[Federal Register Volume 78, Number 153 (Thursday, August 8, 2013)]
[Notices]
[Pages 48532-48535]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-19150]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70103; File No. SR-CBOE-2013-077]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change Relating to Exchange Order Handling
August 2, 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 23, 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 Substance
of the Proposed Rule Change
The Exchange proposes to modify its rules to address certain option
order handling procedures on the Exchange in connection with the
implementation of the market wide equity Plan to Address Extraordinary
Market Volatility (the ``Plan''). The text of the proposed rule change
is available at the Exchange's Office of the Secretary, on the
Exchange's Web site at http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx, at the Commission's Public Reference
Room, and on the Commission's Web site at http://www.sec.gov.
[[Page 48533]]
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
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 are 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\ The Plan was
implemented on April 8, 2013.
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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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Though the Plan was primarily designed for equity markets, the
Exchange believed it would impact the options markets as well. Thus,
the Exchange filed rule changes to amend the Exchange rules to ensure
the option markets are not compromised as a result of the Plan's
implementation.\7\ The Exchange is proposing to further amend these
rules to clarify how the ``Hybrid Opening System'' will operate on the
Exchange in the event of a limit up-limit down state.
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\7\ See Securities and Exchange Act Release No. 34-69328 (April
5, 2013), 78 FR 21642 (April 11, 2013) (order approving SR-CBOE-
2013-030).
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The current rule 6.2B.07, as recently amended, states that if an
underlying security for an option class enters into a limit up-limit
down state when the class moves to opening rotation, ``all market
orders in the system will be cancelled except market orders that are
considered limit orders pursuant to Rule 6.13(b)(iv) and entered the
previous trading day.''\8\ The Exchange is proposing to: (1) Correct
the incorrect reference to Exchange Rule 6.13(b)(iv), and (2) provide
greater clarity on the effect of a limit up-limit down state on an
underlying security after the opening rotation has begun.
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\8\ See Exchange Rule 6.2B.07.
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First, the Exchange is proposing to clarify an incorrect reference
in Rule 6.13(b)(iv). The orders described in the purpose section of the
original rule filing are, ``No-Bid Series'' which are actually found in
Exchange Rule 6.13(b)(vi) and not Exchange Rule 6.13(b)(iv). The
Exchange is now proposing to amend Rule 6.2B.07 to reflect this
correction. As stated in the original rule filing, the Exchange is
proposing to allow such market orders to remain in the Exchange Book
because these orders 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
Exchange Book. In addition, limit orders are not cancelled while the
underlying security is in a limit up-limit down state, so the Exchange
believes allowing market orders that function as a limit orders to
remain in the Exchange Book is consistent with the way limit order are
generally handled.
Next, the Exchange is proposing to add further clarity to the
recently amended rule to clarify that if a limit up-limit down state
commences after the opening rotation process has begun for a class of
options, the opening rotation will continue normally. More
specifically, the Exchange is proposing to add language to state that
market and limit orders will continue through the opening rotation as
they would if there was not a limit up-limit down state. Once the
opening rotation has begun for a class of options, due to how the
Exchange System operates, the process will not be interrupted to modify
the order handling mid-process.
Market orders will continue to process even though they are
normally returned during a limit up-limit down state,\9\ limit orders
will process normally,\10\ and auctions will open and operate as they
normally do.\11\ Market orders, though normally returned during a limit
up-limit down state to avoid executions at unfavorable or unreliable
prices, do not face the same risks when they are part of the opening
process. This is because preopening orders are matched with each other
and with other interest during the opening rotation. Thus market orders
will trade at the calculated opening price. Preopening limit orders
will also be filled at the opening price and cannot be filled through
their limit prices.
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\9\ See Exchange Rule 6.53(a) which describes how market orders
process.
\10\ See Exchange Rule 6.53(b) which describes how limit orders
process.
\11\ See Exchange Rule 6.2B.03 which describes the HAL Opening
Procedure on the Exchange. If a limit up-limit down state commences
after the opening rotation has begun for a class of options, options
to buy and sell will be paired to the extent possible. If another
market is displaying a more favorable price, then the HAL opening
procedure (``HALO'') will begin as described in Exchange Rule
6.2B.03. At the end of the HALO, consistent with Rule 6.2B.03, the
Exchange will link any unmatched portion of the market order to an
away trading venue. Any portion of a market order that is unfilled
and returned to the Exchange will be cancelled. Thus, markets orders
will not be filled at an unreliable price because they will either
be paired with other resting orders at the open or linked to an away
trading venue displaying a more favorable price. The Exchange
believes this is consistent with the treatment of market orders and
ensures they will not be given an unreliable price despite the limit
up-limit down state. Additionally, because limit orders have a limit
price, these orders will also not fill at an unreliable price.
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The Exchange believes this clarity is necessary to ensure Trading
Permit Holders are fully aware of special order handling during limit
up-limit down states. Though the rule currently specifies what happens
to orders on the Exchange if the limit up-limit down state commences
prior to the opening rotation beginning for a class of options, the
Exchange believes it is necessary to additionally state what would
happen if the opening rotation had already begun and the limit up-limit
down state triggers during the time of that process.
[[Page 48534]]
The Exchange believes that including pre-opening market order interest
in the opening rotation will enhance the liquidity available during the
rotation, and that the nature of the opening match process will protect
market orders against anomalous opening prices that could otherwise be
caused by market conditions associated with a limit-up limit-down
state. This will also help to ensure the options markets remain just
and equitable with the implementation of 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.\12\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \13\ 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) \14\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
\14\ 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. More
specifically, the currently proposed changes will correct and clarify
current Exchange rules promoting the interest of investors. Finally,
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 market system after the implementation of
the Plan. In addition, the Exchange is proposing to provide a more
robust rule text by clarifying what occurs if a limit up-limit down
states initiates after the beginning of the Exchange's opening
rotation. The Exchange believes that not cancelling the pre-opening
interest will ensure investors can execute more interest despite the
change in the market conditions after the opening process has begun.
This will also help to ensure the options markets remain just and
equitable with 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
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \15\ and Rule 19b-4(f)(6) thereunder.\16\
Because the 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 prior to
30 days from the date on which it was filed, or such shorter time as
the Commission may designate, if consistent with the protection of
investors and the public interest, the proposed rule change has become
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
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\15\ 15 U.S.C. 78s(b)(3)(A)(iii).
\16\ 17 CFR 240.19b-4(f)(6).
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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 under
Section 19(b)(2)(B) \17\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\17\ 15 U.S.C. 78s(b)(2)(B).
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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-2013-077 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-2013-077. 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 Section, 100 F Street
NE., Washington, DC 20549-1090 on official
[[Page 48535]]
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of
the filing will also 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-2013-077 and should be submitted on or before
August 29, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-19150 Filed 8-7-13; 8:45 am]
BILLING CODE P