Daily Rules, Proposed Rules, and Notices of the Federal Government
The Exchange is proposing to amend Rules 6.45A,
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 those statements may be examined at the
CBOE Rules 6.45A and 6.45B set forth, among other things, the manner in which electronic Hybrid System trades in options are allocated. Paragraph (a) of each rule essentially governs how incoming orders received electronically by the Exchange are electronically executed against interest in the CBOE quote. Paragraph (a) of each rule currently provides a "menu" of matching algorithms to choose from when executing incoming electronic orders. The menu format allows the Exchange to utilize different matching algorithms on a class-by-class basis. The menu includes, among other choices, the ultimate matching algorithm ("UMA"), as well as price-time and pro-rata priority matching algorithms with additional priority overlays. The priority overlays for price-time and pro-rata currently include: public customer priority for public customer orders resting on the Hybrid System, participation entitlements for certain qualifying market-makers. Additional priority overlays for UMA, price-time and pro-rata include the small order preference and a market turner priority (for participants that are first to improve CBOE's disseminated quote). These overlays are optional.
If the small order priority overlay is in effect for an option class, then the following applies:
* Orders for five (5) contracts or fewer will be executed first by the Designated Primary Market-Maker ("DPM") or Lead Market-Maker ("LMM"), as applicable, that is appointed to the option class; provided however, that on a quarterly basis the Exchange evaluates what percentage of the volume executed on the Exchange (excluding volume resulting from the execution of orders in AIM (
* This procedure only applies to the allocation of executions among non-customer orders and market maker quotes existing in the EBook at the time the order is received by the Exchange. No market participant is allocated any portion of an execution unless it has an existing interest at the execution price. Moreover, no market participant can execute a greater number of contracts than is associated with the price of its existing interest. Accordingly, the small order preference contained in this allocation procedure is not a guarantee; the DPM or LMM, as applicable, (i) must be quoting at the execution price to receive an allocation of any size, and (ii) cannot execute a greater number of contracts than the size that is associated with its quote.
* If a Preferred Market-Maker (
* The small order priority overlay is only be [sic] applicable to automatic executions and is not be [sic] applicable to any electronic auctions.
The purpose of the proposed rule change is to expand on the text contained in subparagraphs (a)(iii) of Rules 6.45A and 6.45B to simply make it clearer that, in the event an order for five contracts or fewer is received when there
The operation of the small order priority overlay described above is part of CBOE's careful balancing of the rewards and obligations that pertain to each of the Exchange's classes of memberships. This balancing is part of the overall market structure that is designed to encourage vigorous price competition between Market-Makers (including DPMs, LMMs and Preferred Market-Makers) on the Exchange, as well as maximize the benefits of price competition resulting from the entry of customer and non-customer orders, while encouraging participants to provide market depth. The Exchange believes the small order priority overlay, which includes priority participation rights for DPMs and LMMs or Preferred Market-Makers (as applicable) over non-customer orders and market maker quotes only when the DPM/LMM or Preferred Market-Maker (as applicable) is quoting at the best price, strikes the appropriate balance within its market and maximizes the benefits of an electronic market for all participants. In that regard, the Exchange believes that allowing the Preferred Market-Maker participation entitlement to take precedence over any otherwise applicable Market Turner allocation (in the limited scenario where a preferred order for five contracts or fewer is received when there is a Preferred Market-Maker quoting at a price equal to the NBBO at the time the preferred order is received) strikes the appropriate balance within its market and
The Exchange believes the proposed rule change is consistent with Section 6(b) of the Act
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 proposal.
Because the foregoing rule does not (i) Significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest, provided that the self-regulatory organization has given the Commission written notice of its intent to file the proposed rule change at least five business days prior to the date of filing of the proposed rule change or such shorter time as designated by the Commission, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) 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.