[Federal Register Volume 77, Number 114 (Wednesday, June 13, 2012)]
[Notices]
[Pages 35448-35450]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-14335]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67152; File No. SR-CBOE-2012-013]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Granting Approval of a Proposed Rule Change To
Adopt Self-Trade Prevention Modifiers on the CBOE Stock Exchange
June 7, 2012.
I. Introduction
On April 12, 2012, 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 to adopt Self-Trade Prevention
modifiers on the CBOE Stock Exchange (``CBSX''). The proposed rule
change was published for comment in the Federal Register on May 1,
2012.\3\ The Commission received no comment letters on the proposed
rule change.
[[Page 35449]]
This order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 66860 (April 25,
2012), 77 FR 25767 (``Notice'').
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II. Description of the Proposal
The Exchange proposes to adopt Cancel Newest, Cancel Oldest, and
Cancel Both Self-Trade Prevention modifiers on CBSX. As proposed, a
CBSX trader may elect for none, or all, of his proprietary orders and
quotes to be marked with one of these types of Self-Trade Prevention
modifiers.\4\ If a CBSX trader makes an election, any quote or order he
submits will be prevented from executing against a resting opposite
side order or quote that is labeled as originating from the same
associated acronym and trading for the same account (``Same CBSX
Trader'').
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\4\ According to the Exchange, a CBSX trader may only elect for
one of the three types of Self-Trade Prevention modifiers, as the
CBSX system may only be configured to permit one such election. In
addition, Self-Trade Prevention elections cannot be made on a per-
order, per-quote, or security-by-security basis due to CBSX system
limitations.
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If a CBSX trader elects the Cancel Newest Self-Trade Prevention
modifier, any incoming order or quote submitted by that CBSX trader
will not execute against opposite side resting interest from the Same
CBSX Trader. The incoming order or quote (or any portion thereof) will
be canceled back to the originating CBSX trader if such order or quote
cannot trade with another eligible order or quote originating from any
origin other than the Same CBSX Trader (``Another CBSX Trader''). The
incoming order or quote may only trade with an eligible order or quote
originating from Another CBSX Trader if the order or quote originating
from Another CBSX Trader is at as good a price as the order or quote
from the Same CBSX Trader that is being ``skipped over.'' The resting
order or quote from the Same CBSX Trader will remain on the book. In
the case of an opening or re-opening, the newer of the two orders or
quotes submitted by the Same CBSX Trader will be canceled. The older
order or quote will be permitted to trade with eligible orders or
quotes originating from Another CBSX Trader, and any remaining portion
thereof will remain in the book.\5\
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\5\ The Exchange notes that orders marked with Self-Trade
Prevention modifiers will be treated differently during openings and
re-openings because of system limitations. The CBSX system cannot
process orders marked with Self-Trade Prevention modifiers in the
same manner during openings and re-openings as during regular
trading.
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If a CBSX trader elects the Cancel Oldest Self-Trade Prevention
modifier, any incoming order or quote submitted by that CBSX trader
will not execute against opposite side resting interest from the Same
CBSX Trader. When a CBSX trader submits an incoming order or quote that
would trade against opposite side resting interest from the Same CBSX
Trader, the opposite side resting interest will be canceled. The
incoming order or quote will be eligible to trade with another eligible
order or quote originating from Another CBSX Trader. If any portion of
the incoming order or quote does not trade with another eligible order
or quote originating from Another CBSX Trader, it will be entered into
the book. In the case of an opening or re-opening, the older of the two
orders or quotes submitted by the Same CBSX Trader will be canceled.
The newer order or quote will be permitted to trade with eligible
orders or quotes originating from Another CBSX Trader, and any
remaining portion thereof will be entered into the book.\6\
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\6\ See id.
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If a CBSX trader elects the Cancel Both Self-Trade Prevention
modifier, any incoming order or quote submitted by that CBSX trader
will not execute against opposite side resting interest from the Same
CBSX Trader. When a CBSX trader submits an incoming order or quote that
would trade against opposite side resting interest from the Same CBSX
Trader, the opposite side resting interest will be canceled. The
incoming order or quote (or any portion thereof) will be canceled back
to the Same CBSX Trader if such order or quote (or part of such order
or quote) cannot trade with another eligible order or quote originating
from Another CBSX Trader. In the case of an opening or re-opening, both
of the two orders or quotes will be canceled.\7\
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\7\ See id.
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Under the proposed Self-Trade Prevention modifier rules, orders or
quotes may skip over orders or quotes from the Same CBSX Trader and
trade against eligible orders or quotes with lower priority that
originate from Another CBSX Trader, provided the prices are the same.
Therefore, the Exchange proposes to add Interpretations and Policies
.01 to Rule 52.1, Matching Algorithm/Priority, to provide that in
instances in which the Self-Trade Prevention modifiers are implicated,
the Self-Trade Prevention modifier rules will supersede other
allocation methods only for the purpose of preventing self-trades, as
described in the proposed Self-Trade Prevention modifier rule.
Finally, CBSX Rule 51.8(t) provides for a Market-Maker Trade
Prevention Order which, if combined with a Self-Trade Prevention
modifier, could cause a conflict in order handling. Thus, the Exchange
proposes that, in circumstances where both the Market-Maker Trade
Prevention Order and a Self-Trade Prevention modifier are implicated,
the Self-Trade Prevention modifier shall take precedence.
Once the CBSX system is enabled to permit the use of Self-Trade
Prevention modifiers, and prior to their implementation, CBSX will
announce the availability of Self-Trade Prevention modifiers to CBSX
traders via Regulatory Circular.
III. Discussion and Commission Findings
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange.\8\
Specifically, the Commission finds that the proposed rule change is
consistent with Section 6(b)(5) of the Act,\9\ which requires, among
other things, that the rules of a national securities exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system and, in general, to protect investors and the public
interest.
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\8\ 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).
\9\ 15 U.S.C. 78f(b)(5).
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Self-Trade Prevention modifiers for proprietary orders and quotes
of CBSX traders are, according to the Exchange, designed to prevent a
market participant from unintentionally causing a proprietary self-
trade. As such, Self-Trade Prevention modifiers could provide firms
with the opportunity to better manage order flow and prevent
undesirable self-executions and the potential for, or appearance of,
``wash sales.'' \10\ The Exchange further notes that Self-Trade
Prevention modifiers may reduce false positive results on Exchange-
generated wash trading surveillance reports when orders are executed by
the Same CBSX Trader, which would increase regulatory efficiency.
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\10\ CBSX traders may have multiple connections into CBSX, and
orders routed by the same CBSX trader via different connections may,
in certain circumstances, trade against each other. The proposed
Self-Trade Prevention modifiers could provide CBSX traders the
opportunity to prevent these potentially undesirable trades. See
Notice, 77 FR at 25769.
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The proposed Self-Trade Prevention modifier rules will apply to
orders and quotes because the Exchange believes
[[Page 35450]]
the application of these rules to quotes, as well as orders, would
allow the modifiers to be used in a more complete, comprehensive, and
consistent manner.\11\ The Commission finds that this is reasonable and
consistent with the Act. In addition, the Exchange states that it chose
to limit Self-Trade Prevention modifiers to proprietary orders and
quotes.\12\ This would allow agency orders for the Same CBSX Trader,
which may actually be for different customers, to continue to trade
with each other.
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\11\ Other exchanges apply similar modifiers to orders only.
See, e.g., NYSE Arca Equities Rule 7.31(qq); BATS Rule 11.9(f).
\12\ Other exchanges do not specify that their modifiers are
limited to proprietary orders. See id.
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The Commission also believes that the aspect of the proposal which
would add Interpretations and Policies .01 to Rule 52.1 to provide that
in circumstances where Self-Trade Prevention modifiers are implicated,
the Self-Trade Prevention modifier rules will supersede other
allocation methods only for the purpose of preventing self-trades is
consistent with the Act. In addition, the Commission believes that the
proposal to amend Rule 51.8(t) to provide that in circumstances in
which both the Market-Maker Trade Prevention Order and a Self-Trade
Prevention modifier are implicated, the Self-Trade Prevention modifier
shall take precedence is consistent with the Act. The Commission
believes that these amendments would clarify the application of the
proposed Self-Trade Prevention modifier rules to existing CBSX rules.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule change (SR-CBOE-2012-013) be, and
hereby is, approved.
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\13\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-14335 Filed 6-12-12; 8:45 am]
BILLING CODE 8011-01-P