[Federal Register Volume 77, Number 151 (Monday, August 6, 2012)]
[Notices]
[Pages 46783-46786]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-19144]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67548; File No. SR-CBOE-2012-049]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Adopt Four New Order Types on the CBOE Stock
Exchange
July 31, 2012.
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 July 24, 2012, Chicago Board Options Exchange, Incorporated
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to adopt four new order types on the CBOE
Stock Exchange (``CBSX''). The text of the proposed rule change is
available on the Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, 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 aspects 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 proposes to add four new order types to CBSX: silent
orders, silent-mid orders, silent-post-mid orders, and silent-mid-
seeker orders.
A silent order is an order that is not displayed publicly on the
CBSX Book but is to be executed at the National Best Bid (``NBB'') (for
a ``buy'' order) or National Best Offer (``NBO'') (for a ``sell''
order). A silent order is an order with an optional contingency price
which will indicate the highest price that a buyer is willing to pay or
the lowest price at which a seller is willing to accept (such
contingency price to be in $0.01 (full penny) increments only). If NBB
is higher than this contingency price for a Buy order, or the NBO is
lower than this contingency price for a Sell, Sell Short, or Sell Short
Exempt order, the order, or remainder of the order, will be canceled
prior to trading. The reason that the order, or remainder of the order,
will be canceled prior to trading (as opposed to upon entry) in these
circumstances is because it is possible that, when an order comes in,
the NBB is lower than the contingency price (for a Buy order), but the
order doesn't trade because there is not interest to trade with, and
then the NBB moves to a point at which it is higher than the
contingency price (at which point the order would cancel). The reverse
would be true for Sell, Sell Short, or Sell Short Exempt orders.
A silent order may trade with any other type of order and is to
execute following the execution of any displayed orders at the National
Best Bid and Offer (``NBBO'') (if there are any displayed orders at the
NBBO) and has a higher trading priority than All or None orders. A
silent order will never be routed to an away market. When the NBBO is
locked or crossed, a silent order will never trade, but instead rest on
the CBSX Book and remain eligible to trade once the NBBO is no longer
locked or crossed.
The following examples will explain how silent orders will trade on
CBSX:
Consider, in example 1, a situation in which the NBBO is quoting at
$1.01--$1.02, while CBSX is quoting $0.99-$1.02. A 100-lot silent order
comes in to sell at the market, and rests behind a displayed 100-lot
order to sell at $1.02 in the CBSX Book. A 500-lot order to buy at
$1.02 comes in, and first trades with the displayed 100-lot order to
sell at $1.02. Since there are no more displayed orders to sell at or
better than $1.02, and $1.02 is at the NBBO, the silent order would
then trade with the next 100 contracts in the 500-lot buy order. The
remaining 300 lots of the buy order would be routed to the away
exchange displaying the NBBO.
Consider now, in example 2, a situation in which the NBBO is once
again quoting at $1.01--$1.02, while CBSX is quoting $0.99-$1.02.
Again, a 100-lot silent order comes in to sell at the market, and rests
behind a displayed 100-lot order to sell at $1.02 in the CBSX Book. A
100-lot buy order comes in at $1.02. This buy order would trade with
the displayed 100-lot order to sell at $1.02, causing the CBSX market
to move to $0.99-$1.03. The silent order would continue to rest while
waiting for the opportunity to trade at the National Best Offer. If the
NBO becomes $1.03, the silent order can then trade with any incoming
orders to buy at $1.03 after any resting displayed orders to sell at
$1.03 have already traded.
In this third example, consider a situation in which the NBBO is
quoting at $1.00-$1.01 and CBSX is quoting at $0.99-$1.02. A 100-lot
silent order comes in to buy at the market. A 10,000-lot Intermarket
Sweep Order (``ISO'') comes in to sell at $0.99. The silent order would
trade first at $1.00, since that is the NBBO, regardless of the fact
that there are no current CBSX displayed orders at the NBBO. The
remainder of the ISO trades against CBSX $0.99 orders until volume is
[[Page 46784]]
exhausted and any remainder is canceled.
A silent-mid order is an order that is not displayed publicly on
the CBSX Book but is to be executed at the mid-point between the NBBO.
A silent-mid order is an order with an optional contingency price which
will indicate the highest price that a buyer is willing to pay or the
lowest price at which a seller is willing to accept. A silent-mid order
may trade in $0.005 increments if priced at or above $1 and $0.0001
increments if priced below $1. If the mid-point between the NBBO is not
at a tradable increment, CBSX will round down to the nearest tradable
increment. If the mid-point of the NBBO is higher than this contingency
price for a Buy order or is lower than this contingency price for a
Sell, Sell Short, or Sell Short Exempt order, the order, or remainder
of the order, will be canceled prior to trading. The reason that the
order, or remainder of the order, will be canceled prior to trading (as
opposed to upon entry) in these circumstances is because it is possible
that, when an order comes in, the mid-point of the NBBO is lower than
the contingency price (for a Buy order), but the order doesn't trade
because there is not interest to trade with, and then the mid-point of
the NBBO moves to a point at which it is higher than the contingency
price (at which point the order would cancel). The reverse would be
true for Sell, Sell Short, or Sell Short Exempt orders.
A silent-mid order may trade with any other type of order and is to
execute following the execution of any displayed orders at the NBBO (if
there are any displayed orders at the NBBO) and has a higher trading
priority than All or None orders and Silent-Post-Mid orders. A silent-
mid order will never be routed to an away market. When the NBBO is
locked or crossed, a silent-mid order will never trade, but instead
rest on the CBSX Book and remain eligible to trade once the NBBO is no
longer locked or crossed.
For example, consider a situation in which the NBBO is $13.00--
$14.00, and a 1,000-lot silent-mid buy order comes to CBSX. That order
rests undisplayed. Then a 500-lot order to sell at $13.00 comes in. The
silent-mid order will trade 500 contracts with that sell order at
$13.50. The remaining 500 contracts of the silent-mid order would
continue to rest undisplayed.
A silent-post-mid order is an order that is not displayed publicly
on the CBSX Book but is to be executed at the mid-point between the
NBBO. A silent-post-mid order is an order with an optional contingency
price which will indicate the highest price that a buyer is willing to
pay or the lowest price at which a seller is willing to accept. A
silent-post-mid order may trade in $0.005 increments if priced at or
above $1 and $0.0001 increments if priced below $1. If the mid-point
between the NBBO is not at a tradable increment, CBSX will round down
to the nearest tradable increment. If a silent-post-mid order is to
trade upon its arrival into the system (thereby ``removing''
liquidity), it will not trade, but instead rest until another order
comes in for it to trade against. If the mid-point of the NBBO is
higher than this contingency price for a Buy order or is lower than
this contingency price for a Sell, Sell Short, or Sell Short Exempt
order, the order, or remainder of the order, will be canceled prior to
trading. The reason that the order, or remainder of the order, will be
canceled prior to trading (as opposed to upon entry) in these
circumstances is because it is possible that, when an order comes in,
the mid-point of the NBBO is lower than the contingency price (for a
Buy order), but the order doesn't trade because there is not interest
to trade with, and then the mid-point of the NBBO moves to a point at
which it is higher than the contingency price (at which point the order
would cancel). The reverse would be true for Sell, Sell Short, or Sell
Short Exempt orders.
A silent-post-mid order may trade with any other type of order and
is to execute following the execution of any displayed orders at the
NBBO (if there are any displayed orders at the NBBO) and has a higher
trading priority than All or None orders but a lower priority than
Silent-Mid orders. A silent-post-mid order will never be routed to an
away market. When the NBBO is locked or crossed, a silent-post-mid
order will never trade, but instead rest on the CBSX Book and remain
eligible to trade once the NBBO is no longer locked or crossed. For
example, consider a situation in which the NBBO is $13.00--$14.00, and
500-lot silent-mid order to sell rests on the CBSX Book. A 500-lot
silent-post-mid buy order comes in. That order will not trade with the
resting silent-mid sell order because the silent-post-mid buy order
would be taking liquidity. Instead, the silent-post-mid buy order will
rest on the CBSX Book until another sell order comes in for it to trade
against, and the silent-mid sell order will do the same.
A silent-mid-seeker order is a take-only order that will never rest
in the CBSX Book and is to be executed only at the mid-point between
the NBBO. A silent-mid-seeker order may trade in $0.005 increments if
priced at or above $1 and $0.0001 increments if priced below $1. If the
mid-point between the NBBO is not at a tradable increment, CBSX will
round down to the nearest tradable increment. If, upon the entry of a
silent-mid-seeker order, there is undisplayed interest resting on the
CBSX Book at the mid-point between the NBBO, the silent-mid-seeker
order will interact with this interest. If the undisplayed resting
interest is for a greater quantity than the silent-mid-seeker order,
the silent-mid-seeker order will trade with the undisplayed resting
interest up to the quantity of the silent-mid-seeker order, and the
remainder of the undisplayed interest will remain resting on the CBSX
Book. If the undisplayed resting interest is for a smaller quantity
than the silent-mid-seeker order, the silent-mid-seeker order will
trade with the undisplayed resting interest up to the quantity of the
undisplayed resting interest, and the remainder of the silent-mid-
seeker order will be canceled. If there is no undisplayed resting
interest at the midpoint of the NBBO, the silent-mid-seeker order will
be canceled. A silent-mid-seeker order will never be routed to an away
market. When the NBBO is locked or crossed, a silent-mid-seeker order
will be canceled. For example, consider a situation in which the NBBO
is $13.00--$14.00, and 500-lot silent-mid order to sell rests on the
CBSX Book. A 500-lot silent-mid-seeker buy order comes in. That order
will trade with the resting silent-mid sell order.
Consider another example in which the NBBO is $13.00--$14.00, and
no orders rest at the midpoint of the NBBO on the CBSX Book. A silent-
mid-seeker order comes in. Because no orders rest at the midpoint of
the NBBO on the CBSX Book, the silent-mid-seeker order would not rest
on the CBSX Book, but instead be canceled.
The four new proposed order types are similar to Pegged Orders and
Mid-Point Pegged Orders that may be entered on BATS Exchange, Inc.
(``BATS'').\3\ Like the four new CBSX order types, the Pegged and Mid-
Point Pegged Orders are not displayed publicly,\4\ have a lower
priority than displayed orders,\5\ and are never routed to away
markets.\6\ Like silent orders, Primary Pegged Orders are executed at
the NBB (for a ``buy'' order) or the NBO (for a ``sell''
[[Page 46785]]
order) \7\ and also provide the user the option to enter such orders
with or without a limit (contingency) price.\8\ Like silent-mid orders,
Mid-Point Peg Orders are executed at the mid-point of the NBBO.\9\ Like
silent-post-mid orders, Mid-Point Peg Orders can be designated to only
add liquidity and not trade if they are to take liquidity.\10\ Like
silent-mid-seeker orders, Mid-Point Peg Orders can be designated to
immediately cancel if there is no resting interest at the midpoint of
the NBBO.\11\
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\3\ See BATS Rules 11.9(c)(8)-(9). On BATS, various different
types of orders and modifiers may be combined into one order.
Explanations of different order types and the ways they operate can
be found at http://batstrading.com/resources/features/bats_exchange_definitions.pdf (the ``BATS Order Description Sheet'').
\4\ See BATS Rules 11.9(c)(8)-(9).
\5\ See BATS Rules 11.9(c)(8)-(9) and 11.12(a)(2).
\6\ See BATS Rules 11.9(c)(8)-(9).
\7\ See BATS Rule 11.9(c)(8).
\8\ See BATS Rule 11.9(c)(8), which states that Pegged Orders
can be specified that the order's price will either be inferior to
or equal the inside quote by an amount set by the entering party on
the same side of the market.
\9\ See BATS Rule 11.9(c)(9).
\10\ See BATS Order Description Sheet, which states that pegged
orders can be designated ``Add Liquidity Only'' and BATS Rule
11.9(c)(6), which states that the BATS Post Only Order ``will not
remove liquidity from the BATS book.''
\11\ See BATS Order Description Sheet, which states that
``midpoint orders can have a time in force (TIF) of immediate or
cancel (IOC)'' and BATS Rule 11.9(b)(1) which states that limit
orders can have the time-in-force of ``Immediate-or-Cancel.''
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While there are differences between the CBSX's four new proposed
order types and the BATS Pegged and Mid-Point Pegged Orders, these
differences are not substantive. CBSX uses different terminology than
BATS to describe these order types because the proposed language is
consistent with other language used in the CBSX rules and because CBSX
believes that the proposed language is clearer and more descriptive.
Another difference is that, while the BATS orders optionally allow for
the pegging of the order price to be offset from the opposite side of
the NBBO from the order, the proposed CBSX order types are more
restrictive in only permitting the pegging of the order on either the
bid (for buy orders), offer (for sell orders) or midpoint (due to
system reasons).
One further difference is that, whereas BATS automatically adjusts
the price of a Pegged or Mid-Point Peg Order in response to changes in
the NBBO,\12\ the CBSX System is not enabled to make such adjustments
each time the NBBO changes. However, the CBSX System will adjust the
price of resting silent, silent-mid and silent-post-mid orders prior to
effecting any transaction involving such orders. As such, the same
execution price would result as would if the price of such orders had
been adjusted in response to each change in the NBBO.
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\12\ See BATS Rules 11.9(c)(8)-(9).
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Finally, whereas BATS creates a new timestamp for Pegged and Mid-
Point Pegged Orders each time the orders are automatically
adjusted,\13\ the CBSX System prohibits the creation of such
timestamps. However, CBSX maintains market data that allows CBSX to
create an accurate history of any adjustments in price to the order,
thereby functionally achieving the same goal as occurs on BATS. As
such, orders will maintain their original timestamps as provided when
the order came in and will receive priority, in regards to other
undisplayed orders, based on the time at which they originally came in.
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\13\ See BATS Rules 11.9(c)(8)-(9).
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The Exchange believes that the addition of these new order types
will enhance order execution opportunities on CBSX and should help
provide market participants with flexibility in executing transactions
that meet the specific requirements of the order type. The silent
order, silent-mid order, silent-post-mid order and silent-mid-seeker
order will allow for additional opportunities for liquidity providers
to passively interact with interest on the CBSX Book.
Once the CBSX System is so enabled to permit the use of the silent
order, silent-mid order, silent-post-mid order and silent-mid-seeker
order, and such use has been appropriately tested, CBSX intends to
announce the availability of the silent order, silent-mid order,
silent-post-mid order and silent-mid-seeker order to the CBSX Traders
via Regulatory Circular prior to the implementation of the silent
order, silent-mid order, silent-post-mid order and silent-mid-seeker
order.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act \14\ and the rules and regulations thereunder and, in
particular, the requirements of Section 6(b) of the Act.\15\
Specifically, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \16\ requirements that the rules of
an exchange be designed to promote just and equitable principles of
trade, to prevent fraudulent and manipulative acts, to remove
impediments to and to perfect the mechanism for a free and open market
and a national market system, and, in general, to protect investors and
the public interest by providing new order execution opportunities,
similar to those available on other exchanges, to CBSX market
participants. Silent orders perfect the mechanism for a free and open
market by providing investors the opportunity to enter an order that is
not displayed publicly but is to be executed at the NBB (for a ``buy''
order) or NBO (for a ``sell'' order). Silent-mid orders perfect the
mechanism for a free and open market by providing investors the
opportunity to enter an order that is not displayed publicly but is to
be executed at the mid-point between the NBBO. Silent-post-mid orders
perfect the mechanism for a free and open market by providing investors
the opportunity to enter an order that is not displayed publicly but is
to be executed at the mid-point between the NBBO and only add
liquidity. Silent-mid-seeker orders perfect the mechanism for a free
and open market by providing investors the opportunity to enter an
order that is not displayed publicly but is to be executed at the mid-
point between the NBBO and only take liquidity. Also, all four new
order types are similar to order types already offered on BATS.
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\14\ 15 U.S.C. 78s(b)(1).
\15\ 15 U.S.C. 78f(b).
\16\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
CBOE 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.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
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) \17\ of the Act and
Rule 19b-4(f)(6) \18\ thereunder.
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\17\ 15 U.S.C. 78s(b)(3)(A).
\18\ 17 CFR 240.19b-4(f)(6).
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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.
[[Page 46786]]
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 Exchange 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 protected]. Please include
File Number SR-CBOE-2012-049 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2012-049. 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
a.m. and 3 p.m. Copies of the 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-2012-049 and should be
submitted on or before August 27, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-19144 Filed 8-3-12; 8:45 am]
BILLING CODE 8011-01-P