[Federal Register Volume 75, Number 121 (Thursday, June 24, 2010)]
[Notices]
[Pages 36147-36148]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-15279]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62317; File No. SR-CBOE-2010-038]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Approving Proposed Rule Change, as Modified by
Amendment No. 1 Thereto, Related to the Hybrid Matching Algorithms
June 17, 2010.
On April 22, 2010, 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 market turner and
modified participation entitlement priority overlays. On May 6, 2010,
CBOE filed Amendment No. 1 to the proposed rule change. The proposed
rule change was published for comment in the Federal Register on May
18, 2010.\3\ The Commission received no comment letters on the
proposal. This order approves the proposed rule change, as modified by
Amendment No. 1.
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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. 62083 (May 12,
2010), 75 FR 27850.
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CBOE 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)
set forth, among other things, the manner in which incoming electronic
orders in options are allocated on the Hybrid System. Each rule
currently provides allocation algorithms the Exchange can utilize when
executing incoming electronic orders, including the Ultimate Matching
Algorithm (``UMA''), and price-time and pro-rata priority allocation
algorithms. The price-time and pro-rata priority overlays currently
include: public customer priority for public customer orders resting on
the Hybrid System; participation entitlements for certain qualifying
market-makers (the ``original participation entitlement(s)''); a market
turner priority for participants that are the first to improve CBOE's
disseminated quote; and a modified participation entitlement overlay
\4\ in which the original participation entitlement would apply only if
there are no public customer orders resting at the best price or a
public customer was the first to rest interest at the best price. In
addition, a small order participation entitlement overlay for
Designated Primary Market-Makers (``DPMs'') and Lead Market-Makers
(``LMMs'') can be applied to each of the three allocation algorithms
(i.e., price-time, pro-rata or UMA).\5\ These overlays are all
optional.
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\4\ Securities Exchange Act Release No. 60665 (September 14,
2009), 74 FR 48114 (September 21, 2009) (SR-CBOE-2009-052).
\5\ If the small order priority overlay is in effect for an
option class, then orders for five (5) contracts or fewer will be
executed first by the DPM or LMM, as applicable, appointed to the
option class. This participation entitlement is subject to certain
conditions, including a condition that public customer priority must
be in effect in priority sequence ahead of the participation
entitlement. See Rules 6.45A(a)(iii) and 6.45B(a)(iii).
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The proposed rule change would amend the Exchange's priority
overlays. CBOE proposes to make the market turner overlay available for
classes utilizing any of the priority methods offered by the Exchange.
The Exchange also proposes to amend the application of the modified
participation entitlement overlay. Under the proposal, a Market-Maker
that is the subject of a participation entitlement would only receive
an entitlement if the amount it is entitled to pursuant to the
participation entitlement is greater than the amount the Market-Maker
would otherwise receive pursuant to the algorithm. In all other cases,
the participation entitlement and public customer priority would not be
applied. This allocation would be subject to the following:
The Market-Maker's entitlement share would be calculated
based on any remaining balance after all public customer orders at the
best price are satisfied. For options classes using the pro-rata
method, the Exchange may determine on a class-by-class basis to
calculate the Market-Maker's entitlement share using the UMA
methodology or the pro-rata methodology. For options classes using the
price-time method, the Market-Maker's entitlement share would be
calculated using the price-time methodology only.\6\
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\6\ This modified participation entitlement overlay would only
be applicable to automatic executions and would not be applicable
for executions of incoming electronic orders initiated from PAR or
from electronic auctions. Instead, the original participation
entitlement parameters would be applied for PAR and electronic
auctions. In pro-rata classes where the UMA method is selected to
calculate the Market-Maker's modified participation entitlement
share, executions of incoming electronic orders initiated from PAR
and electronic auctions would be allocated using the UMA method.
Therefore, in such classes, the Market-Maker's original
participation entitlement share of a PAR or electronic auction
execution would be calculated using the UMA method.
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[[Page 36148]]
When calculating the amount the Market-Maker would
otherwise receive pursuant to the operation of the algorithm, the
participation entitlement and public customer priority overlays would
not be considered. Instead the calculation would be based on a price-
time or pro-rata basis, as applicable, and subject to any other
applicable priority overlays, such as market turner priority.
In addition, the Exchange proposes that the modified participation
entitlement overlay would be available to modify the application of the
small order participation entitlement.
The Commission has carefully reviewed the proposed rule change and
finds that it is consistent with the requirements of the Act and the
rules and regulations thereunder applicable to a national securities
exchange.\7\ In particular, the Commission finds that the proposed rule
change is consistent with Section 6(b)(5) of the Act,\8\ which
requires, among other things, that the rules of an exchange be designed
to promote just and equitable principles of trade, 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; and are not designed to permit unfair discrimination between
customers, issuers, brokers, or dealers; as well as Section 6(b)(8) of
the Act, which requires the rules of an exchange not to impose any
burden on competition not necessary or in furtherance of the Act.\9\
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\7\ 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).
\8\ 15 U.S.C. 78f(b)(5).
\9\ 15 U.S.C. 78f(b)(8).
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The Commission believes that the proposed rule change amending the
market turner and modified participation entitlement overlays is
consistent with the Act. All public customer orders at the best price
will continue to be satisfied before a participation entitlement will
be applied. If an entitlement is not applied, then the incoming order
will be allocated among all market participants using the underlying
matching algorithm--price-time or pro-rata--both of which the
Commission already has found consistent with the Act.\10\ In addition,
the Exchange's overlay determinations will be distributed via
regulatory circular. For these reasons, the Commission believes that
the proposed rule change is consistent with the Act.
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\10\ See Securities Exchange Act Release No. 51822 (June 10,
2005), 70 FR 35321 (June 17, 2005) (Adopting CBOE Rule 6.45B).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\11\ that the proposed rule change (SR-CBOE-2010-038), as modified
by Amendment No. 1, be, and hereby is, approved.
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\11\ 15 U.S.C. 78s(b)(2).
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. 2010-15279 Filed 6-23-10; 8:45 am]
BILLING CODE 8010-01-P