Daily Rules, Proposed Rules, and Notices of the Federal Government
The Exchange proposes to amend its rules regarding its automatic order handling process. The text of the proposed rule change is available on the Exchange's Web site at
In its filing with the Commission, the Exchange 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 Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.
The Exchange proposes to amend its rules regarding its automatic order handling process. The proposed rule change adds subparagraph (vi) to Rule 6.13(b) to codify how the CBOE Hybrid System
* If the Exchange best offer in that series is less than or equal to $0.30, then the CBOE Hybrid System will consider, for the remainder of the trading day, the market order as a limit order to sell with a limit price equal to the minimum trading increment applicable to the series and enter the order into the electronic book behind limit orders to sell at the minimum increment that are already resting in the book.
* If the Exchange best offer in that series is greater than $0.30, then the CBOE Hybrid System will route the market order to sell to PAR or, at the order entry firm's discretion, to the order entry firm's booth. If the market order is not eligible to route to PAR, then it will be cancelled.
The Exchange's Rules are currently silent on how the CBOE Hybrid System handles market orders to sell in no-bid series. The Exchange believes that proposed Rule 6.13(b)(vi) will clarify for investors how the CBOE Hybrid System handles these orders.
For example, if the CBOE Hybrid System receives a market order to sell in a no-bid series with a minimum increment of $0.01 and the Exchange best offer is $0.20, the CBOE Hybrid System will consider, for the remainder of the trading day, the order as a limit order with a price of $0.01 and submit it to the electronic book behind other limit orders to sell at the minimum increment that are already resting in the book. At that point, even if the series is no-bid because, for example, the last bid just traded and the limit order trades at $0.01, the next bid entered after the trade would not be higher than $0.20.
However, if the CBOE Hybrid System receives a market order to sell in a no-bid series with a minimum increment of $0.01 and the Exchange best offer is $1.20 (because, for example, the last bid of $1.00 just traded), the CBOE Hybrid System will instead route the order to PAR (or, at the order entry firm's discretion, to the order entry firm's booth). Manual handling of the order provides the entering firm with a potential opportunity to trade at a better price, since the next bid entered in that series is likely to be much higher than $0.01.
The $0.30 threshold has been in place for a number of years, and the Exchange believes the threshold is reasonable. The Exchange notes that this threshold is less than the acceptable price range ("APR") in the price check parameter provision in Rule 6.13(b)(v). Pursuant to that provision, the CBOE Hybrid System will not automatically execute a marketable order if the width between the national best bid and national best offer is not within the APR, which for an option contract with a bid of less than $2 may not be less than $0.375.
The Exchange believes the proposed rule change is consistent with the Act and the rules and regulations thereunder applicable to the Exchange and, in particular, the requirements of Section 6(b) of the Act.
In particular, the proposed rule change protects investors and the public interest by providing investors with more clarity regarding the CBOE Hybrid System's automatic order handling process--specifically how it processes market orders to sell in no-bid series. The Exchange believes that the automated handling of market orders to sell in no-bid series if the Exchange best offer is $0.30 or less assists with the maintenance of fair and orderly markets and protects investors and the public interest because it provides for automated handling of these orders, ultimately resulting in more efficient executions of these orders. The Exchange believes that the $0.30 threshold also protects investors and assists with the maintenance of fair and orderly markets by preventing executions of market orders to sell in no-bid series with higher offers at potentially extreme prices in series that are not truly no-bid. The Exchange believes this threshold appropriately reflects the interests of investors, as options in no-bid series with offers higher than $0.30 are likely not worthless, and manual handling of these orders will lead to better executions for investors than would occur through automatic handling.
CBOE does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.
The Exchange neither solicited nor received comments on the proposed rule change.
The Exchange has filed the proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act
At any time within 60 days of the filing of such proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.
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:
* Use the Commission's Internet comment form (
* Send an email to
* Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.