[Federal Register Volume 80, Number 27 (Tuesday, February 10, 2015)]
[Notices]
[Pages 7515-7518]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-02641]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-74200; File No. SR-CBOE-2015-010]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of a Proposed Rule Change To Amend Rules
6.41 and 24.8
February 4, 2015.
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 22, 2015, 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.
---------------------------------------------------------------------------
\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
CBOE proposes to add an interpretation to each of Rules 6.41 and
24.8. The text of the proposed rule change is provided below.
[[Page 7516]]
(additions are in italics; deletions are [bracketed])
* * * * *
Chicago Board Options Exchange, Incorporated Rules
* * * * *
Rule 6.41. Meaning of Premium Bids and Offers
(a)-(c) No change.
. . . Interpretations and Policies:
.01 When a customer submits to a Trading Permit Holder for open
outcry handling a complex order with a total cash price (the ``total
order price'') and the total number of contracts for each leg, if
pricing the legs for execution would result in a difference between the
total execution price and the total order price, the Trading Permit
Holder must resolve the difference in a manner that provides price
improvement to the customer (i.e. the broker must determine leg prices
that correspond to a total purchase (sale) price that is less (greater)
than the total order price).
* * * * *
Rule 24.8. Meaning of Premium Bids and Offers
No change.
. . . Interpretations and Policies:
.01 When a customer submits to a Trading Permit Holder for open
outcry handling a complex order with a total cash price (the ``total
order price'') and the total number of contracts for each leg, if
pricing the legs for execution would result in a difference between the
total execution price and the total order price, the Trading Permit
Holder must resolve the difference in a manner that provides price
improvement to the customer (i.e. the broker must determine leg prices
that correspond to a total purchase (sale) price that is less (greater)
than the total order price).
* * * * *
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 adopt Interpretation and Policy .01 to
each of Rules 6.41 and 24.8 to describe the process of establishing
final leg execution prices when a broker receives from a customer a
complex order for open-outcry handling at a total cash price for the
order. Rules 6.41 (with respect to equities) and 24.8 (with respect to
indexes) provide that bids and offers must be expressed in terms of
dollars per unit of the underlying security or index, as applicable.\3\
However, the Exchange understands that a customer will sometimes
express interest in executing a complex order at a total cash price for
the order (rather than at a price per contract for each leg) (the
``total order price'') and the total number of contracts of each leg.
In this situation, the broker may represent the order to the trading
crowd at the total order price, and Trading Permit Holders in the
trading crowd may respond to trade with the order at that total order
price. Due to the complexity of the order and the price and number of
contracts involved, there may be instances in which the complex order
may not break down into a per-unit price for each leg based on the
existing market for the leg that corresponds to the total order price.
When this occurs, the broker resolves any difference in a manner that
provides price improvement to the customer (i.e. the broker must
determine leg prices that correspond to a total purchase (sale) price
that is less (greater) than the total order price). The proposed rule
change codifies in its rules the requirement that Trading Permit
Holders resolve any difference between the total order price and total
execution price in this manner.
---------------------------------------------------------------------------
\3\ Additionally, Rule 6.44 requires that bids and offers made
on the trading floor be for one option contract unless a specific
number is expressed in the bid or offer.
---------------------------------------------------------------------------
For example, suppose a customer sends to its broker a complex order
in class XYZ to buy 371 July 50 Calls and buy 400 July 50 Puts for a
total order price of $96,920. The market for July 50 Calls is 1.21-
1.22, and the market for the July 50 Puts is 1.29-1.30. The floor
broker represents the order to the trading crowd, and two Market-Makers
respond with a willingness to participate in the trade (the floor
broker is unable to reasonably determine the sequence in which the
Market-Makers responded so determines to apportion the order
equally).\4\ They establish a per-contract price of 1.21 for the July
50 Calls and 1.30 for the July 50 Puts. Because there is an uneven
number of July 50 Calls, in splitting up the order, one Market-Maker
(``Market-Maker A'') agrees to sell 185 July 50 Calls, and the other
Market-Maker (``Market-Maker B'') agrees to sell 186 July 50 Calls, and
Market-Makers A and B each agree to sell 200 July 50 Puts.\5\ These
market participants execute the trade at the leg prices set forth
above: Market-Maker A sells the July 50 Calls for $22,385 ($1.21 price/
share x 100 shares/contract x 185 contracts = $22,385) and the July 50
Puts for $26,000 ($1.30 price/share x 100 shares/contract x 200
contracts = $26,000), and Market-Maker B sells the July 50 Calls for
$22,506 ($1.21 price/share x 100 shares/contract x 186 contracts =
$22,506) and the July 50 Puts for $26,000 ($1.30 price/share x 100
shares/contract x 200 contracts = $26,000). Therefore, the customer's
total purchase price is $96,891 ($22,385 + $22,506 + $26,000 +
$26,000), which represents price improvement of $29 to the customer's
total order price. Pursuant to the proposed rule change, the broker and
Market-Makers could not execute the order at, for example, $1.22 for
the July 50 Calls and $1.30 for the July 50 Puts, because the total
purchase price for the customer would be $97,262, which is higher than
the customer's total order price.\6\ Brokers
[[Page 7517]]
may not be able to execute a complex order at a customer's exact total
order price because the current markets for the legs and allocation
among Trading Permit Holders may not break down in such a manner. In
addition, brokers must exercise due diligence and obtain the best price
for their customers and comply with the Exchange's rules regarding
minimum increments and complex order priority.\7\ The Exchange believes
the proposed rule change eliminates any potential confusion in the
rules regarding how Trading Permit Holders in the trading crowd must
determine the leg execution prices of these orders in these situations.
---------------------------------------------------------------------------
\4\ Rules 6.45 (with respect to options that do not trade on the
Hybrid trading system), 6.45A(b) (with respect to equity options
that trade on the Hybrid trading system), and 6.45B(b) (with respect
to index and exchange-traded fund options that trade on the Hybrid
trading system) sets forth the allocation and priority rules for
orders represented in open outcry. Generally, when there are
multiple bids (offers) at the best price, public customer orders
have first priority (multiple public customer orders at the same
price are ranked based on time priority), then orders of other
market participants are prioritized by time (for classes on the
Hybrid trading system, in-crowd market participants have priority
ahead of market participants with orders or quotes in the electronic
book). If the sequence in which bids (offers) were made cannot
reasonably be determined, then priority will be apportioned equally.
\5\ As described above, if the floor broker cannot reasonably
determine the sequence in which the Market-Makers responded, it
should apportion the order equally. The allocation and priority
provisions for open outcry trading do not address to which market
participant the ``extra'' contract should be allocated. See Rules
6.45, 6.45A(b) and 6.45B(b). Generally, the market participants
involved in the transaction will agree which one should receive the
extra contract; ultimately the Trading Permit Holder representing
the order (in this example, the floor broker) reasonably determines
how to allocate the order in accordance with the applicable rule.
\6\ This process of leg price determination becomes far more
complicated and time-consuming for complex orders with more than two
legs or when there are more than two responses from Trading Permit
Holders (which occurs regularly). The purpose of this filing is to
simplify this process (to the potential benefit of customers) so
that executions of these complex orders can be completed more
quickly.
\7\ Complex orders may be executed at a net debit or credit
price with another Trading Permit Holder without giving priority to
equivalent bids (offers) in the individual leg series that are
represented in the trading crowd or in the public customer limit
order book provided at least one leg of the order betters the
corresponding bid (offer) in the public customer limit order book by
at least one minimum trading increment or $0.01, as applicable. The
Exchange intends to make explicit in its rules in a separate rule
filing that a complex order (with any number of legs and in any
ratio) may be represented on the Exchange; however only those
complex orders that satisfy certain requirements (such as ratio
requirements) are eligible for this complex order priority, as well
as other special complex order treatment under the rules (such as
the ability to execute complex orders at minimum increments
different than simple orders). The proposed rule change in this
filing applies to all complex orders (both eligible and noneligible
for complex order priority and treatment). A complex order must
continue to satisfy eligibility requirements in the rules to receive
such priority and treatment (complex orders that do not satisfy
those eligibility requirements do not receive such priority and
treatment). See Rule 6.42 (minimum increment for complex orders) and
Rules 6.45(e), 6.45A(b)(ii) and 6.45B(b)(ii) (complex order priority
exception).
---------------------------------------------------------------------------
The proposed rule change does not amend the allocation or priority
rules for open outcry trading.\8\ For example, if a customer submitted
an order in class XYZ to buy 371 July 50 Calls for $1.21 and 400 July
50 Puts for $1.30, the order would execute in the same manner (with
respect to allocation and priority) as the order originally
communicated with a total order price in the example above. The legs
would be required to trade in accordance with Exchange pricing rules,
including the requirement to trade at prices at the applicable
increment for the class that are at or better than the Exchange's best
bid or offer, and the complex order priority rule.\9\ Similarly, in
both situations, the order would be allocated to the two responding
Market-Makers in time priority, or apportioned equally if the floor
broker could not reasonably determine the sequence in which the Market-
Makers responded (as was done in the example above). Thus, the proposed
rule change does not impact how complex orders trade in open outcry; it
only makes explicit in the rules that Trading Permit Holders must
handle orders for which the customer's total order price does not equal
the total execution price in a manner that ensures any price
improvement accrues to the customer.
---------------------------------------------------------------------------
\8\ See id.
\9\ As set forth above, to be eligible for complex order
priority in open outcry, one leg would have to improve the best
public customer price of the strategy by $0.01 for the order to
receive complex order priority. See id. In the initial example
above, the leg price for the July 50 Puts improved on the market, so
the July 50 Calls could receive priority over all other orders and
quotes at the leg execution price, which was the best bid. The
complex order would not have been eligible for complex order
priority had it executed at leg prices of $1.21 (for the July 50
Calls) and $1.29 (for the July 50 Puts). The Exchange notes that
each strategy must execute at least at these prices to receive the
priority (in this example, all 371 calls and 400 puts must have
prices of $1.21 or [sic] $1.29 [sic], respectively, or better to
qualify for complex order priority). The Commission notes that the
Exchange incorrectly noted in the previous sentence that to receive
priority, the strategy in the example must have prices of $1.21 or
$1.29. The Exchange clarified in an email that the sentence should
have stated that to receive priority, the strategy must have prices
of $1.21 and $1.30. See Email to David Hsu, Assistant Director,
Division of Trading and Markets, Commission from Laura Dickman,
Senior Attorney, CBOE, dated February 2, 2015.
---------------------------------------------------------------------------
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.\10\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \11\ 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) \12\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------
\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(5).
\12\ Id.
---------------------------------------------------------------------------
The Exchange believes that specifying in its rules how Trading
Permit Holders must handle complex orders submitted by customers with a
total order price rather than individual leg prices protects investors
and the public interest, because it ensures that price improvement
accrues to the customer. The Exchange believes that the proposed rule
change is not designed to permit unfair discrimination between
customers, issuers, brokers, or dealers because, even though the
proposed rule changes provides customers with benefits. The Exchange
believes it is appropriate to ensure price improvement accrues to
customers because they send orders from off the Exchange and are not in
a position to adjust their prices like the market participants on the
floor executing the orders. In addition, the proposed rule change is
consistent with the long-established history in the options industry of
providing beneficial treatment to customers in various circumstances
(such as providing for public customer priority in trade allocations)
for the purpose of encouraging continuing customer investment.
The Exchange notes that the proposed rule change does not amend the
allocation or priority rules for open outcry trading, including the
complex order priority exception. Any orders represented to the crowd
at a customer's total order price will execute in accordance with the
Exchange's current allocation and priority rules, and will execute in
the same manner as order represented at individual leg prices. In
addition, the Exchange notes that orders represented to the crowd at a
customer's order price must execute at the applicable increment for the
class (or the complex order minimum increment if eligible) and in
accordance with all other pricing rules. The proposed rule change
merely addresses how brokers that receive customer orders with a total
order price must handle those orders and simplifies the process of
determining the leg prices for such order to accelerate the executions
of complex orders.
B. Self-Regulatory Organization's Statement on Burden on Competition
CBOE does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. All brokers that receive
complex orders from customers at a total order price must comply with
the proposed rule change.
[[Page 7518]]
Additionally, these complex orders will trade in the same manner as,
including in accordance with allocation, priority and pricing rules
applicable to, complex orders that brokers receive from customers with
individual leg prices. All complex orders must continue to satisfy
eligibility requirements in the rules to receive complex order priority
and other complex order treatment. While the proposed rule change
provides customers with benefits, the Exchange believes it is
appropriate to ensure price improvement accrues to customers because
they send orders from off the Exchange and are not in a position to
adjust their prices like the market participants on the floor executing
the orders. In addition, the proposed rule change is consistent with
the a long-established history in the options industry of providing
beneficial treatment to customers in various circumstances (such as
providing for public customer priority in trade allocations) for the
purpose of encouraging continuing customer investment. CBOE does not
believe that the proposed rule change will impose any burden on
intermarket competition because the proposed rule change relates to the
form in which customer orders may be presented to the Exchange for
execution, not how orders may be allocated or prioritized. To the
extent the proposed change makes CBOE a more attractive marketplace for
customers to submit orders, those customers 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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. By order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CBOE-2015-010 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-2015-010. 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-2015-010 and should be
submitted on or before March 3, 2015.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
---------------------------------------------------------------------------
\13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-02641 Filed 2-9-15; 8:45 am]
BILLING CODE 8011-01-P