[Federal Register Volume 78, Number 7 (Thursday, January 10, 2013)]
[Notices]
[Pages 2308-2310]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-00308]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68585; File No. SR-CBOE-2012-108]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Approving a Proposed Rule Change To Address the
Authority To Cancel Orders When a Technical or Systems Issue Occurs and
To Describe the Operation of Routing Service Error Accounts
January 4, 2013.
I. Introduction
On November 8, 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 (i) address the authority of
the Exchange to cancel orders (or release routing-related orders) when
a technical or systems issue occurs; and (ii) describe the operation of
an Exchange error account(s) and routing broker error account(s), which
may be used to liquidate unmatched executions that may occur in the
provision of the Exchange's routing service. The proposed rule change
was published for comment in the Federal Register on November 26,
2012.\3\ The Commission received no comment letters regarding the
proposed rule change. 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\ Securities Exchange Act Release No. 68262 (November 19,
2012), 77 FR 70517 (November 26, 2012) (SR-CBOE-2012-108)
(``Notice'').
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II. Description of the Proposal
In its proposal, the Exchange states that it operates a ``hybrid''
style system of trading that allows automatic executions to occur
electronically and open outcry trades to occur on the floor of the
Exchange.\4\ As part of this infrastructure, the Exchange states that
it automatically routes orders to other exchanges under certain
circumstances. These routing services are provided in conjunction with
one or more routing brokers that are not affiliated with the
Exchange.\5\ Mechanically, when the Exchange receives an order from a
Trading Permit Holder that is held in the Exchange system and
determines to route an order to another exchange, the Exchange provides
the routing broker with a corresponding order and instructions to route
the order to another exchange. The routing broker then sends the
corresponding order to the other exchange.
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\4\ See Notice, 77 FR at 70518.
\5\ See Notice, 77 FR at 70518 n.4, n.8, and accompanying text.
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In its proposal, CBOE states that the Exchange may encounter
situations that make it necessary to cancel orders (or release routing-
related orders),\6\ and to resolve error positions that result from
errors of the Exchange, routing brokers, or another exchange.\7\
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\6\ See Notice, 77 FR at 70518. For examples of some of the
circumstances in which the Exchange may decide to cancel orders, see
Notice, 77 FR at 70519.
\7\ See Notice, 77 FR at 70518. Specifically, CBOE Rule 6.14C
defines ``error positions'' as ``unmatched trade positions that may
occur in connection with the routing service provided under Rule
6.14B''.
For examples of some of the circumstances that may lead to error
positions, see Notice, 77 FR at 70520-21.
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Proposed Rule 6.6A (Order Cancellation/Release)
New CBOE Rule 6.6A provides CBOE with general authority to cancel
orders as it deems to be necessary to maintain fair and orderly markets
if a technical or systems issue occurs at the Exchange, a routing
broker in connection with the routing service provided under CBOE Rule
6.14B, or another exchange to which an Exchange order has been routed.
It also provides that a routing broker may only cancel orders being
routed to another exchange based on the Exchange's standing or specific
instructions or as otherwise provided in the Exchange Rules. CBOE will
be required to provide notice of the cancellation to affected Trading
Permit Holders as soon as practicable.\8\
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\8\ See CBOE Rule 6.6A(a).
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Paragraph (b) of the rule provides that the Exchange may also
determine to release orders being held on the
[[Page 2309]]
Exchange awaiting an away exchange execution as it deems to be
necessary to maintain fair and orderly markets if a technical or
systems issues occurs at the Exchange, a routing broker, or another
exchange to which an order has been routed. Paragraph (c) of the rule
provides that, for purposes of Rule 6.6A, technical or system issues
would include, without limitation, instances where the Exchange has not
received confirmation of an execution (or cancellation) on another
exchange from a routing broker within a response time interval
designated by the Exchange, which interval may not be less than three
(3) seconds.
Proposed Rule 6.14C (Routing Service Error Accounts)
New CBOE Rule 6.14C provides that each routing broker shall
maintain, in the name of the routing broker, one or more accounts for
the purpose of liquidating error positions. In addition the Exchange
may also maintain, in the name of the Exchange, one or more Exchange
error accounts (``Exchange Error Account'') for the purposes of
liquidating error positions, subject to the procedures prescribed in
new CBOE Rule 6.14C.
Paragraph (a) of the rule provides that errors to which the rule
applies include any action or omission by the Exchange, a routing
broker, or another exchange to which an Exchange order has been routed,
that results in an unmatched trade position due to the execution of an
order that is subject to the away market routing service and for which
there is no corresponding order to pair with the execution (each a
``routing error''); and that such routing errors would include, without
limitation, positions resulting from determinations by the Exchange to
cancel or release an order pursuant to CBOE Rule 6.6A.
Paragraph (b) of the rule provides that, generally, each routing
broker will use its own error account to liquidate error positions. In
certain circumstances, however, the Exchange may use an Exchange Error
Account. In particular, in instances where the routing broker is unable
to use its own error account (e.g., due to a technical, systems, or
other issue that prevents the routing broker from doing so) \9\ or
where the error is due to a technical or systems issue at the Exchange,
the Exchange may (but would not be required to) determine it is
appropriate to use an Exchange Error Account. The Exchange states that
in making such a determination to use an Exchange Error Account, the
Exchange would consider whether it has sufficient time, information,
and capabilities considering the market circumstances to determine that
an error is due to such circumstances and whether the Exchange can
address the error.\10\
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\9\ See Notice, 77 FR at 70519.
\10\ See Notice, 77 FR at 70520.
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Pursuant to paragraph (c), the Exchange will not be permitted to
accept any positions in an Exchange Error Account from an account of a
Trading Permit Holder or permit any Trading Permit Holder to transfer
any positions from the Trading Permit Holder's account to an Exchange
Error Account. In other words, the Exchange may not accept from a
Trading Permit Holder positions that are delivered to the Trading
Permit Holder through the clearance and settlement process, even if
those positions may have been the result of an error.\11\
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\11\ See Notice, 77 FR at 70520 n.17. This provision would not
apply if the Exchange incurred a position to settle a Trading Permit
Holder purchase, as the Trading Permit Holder did not yet have a
position in its account as a result of the purchase at the time of
the Exchange's action. See id.
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To the extent a routing broker uses its own account to liquidate
error positions, paragraph (d) of new CBOE Rule 6.14 provides that the
routing broker shall liquidate the error positions as soon as
practicable. The routing broker could determine to liquidate the
position itself or have a third-party broker-dealer liquidate the
position on the routing broker's behalf. Paragraph (d) also provides
that the routing broker shall establish and enforce policies and
procedures reasonably designed to (i) adequately restrict the flow of
confidential and proprietary information associated with the
liquidation of the error position in accordance with Rule 6.14B,\12\
and (ii) prevent the use of information associated with other orders
subject to the routing services when making determinations regarding
the liquidation of error positions. In addition, paragraph (d) provides
that the routing broker shall make and keep records associated with the
liquidation of such routing broker error positions and shall maintain
such records in accordance with Rule 17a-4 under the Act.\13\
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\12\ Rule 6.14B(b) provides that the Exchange shall establish
and maintain procedures and internal controls reasonably designed to
adequately restrict the flow of confidential and proprietary
information between the Exchange and the routing broker, and any
other entity, including any affiliate of the routing broker, and, if
the routing broker or any of its affiliates engages in any other
business activities other than providing routing services to the
Exchange, between the segment of the routing broker or affiliate
that provides the other business activities and the segment of the
routing broker that provides the routing services.
\13\ 17 CFR 240.17a-4.
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Paragraph (e) of the rule provides that, to the extent an Exchange
Error Account is used to liquidate error positions, the Exchange shall
liquidate the error positions as soon as practicable. In liquidating
error positions in an Exchange Error Account, the Exchange shall
provide complete time and price discretion for the trading to a third-
party broker-dealer and shall not attempt to exercise any influence or
control over the timing or methods of such trading.\14\ Such a third-
party broker-dealer may include a routing broker not affiliated with
the Exchange. Paragraph (e) also provides that the Exchange shall
establish and enforce policies and procedures reasonably designed to
adequately restrict the flow of confidential and proprietary
information between the Exchange and the third-party broker-dealer
associated with the liquidation of the error positions.
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\14\ This provision is not intended to preclude the Exchange
from providing the third-party broker-dealer with standing
instructions with respect to the manner in which it should handle
all error account transactions. For example, the Exchange might
instruct the broker-dealer to treat all orders as ``not held'' and
to attempt to minimize any market impact on the price of the option
being traded.
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Finally, paragraph (e) provides that the Exchange shall make and
keep records to document all determinations to treat positions as error
positions under the rule (whether or not an Exchange Error Account is
used to liquidate such error positions), as well as records associated
with the liquidation of Exchange Error Account error positions through
a third-party broker-dealer, and shall maintain such records in
accordance with Rule 17a-1 under the Act.\15\
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\15\ 17 CFR 240.17a-1.
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III. Discussion and Commission's Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of Section 6(b) of the Act
\16\ and the rules and regulations thereunder applicable to a national
securities exchange.\17\ In particular, the Commission finds that the
proposed rule change is consistent with Section 6(b)(5) of the Act,\18\
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
[[Page 2310]]
trade, to foster cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect to,
and facilitating transactions in securities, 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; and are not designed to permit unfair discrimination between
customers, issuers, brokers, or dealers. In addition, the Commission
believes the proposed rule change is consistent with Section
11A(a)(1)(C) of the Act \19\ in that it seeks to assure economically
efficient execution of securities transactions.
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\16\ 15 U.S.C. 78f(b).
\17\ 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).
\18\ 15 U.S.C. 78f(b)(5).
\19\ 15 U.S.C. 78k-1(a)(1)(C).
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The Commission recognizes that technical or systems issues may
occur, and believes that CBOE Rule 6.6A, in allowing CBOE to cancel or
release orders affected by technical or systems issues, should provide
a reasonably efficient means for CBOE to handle such orders, and
appears reasonably designed to permit CBOE to maintain fair and orderly
markets.\20\
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\20\ The Commission notes that CBOE states it believes that
allowing the Exchange to cancel or release orders under such
circumstances would allow the Exchange to maintain fair and orderly
markets, and that CBOE Rule 6.14C is designed ensure full trade
certainty for market participants and avoid disrupting the clearance
and settlement process. See Notice, 77 FR at 70521. The Commission
also notes that CBOE states that a decision to cancel or release
orders due to a technical or systems issue is not equivalent to the
Exchange declaring self-help against a routing destination pursuant
to Rule 611 of Regulation NMS. See 17 CFR 242.611(b). See also
Notice, 77 FR at 70519 n.9.
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The Commission also believes that allowing the Exchange to resolve
error positions through the use of error accounts maintained by its
routing brokers or the Exchange itself pursuant to the procedures set
forth in the rule, and as described above, is consistent with the Act.
The Commission notes that the rule establishes criteria for determining
which positions are error positions to which the rule applies, and the
procedures for the handling of such positions. In particular, the
Commission notes that CBOE Rule 6.14C only applies to error positions
that result from the Exchange's routing service, and that such
positions shall be liquidated by the routing broker or the Exchange, as
applicable, as soon as practicable.\21\ In this regard, the Commission
believes that the new rule appears reasonably designed to further just
and equitable principles of trade and the protection of investors and
the public interest, and to help prevent unfair discrimination, in that
it should help assure the handling of error positions will be based on
clear and objective criteria, and that the resolution of those
positions will occur promptly through a transparent process.
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\21\ See CBOE Rule 6.14C.
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The Commission is also concerned about the potential for misuse of
confidential and proprietary information. The Commission notes that
CBOE or a routing broker, as applicable, will establish and enforce
policies and procedures reasonably designed to (1) adequately restrict
the flow of confidential and proprietary information associated with
the liquidation of the error positions, and (2) in the case of
liquidations by a routing broker, prevent the use of information
associated with other orders subject to the routing services when
making determinations regarding the liquidation of error positions.\22\
Furthermore, to the extent the Exchange uses an Exchange Error Account
to liquidate error positions, the Exchange shall provide complete time
and price discretion for the trading to liquidate error positions in an
Exchange Error Account to a third-party broker-dealer and shall not
attempt to exercise any influence or control over the timing or methods
of such trading.\23\ The Commission believes that these requirements
should help mitigate the Commission's concerns. In particular, the
Commission believes that these requirements should help assure that
none of CBOE, its routing brokers, or any third-party broker-dealer is
able to misuse confidential or proprietary information obtained in
connection with the liquidation of error positions for its own benefit.
The Commission also notes that routing brokers would be required to
make and keep records associated with the liquidation of routing broker
error positions \24\ and CBOE would be required to make and keep
records to document all determinations to treat positions as error
positions under this Rule (whether or not an Exchange Error Account is
used to liquidate such error positions), as well as records associated
with the liquidation of Exchange Error Account error positions through
a third-party broker-dealer.\25\
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\22\ See CBOE Rules 6.14C(d)(i); 6.14C(e)(ii).
\23\ See CBOE Rule 6.14C(e)(i).
\24\ See CBOE Rule 6.14C(d)(ii).
\25\ See CBOE Rule 6.14C(e)(iii).
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Finally, the Commission notes that the proposed procedures for
canceling orders and the handling of error positions are consistent
with procedures the Commission has approved for other exchanges.\26\
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\26\ See, e.g., Securities Exchange Act Release Nos. 67281 (June
27, 2012), 77 FR 39543 (July 3, 2012) (SR-NASDAQ-2012-057); 66963
(May 10, 2012), 77 FR 28919 (May 16, 2012) (SR-NYSEArca-2012-22);
67010 (May 17, 2012), 77 FR 30564 (May 23, 2012) (SR-EDGX-2012-08);
and 67011 (May 17, 2012), 77 FR 30562 (May 23, 2012) (SR-EDGA-2012-
09).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\27\ that the proposed rule change (SR-CBOE-2012-108) be, and it
hereby is, approved.
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\27\ 15 U.S.C. 78s(b)(2).
\28\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-00308 Filed 1-9-13; 8:45 am]
BILLING CODE 8011-01-P