Document ID: SEC-2009-0260-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2009-02-26T05:00Z

[Federal Register: February 26, 2009 (Volume 74, Number 37)]
[Notices]               
[Page 8829-8831]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26fe09-85]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59425; File No. SR-CBOE-2009-009]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change To Amend Its 
Rules Prohibiting Members From Functioning as Market-Makers

February 19, 2009.
    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 February 18, 2009, the Chicago Board Options Exchange, 
Incorporated (the ``Exchange'' or ``CBOE'') filed with the Securities 
and Exchange Commission (the

[[Page 8830]]

``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

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

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

    The Exchange proposes to amend Rule 6.8C, Prohibition Against 
Members Functioning as Market-Makers, to eliminate some of its 
restrictions. The Exchange also proposes to make a related cross-
reference update to Rule 1.1(fff), which pertains to Voluntary 
Professionals. The text of the proposed rule change is available on the 
Exchange's Web site (http://www.cboe.org/Legal), at the Office of the 
Secretary, CBOE and at the Commission.

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

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

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

1. Purpose
    The Exchange is proposing to amend Rule 6.8C in order to eliminate 
some of its restrictions. First, Rule 6.8C currently provides that a 
member, acting either as principal or agent, may neither enter nor 
permit the entry of orders into the Exchange's electronic order routing 
system if (i) the orders are limit orders for the account or accounts 
of the same beneficial owner(s) and (ii) the limit orders are entered 
in such a manner that the beneficial owner(s) effectively is operating 
as a market maker by holding itself out as willing to buy and sell such 
securities on a regular or continuous basis. The Exchange is proposing 
that these restrictions be amended to only be applicable to customer 
orders (i.e., non-broker-dealer orders) that are not Voluntary 
Professional orders (as described below), since such customer orders 
have priority at any price over the bids and offers of non-
customers.\3\ The restrictions would no longer be applicable to 
instances where a member is acting as principal on its own behalf or is 
acting as agent on behalf of other broker-dealer orders or Voluntary 
Professional orders (which are a sub-category of customer orders that 
are treated in the same manner as broker-dealer orders).\4\
---------------------------------------------------------------------------

    \3\ The Exchange notes that the Commission has previously found 
that it is consistent with the Act for an options exchange not to 
prohibit a user of its market from effectively operating as a market 
maker by holding itself out as willing to buy and sell options 
contracts on a regular or continuous basis without registering as a 
market maker. See Securities Exchange Act Release No. 57478 (March 
12, 2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-
NASDAQ-2007-080) (order approving, among other things, the rules 
governing the trading of options on the NASDAQ Options Market 
(``NOM'')). The Exchange also notes that the Commission has 
published a rule proposal for the NYSE Alternext U.S. LLC (``Amex'') 
that would only prohibit de facto market making through the use of 
customer orders, since customer orders have priority at any price 
over the bids and offers of non-customers but that would not 
prohibit such activity for other non-market maker broker-dealers. 
See Securities Exchange Act Release No. 59142 (December 22, 2008), 
73 FR 80494 (December 31, 2008) (SR-NYSEALTR-2008-14) (notice of 
proposal to, among other things, adopt rules governing the trading 
of options on a new Amex trading platform).
    \4\ A Voluntary Professional is a new category of non-member 
market participant on the Exchange. The term ``Voluntary 
Professional,'' means any person or entity that is not a broker or 
dealer in securities that elects, in writing, to be treated in the 
same manner as a broker or dealer in securities for purposes of 
certain order handling, order execution, and cancel fee calculation 
purposes. See Rule 1.1(fff) and Securities Exchange Act Release No. 
58327 (August 7, 2008), 73 FR 47988 (August 15, 2008) (SR-CBOE-2008-
09). As part of this rule change, the Exchange is proposing to amend 
Rule 1.1(fff) to provide that a Voluntary Professional will be 
treated in the same manner as a broker or dealer in securities for 
purposes of Rule 6.8C.
---------------------------------------------------------------------------

    Rule 6.8C was adopted in 2001 to limit the ability of members that 
are not Designated Primary Market-Makers or market makers to compete on 
preferential terms within CBOE's automated systems. Because customer 
orders are provided with certain benefits such as priority of bids and 
offers, the Exchange continues to believe that customer orders should 
be subject to the Rule's restrictions. However, because broker-dealer 
orders are not subject to priority that is any better than market 
makers, the Exchange no longer believes it is necessary to impose the 
Rule's restrictions on the entry of broker-dealer orders. Similarly, 
because Voluntary Professionals are not subject to priority that is any 
better than market makers, the Exchange does not believe it is 
necessary to impose the Rule's restrictions on Voluntary 
Professionals.\5\
---------------------------------------------------------------------------

    \5\ The Exchange notes that this rule change would only 
eliminate the restrictions of Rule 6.8C in the manner proposed. 
Members would continue to remain subject to the requirements of Rule 
4.18 (which requires members to establish, maintain and enforce 
written policies and procedures reasonably designed, taking into 
consideration the nature of such member's business, to prevent the 
misuse of material, nonpublic information by such member or persons 
associated with such member); Rule 6.9(e), (which considers it 
conduct inconsistent with just and equitable principles of trade and 
a violation of Rule 4.1 for any member or person associated with a 
member, who has knowledge of all material terms and conditions of an 
original order and a solicited order, including a facilitation 
order, that matches the original order's limit, the execution of 
which are imminent, to enter, based on such knowledge, an order to 
buy or sell an option of the same class as an option that is the 
subject of the original order, or an order to buy or sell the 
security underlying such class, or an order to buy or sell any 
related instrument until either (i) all the terms and conditions of 
the original order and any changes in the terms and conditions of 
the original order of which that member or associated person has 
knowledge are disclosed to the trading crowd or (ii) the solicited 
trade can no longer reasonably be considered imminent in view of the 
passage of time since the solicitation); Rules 6.45A.01 and 6.45B.01 
(which provide that order entry firms may not execute as principal 
against orders they represent as agent unless: (i) agency orders are 
first exposed on the Hybrid System for at least one second, (ii) the 
order entry firm has been bidding or offer for at least one second 
prior to receiving an agency order that is executable against such 
bid or offer, or (iii) the order entry firm proceeds in accordance 
with the crossing rules contained in Rule 6.74); and Rules 6.45A.02 
and 6.45B.02 (which provide that order entry firms must expose 
orders they represent as agent for at least one second before such 
orders may be executed electronically via the electronic execution 
mechanism of the Hybrid System, in whole or in part, against orders 
solicited from members and non-member broker-dealers to transact 
with such orders).
---------------------------------------------------------------------------

    Second, in those instances where the restrictions are applicable, 
Rule 6.8C currently provides that, in determining whether a beneficial 
owner effectively is operating as a market maker, the Exchange will 
consider, among other things, the simultaneous or near simultaneous 
entry of limit orders to buy and sell the same security, the entry of 
multiple limit orders at different prices in the same security, and the 
multiple acquisition and liquidation of positions in the security 
during the same day. The Exchange is proposing to remove this latter 
condition pertaining to the multiple acquisition and liquidation of 
positions from its list of factors used for determining whether a 
beneficial owner is operating as a market maker. In light of the 
proliferation of day trading activity and the fact that such a 
prohibition does not exist on at least one other market,\6\ the 
Exchange no longer believes this activity should be considered a factor 
in determining whether a beneficial owner is effectively acting as a 
market maker.
---------------------------------------------------------------------------

    \6\ See note 3, supra.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section

[[Page 8831]]

6(b) of the Act,\7\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\8\ in particular, in that it is designed to prevent 
fraudulent and manipulative acts and practices, promote just and 
equitable principles of trade, remove impediments to and perfect the 
mechanisms of a free and open market and a national market system, and, 
in general, protect investors and the public interest. The proposed 
changes to the rule should continue to contribute to the Exchange's 
ability to maintain a fair and orderly market in a manner that will 
limit unfair advantage and encourage competition.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    CBOE does not believe that the proposed rule change will impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2009-009 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-2009-009. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/
sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of 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-2009-009 and 
should be submitted on or before March 19, 2009.
---------------------------------------------------------------------------

    \9\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-4120 Filed 2-25-09; 8:45 am]

BILLING CODE 8011-01-P