[Federal Register Volume 73, Number 155 (Monday, August 11, 2008)]
[Notices]
[Pages 46650-46653]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-18368]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-58296; File No. SR-CBOE-2008-30]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Approving a Proposed Rule Change Relating to the
Hybrid Opening System
August 4, 2008.
I. Introduction
On June 5, 2008, the Chicago Board Options Exchange, Incorporated
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission''), pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to revise its Hybrid Opening
System (``HOSS'') procedures to allow the Hybrid Agency Liaison
(``HAL'') functionality to be available on the openings in designated
classes. The proposed rule change was published for comment in the
Federal Register on June 30, 2008.\3\ The Commission received no
comments regarding the proposal. This order approves the proposed rule
change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 57997 (June 20,
2008), 73 FR 36939.
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II. Description of the Proposal
CBOE Rule 6.2B, ``Hybrid Opening System (``HOSS''),'' sets forth
procedures for opening trading rotations for series trading on the CBOE
Hybrid Trading System (``Hybrid''). The current HOSS method for opening
chooses a single ``market clearing'' price that will leave unexecuted
those bids and offers that cannot trade with each other.\4\ However,
one or more series of a class may not open if one of the following
conditions is met: (1) No opening quote that complies with the legal
width quote requirements of Rule 8.7(b)(iv) has been entered by at
least one Market Maker appointed to the class (or by the Designated
Primary Market-Maker or
[[Page 46651]]
Lead Market-Maker, if applicable for the particular class) (the
``opening quote condition''); (2) the opening price is not within an
acceptable range (as applicable for the particular class) compared to
the lowest quote offer and the highest quote bid (the ``acceptable
opening range condition''); or (3) the opening trade would leave a
market order imbalance (i.e., there are more market orders to buy or to
sell for the particular series than can be satisfied by the limit
orders, quotes and market orders on the opposite side) (``market order
imbalance condition'').
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\4\ In determining the priority of orders and quotes to be
traded, HOSS 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. See Rule
6.2B(c)(iv).
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Under the current HOSS procedures, if the opening quote condition
or acceptable opening range condition is present, the senior official
in the Exchange's control room may authorize the opening of the
affected series where necessary to ensure a fair and orderly market. If
the acceptable opening range condition is present, HOSS will not open
the series but will send a notification to market participants
indicating the reason. If the market order imbalance condition is
present, a notification will be sent to market participants indicating
the size and direction (buy or sell) of the market order imbalance.
HOSS will not open the series until the condition causing the delay is
satisfied. HOSS will repeat the process until the series is open.\5\
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\5\ See CBOE Rule 6.2B(f).
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CBOE proposes to amend the current HOSS procedures in CBOE Rule
6.2B to permit HAL functionality to be available on the openings in
designated classes. HAL is a system for automated handling of
electronically received orders that are not automatically executed upon
receipt by Hybrid.\6\ Under the proposed rule change, the Exchange
could designate the classes in which HAL would be activated for HOSS
openings. For such designated classes, additional steps would be
automatically taken using HAL functionality to address the opening
quote, acceptable opening range, and market order imbalance conditions,
as well as to address instances where CBOE's opening trade would be at
a price that is not the current national best bid or offer (the ``NBBO
condition'').
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\6\ See CBOE Rule 6.14 (governing the operation of HAL).
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In particular, CBOE proposes that for classes where HAL is
activated for HOSS openings, the following procedures would apply if
one of the following conditions is met:
(1) If the opening quote condition is present, HOSS would check to
see if there is an NBBO quote on another market that falls within the
acceptable opening range. If such an NBBO quote is present, the series
would open and expose the marketable order(s) at the NBBO price. If
such an NBBO quote is not present, HOSS would not open the series and
would send a notification to market participants indicating the reason.
(2) If the acceptable opening range condition is present, HOSS
would match orders and quotes to the extent possible at a single
clearing price \7\ within the acceptable opening range and then expose
the remaining marketable order(s) at the widest price point within the
acceptable opening range or the NBBO price, whichever is better.
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\7\ In determining the priority of orders and quotes to be
traded on the opening trade or through the subsequent exposure
process, HOSS would give 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 limit orders and quotes
whose price is better than the opening price (with multiple orders
and quotes being ranked in accordance with the allocation algorithm
in effect for the option class pursuant to CBOE Rule 6.45A,
``Priority and Allocation of Equity Option Trades on the CBOE Hybrid
System,'' or 6.45B, ``Priority and Allocation of Trades in Index
Options and Options on ETFs on the CBOE Hybrid System),'' and then
to limit orders and quotes at the opening price (with multiple
orders and quotes being ranked in accordance with the allocation
algorithm in effect for the option class pursuant to Rule 6.45A or
6.45B). See proposed Interpretation and Policy .03(c)(i) to Rule
6.2B.
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(3) If the market order imbalance condition is present, HOSS would
match orders and quotes to the extent possible at a single clearing
price and then expose the remaining marketable order(s) at the widest
price point within the acceptable opening range or the NBBO price,
whichever is better.
(4) If the NBBO condition is present, HOSS would match orders and
quotes to the extent possible at a single clearing price within the
acceptable opening range or the NBBO price, whichever is better, and
then expose the remaining marketable order(s) at the NBBO price.
The order exposure process in each of the above would be conducted
pursuant to Rule 6.14, ``Hybrid Agency Liaison (HAL).'' Under the HAL
process, marketable orders would be electronically exposed to all
Market-Makers appointed to the relevant option class if not executed at
a single clearing price.\8\ For HOSS openings where HAL is used, this
exposure period would afford Market-Makers appointed to the class an
opportunity to match the widest price point within the opening range or
the NBBO price, whichever is better. If at least one Market-Maker
committed to trade any portion of the exposed marketable order(s)
during the exposure period, the exposure period would end and an
allocation period would commence. The Exchange would determine on a
class-by-class basis the applicable exposure period (which would not
exceed 1.5 seconds) and allocation period (which, when combined with
the designated exposure period time--as opposed to an exposure period
that is terminated early \9\--would not exceed a total of 3 seconds)
that would be applicable where HAL is activated for HOSS openings.
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\8\ On an intra-day basis, orders are normally exposed through
HAL to Market-Makers appointed to the relevant option class as well
as members acting as agent for orders at the top of CBOE's book
(``Qualifying Members'') in the relevant series. See CBOE Rule
6.14(b). For HOSS openings where HAL is used, the exposure to
Qualifying Members would not be applicable because there would not
be an established ``top of CBOE's book'' at the time. As part of a
separate rule filing, the Exchange recently modified Rule 6.14 to
permit electronic exposure of HAL orders on a class-by-class basis
to all members that elect to receive HAL messages (not just Market-
Makers appointed to the relevant option class and Qualifying
Members) and to permit such members to participate in the HAL
process. See Securities Exchange Act Release No. 57837 (May 20,
2008), 73 FR 30431 (May 27, 2008) (SR-CBOE-2008-46). In classes
where all members that elect to receive HAL messages are eligible to
participate in the HAL process for a particular class on an intra-
day basis, all such members would also be eligible to participate in
any HAL process that occurs as part of the HOSS opening in that
class.
\9\ In addition to the receipt of a response to trade any
portion of the exposed order(s), the exposure period would also
terminate early under the circumstances described in CBOE Rule
6.14(d).
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At the conclusion of the allocation period, the order(s) would be
filled in accordance with the allocation algorithm in effect for the
class pursuant to Rule 6.45A or 6.45B. There would be no participation
entitlement applicable to exposed orders, and response sizes are
limited to the size of the exposed order for allocation purposes. If no
responses are received or if there remains an unexecuted marketable
order (or portion thereof), then the balance of the order would be
booked if it is a limit order that is not marketable or processed in
accordance with CBOE Rule 6.14(b)(i)-(ii).\10\ In addition, for all
classes, any remaining balance of opening contingency orders not
executed via HAL on the opening would be automatically cancelled.\11\
For single list classes, any remaining balance of
[[Page 46652]]
marketable orders (other than opening contingency orders) not executed
via HAL on the opening would route as determined by the Exchange on a
class-by-class basis to PAR, BART, or at the order entry firm's
discretion to the order entry firm's booth printer.\12\
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\10\ With respect to new proposed HAL exposure period,
``Exchange Initial BBO'' in CBOE Rule 6.14(i)-(ii) means the best
bid (or offer) that exists in the system at the time the auction
begins. This takes into account orders and quotes on the relevant
side of the market that exist in the system at that time (including
orders and quotes that may have been entered up until the beginning
of the HAL auction). See e-mail from Jennifer Lamie, Assistant
General Counsel, CBOE, to Sara Gillis, Special Counsel, Division,
Commission, dated June 19, 2008.
\11\ See proposed CBOE Rule 6.2B, Interpretation .03(c)(ii).
\12\ See proposed CBOE Rule 6.2B, Interpretation .03(c)(ii).
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The Exchange also notes that all transactions executed via HOSS,
including through the new proposed HAL exposure period, must be in
compliance with Section 11(a) of the Act \13\ and the rules promulgated
thereunder. In this regard, the Exchange states that it believes that
orders for proprietary accounts submitted into HOSS, including any such
orders submitted as a response through the proposed HAL exposure
period, would qualify for an exception under Rule 11a2-2(T).\14\
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\13\ 15 U.S.C. 78k(a).
\14\ 17 CFR 240.11a2-2(T).
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III. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange.\15\
Specifically, the Commission finds that the proposal is consistent with
section 6(b)(5) of the Act,\16\ which requires, among other things,
that the rules of a national securities exchange be designed to promote
just and equitable principles of trade, 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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\15\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\16\ 15 U.S.C. 78f(b)(5).
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The Commission believes that the proposed rule change will reduce
delays in the opening of a series where the opening quote, acceptable
opening range, and market order imbalance conditions (collectively,
``opening conditions'') currently would cause the Exchange to delay the
opening of a series until the condition causing the delay is satisfied.
Under the current HOSS procedures, the Exchange must undertake a manual
process when one of the opening conditions exits, which includes
notifying members of the existence of one of the opening conditions and
waiting for the condition(s) to be remedied. The proposed rule change
would automate the process for addressing the opening conditions by
allowing the HAL functionality to be enabled on the openings in
designated classes. Specifically, rather than preventing a series from
opening, the Exchange's system will match orders and quotes to the
extent possible and then expose the remaining marketable orders to HAL.
The Commission believes that this may enhance the efficiency of HOSS
opening rotations because it will allow the opening conditions to be
addressed more quickly through the automated HAL process, as well as
address NBBO condition scenarios where the Exchange's opening trade
might occur at a price inferior to an away market.
Section 11(a)(1) of the Act \17\ prohibits a member of a national
securities exchange from effecting transactions on that exchange for
its own account, the account of an associated person, or an account
over which it or its associated person exercises discretion
(collectively, ``covered accounts'') unless an exception applies. Rule
11a2-2(T) under the Act, known as the ``effect versus execute'' rule,
provides exchange members with an exemption from the section 11(a)(1)
prohibition. Rule 11a2-2(T) permits an exchange member, subject to
certain conditions, to effect transactions for covered accounts by
arranging for an unaffiliated member to execute the transactions on the
exchange. To comply with Rule 11a2-2(T)'s conditions, a member (i) must
transmit the order from off the exchange floor; (ii) may not
participate in the execution of the transaction once it has been
transmitted to the member performing the execution; \18\ (iii) may not
be affiliated with the executing member; and (iv) with respect to an
account over which the member has investment discretion, neither the
member nor its associated person may retain any compensation in
connection with effecting the transaction except as provided in the
Rule.
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\17\ 15 U.S.C. 78k(a).
\18\ The member may, however, participate in clearing and
settling the transaction.
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The Rule's first condition is that orders for covered accounts must
be transmitted from off the exchange floor. The HOSS system receives
orders electronically through remote terminals or computer-to-computer
interfaces.\19\ In the context of other automated trading systems, the
Commission has found that the off-floor transmission requirement is met
if a covered account order is transmitted from a remote location
directly to an exchange's floor by electronic means.\20\ Since HOSS
receives orders electronically through remote terminals or computer-to-
computer interfaces, the Commission believes that such orders satisfy
the off-floor transmission requirement. However, the Commission notes
that to the extent a member submits an order for a covered account into
HOSS from on the floor of the Exchange, such an order would not meet
this requirement.
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\19\ See e-mail from Jennifer Lamie, Assistant General Counsel,
CBOE, to Sara Gillis, Special Counsel, Division of Trading and
Markets, Commission, dated July 31, 2008.
\20\ See, e.g., Securities Exchange Act Release Nos. 57478
(March 12, 2008), 73 FR 14521 (March 18, 2008) (order approving The
NASDAQ Options Market as an options exchange facility of The NASDAQ
Stock Market (``Nasdaq'')); 53128 (January 13, 2006), 71 FR 3550
(January 23, 2006) (order approving Nasdaq's application to register
as a national securities exchange); 49068 (January 13, 2004), 69 FR
2775 (January 20, 2004) (order approving the Boston Options Exchange
as an options trading facility of the Boston Stock Exchange); 44983
(October 25, 2001), 66 FR 55225 (November 1, 2001) (order approving
Archipelago Exchange as electronic trading facility of the Pacific
Exchange (``PCX'')); 29237 (May 24, 1991), 56 FR 24853 (May 31,
1991) (regarding the New York Stock Exchange's (``NYSE'') Off-Hours
Trading Facility); 15533 (January 29, 1979), 44 FR 6084 (January 31,
1979) (regarding the American Stock Exchange (``Amex'') Post
Execution Reporting System, the Amex Switching System, the
Intermarket Trading System, the Multiple Dealer Trading Facility of
the Cincinnati Stock Exchange, the PCX Communications and Execution
System, and the Philadelphia Stock Exchange's Automated
Communications and Execution System (``1979 Release'')); and 14563
(March 14, 1978), 43 FR 11542 (March 17, 1978) (regarding the NYSE's
Designated Order Turnaround System (``1978 Release'')).
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Second, the Rule requires that the member not participate in the
execution of its order. CBOE represented that no Exchange member is
able to acquire control or influence over the result or timing of an
order's execution through HOSS. According to CBOE, the execution of a
member's order through HOSS, including the subsequent HAL exposure, is
determined solely by automated processing and execution by computerized
systems.\21\ Accordingly, the Commission believes that a member does
not participate in the execution of an order submitted to HOSS.
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\21\ The member may cancel or modify the order, or modify the
instruction for executing the order. The Commission has stated that
the non-participation requirement is satisfied under such
circumstances so long as such modifications or cancellations are
also transmitted from off the floor. See 1978 Release, supra note 20
(stating that the ``non-participation requirement does not prevent
initiating members from canceling or modifying orders (or the
instructions pursuant to which the initiating member wishes orders
to be executed) after the orders have been transmitted to the
executing member, provided that any such instructions are also
transmitted from off the floor.'') Thus, the Commission notes that
if such orders are cancelled or modified from on the floor of the
Exchange, such orders would not meet this requirement of Rule 11a2-
2(T).
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Third, Rule 11a2-2(T) requires that the order be executed by an
exchange member who is unaffiliated with the
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member initiating the order. The Commission has stated that this
requirement is satisfied when automated exchange facilities are used,
as long as the design of these systems ensures that members do not
possess any special or unique trading advantages in handling their
orders after transmitting them to the exchange.\22\ CBOE has
represented that the design of HOSS, including the new HAL exposure
period, ensures that no member has any special or unique trading
advantage in the handling of its orders after transmitting its orders
to the Exchange and is designed to prevent any Exchange members from
gaining any time or place advantages. Based on CBOE's representation,
the Commission believes that HOSS, as amended herein, satisfies this
requirement.
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\22\ In considering the operation of automated execution systems
operated by an exchange, the Commission noted that while there is
not an independent executing exchange member, the execution of an
order is automatic once it has been transmitted into the systems.
Because the design of these systems ensures that members do not
possess any special or unique trading advantages in handling their
orders after transmitting them to the exchange, the Commission has
stated that executions obtained through these systems satisfy the
independent execution requirement of Rule 11a2-2(T). See 1979
Release, supra note 20.
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Fourth, in the case of a transaction effected for an account with
respect to which the initiating member or an associated person thereof
exercises investment discretion, neither the initiating member nor any
associated person thereof may retain any compensation in connection
with effecting the transaction, unless the person authorized to
transact business for the account has expressly provided otherwise by
written contract referring to section 11(a) of the Act and Rule 11a2-
2(T).\23\ CBOE represents that members trading for covered accounts
over which they exercise investment discretion must comply with this
condition in order to rely on the rule's exemption.\24\
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\23\ 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written
contract to retain compensation, in connection with effecting
transactions for covered accounts over which such member or
associated persons thereof exercises investment discretion, to
furnish at least annually to the person authorized to transact
business for the account a statement setting forth the total amount
of compensation retained by the member in connection with effecting
transactions for the account during the period covered by the
statement. See 17 CFR 240.11a2-2(T)(d). See also 1978 Release, supra
note 20 (stating ``[t]he contractual and disclosure requirements are
designed to assure that accounts electing to permit transaction-
related compensation do so only after deciding that such
arrangements are suitable to their interests'').
\24\ See e-mail from Jennifer Lamie, Assistant General Counsel,
CBOE, to Sara Gillis, Special Counsel, Division of Trading and
Markets, Commission, dated July 31, 2008.
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Accordingly, for the reasons stated above, the Commission finds
that the proposed rule change is consistent with the Act.
IV. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\25\ that the proposed rule change (SR-CBOE-2008-30) is approved.
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\25\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\26\
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\26\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-18368 Filed 8-8-08; 8:45 am]
BILLING CODE 8010-01-P