[Federal Register Volume 78, Number 223 (Tuesday, November 19, 2013)]
[Notices]
[Pages 69487-69490]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-27623]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70857; File No. SR-CBOE-2013-107]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of a Proposed Rule Change To Amend Its
Rules Regarding Option Orders That Are Tied to Stock Orders
November 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 October 31, 2013, Chicago Board Options
[[Page 69488]]
Exchange, Incorporated (the ``Exchange'' or ``CBOE'') filed with the
Securities and Exchange Commission (the ``Commission'') the proposed
rule change as described in Items I, II, and III below, which Items
have been prepared by the Exchange. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange proposes to amend its rules regarding option orders
that are tied to stock orders. The text of the proposed rule change is
provided below.
(additions are italicized; deletions are [bracketed])
* * * * *
Chicago Board Options Exchange, Incorporated Rules
* * * * *
Rule 6.53. Certain Types of Orders Defined
One or more of the following order types may be made available on a
class-by-class basis. Certain order types may not be made available for
all Exchange systems. The classes and/or systems for which the order
types shall be available will be as provided in the Rules, as the
context may indicate, or as otherwise specified via Regulatory
Circular.
(a)-(x) No change.
(y) Tied to Stock. A tied to stock order is an option order that is
tied to a stock order at the time of order entry (i.e. option order
that, at the time it is entered into the System, is part of a trading
strategy consisting of two or more orders, at least one of which is an
order for the underlying stock, even though the component orders were
submitted separately). Each tied to stock order submitted to the
Exchange must be marked as ``tied to stock'' upon entry into the
System.
. . . Interpretation and Policies:
.01-.05 No change.
* * * * *
Rule 6.77. Order Service Firms
(a)-(d) No change.
(e) Order service firms must submit reports pursuant to Rule 15.2A
with respect to the stock transactions it executes on behalf of market-
makers pursuant to this Rule 6.77.
* * * * *
Rule 15.2A. Reports of Execution of Stock Transactions
In a manner and form prescribed by the Exchange, each Trading
Permit Holder must submit to the Exchange as soon as practicable
following the close of trading on each trading day a report of the
following information regarding the stock legs of tied to stock orders,
QCC orders, stock-option orders and other option orders that include
stock components on the same ticket executed on that trading day: (a)
time of execution, (b) execution quantity, (c) execution price, (d)
venue of execution, and (e) any other information requested by the
Exchange.
. . . Interpretation and Policies:
.01 The Exchange will announce by Regulatory Circular any
determinations, including the manner and form of the report, that it
must make pursuant to Rule 15.2A.
.02 Trading Permit Holders do not need to report information
pursuant to Rule 15.2A with respect to stock-option orders or other
option orders that include stock components on the same ticket that
were submitted to the Exchange for electronic processing.
* * * * *
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
The Exchange proposes to amend its rules regarding option orders
that are tied to stock orders. The proposed rule change adds Rule
6.53(y), which defines a ``tied to stock order'' as an option order
that is tied to a stock order at the time of order entry. In other
words, a ``tied to stock'' order is an option order that, at the time
it is entered into the System, is part of a trading strategy consisting
of two or more orders, at least one of which is an order for the
underlying stock, even though the component orders were submitted
separately). Tied to stock orders do not include standard hedging
strategies that include stock orders, as further discussed below. The
proposed rule requires that each tied to stock order submitted to the
Exchange be marked as ``tied to stock'' upon entry into the system. A
tied to stock order can be a simple or complex order.
Tied to stock orders do not include qualified contingent cross
(``QCC'') orders,\3\ stock-option orders that are submitted on the same
order ticket or submitted to the Exchange for electronic processing
(such as to the complex order book (``COB''), complex order auction
(``COA'') or automated improvement mechanism (``AIM'')),\4\ or
[[Page 69489]]
other option orders that include stock components on the same order
ticket. Thus, those types of orders do not need to be marked as ``tied
to stock.'' The Exchange is already aware that these types of orders
include stock components, and thus does not require market participants
to add the ``tied to stock'' marking to indicate the stock components
for regulatory purposes, as discussed below.
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\3\ A QCC order is an order to buy (sell) at least 1,000
standard option contracts or 10,000 mini-option contracts that is
identified as being part of a qualified contingent trade coupled
with a contra-side order to sell (buy) an equal number of contracts.
These orders may only be entered in the standard increments
applicable to simple orders in the options class under Rule 6.42.
For purposes of this order type, a ``qualified contingent trade'' is
a transaction consisting of two or more component orders, executed
as agent or principal, where: (a) At least one component is an NMS
stock, as defined in Rule 600 of Regulation NMS under Act; (b) all
components are effected with a product or price contingency that
either has been agreed to by all the respective counterparties or
arranged for by a broker-dealer as principal or agent; (c) the
execution of one component is contingent upon the execution of all
other components at or near the same time; (d) the specific
relationship between the component orders (e.g., the spread between
the prices of the component orders) is determined by the time the
contingent order is placed; (e) the component orders bear a
derivative relationship to one another, represent different classes
of shares of the same issuer, or involve the securities of
participants in mergers or with intentions to merge that have been
announced or cancelled; and (f) the transaction is fully hedged
(without regard to any prior existing position) as a result of other
components of the contingent trade. QCC orders may execute without
exposure provided the execution is not at the same price as a public
customer order resting in the electronic book and is at or between
the national best bid or offer. A QCC order will be cancelled if it
cannot be executed. See Rule 6.53(u).
\4\ A stock-option order is an order to buy or sell a stated
number of units of an underlying stock or a security convertible
into the underlying stock (``convertible security'') coupled with
the purchase or sale of options contract(s) on the opposite side of
the market representing either (i) the same number of units of the
underlying stock or convertible security, or (ii) the number of
units of the underlying stock necessary to create a delta neutral
position, but in no case in a ratio greater than eight-to-one
(8.00), where the ratio represents the total number of units of the
underlying stock or convertible security in the option leg to the
total number of units of the underlying stock or convertible
security in the stock leg (or such lower ratio as may be determined
by the Exchange on a class-by-class basis). Only those stock-option
orders with no more than the applicable number of legs, as
determined by the Exchange on a class-by-class basis, are eligible
for processing.
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The proposed rule change also adopts Rule 15.2A, which provides
that each Trading Permit Holder must submit to the Exchange as soon as
practicable following the close of trading on each trading day a report
of the following information regarding the stock legs of any tied to
stock orders, QCC orders, stock-option orders and other option orders
that include stock components executed on that trading day: (a) Time of
execution, (b) execution quantity, (c) execution price, (d) venue of
execution, and (e) any other information requested by the Exchange.
Proposed Interpretation and Policy .01 provides that the Exchange will
designate by Regulatory Circular any determinations \5\ that it must
make under Rule 15.2A, including the manner and form in which Trading
Permit Holders should submit these reports to the Exchange. Proposed
Interpretation and Policy .02 provides that Trading Permit Holders do
not need to report information pursuant to Rule 15.2A with respect to
stock-option orders or other option orders with stock components that
[sic] on the same order ticket submitted to the Exchange for electronic
processing (such as to COB, COA or AIM). Because the Exchange routes
for execution through a routing broker to stock exchanges or trading
centers the stock components of these orders, the Exchange will already
have access to the transaction information for the stock components of
these orders.
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\5\ This includes any updates or changes to any determinations
made by the Exchange.
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The Exchange is responsible for regulating its markets and Trading
Permit Holders. To carry out its regulatory responsibilities, the
Exchange needs to have sufficient trade data to effectively monitor
cross-market trading activity, assist with investigations of potential
violations of federal securities laws and Exchange rules, and perform
market reconstructions or other analysis necessary to understand
trading activity. CBOE currently requires Trading Permit Holders to
submit various execution data in real-time or daily to help the
Exchange monitor trading activity.\6\ The Exchange believes that as use
of electronic, interconnected markets continues to increase, access to
additional cross-market order information, specifically information
regarding stock trades tied to option orders, would enhance the
Exchange's ability to monitor this trading activity and therefore allow
it to more effectively fulfill its regulatory responsibilities.
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\6\ See, e.g., Rules 4.13 (requires Trading Permit Holders to
submit reports to the Exchange related to position limits); 6.24
(which requires Trading Permit Holders to systemize certain order
information); 6.51 (requires Trading Permit Holders to report to the
Exchange certain information regarding transactions on and off the
Exchange); 8.9 (requires Clearing Trading Permit Holders to report
to the Exchange executed orders by Market-Makers for the purchase or
sale of equity securities, as well as opening and closing positions
in those securities); 15.2 (requires Trading Permit Holders to
submit to the Exchange a daily report of all transactions); and 15.3
(requires Trading Permit Holders, upon request of the Exchange, to
submit a report of the total uncovered short positions in each
option contract class); see also Rule 15.1, Interpretation and
Policy .01. Pursuant to Appendix A--Applicability of Rules of the
Exchange to Chapter L of the CBOE Rules, these rules (except for
Rule 6.24) also apply to CBSX Trading Permit Holders.
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The Exchange believes the additional information it will receive
pursuant to proposed Rule 15.2A (including information from orders
service firms) will enhance its ability to effectively monitor and
conduct surveillance of the CBOE market and its Trading Permit Holders,
and their relevant cross-market trading activity, and thus to detect
and investigate illegal activity in a more timely fashion. The Exchange
also believes that the proposed rule change will improve its ability to
conduct more timely and accurate trading analyses, market
reconstructions, complex enforcement inquiries or investigations, and
inspections and examinations. The proposed marking of tied to stock
orders will greatly improve the Exchange's ability to tie an executed
stock leg to the applicable option order and thus the Exchange's
ability to conduct surveillances related to these orders, such as
surveillances for compliance with Regulation SHO and frontrunning
rules.
The Exchange believes the proposed rule change to mark tied to
stock orders will place minimal additional burden on Trading Permit
Holders, because the marking will merely be adding one additional
notation when entering a tied to stock order. The Exchange also
believes the proposed rule change to report to the Exchange information
regarding stock trades will place minimal additional burden on Trading
Permit Holders because they already have the capability to gather the
required information, as the Exchange believes that stock exchanges (on
which stock legs will be executed) require reporting of transaction
information for stock trades in a similar manner as the Exchange does
for option trades. Additionally, as discussed above, Exchange rules
already require Trading Permit Holders to systemize or report various
types of information regarding their orders and transactions to the
Exchange. Further, the Exchange believes that this proposed rule change
will substantially decrease its administrative burden in having to
otherwise manually gather this cross-market information and tie stock
legs to option orders in connection with its regulatory duties.
Order service firms,\7\ which are Trading Permit Holders, will be
subject to the reporting requirements set forth in proposed Rule 15.2A
with respect to stock transactions that they execute on behalf of
market-makers on the floor of the Exchange. The proposed rule change
adds paragraph (e) to Rule 6.77 to include this reporting requirement,
as the Exchange believes that including all requirements applicable to
order service firms in a single Exchange rule will benefit these firms.
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\7\ Order service firms are regular Trading Permit Holder
organizations that are registered with the Exchange for the purpose
of taking orders for the purchase or sale of stocks or commodity
futures contracts (and options thereon) from market-makers on the
floor of the Exchange and forwarding such orders for execution. Rule
6.77(a).
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The Exchange will announce the implementation date of the proposed
rule change in a Regulatory Circular to be published no later than 90
days following the effective date. The implementation date will be no
later than 180 days following the effective date.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of Section 6(b) of the
Act.\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
[[Page 69490]]
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
significantly aid the Exchange's efforts to prevent fraudulent and
manipulative acts and practices with respect to option orders that are
tied to stock, because it will greatly improve the Exchange's ability
to tie executed stock legs to the applicable option orders that were
separately entered. This, along with the additional stock transaction
information that the Exchange will receive pursuant to proposed Rule
15.2A, will provide the Exchange with information that will permit CBOE
to more efficiently and effectively conduct its regulatory
surveillances of CBOE trading activity and cross-market trading
activity, such as surveillances to ensure compliance with Regulation
SHO and frontrunning rules. Because the proposed rule change will
enhance the Exchange's surveillance of cross-market trading activity,
the Exchange believes the proposed rule change will also remove
impediments to and perfect the mechanism of a free and open market and
a national market system. In addition, the Exchange believes the
proposed rule change will promote just and equitable principles of
trade and protect investors by allowing the Exchange to detect and
investigate illegal activity in a more timely fashion and improving the
Exchange's ability to conduct more timely and accurate trading
analyses, market reconstructions, complex enforcement inquiries or
investigations, and inspections and examinations. Finally, the Exchange
believes that the proposed changes to Rule 6.77 will benefit investors
by including all requirements with respect to stock transactions
executed by orders service firms, respectively, in a single place
within the Exchange's rules.
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 not necessary or appropriate in furtherance of
the purposes of the Act. The proposed rule change will impose the same
marking and reporting requirements on all Trading Permit Holders that
submit tied to stock orders to CBOE. The Exchange believes that the
proposed rule change does not impose any burden on intermarket
competition not necessary or appropriate in furtherance of the purposes
of the Act. While the proposed rule change may impose requirements with
respect to tied to stock orders submitted to CBOE that other options
exchanges do not, the Exchange believes that, as discussed above, any
additional burden imposed on Trading Permit Holders by this proposed
rule change is minimal. The Exchange believes that stock exchanges (on
which stock legs will be executed) already require reporting of
transaction information for stock trades in a similar manner as the
proposed rule change will require. Additionally, the marking
requirement for tied to stock orders is only one additional piece of
information that the Trading Permit Holder must enter when submitting a
tied to stock order. The Exchange believes the benefits that the
proposed rule change will provide with respect to its regulatory
responsibilities far outweigh any minimal additional burden imposed 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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange 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 Number SR-CBOE-2013-107 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-2013-107. 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 20549-1090 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-2013-107, and should be submitted on or before December 10, 2013.
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\11\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\11\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-27623 Filed 11-18-13; 8:45 am]
BILLING CODE 8011-01-P