[Federal Register Volume 80, Number 164 (Tuesday, August 25, 2015)]
[Notices]
[Pages 51642-51644]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-20935]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-75736; File No. SR-CBOE-2015-045]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Instituting Proceedings To Determine Whether To
Approve or Disapprove a Proposed Rule Change, as Modified by Amendment
No. 1, Relating to Rule 6.53C and Complex Orders on the Hybrid System
August 19, 2015.
I. Introduction
On May 12, 2015, Chicago Board Options Exchange, Incorporated (the
``Exchange'' or ``CBOE'') filed with the Securities and Exchange
Commission (the ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the ``Exchange Act'' or ``Act''),\1\
and Rule 19b-4 thereunder,\2\ a proposed rule change to modify CBOE
Rule 6.53C, Complex Orders on the Hybrid System, regarding eligibility
for participation in the Complex Order Book (``COB'') and the Complex
Order Auction (``COA''). The proposed rule change was published for
comment in the Federal Register on May 27, 2015.\3\ On June 3, 2015,
CBOE filed Amendment No.1 to the proposed rule change.\4\ On July 6,
2015, the Commission extended the time period within which to approve
the proposed rule change, disapprove the proposed rule change, or
institute proceedings to determine whether to disapprove the proposed
rule change, to August 25, 2015.\5\ The Commission has received no
comments on the proposed rule change. This order institutes proceedings
under Section 19(b)(2)(B) of the Act \6\ to
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determine whether to approve or disapprove the proposed rule change.
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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. 75003 (May 20,
2015), 80 FR 30306 (``Notice'').
\4\ Amendment No. 1 to the proposed rule change amended the
statutory basis and burden on competition sections regarding
distinguishing between Professional and non-Professional orders for
purposes of determining eligibility for COA.
\5\ See Securities Exchange Act Release No. 75359 (July 6,
2015), 80 FR 39821 (July 10, 2015).
\6\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposal
The Exchange seeks to modify CBOE Rule 6.53C to allow the Exchange
to further distinguish between the complex order origin types that are
eligible for the COB and COA.\7\ Currently, under CBOE Rule 6.53C, the
Exchange may determine whether orders from non-broker dealer public
customers, broker-dealers that are not Market-Makers or specialists on
an options exchange, and/or Market-Makers or specialists on an options
exchange are eligible for entry into the COB or COA. Under these
current COA and COB eligibility parameters, there is no distinction
between professional public customers and non-professional public
customers.
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\7\ The COA is a feature within CBOE's Hybrid System that
exposes eligible complex orders for price improvement. In classes
where the COA is activated, eligible orders are electronically
exposed for an exposure period. At the conclusion of the COA
process, the order is then allocated or, to the extent not executed,
sent to the COB or routed. See Notice, 80 FR at 15264.
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The Exchange proposes to modify CBOE Rule 6.53C so that it could
determine whether the following two additional types of market
participants are eligible for entry into the COB and the COA: (i) Non-
broker-dealer public customers that are Voluntary Professional
Customers or Professional Customers (herein, ``Professionals'') and
(ii) non-broker-dealer public customers that are not Voluntary
Professional Customers or Professional Customers.
CBOE states that it is proposing this change so that it may prevent
orders from Professionals from triggering a COA. According to the
Exchange, CBOE participants currently may cancel and replace their
complex orders as often as they wish without incurring any cancellation
fees. Each order that meets the eligibility requirements detailed in
CBOE Rule 6.53C,\8\ including cancellations and replacements, generates
a new COA. The Exchange states that few of the complex orders entered
by Professional Customers that trigger a COA actually execute in the
auction process.\9\ Accordingly, CBOE believes that allowing COA
eligibility to be determined by origin code (e.g., by whether the order
comes from a Professional), which permits CBOE to prevent orders from
Professionals from triggering a COA, will ``eliminate the clutter of
unnecessary Professional COA messages, as well as increase the
likelihood of executions for public customers.'' \10\ The Exchange
further believes that allowing Professionals to participate in the COA
can be detrimental to non-professional public customer order flow.\11\
The Exchange also believes that ``removing unnecessary Professional COA
messages may encourage more participants to provide auction responses
(ultimately increasing the likelihood of executions for public
customers . . .) because fewer unnecessary COA messages will most
likely increase the proportion of responses that lead to an
execution.'' \12\
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\8\ A COA-eligible order is a complex order that, as determined
by the Exchange on a class-by-class basis, is eligible for COA
considering the order's marketability (defined as a number of ticks
away from the current market), size, complex order type, and complex
order origin type. See Rule 6.53C(d)(1). This proposed rule change
would change the term ``complex order origin type'' to ``complex
order origin code.''
\9\ For example, in Amendment No. 1, the Exchange notes that
orders for Professionals made up 52% of COA auctions but resulted in
0.62% of COA executions in the month of February 2015. The Exchange
states that this is a representative example of Professional orders
participation and execution rates in the COA.
\10\ See Notice, 80 FR at 30307.
\11\ See id.
\12\ See Amendment No. 1 at 4.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-CBOE-
2015-045 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \13\ to determine whether the proposed rule
change, as modified by Amendment No. 1, should be approved or
disapproved. Institution of such proceedings is appropriate at this
time in view of the legal and policy issues raised by the proposed rule
change, as discussed below. Institution of proceedings does not
indicate that the Commission has reached any conclusions with respect
to any of the issues involved.
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\13\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\14\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of, and comment on, whether the proposed rule change is
consistent with: Section 6(b)(5) of the Act,\15\ which requires that
the rules of a national securities exchange be designed, among other
things, to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, 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, and are not designed to permit unfair discrimination between
customers, issuers, brokers, or dealers; and Section 6(b)(8) of the
Act,\16\ which requires that the rules of a national securities
exchange not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act.
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\14\ 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of the Exchange
Act also provides that proceedings to determine whether to
disapprove a proposed rule change must be concluded within 180 days
of the date of publication of notice of the filing of the proposed
rule change. See id. The time for conclusion of the proceedings may
be extended for up to 60 days if the Commission finds good cause for
such extension and publishes its reasons for so finding. See id.
\15\ 15 U.S.C. 78f(b)(5).
\16\ 15 U.S.C. 78f(b)(8).
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The Exchange's proposed rule change would provide the Exchange
discretion to determine whether two additional groups of market
participants are eligible for entry into the COA and COB: (i)
Professionals and (ii) non-broker-dealer public customers that are not
Professionals.\17\ The Commission believes that the proposal raises
important issues that warrant further public comment and Commission
consideration regarding whether the proposal would result in unfair
discrimination or would impose an unnecessary and or inappropriate
burden on competition to the extent the Exchange exercises its proposed
discretion and excludes either of the two categories of market
participants discussed above from the COA and COB.
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\17\ Under the current Rule, CBOE already may determine that
Broker-dealers that are not Market-Makers or specialists on an
options exchange and Market-Makers or specialists on an options
exchange are not eligible for entry into the COA and COB pursuant to
CBOE Rule 6.53C.
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In light of these issues and concerns, the Commission believes that
questions arise regarding whether the proposal is consistent with the
requirements of Sections 6(b)(5) and 6(b)(8) of the Act. As the
Commission continues to evaluate the issues presented by the proposal,
the Commission solicits comment on whether the proposal is consistent
with the Act and whether the Exchange has met its burden in presenting
a statutory analysis of how its proposal is consistent with the Act. In
particular, the grounds for disapproval under consideration include
whether the Exchange's proposal is consistent with Sections 6(b)(5)
\18\ and 6(b)(8) \19\ of the Act.
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\18\ 15 U.S.C. 78f(b)(5).
\19\ 15 U.S.C. 78f(b)(8).
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In addition, under the Commission's rules of procedure, a self-
regulatory organization that proposes to amend its rules bears the
burden of demonstrating
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that its proposal is consistent with the Act.\20\ In this regard:
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\20\ Rule 700(b)(3), 17 CFR 201.700(b)(3).
the description of the proposed rule change, its purpose and
operation, its effect, and a legal analysis of its consistency with
applicable requirements must all be sufficiently detailed and
specific to support an affirmative Commission finding. Any failure
of the self-regulatory organization to provide the information
elicited by Form 19b-4 may result in the Commission not having a
sufficient basis to make an affirmative finding that a proposed rule
change is consistent with the Exchange Act and the rules and
regulations thereunder that are applicable to the self-regulatory
organization.\21\
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\21\ Id.
IV. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data and arguments with respect to the
concerns identified above, as well as any other concerns they may have
with the proposed rule change. In particular, the Commission invites
the written views of interested persons concerning whether the proposal
is consistent with Sections 6(b)(5) and 6(b)(8) \22\ or any other
provision of the Act, or the rules and regulations thereunder. Although
there do not appear to be any issues relevant to approval or
disapproval which would be facilitated by an oral presentation of
views, data, and arguments, the Commission will consider, pursuant to
Rule 19b-4 under the Act,\23\ any request for an opportunity to make an
oral presentation.\24\
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\22\ 15 U.S.C. 78f(b)(5) and (b)(8).
\23\ 17 CFR 240.19b-4.
\24\ Section 19(b)(2) of the Act, as amended by the Securities
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants to
the Commission flexibility to determine what type of proceeding--
either oral or notice and opportunity for written comments--is
appropriate for consideration of a particular proposal by a self-
regulatory organization. See Securities Act Amendments of 1975,
Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 75,
94th Cong., 1st Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by September 15, 2015. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
September 29, 2015. In light of the concerns raised by the proposed
rule change, as discussed above, the Commission invites additional
comment on the proposed rule change as the Commission continues its
analysis of whether the proposed rule change is consistent with Section
6(b)(5),\25\ Section 6(b)(8),\26\ and all other provision of the Act,
or the rules and regulations thereunder. The Commission asks that
commenters address the sufficiency and merit of the Exchange's
statements in support of the proposed rule change, in addition to any
other comments they may wish to submit about the proposed rule change.
In particular, the Commission invites comment on the following:
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\25\ 15 U.S.C. 78f(b)(5).
\26\ 15 U.S.C. 78f(b)(8).
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1. Would excluding orders submitted by Professionals from entry
into the COA or COB adversely affect the ability of Professionals to
execute their orders? Why or why not?
2. Do commenters agree with the Exchange that there are an
excessive number of Professional COA messages that adversely affect the
likelihood of executions for non-broker-dealer public customers that
are not Professionals? Would excluding Professionals orders from the
COA increase the likelihood of, or otherwise impact, executions for
non-broker-dealer public customers that are not Professionals? If so,
how?
3. Is the volume of auction messages generated by Professionals
disruptive to the auction process? If so, how?
4. Are there other methods that involve less potential for unfair
discrimination that could be used to reduce the volume of messages?
5. Do Professionals want their orders to be eligible for entry into
the COA or the COB? Why or why not?
6. Although the Exchange states that the proposal is intended to
allow the Exchange to prevent Professionals from entry into the COB or
COA, the proposed rule change, as drafted, would also allow the
Exchange to determine that non-broker-dealer public customers that are
not Professionals Customers are not eligible for entry into both the
COA and the COB. Do commenters believe that excluding non-broker-dealer
public customers that are not Professionals from the COA and COB is
consistent with the Act? Is so, why? If not, why not?
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-2015-045 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-2015-045. 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-2015-045 and should be
submitted by September 15, 2015. Rebuttal comments should be submitted
by September 29, 2015.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(57).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-20935 Filed 8-24-15; 8:45 am]
BILLING CODE 8011-01-P