[Federal Register Volume 79, Number 233 (Thursday, December 4, 2014)]
[Notices]
[Pages 72044-72049]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-28475]
[[Page 72044]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73704; File No. SR-CBOE-2014-062]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of Amendment Nos. 1 and 2 and Order
Granting Accelerated Approval of a Proposed Rule Change, as Modified by
Amendment Nos. 1 and 2, To Adopt Extended Trading Hours for SPX and VIX
November 28, 2014.
I. Introduction
On August 26, 2014, Chicago Board Options Exchange, Incorporated
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange
Commission (the ``Commission'') a proposed rule change pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (the
``Act''),\1\ and Rule 19b-4 thereunder,\2\ to establish a separate
early morning trading session specifically for options on the S&P 500
Index (``SPX'') and CBOE Volatility Index (``VIX''). The proposed rule
change was published for comment in the Federal Register on September
12, 2014.\3\ On October 24, 2014, CBOE filed Amendment No. 1 to the
proposed rule change and also granted the Commission an extension of
time to consider its proposal to November 3, 2014.\4\ On October 31,
2014, CBOE granted the Commission an additional extension of time until
November 24, 2014. On November 21, 2014, CBOE filed Amendment No. 2 to
the proposed rule change and also granted the Commission a further
extension of time to consider its proposal to December 3, 2014.\5\ The
Commission received no substantive comments on the proposal.\6\ The
Commission is publishing this notice to solicit comments on Amendment
Nos. 1 and 2 from interested persons and is approving the proposed rule
change, as modified by Amendment Nos. 1 and 2, on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 73017 (September 8,
2014), 79 FR 54758 (September 12, 2014) (``Notice'').
\4\ CBOE filed Amendment No. 1 to the proposed rule change to
(i) amend the requirements for foreign Trading Permit Holders to
ensure, in part, that foreign Trading Permit Holders will be able to
provide the Exchange with information, including their books and
records; (ii) clarify why VIX index values will not be calculated
and disseminated during Extended Trading Hours; (iii) clarify that
CBOE will make available the number of Trading Permits during
Extended Trading Hours to comply with Section 6(c)(4) of the Act;
(iv) represent that the Exchange will establish procedures to ensure
that Trading Permit Holders only utilize clearing brokers that are
authorized by OCC for clearing during Extended Trading Hours; (v)
represent that CBOE's systems are designed to prohibit unauthorized
access; and (vi) correct an internal cross-reference in proposed
CBOE Rule 6.1A(e)(iii)(B). See Amendment No. 1 to File No. SR-CBOE-
2014-062, dated October 24, 2014 (``Amendment No. 1''). To promote
transparency of its proposed amendment, when CBOE filed Amendment
No. 1 with the Commission, it also submitted Amendment No. 1 as a
comment letter to the file, which the Commission posted on its Web
site and placed in the public comment file for SR-CBOE-2014-062. The
Exchange also posted a copy of its Amendment No. 1 on its Web site
at http://www.cboe.com/publish/RuleFilingsSEC/SR-CBOE-2014-062.a1.pdf when it filed the amendment with the Commission.
\5\ CBOE filed Amendment No. 2 to the proposed rule change to
delete proposed rule text in Exhibit 5 and delete related parts in
the purpose and statutory basis sections of its Form 19b-4
submission, as well as Exhibit 1 and Item 8 in the Form 19b-4 (each
as amended by Amendment No. 1), all of which related to the removal
of proposed requirements that would have applied to foreign Trading
Permit Holders. See Amendment No. 2 to File No. SR-CBOE-2014-062,
dated November 21, 2014 (``Amendment No. 2''). To promote
transparency of its proposed amendment, when CBOE filed Amendment
No. 2 with the Commission, it also submitted Amendment No. 2 as a
comment letter to the file, which the Commission posted on its Web
site and placed in the public comment file for SR-CBOE-2014-062. The
Exchange also posted a copy of its Amendment No. 2 on its Web site
at http://www.cboe.com/publish/RuleFilingsSEC/SR-CBOE-2014-062.a2.pdf when it filed the amendment with the Commission.
\6\ See infra notes 4 and 5 (noting that when CBOE submitted
each Amendment to its proposal, it also submitted them as a comment
letter to the file to promote the broad dissemination of its
Amendments).
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II. Description of the Proposed Rule Change, as Modified by Amendment
Nos. 1 and 2 \7\
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\7\ A full description of the proposed rule change can be found
in the Notice. See Notice, supra note 3.
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Currently, transactions in index options may be effected on the
Exchange generally between 8:30 a.m. and 3:15 p.m.,\8\ Monday through
Friday (``Regular Trading Hours''). CBOE has proposed to adopt rules
that will allow it to conduct a separate, fully-electronic trading
session from 2:00 a.m. to 8:15 a.m. Monday through Friday (``Extended
Trading Hours'') for SPX and VIX, two index options that are
exclusively-listed on CBOE. According to the Exchange, it is proposing
Extended Trading Hours to meet demand from investors who want to trade
these two products outside of Regular Trading Hours.\9\
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\8\ See CBOE Rule 24.6. All times in this order refer to Chicago
time.
\9\ See Notice, supra note 3 at 54758.
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Under the proposal, Extended Trading Hours will be a separate
trading session from Regular Trading Hours and there will be no
carryover from one trading session to the other and no interaction
between Extended Trading Hours and Regular Trading Hours.\10\ Extended
Trading Hours will operate using separate Exchange servers \11\ and
hardware from those used during Regular Trading Hours.\12\ Accordingly,
the electronic order book used during Regular Trading Hours will not be
connected to the electronic order book used during Extended Trading
Hours, and orders and quotes will not interact between the two
sessions.\13\ Rather, all orders will be cancelled at the end of each
Extended Trading Hours session.\14\
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\10\ See id.
\11\ Bandwidth packets will be sold separately for Regular
Trading Hours and Extended Trading Hours. See id. at 54766. Also,
while the same telecommunications lines may be used for both Regular
and Extended Trading Hours, those lines will be connected to a
separate application server at the Exchange to trade during Extended
Trading Hours. See id. at note 45.
\12\ See id. at 54758.
\13\ See id. at 54759.
\14\ See id. at 54763.
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During Extended Trading Hours, all Exchange rules will apply,
except as set forth in proposed CBOE Rule 6.1A (Extended Trading
Hours), and except for CBOE rules that by their terms are inapplicable
during Extended Trading Hours.\15\ For example, since all trading
during Extended Trading Hours will be electronic on the Hybrid Trading
System,\16\ all CBOE rules relating to open outcry trading and the
Hybrid 3.0 System will be inapplicable to Extended Trading Hours.\17\
However, CBOE rules relating to business conduct, doing business with
the public, due diligence, and best execution will apply during
Extended Trading Hours.\18\
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\15\ See proposed CBOE Rule 6.1A(a).
\16\ According to the Exchange, SPX currently trades on the
Hybrid 3.0 trading platform during Regular Trading Hours (except
that the weekly SPX series trade on the Hybrid trading platform
during Regular Trading Hours). Pursuant to proposed Rule 6.1A(b),
SPX will trade on the Hybrid trading platform (and not the Hybrid
3.0 trading platform) during Extended Trading Hours and thus will
trade pursuant to rules applicable to the Hybrid trading platform
(rather than the Hybrid 3.0 trading platform) during Extended
Trading Hours. See Notice, supra note 3 at note 18.
\17\ See id. at 54759.
\18\ See id. at note 13.
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Access. As is true during Regular Trading Hours, only authorized
Trading Permit Holders, their nominees, and their associated persons
will be able to access CBOE's electronic trading system.\19\ However,
trading privileges will be separate and distinct for
[[Page 72045]]
Extended Trading Hours. In other words, a broker-dealer that is not
currently a CBOE member, as well as a current CBOE Trading Permit
Holder (for Regular Trading Hours) will both need to obtain a separate
Extended Trading Hours Trading Permit if they want to trade during
CBOE's new Extended Trading Hours session.\20\ The separate nature of
access for the two trading sessions means that Trading Permit Holders
will need to use separate log-ins for Extended versus Regular Trading
Hours.\21\ In this respect, CBOE's systems will be designed to prevent
unauthorized access by persons not eligible to trade on CBOE during the
Extended Trading Hours session.\22\
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\19\ See id. at 54760. This requirement will apply to any non-
U.S. based person seeking access to the Extended Trading Hours
session. Persons that are not Trading Permit Holders, such as
employees of affiliates of Trading Permit Holders located outside of
the United States, will not have direct access to the Exchange, and
thus their orders and quotes must be submitted to the Exchange
through a Trading Permit Holder, subject to applicable laws, rules,
and regulations. See id. at note 59.
\20\ See proposed CBOE Rule 6.1A(d). The Exchange represents
that it will make available a sufficient number of Trading Permits
during Extended Trading Hours to comply with Section 6(c)(4) of the
Act. See Amendment No. 1, supra note 4. The Exchange intends to set
the initial limit of Extended Trading Hours Trading Permits at 900
Market Maker Trading Permits and 150 Electronic Access Trading
Permits (the same total number as available during Regular Trading
Hours). See id.
\21\ See Notice, supra note 3 at 54765.
\22\ See Amendment No. 1, supra note 4.
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Market Makers. CBOE's proposal contemplates participation from
Market Makers in the Extended Trading Hours session. To be eligible,
Market Makers will need to obtain a separate Extended Trading Hours
Trading Permit and also will need to request a separate appointment
during Extended Trading Hours.\23\ During Extended Trading Hours,
Market Makers will be required to maintain continuous electronic quotes
in 60% of the non-adjusted options series of the Market Maker's
appointed classes that expire in less than nine months for 90% of the
time when the Market Maker is quoting in a class.\24\ In addition, the
Exchange's proposal gives it the authority to determine to have no bid/
ask differential requirement in the Extended Trading Hours session.\25\
Further, Market Makers generally will be able to use the same Exchange
functionality during Extended Trading Hours that is available to them
during Regular Trading Hours. For example, Market Makers may elect to
use a quote risk monitor (``QRM'') mechanism during Extended Trading
Hours. Although, a Market Maker that elects to use QRM for both Regular
Trading Hours and Extended Trading Hours will need to establish
parameters separately for each trading session (even though a Market
Maker may elect to use the same parameters for both trading sessions or
use QRM for one trading session and not the other).\26\
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\23\ See proposed CBOE Rule 6.1A(e). For Extended Trading Hours,
the appointment cost for VIX will be 0.5 and for SPX it also will be
0.5. Each Extended Trading Hours Trading Permit will have an
appointment credit of 1.0 (the same as a Regular Trading Hours
Trading Permit), so at the launch of Extended Trading Hours, a
Market Maker will only need to hold one Extended Trading Hours
Trading Permit if it wants to quote in both SPX and VIX during
Extended Trading Hours. See Notice, supra note 3 at 54760. See also
proposed CBOE Rule 6.1A(e)(i).
\24\ See proposed CBOE Rule 6.1A(e)(ii).
\25\ See id.
\26\ See proposed CBOE Rule 8.18.
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LMMs. The Exchange also may approve one or more Market Makers to
act as Lead Market Makers (``LMMs'') in each class during Extended
Trading Hours.\27\ Unlike Regular Trading Hours, however, LMMs will
only be required to comply with the continuous quoting obligations and
other obligations applicable to regular Market Makers in their assigned
classes.\28\ Consequently, LMMs will not be entitled to receive a
participation entitlement in the Extended Hours Session.\29\ However,
if an LMM meets specific performance criteria during a month, it will
be eligible to receive a specified monetary incentive from CBOE.
Specifically, if an LMM: (1) Provides continuous electronic quotes in
at least the lesser of 99% of the non-adjusted series or 100% of the
non-adjusted series minus one call-put pair in an Extended Trading
Hours allocated class (excluding intra-day add-on series on the day
during which such series are added for trading) during Extended Trading
Hours in a given month and (2) ensures an opening of the same
percentage of series by 2:05 a.m. for at least 90% of the trading days
during Extended Trading Hours in a given month, the LMM will be
eligible to receive a rebate for that month in an amount set forth in
the Exchange Fees Schedule.\30\ For purposes of this heightened
continuous quoting standard, an LMM will be deemed to have provided
continuous electronic quotes during Extended Trading Hours if the LMM
provides electronic two-sided quotes for 90% of the time in Extended
Trading Hours in a given month.\31\
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\27\ See proposed CBOE Rule 6.1A(e)(iii)(A).
\28\ See proposed CBOE Rule 6.1A(e)(iii)(B).
\29\ See, e.g., CBOE Rules 6.45B and 8.15B (concerning
participation entitlements).
\30\ CBOE's adoption of any such rebate will be subject to the
rule filing process of Section 19 of the Act. CBOE is not proposing
any rebate in this current proposal.
\31\ See proposed CBOE Rule 6.1A(e)(iii)(C). Because the
heightened quoting standard for LMMs in the Extended Hours Trading
session is applicable only to a fee rebate and not a participation
entitlement, the monthly measuring period is separate and distinct
from the heightened quoting standard in the Regular Trading Hours
session, which is measured on a daily basis. See Notice, supra note
3 at 54762.
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Trading. During Extended Trading Hours, the Exchange proposes to
limit the available order types that may be entered into the system.
Specifically, in recognition of the expected reduced liquidity, higher
volatility, and wider spreads during Extended Trading Hours, the
Exchange will not allow market orders, market-on-close orders, stop
orders, and good-til-cancelled orders.\32\ Otherwise, order processing
during Extended Trading Hours will operate in the same manner as it
does for Regular Trading Hours and there will be no change to ranking,
display, or allocation algorithms rules.\33\ Moreover, there will be no
change between Regular and Extended Trading Hours in regards to the
processes for clearing, settlement, exercise, and expiration.\34\ In
addition, the Exchange will report the best bid and offer and executed
trades to the Options Price Reporting Authority (``OPRA'') during
Extended Trading Hours in the same manner that it reports that
information to OPRA during Regular Trading Hours.\35\
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\32\ See Notice, supra note 3 at 54763. See also proposed CBOE
Rule 6.1A(f).
\33\ See Notice, supra note 3 at 54765. The Exchange also
intends to activate the complex order auction and the automated
improvement mechanism (``AIM'') auction during Extended Trading
Hours. These auctions will operate in the same manner as they do
during Regular Trading Hours, except with respect to AIM, the
requirement that three Market Makers must be quoting to initiate an
AIM auction will not apply during Extended Trading Hours. See id. at
note 43.
\34\ See Notice, supra note 3 at 54765. According to the
Exchange, the Options Clearing Corporation has stated that it will
be able to clear and settle all transactions and handle exercises of
options during Extended Trading Hours. See id. at note 48. In
addition, the Exchange has represented that it will work with OCC to
establish procedures in connection with on-boarding Trading Permit
Holders to ensure that Extended Trading Hours Trading Permit Holders
only utilize clearing brokers that are properly authorized by OCC
for operating during Extended Trading Hours. See Amendment No. 1,
supra note 4.
\35\ See Notice, supra note 3 at 54765. The operator of OPRA has
informed CBOE that it intends to add a modifier to the disseminated
information during Extended Trading Hours. See id. at note 57. The
Exchange also will disseminate Extended Trading Hours data through
its proprietary data feed in the same format and manner that it
distributes data during Regular Trading Hours. See id. at 54765. Any
fees to be charged by CBOE for the Extended Trading Hours
proprietary data feed will be subject to a separate fee change
filing. See id. at note 49.
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The Exchange also may halt trading during Extended Trading Hours in
the interests of a fair and orderly market largely in the same manner
that it can during Regular Trading Hours.\36\ For
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example, if there was a marketwide trading halt at the end of the prior
trading day, CBOE could consider that as an ``unusual condition'' in
determining whether to halt trading during the following day's Extended
Trading Hours session.\37\ Separately, CBOE proposed to amend its trade
halt rule to provide that it also may consider whether trading in
related futures has been halted as a factor in determining whether to
halt trading in an option.\38\
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\36\ See proposed CBOE Rule 24.7(d). Further, clearly erroneous
trade breaks during Extended Trading Hours will be processed in the
same manner as Regular Trading Hours, except that during Extended
Trading Hours, only two Exchange Officials that are members of the
Exchange's staff will be necessary to make such a determination. See
Notice, supra note 3 at 54765.
\37\ See Notice, supra note 3 at 54766; and proposed CBOE Rule
24.7(d). Also, under the proposed rule change, CBOE will not have to
consider during Extended Trading Hours existing factors that are not
applicable to the Extended session, such as (i) the extent to which
trading is not occurring in the stocks or options underlying the
index; (ii) the current calculation of the index derived from the
current market prices of the stocks is not available; (iii) the
``current index level'' for a volatility index is not available or
the cash (spot) value for a volatility index is not available; and
(iv) the extent to which the rotation has been completed or other
factors regarding the status of the rotation, in determining whether
to halt trading during Extended Trading Hours. See Notice, supra
note 3 at note 53; and proposed CBOE Rule 24.7(d).
\38\ See proposed CBOE Rule 24.7, Interpretation and Policies
.01. Currently, CBOE's rule allows it to consider the activation of
price limits on futures exchanges when determining whether to halt
trading in an index options. The proposed change will allow CBOE to
consider any halt in futures trading, including halts called in
situations other than in response to the activation of a price
limit. See Notice, supra note 3 at 54765.
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Surveillance and Disclosures. The Exchange has represented that it
will perform all necessary surveillance coverage and will have
appropriately trained and qualified regulatory and operations staff in
place during Extended Trading Hours to satisfy its regulatory
obligations and administer the Extended Trading Hours session in real
time.\39\ In addition, because of the differences in the nature of the
market and trading between Regular and Extended Trading Hours, CBOE
will require Trading Permit Holders to disclose to customers that
trading during Extended Trading Hours may involve material risks,
including, in part, the possibility of lower liquidity, higher
volatility, and lack of an updated underlying index or portfolio
value,\40\ prior to accepting an order from a customer for execution
during Extended Trading Hours.\41\ The Exchange also will distribute a
Regulatory Circular detailing, among other things, some of the risks of
trading during Extended Trading Hours.\42\
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\39\ See Notice, supra note 3 at 54765 and 54767.
\40\ CBOE is the index calculator for the VIX. According to
CBOE, the accuracy of the calculation for VIX indicative (or spot)
values depends upon the quality of bid and offer quotes for
constituent SPX option series. CBOE is unsure whether the SPX option
quotes displayed during Extended Trading Hours will be sufficient to
calculate accurate and meaningful VIX indicative quote values during
Extended Hours. Accordingly, CBOE has determined to not calculate
VIX spot values during Extended Trading Hours. See Amendment No. 1,
supra note 4. However, as the Exchange and market participants gain
experience with the Extended Trading Hours session and if activity
and market maker participation increases, the Commission expects
CBOE to reevaluate this decision and consider disseminating a VIX
index value if and when quoting activity becomes sufficient to allow
CBOE to calculate accurate and meaningful VIX index values during
the Extended Trading Hours session.
\41\ See proposed CBOE Rule 6.1A(j).
\42\ See Notice, supra note 3 at 54764.
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III. Discussion and Commission Findings
After careful consideration, the Commission finds that the proposed
rule change, as modified by Amendment Nos. 1 and 2, is consistent with
the requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange.\43\ In particular, the
Commission finds that the proposed rule change, as amended, is
consistent with Section 6(b)(5) of the Act,\44\ which requires, among
other things, 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. While no other options
exchange is currently open for trading outside of Regular Trading
Hours, the Commission notes that it has previously approved extended
trading hours in the cash equities markets.\45\
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\43\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\44\ 15 U.S.C. 78f(b)(5).
\45\ See e.g., Securities Exchange Act Release Nos. 29237 (May
24, 1991), 56 FR 24853 (May 31, 1991) (SR-NYSE-90-52 and SR-NYSE-90-
53) (approving an off-hours trading facility on a pilot basis);
42004 (October 13, 1999), 64 FR 56548 (October 20, 1999) (SR-CHX-99-
16) (approving extended trading hours on a pilot basis); and 56985
(December 18, 2007), 72 FR 73388 (December 27, 2007) (SR-NASDAQ-
2007-098) (approving the trading of certain securities outside of
regular market hours).
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The proposed rule change, as modified by Amendment Nos. 1 and 2,
will allow investors additional trading opportunities to trade in two
CBOE exclusively-listed products outside of CBOE's current Regular
Trading Hours. The hours of CBOE's proposed Extended Trading Hours
roughly coincide with the regular trading hours in Europe, and
therefore CBOE's proposal may be of particular interest to traders
located in non-U.S. jurisdictions. At the same time, CBOE has proposed
certain limitations and protections on access and trading during
Extended Trading Hours that are designed to promote just and equitable
principles of trade and foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities. For example, as discussed above, only authorized Trading
Permit Holders, their nominees, and their associated persons will be
able to access the CBOE trading system during Extended Trading Hours,
and CBOE's system is designed to allow CBOE to restrict unauthorized
access to its systems in Extended Trading Hours.\46\ Specifically, CBOE
is requiring a new class of trading permits for Extended Trading Hours
with their own unique log-in ID, and only persons in possession of
those credentials will have access to CBOE's systems to trade during
Extended Trading Hours. Moreover, consistent with fostering cooperation
and coordination with persons engaged in clearing and settling
transactions in securities, CBOE has represented that it will work with
OCC to establish procedures in connection with on-boarding Extended
Trading Hours permit holders to ensure that Trading Permit Holders only
utilize clearing brokers that have been properly authorized by OCC for
operating during Extended Trading Hours.\47\ This process is designed
to help assure the orderly functioning of the clearing process in
Extended Trading Hours by avoiding any risk associated with a CBOE
permit holder trading through a clearing broker during Extended Trading
Hours if such clearing broker does not, in OCC's opinion, meet OCC's
standards for clearing outside of regular trading hours.
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\46\ The Commission notes that in order to be a Trading Permit
Holder, an individual or organization must be, in part, registered
as a broker or dealer pursuant to Section 15 of the Act or be
associated with a Trading Permit Holder organization that is
registered as a broker or dealer pursuant to Section 15 of the Act.
See CBOE Rules 3.2 and 3.3.
\47\ See Amendment No. 1, supra note 4.
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In addition, as discussed above, all of CBOE's rules, with certain
exceptions, will continue to apply during Extended Trading Hours. These
rules, among other things, prohibit Trading Permit Holders from
engaging in acts or practices inconsistent with just and equitable
principles of trade, making any willful or material misrepresentation
or omission in any
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application, report, or other communication to the Exchange or the OCC,
and from effecting or inducing the purchase, sale, or exercise of any
security for the purpose of manipulating the price or activity of the
security,\48\ as well as impose best execution requirements and
prohibit trading ahead of customer orders.\49\ In addition, the
Exchange has represented that it will revise its surveillance
procedures to incorporate transactions that occur and orders and
quotations that are submitted during Extended Trading Hours and perform
all necessary surveillance coverage during Extended Trading Hours.\50\
Importantly, CBOE has represented that it will have a sufficient number
of appropriately qualified staff on-site and otherwise available as
necessary during Extended Trading Hours to provide support and handle
any operations and regulatory issues that may arise.\51\ CBOE's
represented commitment to adequately staff its operations during
Extended Trading Hours is important to assure the integrity of CBOE's
operations during those early morning hours and necessary to assure
that CBOE is able to carry out and enforce its rules during this
session, including rules relating to trading halts and obvious error
trades, as well as thoroughly monitor trading and the operations of its
trading systems. Accordingly, the Commission believes that CBOE has
designed its Extended Trading Hours session to promote just and
equitable principles of trade and prevent fraudulent and manipulative
acts and practices to the same extent that its Regular Trading Hours
session has been so designed.
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\48\ See Chapter IV (Business Conduct) of CBOE's rules.
\49\ See CBOE Rules 53.2 (Prohibition Against Trading Ahead of
Customer Orders) and 53.8 (Best Execution and Interpositioning). The
Commission notes that CBOE Rule 53.2, Interpretations and Policies
.07, specifically provides that Trading Permit Holders may limit the
life of a customer order to the period of normal market hours.
However, if the customer and Trading Permit Holder agree to the
processing of the customer's order outside normal market hours, the
protections of the rule will apply to that customer's order for the
entirety of the agreed upon executable time.
\50\ See Notice, supra note 3 at 54765 and 54767.
\51\ See id.
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The Commission also believes that CBOE's disclosure requirement
that obligates members to make certain written disclosures to customers
regarding material trading risks that may exist during Extended Trading
Hours is consistent with the protection of investors.\52\ Specifically,
Trading Permit Holders will be required to make certain disclosures to
customers regarding the risk of lower liquidity, higher volatility, and
wider spreads during Extended Trading Hours as compared to Regular
Trading Hours.\53\ The Commission believes that such disclosures should
help ensure that customers are reasonably informed about the specific
risks associated with trading in the non-core market before they decide
to submit their first order in the Extended Trading Hours session.
Further, these requirements are designed to mitigate, to the extent
possible, the likelihood of investor confusion regarding the
significant differences between the character of the market typical of
Regular and Extended Trading Hours sessions.
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\52\ See proposed CBOE Rule 6.1A(j).
\53\ See id.
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The Commission further believes that CBOE's proposal to use a fully
electronic trading platform during Extended Trading Hours that shares
most of the functionality of its Hybrid System is reasonable. As
discussed above, CBOE will use separate servers and hardware for the
Extended Trading Hours session and the two sessions will not be linked
or otherwise interact with each other. Nevertheless, according to the
Exchange, orders will be processed in the same manner during Extended
Trading Hours as Regular Trading Hours and there will be no changes to
the ranking, display, or allocation algorithm rules.\54\ CBOE also
explained that there will be no changes to the processes for clearing,
settlement, exercise, and expiration.\55\ The Commission believes that
maintaining separate infrastructure for the two separate trading
systems is designed to protect the resiliency of the Regular Trading
Hours session. Further, utilizing the existing trading and clearing
process for the Extended Trading Hours session that CBOE uses for its
electronic trading during Regular Trading Hours should facilitate the
ability of CBOE members to trade in the new session on terms and with
functionality that is familiar to them.
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\54\ See Notice, supra note 3 at 54758.
\55\ See id. at 54765.
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However, there will be some differences during Extended Trading
Hours, such as returning certain kicked-out orders to a Trading Permit
Holder in lieu of routing such order to PAR, and limiting the types of
orders available for electronic processing to avoid the use of market
orders or any order that could convert into a market order. The
Commission believes these differences reflect that the character of
trading during Extended Trading Hours will likely differ from typical
trading during Regular Trading Hours, including the likelihood of
reduced liquidity, higher volatility, and wider spreads during Extended
Trading Hours.
Furthermore, CBOE has proposed to provide for Market Makers during
Extended Trading Hours. Any Market Maker that elects to have an
appointment during Extended Trading Hours will be subject to the same
general quoting obligations as are applicable during Regular Trading
Hours, though CBOE may determine not to impose bid/ask differential
requirements during Extended Trading Hours.\56\
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\56\ As noted above, Market Makers will not have to satisfy the
open outcry quoting obligations since all trading during Extended
Trading Hours will be electronic. See proposed CBOE Rule
6.1A(e)(ii).
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CBOE also has provided for Lead Market Makers, though the
Commission notes that LMMs will not be entitled to a participation
entitlement in Extended Trading Hours. However, LMMs that satisfy a
heightened quoting standard during a month will be eligible to receive
a rebate from CBOE for that month.\57\ The Commission believes that
CBOE's proposed LMM incentive program during Extended Trading Hours is
designed to encourage two-sided liquidity during Extended Trading Hours
and, to the extent it is successful, may contribute to the maintenance
of fair and orderly markets during Extended Trading Hours. To the
extent that CBOE is successful in encouraging active participation of
Market Makers and LMMs during Extended Trading Hours, then CBOE may be
able to help address some of the risks inherent in a non-core hours
trading session, including the risks of reduced liquidity, higher
volatility, and wider markets. Therefore, the proposal's provision for
Market Makers and LMMs during the Extended Trading Hours session is
consistent with the protection of investors and the public interest as
well as the promotion of fair and orderly markets.
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\57\ The Commission notes that the Exchange will need to submit
a proposed rule change pursuant to Section 19(b) of the Act if and
when it seeks to add such a rebate for LMMs to the Exchange's fee
schedule.
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The Commission also believes that CBOE's proposed changes to its
trading halt rule are consistent with the Act and designed to promote
fair and orderly markets. The Commission notes that the Exchange will
consider halting trading during Extended Trading Hours in the interests
of a fair and orderly market in the same manner that it could halt
trading during Regular Trading Hours. CBOE's proposed amendment to the
trading halt rule to allow it to consider a halt in trading in related
futures contracts is a reasonable additional
[[Page 72048]]
factor and consistent with the existing factors under the rule that
allows CBOE to consider the activation of price limits in the futures
markets.\58\
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\58\ See proposed CBOE Rule 24.7, Interpretations and Policies
.01.
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In addition, the Commission finds that the proposed rule change, as
amended, is consistent with Section 11A(a)(1)(C) of the Act.\59\
Congress found in those provisions that it is in the public interest
and appropriate for the protection of investors and the maintenance of
fair and orderly markets to assure the availability to brokers,
dealers, and investors of information with respect to quotations for
and transactions in securities, and to assure the practicability of
brokers executing investors' orders in the best market. The proposed
rule change is designed to accomplish these objectives by ensuring that
the Exchange will report its best bid and offer and executed trades to
OPRA during Extended Trading Hours in the same manner that they are
reported during Regular Trading Hours,\60\ thereby providing public
transparency of activity in the Extended Trading Hours market.
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\59\ 15 U.S.C. 78k-1(a)(1)(C).
\60\ See Notice, supra note 3 at 54765. See also supra note 35
(noting that OPRA intends to add a modifier to Extended Trading
Hours quotes and trades).
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IV. Solicitation of Comments on Amendment Nos. 1 and 2
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment Nos. 1
and 2 are 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 No. SR-CBOE-2014-062 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File No. SR-CBOE-2014-062. 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 such 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 No. SR-CBOE-2014-062 and should be
submitted on or before December 26, 2014.
V. Accelerated Approval of Proposed Rule Change as Modified by
Amendment Nos. 1 and 2
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment Nos. 1 and 2, prior to the thirtieth
day after the date of publication of notice of Amendment Nos. 1 and 2
in the Federal Register. The Commission notes that, in addition to
filing Amendment Nos. 1 and 2 with the Commission, CBOE also submitted
Amendment No. 1 and 2 as comments to the file, which the Commission
promptly posted on its Web site on October 27, 2014 and November 21,
2014, respectively, in order to promote public availability and
accessibility of the Amendments. The Commission notes that it did not
receive any comments on CBOE's initial proposal or on either Amendment
Nos. 1 or 2 prior to the date of this order.
In Amendment No. 1, the Exchange made several discrete changes to
its proposal to provide additional clarity and further legal support
for why its proposal is consistent with the Act. In particular, CBOE
represented that it will establish procedures with OCC to ensure that
Trading Permit Holders only utilize clearing brokers that have been
authorized by OCC to clear during Extended Trading Hours.\61\ Further,
CBOE clarified that it will be able to prohibit an unauthorized user
from accessing the trading system during Extended Trading Hours.\62\
CBOE also represented that it will comply with the provisions of
Section 6(c)(4) of the Act in making Trading Permits available during
Extended Trading Hours by authorizing a total of 1,050 total permits
for the Extended Trading Hours session.\63\ Finally, CBOE provided
additional support to justify its decision to not disseminate VIX
values during Extended Trading Hours.\64\ As the index calculator for
VIX, CBOE explained that it does not currently know whether SPX options
quotes (on which the VIX index is calculated) displayed in Extended
Trading Hours will be sufficient to calculate an accurate and
meaningful VIX indicative value in the same manner as what typically
occurs during Regular Trading Hours. CBOE further pledged to reconsider
the issue in the future and reassess whether trading in the Extended
Trading Hours session rises to a sufficient level that is capable of
supporting the calculation of accurate and meaningful VIX indicative
values. The Commission believes that these proposed changes in
Amendment No. 1 are reasonable and clarify the application and
operation of CBOE's original proposal in a manner that is materially
consistent with the scope of what CBOE originally proposed and what the
Commission noticed for public comment in the Federal Register.
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\61\ See Amendment No. 1, supra note 4.
\62\ See id.
\63\ See id.
\64\ See id.
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In addition, in Amendment No. 1, CBOE revised its proposed rules
regarding foreign Trading Permit Holders and access from foreign
jurisdictions. However, in Amendment No. 2 CBOE withdrew those proposed
rule changes. The Commission believes that those proposed changes were
incidental to the Exchange's core proposal to adopt an Extended Trading
Hours session for SPX and VIX, and that their deletion from the
proposal does not raise any concerns with the remainder of the
proposal. If, in the future, CBOE decides to revisit its rules
applicable to foreign Trading Permit Holders, it would need to submit a
proposed rule change filing pursuant to Section 19(b) of the Act.\65\
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\65\ 15 U.S.C. 78s(b).
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Accordingly, the Commission finds good cause, pursuant to Section
19(b)(2) of the Act, to approve the proposed rule change, as modified
by Amendment Nos. 1 and 2, on an accelerated basis.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\66\ that the
[[Page 72049]]
proposed rule change, as modified by Amendment Nos. 1 and 2, (SR-CBOE-
2014-062), be, and it hereby is, approved on an accelerated basis.
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\66\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\67\
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\67\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2014-28475 Filed 12-3-14; 8:45 am]
BILLING CODE 8011-01-P