[Federal Register Volume 79, Number 4 (Tuesday, January 7, 2014)]
[Notices]
[Pages 867-869]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-31600]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71209; File No. SR-TOPAZ-2013-20]
Self-Regulatory Organizations; Topaz Exchange, LLC; Notice of
Filing of Proposed Rule Change To More Specifically Address the Number
and Size of Counterparties to a Qualified Contingent Cross Order
December 31, 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 December 18, 2013, the Topaz Exchange, LLC (d/b/a ISE Gemini)
(the ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which items have been prepared by the self-regulatory
organization. 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 is proposing to amend Rule 715 (Types of Orders) to
more specifically address the number and size of counterparties to a
Qualified Contingent Cross Order (``QCC Order''). The text of the
proposed rule change is available on the Exchange's Internet Web site
at http://www.ise.com, at the principal office of the Exchange, 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 self-regulatory organization
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 self-regulatory organization
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 purpose of this proposal is to remove the size restriction on
contra-party participation on a QCC Order. This proposal would expand
the availability of QCC Orders by permitting multiple contra-parties on
a QCC Order, each of which may consist of an order for less than 1,000
contracts; provided however, that the originating QCC Order meets the
1,000 contract minimum (as well as the other requirements of a QCC
Order). This change is intended to increase liquidity and, potentially,
improve the prices at which QCC Orders get executed, as explained
further below.
A QCC Order must be comprised of an originating order to buy or
sell at least 1,000 contracts \3\ that is identified as being part of a
qualified contingent trade,\4\ coupled with a contra-side order or
orders totaling an equal number of contracts, each of which is at least
1,000 contracts. QCC Orders are automatically executed upon entry
provided that the execution (i) is not at the same price as a Priority
Customer Order on the Exchange's limit order book and (ii) is at or
between the NBBO. QCC Orders will be automatically canceled if they
cannot be executed. QCC Orders may only be entered in the regular
trading increments applicable to the options
[[Page 868]]
class under Rule 710 (Minimum Trading Increments).
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\3\ In the case of Mini Options, the minimum size is 10,000
contracts.
\4\ 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 the Exchange Act; (b) all
components are effected with a product or price contingency that
either has been agreed to by all the respective contra-parties [sic]
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.
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The QCC Order type was originally approved on July 26, 2013.\5\ The
Exchange then amended this rule on December 18, 2013 to specify that a
QCC Order could have multiple contra-parties, so long as each contra-
party's order is for at least 1,000 contracts.\6\
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\5\ See Securities Exchange Act Release No. 70050 (July 26,
2013), 78 FR 46622 (August 1, 2013) (File No. 10-209).
\6\ See SR-Topaz-2013-20 [sic].
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The Exchange is now proposing to remove the size limit placed on
contra-parties to QCC Orders in an effort to increase liquidity and,
potentially, improve the prices at which QCC Orders get executed. The
ability for market participants to provide liquidity in response to
large sized orders is directly proportional to the size and associated
risk of the resulting position. As a result, smaller sized trades are
often done at a better price than larger sized trades, which convey
more risk. The ability to pool together multiple market participants to
participate on a trade for any size, as opposed to only allowing market
participants to participate for a minimum of 1,000 contracts has a
direct and positive impact on the ability of those market participants
to provide the best price as they compete to participate against the
order without being compelled to provide liquidity with a large minimum
quantity. This concept isn't unique to large crosses. It is well
understood and observed that any product with multiple market
participants providing liquidity offers the tightest and most liquid
market and the same applies to the larger orders negotiated away from
the exchanges.
Allowing several participants to offer liquidity to a QCC Order
serves to ensure that that order receives the best possible price
available in the market. Restricting interaction to only participants
who are willing to trade a minimum of 1,000 contracts simply guarantees
an inferior price because a trade will be limited to few liquidity
providers who are taking on more risk as opposed to multiple liquidity
providers being able to share the overall risk and trade at a better
price. For example, a 1,000 contract order in GOOG will receive a
better price if two liquidity providers are able to each provide 500
contracts, rather than one of them having to trade the entire 1,000
contracts.
An area of concern has been the protection of smaller orders, which
is why the QCC Order is limited to the 1,000 contract minimum. It is
important to note that the concern has always been and should continue
to be for the originating or unsolicited part of the order, the order
that is seeking liquidity and not the professional responders and
providers of liquidity. Allowing smaller orders to participate on the
other side of QCC Orders not only provides the best price and
opportunity for a trade to occur in a tight and liquid market, but
ensures that the highest possible number of liquidity providers are
able to participate. Limiting participation only to liquidity providers
who are willing to participate on the trade for 1,000 contracts
conversely could result in an inferior price by shutting out some
participants due to the large size and thereby minimizing the
opportunity for competition and price improvement. Removing this
limitation benefits both sides of a QCC trade by ensuring a trade at
the best possible price without favoring larger participants on the
solicited side of the trade.
2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) \7\ that an exchange have rules that
are designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism for a free and open market and
a national market system, and, in general, to protect investors and the
public interest by amending the rule text to more clearly defining the
QCC Order. Specifically, because the proposal removes the size
restriction placed on the contra-sides to a QCC Order, it should
increase liquidity and improve the prices at which QCC Orders get
executed and, therefore, provide more opportunity to participate in QCC
trades, consistent with the key principles behind the QCC Order.
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\7\ 15 U.S.C. 78f(b)(5).
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In approving QCC Orders, the Commission has stated that ``. . .
qualified contingent trades are of benefit to the market as a whole and
a contribution to the efficient functioning of the securities markets
and the price discovery process.'' \8\ The Commission ``also has
recognized that contingent trades can be useful trading tools for
investors and other market participants, particularly those who trade
the securities of issuers involved in mergers, different classes of
shares of the same issuer, convertible securities, and equity
derivatives such as options [emphasis added].'' \9\ In light of these
benefits, the Exchange believes that the proposal should improve the
usefulness of the QCC Order without raising novel regulatory issues,
because the proposal does not impact the fundamental aspects of this
order type--it merely permits multiple contra-parties, regardless of
size, on one side, while preserving the 1,000 contract minimum on the
originating QCC Order.
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\8\ QCC Approval Order at text accompanying footnote 115.
\9\ QCC Approval Order at Section III.A. citing Securities
Exchange Act Release No. 54389 (August 31, 2006), 71 FR 52829
(September 7, 2006) (Original QCT Exemption).
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Consistent with Section 6(b)(8) of the Act, the Exchange believes
that this will be beneficial to participants because allowing multiple
parties of any size on one contra-side of a QCC Order should foster
competition for filling QCC Orders and thereby result in potentially
better prices.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange 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. In fact, the proposal is
intended to relieve a burden on competition, which results from
different exchanges interpreting their rules differently. Among the
options exchanges, the Exchange believes that the proposal to allow
multiple counterparties of at least 1,000 contracts should foster
competition for filling the contra-side of a QCC order and thereby
result in potentially better prices for such orders.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments from members or other interested
parties.
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 self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
[[Page 869]]
(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-TOPAZ-2013-20 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-TOPAZ-2013-20. 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 the 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 Number SR-TOPAZ-2013-20 and should be
submitted on or before January 28, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-31600 Filed 1-6-14; 8:45 am]
BILLING CODE 8011-01-P [FEDREG][VOL]*[/VOL][NO]*[/NO][DATE]*[/
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