Document ID: SEC-2009-1252-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Related to Hybrid Quote Locks
Posted Date: 2009-09-02T04:00Z

[Federal Register: September 2, 2009 (Volume 74, Number 169)]
[Notices]               
[Page 45498-45500]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02se09-94]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60572; File No. SR-CBOE-2009-060]

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

August 26, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\

[[Page 45499]]

notice is hereby given that on August 19, 2009, 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, 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).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to amend Rules 6.45A, Priority and 
Allocation of Equity Option Trades on the CBOE Hybrid System, and 
6.45B, Priority and Allocation of Trades in Index Options and Options 
on ETFs on the CBOE Hybrid System, to eliminate provisions in each 
respective rule that provide that Market-Makers whose quotes are locked 
(or inverted) will receive a quote update notification. CBOE is also 
proposing to amend Rule 6.45A to provide that the length of the quote 
lock counting period will be established by the Exchange, may vary by 
product, and will not exceed one second. 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 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
    Rules 6.45A(d) and 6.45B(d) describe how the Hybrid System operates 
in the event that a Market-Maker's disseminated quotes interact with 
the disseminated quote(s) of other Market-Makers, resulting in a 
``locked'' quote (e.g., $1.00 bid--$1.00 offer). In the event of a 
quote lock, the following currently occurs:
    (i) The Exchange will disseminate the locked market and both quotes 
will be deemed ``firm'' disseminated market quotes.
    (ii) The Market-Makers whose quotes are locked will receive a quote 
update notification advising that their quotes are locked.
    (iii) When the market locks, a ``counting period'' will begin 
during which Market-Makers whose quotes are locked may eliminate the 
locked market. Provided, however, in accordance with paragraph (i) 
above a Market-Maker will be obligated to execute customer and broker-
dealer orders eligible for automatic execution pursuant to Rule 6.13, 
CBOE Hybrid System's Automatic Execution Feature, at his disseminated 
quote in accordance with Rule 8.51, Firm Disseminated Market Quotes. If 
at the end of the counting period the quotes remain locked, the locked 
quotes will automatically execute against each other in accordance with 
the applicable allocation algorithm. Under Rule 6.45A (applicable to 
equity options), the counting period is one second. Under Rule 6.45B 
(applicable to index and ETF options), the length of the counting 
period is established by the Exchange, may vary by product, and will 
not exceed one second.\5\
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    \5\ Under Rule 6.45B, an exception applies when the market locks 
in a Hybrid 3.0 class. In such cases, there is no counting period. 
Locked quotes will not automatically execute against each other and 
will remain locked until a quote is cancelled or changed. See Rule 
6.45A(d)(i)(C).
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    (iv) The Hybrid System will not disseminate an internally crossed 
market (i.e., the CBOE best bid is higher than the CBOE best offer). If 
a Market-Maker submits a quote (``incoming quote'') that would invert 
an existing quote (``existing quote''), the Hybrid System will change 
the incoming quote such that it locks the first quote and send a notice 
to the second Market-Maker indicating that its quote was changed. 
Locked markets are handled in accordance with paragraphs (i) through 
(iii) above. During the lock period, if the existing quote is cancelled 
subsequent to the time the incoming quote is changed, the incoming 
quote will automatically be restored to its original terms.
    Through this rule change, the Exchange is seeking to amend the 
locked quote process in two respects. First, the Exchange is proposing 
to eliminate the provisions that provide that Market-Makers whose 
quotes are locked (or inverted) will receive a quote update 
notification message (as described in paragraphs (ii) and (iv) above). 
The Exchange will continue to disseminate the locked market and have a 
counting period during which Market-Makers whose quotes are locked may 
eliminate the locked market in the same manner as described above. The 
Exchange believes that elimination of the notification messages will 
permit its systems to operate more efficiently. In addition, the 
Exchange believes that it is no longer necessary for Market-Makers to 
have a separate notification to react to a quote lock. For example, 
they can instead react based on a disseminated locked market.
    Second, the Exchange is amending Rule 6.45A (applicable to equity 
options) to provide that the length of the counting period, which is 
currently fixed at one-second, will instead be established by the 
Exchange, may vary by product, and will not exceed one second. This 
change will provide more flexibility in the administration of the rule 
and is consistent with the counting period language that already exists 
in Rule 6.45B (applicable to index and ETF options). The Exchange had 
previously indicated that the ability to vary the timer by product is 
more important in an index setting where there are larger trading 
crowds than there are in an equity setting.\6\ However, the Exchange 
believes we no longer need to have that distinction and we should have 
the same flexibility to reduce the timer in an equity setting.
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    \6\ See Securities Exchange Act Release No. 51680 (May 10, 
2005), 70 FR 28326 (May 17, 2005) (SR-CBOE-2004-87) (notice of 
proposed rule change relating to trading rules on the Hybrid System 
for index options and options on ETFs); see also Securities Exchange 
Act Release No. 51822 (June 10, 2005), 70 FR 35321 (June 17, 2005) 
(order approving SR-CBOE-2004-87).
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act \7\ and the rules and regulations thereunder and, in 
particular, the requirements of Section 6(b) of the Act.\8\ 
Specifically, the Exchange believes the proposed rule change is 
consistent with

[[Page 45500]]

the Section 6(b)(5) \9\ requirements that the rules of an exchange be 
designed to promote just and equitable principles of trade, to prevent 
fraudulent and manipulative acts, to remove impediments to and to 
perfect the mechanism for 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 elimination of the 
notification messages will permit its systems to operate more 
efficiently and the change to the counting period for equity options 
classes will provide more flexibility in the administration of the rule 
in a manner consistent with the existing rule for index and ETF options 
classes.
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    \7\ 15 U.S.C. 78s(b)(1). [sic]
    \8\ 15 U.S.C. 78f(b).
    \9\ 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 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 rule change (i) does not significantly affect 
the protection of investors or the public interest; (ii) does not 
impose any significant burden on competition; and (iii) by its terms, 
does not become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest, 
provided that the self-regulatory organization has given the Commission 
written notice of its intent to file the proposed rule change at least 
five business days prior to the date of filing of the proposed rule 
change or such shorter time as designated by the Commission, the 
proposed rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \10\ and Rule 19b-4(f)(6) thereunder.\11\ At any 
time within 60 days of the filing of such proposed rule change, the 
Commission may summarily abrogate such rule change if it appears to the 
Commission that such action is necessary or appropriate in the public 
interest, for the protection of investors, or otherwise in furtherance 
of the purposes of the Act.
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 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. 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-2009-060 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-2009-060. 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-2009-060 and should be submitted on 
or before September 23, 2009.
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    \12\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-21135 Filed 9-1-09; 8:45 am]

BILLING CODE 8010-01-P