[Federal Register Volume 79, Number 5 (Wednesday, January 8, 2014)]
[Notices]
[Pages 1398-1399]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-00071]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71227; File No. SR-CBOE-2013-110]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Approving a Proposed Rule Change To Eliminate the
e-DPM Program January 2, 2014.
I. Introduction
On November 1, 2013, Chicago Board Options Exchange, Incorporated
(the ``Exchange'' or ``CBOE'') 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 eliminate the Electronic DPM
(``e-DPM'') Program (the ``e-DPM Program'' or ``Program''). The
proposed rule change was published for comment in the Federal Register
on November 20, 2013.\3\ The Commission received no comments on 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. 70875 (November 14,
2013), 78 FR 69723 (``Notice'').
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II. Description of the Proposal
The Exchange proposes to eliminate the e-DPM Program by deleting
Exchange rules that exclusively govern the Program and by removing all
references to either the Program or e-DPMs throughout the remainder of
its rulebook. Originally adopted in 2004, the e-DPM Program allows
Trading Permit Holders (``TPHs'') to remotely function as a Designated
Primary Market-Maker (``DPM'').\4\ An e-DPM acts as a specialist on
CBOE by entering bids and offers electronically from locations other
than the floor-based trading crowds where applicable option classes are
traded, and are not required to have traders physically present in the
trading crowd.\5\
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\4\ See id. at 69723. CBOE Rule 8.80(a) defines as a DPM as a
``TPH organization that is approved by the Exchange to function in
allocated securities as a Market-Maker'' and is subject to certain
obligations as provided in CBOE's rules. A DPM generally will
operate on CBOE's trading floor, but can function remotely away from
CBOE's trading floor in certain classes, subject to approval by the
Exchange. See CBOE Rule 8.80(a).
\5\ CBOE Rule 8.92, which the Exchange proposes to delete,
defined an e-DPM as ``a TPH organization that is approved by the
Exchange to remotely function in allocated option classes as a DPM
and to fulfill certain obligations required of DPMs except for Floor
Broker and Order Book Official obligations.''
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The Exchange proposes to eliminate the Program because it believes
the Program is no longer competitively necessary given the growing
prevalence of Preferred Market-Maker \6\ (``PMM'') routing, which the
Exchange believes has rendered the initially unique tenets of the
Program less relevant and attractive to broker-dealers that might
otherwise consider becoming or remaining an e-DPM.\7\ In particular,
the Exchange noted in its filing that while e-DPMs have similar or
greater quoting obligations than PMMs, CBOE's rules provide a smaller
participation entitlement to e-DPMs as compared to the participation
entitlement that CBOE provides to PMMs.\8\ The Exchange further
represented that all e-DPMs that receive preferred orders on CBOE are
also registered as PMMs.\9\ The Exchange explained that the only
circumstance in which it is a benefit to act as an e-DPM from the
perspective of increasing a TPH's participation entitlement is where an
order is not preferred to any party or the recipient of the preferred
order is not at the NBBO when the order is received.\10\ To place this
attribute in context, the Exchange noted that 85% of orders that come
into the Exchange are preferred orders.\11\
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\6\ Pursuant to CBOE Rule 8.13, the PMM program permits the
Exchange to ``allow on a class-by-class basis, for the receipt of
marketable orders, through the Exchange's Order Routing System when
the Exchange's disseminated quote is the NBBO, that carry a
designation from the Trading Permit Holder transmitting the order
that specifies a Market-Maker in that class as the `Preferred
Market-Maker' for that order. A qualifying recipient of a Preferred
Market-Maker order shall be afforded a participation entitlement''
as set forth in CBOE Rule 8.13.
\7\ See Notice, supra note 3, at 69723.
\8\ See id. The Exchange stated that on most transactions to
which the e-DPM entitlement applies, if no party is labeled
``preferred'' for that order, or the party labeled ``preferred'' is
not at the NBBO, e-DPMs are only guaranteed a maximum of 15%
participation entitlement per order, whereas PMMs have a maximum 40%
participation entitlement on orders that are preferred to them. See
Notice, supra note 3, at 69723-69724.
\9\ See id. at 69723.
\10\ See id. at 69724.
\11\ See id.
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The Exchange stated that it does not believe that the elimination
of the e-DPM Program will affect CBOE's market quality because the
Exchange does not expect any Market-Makers to cease doing business on
the Exchange due to
[[Page 1399]]
the elimination of the Program; instead, the Exchange anticipates that
all e-DPMs will stay on as Market-Makers and, on an order-by-order
basis, as PMMs.\12\ The Exchange believes that the greater
participation entitlement under the PMM program when an order is
preferred provides a stronger incentive for TPHs to quote at the NBBO
than the lower participation entitlement for e-DPMs, which, according
to the Exchange, helps to encourage narrower spreads.\13\
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\12\ See id.
\13\ See id.
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In support of its proposal to discontinue the e-DPM program, the
Exchange further represented that it believes that the Program adds an
unnecessary layer of complexity to CBOE rules, system processes,
matching algorithms, and trading procedures.\14\ The Exchange does not
believe that the e-DPM Program provides CBOE with any competitive
advantage, and believes that the elimination of the Program will
provide the Exchange with more flexibility to consider other methods of
encouraging DPM performance.\15\
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\14\ See id.
\15\ See id.
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In its filing, the Exchange represented that, if its proposal is
approved by the Commission, CBOE would announce the elimination of the
Program via a Regulatory Circular, which will include an end date for
the Program that will be at least two weeks in advance in order for
current e-DPMs to determine their course of action following
elimination of the Program.\16\
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\16\ See id.
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III. Discussion and Commission Findings
After careful review of the proposal, the Commission finds that the
proposed rule change is consistent with the requirements of the Act and
the rules and regulations thereunder that are applicable to a national
securities exchange.\17\ In particular, the Commission finds that the
proposed rule change is consistent with Section 6(b)(1) of the Act,\18\
which requires, among other things, that the Exchange be so organized
and have the capacity to carry out the purposes of the Act. The
Commission also finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\19\ which requires, among other things,
that the rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices, 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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\17\ In approving the proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\18\ 15 U.S.C. 78f(b)(1).
\19\ 15 U.S.C. 78f(b)(5).
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As noted above, CBOE represents that all e-DPMs are also registered
as PMMs. Accordingly, CBOE does not believe that elimination of the
Program will harm CBOE's market quality as it anticipates current e-
DPMs will continue to serve as market-makers on the Exchange and as
PMMs on orders that are preferred to them.
Further, because such a high percentage of CBOE's order-flow is
preferenced (85% as indicated by CBOE), and because PMM status provides
a comparably larger entitlement for preferred orders compared to e-DPM
status, CBOE believes that the e-DPM program does not provide an
incentive great enough to warrant the complexity the e-DPM program
brings to the Exchange's rules, systems, and processes. CBOE also noted
that other options exchanges do not have programs similar to the e-DPM
program.\20\
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\20\ See Notice, supra note 3, at 69724.
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Based on CBOE's representations, discussed above, the Commission
believes that elimination of the e-DPM Program should not hinder the
Exchange's capacity to carry out the purposes of the Act nor should it
impede CBOE's ability to remove impediments to and perfect the
mechanism of a free and open market and a national market system.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\21\ that the proposed rule change (SR-CBOE-2013-110) be, and
hereby is, approved.
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\21\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-00071 Filed 1-7-14; 8:45 am]
BILLING CODE 8011-01-P