Document ID: SEC-2010-2012-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2010-12-28T05:00Z

[Federal Register Volume 75, Number 248 (Tuesday, December 28, 2010)]
[Notices]
[Pages 81704-81706]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-32512]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63580; File No. SR-CBOE-2010-114]

Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Related to the Hybrid Opening System

December 20, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on December 8, 2010, the Chicago Board Options Exchange, 
Incorporated (``Exchange'' or ``CBOE'') filed with the Securities and 
Exchange Commission (the ``Commission'') the proposed rule change as 
described in Items I and II below, which Items have been prepared by 
the Exchange. The Exchange has designated 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).

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[[Page 81705]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to modify Rule 6.2B, Hybrid Opening System 
(``HOSS''). The text of the proposed rule change is available on the 
Exchange's Web site (http://www.cboe.org/Legal), at the Exchange's 
Office of the Secretary and at the Commission.

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

    In its filing with the Commission, the 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 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
    HOSS is a feature within CBOE's Hybrid System that is used for 
conducting trading rotations. The Exchange is proposing to amend the 
HOSS rule in various respects.
    First, to have more flexibility in a manner that is consistent with 
other CBOE rules with order eligibility provisions, the Exchange is 
proposing to amend the HOSS rule to include an order eligibility 
provision. In particular, Rule 6.2B will be amended to provide that the 
Exchange shall designate the eligible order size, eligible order type, 
eligible order origin code (i.e., public customer orders, non-Market 
Maker broker-dealer orders, and Market Maker broker-dealer orders) that 
HOSS will accept for rotations on a class-by-class basis. The proposal 
would not, however, permit the Exchange to discriminate among 
individual market participants of the same type (e.g., permit certain 
market-maker orders but not others to be eligible). The Rule will also 
be amended to delete a reference to spread orders and contingency order 
[sic] not being eligible to participate in HOSS opening trades or in 
the determination of the opening price, expected opening price or 
expected opening size. (As revised, the Exchange would determine 
whether to designate these orders types as eligible for HOSS on a 
class-by-class basis, just as it would for any other order type.) Any 
changes to the HOSS order eligibility parameters determined by the 
Exchange would be announced to CBOE Trading Permit Holders via 
Regulatory Circular.
    This proposed change to include order eligibility requirements 
within the HOSS rule is consistent with the order eligibility 
requirements contained in other rules that pertain to features within 
CBOE's Hybrid System, such as the order eligibility requirements for 
Rule 6.13A, Simple Auction Liaison (SAL) (SAL is a feature within the 
Hybrid System that auctions marketable orders for price improvement 
over the national best bid and offer), and Rule 6.14, Hybrid Agency 
Liaison (HAL) (HAL is a feature within the Hybrid System that provides 
automated order handling in designated classes trading on Hybrid for 
qualifying electronic orders that are not automatically executed by the 
Hybrid System). The proposed rule change is also consistent with the 
provisions of Rule 6.53, Certain Types of Orders Defined, which 
provides that the classes and/or systems (e.g., the HOSS, SAL and HAL 
systems) for which the orders types described in Rule 6.53 shall be 
available will be as provided in the Exchange Rules, as the context may 
indicate, or as otherwise specified via Regulatory Circular.
    Second, the Exchange is proposing to adopt new Interpretation and 
Policy .04 regarding the applicable allocation algorithm \5\ for HOSS 
and to make related changes to Interpretation and Policy .03. 
Currently, there are various rotations procedures set forth in Rule 
6.2B, such as the regular HOSS rotation procedure described in Rule 
6.2B(a)-(g), the modified HOSS rotation procedure for Hybrid 3.0 
classes described in Rule 6.2B.01, and the HOSS Hybrid Agency Liaison 
(``HAL'') for openings (referred to herein as the ``HOSS HAL-O'' 
procedure) described in Rule 6.2B.03. Right now the Rule does not 
specifically identify the applicable allocation algorithm for the HOSS 
and modified HOSS rotation procedures. Paragraph (c)(iv) of the Rule 
simply states that in determining the priority of orders and quotes to 
be traded, the System gives priority to market orders first, then to 
limit orders and quotes whose price is better than the opening price, 
and then to resting orders and quotes at the opening price. For the 
HOSS HAL-O rotation procedure, Rule 6.2B.03 provides that the system 
gives priority to public customer market orders first (with multiple 
orders ranked based on time priority), then to non-public customer 
market orders second (with multiple orders being ranked based on time 
priority), then to multiple quotes and orders whose price is better 
than the opening price (with multiple quotes and orders being ranked in 
accordance with the allocation algorithm in effect for the option class 
pursuant to Rule 6.45A or 6.45B), then to limit orders and quotes at 
the opening price (with multiple orders and quotes ranked in accordance 
with the allocation algorithm in effect for the class pursuant to Rule 
6.45A or 6.45B).
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    \5\ The allocation algorithms include price-time, pro-rata, and 
the ultimate matching algorithm (``UMA'') base priorities and a 
combination of various optional priority overlays pertaining to 
public customer priority, Market-Maker participation entitlements, 
small order preference, and market turner. See 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.
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    The Exchange is proposing to remove the specific allocation 
algorithm description for HOSS HAL-O rotations in Interpretation and 
Policy .03(c)(i) of Rule 6.2B. Instead, the provision will be amended 
provide [sic] that, in determining the priority of orders and quotes to 
be traded, the System will give priority to market orders first, then 
to limit orders and quotes whose price is better than the opening 
price, and then to resting orders and quotes at the opening price (this 
description is the same as is currently provided in Rule 6.2B(c)(iv) 
and noted above). The Exchange is also proposing to adopt new 
Interpretation and Policy .04 to Rule 6.2B. Proposed Interpretation and 
Policy .04 to Rule 6.2B will provide that the Exchange may determine on 
a class-by-class basis which electronic allocation algorithm would 
apply for rotations (whether using the HOSS, modified HOSS or HOSS HAL-
O rotation procedure). This change will also provide the Exchange with 
additional flexibility to permit the allocation algorithm in effect for 
a rotation to be different from the allocation algorithm in effect for 
the option class. All pronouncements regarding allocation algorithm 
determinations by the Exchange will be announced to CBOE Trading Permit 
Holders via Regulatory Circular.
    In conjunction with this change, the Exchange is also proposing to 
modify Rule 6.2B to codify and describe the manner in which HOSS 
handles opening imbalances in series that open at a minimum price 
increment (e.g., a series that opens at a price of $0.05 when the 
series is quoted in $0.05 increments and a series that opens at a price 
of $0.01 when the series is quoted in $0.01 increments). In those 
scenarios, HOSS opens even if a sell market order imbalance exists. In 
addition, the

[[Page 81706]]

Exchange may determine to apply a separate electronic allocation 
algorithm for series that open at a minimum price increment due to a 
sell market order imbalance. As indicated above, pronouncements 
regarding allocation algorithm determinations will be announced via 
Regulatory Circular.
    The matching algorithm applied for rotations for each option class 
will be pursuant to Rule 6.45A or 6.45B, as applicable. Thus, the 
Exchange is not creating any new algorithms, but is amending Rule 6.2B 
to make clear that the Exchange may determine the applicable allocation 
algorithm for rotations as described above and to provide the 
flexibility for the Exchange to choose an algorithm from among the 
existing algorithms to be applied to rotations, rather than simply 
defaulting to the algorithm in effect for intra-day trading in the 
option class.
    Finally, the Exchange is proposing non-substantive amendments to 
Rule 6.2B, so that the rule text can generally be more consistently 
organized, numbered and worded. For example, the Exchange is proposing 
to add descriptive headings to each section of the rule, and to replace 
multiple references to Exchange determinations being announced via 
Regulatory Circular with a single reference in proposed Interpretation 
and Policy .05, which will provide that all pronouncements regarding 
determinations by the Exchange pursuant to Rule 6.2B and the 
Interpretations and Policies thereunder will be announced to Trading 
Permit Holders via Regulatory Circular.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act \6\ in general and furthers the objectives of 
Section 6(b)(5) of the Act \7\ in particular in that it is designed 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. 
In particular, the Exchange believes that the proposed change would 
provide more flexibility and clarity in its HOSS rule. The Exchange 
also believes that the proposed HOSS order eligibility provision is 
consistent with order eligibility provisions in other existing rules, 
such as the SAL, HAL and order type rules.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 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.

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: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) by its terms does not become operative for 30 days after the 
date of this filing, or such shorter time as the Commission may 
designate if consistent with the protection of investors and the public 
interest, the proposed rule change has become effective pursuant to 
Section 19(b)(3)(A) of the Act \8\ and Rule 19b-4(f)(6) thereunder.\9\ 
A proposed rule change filed under Rule 19b-4(f)(6) \10\ normally may 
not become operative prior to 30 days after the date of filing. 
However, Rule 19b-4(f)(6)(iii) \11\ permits the Commission to designate 
such shorter time if such action is consistent with the protection of 
investors and the public interest.
    At any time within 60 days of the filing of such 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.
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    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 17 CFR 240.19b-4(f)(6).
    \10\ 17 CFR 240.19b-4(f)(6).
    \11\ 17 CFR 240.19b-4(f)(6)(iii).
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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. 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-2010-114 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CBOE-2010-114. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of the 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-2010-114 and should be 
submitted on or before January 18, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-32512 Filed 12-27-10; 8:45 am]
BILLING CODE 8011-01-P