SEC Division of Trading and Markets no-action letter: Chicago Board Options Exchange

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

DIVISION OF

TRADING AND MARKETS

August 28, 2009
Edward 1. Joyce

President and Chief Operating Officer

Chicago Board Options Exchange, Inc.

400 South LaSalle Street

Chicago, IL 60605-1023

Re: Chicago Board Options Exchange's Request under Rule 608(e) of Regulation NMS for a Temporary Exemption from Certain Provisions of the Options Order Protection and Locked/Crossed Market Plan Dear Mr. Joyce:
Rule 608(e) of Regulation NMSunder the Securities Exchange Act of 1934 ("Exchange Act") provides that the Securities and Exchange Commission ("Commission") may exempt from the provisions of Rule 608 of Regulation NMS, either unconditionally or on specified terms and conditions, any self-regulatory organization, ifthe Commission determines that such exemption . is consistent with the public interest, the protection of investors, the maintenance of fair and orderly markets, and the removal of impediments to, and perfection ofthe mechanisms of, a national market system. l As discussed below, the Commission is exempting the Chicago Board Options Exchange, Inc. ("CBOE") from Rule 608(c) of Regulation NMS, which requires CBOE to comply with, and enforce compliance by its members with, certain provisions of the Options Order Protection and Locked/Crossed Market Plan ("Plan")? Exemption from Section 8(c) of the Linkage Plan In the Exchange's letter, dated August 27,2009, CBOE seeks an exemption from Rule 608(c) of Regulation NMS, which requires CBOE to comply with, and enforce compliance by its 17 CFR 242.608. -The Division ofTrading and Markets has delegated authority to grant an exemption pursuant to 17 CFR 200.30-3(a)(42). 2 The Plan is a national market system plan approved by the Commission pursuant to
Section IIA ofthe Exchange Act, 15 U.S.C. 78k-I, and Rule 608 of Regulation NMS.
See Securities Exchange Act Release No. 60405 (July 30, 2009), 74 FR 39362 (August 6, 2009). All capitalized terms used in this letter have the same meaning as in the Plan, unless otherwise specified.

Mr. Edward J. Joyce
August 28, 2009 members with, the terms ofthe Plan regarding Trade-Throughs.3 Specifically, CBOE requests that the Commission, pursuant to Rule 608(e) ofRegulation NMS, exempt CBOE from the requirement ofRule 608(c) ofRegulation NMS that CBOE comply, and enforce compliance by its members, with Section 5(a) ofthe Plan subject to certain conditions. Section 5(a) ofthe Plan provides that each Participant shall establish, maintain and enforce written policies and procedures that are reasonably designed to prevent Trade-Throughs in that Participant's market that do not fall within an exception set forth in Section 5(b). CBOE has requested an exemption to allow it to effect transactions that Trade Through the NBBO by one minimum quoting increment ifsuch transactions are effected in connection with the simultaneous routing ofPIA Orders or Principal Orders4 to other Participants ofthe Plan that can execute against the full displayed size of all Participants that are disseminating a better price than CBOE. CBOE has requested that the exemption be granted through October 16,2009. Further, CBOE has represented that it would continue to financially support the OCC hub consistent with our contractual obligations with OCC for any time period that CBOE utilizes the hub. Response to Request for Exemption On the basis ofthe representations and facts presented in your letter, the Commission grants an exemption to CBOE from the requirement in Rule 608(c) ofRegulation NMS that CBOE comply, and enforce compliance by its members, with Section 5(a) ofthe Plan, provided that: (1) the transaction that constitutes a Trade-Through is at a price only one minimum quoting increment lower than a Protected Bid or one minimum increment higher than a Protected Offer; and (2) CBOE simultaneously routes a PIA or Principal Order that can execute against the full displayed size of all Participants that are disseminating a better price than CBOE. The Commission finds that it is consistent with the public interest, the protection of investors, the maintenance offair and orderly markets and the removal ofimpediments to, and 3 A "Trade-Through" is defined in Section 2(21) ofthe Plan as "a transaction in an options series, either as principal or agent, at a price that is lower than a Protected Bid or higher than a Protected Offer." 4 PIA Orders and Principal Orders are order types provided for by the Plan for the Purpose ofCreating and Operating an Intermarket Option Linkage. A PIA order is an order sent through the routing hub operated by the Options Clearing Corporation ("OCC Hub") on behalfof a non-broker-dealer customer. A Principal Order is an order sent through the OCC Hub for the principal account of an exchange market maker.

Mr. Edward 1. Joyce
August 28, 2009 perfection of the mechanisms of, a national market system to grant the exemption described above because it will help the Exchange ensure that an orderly transition is achieved on CBOE to the Plan's new structure without undennining the objectives ofthe Plan. This exemption is conditioned solely on the facts and representations presented in your letter. In the event that any material change occurs with respect to any ofthe facts or representations presented, the exemption will expire and CBOE must immediately resume operating in accordance with all provisions ofthe Plan. The exemption will otherwise expire on October 16,2009. For the Commission, by the Division of Market Regulation, pursuant to delegated authority,5 Er~t./~ Associate Director 17 CFR 200.30-3(a)(42). 5

Edward J. Joyce
President aM
Chief Operating Officer
CHICAGO BOARD OPTIONS EXCHANGE Phone: 312 786-7310 Fax: 312786-7407 joyce@cboe.com August 27, 2009 Elizabeth M. Murphy Secretary Securities and Exchange Commission 100 F Street, NE Washington, DC 20549 Re: Request under Rule 608(e) of Regulation NMS for a Temporary Exemption from Certain Provisions of the Options Order Protection and Locked/Crossed Market Plan Pursuant to Rule 608(e) of Regulation NMS under the Securities Exchange Act of 1934 ("Exchange Act"), the Chicago Board Options Exchange, Inc. ("CBOE" or "Exchange") requests that the Securities and Exchange Commission ("SEC" or "Commission") grant CBOE a limited exemption to Section 5(a) of the Options Order Protection and Locked/Crossed Market Plan (the "Plan" or "New Plan"). Commission's Exemptive Authority Rule 608(e) of Regulation NMS authorizes the Commission to Issue exemptions from the provisions ofRule 608. In particular, Rule 608(e) provides:
The Commission may exempt from the provisions of this section, either unconditionally or on specified terms and conditions, any self-regulatory organization. .. if the Commission determines that such exemption is consistent with the public interest, the protection of investors, the maintenance of fair and orderly markets and the removal of impediments to, and perfection of the mechanisms of, a national market system. 17 CFR 242.608(e). The Plan is an effective national market system plan pursuant to Rule 608 of Regulation NMS, and the Exchange is a participant in the Plan. Rule 608(e) of Regulation NMS authorizes the Commission to issue an exemption to the Exchange from Rule 608(c), which requires the Exchange to comply with and to enforce compliance by the Exchange's members with the terms of the Plan.1 1 Rule 608(c) requires each self-regulatory organization to "comply with the terms of any national market system plan of which it is a sponsor or a participant [, and] absent reasonable justification or excuse, enforce compliance with any such plans by its members." 17 CFR 242.608(c). 400 South LaSalle Street Chicago, Illinois 60605 www.cboe.com

Background
The Plan is a Commission approved national market system plan adopted by all of the current U.S. options exchanges (the "Participants") to provide a framework for order protection and locked and crossed market handling. The Plan replaces the Plan for the Purpose of Creating and Operating an Intermarket Option Linkage (the "Old Plan"). The Old Plan also provided a framework for addressing order protection and locked/crossed markets, but unlike the New Plan, the Old Plan utilized the Options Clearing Corporation as a "hub" for the transmission of linkage orders between exchanges. There are three types of linkage orders under the Old Plan, PIA Orders (orders sent on behalf of a non-broker dealer customer), P Orders (orders send for the principal account of an exchange market-maker), and Satisfaction Orders (orders reflecting the terms of an order resting on an exchange that was traded-through by another market). Under the New Plan, it is anticipated that Participants would access other Participants directly and not through a hub (i.e. through members that can provide "front-door" access). CBOE is a signatory to the New Plan, but in order to assure a controlled and orderly migration from the Old Plan to the New Plan, CBOE will continue to route PA and P orders to other Participants through the OCC hub for a limited period of time after CBOE and the other Participants have withdrawn from the Old Plan.· As soon as the New Plan is operational, CBOE will begin to accept Intermarket Sweep Orders ("ISOs") in all multiple-list classes as required by the New Plan. However, CBOE will not conduct a "big bang" transition to the New Plan in terms ofrouting ISOs to other Participants to access their better-price quotations. Instead, CBOE intends to initially use ISOs for outbound routing for a few option classes. Assuming CBOE's outbound ISO routing systems are functioning properly, the Exchange will transition to ISO routing for all remaining classes over a period of several weeks. Until the transition is complete, CBOE will route PA and P orders to other Participants (in classes that have not migrated to outbound ISO routing functionality) in accordance with CBOE's Temporary Rule 6.83 (Phase Out ofIntermarket Linkage Rules). The Exchange notes that all of the Participants are adopting temporary rules to accommodate the receipt of P and PA orders from Exchanges that have not fully transitioned to New Plan ISO routing functionality. Those P and PA orders would be processed consistent with the requirements of the Old Plan. Thus, there may be instances where CBOE routes a P or PA order to a Participant disseminating the NBBO concurrent with an execution at CBOE's non￾NBBO price. While this action would be deemed trade-through exempt under the Old Plan, it is not exempt under the New Plan because the New Plan does not contemplate the use ofP and PA orders. Provision of the Plan Requiring Exemption
Section 5(a) of the Plan, Order Protection, provides that each Participant shall establish,
maintain and enforce written policies and procedures that are reasonably designed to prevent Trade-Throughs in that Participant's market that do not fall within an exception set forth in
Section 5(b). While Section 5(b) contains many of the same exceptions as the exceptions in the
Old Plan, the routing ofPA and P orders is not listed.
2

Exemption Request
CBOE respectfully requests, pursuant to Rule 608(e) of Regulation NMS, relief from the requirement of Rule 608(c) of Regulation NMS that the Exchange comply with and enforce compliance by its members with the requirements of Section Sea) of the Plan for "trade-through" executions one minimum quoting increment inferior to the NBBO on CBOE that are effected in connection with the simultaneous routing of PA or P orders to other Participants that can execute against the full displayed size of all Participants that are disseminating a better price than CBOE (i.e. the NBBO). We request that the exemption be granted through October 16, 2009. We represent that we would continue to financially support the OCC hub consistent with our contractual obligations with OCC for any time period that CBOE utilizes the hub. The exemption of the Exchange request satisfies the requirements of Rule 608(e) of Regulation NMS, in that the exemption is consistent with the public interest, the protection of investors, the maintenance of fair and orderly markets and the removal of impediments to, and the perfection of the mechanisms of, a national market system. Specifically, the Exchange believes that such an exemption would help the Exchange ensure that an orderly transition is achieved on CBOE from the Old Plan order-routing structure to the New Plan structure without undermining the objectives ofthe New Plan. For the foregoing reasons, the Exchange respectfully requests that the Commission grant an exemption to the Exchange from Rule 608(c) of Regulation NMS, which requires the Exchange to comply with and enforce compliance with, section Sea) of the Plan, under the terms and conditions specified above. If you have any questions or concerns, please contact Angelo Evangelou at 312-786-7464. Sincerely, cc: David Liu Jennifer Colihan 3