[Federal Register Volume 79, Number 226 (Monday, November 24, 2014)]
[Notices]
[Pages 69958-69961]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-27706]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73628; File No. SR-CBOE-2014-085]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change Relating to Professional Orders
November 18, 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 November 10, 2014, 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, 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 Substance
of the Proposed Rule Change
The Exchange proposes to amend the definition of ``Professional''
in Rule 1.1(ggg) and adopt Interpretation and Policy .01 to Rule
1.1(ggg) concerning the definition of an ``order'' for purposes of Rule
1.1(ggg). The text of the proposed rule change is provided below and in
Exhibit 1.
(additions are italicized; deletions are [bracketed])
* * * * *
Chicago Board Options Exchange, Incorporated Rules
* * * * *
CHAPTER I
Definitions
] 2001 Definitions
RULE 1.1 When used in these Rules, unless the context otherwise
requires:
(a) Any term defined in the Bylaws and not otherwise defined in
this Chapter shall have the meaning assigned to such term in the
Bylaws.
(b)-(fff)
Professional
(ggg) The term ``Professional'' means any person or entity that (i)
is not a broker or dealer in securities, and (ii) places more than 390
orders in listed options per day on average during a calendar month for
its own beneficial account(s). A Professional will be treated in the
same manner as a broker or dealer in securities for purposes of Rules
6.2A, 6.2B, 6.8C, 6.9, 6.13A, 6.13B, 6.25, 6.45, 6.45A (except for
Interpretation and Policy .02), 6.45B (except for Interpretation and
Policy .02), 6.53C(c)(ii), 6.53C(d)(v), subparagraphs (b) and (c) under
Interpretation and Policy .06 to Rule 6.53C, 6.74 (except Professional
orders may be considered public customer orders subject to facilitation
under paragraphs (b) and (d)), 6.74A, 6.74B, 8.13, 8.15B, 8.87, 24.19,
43.1, 44.4, 44.14. The Professional designation is not available in
Hybrid 3.0 classes. All Professional orders shall be marked with the
appropriate origin code as determined by the Exchange.
. . . Interpretations And Policies
.01 For purposes of this Rule 1.1(ggg), an order which is placed
for the beneficial account(s) of a person or entity that is not a
broker or dealer in securities that is broken into multiple parts by a
broker or dealer or by an algorithm housed at a broker or dealer or by
an algorithm licensed from a broker or dealer, but which is housed with
the customer in order to achieve a specific execution strategy
including, for example, a basket trade, program trade, portfolio trade,
basis trade, or benchmark hedge, constitutes a single order and shall
be counted as one order.
* * * * *
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 definition of ``Professional''
to clarify how orders are computed under Rule 1.1(ggg). Specifically,
the Exchange proposes to adopt Interpretation and Policy .01 to Rule
1.1(ggg) to its definition of ``Professional'' in Rule 1.1(ggg) to
provide that for purposes of Rule 1.1(ggg), an order which is placed
for the beneficial account(s) of a person or entity that is not a
broker or dealer in securities that is broken into multiple parts by a
broker or dealer or by an algorithm housed at a broker or dealer or by
an algorithm licensed from a broker or dealer, but which is housed with
the customer in order to achieve a specific execution strategy
including, for example, a basket trade, program trade, portfolio trade,
basis trade, or benchmark hedge, constitutes a single order and shall
be counted as one order. The Exchange also proposes to add a provision
to Rule 1.1(ggg), which would provide that all Professional orders
shall be marked with the appropriate origin code as determined by the
Exchange.
The Exchange believes that the proposed rule changes will add
clarity and transparency to its current rules, which is in the
interests of all market participants. The purpose of this rule filing
is to codify the details of the Exchange's existing policies within the
Rules. The Exchange is continuously
[[Page 69959]]
evaluating clarifying additions to the Rules, particularly with respect
to order handling. The Exchange believes that the proposed rule change
and adoption of proposed Interpretation and Policy .01 to Rule 1.1(ggg)
is consistent with this effort.
Background
Under the Exchange's Rules, ``public customers'' are granted
certain marketplace advantages over non-customers. In particular,
public customer orders receive priority over non-customer orders and
Market-Maker quotes at the same price. Subject to certain exceptions,
public customer orders also do not incur transaction charges. These
marketplace advantages are intended to promote various business and
regulatory objectives including, but not limited to the Exchange's
goals of providing competitive pricing and attracting retail order
flow.
Prior to 2009, the Exchange designated all orders as either
customer orders or non-customer orders based on whether an order was
placed for the account of a registered securities broker or dealer. In
general, order priority and transaction fees were determined solely on
this distinguishing criterion. As investors' access to technology and
information increased, however, the Exchange's distinction between
public customers and non-customers became less effective in promoting
the intended purpose of the Rules. As the Exchange noted at the time,
it did not believe that the definitions of public customer and non-
customer properly distinguished between the kind of non-professional
retail investors that the order priority rules and transaction fees
exceptions were intended to benefit.\3\ Furthermore, the Exchange
believed that distinguishing solely between registered broker-dealers
and non-broker-dealers with respect to these advantages was no longer
appropriate in the marketplace because some non-broker-dealer
individuals and entities have access to information and technology that
enables them to trade listed options in the same manner as a broker or
dealer in securities.\4\ The Exchange therefore did not believe that it
was consistent with fair competition for these professional account
holders to continue to receive the same marketplace advantages that
retail investors have over broker-dealers trading on the Exchange.\5\
Accordingly, in 2009, the Exchange adopted a definition of
``Professional'' under Rule 1.1(ggg) to further distinguish different
types of orders placed on the Exchange.\6\
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\3\ See Securities Exchange Act Release No. 34-61198 (December
17, 2009), 74 FR 248 (December 29, 2009) (Order Granting Approval of
the Proposed Rule Change, as Modified by Amendment No. 1, Related to
Professional Orders) (SR-CBOE-2009-078).
\4\ See id.
\5\ See id.
\6\ See Rule 1.1(ggg).
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Under Rule 1.1(ggg), a person or entity that is not a securities
broker or dealer that places more than 390 listed options orders per
day on average during a calendar month for its own beneficial
account(s) is considered a ``Professional.'' Furthermore, under Rule
1.1(ggg), a person or entity that is not a securities broker or dealer
that places more than 390 listed options orders per day on average
during a calendar month for its own beneficial account(s) is considered
a ``Professional'' and treated in the same manner as a broker or dealer
in securities with respect to order priority and transaction fees.\7\
In general, ``Professionals'' are treated as broker-dealers with
respect to priority of order and transaction fees under the current
Rules of the Exchange. Rule 1.1(ggg) is based on and substantially
similar to International Securities Exchange (``ISE'') Rule 100(a)(31A)
as well as NASDAQ OMX BX Chapter I, Section I(a)(49), BATS Exchange
Rule 16.1(a)(45), NASDAQ OMX Phlx Rule 1000(b)(14), BOX Options
Exchange Rule 100(a)(50), and NYSE Amex Exchange Rule 900.2NY(18A).\8\
Notably, several of these exchanges cited uniform application of
Professional Order rules and discouraging regulatory arbitrage as
primary reasons for adopting a Professional Order rule.\9\
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\7\ Under Rule 1.1(ggg), ``Professionals'' are treated in the
same manner as a broker or dealer in securities for purposes of
Rules 6.2A (Rapid Opening System), 6.2B (Hybrid Opening System),
6.8C (Prohibition Against Members Functioning as Market-Makers), 6.9
(Solicited Transactions), 6.13A (Simple Auction Liaison), 6.13B
(Penny Price Improvement), 6.45 (Priority of bids and Offers--
Allocation of Trades), 6.45A (Priority and Allocation of Equity
Option Trades on the CBOE Hybrid System) (except that Professional
orders may be considered public customer orders, and therefore not
be subject to the exposure requirements for solicited broker-dealer
orders, under Interpretation and Policy .02), 6.45B (Priority and
Allocation of Trades in Index Options and Options on ETFs on the
CBOE Hybrid System) (except that Professional orders may be
considered public customer orders, and therefore not be subject to
the exposure requirements for solicited broker-dealer orders, under
Interpretation and Policy .02), 6.53C(c)(ii) and (d)(v) and
6.53C.06(b) and (c) (Complex Orders on the Hybrid System), 6.74
(Crossing Orders) (except that Professional orders may be considered
public customer orders subject to facilitation under paragraphs (b)
and (d)), 6.74A (Automated Improvement Mechanism) (except
Professional orders may be considered customer Agency Orders or
solicited orders eligible for customer-to-customer immediate crosses
under Interpretation and Policy .09), 6.74B (Solicitation Auction
Mechanism), 8.13 (Preferred Market-Maker Program), 8.15B
(Participation Entitlement of LMMs), 8.87 (Participation Entitlement
of DPMs and e-DPMs), 24.19 (Multi-Class Broad-Based Index Option
Spread Orders), 43.1 (Matching Algorithm/Priority), 44.4
(Obligations of SBT Market-Makers), and 44.14 (SBT DPM Obligations).
See Securities and Exchange Act Release No. 34-61198 (December 17,
2009), 74 FR 68880 (December 29, 2009) (Order Granting Approval of
the Proposed Rule Change, as Modified by Amendment No. 1, Related to
Professional Orders) (SR-CBOE-2009-078).
\8\ See Securities and Exchange Act Release No. 34-61198
(December 17, 2009), 74 FR 68880 (December 29, 2009) (Order Granting
Approval of the Proposed Rule Change, as Modified by Amendment No.
1, Related to Professional Orders) (SR-CBOE-2009-078).
\9\ See, e.g.; Securities and Exchange Act Release No. 34-62724
(August 16, 2010), 75 FR 51509 (August 20, 2010) (Notice of Filing
of a Proposed Rule Change by the NASDAQ Stock Market LLC To Adopt a
Definition of Professional and Require That All Professional Orders
Be Appropriately Marked) SR-NASDAQ-2010-099;Securities and Exchange
Act Release No. 34-65500 (October 6, 2011), 76 FR 63686 (October 13,
2011) (Notice of Filing and Immediate Effectiveness of Proposed Rule
Change To Adopt a Definition of Professional and Require That All
Professional Orders Be Appropriately Marked) SR-BATS-2011-041.
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Upon adopting Rule 1.1(ggg), the Exchange issued a Regulatory
Circular, interpreting Rule 1.1(ggg).\10\ With respect the counting of
single original orders that are then broken up into multiple orders to
achieve a specific execution strategy, the Exchange followed ISE's
interpretation of its Rule 100(a)(31A).\11\ Under ISE Rule 100(a)(31A),
if a customer places a ``parent'' order that is then broken up by an
executing firm into multiple ``child'' orders to achieve a specific
execution strategy, the original order is counted as one order for
professional order purposes.\12\ ISE recently clarified this
interpretation further, providing that original orders that are placed
on behalf of the beneficial account of a non-broker-dealer, which are
then broken up by a broker-dealer (or pursuant to an algorithm licensed
from a broker-dealer) in order to achieve a specific execution
strategy, such original orders will be counted as one order for
professional order purposes.\13\ In order to clarify the Rules and
ensure uniformity with Professional Order rules in place throughout the
industry, the Exchange is proposing to codify this interpretation in
the Rules.
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\10\ See CBOE RG09-148 (Professional Orders).
\11\ See ISE Regulatory Information Circular 2009-179 (Priority
Customer Orders and Professional Orders (FAQ)).
\12\ Id.
\13\ See ISE Regulatory Information Circular 2014-007 (Priority
Customer Orders and Professional Orders (FAQ)).
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Proposal
The Exchange proposes to adopt Interpretation .01 to Rule 1.1(ggg)
to clarify the Rules and help ensure uniform compliance. Specifically,
the
[[Page 69960]]
Exchange proposes to codify its current practice of counting ``parent''
orders, placed on a single ticket for the beneficial account(s) of a
person or entity that is not a broker or dealer in securities and which
are broken into multiple parts by a broker or dealer or by an algorithm
housed at a broker or dealer or by an algorithm licensed from a broker
or dealer, but which is housed with the customer in order to achieve a
specific execution strategy as one order for Professional Order
purposes. The Exchange believes that the proposed rule will add
transparency to and completeness to the Rules, which is in the best
interests of all market participants.
The Exchange notes that the proposed rule is in-line with current
Exchange practices and interpretations of nearly identical rules of
other exchanges.\14\ The Exchange believes that disparate rules with
respect to Professional order designation, and lack of uniform
application of such rules, do not promote the best regulation and may,
in fact, encourage regulatory arbitrage. The Exchange believes that the
risk of regulatory arbitrage is heightened in an environment where
similar rules are interpreted differently amongst different exchanges
and there is a lack of uniformity in marking Professional Orders when
routing such orders away. The Exchange also proposes to amend Rule
1.1(ggg) to provide that all Professional orders shall be marked with
the appropriate origin code as determined by the Exchange in order to
bring the Exchange's rules in-line with the Professional Order rules of
other exchanges. The Exchange believes that it is necessary to have
uniform interpretations of Professional Order designations throughout
the industry.
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\14\ See ISE Regulatory Information Circular 2014-007 (Priority
Customer Orders and Professional Orders (FAQ)).
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The Exchange also believes that counting basket trades, program
trades, portfolio trades, basis trades, and benchmark hedges placed for
the beneficial account(s) of a person or entity that is not a broker or
dealer in securities and which are broken into multiple parts by a
broker or dealer or by an algorithm housed at a broker or dealer or by
an algorithm licensed from a broker or dealer, but which is housed with
the customer as one order for Professional Order purposes is in-line
with the purpose of its Professional customer rule and serves the best
interests of investors. The types of trades cited above are often used
by money managers, pension fund managers, and others to gain exposure
to a particular set of securities at exactly the same time on behalf of
retail customers and investors. These strategies are singular
strategies, placed on a single ticket, that are used to avoid front-
running and maintain privacy on behalf of customers. These trades are
essentially one trade from a strategic standpoint in that all the terms
of the trade are entered at one point in time on a single ticket.\15\
Accordingly, the Exchange believes that such trades should be treated
as one trade for Professional order purposes.
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\15\ Although a change in a parent order's terms, price, or size
would cause the order to be considered an additional order under the
Rules, changes to child orders, which are initiated to keep an
overall execution strategy in place, would not cause a parent order
to refresh or result in multiple orders.
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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.\16\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \17\ 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) \18\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\16\ 15 U.S.C. 78f(b).
\17\ 15 U.S.C. 78f(b)(5).
\18\ Id.
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In particular, the Exchange believes that the proposed rules is
consistent with Section 6(b)(5) of the Act \19\ with respect to removal
of impediments to, and perfection of the mechanism of, a free and open
market and national market system. The Exchange believes that disparate
rules regarding Professional order designations, and a lack of uniform
application of such rules, do not promote the best regulation and may,
in fact, encourage regulatory arbitrage. Accordingly, the Exchange
believes that disparate application of similar Professional Order rules
is inconsistent with the goals of a national market system. The
Exchange believes that it is therefore prudent and necessary to have a
Professional designation rule that is in-line with the rules of other
exchanges. The Exchange believes that the disparate application of
Professional Order designations would result in the different treatment
of similar orders, thwarting the principles underlying order protection
rules and the national market system. The Exchange believes that an
alternative interpretation of Rule 1.1(ggg) would result in the
disparate treatment retail investors who the Rules are designed to
grant priority and who might otherwise be treated as Professionals
under the Rules. As such, the Exchange believes that the proposed rule
changes are consistent with the Act.
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\19\ Id.
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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 proposed rule will promote both intramarket and
intermarket competition by allowing retail investors to take advantage
of the priority rules that are intended to benefit them and placing all
investors on equal footing as a result of uniform rules amongst the
various exchanges. The Exchange believes that disparate rules with
respect to Professional order designation, and lack of uniform
application of such rules, do not promote the best regulation and may,
in fact, encourage regulatory arbitrage. The Exchange believes that
regulatory arbitrage contravenes the notion of fair competition and is
not in the best interests of investors.
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 written comments on the
proposed rule changes submitted in this filing.
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 \20\ and Rule 19b-4(f)(6) thereunder.\21\
Because the foregoing proposed rule change does
[[Page 69961]]
not: (1) significantly affect the protection of investors or the public
interest; (2) impose any significant burden on competition; and (3)
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 \22\ and Rule 19b-
4(f)(6) \23\ thereunder. 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 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 will
institute proceedings to determine whether the proposed rule change
should be approved or disapproved.
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\20\ 15 U.S.C. 78s(b)(3)(A).
\21\ 17 CFR 240.19b-4(f)(6).
\22\ 15 U.S.C. 78s(b)(3)(A).
\23\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
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.
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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-2014-085 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2014-085. 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-2014-085 and should be
submitted on or before December 15, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-27706 Filed 11-21-14; 8:45 am]
BILLING CODE 8011-01-P