[Federal Register Volume 78, Number 53 (Tuesday, March 19, 2013)]
[Notices]
[Pages 16895-16898]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-06239]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69129; File No. SR-CBOE-2013-033]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change Relating to Complex Orders and Mini-Options
March 13, 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 March 7, 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 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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange proposes to amend its rules related to complex orders.
The text of the proposed rule change is also available on the
Exchange's Web site (http://www.cboe.org/legal) 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
CBOE recently amended its rules to allow for the listing of mini-
options on SPDR S&P 500 (``SPY''), Apple, Inc. (``AAPL''), SPDR Gold
Trust (``GLD''), Google Inc. (``GOOG'') and Amazon.com Inc.
(``AMZN'').\3\ Mini-option trading is expected to commence in March
2013. Whereas standard option contracts represent a deliverable of 100
shares of an underlying security, mini-options contracts represent a
deliverable of 10 shares. Except for the difference in the number of
deliverable shares, mini-options have the same terms and contract
characteristics as regular-sized equity and ETF options, including
exercise style. Accordingly, the Exchange noted in its original mini-
option filing that Exchange rules that apply to the trading of standard
option contracts would apply to mini-option contracts as well.\4\
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 68656 (January 15,
2013), 78 FR 4526 (January 22, 2013) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change to List and Trade Option
Contracts Overlying 10 Shares of Certain Securities) (SR-CBOE-2013-
001).
\4\ Id.
---------------------------------------------------------------------------
Prior to the commencement of trading mini-options, the Exchange
proposes to amend Rule 6.53C (Complex Orders on the Hybrid System) and
Rule 6.80 (Definitions) to provide that Exchange rules regarding
complex orders shall apply to mini-options and that consequently,
Trading Permit Holders may execute complex and stock-option orders
involving mini-options. Moreover, the Exchange seeks to amend these
rules to provide that all permissible ratios referenced in the
definitions of stock-option orders represent the total number of shares
of the underlying stock in the option leg to the total number of shares
of the underlying stock in the stock leg.
By way of background, CBOE Rule 6.53C governs Complex Orders on the
Hybrid System and CBOE Rule 6.80 lists definitions applicable to
intermarket linkage. Currently, stock-option orders are defined in Rule
6.53C(a)(2) and 6.80(4)(ii)(A)-(B) as trades where the options leg of
the trade is coupled with
[[Page 16896]]
the purchase or sale of either (1) the same number of units of the
underlying stock or convertible security, or (2) the number of units of
the underlying stock or convertible security necessary to create a
``delta neutral'' position, but in no case in a ratio greater than 8
option contracts per unit of trading of the underlying stock or
convertible security established for that series by the Clearing
Corporation. Therefore, under this definition it would be permissible
to execute, for example, a trade where the options leg consists of one
(1) standard option contract (i.e., 100 shares) and the stock leg
consists of 100 shares of the underlying stock. Additionally, it would
be permissible to execute a trade where the options leg consists of
eight (8) standard option contracts (i.e., 800 shares) and the stock
leg consists of 100 shares of the underlying stock.
Next, ``complex order'' in Rule 6.53C(a)(1) and ``complex trade''
in Rule 6.80(4)(i) (collectively referred to as ``complex orders'') \5\
is defined as any order involving the execution of two or more
different options series in the same underlying security occurring at
or near the same time in a ratio that is equal to or greater than one-
to-three (.333) and less than or equal to three-to-one (3.00).
---------------------------------------------------------------------------
\5\ The definitions of ``complex order'' in Rule 6.53C(a)(1) and
``complex trade'' in Rule 6.80(4)(i) are substantially identical.
---------------------------------------------------------------------------
The Exchange notes that the abovementioned permissible ratios were
established to ensure that only complex and stock-option orders that
seek to achieve legitimate investment strategies are afforded certain
benefits. Particularly, since compliance with trade-through rules may
impede a market participant's ability to achieve the legitimate
investment strategies that complex and stock-option orders facilitate,
an exception from the prohibition on trade-throughs is provided for any
transaction that was effected as a portion of a legitimate complex or
stock-option order. Requiring a meaningful relationship between the
different legs of a complex or stock-option order prevents market
participants from taking advantage of these orders to circumvent the
otherwise applicable trade-through rules (e.g., preventing the
execution of a stock-option order where the option leg consists of 100
options (i.e., 10,000 shares) and the stock leg consists of only 100
shares).
The Exchange first proposes to amend the definition of ``stock-
option orders'' in Rule 6.53C(a)(2) and Rule 6.80(4)(ii)(A)-(B). As
discussed above, the stock-option order definition in both Rule 6.53C
and Rule 6.80 clearly permits that an option leg may be coupled with a
stock leg representing the same number of units of the underlying stock
(i.e., one-to-one ratio). The Exchange seeks to provide that mini-
options may also be coupled with a stock leg if the stock leg
represents the same number of units of the underlying stock. For
example, pursuant to the definition, it would be permissible to execute
a trade where leg one consists of one (1) mini-option contract (i.e.,
10 shares) and leg two consists of 10 shares of the underlying stock.
Next, the Exchange seeks to amend the stock-option order definition
in Rule 6.53C and Rule 6.80 to provide that in addition to standard
options, mini-options may be coupled with a stock leg consisting of
however many units of the underlying stock is necessary to create a
delta neutral position, provided that the total number of shares of the
underlying stock in the option leg to the total number of shares of the
underlying stock in the stock leg does not exceed an eight-to-one
ratio. The Exchange notes the definition of a stock-option order in
Rule 6.53C and Rule 6.80 was drafted at a time in which only option
contracts with a deliverable of 100 shares was contemplated. Therefore,
the rules do not address how the eight-to-one ratio would be scaled in
the event an option with a non-standard deliverable becomes available
for trading. The language of the rules needs to be amended so that it
is clear how Rule 6.53C and 6.80 would apply to mini-options, as well
as standard options. Accordingly, the proposed change specifies that
the permissible ratios should be calculated and scaled based upon the
total number of shares of the underlying stock in the option leg to the
total number of shares of the underlying stock in the stock leg,
instead of by the total number of option contracts in the option leg to
the total number of shares of the underlying stock in the stock leg. An
example of a permitted stock-option order involving mini-options would
be an order in which leg one consists of eighty (80) mini-options
(i.e., 800 shares) and leg two consists of 100 shares of the underlying
stock (i.e., eight-to-one ratio). Similarly, an order where leg one
consists of eight (8) mini-options (i.e. 80 shares) and leg two
consists of 10 shares of the underlying stock would be permitted.
The proposed rule change provides that market participants may
execute stock-option orders involving mini-options. The proposed change
also ensures that the principle behind the permissible ratios (i.e., to
provide a meaningful relationship between the legs of complex and
stock-option orders) is maintained for mini-options. Finally, the
Exchange notes that reference to the Clearing Corporation in Rule
6.53C(a)(2) and 6.80(4)(ii)(A)-(B) was superfluous and unnecessary and
therefore deleted.
Next the Exchange seeks to make clear that it interprets its
current definition of a ``complex order'' in Rule 6.53C(a)(1) and
``complex trade'' in Rule 6.80(4)(i)-(ii) to apply to both standard
options and mini-options. The Exchange seeks to provide that in
accordance to the provisions of Rule 6.53C and Rule 6.80, one leg of a
complex order may consist of mini-option contract(s) and the other leg
of the order may consist of standard option(s), so long as the
underlying security is the same and the transaction does not violate
the permissible ratios set forth in the rules (i.e., ratio greater or
equal to one-to-three or less or equal to three-to-one). Moreover, the
Exchange seeks to clarify that these permissible ratios represent the
total number of shares of the underlying stock in the mini-option leg
to the total number of shares of the underlying stock in the standard
option leg. An example of a permissible complex order involving mini-
options and standard options would be an order in which leg one
consists of thirty (30) mini-options (i.e., 300 shares) and leg two
consists of one (1) standard option (i.e., 100 shares) in the same
underlying security (i.e., a ratio equal to 3.0). Another example of a
permissible complex order would be an order in which leg one consists
of ten (10) mini-options (i.e., 100 shares) and leg two consists of one
(1) standard option (i.e., 100 shares) in the same underlying security
(i.e., a ratio equal to one-to-one). The proposed clarification will
reduce potential confusion for investors when trading of mini-options
becomes effective.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder, including the
requirements of Section 6(b) of the Act.\6\ In particular, the Exchange
believes the proposed rule change is consistent with the Section
6(b)(5) \7\ requirements that the rules of an exchange be designed to
promote just and equitable principles of trade, to prevent fraudulent
and manipulative acts, to foster cooperation and coordination with
persons engaged in facilitating transactions in securities, to remove
impediments to and to perfect
[[Page 16897]]
the mechanism for a free and open market and a national market system,
and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------
\6\ 15 U.S.C. 78f(b).
\7\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Specifically, the Exchange believes that investors and other market
participants would benefit from the current rule proposal because it
would allow market participants to take advantage of legitimate
investment strategies and execute complex orders and stock-option
orders in mini-options. Additionally, the Exchange believes the
proposed rule change will avoid investor confusion if both standard
options and mini-options on the same underlying security are permitted
to trade as complex orders and stock-option orders. Also, the proposal
to maintain the permissible ratios that are applicable to standard
options in proportion for mini-options ensures that the principle
behind the permissible ratios (i.e., to provide a meaningful
relationship between the legs of complex and stock-option orders) is
maintained for mini-options, which promotes just and equitable
principles of trade. The Exchange believes that describing prior to the
commencement of trading how the permissible ratios in the complex order
and stock-option order rules will be scaled for mini-options would
lessen investor and marketplace confusion.
Finally, the Exchange believes that the proposed rule change is
designed to not permit unfair discrimination among market participants
as all market participants may participate in complex or stock-option
orders involving mini-options.
B. Self-Regulatory Organization's Statement on Burden on Competition
This proposed rule change does not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Act. Specifically, since mini-options are permitted on multiply-
listed classes, other exchanges that have received approval to trade
mini-options will have the opportunity to similarly amend their complex
order rules to clarify and accommodate complex orders and stock-option
orders in mini-option classes. Moreover, because all Trading Permit
Holders may participate in complex and stock-options orders involving
mini-options, the rule change does not permit unfair discrimination and
does not impose a burden on Trading Permit Holders.
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:
(i) Significantly affect the protection of investors or the public
interest;
(ii) Impose any significant burden on competition; and
(iii) 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) \8\ of the Act and
Rule 19b-4(f)(6) \9\ thereunder.
---------------------------------------------------------------------------
\8\ 15 U.S.C. 78s(b)(3)(A).
\9\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of the filing of the
proposed rule change, or such shorter time as designated by the
Commission. The Exchange has satisfied this requirement.
---------------------------------------------------------------------------
A proposed rule change filed under Rule 19b-4(f)(6) of the Act \10\
normally does not become operative prior to 30 days after the date of
the filing. However, pursuant to Rule 19b-4(f)(6)(iii) of the Act,\11\
the Commission may designate a shorter time if such action is
consistent with the protection of investors and the public interest.
The Exchange has requested the Commission to waive the 30-day operative
delay so that the proposal may become operative immediately upon
filing. In January 2013, the Exchange filed a proposed rule change to
amend its rules to list and trade certain mini-options contracts on the
Exchange, and represented in that filing that the Exchange's rules that
apply to the trading of standard options contracts would apply to mini-
options contracts.\12\ The Exchange has represented that it intends to
launch trading in mini-options contracts on March 18, 2013.\13\ The
Exchange believes that waiver of the 30-day operative delay is
consistent with the protection of investors and the public interest
because such waiver would minimize confusion among market participants
about how complex orders and stock-options orders involving mini-
options contracts will trade.\14\
---------------------------------------------------------------------------
\10\ 17 CFR 240.19b-4(f)(6).
\11\ 17 CFR 240.19b-4(f)(6)(iii).
\12\ See supra note 3.
\13\ See SR-CBOE-2013-033, Item 7.
\14\ See id.
---------------------------------------------------------------------------
The Commission believes that waiving the 30-day operative delay is
consistent with the protection of investors and the public interest.
Such waiver would allow the Exchange to implement the proposed rule
change prior to its launch of mini-options contracts trading on March
18, 2013, thereby mitigating potential investor confusion as to how
complex orders and stock options orders involving mini-options
contracts will trade. For this reason, the Commission hereby waives the
30-day operative delay and designates the proposed rule change to be
operative upon filing with the Commission.\15\
---------------------------------------------------------------------------
\15\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
---------------------------------------------------------------------------
At any time within 60 days of the filing of such 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. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule change should be approved or
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 Number SR-CBOE-2013-033 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-2013-033. 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
[[Page 16898]]
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
20549-1090 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 offices 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-2013-033, and should be
submitted on or before April 9, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
---------------------------------------------------------------------------
\16\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-06239 Filed 3-18-13; 8:45 am]
BILLING CODE 8011-01-P