[Federal Register Volume 79, Number 16 (Friday, January 24, 2014)]
[Notices]
[Pages 4188-4191]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-01401]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71347; File No. SR-CBOE-2014-002]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change Relating to the Exchange's Quote Risk Monitor
Mechanism
January 17, 2014.
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 January 15, 2014, Chicago Board Options Exchange, Incorporated
(``Exchange'' or ``CBOE'') 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 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 Substance
of the Proposed Rule Change
The Exchange proposes to amend its Quote Risk Monitor Mechanism.
The text of the proposed rule change is available on the Exchange's Web
site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at
the Exchange's Office of the Secretary, at the Commission's Public
Reference Room, and on the Commission's Web site (http://www.sec.gov).
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 operation of the Exchange's Quote Risk Monitor (``QRM'')
Mechanism is codified in Rule 8.18. The purpose of this proposed rule
change is to add three new functions to QRM Mechanism to help Hybrid
Market-Makers (as defined in Rule 8.18) and TPH organizations control
the risk of multiple, nearly-simultaneous executions across related
option series. The use of the new functions is voluntary. The proposed
rule change also makes clear that the TPH organization with which a
Hybrid Market-Maker is associated (as well as the Hybrid Market-Maker
himself) may establish parameters by which the Exchange will activate
the QRM Mechanism for the Hybrid Market-Maker (the current rule text
only explicitly permits Hybrid Market-Makers to establish such
parameters). The Exchange also proposes to make some changes to the
Rule 8.18 text to
[[Page 4189]]
make such rule more readable in conjunction with the other changes
proposed herein.\3\
---------------------------------------------------------------------------
\3\ Specifically, the Exchange proposes to amend the beginning
of the second sentence of Rule 8.18, which reads ``Hybrid Market-
Makers that use the QRM Mechanism shall specify, for each such
option class in which the Hybrid Market-Maker is engaged in trading,
a maximum number of contracts for such option class (the ``Contract
Limit'') and a rolling time period in seconds within which such
Contract Limit is to be measured (the ``Measurement Interval'')'' to
read: ``The functionality of the QRM Mechanism that is available to
Hybrid Market-Makers includes, for each such option class in which
the Hybrid Market-Maker is engaged in trading: (i) A maximum number
of contracts for such option class (the ``Contract Limit'') and a
rolling time period in milliseconds within which such Contract Limit
is to be measured (the ``Measurement Interval'');''. The Exchange's
systems will allow Hybrid Market-Makers to set the Measurement
Interval in milliseconds (as opposed to seconds), so the Exchange
proposes to provide this more precise option to Hybrid Market-
Makers.
---------------------------------------------------------------------------
The first new function available to Hybrid Market Makers allows
each Hybrid Market-Maker the ability to specify a maximum cumulative
percentage that the Hybrid Market-Maker is willing to trade (the
``Cumulative Percentage Limit''). Under the proposal, the cumulative
percentage is the sum of the percentages of the original quoted size of
each side of each series within a class that traded, and a rolling time
period in milliseconds within which such Cumulative Percentage Limit is
to be measured (the ``Measurement Interval''). When the QRM Mechanism
determines that the Hybrid Market-Maker has traded at least the
Cumulative Percentage Limit for any option class on a trading platform
during any rolling Measurement Interval, the QRM Mechanism will
automatically cancel all of the electronic quotes being disseminated on
that trading platform with respect to that Hybrid Market-Maker in that
option class and any other classes with the same underlying security
until the Hybrid Market-Maker refreshes those electronic quotes.\4\
---------------------------------------------------------------------------
\4\ The Exchange also proposes to delete the words ``more than''
from the specification that ``When the Exchange determines that the
Hybrid Market-Maker has traded more than the Contract Limit or
Cumulative Percentage Limit for such option class on a trading
platform during any rolling Measurement Interval, or has traded at
least the Number of Series Fully Traded on a trading platform during
any rolling Measurement Interval, the QRM Mechanism shall cancel all
electronic quotes that are being disseminated on the same trading
platform with respect to that Hybrid Market-Maker in that option
class and any other classes with the same underlying security until
the Hybrid Market-Maker refreshes those electronic quotes'' and
replace ``more than'' with the words ``at least''. This is because
the QRM Mechanism is triggered (and quotes are canceled) at the
moment when the Hybrid Market-Maker trades the Contract Limit or
Cumulative Percentage Limit (as opposed to when the Hybrid Market-
Maker has traded more than Contract Limit or Cumulative Percentage
Limit). The Exchange also proposes to delete the words ``that are''
from the above statement for reasons of grammatical simplicity.
---------------------------------------------------------------------------
By way of example, assume a Hybrid Market-Maker is quoting the
following series:
Series A Quote: 1.00--1.20 50 x 50
Series B Quote 2.00--2.20 75 x 75
Series C Quote 3.00--3.20 100 x 100
If the Cumulative Percentage Limit is set at 150% for the Hybrid
Market-Maker and an order to buy 40 contracts of Series A is received,
the series percentage would be 80% (i.e., 40/50). The cumulative
percentage would also be 80%. If a second order to sell 25 contracts of
Series B is received, the series percentage would be 33% (i.e., 25/75).
The cumulative percentage would now be 113% (i.e., 80 + 33 = 113). If a
third order to buy 70 contracts of Series C is received, the series
percentage would be 70% (i.e., 70/100). The cumulative percentage would
now be 183% (i.e., 113 + 70 = 183). Since 183% exceeds the Cumulative
Percentage Limit of 150%, the Hybrid Market-Maker's quotes in the
class, and any class on the same trading platform with the same
underlying security, would be cancelled. This cancellation, however,
would not occur until after execution of the third order. Due to firm
quote obligations rules, the QRM Mechanism will not cancel quotes (and
in the case of an Exchange-wide QRM Incident, orders) until after the
execution of the order that caused the triggering of the QRM Mechanism.
Note that percentages are added to one another, regardless of the
denominator.
Percentages are also calculated based on the original quote size,
not the remaining quote size. Using the quotes set forth above as an
example, if an order to buy 40 contracts of Series A is received, the
series percentage would be 80% (i.e., 40/50). The cumulative percentage
would also be 80%. If a second order to sell 25 contracts of Series B
is received, the series percentage would be 33% (i.e., 25/75). The
cumulative percentage would then be 113% (i.e., 80 + 33 = 113). If a
third order to buy 10 contracts of Series A is received, the series
percentage would be 20% (i.e., 10/50). The cumulative percentage would
then be 133% (i.e., 113 + 20 = 133). If a fourth order to buy 70
contracts of Series C is received, the series percentage would be 70%
(i.e., 70/100). The cumulative percentage would then be 203% (i.e., 133
+ 70 = 203).
The proposed rule change adds a second new function to the QRM
Mechanism that would allow each Hybrid Market-Maker to specify the
maximum number of series for which either side of the quote is fully
traded (the ``Number of Series Fully Traded'') and a Measurement
Interval. When the QRM Mechanism determines that the Hybrid Market-
Maker has traded at least the Number of Series Fully Traded for any
option class on a trading platform during any rolling Measurement
Interval, the QRM mechanism will automatically cancel all of the Hybrid
Market-Maker's electronic quotes being disseminated on the same trading
platform in that option class and any other classes with the same
underlying security until the Hybrid Market-Maker refreshes those
electronic quotes.
To illustrate this functionality, assume that a Hybrid Market-Maker
is quoting the following series:
Series A Quote: 1.00--1.20 50 x 50
Series B Quote 2.00--2.20 75 x 75
Series C Quote 3.00--3.20 100 x 100
If the Number of Series Fully Traded is set at two, and an order to
buy 50 contracts of Series A is received, the number of series traded
in full will be one. If a second order to sell 25 contracts of Series B
is received, the number of series traded in full will still be one
because Series B did not trade in full. If a third order to buy 100
contracts of Series C is received, the number of series traded in full
will then be two. Since two meets the parameter set for Number of
Series Fully Traded, the Hybrid Market-Maker's quotes on that trading
platform in that class (and any other classes with the same underlying
security traded on that trading platform) would be cancelled.
Whenever one of the QRM functions (i.e., Contract Limit, Cumulative
Percentage Limit or Number of Series Fully Traded) has been triggered
and the QRM Mechanism automatically cancels all of the Hybrid Market-
Maker's electronic quotes in all series of that option class traded on
that trading platform (and any other classes with the same underlying
security traded on that trading platform), such action by the Exchange
shall be termed a ``QRM Incident''. Both of the new functionalities
described above (along with the already-existing Contract Limit QRM
functionality) are optional and Hybrid Market-Makers are not required
to set parameters for the aforementioned QRM Mechanism functions.
The Exchange has above proposed that, when the QRM Mechanism
automatically cancels all of a Hybrid Market-Maker's electronic quotes
in an option class, the Exchange will also cancel all of the Hybrid
Market-Maker's electronic quotes in any other classes with the same
underlying security. The
[[Page 4190]]
purpose of this is because the risk involved in trading beyond a
Market-Maker's risk profile extends to classes that have the same
underlying security (since often the only difference between such
classes is the multiplier of number of units of the underlying
security).
However, the Exchange has also limited cancellation of quotes to
those being disseminated on the same trading platform. When a Hybrid
Market-Maker has traded at least the Contract Limit or Cumulative
Percentage Limit, on an option class on a trading platform during any
rolling Measurement Interval, or has traded the Number of Series Fully
Traded on an option class on a trading platform during any rolling
Measurement Interval, the QRM Mechanism shall cancel all electronic
quotes being disseminated on the same trading platform. This
qualification is proposed because of the Exchange's SPX options class.
SPX options (and QIXs on the S&P 500) are traded on the Exchange's
Hybrid 3.0 platform, while SPX options with End-of-Week expiration
(``SPXW'') trade on the Exchange's Hybrid platform. The Exchange
believes that the differences between trading on the two platforms are
such that a Market-Maker exceeding his risk profile trading on one
platform will not necessarily mean that the Market-Maker will have
exceeded his risk profile on the other platform. This will also allow a
Market-Maker to set different QRM limits on SPX and SPXW.
Finally, the proposed amendment adds a third function that allows
the Exchange to cancel all quotes and orders of a Hybrid Market-Maker
or TPH Organization once a specified number of QRM Incidents has been
reached. Under this proposed functionality, a Hybrid Market-Maker or a
TPH organization may specify a maximum number of QRM Incidents with
respect to all QRM Functions (i.e., Contract Limit, Cumulative
Percentage Limit and Number of Series Fully Traded) and a Measurement
Interval on an Exchange-wide basis. When the Exchange determines that
such Hybrid Market-Maker or TPH organization has reached its QRM
Incident limit during any rolling Measurement Interval, the QRM
Mechanism shall cancel all of the Hybrid Market-Maker's or TPH
organization's electronic quotes and Market-Maker orders resting in the
Book in all option classes on the Exchange and prevent a Hybrid Market-
Maker or TPH organization from sending additional quotes or orders to
the Exchange until the Hybrid Market-Maker or TPH organization
reactivates its ability to send quotes or orders in a manner prescribed
by the Exchange.\5\
---------------------------------------------------------------------------
\5\ The Exchange will announce such manner to Trading Permit
Holders via Regulatory Circular. The current plan for such
reactivation is for the Hybrid Market-Maker or TPH Organization to
contact the Exchange's Help Desk to request reactivation, though the
Exchange is examining the possibility of creating a systematized
manner for Hybrid Market-Makers or TPH Organizations to reactivate.
---------------------------------------------------------------------------
Once the QRM Mechanism is triggered and quotes (and in the case of
an Exchange-wide cancellation, orders) are cancelled, all counters that
determine whether the QRM Mechanism is triggered and a QRM Incident
occurs will be reset for all classes for which quotes (and in the case
of an Exchange-wide cancellation, orders) were canceled for all parties
for whom such quotes (and in the case of an Exchange-wide cancellation,
orders) were canceled. This means that, if the QRM Mechanism is
triggered due to a party's reaching the Contract Limit, Cumulative
Percentage Limit, or Number of Series Fully Traded for a class, and
quotes (and in the case of an Exchange-wide cancellation, orders) are
canceled, the number of contracts traded in all classes for which
quotes and orders were canceled would be reset to zero, the cumulative
percentage for all classes for which quotes and orders were canceled
would be reset to zero, and the number of series that are fully traded
for all classes for which quotes and orders were canceled would be
reset to zero. If the Exchange cancels all of the Hybrid Market-Maker's
or TPH organization's electronic quotes and Market-Maker orders resting
in the Book, and the Hybrid Market-Maker or TPH organization does not
reactivate its ability to send quotes or orders, the block will be in
effect only for the trading day that the Hybrid Market-Maker or TPH
organization reached its QRM Incident limit.
As with the Contract Limit, Cumulative Percentage Limit or Number
of Series Fully Traded QRM functions, Hybrid Market-Makers and TPH
organizations are not required to set parameters for the Exchange-wide
QRM. All QRM Mechanism functionalities are currently optional.
The Exchange represents that it has the systems capacity to permit
the operation of these enhanced QRM Mechanism functions. The Exchange
does note that, in a situation in which the QRM Mechanism is triggered,
and quotes (and in the case of an Exchange-wide cancellation, orders)
must be canceled for multiple classes related to the same underlying
security or across multiple business clusters,\6\ it may take a brief
period for such cancellation to occur (during which period orders may
execute against such quotes and orders; this functionality will not
violate the Exchange's firm quote rules). The Exchange will use best
efforts to cancel such quotes and orders as rapidly as possible.
---------------------------------------------------------------------------
\6\ The Exchange's systems group various classes into different
business clusters for systems purposes.
---------------------------------------------------------------------------
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.\7\ Specifically, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \8\ 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) \9\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------
\7\ 15 U.S.C. 78f(b).
\8\ 15 U.S.C. 78f(b)(5).
\9\ Id.
---------------------------------------------------------------------------
In particular, the Exchange believes that investors and market
participants will benefit from the proposed new functionality of the
QRM Mechanism. Hybrid Market-Makers are vulnerable to the risk that,
through an error in pricing or due to market events, they will receive
multiple, automatic executions at disadvantageous or erroneous prices
before they can adjust their quotes. Without adequate risk management
tools such as the QRM, Hybrid Market-Makers could widen their quotes,
quote less aggressively or limit their quote size. Such actions may
undermine the quality of the markets available to customers and other
market participants.
Accordingly, with the enhancements proposed by the Exchange to QRM,
the use of the QRM Mechanism will encourage more aggressive and
narrower quoting, thereby removing impediments to and perfecting the
mechanism of a
[[Page 4191]]
free and open market and a national market system, and, in general,
more effectively protecting investors and the public interest. In
addition, providing Market-Makers with more tools for managing risk
will facilitate transactions in securities because, as noted above, the
quotes of market makers will be more reliable and could help prevent
erroneous orders and transactions. As a result, the new functionality
for the QRM Mechanism has the potential to promote just and equitable
principles of trade. Also, the proposed changes do not change to whom
any aspects of the QRM Mechanism applies, as the proposed changes apply
to all market participants to whom the QRM Mechanism previously
applied.
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 that is not necessary or appropriate
in furtherance of the purposes of the Act. Rather, the Exchange
believes that the functions of the QRM mechanism help promote fair and
orderly markets.
The Exchange does not believe that the proposed rule change will
impose any burden on intramarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act because the use
of the QRM Mechanism including the new enhancements is voluntary.
Further, the proposed changes do not change to whom any aspects of the
QRM Mechanism applies, as the proposed changes apply to all market
participants to whom the QRM Mechanism previously applied. Similarly,
the Exchange does not believe that the proposed rule change will impose
any burden on intermarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act because, again,
the use of the QRM Mechanism including the new enhancements is
voluntary. Moreover, the proposed enhancements to the QRM Mechanism
apply only to trading on CBOE. To the extent that the proposed changes
may make CBOE a more attractive trading venue for market participants
on other exchanges, such market participants may elect to become CBOE
market participants.
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) of the Act \10\ and Rule 19b-4(f)(6) thereunder.\11\
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 \12\ and Rule 19b-
4(f)(6) thereunder.\13\
---------------------------------------------------------------------------
\10\ 15 U.S.C. 78s(b)(3)(A).
\11\ 17 CFR 240.19b-4(f)(6).
\12\ 15 U.S.C. 78s(b)(3)(A).
\13\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires the Exchange to give the Commission written notice of the
Exchange's intent to file the proposed rule change, along with a
brief description and text of 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.
---------------------------------------------------------------------------
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.
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-2014-002 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-2014-002. 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-CBOE-2014-002 and should be
submitted on or before February 14, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
---------------------------------------------------------------------------
\14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-01401 Filed 1-23-14; 8:45 am]
BILLING CODE 8011-01-P