders at the same price will be treated as one broker-dealer 
order, is not only consistent with current System functionality (and 
the UMA allocation algorithm, proposed to be renamed the aggregated 
allocation algorithm, which algorithm applies along with a 
participation entitlement to most classes), but also encourages all 
Market-Makers, not just Trading Permit Holders, to continue to provide 
liquidity to the market because it may provide them with the 
opportunity to participate in a larger portion of a trade in which a 
PMM, LMM or DPM has a participation right (70% v. 60% v. 50%), which 
liquidity will ultimately benefit investors. PMMs, LMMs and DPMs will 
still be entitled to a significant participation right of 30%, 40% or 
50%, as applicable, which continues to provide an appropriate balance 
with their heightened quoting obligations. The proposed rule change 
that the PMM, LMM or DPM participation entitlement may not be fewer 
than one contract when there are other Market-Maker quotes or non-
Public Customer orders ensures PMMs, LMMs and DPMs will receive a 
benefit in exchange for their heightened quoting obligations when 
executions involve small number of contracts.
    The proposed rule changes regarding the decrementation of an order 
or quote following partial execution, the priority of modified orders 
and quotes, and the priority of contingency orders, are consistent with 
current System functionality. The additional detail provides 
transparency of this functionality to the Rules, which benefits 
investors. These proposed rule changes are consistent with the rules of 
another options exchange.\59\
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    \59\ See C2 Rule 6.12(c)-(e).
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    The proposed rule change regarding the length of the counting 
period for the quote lock functionality is consistent with a previous 
rule filing regarding this functionality, which accounted for the 
possibility of having the counting period set to zero seconds. The 
proposed rule change merely clarifies this possibility in the Rules. 
The proposed rule change to cap orders and auction responses for 
allocation purposes for COA is consistent with another auction on CBOE 
(SAL) and promotes just and equitable principles of trade ensuring 
Trading Permit Holders may not submit orders and responses of large 
sizes to obtain a larger pro-rata share of an auctioned order.

B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed rule change is 
consistent with how the System currently executes and prioritizes 
orders and quotes and primarily simplifies the allocation and priority 
rules, adds detail to the rules regarding current System functionality, 
and eliminates duplicative and obsolete rule text. Thus, the System 
will allocate orders and quotes under the proposed rule change in the 
same manner as it does today. These allocation and priority rules apply 
in the same manner to the orders and quotes of all Trading Permit 
Holders (and PAR Officials), and the additional transparency and 
simplification in the rules benefits all investors. The proposed rule 
change has no impact on intermarket competition, as it applies to the 
allocation of orders and quotes executed on CBOE. Additionally, as 
discussed above, certain provisions of the proposed rule change are 
substantially similar to those of another options exchange.

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 
proposed rule change.

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

    Because the foregoing proposed rule change does not:
    A. Significantly affect the protection of investors or the public 
interest;
    B. impose any significant burden on competition; and
    C. become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \60\ and 
Rule 19b-4(f)(6) \61\ thereunder. At any time within 60 days of the 
filing of the proposed rule change, the Commission summarily may 
temporarily suspend such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission will institute proceedings to determine whether the proposed 
rule change should be approved or disapproved.
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    \60\ 15 U.S.C. 78s(b)(3)(A).
    \61\ 17 CFR 240.19b-4(f)(6).
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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.

[[Page 10533]]

Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2017-009 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2017-009. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-CBOE-2017-009 and should be 
submitted on or before March 6, 2017.

For the Commission, by the Division of Trading and Markets, pursuant 
to delegated authority.\62\
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    \62\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-02836 Filed 2-10-17; 8:45 am]
BILLING CODE 8011-01-P