[Federal Register Volume 78, Number 143 (Thursday, July 25, 2013)]
[Notices]
[Pages 44994-44997]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-17862]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70011; File No. SR-CBOE-2013-074]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change Relating to CBSX Rule 53.2
July 19, 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 July 19, 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.
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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 the
Substance of the Proposed Rule Change
The Exchange proposes to amend CBOE Stock Exchange, LLC (``CBSX'')
Rule 53.2, which relates to the prohibition against trading ahead of
customer orders. The text of the proposed rule change is provided
below.
(additions are italicized; deletions are [bracketed])
* * * * *
Chicago Board Options Exchange, Incorporated
Rules
* * * * *
Rule 53.2. Prohibition Against Trading Ahead of Customer Orders
No change.
* * * Interpretations and Policies:
.01--No change.
.02 No-Knowledge Exception. With respect to NMS stocks, as
defined in Rule 600 of SEC Regulation NMS, if a Trading Permit
Holder implements and utilizes an effective
[[Page 44995]]
system of internal controls, such as appropriate information
barriers, that operate to prevent one trading unit from obtaining
knowledge of customer orders held by a separate trading unit, those
other trading units trading in a proprietary capacity may continue
to trade at prices that would satisfy the customer orders held by
the separate trading unit. A Trading Permit Holder that structures
its order handling practices in NMS stocks to permit its proprietary
and/or market-making desk to trade at prices that would satisfy
customer orders held by a separate trading unit must disclose in
writing to its customers, at account opening and annually
thereafter, a description of the manner in which customer orders are
handled by the Trading Permit Holder and the circumstances under
which the Trading Permit Holder may trade proprietarily at its
proprietary and/or market-making desk at prices that would satisfy
the customer order. If a Trading Permit Holder intends to rely on
this exception by implementing information barriers, those
information barriers should at a minimum (i) [must ]provide for the
organizational separation of a Trading Permit Holder's customer
order trading unit and proprietary trading unit; (ii) [must ]ensure
that one trading unit does not exert influence over the other
trading unit; (iii) [must ]ensure that information relating to each
trading unit's stock positions[,] and trading activities[, and
clearing and margin arrangements] is not improperly shared (except
with persons in senior management who are involved in exercising
general managerial oversight of one or both entities); (iv) [must
require each trading unit to maintain separate books and records
(and separate financial accounting); (v) must require each trading
unit to separately meet all required capital requirements; (vi) must
]ensure the confidentiality of the trading unit's book as provided
by Exchange rules; and (v[ii]) [must ]ensure that any other
material, non-public information (e.g. information related to any
business transactions between the trading unit and an issuer or any
research reports or recommendations issued by the trading unit) is
not made improperly available to the other trading unit in any
manner that would allow that trading unit to take undue advantage of
that information while trading on CBSX. A Trading Permit Holder must
submit the proposed information barriers in writing to the Exchange
upon request. Trading Permit Holders must maintain records that
indicate which orders rely on this exception and submit these
records to the Exchange upon request.
.03-.07 No change.
* * * * *
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'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
CBSX Rule 53.2 governs the treatment of customer orders and
prohibits a CBSX Trading Permit Holder from proprietarily trading ahead
of a customer order. The Securities and Exchange Commission (the
``Commission'') recently approved a rule filing to, among other things,
amend CBSX Rule 53.2.\3\ The amendments to Rule 53.2 included, among
other things, the addition of a number of exceptions to the customer
order protection rule. One of the new exceptions is a ``no-knowledge''
exception, which allows a proprietary trading unit of a Trading Permit
Holder organization to continue trading in a proprietary capacity and
at prices that would satisfy customer orders that were being held by
another, separate trading unit at the Trading Permit Holder
organization.\4\ In order to avail itself of the ``no-knowledge''
exception, a Trading Permit Holder organization must first implement
and utilize an effective system of internal controls (such as
appropriate information barriers) that operate to prevent the
proprietary trading unit from obtaining knowledge of the customer
orders that are held at a separate trading unit.\5\
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\3\ See Securities Exchange Act Release No. 34-69504 (May 2,
2013), 78 FR 26828 (May 8, 2013) (SR-CBOE-2013-027). Pursuant to
that rule filing, the Exchange issued Regulatory Circular RG 13-098
on July 10, 2013, which announced that the amendments to Rule 53.2
would become effective on July 22, 2013.
\4\ See Rule 53.2, Interpretation and Policy .03. The ``no-
knowledge'' exception is applicable with respect to NMS stocks, as
defined in Rule 600 of SEC Regulation NMS.
\5\ The ``no-knowledge'' exception also provides that a Trading
Permit Holder organization that structures its order handling
practices in NMS stocks to permit its proprietary and/or market-
making desk to trade at prices that would satisfy customer orders
held as a separate trading unit must disclose in writing to its
customers, at account opening and annually thereafter, a description
of the manner in which customer orders are handled by the Trading
Permit Holder and the circumstances under which the Trading Permit
Holder may trade proprietarily at its market-making desk at prices
that would satisfy the customer order.
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If a Trading Permit Holder intends to rely on the ``no-knowledge''
exception by implementing information barriers, those information
barriers must (i) Provide for the organization separation \6\ of a
Trading Permit Holder's trading unit that holds customer orders and a
proprietary trading unit; (ii) ensure that one trading unit does not
exert influence over the other trading unit; (iii) ensure that
information relating to each trading unit's stock positions, trading
activities, and clearing and margin arrangements is not improperly
shared (except with person in senior management who are involved in
exercising general managerial oversight of one or both entities); (iv)
require each trading unit to maintain separate books and records (and
separate financial accounting); (v) require each trading unit to
separately meet all required capital requirements; (vi) ensure the
confidentiality of each trading unit's book as provided by the Exchange
rules; and (vii) ensure that any other material non-public information
(e.g. information related to any business transactions between a
trading unit and an issuer or any research reports or recommendations
issued by the trading unit) is not made improperly available to the
other trading unit in any manner that would allow that trading unit to
take undue advantage of that information while trading on CBSX. A
Trading Permit Holder must submit the proposed information barriers in
writing to the Exchange upon request.
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\6\ Organizational separation includes physical separation of
the trading units.
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The Exchange proposes to amend the information barrier requirements
of the ``no-knowledge'' exception as follows:
Remove from requirement (iii) the need to ensure that
information relating to each trading unit's clearing and margin
arrangements is not improperly shared;
eliminate information barrier requirements (iv) and (v);
and
renumber requirements (vi) and (vii) as (iv) and (v).
The Exchange believes the remaining information barrier requirements
provide for the necessary protections in order for a Trading Permit
Holder to avail itself of the ``no-knowledge'' exception.
The Exchange also proposes to amend the ``no-knowledge'' exception
by providing that a Trading Permit Holder
[[Page 44996]]
relying on this exception should have information barriers that, at a
minimum, satisfy the specified criteria. This change clarifies that
Trading Permit Holders are able to include additional conditions in
their information barriers as they deem appropriate.
Finally, the Exchange proposes to add a requirement that Trading
Permit Holders must maintain records that indicate which orders rely on
this ``no-knowledge'' exception and provide these records to the
Exchange upon request. This change will ensure that a documented audit
trail exists to indicate which orders are subject to this exception and
that the Exchange will have access to records in connection with its
surveillances associated with customer order protection.
The Exchange will implement the proposed changes on July 22, 2013,
in conjunction with the previously approved amendments to CBSX Rule
53.2.\7\
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\7\ See supra note 3.
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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.\8\ Specifically, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \9\ 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) \10\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\8\ 15 U.S.C. 78f(b).
\9\ 15 U.S.C. 78f(b)(5).
\10\ Id.
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In particular, the Exchange believes the proposed rule change will
protect investors by bringing the information barriers that Trading
Permit Holders must maintain to avail themselves of the ``no-
knowledge'' exception more in line with other trading venues while at
the same time ensuring sufficient customer order protection.\11\ The
Exchange also believes the proposed change to clarify that Trading
Permit Holders should at a minimum satisfy the information barrier
requirements, as amended, will provide Trading Permit Holders with the
flexibility to include other conditions they believe are appropriate to
ensure proper barriers are in place.\12\ In general, the Exchange
believes that harmonizing customer order protection rules across self-
regulatory organizations and providing Trading Permit Holders with the
flexibility to implement their barriers in a manner they deem
appropriate will foster cooperation and contribute to perfecting the
mechanism of a free and open market and national market system. In
addition, the Exchange believes the additional requirement for Trading
Permit Holders to maintain records that identify the orders that are
associated with the reliance of the no-knowledge exception will further
enhance the Exchange's ability to adequately surveil its Trading Permit
Holders for compliance with the customer order protection rule.
Overall, the Exchange believes that the customer order protection rule,
as amended by the proposed rule change, will continue to maintain the
necessary protection and priority of customer orders designed to
prevent fraudulent and manipulative acts, without imposing any undue
regulatory costs on industry participants.
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\11\ See, e.g., Financial Industry Regulatory Authority (FINRA)
Rule 5320, ``Prohibition Against Trading Ahead of Customer Orders;
and Chicago Stock Exchange (CHX) Article 9, Rule 17, ``Prohibition
Against Trading Ahead of Customer Orders.''
\12\ Since each Trading Permit Holder is somewhat unique in its
structure and business model, such flexibility will provide each
firm with the ability to tailor their barriers in a way that is
consistent with their needs, so long as, at a minimum, they include
the requirements as proposed in this filing.
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B. Self-Regulatory Organization's Statement on Burden on Competition
CBOE does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. All Trading Permit Holders that
rely on information barriers to take advantage of the ``no-knowledge''
exception will have to satisfy the same criteria. The Exchange believes
the proposed rule change will reduce the burdens on market participants
by eliminating certain requirements in the current rule with which they
must comply to avail themselves of the ``no-knowledge'' exception. The
Exchange also believes the proposed rule change will reduce the burdens
on market participants that result from their having to comply with
varying rules related to customer order protection, thus reducing the
complexity of customer order protection rules, particularly for those
firms subject to the rules of multiple trading venues. The Exchange
believes the additional requirement to maintain records of orders that
rely on the ``no-knowledge'' exception will not impose additional
burdens on Trading Permit Holders, as it is consistent with audit trail
and record retention requirements that are already imposed on market
participants. Overall, the Exchange believes the proposed rule change
further harmonizes customer order protection rules across self-
regulatory organizations while sufficiently protecting customer orders,
which ultimately benefits market participants and does not impose a
burden on competition.
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) of the Act \13\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\14\
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\13\ 15 U.S.C. 78s(b)(3)(A).
\14\ 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 filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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A proposed rule change filed under Rule 19b-4(f)(6) normally does
not become operative for 30 days after the date of filing.\15\ However,
Rule 19b-4(f)(6)(iii) permits the Commission to designate a shorter
time if such action is consistent with the protection of investors and
the public interest.\16\ The Exchange has requested that the Commission
waive the 30-day operative delay because the Exchange believes the
proposed rule change does not present
[[Page 44997]]
any new, unique or substantive issues. The proposed rule change
eliminates some requirements that Trading Permit Holders otherwise
would have to satisfy to take advantage of the ``no-knowledge''
exception; however, the Exchange believes that the amended information
barrier requirements bring the rule further in line with the customer
protection rule requirements of other self-regulatory organizations. In
addition, the Exchange believes the information barriers, as amended,
will be sufficiently adequate to allow Trading Permit Holders to avail
themselves of the ``no-knowledge'' exception. The Exchange also
believes that the additional requirement to maintain records of orders
that rely on the ``no-knowledge'' exception is consistent with
requirements already imposed on market participants and thus will not
impose any additional burdens on Trading Permit Holders.
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\15\ 17 CFR 240.19b-4(f)(6)(iii).
\16\ Id.
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The Commission believes that the waiver of the 30-day operative
delay is consistent with the protection of investors and the public
interest because the proposed rule will harmonize the Exchange's
customer order protection rules with the rules of other self-regulatory
organizations,\17\ and that the requirements that the Exchange's rules
impose on Trading Permit Holders will continue to ensure that customer
orders are afforded sufficient protection. Therefore, the Commission
designates the proposal operative upon filing.\18\
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\17\ See supra note 11.
\18\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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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: (i)
necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) otherwise in furtherance of the
purposes of the Act.
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-2013-074 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-2013-074. 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 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 CBOE. 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-2013-074, and should be submitted on or before
August 15, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-17862 Filed 7-24-13; 8:45 am]
BILLING CODE 8011-01-P