[Federal Register Volume 76, Number 251 (Friday, December 30, 2011)]
[Notices]
[Pages 82336-82339]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-33587]
[[Page 82336]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66048; File No. SR-CBOE-2011-116]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of a Proposed Rule Change Relating to
Its Automated Improvement Mechanism
December 23, 2011.
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 December 14, 2011, 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 the
Substance of the Proposed Rule Change
The Exchange proposes to amend its rules relating to its Automated
Improvement Mechanism (``AIM''). The text of the proposed rule change
is available on the Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, and at the Commission.
II. Self-Regulatory Organization's Statement of the Purpose of, and the
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 these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in sections A, B, and C below, of the
most significant aspects 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 purpose of the proposed rule change is to amend CBOE Rule 6.74A
to (i) allow Trading Permit Holders (``TPHs'') to enter orders they
represent as agent (``Agency Orders'') for fewer than 50 contracts into
AIM at the national best bid or offer (``NBBO''); (ii) eliminate the
requirement that there be at least three market-makers quoting in the
relevant series in order for an AIM auction (``Auction'') to commence;
(iii) allow TPHs that initiate an Auction (``Initiating TPHs'') to
designate a limit price if it elects to automatically match the price
and size of all Auction responses (``auto-match''); and (iv) eliminate
the restriction that only market-makers with an appointment in the
relevant option class may submit responses to a Request for Responses
(``RFR'') for an Agency Order in an Auction.
This proposed rule change would make AIM more similar to current
rules of the Boston Options Exchange Group, LLC (``BOX'') \3\ and the
International Securities Exchange, LLC (``ISE'') \4\ relating to the
Price Improvement Period (``PIP'') and Price Improvement Mechanism
(``PIM''), respectively, which are automated price improvement
mechanisms.\5\
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\3\ See BOX Rules Chapter V, Section 18.
\4\ See ISE Rule 723.
\5\ AIM, PIP and PIM have certain characteristics in common with
each other. All three mechanisms (a) provide for the opportunity for
customer price improvement, (b) have certain periods where the
initial orders are exposed for potential price improvement, (c) have
certain guidelines regarding the types of orders that may be
eligible for price improvement, and (d) have certain defined rules
related to the allocation of trades within price improvement
auctions.
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AIM allows a TPH to submit an Agency Order along with a contra-side
second order (a principal order or a solicited order for the same size
as the Agency Order) into an Auction where other participants could
compete with the Initiating TPH's second order to execute against the
Agency Order, which guarantees that the Agency Order will receive an
execution. Once an Auction commences, the Initiating TPH cannot cancel
it.\6\
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\6\ See CBOE Rule 6.74A(b)(1)(A).
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Under this proposal, Agency Orders of all sizes submitted to AIM
will be guaranteed execution at a price at least as good as the NBBO
while providing the opportunity for execution at a price better than
the NBBO. The proposal will incent more TPHs to initiate and
participate in Auctions and will allow even broader participation in
Auctions by all types of market participants. As a result, CBOE expects
the proposal will increase the number of and participation in Auctions,
which would enhance competition in the Auctions. The Exchange believes
that this proposal will ultimately provide additional opportunities for
price improvement over the NBBO for its customers.
Elimination of Entry Price Restriction on Agency Orders for Fewer Than
50 Contracts
CBOE Rule 6.74A(a)(2) and (3) currently provides that if an
Initiating TPH submits an Agency Order to AIM for 50 contracts or more,
the Initiating TPH must enter its contra-side second order (or stop the
Agency Order) at the better of the NBBO or the Agency Order's limit
price (if the order is a limit order); however, if an Initiating TPH
submits an Agency Order to AIM for fewer than 50 contracts, the
Initiating TPH must stop the entire Agency Order at the better of the
NBBO price improved by one minimum price improvement increment or the
Agency Order's limit price (if the order is a limit order). The
Exchange is proposing to eliminate this distinction and allow
Initiating TPHs to submit to AIM Agency Orders of any size at the NBBO.
The Exchange believes this proposal will increase the likelihood
that TPHs will initiate Auctions for Agency Orders for fewer than 50
contracts because the TPHs will only be required to guarantee an
execution at the NBBO, which will provide additional customer orders
with an opportunity for price improvement over the NBBO. The Exchange
believes the proposal will also encourage increased participation in
AIM by TPHs willing to trade with an Agency Order for fewer than 50
contracts at the NBBO but not better than the NBBO.
In support of this proposal, the Exchange notes that both BOX \7\
and ISE \8\ allow entry of orders into PIP and PIM, respectively, at
the NBBO without distinguishing between orders of more than or fewer
than 50 contracts. Because BOX and ISE are currently able to offer
their customers price improvement for orders of fewer than 50 contracts
at the NBBO in PIP and PIM, respectively, the Exchange has determined
that it is important for competitive purposes that it be able to offer
the same opportunities
[[Page 82337]]
to its customers for price improvement on CBOE through AIM.
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\7\ See supra note 3; see also Securities Exchange Act Release
No. 34-59654 (March 30, 2009), 74 FR 15551 (April 6, 2009) (SR-BX-
2009-08) (order approving proposed rule change allowing entry of
orders into PIP at the NBBO when BOX's best bid or offer is inferior
to the NBBO with no order size distinction).
\8\ See supra note 4; see also Securities Exchange Act Release
No. 34-57847 (May 21, 2008), 73 FR 30987 (May 29, 2008) (SR-ISE-
2008-29) (order approving proposed rule change allowing entry of
orders into PIM at the NBBO when ISE's best bid or offer is inferior
to the NBBO with no order size distinction).
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The Exchange notes that certain allocation differences exist
between AIM and PIM as well as AIM and PIP. As proposed, our AIM change
would make the handling of AIM trades for 50 or more contracts
consistent with AIM trades under 50 contracts.\9\ However, unlike PIM,
which requires auctions to commence at prices better than the ISE best
bid or offer and thus precludes an auction initiator from establishing
priority ahead of any resting ISE interest, an AIM Auction can begin
and conclude at the CBOE best bid or offer. This means that, like for
orders of 50 or more contracts on CBOE, the Initiating TPH can trade at
a price in which resting interest existed and can establish priority
over resting broker-dealer interest. Although PIP allows auctions to
occur at the BOX best bid or offer, PIP uses an order allocation
structure based on price-time priority sequence with priority for
public customer orders (like CBOE) and secondary priority for non-BOX
Participant broker-dealers. On CBOE, when an Auction concludes at the
CBOE best bid or offer, first priority is for public customers, second
priority is for the Initiating TPH (for 40%), third priority is for
nonpublic customer resting orders or quotes that are unchanged from
when the Auction began, and last priority is for RFR responses. The
Exchange references these differences for informational purposes but
does not believe that the differences are material to the Exchange's
goals of handling AIM orders of all sizes the same and allowing
Auctions of orders smaller than 50 contracts at the NBBO (like PIP and
PIM).
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\9\ PIP and PIM also do not distinguish between orders over 50
contracts and orders under 50 contracts.
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The Exchange further notes that certain components of AIM were
approved on a pilot basis, including that there is no minimum size
requirement for orders to be eligible for the Auction.\10\ The
Commission has approved six one-year extensions to the pilot programs,
most recently until July 18, 2012.\11\ In connection with the pilot
programs, the Exchange has submitted, and will continue to submit, to
the Commission reports providing detailed AIM Auction and order
execution data, including monthly data regarding executions through AIM
of Agency Orders for more or fewer than 50 contracts, as supporting
evidence that, among other things, there is meaningful competition for
all size orders.
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\10\ See Securities Exchange Act Release No. 53222 (February 3,
2006), 71 FR 7089 (February 10, 2006) (SR-CBOE-2005-60) (order
approving implementation of AIM).
\11\ See Securities Exchange Act Release Nos. 34-54147 (July 14,
2006), 71 FR 41487 (July 21, 2006) (SR-CBOE-2006-64); 56094 (July
18, 2007), 72 FR 40910 (July 25, 2007) (SR-CBOE-2007-80); 58196
(July 18, 2008), 73 FR 43803 (July 28, 2008) (SR-CBOE-2008-76);
60338 (July 17, 2009), 74 FR 36803 (July 24, 2009) (SR-CBOE-2009-
51); 62522 (July 16, 2010), 75 FR 43596 (July 26, 2010) (SR-CBOE-
2010-67); and 34-64930 (July 20, 2011), 76 FR 44636 (July 26, 2011)
(SR-CBOE-2011-66).
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Elimination of Three Market-Maker Requirement
CBOE Rule 6.74A(a)(4) currently requires that there be at least
three market-makers quoting in the relevant series for an Auction to
commence. The Exchange is proposing to eliminate this requirement. The
Exchange does not believe that customer orders should be denied the
benefits of AIM simply because there may be less than three market-
makers quoting in a relevant options class at a specific point in time.
Any concern regarding an Auction starting with a lower number of
market-makers quoting in a relevant series is offset by the broad
participation and competition that would be present once an Auction
commenced.
In support of this proposal, the Exchange notes that both PIP \12\
and PIM \13\ permit auctions to commence without the condition that
there be a minimum number of market-makers quoting in the particular
series. The Exchange believes that AIM, and in turn the customers that
benefit from AIM, would be disadvantaged if the three market-maker
requirement remained as a condition to start an Auction because this
requirement potentially reduces the number of Auctions and, as a
result, opportunities for price improvement. Because BOX and ISE are
currently able to offer their customers price improvement without a
minimum quoter requirement in PIP and PIM, respectively, the Exchange
believes it is essential for competitive purposes that it be able to
offer the same opportunities for price improvement on CBOE through AIM.
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\12\ See supra note 3; see also Securities Exchange Act Release
No. 34-58999 (November 21, 2008), 73 FR 72536 (November 28, 2008)
(SR-BSE-2008-54) (order approving proposed rule change to eliminate
requirement that there be at least three market-makers quoting in
the relevant series for an auction to commence).
\13\ See supra note 4; see also Securities Exchange Act Release
No. 34-58710 (October 1, 2008), 73 FR 59008 (October 8, 2008) (SR-
ISE-2008-63) (order approving proposed rule change to eliminate
requirement that there be at least three market-makers quoting in
the relevant series for an auction to commence).
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Addition of Option To Designate Auto-Match Limit Price
CBOE Rule 6.74A(b)(1)(A) currently allows an Initiating TPH to
enter its contra-side second order in one of two formats: (1) A
specified single price; or (2) a non-price specific commitment to auto-
match all Auction responses achieved during the Auction. In this case,
the Initiating TPH would have no control over the match price. The
Exchange is proposing to provide Initiating TPHs with the additional
option to auto-match competing prices from other market participants up
to a designated limit price. The Initiating TPH will still not be able
to cancel the auto-match instruction after an Auction commences and
will have no control over the prices at which it receives an allocation
of the Auction other than the outside boundary established by the
designated limit price.
The Exchange notes that when the Initiating TPH selects the auto-
match feature prior to the start of an Auction (with or without a
designated limit price), the available liquidity at improved prices is
increased and competitive final pricing is out of the Initiating TPH's
control. The Exchange believes the proposal will encourage increased
participation in AIM because it allows TPHs willing to trade with an
Agency Order at a price better than the NBBO, but only up to a certain
price, to initiate an Auction.
In support of this proposal, the Exchange also notes that both PIP
\14\ and PIM \15\ permit initiating participants to elect to auto-match
up to a designated limit price. The Exchange believes that AIM, and in
turn the customers that benefit from AIM, would be disadvantaged if
TPHs are not provided with the option to auto-match up to a designated
limit price because this lack of flexibility reduces the number of
Auctions and, as a result, opportunities for price improvement. Because
BOX and ISE currently allow initiating participants or members,
respectively, the option to auto-match up to the NBBO achieved during
an auction or up to a designated limit price, the Exchange believes it
is important for competitive purposes that it be able to offer the same
[[Page 82338]]
opportunities for price improvement on CBOE through AIM.
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\14\ See supra note 3; see also Securities Exchange Act Release
No. 34-61805 (March 31, 2010), 75 FR 17454 (April 6, 2010) (SR-BX-
2010-22) (order approving implementation of auto-match feature with
the option to auto-match up to a designated limit price).
\15\ See supra note 4; see also Securities Exchange Act Release
No. 34-62644 (August 4, 2010), 75 FR 48395 (August 10, 2010) (SR-
ISE-2010-61) (order approving implementation of auto-match feature
with the option to auto-match up to a designated limit price).
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The Exchange will provide the Commission with the following data:
(1) The percentage of trades effected through AIM in which the
Initiating TPH submitted an Agency Order with an auto-match instruction
that included a designated limit price and the percentage that did not
include a designated limit price; and (2) the average amount of price
improvement provided to AIM Agency Orders when the Initiating TPH
submitted an auto-match instruction that included a designated limit
price and the average amount that did not include a designated limit
price, versus the average amount of price improvement provided to AIM
Agency Orders when the Initiating TPH submitted a single price (no
auto-match instruction).
After effectiveness of the proposal, and at least one week prior to
implementation of the rule change, CBOE will issue a notice to TPHs
informing them of the implementation of the additional auto-match
feature. This will give TPHs an opportunity to make any necessary
modifications to coincide with the implementation date.
Elimination of Relevant Option Class Restriction
CBOE Rule 6.74A(b)(1)(D) currently provides that only market-makers
with an appointment in the relevant option class may submit responses
to an RFR in an Auction. The Exchange is proposing to eliminate this
restriction and allow all TPHs that receive an RFR to submit responses
in an Auction. The Exchange notes that the elimination of this
restriction will allow for broader participation in Auctions by all
types of market participants (e.g., public customers, broker-dealers
and market-makers). This broader participation will increase
competition in Auctions because more market participants will be able
to submit responses to RFRs, which responses may result in better
prices for customers.
In support of this proposal, the Exchange notes both PIP \16\ and
PIM \17\ permit all participants and members, respectively, to submit
competing prices in an auction. The Exchange believes that the
elimination of the restriction on which TPHs may compete in an Auction
would increase the opportunities for all types of market participants
to participate in AIM and submit price responses, leading to more
robust competition in AIM.
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\16\ See supra note 3; see also Securities Exchange Act Release
No. 34-51651 (May 3, 2005), 70 FR 24848 (May 11, 2005) (SR-BSE-2005-
01) (order approving proposed rule change to eliminate certain
restrictions on the ability of certain market participants to
participate in PIP).
\17\ See supra note 4; see also Securities Exchange Act Release
No. 34-50819 (December 8, 2004), 69 FR 75093 (December 15, 2004)
(SR-ISE-2003-06) (order approving proposed rule change to implement
PIM without a restriction on which members may submit auction
responses).
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange and, in particular, the
requirements of Section 6(b) of the Act.\18\ Specifically, the Exchange
believes the proposed rule change is consistent with the Section
6(b)(5) \19\ 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.
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\18\ 15 U.S.C. 78f(b).
\19\ 15 U.S.C. 78f(b)(5).
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In particular, the Exchange believes this proposed rule change is a
reasonable modification designed to provide additional flexibility for
TPHs to obtain executions on behalf of their customers while continuing
to provide meaningful, competitive Auctions. The Exchange also believes
that the proposed rule change will increase the number of and
participation in Auctions, which will ultimately enhance competition in
the AIM Auctions and provide customers with additional opportunities
for price improvement. These changes are consistent with changes made
by other exchanges and they serve to remove impediments to and to
perfect the mechanism for a free and open market and a national market
system.
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 45 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 or disapprove 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 email to [email protected]. Please include
File Number SR-CBOE-2011-116 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-2011-116. This file
number should be included on the subject line if email 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 Web site
viewing and printing in the Commission's Public Reference Room on
official business days between the hours of 10 a.m. and 3 p.m. Copies
of such filing also will be
[[Page 82339]]
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-2011-116, and should be submitted on or before January 20, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-33587 Filed 12-29-11; 8:45 am]
BILLING CODE 8011-01-P