[Federal Register: June 13, 2007 (Volume 72, Number 113)]
[Notices]
[Page 32688-32690]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13jn07-119]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-55874; File No. SR-CBOE-2006-101]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Approving Proposed Rule Change as Modified by
Amendment Nos. 1 and 2 Thereto To Amend CBOE's Rules To Reflect the
Migration of Its TPF Technology Platform Over to the Existing
CBOEdirect Technology Platform
June 7, 2007.
I. Introduction
On November 30, 2006, 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 introduce a third trading
platform into its existing CBOEdirect system, ``Hybrid 3.0.'' The
Exchange submitted Amendment No. 1 to the proposed rule change on
February 15, 2007. The Exchange submitted Amendment No. 2
[[Page 32689]]
to the proposed rule change on April 13, 2007.\3\ The proposed rule
change, as modified by Amendment Nos. 1 and 2, was published for
comment in the Federal Register on May 3, 2007.\4\ The Commission did
not receive any comments regarding the proposal. This order approves
the proposed rule change as modified by Amendment Nos. 1 and 2.
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\1\ 15 U.S.C. 78s(b)(1).
\2 \ 17 CFR 240.19b-4.
\3 \ Amendment No. 2 replaced and superseded Amendment No. 1 and
the original filing in their entireties.
\4\ Securities Exchange Act Release No. 55674 (April 26, 2007),
72 FR 24639 (May 3, 2007).
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II. Description of the Proposal
In 2003, CBOE introduced the Hybrid Trading System (``Hybrid'' or
``Hybrid System''), an electronic trading platform integrated with
CBOE's floor-based open-outcry auction market.\5\ Under CBOE's existing
rules, the Hybrid System currently supports two trading platforms: (i)
The original Hybrid Trading System, which is a trading platform that
allows individual Market-Makers to submit electronic quotes in their
appointed classes; and (ii) Hybrid 2.0, which is an enhanced trading
platform that allows remote quoting by authorized categories of
Exchange members. These two platforms operate on a technology system
that is referred to as the CBOEdirect trade engine. In addition to
these two platforms, prior to 2003 and through the present, CBOE has
also utilized its TPF mainframe system to support trading in its ``non-
Hybrid'' classes.\6\ Therefore, options classes currently may be
authorized by the Exchange to trade on the non-Hybrid, original Hybrid
Trading System or Hybrid 2.0 platforms.
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\5\ See Securities Exchange Act Release No. 47959 (May 30,
2003), 68 FR 34441 (June 9, 2003).
\6\ The three current non-Hybrid classes are options: on the S&P
100 Index--OEX; options on the S&P 500 Index--SPX; and options on
the Morgan Stanley Retail Index--MVR.
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CBOE has determined to migrate the trading programs operating on
its TPF mainframe system to the CBOEdirect trade engine. To accommodate
this changeover, CBOE has proposed to amend its Hybrid rules to
introduce a third trading platform into its existing CBOEdirect system,
called ``Hybrid 3.0,'' which incorporates certain aspects of both the
Hybrid Trading System and non-Hybrid platforms. The more significant
aspects of the proposal are outlined below.\7\
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\7\ To incorporate Hybrid 3.0 into CBOE's existing Hybrid rules,
CBOE has proposed to define all references to ``Hybrid,'' ``Hybrid
System,'' and ``Hybrid Trading System'' in CBOE's rules to mean all
CBOE hybrid platforms, including Hybrid 3.0, unless otherwise
provided by a specific CBOE rule.
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A. Quoting
As proposed, the Hybrid 3.0 platform will allow a single electronic
quote, which will represent the aggregate Market Maker quoting interest
in each option series for the trading crowd (``Hybrid 3.0 crowd
quote''). This single quote will be generated from either an appointed
Designated Primary Market Maker (``DPM'') or Lead Market Maker
(``LMM''). In this way, Hybrid 3.0 will operate in a manner similar to
the existing non-Hybrid platform where an appointed DPM or LMM may
generate an automated quote for the trading crowd.\8\
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\8\ Currently, the non-Hybrid platform allows for the use of an
Exchange-sponsored autoquote system. However, according to CBOE,
this functionality will not be available for Hybrid 3.0.
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In Hybrid 3.0, members of the trading crowd will be able to submit
manual quotes. Specifically, members of the trading crowd will be able
to verbalize manual quotes to be input into Exchange systems by quote
reporters for dissemination to the Options Price Reporting Authority
(``OPRA'').\9\ The manual quote disseminated in Hybrid 3.0 classes will
be separate and additional to the Hybrid 3.0 crowd quote. If market
participants (which include in-crowd market makers) are eligible to
submit orders for entry into the electronic book, then the appropriate
Procedure Committee may determine to disable manual quotes.\10\
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\9\ Similar to the existing functionality for manual quotes in
non-Hybrid classes, in Hybrid 3.0 the Exchange's disseminated OPRA
quote will not distinguish between electronic and manual quotes but
members of the trading crowd will be able to distinguish between
electronic and manual quotes.
\10\ A market participant is defined as a ``Market-Maker, a
Remote Market-Maker, an in-crowd DPM or LMM, an e-DPM with an
appointment in the subject class, and a floor broker or PAR Official
representing orders in the trading crowd.'' See CBOE Rule 6.45B.
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B. Order Eligibility for Entry into Electronic Book
In Hybrid 3.0, public customer orders are automatically eligible
for electronic book entry.\11\ Moreover, in Hybrid 3.0, the appropriate
Procedure Committee can determine, on a class by class basis, to allow
certain other types of orders into the electronic book, including
orders of market participants and broker-dealers.\12\ These eligibility
rules are the same as the existing rules for other Hybrid classes
except that, with respect to other Hybrid classes, market participants
are eligible to submit orders for entry into the electronic book
without the appropriate Procedure Committee's approval. The proposed
electronic book eligibility rules for Hybrid 3.0 are consistent with
current practices in CBOE's non-Hybrid classes.\13\
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\11\ See CBOE Rule 7.4(a)(1).
\12\ Id.
\13\ See CBOE Rule 6.8.01.
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C. Automatic Execution of Incoming Orders
Hybrid 3.0 proposes to permit automatic execution of non-broker-
dealer public customer orders. In addition, the appropriate Procedure
Committee may determine, on a class by class basis, to allow orders of
broker-dealers that are not market-makers or specialists on an exchange
who are exempt from the provisions of Regulation T of the Federal
Reserve Board pursuant to Section 7(c)(2) of the Act (``non-Market-
Maker or non-Specialist broker-dealers'') to be eligible for automatic
execution.\14\
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\14\ See proposed changes to CBOE Rule 6.13(b)(i)(C)(i). This
process is consistent with the appropriate Procedure Committee's
ability to permit broker-dealer orders to be automatically executed
through the Exchange's Retail Automatic Execution System (``RAES'')
in CBOE's non-Hybrid Classes. See CBOE Rule 6.8.01.
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For Hybrid 3.0 classes, incoming orders that are eligible to
receive automatic execution will execute against public customer orders
in the electronic book. The remaining balance of the incoming order, if
any, may be (i) Represented in the electronic book provided such order
is eligible for book entry \15\ or (ii) if the order is not eligible
for book entry, it will route to PAR, BART, or to the order entry
firm's booth printer.
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\15\ Even if an order is eligible for book entry, the order
entry firm will have the discretion to have the remaining balance of
the eligible order route to PAR, BART, or to the order entry firm's
booth printer.
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On the Hybrid 3.0 platform, automatic execution against quotes
(whether electronic or manual) will not be allowed.\16\ However, if the
electronic book price matches a manual quote, then automatic execution
will be permissible against public customer orders in the electronic
book.\17\ CBOE represented that, consistent with existing practices in
CBOE's non-Hybrid
[[Page 32690]]
Classes, the Exchange will apply similar firm quote surveillance
procedures in Hybrid 3.0 to monitor for compliance with members' firm
quote obligations.
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\16\ See CBOE Rule 6.13. By comparison, currently in CBOE's non-
Hybrid Classes, orders may be eligible for automatic execution
against market maker quotes on RAES. See CBOE Rules 6.8 and 24.17.
The Exchange represents that the number of trades that occur on RAES
is minimal (approximately 1/10th of 1% of all volume occurs on
RAES).
\17\ See proposed changes to CBOE Rule 6.43(b). For example, if
the electronic book is a $1.20 bid and the manual quote is at a
$1.20 bid, then the system will allow for automatic execution
against the $1.20 electronic book bid but not the $1.20 quote. In
addition, if the Hybrid 3.0 crowd quote matches the electronic book
price, automatic execution against public customer orders in the
book is permissible.
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D. Application of CBOE Rule 6.45B
CBOE Rule 6.45B, which relates to the priority and allocation of
trades, will apply to trading in Hybrid 3.0 classes in the same way it
is applied to CBOE's existing Hybrid Trading System. For example,
multiple customer orders in the electronic book at the same price will
be ranked based on time priority pursuant to the priority methods set
forth in Rule 6.45B.\18\ Further, unlike CBOE's non-Hybrid classes,
Hybrid 3.0 will allow (i) Each Market-Maker in the trading crowd and
(ii) all floor brokers in the trading crowd (collectively referred to
as ``in-crowd market participants'' or ``ICMPs'') to trade against the
electronic book pursuant to CBOE Rule 6.45B(c).\19\
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\18\ See CBOE Rule 6.45B(a)(ii)(A)(1).
\19\ This process is the same as for existing Hybrid classes.
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CBOE Rule 6.45B(d) currently governs the interaction of quotes when
they are locked (e.g., $1.00 bid--1.00 offer). Specifically, CBOE Rule
6.45B(d) provides that when the quotes of two Market-Makers interact
(i.e., ``quote lock''), either party has one second during which it may
move its quote without obligation to trade with the other party. If,
however, the quotes remain locked at the conclusion of one-second, the
quotes trade in full against each other. For quote locks in Hybrid 3.0
classes, the appropriate Procedure Committee will set the length of the
counting period, provided that the period shall not exceed ten
seconds.\20\ According to the Exchange, the proposed ten second
threshold is intended to provide additional flexibility for Market-
Makers to become acclimated with Hybrid 3.0.\21\
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\20\ See proposed changes to CBOE Rule 6.45B(d).
\21\ By comparison, the current quote lock timer for Hybrid and
Hybrid 2.0 classes may not exceed one second. See CBOE Rule
6.45B(d)(i)(C).
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Regarding the time periods required for order exposure in
Interpretation .01 of Rule 6.45B (``Principal Transactions'') and
Interpretation .02 of Rule 6.45B (``Solicitation Orders''), CBOE has
proposed a minimum exposure time for Hybrid 3.0 classes, on a class by
class basis, to be at least three seconds but not to exceed thirty
seconds.\22\ According to CBOE, this extended time frame for exposure
will provide additional flexibility as ICMPs become more acclimated
with Hybrid 3.0.\23\
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\22\ See proposed changes to CBOE Rule 6.45B.01 and 6.45B.02.
\23\ By comparison, the current exposure period for Hybrid and
Hybrid 2.0 classes is at least three seconds. See CBOE Rule 6.45B.01
and 6.45B.02.
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E. Opening Procedures
Only the DPM or LMM responsible for generating the Hybrid 3.0 crowd
quote will be required to enter quotes as part of the opening rotations
in Hybrid 3.0 option classes. The DPM or LMM must enter opening quotes
in opening rotations that comply with the legal quote width
requirements of Rule 8.7(b)(iv), and if there is not a quote present in
a series that complies with the legal quote width requirements of Rule
8.7(b)(iv), then that series will not open.\24\ Additionally, Hybrid
3.0 will allow public customer, broker-dealer, Exchange Market-Maker,
away Marker-Maker and Specialist participation in the opening. Since
Hybrid 3.0 is a single quoter environment, these participants will not
be permitted to enter opening quotes in opening rotations but will be
permitted to directly enter opening orders in opening rotations in
Hybrid 3.0 classes.\25\ Further, similar to the rules for CBOE's non-
Hybrid classes, Hybrid 3.0 also proposes to allow special ``modified''
opening procedures for settlement in options on the Volatility
Indexes.\26\
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\24\ This is consistent with the opening quote requirements in
CBOE's existing Hybrid classes that utilize CBOE's Hybrid Opening
System (``HOSS''). See CBOE Rule 6.2B.
\25\ See proposed Interpretation .01 to CBOE Rule 6.2B. By
comparison, currently in non-Hybrid option classes (such as SPX and
OEX), public customers, Market-Makers and broker-dealers are not
able to directly participate in the opening rotations (for series
that utilize the Exhange's Rapid Opening System). For example,
Market-Makers who wish to participate on ROS in the opening rotation
in non-Hybrid option classes must submit orders through the LMM at
least ten minutes prior to the opening of trading pursuant to CBOE
Rules 6.2A and 24.13.
\26\ See the ``Modified HOSS Opening Procedures'' in proposed
Interpretation .01 to CBOE Rule 6.2B. By comparison, non-Hybrid
option classes that utilize RAES and ROS have special procedures for
purposes of settlement in the volatility indexes called ``Modified
ROS Opening Procedures'' pursuant to Interpretation .03 to CBOE Rule
6.2A.
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III. Discussion
The Commission has reviewed carefully the proposed rule change, as
amended, and finds that it is consistent with the requirements of the
Act and the rules and regulations thereunder applicable to a national
securities exchange.\27\ In particular, the Commission finds that the
proposed rule change is consistent with Section 6(b)(5) of the Act,\28\
which requires that an exchange have rules designed, among other
things, 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. The proposed rules for Hybrid 3.0 are similar to
existing rules applicable to trading in Hybrid and/or non-Hybrid
classes. The Commission believes that the proposed rules for the Hybrid
3.0 platform, including those pertaining to quoting, order eligibility
in the electronic book, automatic execution, order priority and
allocation, are consistent with the Act.
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\27\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
\28\ 15 U.S.C. 78f(b)(5).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\29\ that the proposed rule change as modified by Amendment Nos. 1
and 2 thereto (File No. SR-CBOE-2006-101) be, and hereby is, approved.
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\29\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant delegated authority.\30\
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\30\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-11366 Filed 6-12-07; 8:45 am]
BILLING CODE 8010-01-P