Document ID: SEC-2009-1121-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change Related to the Hybrid Matching Algorithms
Posted Date: 2009-08-10T04:00Z

[Federal Register: August 10, 2009 (Volume 74, Number 152)]
[Notices]               
[Page 39989-39991]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10au09-72]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60420; File No. SR-CBOE-2009-052]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change Related to the 
Hybrid Matching Algorithms

August 3, 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 July 17, 2009, the Chicago Board Options Exchange, Incorporated 
(the ``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 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes 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 adopt a modified participation entitlement 
priority overlay. 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.

[[Page 39990]]

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

1. Purpose
    CBOE Rules 6.45A and 6.45B set forth, among other things, the 
manner in which electronic Hybrid System trades in options are 
allocated. Paragraph (a) of each rule essentially governs how incoming 
orders received electronically by the Exchange are electronically 
executed against interest in the CBOE quote. Paragraph (a) of each rule 
currently provides a ``menu'' of matching algorithms to choose from 
when executing incoming electronic orders. The menu format allows the 
Exchange to utilize different matching algorithms on a class-by-class 
basis. The menu includes, among other choices, price-time and pro-rata 
priority matching algorithms with additional priority overlays.\3\ The 
priority overlays currently include: Public customer priority for 
public customer orders resting on the Hybrid System, participation 
entitlements for certain qualifying market-makers, and a market turner 
priority for participants that are first to improve CBOE's disseminated 
quote. These overlays are optional.
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    \3\ The menu also includes a matching algorithm called the 
Ultimate Matching Algorithm (``UMA''). CBOE is not proposing any 
changes to the UMA matching algorithm at this time.
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    The purpose of this rule filing is to adopt an additional priority 
overlay for the price-time and pro-rata matching algorithms, which the 
Exchange will refer to as the ``modified participation entitlement.'' 
The modified participation entitlement will operate in the same manner 
as the existing participation entitlement with a few exceptions 
described below.\4\ In particular, if the modified participation 
entitlement is in effect for an option class, then the following would 
apply:
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    \4\ Under the existing participation entitlement, the Exchange 
may determine to grant Market-Makers participation entitlements 
pursuant to the provisions of Rules 8.87, Participation Entitlement 
of DPMs and e-DPMs, 8.13, Preferred Market-Maker Program, or 8.15B, 
Participation Entitlement of LLMs. More than one such participation 
entitlements may be activated for an option class (including at 
different priority sequences), however in no case may more than one 
participation entitlement be applied on the same trade. In 
allocating the participation entitlement, all of the following 
apply: (i) To be entitled to their participation entitlement, the 
Market-Maker's order and/or quote must be at the best price on the 
Exchange. (ii) The Market-Maker may not be allocated a total 
quantity greater than the quantity that it is quoting (including 
orders not part of quotes) at that price. If pro-rata priority is in 
effect, and Market-Maker's allocation of an order pursuant to its 
participation entitlement is greater than its percentage share of 
quotes/orders at the best price at the time that the participation 
entitlement is granted, the Market-Maker shall not receive any 
further allocation of that order. (iii) In establishing the 
counterparties to a particular trade, the participation entitlement 
must first be counted against that Market-Maker's highest priority 
bids or offers. (iv) The participation entitlement shall not be in 
effect unless the public customer priority is in effect in a 
priority sequence ahead of the participation entitlement and then 
the participation entitlement shall only apply to any remaining 
balance. See Rules 6.45A(a)(ii)(2) and 6.45B(a)(i)(2).
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     If at the time of execution there are no public customer 
orders resting at the execution price, then the Market-Maker 
participation entitlement would be applied. This outcome is no change 
from how the existing participation entitlement works today.
     If at the time of execution there is a public customer 
order that was entered first in time sequence among all other resting 
trading interest at the execution price, then the Market-Maker 
participation entitlement would be applied after public customer orders 
are satisfied. This outcome is no change from how the existing 
participation entitlement works today.
     In all other cases involving the allocation of an incoming 
electronic order, i.e., if at the time of execution there is one or 
more public customer orders resting at the execution price but none was 
entered first in time sequence, then the Market-Maker participation 
entitlement and public customer priority overlays would not be applied 
to the allocation. This outcome is a change from how the existing 
participation entitlement works today.\5\
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    \5\ For example, assume the matching algorithm for an options 
class is established so that public customer orders have first 
priority, the modified participation entitlement has second 
priority, and any remaining balance is allocated using the pro-rata 
matching algorithm. If at the time of execution there is one or more 
public customer orders at the execution price but none is first in 
time sequence (say because a Market-Maker quote was the first 
trading interest posted at the execution price), then the Market-
Maker participation entitlement and public customer priority 
overlays would not be applied and the incoming order would be 
allocated solely on a pro-rata basis.
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     The modified participation entitlement would not be used 
for any electronic auctions; instead, the existing participation 
entitlement parameters would be applied.\6\ Thus, the outcome would be 
no change from how the existing participation entitlement works today 
for electronic auctions.
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    \6\ CBOE has various electronic auctions that are described 
under Rules 6.13A, Simple Auction Liaison (``SAL''), 6.14, Hybrid 
Agency Liaison (HAL), 6.53C(d), Process for Complex Order RFR 
Auction (``COA''), 6.74A, Automated Improvement Mechanism (``AIM''), 
and 6.74B, Solicitation Auction Mechanism (``AIM SAM''). Each of 
these auctions generally allocates executions pursuant to the 
matching algorithm in effect for the options class with certain 
exceptions noted in the respective rules. For example, no 
participation entitlement is applied to orders executed through HAL 
or AIM.
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    Lastly, it should be noted that, like the existing priority 
overlays, the modified participation entitlement is optional. As with 
the existing procedures, the Exchange will continue to determine 
whether one or more of the priority overlays shall apply to an option 
class and if more than one is selected, the sequence in which they 
shall apply (consistent with applicable rules). All determinations 
would be set forth in a regulatory circular.
2. Statutory Basis
    This change will allow the Exchange another method to reward 
aggressive pricing in options trading on the Hybrid System. 
Accordingly, CBOE believes the proposed rule change is consistent with 
Section 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 
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.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 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

    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

[[Page 39991]]

    (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 No. SR-CBOE-2009-052 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 No. SR-CBOE-2009-052. 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 changes between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of CBOE. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File No. SR-CBOE-2009-052 and should be 
submitted on or before August 31, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-19018 Filed 8-7-09; 8:45 am]

BILLING CODE 8010-01-P