[Federal Register: November 23, 2007 (Volume 72, Number 225)]
[Notices]
[Page 65776-65784]
[DOCID:fr23no07-112]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56792; File No. SR-CBOE-2006-99]

Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Amendment Nos. 2 and 3 to Proposed Rule Change
Relating to FLEX Options Trading and Order Granting Accelerated
Approval to Proposed Rule Change as Amended

November 15, 2007.

I. Introduction

    On November 27, 2006, the Chicago Board Options Exchange,
Incorporated (``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 providing for the trading of
Flexible Exchange (``FLEX'') Options on a new electronic platform, and
to make certain corresponding revisions to its existing open-outcry
FLEX rules. On August 17, 2007, CBOE filed Amendment No. 1 to the
proposed rule change. On August 30, 2007, the proposed rule change, as
amended, was published for comment in the Federal Register.\3\ No
comments were received on the proposal. On November 7, 2007 and
November 15, 2007, CBOE filed Amendment Nos. 2 and 3, respectively, to
the proposed rule change.\4\ This notice and order solicits comments
from interested persons on Amendment Nos. 2 and 3 and grants
accelerated approval to the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 56311 (August 23, 2007),
72 FR 50133.
    \4\ See infra Section II(D).
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II. Description of Proposal

    FLEX Options provide investors with the ability to customize basic
option features including size, expiration date, exercise style, and
certain exercise prices. Currently, Exchange members may trade FLEX
Options in open outcry. Markets are created when a member submits a
request for quotes (``RFQ'') to the crowd. This system is referred to
herein as the ``FLEX RFQ System.'' The Exchange has proposed an
alternate framework for trading FLEX Options using a ``hybrid''
platform, which will incorporate both open outcry and electronic
trading functionality (referred to herein as the ``FLEX Hybrid Trading
System'' or the ``System''). Some key features of the new FLEX Hybrid
Trading System are the following:
     Method of Operation: Transactions can take place through
either an open-outcry RFQ process similar to the existing FLEX RFQ
System or a new, Internet- and API-based electronic trading platform.
Currently, the FLEX RFQ System does not provide for a book, and quotes
and orders expire at the conclusion of the RFQ process. By contrast,
the new System may allow FLEX Orders to be entered and trade via an
electronic book (the ``Book''). The Exchange would determine on a
class-by-class basis whether to make a Book available.\5\
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    \5\ See Rule 24B.5(b)(1).
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     Access: CBOE members seeking to use the new System must
apply to and be approved by the Exchange. Approved members are
collectively referred to as ``FLEX Traders.'' In addition, non-members
that meet certain conditions may be offered ``sponsored access'' to the
new System.
     Market-Maker Participation: As with the existing FLEX
rules, there are two types of FLEX Market-Makers: FLEX Appointed
Market-Makers and FLEX Qualified Market-Makers. The responsibilities
and obligations of FLEX Market-Makers on the new System, and changes to
the corresponding rules of

the existing FLEX RFQ System, are discussed further below.

Detailed Summary of Proposed Rule Change

A. Proposed FLEX Hybrid Trading System Rules (Chapter XXIVB)

    The rules governing the existing FLEX RFQ System are contained, and
will continue to be maintained, in Chapter XXIVA of the Exchange rules.
The proposed rules governing the new FLEX Hybrid Trading System are
found in proposed Chapter XXIVB. The Exchange currently intends to
maintain and operate both systems and will determine which system to
use on a class-by-class basis. These determinations will be announced
to the membership via regulatory circular. This rule further explains
that Chapters I through XIX and XXIV of the Exchange rules apply to the
new System, except as otherwise indicated. If the rules in Chapter
XXIVB are inconsistent with other Exchange rules, the rules in Chapter
XXIVB take precedence in relation to the trading of FLEX Options on the
new System.
1. Definitions (Proposed Rule 24B.1)
    Proposed Rule 24B.1, Definitions, corresponds with existing Rule
24A.1 but contains several new definitions necessary to accommodate the
new System. For example, the term ``FLEX Hybrid Trading System'' means
the Exchange's trading platform that allows FLEX Traders to submit
RFQs, FLEX Quotes, and FLEX Orders. A ``FLEX Quote'' is a bid or offer
entered by a FLEX Market-Maker or an order to purchase or sell entered
by a FLEX Trader, in either case in response to an RFQ. A ``FLEX
Order'' is a bid or offer entered by a FLEX Market-Maker or an order to
purchase or sell entered by a FLEX Trader, in either case into the
Book.
    Proposed Rule 24B.1 also defines several terms relating to the RFQ
process. The ``Submitting Member'' is the FLEX Trader who initiates the
RFQ or who enters a FLEX Order into the Book. The ``RFQ Response
Period'' is the period during which FLEX Traders may provide FLEX
Quotes in response to an RFQ. The ``RFQ Reaction Period'' is the period
during which the Submitting Member determines whether to accept or
reject the RFQ Market.\6\ The ``RFQ Market'' consists of the FLEX
Quotes entered in response to an RFQ and FLEX Orders resting in the
Book. An ``RFQ Order'' is an order to buy or an order to sell entered
by the Submitting Member during the RFQ Reaction Period.
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    \6\ See proposed Rule 24B.1(u) (as modified by Amendment No. 3).
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    Proposed Rule 24B.1 also identifies certain trade conditions that
can be placed on an RFQ Order or FLEX Order, such as fill-or-kill, all-
or-none, minimum fill, ``lots of,'' and hedge. FLEX Orders except for
fill-or-kill orders would be designated by the System as day orders
and, if unexecuted, would be canceled at the close of each trade day.
An RFQ may include a hedge or ``Intent to Cross'' trade condition,
discussed more fully below. Hedge and Intent to Cross trade conditions
will be disclosed on the System.
2. Terms of FLEX Options (Proposed Rule 24B.4)
    Proposed Rule 24B.4, Terms of FLEX Options, is similar to existing
Rule 24A.4. Both rules set forth the variable terms of FLEX Options
(such as the underlying security or index, put or call type, exercise
style, expiration date, and exercise price). Other terms are not
variable and are the same as those that apply to Non-FLEX Options. Both
rules set forth the information required from a member who initiates an
RFQ, such as the type and form of quote sought, any trade conditions,
and the length of the RFQ Response Period.\7\
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    \7\ The length of the RFQ Response Period is defined by the
Submitting Member but must fall within the time ranges established
by the appropriate Procedure Committee on a class-by-class basis.
The period cannot be less than three seconds. See proposed Rule
24B.4(a)(3)(iii).
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    Proposed Rule 24B.4 lists additional contract and transaction
specifications for RFQs, FLEX Quotes, FLEX Orders, and RFQ Orders.
These specifications pertain in part to maximum expiration terms and
second to minimum value size requirements. The maximum expiration terms
are the same as in the existing FLEX rules.\8\ The minimum value size
specifications are substantially similar to those in Rule 24A.4, though
additional language has been added to clarify the minimum value size
requirements for FLEX Orders entered in the Book. There are additional
special terms for FLEX Index Options \9\ and FLEX Equity Options,\10\
which correspond to provisions in existing Rule 24A.4.
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    \8\ For FLEX Equity Options, the maximum term is generally three
years, although the Submitting Member may request up to five years.
For FLEX Index Options, the maximum term is generally five years,
although a Submitting Member may request up to ten years. See
existing Rule 24A.4(a)(4); proposed Rule 24B.4(a)(5).
    \9\ See proposed Rule 24B.4(b).
    \10\ See proposed Rule 24B.4(c). For example, settlement of a
FLEX Equity Option shall be by physical delivery of the underlying
security.
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3. FLEX Trading Procedures and Principles (Proposed Rule 24B.5)
    On the new System, there will be no trading rotations in FLEX
Options, either at the open or the close.\11\ Instead, trading will
result from RFQs submitted through the System or in open outcry, or
from transactions on the Book.
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    \11\ See proposed Rule 24B.3.
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(a) Electronic RFQ Process
    Upon receipt of an RFQ in proper form, the System will cause the
terms and specifications of the RFQ to be communicated to all FLEX
Traders. Any FLEX Trader, including the Submitting Member, may then
enter a FLEX Quote during the RFQ Response Period. Any FLEX Quote or
FLEX Order may be entered, modified, or withdrawn at any point during
the RFQ Response Period.\12\ The System will dynamically calculate and
disseminate to all FLEX Traders the RFQ Market.\13\
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    \12\ However, a FLEX Appointed Market-Maker must meet certain
FLEX Quote maintenance obligations. See proposed Rule
24B.5(a)(1)(ii)(B).
    \13\ See proposed Rule 24B.5(a)(1)(ii)(C) (as modified by
Amendment No. 2).
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    Following the RFQ Response Period, the Submitting Member may trade
against the RFQ Market during the RFQ Reaction Period. The length of
this period will be established by the appropriate Procedure Committee
on a class-by-class basis and will not be more than five minutes.\14\
Failure of the Submitting Member to trade against the RFQ Market before
expiration of the RFQ Reaction Period would equate to a rejection.
During the RFQ Reaction Period: (1) FLEX Traders can continue to enter,
modify, or withdraw FLEX Quotes and FLEX Orders; (2) FLEX Orders that
are entered or modified during the RFQ Response and Reaction Periods
will be treated the same as FLEX Quotes for purposes of the priority
allocation; and (3) the System will dynamically calculate and
disseminate to all FLEX Traders the RFQ Market given the current FLEX
Quotes and resting FLEX Orders.\15\
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    \14\ The Exchange originally proposed to cap the RFQ Reaction
Period at 30 seconds. In Amendment No. 2, the Exchange proposed to
increase the maximum period to five minutes ``to address feedback
received from members and potential users that the RFQ Reaction
Period should be lengthened to provide Submitting Members with
additional time to assess an RFQ Market, determine whether to accept
or reject it, and process a response accordingly.''
    \15\ See proposed Rule 24B.5(a)(1)(iii)(B)(II) (as modified by
Amendment No. 2).
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    The Submitting Member may decline to trade against the RFQ Market
by canceling the RFQ or letting it expire. If the Submitting Member
chooses to trade but has not indicated an Intent to Cross,

he or she may enter an RFQ Order to trade with one side of the RFQ
Market (but not both). The Submitting Member's RFQ Order will be
eligible to trade with FLEX Quotes and FLEX Orders at a single price
that will leave bids and offers which cannot trade with each other (the
``BBO clearing price''). In determining the priority of FLEX Quotes and
FLEX Orders, the System gives priority to those priced better than the
BBO clearing price, then to FLEX Quotes and FLEX Orders at the BBO
clearing price. Priority among FLEX Quotes and FLEX Orders at the BBO
clearing price is as follows: (1) any FLEX Quotes that are subject to a
FLEX Appointed Market-Maker participation entitlement; (2) FLEX Orders
resting in the Book, based on the Book priority algorithm; (3) FLEX
Quotes for the account of public customers and non-member broker-
dealers based on time priority; and (4) all other FLEX Quotes based on
time priority.
    If the RFQ Market is locked or crossed, priority among FLEX Quotes
and FLEX Orders at the BBO clearing price and on the same side as the
RFQ Order is as follows: (1) FLEX Orders in the Book, based on the Book
priority algorithm; (2) if applicable, an RFQ Order for the account of
a public customer or non-member broker-dealer, then any FLEX Quote that
is subject to a FLEX Appointed Market-Maker participation entitlement;
(3) FLEX Quotes for the account of public customers and non-member
broker-dealers, based on time priority; (4) if applicable, an RFQ Order
for the account of a member, then any FLEX Quote that is subject to a
FLEX Appointed Market-Maker participation entitlement; and (5) all
other FLEX Quotes, based on time priority. The System will enter any
remaining balance of the incoming RFQ Order in the Book (if available),
unless the Submitting Member has indicated that the balance of the RFQ
Order is to be automatically canceled if it is not traded.
    If the Submitting Member has indicated an ``Intent to Cross'' in
its RFQ request, the Submitting Member may receive a crossing
participation entitlement if one has been established in that class by
the appropriate Procedure Committee, and if the RFQ Order entered by
the Submitting Member during the RFQ Reaction Period matches or
improves the BBO clearing price. The RFQ Order will be eligible to
trade with FLEX Quotes and FLEX Orders at the BBO clearing price giving
priority to the FLEX Quotes and FLEX Orders priced better than the BBO
clearing price, then to FLEX Quotes and FLEX Orders at the BBO clearing
price. Priority among multiple FLEX Quotes and FLEX Orders at the BBO
clearing price is as follows: (1) FLEX Orders in the Book, based on the
Book priority algorithm; (2) FLEX Quotes for the account of public
customers and non-member broker-dealers, based on time priority; (3)
the crossing participation entitlement; (4) any FLEX Quotes that are
subject to a FLEX Appointed Market-Maker participation entitlement;
\16\ and (5) then all other FLEX Quotes, based on time priority.
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    \16\ The crossing participation entitlement and the FLEX
Appointed Market-Maker entitlement together may not exceed a certain
percentage of the original order. See proposed Rule
24B.5(d)(2)(i)(A)-(B).
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    If a Book is available in that class, the System would enter any
remaining balance of the incoming RFQ Order in the Book and treat it
the same as other FLEX Orders. If there is no Book available, the
System will expose any remaining balance of the incoming RFQ Order so
other FLEX Traders can trade against it. After the remaining balance of
the RFQ Order has been exposed for at least the Crossing Exposure
Period,\17\ the Submitting Member may enter a contra-side order to
trade all or any portion of the remaining balance.\18\
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    \17\ The length of this Crossing Exposure Period shall be
determined by the appropriate Procedure Committee on a class-by-
class basis and shall not be less than three seconds. See proposed
Rule 24B.5(a)(1)(iii)(D)(IV).
    \18\ The Submitting Member must, however, enter a contra-side
order when necessary to satisfy applicable minimum value size
requirements. See id.
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    If the Submitting Member rejects the RFQ Market or to the extent
the RFQ Market size exceeds the Submitting Member's size, the System
automatically would execute any remaining FLEX Quotes and FLEX Orders
that are marketable against each other at the BBO clearing price. Then,
if a Book is available, any remaining balance of any FLEX Quote would
be automatically entered into the Book unless the FLEX Trader who
entered it had indicated that the FLEX Quote is to be automatically
canceled if not traded. If no Book is available, any remaining balance
of the FLEX Quotes will be automatically canceled at the conclusion of
the RFQ Reaction Period.\19\
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    \19\ See proposed Rule 24B.5(a)(1)(F).
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(b) Open-Outcry RFQ Process

    To initiate a FLEX transaction using the open-outcry RFQ process
under proposed Rule 24B.5, a Submitting Member would submit an RFQ to a
FLEX Official. The Submitting Member would then immediately announce
the terms and specifications of the RFQ to the crowd. FLEX Traders
present in the crowd may respond orally with FLEX Quotes during the RFQ
Response Period. A FLEX Trader could enter, modify, or withdraw its
FLEX Quote at any point during the RFQ Response Period. At the
expiration of the RFQ Response Period, the Submitting Member would
identify the BBO (considering responsive FLEX Quotes and, if
applicable, FLEX Orders resting in the Book) and announce the BBO to
the crowd.
    If the Submitting Member does not indicate an Intent to Cross or
act as principal with respect to any part of the trade, the Submitting
Member may submit an agency RFQ Order to trade against the RFQ Market.
If the Submitting Member rejects the BBO or is given a BBO for less
than the entire size requested, the FLEX Traders in the crowd other
than the Submitting Member would have an opportunity to match or
improve the BBO during a BBO Improvement Interval. At the expiration of
any BBO Improvement Interval, the Submitting Member must promptly
accept or reject the BBO.
    If the Submitting Member indicates an Intent to Cross or act as
principal with respect to any part of the trade, acceptance of the
displayed BBO would be automatically delayed until the expiration of
the BBO Improvement Interval. Prior to the BBO Improvement Interval,
the Submitting Member must announce to the crowd the price at which it
expects to trade. In these circumstances, the Submitting Member may
participate with all other FLEX Traders present in the crowd in
attempting to improve or match the BBO during the BBO Improvement
Interval. At the expiration of the BBO Improvement Interval, the
Submitting Member could trade against the BBO or reject it.
    If the Submitting Member rejects the BBO after an RFQ Response
Period or BBO Improvement Interval, or the BBO size exceeds the FLEX
transaction size indicated in the RFQ, FLEX Traders present in the
crowd could accept the unfilled balance of the BBO. Such acceptance
must occur by public outcry immediately following the Submitting
Member's rejection of the BBO or any BBO Improvement Interval, or the
Submitting Member's trade that does not exhaust the full size of the
BBO.
    The highest bid (lowest offer) would have priority. Among bids
(offers) at the same price, priority generally is as follows: (1) The
crossing participation entitlement, if the Submitting Member has
indicated an Intent to Cross and an entitlement is available in that
class; (2)

any FLEX Quote subject to a FLEX Appointed Market-Maker participation
entitlement; (3) all other FLEX Quotes, in the sequence in which they
are entered; \20\ and (4) FLEX Orders resting in the Book, based on the
Book priority algorithm. However, if a member is relying on the ``G''
exception to section 11(a) of the Act,\21\ the member's bid (offer)
must yield to any bid (offer) at the same price on the Book and all
other bids (offers) that have priority over the Book. If a Submitting
Member is asserting a crossing participation entitlement on behalf of a
proprietary account of a member relying on the ``G'' exception and a
FLEX Appointed Market-Maker is also asserting a participation
entitlement, the Submitting Member's crossing participation entitlement
combined with any guaranteed participation for FLEX Appointed Market-
Makers shall not exceed 40% of the original order.
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    \20\ If two or more best bids (offers) are submitted in open
outcry at the same time and same price or if the Submitting Member
cannot reasonably determine the sequence in which they were made,
priority would be apportioned equally among those open-outcry bids
(offers). See proposed Rule 24B.5(a)(2)(v)(A)(III) (as modified by
Amendment No. 2).
    \21\ 15 U.S.C. 78k(a)(1)(G).
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    The proposed open-outcry RFQ process is similar to the existing
process, with a few distinctions. Under the new System, the Submitting
Member is responsible for announcing the terms and specifications of
the RFQ to the crowd, receiving responsive FLEX Quotes, and at the
conclusion of the RFQ Response Period announcing the BBO to the crowd.
Under the existing process, the FLEX Post Official communicates the RFQ
to the crowd over facilities maintained by the Exchange, responsive
FLEX Quotes may be entered at the post, and the BBO is visibly
displayed at the post and over the network.\22\ The proposed priority
algorithm takes into consideration the Book, which does not exist
currently, and provides that two bids submitted in open outcry at the
same time and same price will be apportioned equally, as compared to
the existing practice of affording priority to FLEX Appointed or
Qualified Market-Makers.\23\
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    \22\ Compare proposed Rules 24B.5(a)(2)(i)(B), (ii)(A), and
(ii)(B) to existing Rule 24A.5(a)(ii), (b)(i), and (b)(iii).
    \23\ Compare proposed Rules 24B.5(a)(2)(v) and (d) to existing
Rules 24A.5(e) and (f).
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(c) The FLEX Book and FLEX Orders

    The Exchange may determine to make a FLEX Book available on a
class-by-class basis. If a Book has been enabled, a Submitting Member
may enter a FLEX Order if it satisfies the applicable minimum value
size requirements and the FLEX Order is in compliance with section
11(a) of the Act. A FLEX Order submitted on behalf of the proprietary
account of a member relying on the ``G'' exception to Section 11(a) may
be entered only to hit the Book and may not rest in the Book.\24\
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    \24\ See proposed Rule 24B.5(b)(2)(ii).
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    FLEX Orders in the Book are ranked and matched based on price/time
priority. However, if a FLEX Appointed Market-Maker is quoting at the
best bid (offer) and a FLEX Appointed Market-Maker participation
entitlement has been established, then priority at the same price is as
follows: (1) Any FLEX Orders for the account of public customer ranked
ahead of the FLEX Appointed Market-Maker; (2) any FLEX Orders subject
to a FLEX Appointed Market-Maker entitlement; and (3) all other FLEX
Orders, based on time priority.\25\
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    \25\ See proposed Rule 24B.5(b)(2)(iii).
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    A Submitting Member may not execute as principal against a FLEX
Order on the Book that it represents as agent unless: (1) The
Submitting Member has been bidding or offering for at least the
Crossing Exposure Period before receiving the agency FLEX Order that is
executable against such bid or offer; \26\ or (2) the agency FLEX Order
is first subject to an RFQ and the agency FLEX Order (or any remaining
balance not executed during the RFQ Reaction Period) is exposed on the
System for at least the Crossing Exposure Period.\27\ A Submitting
Member may not execute a solicited order against a FLEX Order that the
Submitting Member is representing as agent unless the agency FLEX Order
is first subject to any RFQ and the agency FLEX Order (or any remaining
balance not executed during the RFQ Reaction Period) is exposed on the
System for at least the Crossing Exposure Period.\28\ The Crossing
Exposure Period referenced in the above provisions will be established
by the appropriate Procedure Committee on a class-by-class basis and
will not be less than three seconds.\29\
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    \26\ See proposed Rule 24B.5(b)(3)(i)(B).
    \27\ See proposed Rule 24B.5(b)(3)(i)(A) (as modified by
Amendment No. 2).
    \38\ See proposed Rule 24B.5(b)(3)(ii) (as modified by Amendment
No. 2).
    \26\ See proposed Rule 24B.5(b)(3)(iii) (added by Amendment No.
2).
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(d) Creation of Binding Contracts

    Proposed Rule 24B.5(c) provides that acceptance of any bid or offer
creates a binding contract under Rule 6.48. This provision is the same
as in existing Rule 24A.5(d) and applies to both RFQ and Book
transactions.

(e) Guarantees

    For FLEX Equity Options, the Exchange's appropriate Procedure
Committee may determine on a class-by-class basis to establish a
crossing participation entitlement for facilitations and/or
solicitations with respect to open-outcry and/or electronic trades. The
entitlement percentage may not exceed 40% of the original order.\30\ If
the Submitting Member matches or improves the BBO or BBO clearing
price, as applicable, the Submitting Member would have priority to
execute the contra-side of the order up to the crossing participation
entitlement percentage. The appropriate Procedure Committee similarly
may determine on a class-by-class basis to establish a crossing
participation entitlement for FLEX Index Options, which may not exceed
40% of the trade. With respect to FLEX Index Options, if the Submitting
Member matches or improves the BBO or BBO clearing price, as
applicable, the Submitting Member would have priority to execute the
contra-side of the order up to the largest of: (1) The crossing
entitlement percentage; (2) a proportional share of the trade; (3) $1
million underlying equivalent value; or (4) the remaining underlying
equivalent value on a closing transactions valued at less than $1
million.\31\
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    \30\ See proposed Rule 24B.5(d)(2)(i)(A).
    \31\ See proposed Rule 24B.5(d)(2)(i)(B). In the FLEX RFQ System
rules, the crossing participation entitlement for transactions in
FLEX Index Options is currently 20%, and there are similar
provisions for FLEX Index Options that could permit an entitlement
of greater than 40% in certain cases. See existing Rule
24A.5(e)(iii)(B).
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    In the past, the establishment of FLEX Appointed Market-Maker
entitlements were the subject of separate rule filings.\32\ In lieu of
submitting separate rule filings, the Exchange has now proposed to
include specific parameters within the rule text, similar to its rules
respecting crossing participation entitlements and market-maker
participation entitlements for Non-FLEX Options.\33\ Henceforth, the
appropriate Procedure Committee may establish a participation
entitlement for FLEX Appointed Market-Makers on a class-by-class basis
with respect to open-outcry RFQs, electronic RFQs, and/or Book
transactions. Any such entitlement shall: (1) Be divided equally by the
number of FLEX Appointed Market-Makers quoting at the BBO or BBO

clearing price, as applicable; (2) collectively be no more than: (a)
50% of the remaining order when one other FLEX Market-Maker is quoting
at the same price, (b) 40% when two other FLEX Market-Makers are
quoting at the same price, and (c) 30% when three or more FLEX Market-
Makers are quoting at the same price; and (3) when combined with any
Submitting Member's crossing participation entitlement, shall not
exceed 40% of the size of the original order.\34\ Pronouncements
regarding the applicable participation entitlements must be announced
to the membership via regulatory circular.
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    \32\ See Rule 24A.5(e)(iv); Securities Exchange Act Release No.
45934 (May 15, 2002), 67 FR 36276 (May 23, 2002) (SR-CBOE-2002-09).
    \33\ See, e.g., Rule 8.87, Participation Entitlement of DPMs and
e-DPMs (providing for a DPM/e-DPM participation entitlement after
all public customer orders are satisfied).
    \34\ See proposed Rule 24B.5(d)(2)(ii).
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(f) Solicited Orders

    A Submitting Member trading in open outcry may not cross an order
that he or she is holding with an order that he or she solicited from a
FLEX Market-Maker who is then in the trading crowd, except in
accordance with CBOE Rule 6.55, Multiple Representation Prohibited. A
Submitting Member utilizing the electronic System may not cross an
order that he or she is holding with: (1) a solicited order for a FLEX
Market-Maker's individual or joint account; or (2) a solicited order
initiated by the FLEX Market-Maker for an account in which the FLEX
Market-Maker has an interest, unless the FLEX Market-Maker refrains
from participating on the same trade.\35\
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    \35\ See proposed Rule 24B.5(d)(2)(i)(C).
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(g) FLEX Standard Minimum Increments

    The applicable increments for FLEX Index Options will be identical
to the increments in the existing FLEX rules, which permit decimal bids
and offers in the designated currency that meet or exceed certain
minimum parameters.\36\ For example, the minimum increment in U.S.
dollars is $0.01 (or such other minimum as the appropriate Procedure
Committee may set from time to time to ensure fair and orderly
markets). The applicable increments for FLEX Equity Options will be
determined by the appropriate Procedure Committee on a class-by-class
basis, but may not be smaller than $0.01. This represents a change from
the existing FLEX rules, under which the trading increments applicable
to FLEX Equity Options are the same as those applicable to Non-FLEX
Equity Options (i.e., $0.10 for simple bids and offers in series quoted
at or above $3 a contract, $0.05 for simple bids and offers in series
quoted below $3 a contract, and $0.01 for series quoted in the penny
pilot program \37\).
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    \36\ See existing Rule 24A.5(g) (which is proposed to be
renumbered as Rule 24A.5(f)); proposed Rule 24B.5(e).
    \37\ See CBOE Rule 6.42.
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4. FLEX Market-Maker Appointments and Obligations (Proposed Rule 24B.9)
    Under the rules for the new System, the Exchange will appoint two
or more FLEX Qualified Market-Makers to each FLEX Index Option class
and settlement currency, and two or more FLEX Qualified Market-Makers
to each FLEX Equity Option class. In making such appointments and in
taking other action with respect to FLEX Qualified Market-Makers, the
Exchange shall take into account the factors enumerated in, and shall
refer to the requirements of, existing CBOE Rule 8.3, Appointment of
Market-Makers. As a condition to receiving and maintaining a FLEX
Qualified Market-Maker appointment in a FLEX Index Option (FLEX Equity
Option), the FLEX Qualified Market-Maker must maintain an appointment
in one or more Non-FLEX Index Option classes (Non-FLEX Equity Option
classes). The Non-FLEX Option class need not include the FLEX Option
class's underlying index or security.
    Notwithstanding the above, the appropriate Market Performance
Committee may determine to solicit applications and appoint: (1) One or
more FLEX Appointed Market-Makers in addition to appointing FLEX
Qualified Market-Makers to such classes; or (2) two or more FLEX
Appointed Market-Makers in lieu of appointed FLEX Qualified Market-
Makers. Thus, under this revised structure applicable to both
platforms, a FLEX Option class could be structured as a FLEX Qualified
Market-Maker-only crowd with at least two participants, a mixed FLEX
Qualified/Appointed Market-Maker crowd with at least three
participants, or a FLEX Appointed Market-Maker-only crowd with at least
two participants.
    A FLEX Appointed Market-Maker must provide a FLEX Quote in response
to any open-outcry RFQ in a class of FLEX Options to which it is
appointed and trades in open outcry.\38\ In addition, a FLEX Appointed
Market-Maker must provide FLEX Quotes in response to a designated
percentage of electronic RFQs, such percentage to be determined by the
appropriate Procedure Committee and not less than 80%.\39\ Although a
FLEX Qualified Market-Maker need not enter a FLEX Quote in response to
an RFQ in a class of FLEX Options to which it is appointed,\40\ the
FLEX Qualified Market-Maker (like the FLEX Appointed Market-Maker) must
submit a FLEX Quote if called upon by a FLEX Official, including when
no FLEX Quotes are submitted in response to a specific RFQ.\41\
---------------------------------------------------------------------------

    \38\ See proposed Rule 24B.9(c)(i).
    \39\ See proposed Rule 24B.4(a)(5)(iv).
    \40\ See proposed Rule 24B.9(c).
    \41\ See proposed Rule 24B.9(d).
---------------------------------------------------------------------------

5. FLEX Officials (Proposed Rule 24B.14)
    Existing FLEX Rule 24A.12 provides that a FLEX Post Official is
responsible for: (1) Reviewing the conformity of RFQs and FLEX Quotes
to the terms and specifications contained in Rule 24A.4; (2) posting
RFQs for dissemination; (3) determining the BBO; (4) ensuring that
contracts are executed in conformance with the priority principles set
forth in Rule 24A.5(e); (5) calling for Indicative FLEX Quotes in
accordance with the requirements of Rule 24A.12(c); and (6) calling
upon FLEX Qualified Market-Makers to provide FLEX Quotes in specific
classes of FLEX Equity Options as provided in Rule 24A.9(c).\42\
---------------------------------------------------------------------------

    \42\ See existing Rule 24A.12(b).
---------------------------------------------------------------------------

    Proposed Rule 24B.14, FLEX Official, corresponds with existing Rule
24A.12 and describes the functions of a FLEX Official for the new
System. The FLEX Official would continue to be responsible for
reviewing the conformity of open-outcry RFQs to the applicable terms
and specifications in proposed Rule 24B.4. However, because open-outcry
FLEX Quotes will now be provided to the Submitting Member, the FLEX
Official is no longer responsible for reviewing them for conformity to
the applicable terms and specifications or for determining the BBO. In
addition, a FLEX Official may nullify a FLEX transaction, whether
electronic or open-outcry, if he or she determines that it does not
conform to the terms of proposed Rules 24B.4 or 24B.5. As noted above,
a FLEX Official may call upon FLEX Market-Makers, whether Qualified or
Appointed to a given class, to provide FLEX Quotes in certain
circumstances, as provided in proposed Rule 24B.9.
    A FLEX Official may be an employee of the Exchange or an
independent contractor. The Exchange may designate other qualified
employees or independent contractors to assist the FLEX Official as the
need arises.\43\
---------------------------------------------------------------------------

    \43\ See proposed Rule 24B.14(a).
---------------------------------------------------------------------------

6. Position and Exercise Limits
    Proposed Rules 24B.7, Position Limits and Reporting Requirements,
and 24B.8, Exercise Limits, are modeled after existing Rules 24A.7 and
24A.8. However, the Exchange is proposing to make certain revisions to
existing Rules

24A.7 and 24A.8, and to include the same language in proposed Rules
24B.7 and 24B.8, relating to the applicable position and exercise
limits for FLEX Index Options and the aggregation of certain FLEX and
non-FLEX positions. The Exchange has proposed changes to Rule 24A.7 to
conform the language of that rule to reflect changes that were recently
approved by the Commission in a separate proposed rule change.\44\
---------------------------------------------------------------------------

    \44\ See Securities Exchange Act Release No. 56350 (September 4
2007), 72 FR 51878 (September 11, 2007) (SR-CBOE-2007-79).
---------------------------------------------------------------------------

    In addition, the proposal would amend Rule 24A.7 to establish new
position limits for certain industry-based FLEX Index Option classes:
    1. No more than four times the applicable position limits
established pursuant to Rule 24.4A for FLEX Options on: (a) The Dow
Jones Transportation Average or the Dow Jones Utility Average; or (b)
an industry-based index that is not a ``narrow-based security index,''
as defined under Section 3(a)(55)(B) of the Act.\45\
---------------------------------------------------------------------------

    \45\ 15 U.S.C. 78c(a)(55)(B).
---------------------------------------------------------------------------

    2. For all other industry-based FLEX Index Option classes, no more
than one times the applicable number of Non-FLEX Index Option contracts
(whether long or short) of the put class and the call class on the same
side of the market, as determined on the basis of the position limits
established pursuant to Rule 24.4A, Position Limits for Industry Index
Options.
    The proposal also would amend Rule 24A.7 to provide that position
limits for a micro narrow-based FLEX Index Option class shall not
exceed one times the applicable number of Non-FLEX Index Option
contracts (whether long or short) of the put class and the call class
on the same side of the market, as determined on the basis of the
position limits established pursuant to Rule 24.4B, Position Limits for
Options on Micro Narrow-Based Indexes As Defined Under Rule 24.2(d).
Finally, new language to Rule 24A.7 would provide that, except as
otherwise provided, the position limit for a broad-based FLEX Index
Option class may not exceed 200,000 contracts on the same side of the
market. Proposed Rule 24B.7 replicates amended Rule 24A.7 in the rules
applying to the new System.
    Both rules would contain new language requiring that positions in
FLEX Options must be aggregated with positions in Non-FLEX Options in
certain circumstances:
     QIX Options: Commencing at the close of trading two
business days prior to the last trading day of the calendar, positions
in FLEX Index Options having an exercise settlement value determined by
the level of the index at the close of trading on the last trading day
before expiration shall be aggregated with positions in Quarterly Index
(QIX) Options on the same index with the same expiration and shall be
subject to the position limits set forth in Rule 24.4, 24.4A, or 24.4B,
as applicable.
     Weekly Options: Commencing at the close of trading two
business days prior to the last trading day of the week, positions in
FLEX Options that are cash-settled \46\ shall be aggregated with
positions in Short Term Option Series on the same underlying index with
the same means for determining exercise settlement value (e.g., opening
or closing prices of the underlying index) with the same expiration and
shall be subject to the position limits set forth in Rule 24.4, 24.4A,
24.4B or 29.5, as applicable.
---------------------------------------------------------------------------

    \46\ FLEX Index Options and FLEX Credit Default Options are cash
settled. FLEX Equity Options are settled by physical delivery. See
existing Rules 24A.4(b)(4) and (c)(3) and 29.19; see also proposed
Rules 24B.4(b)(4) and (c)(3).
---------------------------------------------------------------------------

    Proposed Rule 24B.8 replicates existing Rule 24A.8 regarding
exercise limits. Both rules generally provide that the exercise limit
for a FLEX Index Option is equivalent to the position limit. Both rules
also set forth certain minimum value size requirements for exercises of
FLEX Equity Options and FLEX Index Options.
    In an earlier proposed rule change, CBOE represented that, when it
files a proposed rule change to list and trade a new Non-FLEX Index
Option, it also would propose to list and trade the FLEX Index Options
in the same filing and include proposed position and exercise
limits.\47\ Because the maximum FLEX Index Option position and exercise
limits will now be explicitly set out in Rules 24A.7, 24A.8, 24B.7, and
24B.8, the Exchange seeks to eliminate this earlier commitment.
---------------------------------------------------------------------------

    \47\ See Securities Exchange Act Release No. 43108 (August 2,
2000), 65 FR 48770 (August 9, 2000) (SR-CBOE-00-26) (immediately
effective proposal providing for the listing and trading of FLEX
Options on all indices that underlie Non-FLEX Options listed and
traded by the Exchange).
---------------------------------------------------------------------------

7. Financial Requirements
    Under the proposal, a FLEX Index Market-Maker may not effect a FLEX
Index Option transaction unless it has demonstrated to the satisfaction
of the Exchange that the net liquidating equity maintained in the FLEX
Appointed Market-Maker's individual or joint accounts with any one
clearing member in which transactions in FLEX Index Options will be
conducted is at least $100,000.\48\ In addition, a FLEX Index Appointed
Market-Maker is required to maintain at least $1 million net
liquidating equity and/or $1 million net capital, as applicable.\49\ A
FLEX Index Appointed Market-Maker or its clearing member must
immediately inform the Exchange whenever the FLEX Index Appointed
Market-Maker fails to be in compliance with any of the above
requirements. FLEX Market-Makers and floor brokers must file letters of
guarantee accepting financial responsibility for all FLEX transactions
they make.\50\ These provisions parallel existing Rules 24A.13, 24A.14,
and 24A.15 that apply to the FLEX RFQ System.
---------------------------------------------------------------------------

    \48\ See proposed Rule 24B.11.
    \49\ See proposed Rule 24B.12.
    \50\ See proposed Rule 24B.13.
---------------------------------------------------------------------------

8. Other Rules for New System
    Other rules in proposed Chapter XXIVB are the same as, or closely
modeled after, the existing rules of the FLEX RFQ System. Proposed
Rules 24B.2, Hours of Trading; 24B.3, Trading Rotations; 24B.10,
Related Securities; 24B.15, Nonavailability of RAES; and 24B.16,
Inapplicability of Split Price and Accommodation Liquidation Rules, are
identical to Rules 24A.2, 24A.3, 24A.11, 24A.16, and 24A.17,
respectively. Proposed Rules 24B.6, Discretionary Transactions, and
24B.13, Letter of Guarantee or Authorization are virtually identical to
Rules 24A.6 and 24A.15, respectively, except for non-substantive
grammatical changes. Proposed Rules 24B.11, FLEX Index Appointed
Market-Maker Account Equity, and 24B.12, FLEX Index Appointed Market-
Maker Financial Requirements, are virtually identical to Rules 24A.13
and 24A.14, respectively, except that revisions are being made to
clarify that these rules apply only to FLEX Appointed Market-Makers in
FLEX Index Options.\51\
---------------------------------------------------------------------------

    \51\ The special account equity and financial requirements under
existing Rules 24A.13 and 24A.14 apply only to FLEX Appointed
Market-Makers, who currently are appointed only to FLEX Index Option
classes and currently are subject to certain heightened minimum
value size requirements under Rule 24A.4(a)(4)(iv). Given the
proposed changes to the FLEX Market-Maker appointments discussed
above, which would allow for the appointment of a FLEX Equity
Appointed Market-Maker, proposed Rules 24B.11 and 24B.12 make clear
that these special account equity and financial requirements would
apply only to FLEX Appointed Market-Makers in FLEX Index Options
(who would continue to be subject to the heightened minimum value
size requirements under proposed Rule 24B.4(a)(5)(iv)) and not FLEX
Appointed Market-Makers in FLEX Equity Options (who would not be
subject to heightened minimum value size requirements). The Exchange
has proposed corresponding changes to existing Rules 24A.13 and
24A.14.

---------------------------------------------------------------------------

B. Changes to Existing FLEX Rules

    The Exchange is proposing various changes to the existing FLEX
rules to conform them to the corresponding new System rules. In
addition, the term ``Indicative FLEX Quote'' in Rule 24A.1 and a
related reference in Rule 24A.12 are being deleted. Indicative FLEX
Quotes are non-binding indications of the market that were periodically
supplied by FLEX Market-Makers and displayed on the FLEX communication
network. This functionality is no longer utilized, so these references
in Rules 24A.1 and 24A.12 are being deleted.
    The Exchange is also proposing to increase the crossing
participation entitlement percentage available on the FLEX RFQ System.
Currently, the Submitting Member may obtain a crossing participation
entitlement of 25% of the incoming order for a FLEX Equity Option or
20% of the incoming order for a FLEX Index Option.\52\ Under the
proposal, the appropriate Procedure Committee could determine on a
class-by-class basis whether to establish a crossing participation
entitlement for facilitations and/or solicitations and the applicable
crossing participation entitlement percentage, which may not exceed 40%
of the incoming order.\53\ These revisions would make the crossing
participation entitlements equivalent on the FLEX RFQ System and the
FLEX Hybrid Trading System.
---------------------------------------------------------------------------

    \52\ See Rule 24A.5(e)(iii)(A)-(B). Other existing provisions
could allow the Submitting Member to receive in excess of 20% of an
incoming order for a FLEX Index Option. See Rule 24A.5(e)(iii)(B).
    \53\ See proposed Rule 24A.5(e)(iii)(A)-(B).
---------------------------------------------------------------------------

C. Other Changes to CBOE Rules

    The Exchange is proposing to allow sponsored access to the new
System. Under proposed Rule 6.20A, a CBOE member (``Sponsoring
Member'') may provide a non-member (``Sponsored User'') with electronic
access to the System. The proposed rule outlines the requirements that
Sponsored Users and Sponsoring Members are required to meet prior to
engaging in a sponsorship arrangement. A Sponsored User may be a
person, such as an institutional investor, who has entered into a
sponsorship arrangement with a Sponsoring Member for purposes of
entering orders on the System. This would include entering and
responding to electronic RFQs and entering FLEX Orders into the Book. A
Sponsored User may utilize the System only if authorized in advance by
one or more Sponsoring Members in accordance with the provisions of
proposed Rule 6.20A.

D. Amendment Nos. 2 and 3

    In Amendment No. 2, the Exchange made the following changes to the
proposal:
     In proposed Rule 24B.5(a)(1), modifying the procedures
that apply during the electronic RFQ Reaction Period to: (i) Permit
FLEX Quotes and FLEX Orders to be entered, modified, or canceled during
the RFQ Reaction Period; (ii) increase the maximum RFQ Reaction Period
from the proposed 30 seconds to five minutes; (iii) provide that, if
the Submitting Member enters a FLEX Quote during the RFQ Reaction
Period, the Submitting Member must be bidding (offering) for at least
the Crossing Exposure Period prior to entering an RFQ Order; and (iv)
provide that the RFQ Market is dynamically updated during both the RFQ
Response and RFQ Reaction Periods;
     Also in proposed Rule 24B.5(a)(2), modifying the open-
outcry priority provisions to clarify the Exchange's original intent
that, after the application of any participation entitlements, all
other FLEX Quotes submitted in response to an open-outcry RFQ have
priority based on the sequence in which those FLEX Quotes are made in
open outcry and, to the extent two or more best bid (offer) FLEX Quotes
are submitted in open outcry at the same time and same price (or the
Submitting Member cannot reasonably determine the sequence), priority
will be apportioned equally;
     In proposed Rule 24B.5(b), modifying the Book crossing
provisions to clarify the Exchange's original intent that an agency
FLEX Order must first be subject to an RFQ and the agency FLEX Order
(or any remaining balance not executed during the RFQ Reaction Period)
must also be exposed on the System for at least the Crossing Exposure
Period prior to entering a contra-side principal or solicitation order
that is executable against the agency FLEX Order. Previously, the
proposed rule text had simply indicated that the agency FLEX Order must
first be subject to an RFQ;
     Updating the text of Rules 24A.7 and 24A.8, as well as
proposed Rules 24B.7 and 24B.8, to reflect unrelated changes that have
been approved in a separate rule filing \54\ and to make certain non-
substantive corrections;
---------------------------------------------------------------------------

    \54\ See Securities Exchange Act Release No. 56350 (September 4,
2007), 72 FR 51878 (September 11, 2007) (SR-CBOE-2007-79).
---------------------------------------------------------------------------

     Inserting corresponding changes to the discussion sections
of the Form 19b-4 and the Exhibit 1 Federal Register notice to reflect
the above-noted changes;
     Providing information regarding its plans respecting
dissemination of FLEX data via the Options Price Reporting Authority
(``OPRA''). Specifically, with respect to price reporting, the Exchange
currently plans to continue disseminating via OPRA information
regarding executed FLEX transactions. However, the Exchange currently
does not plan to disseminate via OPRA information respecting pending
electronic and open-outcry RFQs or information on resting orders in the
Book; and
     Submitting as part of Exhibit 5 the text of the Sponsored
User Agreement form that the Exchange proposes to use in connection
with proposed Rule 6.20A.
    In Amendment No. 3, the Exchange made the following changes to the
proposal:
     Revising the text of Rule 24B.1(u), RFQ Reaction Period,
to reflect that during this time a Submitting Member determines whether
to accept or reject the RFQ Market, which consists of both FLEX Quotes
and FLEX Orders; and
     Correcting the text of proposed Rule 24B.5(a)(2)(iii) that
was submitted as part of Amendment No. 2.

III. Discussion

    After careful consideration, the Commission finds that the proposed
rule change, as amended, is consistent with the requirements of the Act
and the rules and regulations thereunder applicable to a national
securities exchange.\55\ In particular, the Commission finds that the
proposal is consistent with section 6(b)(5) of the Act,\56\ which
requires that the rules of an exchange be 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, in general, to protect investors and the public interest. The
Commission also finds that the proposal is consistent with section
11A(a)(1)(C) of the Act,\57\ which sets forth Congress's findings that
it is in the public interest and appropriate for the protection of
investors and the maintenance of fair and orderly markets to assure,
among other things, economically efficient execution of securities
transactions; fair competition among brokers and dealers, among
exchange markets, and between exchange markets and markets other than
exchange markets; and the

practicability of brokers executing investors' orders in the best
market. The Commission generally believes that an exchange furthers
these principles when developing products and trading functionality
that compete with the over-the-counter markets. This order approves the
amended proposal in its entirety, although only certain aspects of the
proposed rule change are discussed below.
---------------------------------------------------------------------------

    \55\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
    \56\ 15 U.S.C. 78f(b)(5).
    \57\ 15 U.S.C. 78k-1(a)(1)(C).
---------------------------------------------------------------------------

A. Execution Algorithm and Priority and Allocation Rules

1. Electronic Trading
    The Commission believes that the priority and allocation rules for
electronic trading on the new System are reasonable and consistent with
the Act. These rules generally provide for allocation pursuant to
price/time priority, with some allowance for market-maker and crossing
participation guarantees. The proposed guarantees appear reasonably
designed to balance incentives for providing liquidity in the FLEX
market (in the case of the market-maker entitlement) and for bringing
trades to the Exchange (in the case of the crossing participation
entitlement) with incentives for all other market participants to quote
competitively.
    The Commission also believes that the priority and allocation rules
for electronic FLEX trading are consistent with section 11(a) of the
Act.\58\ The Commission believes, however, that neither a Submitting
Member who trades against an electronic RFQ Market nor any other FLEX
Trader who itself submits an RFQ Quote electronically qualifies for the
``effect-versus-execute'' exception to section 11(a).\59\ Nevertheless,
the Commission believes that other exceptions may apply. FLEX Market-
Makers qualify for the market-maker exception. With respect to non-
market-maker members, the new System appears reasonably designed to
cause RFQ Quotes constituting the RFQ Market and the RFQ Order that
trades against the RFQ Market to yield to non-member interest,
consistent with the ``G'' exception.\60\
---------------------------------------------------------------------------

    \58\ 15 U.S.C. 78k(a). Section 11(a)(1) prohibits a member of a
national securities exchange from effecting transactions on that
exchange for its own account, the account of an associated person,
or an account over which it or its associated person exercises
discretion unless an exception applies.
    \59\ 17 CFR 240.11a2-2(T).
    \60\ See 15 U.S.C. 78k(a)(1)(G) (setting forth all requirements
for the ``G'' exception).
---------------------------------------------------------------------------

2. Open-Outcry Trading on New System
    The Commission believes that the priority and allocation rules for
open-outcry trading on the new System are reasonable and consistent
with the Act. These provisions are generally modeled on the priority
and allocation rules of the existing FLEX RFQ System, which were
previously found by the Commission to be consistent with the Act.\61\
There is one significant difference, however, the addition of an
electronic Book. Generally, an order resting on the Book will be filled
only after all FLEX Quotes submitted in open outcry, even if the order
was booked before the RFQ began and any oral responses to the RFQ were
submitted.\62\ The Commission generally believes that displayed limit
orders of public customers must be able to compete freely and openly
for executions on an equitable basis. However, with a highly customized
product such as FLEX Options, there are likely to be few booked orders.
Therefore, solely with respect to the FLEX Hybrid Trading System, the
Commission believes at the present time that it is appropriate to
approve CBOE's proposal to allow FLEX Quotes submitted in response to
an open-outcry RFQ to have priority over same priced bids (offers) on
the Book.\63\ The Commission also notes that an open-outcry FLEX Quote
must yield to the Book and all other bids (offers) that have priority
over the Book if the member entering the FLEX Quote is relying on the
``G'' exception to Section 11(a) of the Act.\64\
---------------------------------------------------------------------------

    \61\ See Securities Exchange Act Release No. 31920 (February 24,
1993), 58 FR 12280 (March 3, 1993) SR-CBOE-92-17).
    \62\ See proposed Rule 24B.5(a)(2)(v)(A).
    \63\ If circumstances change and the FLEX Book becomes
frequently used, the Commission may revisit this issue.
    \64\ See proposed Rule 24B.5(a)(2)(v)(B).
---------------------------------------------------------------------------

3. Orders on the Book
    If the Exchange enables an electronic Book in a FLEX Option class,
any transaction involving a booked order must comply with section 11(a)
of the Act. If a FLEX Trader cannot avail itself of any other
exception, it must rely on the ``G'' exception, which requires, among
other things, that a member order yield to a non-member order at the
same price, even if the member order has time priority. The new System
has not been programmed to cause a member order on the Book to yield to
a later-arriving non-member order at the same price, although proposed
Rule 24B.5(b)(2)(ii) prohibits a member order that is relying on the
``G'' exemption from resting on the Book. The Commission believes that
a member may rely on the ``G'' exception if it sends an order to the
Book and then cancels it immediately if it is not executed in full.
4. Changes to Allocation Rules of FLEX RFQ System
    CBOE has proposed certain changes to its allocation rules under the
existing FLEX RFQ System. Under the proposal, a FLEX Appointed Market-
Maker will have priority over a FLEX Qualified Market-Maker when the
two submit orders at the same time and same price. The Commission
believes that this is consistent with the Act in light of the greater
quoting obligations of the FLEX Appointed Market-Maker. CBOE also is
proposing to increase the percentages of an incoming order that can be
reserved for a crossing guarantee or FLEX Appointed Market-Maker
participation entitlement.\65\ These percentages appear reasonably
designed to balance incentives for providing liquidity with incentives
for all other market participants to quote competitively.
---------------------------------------------------------------------------

    \65\ See proposed Rule 24A.5(e)(iii)-(iv).
---------------------------------------------------------------------------

5. Best Execution
    The proposed rules do not explicitly require an RFQ Trader to trade
against an RFQ Market. The Commission reminds RFQ Traders that the duty
of best execution requires them to assess the quality of competing
markets to ensure that a customer order is directed to the market
providing the most advantageous terms for the customer. If a Submitting
Member declines to trade a customer order against an RFQ Market and
subsequently facilitates the customer order at a price inferior to the
RFQ Market, there would be a presumption that the Submitting Member did
not fulfill its best execution obligation.

B. Market-Maker Benefits and Obligations

    The Commission believes that the balance of benefits and
obligations of FLEX Market-Makers under the rules for the new System is
consistent with the Act. A FLEX Appointed Market-Maker must provide a
FLEX Quote in response to any open-outcry RFQ in a class of FLEX
Options to which it is appointed and trading in open outcry.\66\ In
addition, the FLEX Appointed Market-Maker must provide FLEX Quotes in
response to a designated percentage of electronic RFQs, such percentage
to be determined by the appropriate Procedure Committee and not less
than 80%.\67\ Although a FLEX Qualified Market-Maker need not enter a
FLEX Quote in response to an RFQ in its assigned class,\68\ the FLEX
Qualified

Market-Maker (like the FLEX Appointed Market-Maker) must submit a FLEX
Quote if called upon by a FLEX Official, including when no FLEX Quotes
are submitted in response to a specific RFQ.\69\ FLEX Appointed Market-
Makers may be awarded a participation entitlement, noted above. Both
FLEX Market-Makers qualify for the market-maker exception to section
11(a) of the Act.
---------------------------------------------------------------------------

    \66\ See proposed Rule 24B.9(c)(i).
    \67\ See proposed Rule 24B.4(a)(5)(iv).
    \68\ See proposed Rule 24B.9(c).
    \69\ See proposed Rule 24B.9(d).
---------------------------------------------------------------------------

C. Position and Exercise Limits

    The Commission believes that the proposed position and exercise
limits in FLEX Options are reasonable and consistent with the Act. They
appear reasonably designed to prevent a member from establishing an
imprudent position in FLEX Options. Moreover, the Commission believes
that these rules are reasonably designed to prevent a FLEX Trader from
using FLEX Options to evade the position limits applicable to
comparable Non-FLEX Options. In view of the explicit standards for
position and exercise limits set forth in Rules 24A.7, 24A.8, 24B.7,
and 24B.8, the Commission believes it is reasonable to relieve the
Exchange of the obligation to propose new position and exercise limits
for FLEX Options whenever it lists and trades a comparable non-FLEX
product.

D. Sponsored Access

    The Commission believes that the proposed sponsored access
provisions are reasonable and consistent with the Act. The Commission
notes that these provisions are substantially similar to those of
another exchange, which previously were approved by the Commission.\70\
The Exchange has proposed to offer sponsored access only to the new
FLEX Hybrid Trading System, not to open-outcry FLEX trading or to other
Exchange trading facilities. If the Exchange in the future would seek
to offer sponsored access to its other trading facilities, it would
have to file a proposed rule change pursuant to section 19(b) of the
Act.
---------------------------------------------------------------------------

    \70\ See NYSE Arca Equities Rule 7.29; Securities Exchange Act
Release No. 44983 (October 25, 2001), 66 FR 55225 (November 1, 2001)
(SR-PCX-00-25) (approving proposal to establish Archipelago Exchange
as the equities trading facility of the Pacific Exchange).
---------------------------------------------------------------------------

E. Acceleration

    The Commission finds good cause for approving the proposal, as
modified by Amendment Nos. 2 and 3, prior to the thirtieth day after
the date of publication of notice of the amended proposal in the
Federal Register. Amendment Nos. 2 and 3 made only minor changes to the
overall proposal, which was subject to a notice-and-comment period.
Because no comments were received, the Commission believes that good
cause exists to grant accelerated approval and thereby allow the
Exchange to implement the proposal without further delay.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning Amendment Nos. 2 and 3, including whether it 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 e-mail to<EMAIL_ADDRESS>Please include

File Number SR-CBOE-2006-99 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2006-99. This file
number should be included on the subject line if e-mail 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 inspection and
copying in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal office of the Exchange. 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-2006-99 and should be
submitted on or before December 14, 2007.

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\71\ that the proposed rule change (SR-CBOE-2006-99), as amended,
is approved.
---------------------------------------------------------------------------

    \71\ 15 U.S.C. 78s(b)(2).
    \72\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\72\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-22779 Filed 11-21-07; 8:45 am]

BILLING CODE 8011-01-P


[Federal Register Volume 85, Number 109 (Friday, June 5, 2020)]
[Notices]
[Page 34638]
[FR Doc No: C1-2020-11280]

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Food and Drug Administration

[Docket No. FDA-2020-D-1301]

Q3C(R8) Recommendations for the Permitted Daily Exposures for
Three Solvents--2-Methyltetrahydrofuran, Cyclopentyl Methyl Ether, and
Tert-Butyl Alcohol--According to the Maintenance Procedures for the
Guidance Q3C Impurities: Residual Solvents; International Council for
Harmonisation; Draft Guidance for Industry; Availability

Correction

    In notice document 2020-11280, appearing on pages 31785 through
31786 in the issue of Wednesday, May 27, 2020 make the following
correction.
    On page 31785, in the first column, on the last line, ``July 26,
2024'' should read ``July 27, 2020''.
[FR Doc. C1-2020-11280 Filed 6-4-20; 8:45 am]
 BILLING CODE 1300-01-D


[Federal Register Volume 81, Number 96 (Wednesday, May 18, 2016)]
[Notices]
[Pages 31272-31276]
[FR Doc No: 2016-11642]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77819; File No. SR-BatsEDGX-2016-17]

Self-Regulatory Organizations; Bats EDGX Exchange, Inc.; Notice
of Filing and Immediate Effectiveness of a Proposed Rule Change To
Amend the Description of Price Improving Orders Under Subparagraph (6)
to Rule 21.1(d) and Add Subparagraph (4) to Rule 21.1(h) Modifying the
Operation of Orders Subject to the Display Price Sliding Process When a
Contra-Side Post Only Order Is Received by the Bats EDGX Exchange
Options Platform

May 12, 2016.
    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 May 3, 2016, Bats EDGX Exchange, Inc. f/k/a EDGX Exchange, Inc.
(the ``Exchange'' or ``EDGX'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the Exchange.
The Exchange has designated this proposal as a ``non-controversial''
proposed rule change pursuant to Section 19(b)(3)(A) of the Act \3\ and
Rule 19b-4(f)(6)(iii) thereunder,\4\ which renders it effective upon
filing with the Commission. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6)(iii).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange filed a proposal to: (i) Amend the description of
Price

Improving Orders under subparagraph (6) to Rule 21.1(d); and (ii) add
subparagraph (4) to Rule 21.1(h) modifying the operation of orders
subject to the display price sliding process when a contra-side Post
Only Order \5\ is received by the Exchange's options platform (``EDGX
Options'').
---------------------------------------------------------------------------

    \5\ See Exchange Rule 21.1(d)(8).
---------------------------------------------------------------------------

    The text of the proposed rule change is available at the Exchange's
Web site at www.batstrading.com, at the principal office of the
Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    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 parts of such
statements.

(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange is proposing to: (i) Amend the description of Price
Improving Orders under subparagraph (6) to Rule 21.1(d); and (ii) add
subparagraph (4) to Rule 21.1(h) modifying the operation of orders
subject to the display price sliding process when a contra-side Post
Only Order is received by EDGX Options.
Price Improving Orders
    Price Improving Orders are orders to buy or sell an option at a
specified price at an increment smaller than the minimum price
variation in the security.\6\ Price Improving Orders may be entered in
increments as small as (1) one cent. Price Improving Orders are
displayed at the minimum price variation in the security and shall be
rounded up for sell orders and rounded down for buy orders. Unless a
User \7\ has entered instructions not to do so, Price Improving Orders
are subject to the ``display-price sliding process'' described in
current Rule 21.1(h).
---------------------------------------------------------------------------

    \6\ See Exchange Rule 21.1(d)(6).
    \7\ The term ``User'' means any Options Member or Sponsored
Participant who is authorized to obtain access to the System
pursuant to Rule 11.3 (Access). See Exchange Rule 16.1(a)(63).
---------------------------------------------------------------------------

    As described above, Price Improving Orders may be priced at an
increment smaller than the minimum price variation in the security
(i.e., for options priced in five (5) cent or ten (10) cent increments,
an order priced at 1.03 is not a permissible increment for display).
This may result in the order being ranked on the EDGX Options Book \8\
non-displayed at a price increment smaller than the security's minimum
price variation. The Exchange proposes to amend the description of
Price Improving Orders under subparagraph (6) to Rule 21.1(d) to
prevent Price Improving Orders subject to the Price Adjust process \9\
from being ranked at a non-displayed price on the EDGX Options Book.
The Exchange also proposes to amend subparagraph (6) to Rule 21.1(d) to
clarify how Price Improving Orders subject to the display price sliding
process are currently handled on the EDGX Options Book.
---------------------------------------------------------------------------

    \8\ ``EDGX Options Book'' is defined as ``the electronic book of
options orders maintained by the Trading System.'' See Exchange Rule
16.1(a)(9).
    \9\ See Exchange Rule 21.1(i).
---------------------------------------------------------------------------

    First, the Exchange proposes to amend the description of Price
Improving Orders under subparagraph (6) to Rule 21.1(d) to prevent
Price Improving Orders subject to the Price Adjust process from being
ranked at a non-displayed price on the EDGX Options Book. Under the
Price Adjust process, an order that, at the time of entry, would lock
or cross a Protected Quotation of another options exchange or the
Exchange will be ranked and displayed by the System at one minimum
price variation below the current NBO (for bids) or to one minimum
price variation above the current NBB (for offers). This could result
in Price Improving Orders in securities with minimum quoting increments
of five (5) or ten (10) cents \10\ that the User elected to be subject
to the Price Adjust process to be ranked on the EDGX Options Book at a
non-displayed price. To prevent such orders from being ranked at a non-
displayed price, the Exchange proposes to amend subparagraph (6) to
Rule 21.1(d) to state that Price Improving Orders subject to the Price
Adjust process will be ranked at the displayed price. Thus, other than
a potential execution against contra-side liquidity when entered, a
Price Improving Order subject to the Price Adjust process will no
longer be priced at an increment smaller than the minimum price
variation in the security.
---------------------------------------------------------------------------

    \10\ See Exchange Rule 21.5 for a description of the Exchange's
Minimum Increments.
---------------------------------------------------------------------------

    The following examples describe the proposed operation of Price
Improving Orders subject to the Price Adjust process.
    Assume the NBBO is $1.00 x $1.05 and that the security's minimum
quoting increment is five (5) cents. Further assume that there is no
liquidity to sell resting on the EDGX Options Book at a price below
$1.05. A Price Improving Order to buy priced at $1.03 is entered and
the User has elected the Price Adjust process. Under current
functionality, the order will be ranked, non-displayed on the EDGX
Options Book at $1.03, the price of the order, and displayed at $1.00.
As proposed, the order would be ranked and displayed at $1.00, the
displayed price.
    Assume the same example as above except that when the Price
Improving Order is entered (i.e., an order to buy priced at $1.03
subject to the Price Adjust process) there is a resting Price Improving
Order to sell ranked at a price of $1.03 (i.e., an order subject to the
display price sliding process). In this case, the Price Improving Order
subject to the Price Adjust process would execute upon entry against
the resting order at $1.03.
    The Exchange also proposes to amend subparagraph (6) to Rule
21.1(d) to clarify how Price Improving Orders subject to the display
price sliding process are currently handled on the EDGX Options Book.
While the Exchange believes the current operation of Price Improving
Orders is clear based on existing rules, the Exchange believes this
clarification is necessary due to the proposed changes. Particularly,
in light of the change proposed above regarding Price Improving Orders
subject to the Price Adjust process, the Exchange proposes to add
language to subparagraph (d)(6) clarifying the operation of Price
Improving Orders subject to the display price sliding process. As
proposed, Exchange Rule 21.1(d)(6) would state that Price Improving
Orders subject to the display-price sliding process will be ranked at
the price entered by the User down to the current NBB (for offers) or
up to the current NBO (for bids). The proposed language would make
clear the current operation of such orders vis-a vis the proposed
operation of Price Improving Orders subject to the Price Adjust
process.
Display Price Sliding Process and Post Only Orders
    Under current Exchange Rule 21.1(h), an order subject to the
display price sliding process that, at the time of entry,

would lock or cross a Protected Quotation of another options exchange
will be ranked at the locking price in the EDGX Options Book and
displayed by the System at one minimum price variation below the
current National Best Offer (``NBO'') \11\ (for bids) or to one minimum
price variation above the current National Best Bid (``NBB'') \12\ (for
offers). Post Only Orders are orders that are to be ranked and executed
on the Exchange pursuant to Rule 21.8 (Order Display and Book
Processing) or cancelled, as appropriate, without routing away to
another trading center.\13\ Currently, a Post Only Order will not
remove liquidity from the EDGX Options Book unless the value of price
improvement associated with such execution equals or exceeds the sum of
fees charged for such execution and the value of any rebate that would
be provided if the order posted to the EDGX Options Book and
subsequently provided liquidity. In order to prevent circumstances on
the EDGX Options Book where an order is ranked at the displayed price
of a resting contra-side order, which could result in apparent
violations of the Exchange's priority rule, an incoming Post Only Order
is currently rejected if it would be posted at the locking price of a
contra-side order subject to the display price sliding process. In
particular, accepting such order would result in a situation where an
order is displayed on the Exchange and a contra-side order is ranked at
the same price as such order. In turn, if an execution at that price is
reported by the Exchange, the Exchange believes a User representing the
order displayed on the Exchange might believe that an incoming order
was received by the Exchange and then bypassed such order (i.e.,
removing some other liquidity on the same side of the market as the
displayed order). As described in further detail below, the proposal
will avoid the possibility of an execution of an order subject to
display-price sliding at the same price as an order displayed on the
Exchange. The Exchange notes that the circumstance described above,
where an incoming Post Only Order is rejected by the Exchange, is
limited to times when the Exchange is not already quoting at the NBBO
and a Post Only Order is seeking to join either the NBB or NBO but
there is a resting display-price slid order on the contra-side of the
Exchange's order book.
---------------------------------------------------------------------------

    \11\ See Exchange Rule 16.1(a)(29) (defining the terms ``NBB'',
``NBO'', and ``NBBO'').
    \12\ Id.
    \13\ See Exchange Rule 21.1(d)(8).
---------------------------------------------------------------------------

    In order to facilitate the entry of orders priced at the National
Best Bid or Offer (``NBBO''), the Exchange proposes to add subparagraph
(4) to Rule 21.1(h) modifying the operation of orders subject to the
display price sliding process when a contra-side Post Only Order is
received by EDGX Options. Under proposed subparagraph (4), to the
extent an incoming Post Only Order would be ranked and displayed at a
price equal to the ranked price of a contra-side order subject to
display-price sliding (i.e., the locking price) the order subject to
display-price sliding would be re-ranked at one (1) cent above the
current NBB (for offers) or one (1) cent below the current NBO (for
bids). An order subject to display price sliding that is re-ranked
pursuant to proposed subparagraph (4) of Rule 21.1(h) would be re-
ranked at the locking price in the event there is no longer displayed
contra-side interest at the locking price. In both cases, the order
would remain displayed by the System at one minimum price variation
below the current NBO (for bids) or to one minimum price variation
above the current NBB (for offers).
    The below examples describe the operation of orders subject to
display price sliding under proposed subparagraph (4) to Rule 21.1(h).

    Example 1: Securities Quoted in Penny Increments--Proposed
Operation. Assume the NBBO is $1.00 x $1.01 and that the Exchange's
displayed best bid and offer (``BBO'') is $1.00 x $1.02. Also assume
that a non-routable order to buy at $1.01 subject to display price
sliding is resting on the EDGX Options Book, ranked at $1.01 and
displayed at $1.00. Assume a Post Only Order to sell at $1.01 is
entered and, under current functionality, would be rejected because
it is executable at the locking price of the order to buy subject to
display price sliding resting on the EDGX Options Book. As proposed,
the order to buy subject to display price sliding would be re-ranked
and would remain displayed at $1.00, one (1) cent below the current
NBO. The Post Only Order to sell would be posted to the EDGX Options
Book, ranked and displayed at $1.01 (i.e., allowing the Exchange to
join the NBBO of $1.00 x $1.01). If the Post Only Order to sell is
executed or cancelled, the order to buy subject to display price
sliding would be re-ranked at $1.01, its original ranked price, and
would remain displayed at $1.00.
    Example 2: Securities Quoted in Non-Penny Increments--Proposed
Operation. Assume the NBBO is $1.00 x $1.05 and that the Exchange's
BBO is $1.00 x $1.10. Also assume that a non-routable order to buy
at $1.05 subject to display price sliding is resting on the EDGX
Options Book, ranked at $1.05 and displayed at $1.00. Assume a Post
Only Order to sell at $1.05 is entered and, under current
functionality, would be rejected because it is executable at the
locking price of the order to buy subject to display price sliding
resting on the EDGX Options Book. As proposed, the order to buy
subject to display price sliding would be re-ranked at $1.04, one
(1) cent below the NBO, and would remain displayed at $1.00. The
Post Only Order to sell would be posted to the EDGX Options Book,
ranked and displayed at $1.05 (i.e., allowing the Exchange to join
the NBBO of $1.00 x $1.01). If the Post Only Order to sell is
executed or cancelled, the order to buy subject to display price
sliding would be re-ranked at $1.05, its original ranked price, and
would remain displayed at $1.00.

    The Exchange notes that similar behavior currently exists on the
Bats BZX Exchange, Inc. (``BZX'') equities platform that permits an
order to buy(sell) subject to display price sliding to be executed at
one-half minimum price variation more(less) than the price of a contra-
side displayed BZX Post Only Order.\14\ Specifically, under BZX Rule
11.9(g)(1)(E), BZX Post Only Orders are permitted to post and be
displayed opposite the ranked price of orders subject to display-price
sliding. In the event an order subject to display-price sliding is
ranked on the BZX Book \15\ at a price equal to an opposite side order
displayed by the Exchange, it cannot be executed at that price and
instead will be subject to processing as set forth in BZX Rule
11.13(a)(4)(D). Under BZX Rule 11.13(a)(4)(D), in the event that an
incoming order is a market order or is a limit order priced more
aggressively than the displayed order, BZX will execute the incoming
order at, in the case of an incoming sell order, one-half minimum price
variation less than the price of the displayed order, and, in the case
of an incoming buy order, at one-half minimum price variation more than
the price of the displayed order. This behavior is designed to avoid an
apparent priority issue. In particular, in such a situation the
Exchange believes a User representing an order that is displayed on the
Exchange might believe that an incoming order was received by the
Exchange and then bypassed such displayed order, removing some other
non-displayed liquidity on the same side of the market as such
displayed order. Similar to what the Exchange proposes for EDGX
Options, the above described functionality on its equites platform also
effectively changes the ranked price of the order subject to display
price sliding. Although the underlying solution is intended to solve
the same circumstance, because half-penny executions are not permitted
with respect to options transactions, on EDGX Options the Exchange
proposes to adjust the ranked price of the display-price slid order
when a contra-side Post

Only order is received by EDGX and posted at the locking price.
---------------------------------------------------------------------------

    \14\ See BZX Rule 11.9(c)(6).
    \15\ See BZX Rule 1.5(e).
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that its proposal is consistent with the
requirements of the Act and the rules and regulations thereunder that
are applicable to a national securities exchange, and, in particular,
with the requirements of Section 6(b) of the Act.\16\ In particular,
the proposal is consistent with Section 6(b)(5) of the Act \17\ because
it is designed to encourage displayed liquidity and offer market
participants greater flexibility to post liquidity on the EDGX Options
Book, thereby promoting just and equitable principles of trade,
fostering cooperation and coordination with persons engaged in
facilitating transactions in securities, removing impediments to, and
perfecting the mechanism of, a free and open market and a national
market system.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

Price Improving Orders
    The proposed changes to the description of Price Improving Orders
under Rule 21.1(d)(6) promote just and equitable principles of trade
and foster cooperation and coordination with persons engaged in
facilitating transactions in securities. Specifically, the proposed
change regarding Price Improving Orders subject to the Price Adjust
process is designed to prevent the possibility of an internally crossed
book where a Price Improving Order has already been submitted and is
ranked non-displayed by the Exchange and a Post Only Order subject to
the Price Adjust process is entered at a price increment smaller than
the security's minimum price increment and that crosses the resting
order.
    In addition, the proposed amendment to Exchange Rule 21.1(d)(6) to
clarify that Price Improving Orders subject to the display-price
sliding process will be ranked at the price entered by the User down to
the current NBB (for offers) or up to the current NBO (for bids) also
promotes just and equitable principles of trade because it is
consistent with and further clarifies the current operation of such
orders. In addition, the addition of such language should avoid
potential investor confusion regarding the operation of such orders
with regard to the proposed language amending the operation of Price
Improving Orders subject to the Price Adjust process.
Display Price Sliding Process and Post Only Orders
    Under current functionality, an incoming Post Only Order would be
rejected if it is executable at the locking price of a contra-side
order subject to display price sliding resting on the EDGX Options
Book. This, at times, inhibits market participants, including Market
Makers \18\ from utilizing Post Only Orders to quote at the NBBO. Post
Only Orders allow Users to post aggressively priced liquidity, as such
Users have certainty as to the fee or rebate they will receive from the
Exchange if their order is executed. Without such ability and by
rejecting such Post Only Orders in scenarios described herein, the
Exchange believes that certain Users would simply post less
aggressively priced liquidity, and prices available for market
participants, including retail investors, would deteriorate.
Accordingly, the Exchange believes that the proposed rule change
promotes just and equitable principles of trade by enhancing the
liquidity available to all market participants by allowing Market
Makers and other liquidity providers to add liquidity to the Exchange
at the NBBO without fear that their order would be rejected. In
addition, the proposed rule change would assist Market Makers in
satisfying their two-sided quoting obligations under Exchange Rules
22.5(a)(1) and 22.6(d)(1). The proposed rule change should increase
displayed liquidity at the NBBO on the Exchange, resulting in improved
market quality and price discovery for all participants. The Exchange
also notes that similar behavior currently exists on BZX's equities
platform that permits an order to buy(sell) subject to display price
sliding to be executed at one-half minimum price variation more(less)
than the price of a contra-side displayed BZX Post Only Order.\19\
---------------------------------------------------------------------------

    \18\ See Exchange Rule 16.1(a)(37).
    \19\ See BZX Rules 11.9(g)(1)(E) and 11.13(a)(4)(D). See also
Securities Exchange Act Release No. 64754 (June 27, 2011), 76 FR
38712 (July 1, 2011) (SR-BATS-2011-015) (Order Approving a Proposed
Rule Change to Amend BATS Rule 11.9, Entitled ``Orders and
Modifiers'' and BATS Rule 11.13, Entitled ``Order Execution'').
---------------------------------------------------------------------------

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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. To the contrary, the
Exchange believes the proposed rule change regarding display price
sliding and Post Only Orders would enhance competition by enabling
market participants to post liquidity at the NBBO, thereby increasing
the liquidity on the Exchange at the NBBO. In addition, the Exchange
believes the proposed amendments to Price Improving Orders would does
not impact competition, but rather seeks to avoid the potential of an
internally crossed book on the Exchange as well as to further clarify
the operation of such orders when subject to the display price sliding
process. For all the reasons stated above, the Exchange does not
believe that the proposed rule changes will impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Act, and believes the proposed change will enhance competition.

(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants or Others

    The Exchange has neither solicited nor received written comments on
the proposed rule change. The Exchange has not received any written
comments from members or other interested parties.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \20\ and Rule 19b-4(f)(6) thereunder.\21\
Because the proposed rule change 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, the proposed rule change has become
effective pursuant to Section 19(b)(3)(A) of the Act \22\ and Rule 19b-
4(f)(6) thereunder.\23\
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \21\ 17 CFR 240.19b-4(f)(6).
    \22\ 15 U.S.C. 78s(b)(3)(A).
    \23\ In addition, Rule 19b-4(f)(6)(iii) requires the Exchange to
give the Commission written notice of the Exchange's intent to file
the proposed rule change, along with a brief description and text of
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 Exchange has satisfied this
requirement.
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) under the Act
\24\ normally does not become operative for 30 days after the date of
filing. However,

Rule 19b-4(f)(6)(iii) \25\ permits the Commission to designate a
shorter time if such action is consistent with the protection of
investors and the public interest. The Exchange has asked the
Commission to waive the 30-day operative delay so that the proposal may
become operative immediately upon filing. The Exchange states that the
proposed rule change will benefit market participants by enhancing
their ability to post liquidity at the NBBO, and that waiver of the
operative delay may increase displayed liquidity at the NBBO on the
Exchange, resulting in improved market quality and price discovery for
all participants in a timely manner. Further, the Exchange notes that
the proposed rule change will not require any systems changes by
Exchange Users that would necessitate a delay, as the Exchange will now
accept and no longer reject Post Only Orders in the situations
described herein. Based on the foregoing, the Commission believes that
waiving the 30-day operative delay is consistent with the protection of
investors and the public interest.\26\ The Commission hereby grants the
Exchange's request and designates the proposal operative upon filing.
---------------------------------------------------------------------------

    \24\ 17 CFR 240.19b-4(f)(6).
    \25\ 17 CFR 240.19b-4(f)(6)(iii).
    \26\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the 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. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or 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_ADDRESS>Please include
File Number SR-BatsEDGX-2016-17 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-BatsEDGX-2016-17. 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, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing will also be available
for inspection and copying at the principal office of the Exchange. 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-BatsEDGX-2016-17 and should
be submitted on or before June 8, 2016.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
---------------------------------------------------------------------------

    \27\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-11642 Filed 5-17-16; 8:45 am]
 BILLING CODE 8011-01-P