[Federal Register Volume 78, Number 17 (Friday, January 25, 2013)]
[Notices]
[Pages 5544-5548]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-01485]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68691; File No. SR-CBOE-2013-008]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Amend Its Rules Relating to Preferred Market-
Makers' Continuous Quoting Obligation
January 18, 2013.
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 January 11, 2013, Chicago Board Options Exchange, Incorporated
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange
Commission (the ``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 amend its rules relating to Preferred
Market-Makers' (``PMMs'') continuous quoting obligations. The text of
the proposed rule change is provided below.\3\
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\3\ The Exchange recently proposed to, among other things, (a)
reduce to 90% the percentage of time for which a PMM is required to
provide electronic quotes in an appointed option class on a given
trading day and (b) to increase to the lesser of 99% or 100% minus
one call-put pair the percentage of series in each class in which a
PMM must provide continuous electronic quotes in classes in which it
receives PMM orders, which proposed rule change was immediately
effective upon filing. Securities Exchange Act Release No. 34-67410
(July 11, 2012), 77 FR 42040 (July 17, 2012) (SR-CBOE-2012-064); see
also Securities Exchange Act Release No. 34-67644 (August 13, 2012),
77 FR 49846 (August 17, 2012) (SR-CBOE-2012-077) (immediately
effective rule change to delay the implementation date of the
proposed rule change in rule filing SR-CBOE-2012-064 and to indicate
that the Exchange will announce the new implementation date by
Regulatory Circular); and Securities Exchange Act Release No. 34-
68218 (November 13, 2012), 77 FR 69667 (November 20, 2012) (SR-CBOE-
2012-106) (immediately effective rule change to further delay the
implementation date of the proposed rule change in rule filing SR-
CBOE-2012-064 and to indicate that the Exchange will announce the
new implement date by Regulatory Circular). The rule text in this
filing includes the effective (but not implemented) changes to the
rule text made by rule filing SR-CBOE-2012-064. The Exchange expects
to implement the effective rule changes to quoting obligations in
filing SR-CBOE-2012-064 in conjunction with the implementation of
the proposed rule change in this filing.
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(additions are italicized; deletions are [bracketed])
* * * * *
Chicago Board Options Exchange, Incorporated Rules
* * * * *
Rule 8.13. Preferred Market-Maker Program
(a) Generally. The Exchange may allow, on a class-by-class basis,
for the receipt of marketable orders, through the Exchange's Order
Routing System when the Exchange's disseminated quote is the NBBO, that
carry a designation from the Trading Permit Holder transmitting the
order that specifies a Market-Maker in that class as the ``Preferred
Market-Maker'' for that order. A qualifying recipient of a
[[Page 5545]]
Preferred Market-Maker order shall be afforded a participation
entitlement as set forth in subparagraph (c) below.
(b) Eligibility. No change.
(c) Entitlement Rate. No change.
(d) Quoting Obligations: The Preferred Market-Maker must comply
with the quoting obligations applicable to its Market-Maker type under
Exchange rules and must provide continuous electronic quotes (as
defined in Rule 1.1(ccc)) in at least the lesser of 99% of the non-
adjusted option series that have a time to expiration of less than nine
months or 100% of the non-adjusted option series that have a time to
expiration of less than nine months minus one call-put pair of each
class for which it receives Preferred Market-Maker orders, with the
term ``call-put pair'' referring to one call and one put that cover the
same underlying instrument and have the same expiration date and
exercise price.
* * * Interpretations and Policies:
.01 No change.
.02 Rule 8.13(d) does not require a Preferred Market-Maker to
provide continuous electronic quotes in series that have a time to
expiration of nine months or more in the classes for which it receives
Preferred Market-Maker orders. However, a Preferred Market-Maker may
still receive a participation entitlement in such series if it elects
to quote in such series and otherwise satisfies the requirements set
forth in Rule 8.13(b).
* * * * *
The text of the proposed rule change is also 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.
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
Rule 8.13(d) currently 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
PMM orders.\4\ Rule 1.1(ccc) currently provides that a PMM will be
deemed to have provided ``continuous electronic quotes'' if the PMM
provides electronic two-sided quotes for 99% of the time.\5\
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\4\ See supra note 3 for a discussion regarding the
implementation of a change to increase PMMs' continuous quoting
obligations to require continuous electronic quotes in the lesser of
99% of the non-adjusted option series or 100% of the non-adjusted
option series minus one put-class pair of each appointed class.
\5\ See Rule 1.1(ccc), which provides that a Hybrid Market-Maker
will be deemed to have provided ``continuous electronic quotes'' if
the Hybrid Market-Maker provides electronic two-sided quotes for 99%
of the time that the Hybrid Market-Maker is required to provide
electronic quotes in an appointed option class on a given trading
day. As discussed above, rule filing SR-CBOE-2012-064 reduced this
percentage of time from 99% to 90% (which change is effective but
not yet operative, and the Exchange expects to implement in
conjunction with this proposed rule change). See supra note 3. The
Rule also provides that if a technical failure or limitation of a
system of the Exchange prevents the Hybrid Market-Maker from
maintaining, or prevents the Hybrid Market-Maker from communicating
to the Exchange, timely and accurate electronic quotes in a class,
the duration of the failure will not be considered in determining
whether the Hybrid Market-Maker has satisfied the 99% (and soon to
be 90%) 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.
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The Exchange proposes to exclude series that have a time to
expiration of nine months or more (i.e., Long-Term Equity Options
Series, or ``LEAPS'') from PMMs' continuous quoting obligation. As a
result, PMMs' continuous quoting obligation will not apply to options
series with a time to expiration of nine months or more.\6\ Exchange
Rule 8.7(d)(ii)(B) currently excludes series that have a time to
expiration of nine months or more from the quoting obligations of
Market-Makers.
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\6\ As set forth in Rule 8.13(d), PMMs also have no quoting
obligations in adjusted option series, which are option series for
which, as a result of a corporate action by the issuer of the
underlying security, one option contract in the series represents
the delivery of other than 100 shares of underlying stock or Units.
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The Exchange is proposing this rule change for competitive reasons.
NASDAQ OMX PHLX LLC (``PHLX'') excludes, among other series, option
series with a time to expiration of nine months or more from the
quoting obligations of its streaming quote traders (``SQTs), remote
SQTs (``RSQTs''), directed SQTs (``DSQTs'') and directed RSQTs
(``DRSQTs''), the PHLX market participants generally equivalent to
Market-Makers (SQTs and RSQTs) and PMMs (DSQTs and DRSQTs).\7\ The
Exchange believes this proposal changes the continuous quoting
obligation of PMMs so that PMMs are required to quote in substantially
similar types of series as equivalent market participants at another
options exchange and is therefore essential for competitive
purposes.\8\ CBOE believes it is disadvantageous to PMMs if they are
subject to stricter quoting requirements with respect to their
continuous quoting obligations than equivalent market participants at a
competing options exchange.
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\7\ See PHLX Rule 1014(b)(ii)(D)(4). Additionally, while not
specified in its rules, International Securities Exchange (``ISE'')
Regulatory Information Circular 2009-248 similarly excludes these
option series from the quoting obligations of competitive market-
makers, including competitive market-makers that receive preferenced
orders, the ISE market participants generally equivalent to PMMs.
The Exchange notes that other exchanges exclude these long-term
options from the quoting obligations of market participants that are
equivalent to Lead Market-Makers (``LMMs'') or Designated Primary
Market-Makers (``DPMs''), but not PMMs. See, e.g., NYSE MKT Options
Rule 925.1NY, Commentary .01; and NYSE Arca Options Rule 6.37B,
Commentary .01.
\8\ As noted below, PMMs will still be required to quote in
quarterly options series, which DSQTs and DRSQTs are not.
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The Exchange also notes that this proposed rule change is
consistent with the approach in current Rule 5.8, which states that
strike price interval, bid/ask differential and continuity rules will
not apply to equity LEAPS until the time to expiration is less than
nine months.\9\
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\9\ Similarly, Rule 24.9(b)(1)(A) states that strike price
interval, bid/ask differential and continuity rules will not apply
to index LEAPS until the time to expiration is less than twelve
months.
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The Exchange believes the proposed rule change will continue to
ensure that PMMs create a fair and orderly market in classes in which
they receive PMM orders, as it does not absolve PMMs from providing
continuous electronic quotes in a significant percentage of series of
each class for a substantial portion of the trading day. PMMs must
engage in activities that constitute a course of dealings reasonably
calculated to contribute to the maintenance of a fair and orderly
market, including (1) Competing with other Market-Makers to improve
markets in all series of options classes comprising their appointments,
(2) making markets that, absent changed market conditions, will be
honored in accordance with firm quote rules, and (3) updating market
quotations in
[[Page 5546]]
response to changed market conditions in their appointed options
classes and to assure that any market quote it causes to be
disseminated is accurate.\10\
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\10\ See Rule 8.7(a) and (b).
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The relief proposed in this filing is mitigated by a PMM's other
obligations. The proposed rule change would not excuse a PMM 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.\11\ The proposed rule change would also not excuse a PMM
that is present on the trading floor from its obligation to provide an
open outcry two-sided market complying with the bid/ask differential
requirements in response to a request for a quote by a Trading Permit
Holder or PAR Official directed at that Market-Maker or when, in
response to a general request for a quote by a Trading Permit Holder or
PAR Official, a market is not then being vocalized by a reasonable
number of Market-Makers.\12\ Further, the proposed rule change would
not excuse a PMM from its obligation to submit a single quote or
maintain continuous quotes in one or more series of a class to which
the PMM is appointed when called upon by an Exchange official if, in
the judgment of such official, it is necessary to do so in the interest
of maintaining a fair and orderly market.\13\
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\11\ See Rule 8.7(d)(i)(C) (relating to a request for quote by a
floor broker) and (ii)(C) (relating to a request for a quote by a
Trading Permit Holder or PAR Official).
\12\ See Rule 8.7(d)(iv).
\13\ Id.
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The proposed rule change also adds Interpretation and Policy .02 to
Rule 8.13 to clarify that while Rule 8.13(d) does not require a PMM to
provide continuous electronic quotes in LEAPS in the classes for which
it receives Preferred Market-Maker orders, a PMM may still receive a
participation entitlement in a LEAPS series if it elects to quote in
that series and otherwise satisfies the requirements set forth in Rule
8.13(b). If a PMM elects to quote in a LEAPS series in one of its
preferred classes, in order to receive the participation entitlement in
that series, the PMM must still be quoting at the best bid or offer on
the Exchange and satisfying its other obligations set forth in Rule
8.13(b). PMMs already receive participation entitlements in series they
are not required to quote. As discussed above, a PMM is currently
required to provide continuous electronic quotes in at least 90% of the
non-adjusted option series of each class for which it receives PMM
orders.\14\ If the PMM elects to quote in 100% of the non-adjusted
series in the class, it will receive a participation entitlement in all
of those series when quoting at the best price, including the 10% of
the series in which it is not required to quote. Thus, under the
proposed rule change, the market would continue to function as it does
now. The Exchange believes this benefit is appropriate, as it
incentivizes PMMs to quote in as many series as possible in the classes
in which it receives PMM orders, even LEAPS, which Rule 8.13 does not
require them to continuously quote.
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\14\ As discussed above, this obligation will change upon
implementation of a recent rule change. See supra note 3.
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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 proposed rule change without fear of losing
liquidity. This is especially true given that the quoting obligations
of LMMs, DPMs, and electronic DPMs (``e-DPMs'') in Hybrid option
classes set forth in Rules 8.15A, 8.85, and 8.93, respectively, will
still apply to LEAPS, so the Exchange may still have a disseminated
continuous two-sided market in LEAPS. Further, the Exchange believes
that the current quoting obligation in LEAPS is a minor part of PMMs'
overall obligations, so the burden of continuous quoting in these
series by PMMs while DPMs and LMMs are also required to continuously
quote in those series is counter to efforts to mitigate the number of
quotes collected and disseminated. The Exchange also believes that
market-making activity may increase as a result of adopting a provision
that is already in place at another options exchange. Additionally, the
Exchange believes that the proposed rule change to clarify that PMMs
may still receive participation entitlements in LEAPS in the classes
for which they received PMM orders in which they are quoting, even
though Rule 8.13(d) does not require the PMMs to continuously quote in
LEAPS, will incent PMMs to quote in LEAPS, which may increase liquidity
in those classes.
The Exchange will announce the implementation date of the proposed
rule change in a Regulatory Circular to be published no later than 90
days following the effective date. The implementation date will be no
later than 150 days following the effective date.
2. Statutory Basis
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.\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 prevent fraudulent and manipulative acts
and practices, to promote just and equitable principles of trade, to
foster cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitation 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.
Additionally, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \17\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\15\ 15 U.S.C. 78f(b).
\16\ 15 U.S.C. 78f(b)(5).
\17\ Id.
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In particular, the Exchange believes the proposed rule change
promotes just and equitable principles of trade because it reduces
burdens and unnecessary restrictiveness on PMMs. The quoting
obligations of LMMs, DPMs, and e-DPMS will still apply to LEAPS, which
the Exchange believes eliminates the risk of a material decrease in
liquidity of LEAPS. The Exchange still imposes many obligations on PMMs
to maintain a fair and orderly market in their appointed classes,
including obligations to provide continuous electronic quotes for a
significant part of the trading day in a substantial number of series
of each appointed class. Further, the elimination of PMMs' continuous
quoting obligations in LEAPS is a minor change and should not impact
the quality of CBOE's market. Consequently, continuous quotes in these
series by PMMs, in addition to DPMs and LMMs, increases quote traffic
and burdens systems without a corresponding benefit. Thus, by not
requiring PMMs to continuously quote in LEAPS, the Exchange's proposed
rule change would further the Exchange's goal of measured quote
mitigation. Additionally, PMMs 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.
[[Page 5547]]
Accordingly, the proposal supports the quality of CBOE's markets by
helping to ensure that PMMs will continue to be obligated to quote in
series when necessary. The Exchange believes these changes are
reasonable and are offset by PMMs' continued responsibilities to
provide significant liquidity to the market to the benefit of market
participants. In addition, the proposed rule change removes impediments
to and allows for a free and open market, while protecting investors,
by promoting additional transparency regarding PMMs' obligations and
benefits in the Exchange Rules. In addition, the Exchange believes that
the proposed rule change is designed to not permit unfair
discrimination, as the proposed rule change provides the proposed
relief for all PMMs.
The proposed rule change to clarify that PMMs may still receive
participation entitlements in LEAPS in the classes for which they
received PMM orders in which they are quoting, even though Rule 8.13(d)
does not require the PMMs to continuously quote in LEAPS, further
supports the quality of the Exchange's trading markets because it
encourages PMMs to quote in LEAPS, which ultimately benefits all
investors. This benefit is offset by the PMMs' continued quoting
obligations and the fact that they must still satisfy all of their
other obligations in order to receive the entitlement in these ``non-
required'' series. The Exchange also believes that this proposed change
is consistent with its current practice, pursuant to which PMMs receive
participation entitlements in additional series in which they elect to
quote above the minimum percentage of series in which they are required
to continuously quote under Rule 8.13.
The proposed rule change is also consistent with the rules of
another options exchange.\18\ The proposed rule change requires its
PMMs to provide continuous quotes in the same types of series as
equivalent market participants at a competing options exchange, which
the Exchange believes could increase market-making activity on the
Exchange.
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\18\ See supra note 7.
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For the foregoing reasons, the Exchange believes that the balance
between the benefits provided to and the obligations imposed upon PMMs
by the proposed rule change is appropriate.
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. The proposed rule change
provides the same relief to a group of similarly situated market
participants--PMMs. While other types of Market-Makers will still be
required to continuously quote in LEAPS, the Exchange believes this is
not unfairly discriminatory, as its Rules already impose different
obligations on each type of Market-Maker based on the purposes and
functions of, and benefits received by, that type of Market-Maker (e.g.
Market-Makers are already not required to continuously quote in LEAPS,
while LMMs, DPMs, and e-DPMs are, and will continue to be).
CBOE believes that the proposed rule change will in fact relieve
any burden on, or otherwise promote, competition. The Exchange believes
the proposed rule change is procompetitive because it would enable the
Exchange to provide its PMMs with rules that are similar to those of
another options exchange applicable to equivalent market participants
at that exchange. The Exchange believes this will promote trading
activity on the Exchange to the benefit of the Exchange, its Trading
Permit Holders, and market participants.
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) of the Act \19\ and
Rule 19b-4(f)(6) \20\ thereunder. At any time within 60 days of the
filing of the 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.
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\19\ 15 U.S.C. 78s(b)(3)(A).
\20\ 17 CFR 240.19b-4(f)(6).
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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 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-2013-008 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-2013-008. 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
10:00 a.m. and 3:00 p.m. Copies of such 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-2013-008 and should be
submitted on or before February 15, 2013.
[[Page 5548]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-01485 Filed 1-24-13; 8:45 am]
BILLING CODE 8011-01-P