The Chicago Board Options Exchange, Incorporated (CBOE) has filed a proposed rule change to amend its rules regarding the application of participation entitlements to orders executed electronically on the CBOE Hybrid Trading System (Hybrid System). Current CBOE Rules 6.45A and 6.45B govern priority and allocation of trades on the Hybrid System for equity options and index/ETF options, respectively. The first step in creating an allocation structure is to select a base matching algorithm. After a base matching algorithm is selected, the CBOE may utilize optional priority overlays that would be applied on a trade before the matching algorithm was used to allocate an order.
The proposed rule change would allow for more than one participation entitlement to be activated for an option class, including in different priority sequences, provided that no more than one entitlement could be applied on any given trade. Thus, the CBOE could set up an allocation structure that contemplates using both the Preferred Market-Maker entitlement and the Designated Primary Market-Makers or Lead Market-Makers entitlement with different priority positions.