[Federal Register Volume 78, Number 50 (Thursday, March 14, 2013)]
[Notices]
[Pages 16351-16356]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-05884]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69082; File No. SR-CBOE-2013-030]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of Proposed Rule Change Relating to the
Regulation NMS Plan To Address Extraordinary Market Volatility
March 8, 2013.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on March 7, 2013, Chicago Board Options Exchange, Incorporated
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``SEC'' or ``Commission'') the proposed rule change as
described in Items I and II 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 modify its rules to address certain option
order handling procedures and quoting obligations on the Exchange after
the implementation of the market wide equity Plan to Address
Extraordinary Market Volatility (the ``Plan'').
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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange is proposing to update Exchange rules to correspond
with the Plan. Specifically, the Exchange is proposing to make proposed
changes to Exchange Rules Rule 6.2B, ``Hybrid Opening System
(``HOSS''), 6.3A, ``Equity Market Trading Halt,'' Rule 6.14A, ``Hybrid
Agency Liaison,'' Rule 6.25, ``Nullification and Adjustment of Options
Transactions,'' Rule 6.53, ``Certain Types of Orders Defined,'' Rule
6.53C, ``Complex Orders on the Hybrid System,'' Rule 8.7, ``Obligations
of Market-Makers, Rule 8.13, ``Preferred Market-Maker Program,'' Rule
8.15A ``Lead Market-Maker in Hybrid Classes,'' Rule 8.85, ``DPM
Obligations,'' and Rule 8.93, ``e-DPM Obligations.'' The Exchange
believes these modifications will protect investors because when an
underlying security is in a limit or straddle state (collectively
referred to in this filing as a ``limit up-limit down state''), there
will not be a reliable price for the security to serve as a benchmark
[[Page 16352]]
for the price of the option. In addition, the width of the markets
might be compromised and, thus, the quality of execution for retail
customers. The Plan is more fully explained below.
In an attempt to address extraordinary market volatility in NMS
Stock, and, in particular, events like the severe volatility on May 6,
2010, the Exchange, in conjunction with the other national securities
exchanges and the Financial Industry Regulatory Authority, Inc.
(collectively, ``Participants'') drafted the Plan pursuant to Rule 608
of Regulation NMS and under the Securities Exchange Act of 1934 (the
``Act'').\3\ The Plan is primarily designed to, among other things,
address extraordinary market volatility in NMS stocks, protect
investors, and promote fair and orderly markets. The Plan provides for
market-wide limit up-limit down requirements that prevent trades in
individual NMS Stocks from occurring outside of specified price bands,
as defined in Section I(N) of the Plan. These requirements would be
coupled with trading pauses, as defined in Section I(Y) of the Plan, to
accommodate more fundamental price moves (as opposed to erroneous
trades or monetary gaps of liquidity).
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\3\ See Securities Exchange Act Release No. 64547 (May 25,
2011), 76 FR 31647 (June 1, 2011) (File No. 4-631).
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The Plan was filed on April 5, 2011 by the Participants for
publication and comment.\4\ The Participants requested the Commission
approve the Plan as a one-year pilot. On May 24, 2012, the Participants
filed an amendment to the Plan which clarified, among other things, the
calculation of the reference price, as defined in Section I(T) of the
Plan, potential for order type exemption, and the creation of an
Advisory Committee.\5\ On May 31, 2012, the Commission approved the
Plan, as amended, on a one-year pilot basis.\6\
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\4\ Id.
\5\ See Securities and Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631).
\6\ See Securities and Exchange Act Release No. 67091 (May 31,
2012) 77 FR 33498 (June 6, 2012).
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Under the Plan, Participants are required to adopt certain rules in
order to comply. Specifically, Section VI of the Plan sets forth the
limit up-limit down requirements of the Plan, and in particular, that
all trading centers in NMS Stocks, including both those operated by the
Participants and those operated by member of Participants, shall
establish, maintain, and enforce written policies and procedures that
are reasonably designed to prevent trades at prices that are below the
lower price band or above the upper price band for an NMS Stock,
consistent with the Plan. Price Bands will be calculated by Securities
Information Processors (``SIPs'') responsible for consolidation of
information for an NMS Stock pursuant to Rule 603(b) of Regulation NMS
under the Act. As proposed, and approved, the Plan will be implemented,
as a one year pilot program, in two phases.\7\ Phase I will become
effective April 8, 2013 and apply to Tier I NMS Stocks per Appendix A
of the Plan, and Phase II would become effective six months later, or
earlier if announced by the SIPs 30 days prior, and would apply to all
NMS Stocks.
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\7\ Id.
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Under the Plan, when one side of the market for an individual
security is outside the applicable price band, the SIPs will be
required to disseminate such National Best Bid or National Best Offer
with an appropriate flag identifying it as non-executable. When the
other side of the market reaches the applicable price band, the market
for an individual security will enter a limit state. Trading for that
security will exit the limit state if, within 15 seconds of entering
the limit state, all limit state quotations were executed or cancelled.
If the market does not exit a limit state within 15 seconds, then the
primary listing exchange will declare a five-minute trading pause,
which will be applicable to all markets trading the security.
Though the Plan is primarily designed for equity markets, the
Exchange believes it will, indirectly, potentially impact the options
markets as well. Thus, as stated above, the Exchange is proposing to
amend its rules to ensure the option markets are not harmed as a result
of the Plan's implementation. As such, the Exchange is proposing to
amend various rules to reflect such changes. The Exchange believes such
changes will protect participants, the Exchange and investors in
general.
First, the Exchange is proposing to add Rule 6.3A to codify the
changes throughout the Exchange's rules. Currently, Rule 6.3A is titled
``Equity Market Trading Halts'' and has been deleted in its entirety.
The Exchange is proposing to amend the title to ``Equity Market Plan to
Address Extraordinary Market Volatility'' and add text. Rule 6.3A will
define the Plan as it applies to the Exchange. In addition, the
proposed rule change will describe the location of the other rule
changes associated with the Plan. In essence, the proposed changes to
Rule 6.3A will serve as a roadmap for the Exchange's universal changes
due to the implementation of the Plan. The proposed rule changes will
list changes to Exchange order types, order handling, obvious error,
and market-maker quoting obligations that the Exchange is proposing to
make in connection with the implementation of the Plan. These rule
changes are more thoroughly described in various sections of the
Exchange Rulebook, but having one place referencing all rules
associated with the Plan will serve to better protect investors by
making the other rules easily located. The Exchange believes the
proposed changes to Rule 6.3A will describe to Trading Permit Holders
(``TPHs''), and other participants, where to find the changes
associated with the Plan and will, thus, attempt to maintain a more
orderly market.
Next, the Exchange is proposing to modify its opening procedures
under Rule 6.2B, ``Hybrid Opening System'' (``HOSS''). The Exchange is
proposing to add an Interpretation and Policy .07 to clarify that if
the underlying security for a class of options enters into a limit up-
limit down state when the class moves to opening rotation, any market
orders entered that trading day will be cancelled. The Exchange
believes that by cancelling the market orders, it will comply with the
Plan by not allowing orders outside of the Price Bands to execute. As
an exception, market orders that are considered limit orders pursuant
to Rule 6.13(b)(iv) and entered the previous trading day will remain in
the Book. The Exchange is proposing to allow such market orders to
remain in the Book because these essentially act as limit orders at the
minimum increment. Cancelling such orders could potentially cause such
orders to lose their priority with respect to other market orders in
the Book.
Next, the Exchange is proposing to modify Exchange Rule 6.14A,
``Hybrid Agency Liaison--(HAL).'' Exchange Rule 6.14A currently governs
the operation of HAL, a feature within the Hybrid System that provides
automated order handling in designated classes trading on the Hybrid
System for qualifying electronic orders that are not automatically
executed by the Hybrid System. The Exchange determines the eligible
order size, eligible order types, eligible origin code (i.e. public
customer orders, non-Market-Maker broker-dealer orders and Market-Maker
broker-dealer orders), and classes in which HAL is activated.\8\ When
the Exchange receives a qualifying order that is marketable against the
National Best Bid or Offer (``NBBO'') and/or the Exchange's best
[[Page 16353]]
bid or offer (``BBO'') \9\, HAL electronically exposes the order \10\
at the NBBO price to allow Market-Makers appointed in that class, as
well as all TPHs acting as agent for orders, at the top of the
Exchange's book in the relevant series (or all TPHs if allowed by the
Exchange) to step-up to the NBBO price.
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\8\ Rule 6.14A(a).
\9\ HAL will not electronically expose the order if the
Exchange's quotation contains resting orders and does not contain
sufficient Market-Maker quotation interest to satisfy the entire
order.
\10\ The duration of the exposure period may not exceed one
second. Rule 6.14A(c) describes the manner in which an exposed order
is allocated under HAL, and Rule 6.14A(d) lists the circumstances in
which an exposure period would terminate early.
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Because the underlying security of the option in HAL affects the
pricing of the eventually executed order, the Exchange is proposing to
make changes to Rule 6.14A to reflect the implementation of the Plan.
More specifically, the Exchange is proposing to amend Rule 6.14A to
modify the behavior of HAL of a market order while the underlying
security of the option is in a limit up-limit down state. If an
underlying security shall enter a limit up-limit down state while a HAL
of a market order is in process, the auction will end early, upon the
entering of the state. Any unexecuted portion of the market order shall
be cancelled. The Exchange believes the proposed rule changes will best
protect the TPH by ensuring it does not receive an executed order with
an unanticipated price due to the change in the underlying security. In
addition, by ending the auction early, the Exchange is providing a
better chance for the TPH to get its order executed as it is in the
TPH's interest for an earlier execution versus a later one.
Next, the Exchange is proposing to modify how an electronic complex
order request for responses (``RFR'') auction (``COA'') will operate
while the underlying security of at least one of the options has
entered a limit state. Exchange Rule 6.53C(d) currently describes the
general COA process. Generally, on a class-by-class basis, the Exchange
may activate COA, which is a process by which eligible complex orders
\11\ are given an opportunity for price improvement before being booked
in the electronic complex order book (``COB'') or once on a PAR
workstation. On receipt of a COA-eligible order and request from a TPH
representing the order that it be COA'd, the Exchange will send an RFR
message to all TPHs who have elected to receive RFR messages.\12\ Each
Market-Maker with an appointment in the relevant option class and each
TPH acting as agent for orders resting at the top of the COB in the
relevant options series may then submit responses to the RFR message
during the Response Time Interval.\13\ The Exchange is proposing to add
to the COA rule that if, during COA of a market order, the underlying
security of an option enters a limit up-limit down state, the COA will
end upon the entering of that state and the remaining portion of the
order, if a market order, will cancel. The Exchange believes this
change will best protect investors as, must [sic] like HAL, the TPH may
receive a skewed price of the underlying security which would impact
the price of the option.
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\11\ An eligible complex order, referred to in Rule 6.53C as a
``COA-eligible order,'' means a complex order that, as determined by
the Exchange on a class-by-class basis, is eligible for a COA
considering the order's marketability (defined as a number of ticks
away from the current market), size, complex order type and complex
order origin type (i.e. non-broker-dealer public customer, broker-
dealers that are not Market-Makers or specialists on an options
exchange, and/or Market-Makers or specialists on an options
exchange). All determinations by the Exchange on COA-eligible order
parameters are announced to Trading Permit Holders by Regulatory
Circular. See Rule 6.53C(d)(i)(2) and Interpretation and Policy .01
to Rule 6.53C.
\12\ See Rule 6.53C(d)(ii). The RFR message will identify the
component series, the size of the COA-eligible order and any
contingencies, but will not identify the side of the market.
\13\ See Rule 6.53C(d)(iii). A ``Response Time Interval'' means
the period of time during which responses to the RFR may be entered,
the length of which is determined by the Exchange on a class-by-
class basis but may not exceed three seconds. See Rule
6.53C(d)(iii)(2).
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Next, the Exchange is proposing to amend Exchange Rule 6.25
relating to the nullification and adjustment of options transactions.
Under the current rule, an Obvious Pricing Error occurs when the
execution price of an electronic transaction is above or below the
Theoretical Price for the series by a specified amount. For purpose of
the rule, the ``Theoretical Price'' of an option series is currently
defined, for series traded on at least one other options exchange, as
the last national best bid price with respect to an erroneous sell
transaction and the last national best offer price with respect to an
erroneous buy transaction, just prior to the trade. If there are no
quotes for comparison, Trading Officials \14\ determine the Theoretical
Price.
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\14\ The term ``Trading Officials'' currently means two Exchange
members designated as Floor Officials and one member of the
Exchange's staff designated to perform Trading Official functions.
See Rules 6.25.02 and 24.16.02.
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Because the theoretical price may be unreliable due to the
underlying security entering a limit up-limit down state, the Exchange
is proposing to amend the Exchange obvious error rules to provide that
the Exchange may not nullify or adjust executed orders when the
underlying security is in a limit up-limit down state. The Exchange is
also proposing to add language specifying that transactions in options
that overlay a security that is in a limit state may, however, be
reviewed on an Exchange motion. The Exchange believes this will best
protect the market because it allows limit orders to be executed on the
Exchange while the underlying securities are in limit states regardless
of the calculated theoretical price. Finally, the Exchange is proposing
to add language to specify that this provision will be on a one year
pilot basis to coincide with the Plan. The Exchange will provide the
Commission with data and analysis during the duration of this pilot as
requested.
In addition, the Exchange believes the proposed rule change would
protect against TPHs getting a potential second look at transactions
that happened during limit states that could be unfair to other
participants. The proposed rule change would encourage added liquidity
on the Exchange as the proposed changes would help to ensure that limit
orders that are filled during a limit up-limit down state would have
certainty of execution. By allowing the Exchange to continue to review
such transactions on their own motion, the Exchange is further
attempting to protect investors and maintain an orderly market. The
Exchange believes that the combination of encouraging TPHs to
participate on the market and allowing a safeguard to erroneous trades
will provide the best solution during the pilot of the Plan.
Next, the Exchange is proposing to modify Rule 6.53 and 6.53C and,
more specifically, how certain Exchange order types will be handled
while the underlying security of such orders enters into a limit up-
limit down state. The proposed rule change will, among other things,
address how market orders,\15\ market-on-close,\16\ stop orders,\17\
and stock option orders \18\ will
[[Page 16354]]
function on the Exchange upon the implementation of the Plan. More
specifically, the Exchange is proposing to add language to clarify
that: (a) Market orders will be returned during limit up-limit down
states, (b) market-on-close orders will not be elected if the
underlying security is in a limit up-limit down state,\19\ (c) stop
orders will be held while the underlying security is in a limit up-
limit down state, and (d) stock-option orders will only execute if the
calculated stock price is within the permissible bands.\20\ In
addition, during a limit up-limit down state, if a message is sent to
replace a limit order with a market order, the resting limit order will
be cancelled and the replaced market order will also be cancelled.
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\15\ See Exchange Rule 6.53(a) which defines a market order as
``an order to buy or sell a stated number of options contracts at
the best price obtainable when the order reaches the post.''
\16\ See Exchange Rule 6.53(c)(ii) which defines a market-on-
close order designation as an order ``to be executed as close as
possible to the closing bell, or during the closing rotation, and
should be near to or at the closing price for the particular series
of option contracts.''
\17\ See Exchange Rule 6.53(c)(iii) which defines a stop order
contingency to an order as one that ``to buy or sell when the market
for a particular option contract reaches a specified price on the
CBOE floor.''
\18\ See Exchange Rule 6.53C(a)(2) which defines a stock-option
order as ``an order to buy or sell a stated number of units of an
underlying stock or a security convertible into the underlying stock
* * * coupled with the purchase or sale of options contract(s) on
the opposite side of the market.''
\19\ During closing rotation, the Exchange will continue to re-
evaluate the state of underlying securities for which the overlying
securities have not yet been closed. If upon re-evaluation the
underlying security should exit a limit up-limit down state, a
market-on-close order may be executed.
\20\ If the calculated price of a stock-option order is not
within the permissible Price Bands, the stock-option order will be
routed for manual handling.
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When a stock is in a limit or straddle state, while options trading
will continue, there will not be a reliable price for a security to
serve as a benchmark for the price of the option. In addition, without
a reliable underlying stock price, there is an enhanced risk of errors
and improper executions. With these concerns in mind, the Exchange
believes that adding a level of certainty for TPHs will encourage
participation on the Exchange whilst the underlying securities are in
limit up-limit down states. Thus, the Exchange believes handling these
certain orders in this way will best protect the investor after the
implementation of the Plan by not allowing execution at unreasonable
prices due to the shift in the stock prices.
Finally, the Exchange is proposing to eliminate all market maker
obligations for options in which the underlying security is in a limit
up-limit down state while the underlying security in is in the limit
state. Currently, Exchange Rules 8.7, 8.13, 8.15A, 8.85, and 8.93
impose certain obligations on Market-Makers,\21\ PMMs,\22\ LMMs,\23\
DPMs,\24\ and e-DPMs,\25\ respectively, including obligations to
provide continuous electronic quotes. Upon implementation of the recent
rule change to Market-Maker's continuous quoting obligations,\26\ Rules
8.7, 8.13, 8.15A, 8.85, and 8.93 will require that Market-Makers
generally maintain continuous electronic quotes as follows:
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\21\ See Exchange Rule 8.1, which defines a ``Market-Maker'' as
``an individual Trading Permit Holder or a TPH organization that is
registered with the Exchange for the purpose of making transactions
as a dealer specialist on the Exchange * * * .''
\22\ See Exchange Rule 8.13, which defines a ``Preferred Market-
Maker'' as a specific Market-Maker designated by a Trading Permit
Holder to receive that Trading Permit Holder's orders in a specific
class.
\23\ See Exchange Rule 8.15A, which defines a ``Lead Market-
Maker'' as a Market-Maker in good standing appointed by the Exchange
``in an option class for which a DPM has not been appointed * * *
.''
\24\ See Exchange Rule 8.80, which defines a ``Designated
Primary Market-Maker'' as a ``TPH organization that is approved by
the Exchange to function in allocated securities as a Market-Maker *
* * and is subject to the obligations under Rule 8.85 * * * .''
\25\ See Exchange Rule 8.92, which defines an ``Electronic DPM''
as a ``TPH Organization that is approved by the Exchange to remotely
function in allocated option classes as a DPM and to fulfill certain
obligations required of DPMs * * * .''
\26\ The Exchange recently proposed to, among other things, (a)
reduce to 90% the percentage of time for which a Market-Maker 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 which Lead
Market-Makers, Designated Primary Market-Makers and Electronic
Designated Primary Market-Makers must provide continuous electronic
quotes in their appointed classes, which proposed rule change was
immediately effective upon filing. See Securities Exchange Act
Release No. 67410 (July 11, 2012), 77 FR 42040 (July 17, 2012) (SR-
CBOE-2012-064); see also Securities Exchange Act Release No. 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); see also Securities and Exchange Act
Release No. 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). In
addition, the Exchange recently filed an effective rule proposing to
exclude series that have a time to expiration of nine months or more
from Exchange Preferred Market Maker's continuous quoting
obligation. See Securities and Exchange Act Release No. 68691
(January 18, 2013), 78 FR 5548 (January 25, 2013) (SR-CBOE-2013-
008). Finally, the Exchange recently filed a rule proposing to
exclude series that are added during the trading day from Exchange
Market Maker's continuous quoting obligation. See Securities and
Exchange Act Release No. 34-68944, 78 FR 12377. The rule text in
this filing includes the effective (but not implemented) changes to
the rule text made by rule filings SR-CBOE-2012-064 and SR-CBOE-
2013-008. The Exchange expects to implement the effective rule
changes to quoting obligations in filings SR-CBOE-2012-064 and SR-
CBOE-2013-008 in conjunction with the approval of the proposed rule
change in SR-CBOE-2013-019.
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Rule 8.7(d)(ii)(B) will require that Market-Makers provide
continuous electronic quotes when quoting in a particular class on a
given trading day in 60% of the non-adjusted option series of the
Market-Maker's appointed class that have a time to expiration of less
than nine months;
Rule 8.13(d) will require that PMMs provide continuous
electronic quotes when the Exchange is open for trading in at least the
lesser of 99% or 100% minus one call-put pair \27\ of the non-adjusted
option series of each class for which it receives Preferred Market-
Maker orders;
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\27\ A ``call-put pair'' is one call and one put that cover the
same underlying instrument and have the same expiration date and
exercise price.
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Rule 8.15A(b)(i) will require that LMMs provide continuous
electronic quotes when the Exchange is open for trading in at least the
lesser of 99% or 100% minus one call-put pair of the non-adjusted
option series within their assigned classes;
Rule 8.85(a)(i) will require DPMs to provide continuous
electronic quotes when the Exchange is open for trading in at least the
lesser of 99% or 100% minus one call-put pair of the non-adjusted
option series of each class allocated to it; and
Rule 8.93 will require e-DPMs to provide continuous
electronic quotes when the Exchange is open for trading in at least the
lesser of 99% or 100% minus one call-put pair of the non-adjusted
option series of each allocated class.
Exchange Rules 8.13, 8.15B, and 8.87 provide that PMMs, LMMs, and
DPMs, and e-DPMs, respectively, generally will receive the following
participation entitlements in their assigned classes when quoting at
the best price if they satisfy their obligations and other conditions
set forth in the rules:
Rule 8.13(c) provides that a PMM will receive a
participation entitlement of 40% when there are two or more Market-
Makers quoting at the best price on the Exchange and 50% when there is
only one other Market-Maker quoting at the best price on the Exchange;
Rule 8.15B(c) provides that an LMM will receive a
participation entitlement of 50% when there is one Market-Maker also
quoting at the best price on the Exchange, 40% when there are two
Market-Makers also quoting at the best price on the Exchange, and 30%
when there are three or more Market-Makers
[[Page 16355]]
also quoting at the best price on the Exchange; \28\ and
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\28\ If more than one LMM is entitled to a participation
entitlement, the entitlement will be distributed equally among
eligible LMMs.
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Rule 8.87(b)(2) provides that the collective DPM/e-DPM
participation entitlement will be 50% when there is one Market-Maker
also quoting at the best price on the Exchange, 40% when there are two
Market-Makers also quoting at the best price on the Exchange, and 30%
when there are three or more Market-Makers also quoting at the best
price on the Exchange.\29\
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\29\ The participation entitlements of PMMs, LMMs, DPMs and e-
DPMs are based on the number of contracts remaining after all public
customer orders in the book at the best price on the Exchange have
been satisfied. Additionally, a PMM, LMM, DPM or e-DPM may not be
allocated a total quantity greater than the quantity for which the
PMM, LMM, DPM or e-DPM is quoting at the best price. See Rules
8.13(c)(i) and (ii) (PMMs), 8.15B(b) and (c) (LMMs), and
8.87(b)(1)(ii) and (iii) (DPMs and e-DPMs).
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Once the Exchange implements the rule change referenced above,
Exchange Rule 1.1(ccc) will provide that a Market-Maker who is
obligated by CBOE Rules to provide continuous electronic quotes will be
deemed to have provided ``continuous electronic quotes'' if the Market-
Maker provides electronic two-sided quotes for 90% of the time that the
Market-Maker is required to provide electronic quotes in an appointed
option class on a given trading day. The rule will still provide that
if a technical failure or limitation of a system of the Exchange
prevents the Market-Maker from maintaining, or from communicating to
the Exchange, timely and accurate electronic quotes in a class, the
duration of such failure will not be considered in determining whether
the Market-Maker has satisfied the 90% quoting standard with respect to
that option class. In addition, the rule will still provide that the
Exchange may consider other exceptions to this continuous electronic
quote obligation based on demonstrated legal or regulatory requirements
or other mitigating circumstances.
Because prices may be skewed due to the underlying security being
in a limit up-limit down state, the Exchange is proposing to eliminate
all market-maker quoting obligations in series of options that the
underlying security is currently in a limit up-limit down state.
Because of the direct relationship between an options price and the
price of the associated underlying security, the Exchange believes
eliminating all Market-Maker obligations in connection with the
implementation of the Plan is the most effective way to ensure the
options markets will not be compromised. Because a bid or offer of an
underlying security may not be executable due to a limit or straddle
state, the ability to hedge the purchase or sale of an option may not
be possible or, in the least, is at risk. Because of this reason, the
Exchange is anticipating that Exchange Market-Makers will be forced to
change behaviors. In addition, the Exchange believes other options
markets will be implementing similar changes. In an effort to protect
the investors in the options market while the underlying security is in
a limit up-limit down state, the Exchange believes that eliminating
quoting obligations is the more effective way for this protection.
The Exchange, however, is proposing that Market-Makers may still
receive participation entitlements pursuant to the proposed rules in
all series in their assigned classes in which they are quoting, even in
series in which they are not required to provide continuous electronic
quotes under the Exchange Rules. Market-Makers already receive
participation entitlements in series they are not required to quote.
For example, a DPM is currently required to provide continuous
electronic quotes in at least 90% of the non-adjusted option series of
each multiply listed option class allocated to it and in 100% of the
non-adjusted option series of each singly listed option class allocated
to it for 99% of the trading day.\30\ If the DPM elects to quote in
100% of the non-adjusted series in a multiply listed option class
allocated to it, 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 in. Thus, under the
proposed rule change, the market would continue to function as it does
now with respect to how entitlements are allocated to Market-Makers.
The Exchange believes this benefit is appropriate, as it incentivizes
Market-Makers to quote in as many series as possible in their appointed
classes, even those series in which the underlying security has entered
into a limit up-limit down state. The Exchange is attempting to better
encourage Market-Makers to quote though they will not be obligated to.
If they do choose to quote, the Exchange believes they should be
entitled to receive the Entitlement for such quoting as appropriate.
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\30\ As discussed above, this obligation will change upon
implementation of a recent rule change. See supra note 26.
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The Exchange believes the combination of these modifications will
protect investors because when an underlying security is in a limit up-
limit down state, there will not be a reliable price for the security
to serve as a benchmark for the price of the option. In addition, the
width of the markets might be compromised and, thus, the quality of
execution for retail customers. At the same time, the Exchange believes
the proposed rule change will create more certainty on the options
markets encouraging more investors to participate despite the changes
associated with the Plan.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\31\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \32\ 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 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. Additionally,
the Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \33\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\31\ 15 U.S.C. 78f(b).
\32\ 15 U.S.C. 78f(b)(5).
\33\ Id.
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In particular, the Exchange believes the proposed changes will be
in accordance with the Act as they are merely intended to ensure the
options markets will continue to remain just and equitable with the
implementation of the Plan which is intended to reduce the negative
impacts of a sudden, unanticipated price movement in NMS stocks. The
proposed rule changes would promote this intention in the options
markets while protecting investors participating there. In addition,
similar rule changes will be adopted by other markets in the national
market system in a coordinated manner promoting the public interest.
Creating a more orderly market will promote just and equitable
principles of trade by allowing investors to feel more secure in their
participation in the national
[[Page 16356]]
market system after the implementation of the Plan.
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. Specifically, the Exchange
believes the proposed changes will not impose any burden on intramarket
competition because it applies to all TPHs equally. The Exchange does
not believe the proposed changes will impose any burden on intermarket
competition as the changes are merely being made to protect investors
with the implementation of the Plan. In addition, the proposed changes
will provide certainty of treatment and execution of options orders
during periods of extraordinary market volatility.
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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
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 No. SR-CBOE-2013-030 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 No. SR-CBOE-2013-030. 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 No. SR-CBOE-2013-030 and should be
submitted on or before March 29, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\34\
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\34\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-05884 Filed 3-13-13; 8:45 am]
BILLING CODE 8011-01-P