Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the “Act”),
The Exchange proposes to amend its Rules relating to continuous electronic quotes. The text of the proposed rule change is available on the Exchange's Web site (
In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.
The purpose of the proposed rule change is to amend Rule 1.1(ccc), “Continuous Electronic Quotes,” to reduce to 90% the percentage of time for which a Market-Maker is required to provide electronic quotes in an appointed option class on a given trading day. Additionally, the proposed rule change amends Rules 8.13, 8.15A, 8.85 and 8.93 to increase to the lesser of 99% or 100% minus one call-put pair the percentage of series in each class in which Preferred Market-Makers (“PMMs”), LMMs, Designated Primary Market-Makers (“DPMs”), and electronic DPMs (“e-DPMs”), respectively (Market-Makers, PMMs, LMMs, DPMs and e-DPMs are collectively referred to in this filing as “Market-Makers” unless the context provides otherwise), must provide continuous electronic quotes. The proposed rule change is comparable to the rules of other options exchanges applicable to equivalent market participants.
The continuous quoting obligations for NYSE Amex LLC (“NYSE Amex”) and NYSE Arca, Inc. (“NYSE Arca”) directed order market-makers and PHLX directed SQTs and RSQTs (similar to PMMs) are as follows: (1) NYSE Amex Options Rules 964.1NY—directed order market-makers must provide continuous two-sided quotations throughout the trading day in issues for which it receives directed orders for 90% of the time NYSE Amex is open for trading in each issue (applies to all of the directed order market-maker's appointed issues collectively); (2) NYSE Arca Options Rules 6.88—directed order market-makers must provide continuous two-sided quotations throughout the trading day in issues for which it receives directed orders for 90% of the time NYSE Arca is open for trading in each issue (applies to all of the directed order market-maker's appointed issues collectively); and (3) PHLX Rule 1014(b)(ii)(D)(1)—directed SQTs and RSQTs must quote two-sided markets in the lesser of 99% of series listed on the exchange or 100% of the series listed on the exchange minus one call-put pair, in each case in at least 60% of the options classes in which they are assigned for at least 90% of the trading day (as a percentage of the total number of minutes in such trading day); once they enter a quote in an assigned class, they must maintain until the close of that trading day quotations for the lesser of 99% of the series of the option listed on the Exchange or 100% of the series of the option listed on the Exchange minus one call-put pair.
The continuous quoting obligations for NYSE Amex and PHLX specialists and NYSE Arca lead market-makers (similar to LMMs, DPMs and e-DPMs) are as follows: (1) NYSE Amex Options Rules 925.1NY—specialists must provide continuous two-sided quotations throughout the trading day in its appointed issues for 90% of the time NYSE Amex is open for trading in each issue (applies to all of the specialist's appointed issues collectively); (2) NYSE Arca Options Rules 6.37B—lead market-makers must provide continuous two-sided quotations throughout the trading day in its appointed issues for 90% of the time NYSE Arca is open for trading in each issue (applies to all of the lead market-maker's appointed issues collectively); and (3) PHLX Rule 1014(b)(ii)(D)(1)—specialists are responsible to quote two-sided markets in the lesser of 99% of the series or 100% of the series minus one call-put pair in each option in which such specialist is assigned for 90% of the trading day (as a percentage of the total number of minutes in such trading day).
Rules 8.7, 8.13, 8.15A, 8.85, and 8.93 impose certain obligations on Market-Makers, PMMs, LMMs, DPMs, and e-DPMs, respectively. These Rules require that Market-Makers generally maintain continuous electronic quotes as follows:
• Rule 8.7(d)(ii)(B) requires that Market-Makers provide continuous electronic quotes when quoting in a particular class on a given trading day in 60% of the non-adjusted option series of the Market-Maker's appointed class that have a time to expiration of less than nine months;
• Rule 8.13(d) requires that PMMs provide continuous electronic quotes when the Exchange is open for trading in at least 90% of the non-adjusted option series of each class for which it receives Preferred Market-Maker orders;
• Rule 8.15A(b)(i) requires that LMMs provide continuous electronic quotes when the Exchange is open for trading in at least 90% of the non-adjusted option series within their assigned classes;
• Rule 8.85(a)(i) requires DPMs to provide continuous electronic quotes when the Exchange is open for trading in at least 90% of the non-adjusted option series of each multiply listed option class allocated to it and in 100% of the non-adjusted option series of each singly listed option class allocated to it; and
• Rule 8.93 requires e-DPMs to provide continuous electronic quotes when the Exchange is open for trading in at least 90% of the non-adjusted option series of each allocated class.
Rule 1.1(ccc) currently provides that a Market-Maker who is obligated by CBOE Rules to provide continuous electronic quotes will be deemed to have provided “continuous electronic quotes” if the Market-Maker provides electronic two-sided quotes for 99% of the time that the Market-Maker is required to provide electronic quotes in an appointed option class on a given trading day. The rule also provides that if a technical failure or limitation of a system of the Exchange prevents the Market-Maker from maintaining, or from communicating to the Exchange, timely and accurate electronic quotes in a class, the duration of such failure will not be considered in determining whether the Market-Maker has satisfied the 99% quoting standard with respect to that option class. The Exchange may consider other exceptions to this continuous electronic quote obligation based on demonstrated legal or regulatory requirements or other mitigating circumstances.
The Exchange proposes to amend the definition of continuous electronic quotes to mean 90% of the time a Market-Maker is required to quote in an appointed option class on a given trading day. The rule will still provide for automatic exceptions for technical failures or system limitations and discretionary exceptions based on demonstrated legal or regulatory requirements or other mitigating circumstances.
The Exchange also proposes to increase the percentage of series in each option class in which PMMs, LMMs, DPMs and e-DPMs are required to provide continuous electronic quotes. The proposed rule change amends: (i) Rule 8.13(d) to require PMMs to provide
The proposed rule change also makes additional changes to create consistency among the continuous quoting obligations for all CBOE Market-Makers. The proposed rule change eliminates the separate quoting requirements for DPMs in singly listed and multiply listed classes. This will cause the quoting obligation for multiply listed classes to increase from 90% to 99% of the series and for singly listed classes to decrease slightly from 100% to 99%. The Exchange believes that is no longer necessary to have a separate, slightly higher requirement for singly listed classes given the increase in the obligation for multiply listed series. The proposed rule change also deletes the requirement that e-DPMs will alternatively be required to respond to 98% of the requests for quotes (“RFQs”) if the Exchange has enabled RFQ functionality in a class. The Exchange never enabled the RFQ functionality in any class for e-DPMs, and it is no longer available. Therefore, the Exchange believes it is appropriate to delete this provision from the e-DPM rules.
The Exchange does not believe that the proposed rule change would adversely affect the quality of the Exchange's markets or lead to a material decrease in liquidity. Rather, the Exchange believes that its current market structure with its high rate of participation by Market-Makers permits the lowering of the quoting time obligation without fear of losing liquidity. Market-Makers will continue to be required to provide continuous electronic quotes in 60% of each allocated class. Additionally, for PMMs, LMMs, DPMs and e-DPMS, the proposed reduction in required quoting time will be offset by the increase in percentage of series in each appointed class in which PMMs, LMMs, DPMs and e-DPMs are required to provide continuous electronic quotes. The proposed rule change to require PMMs, LMMs, DPMs and e-DPMs to quote in the lesser of 99% of the series or 100% of the series minus one call-put pair in each class provides flexibility in assignments that contain relatively fewer series and avoids situations when failure to quote 90% of the trading day in merely one individual option or one pair breaches the quoting requirement.
The Exchange Rules also impose a number of other obligations on Market-Makers that will continue to ensure that they create and maintain a fair and orderly market in the option classes to which they are assigned. The proposed rule change would not excuse a Market-Maker that is present on the trading floor from its obligation to provide a two-sided market complying with the bid/ask differential requirements in response to any request for quote by a floor broker, Trading Permit Holder or PAR Official.
In support of this proposal, the Exchange notes that other competing options exchanges impose continuous quoting obligations on their market participants that have equivalent rights and obligations as Market-Makers, PMMs, LMMs, DPMs and e-DPMs that are comparable to the obligations proposed in this filing:
As the above tables show, there are slight differences among the quoting obligations of these exchanges, including differences in the application of these obligations to appointed option classes collectively or on a class-by-class basis and slight differences in the percentages of series of appointed classes in which market-makers must provide continuous electronic quotes. However, the Exchange believes that despite these slight variations, upon effectiveness of the proposed rule change, Market-Makers will be required to provide continuous electronic quotes for the same amount of time in the same or a substantially similar percentage of series as market-makers at these other exchanges.
To demonstrate this point, consider a Market-Maker with 10 appointed classes, each of which has 50 series, for a total of 500 series, quoting in each class during a regular 390-minute trading day.
The following table shows the “minimum total quoting minutes” of CBOE PMMs, NYSE Amex and NYSE Arca directed order market-makers, and PHLX directed SQTs and RSQTs (assuming effectiveness of
The following table shows the “minimum total quoting minutes” of CBOE LMMs/DPMs/e-DPMs, NYSE Amex specialists, NYSE Arca lead market-makers, and PHLX specialists (assuming effectiveness of the proposed
As the above example demonstrates, upon effectiveness of the proposed rule change, the minimum quoting minutes for Market-Makers will be the same as those of NOM market-makers and PHLX SQTs and RSQTs.
The Exchange believes this proposal will make the quoting time requirements of Market-Makers more comparable to those at other options exchanges and is therefore essential for competitive purposes. CBOE believes it is disadvantageous to CBOE Market-Makers if they are subject to stricter timing requirements with respect to their continuous quoting obligations than market-makers at other options exchanges.
The Exchange believes the proposed rule change is consistent with the Act and the rules and regulations thereunder applicable to the Exchange and, in particular, the requirements of Section 6(b) of the Act.
In particular, the Exchange believes this proposed rule change promotes just and equitable principles of trade because it reduces burdens and unnecessary restrictiveness on Market-Makers. The Exchange still imposes many obligations on Market-Makers to maintain a fair and orderly market in their appointed classes, which the Exchange believes eliminates the risk of a material decrease in liquidity. While the time during which Market-Makers must provide continuous electronic quotes will be slightly reduced, Market-Makers will still be obligated to provide continuous electronic quotes for a significant part of the trading day in 60% of series of each appointed class. PMMs, LMMs, DPMs and e-DPMs will be obligated to provide continuous electronic quotes for a significant part of the trading date in an increased percentage (99% or 100% minus one call-put pair) of series of each appointed class. Additionally, all Market-Makers will continue to be obligated to quote the series when requested by a floor broker, Trading Permit Holder or PAR Official, or if the need otherwise arises.
Accordingly, the proposal supports the quality of CBOE's markets by helping to ensure that Market-Makers will continue to be obligated to quote in series when necessary. With respect to PMMs, LMMs, DPMs and e-DPMs, the benefit provided to these Market-Makers from the proposed reduction in required quoting time is offset by the proposed increased in required percentage of series in which these Market-Makers must provide continuous electronic quotes. Ultimately, the benefits the
The proposed rule change also protects investors and the public interest by creating more uniformity and consistency among the Exchange's rules related to Market-Maker quoting obligations and deleting a provision regarding functionality that is no longer used by the Exchange.
Finally, the proposed rule change allows the Exchange to require its Market-Makers to provide continuous quotes in a percentage of series in their appointed classes for a portion of the trading day that is the same as that of market-makers at other exchanges, which the Exchange believes will ultimately make the Exchange more competitive and help remove impediments to and promote a free and open market.
For the foregoing reasons, the Exchange believes that the balance between the benefits provided to Market-Makers and the obligations imposed upon Market-Makers by the proposed rule change is appropriate.
CBOE does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. In this regard and as indicated above, the Exchange notes that the proposed rule change is comparable to current rules at competing options exchanges related to market-maker continuous quoting obligations
The Exchange neither solicited nor received comments on the proposed rule change.
Because the foregoing proposed rule change does not:
A. Significantly affect the protection of investors or the public interest;
B. Impose any significant burden on competition; and
C. Become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A)
At any time within 60 days of the filing of this proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
• Use the Commission's Internet comment form (
• Send an email to
• Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.