[Federal Register Volume 80, Number 199 (Thursday, October 15, 2015)]
[Notices]
[Pages 62125-62129]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-26156]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-76106; File No. SR-CBOE-2015-081]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change Relating to Complex Orders
October 8, 2015.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the
[[Page 62126]]
``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on October 2, 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 Exchange filed the proposal as a ``non-controversial''
proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act
\3\ and Rule 19b-4(f)(6) thereunder.\4\ 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.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange seeks to amend its rules related to complex orders.
The text of the proposed rule change is provided below.
(additions are in italics; deletions are [bracketed])
* * * * *
Chicago Board Options Exchange, Incorporated Rules
* * * * *
Rule 6.53C. Complex Orders on the Hybrid System
(a) Definition: No change.
(b) Types of Complex Orders: No change.
(c) Complex Order Book
No change.
(d) Process for Complex Order RFR Auction: Prior to routing to
the COB or once on PAR, eligible complex orders may be subject to an
automated request for responses (``RFR'') auction process.
(i) For purposes of paragraph (d):
(1) ``COA'' is the automated complex order RFR auction process.
(2) A ``COA-eligible order'' means a complex order that, as
determined by the Exchange on a class-by-class basis, is eligible
for a COA considering the order's marketability (defined as a number
of ticks away from the current market), size, complex order type (as
defined in paragraphs (a) and (b) above) and complex order origin
types (as defined in subparagraph (c)(i) above). Complex orders
processed through a COA may be executed without consideration to
prices of the same complex orders that might be available on other
exchanges.
(ii) Initiation of a COA: On receipt of (1) a COA-eligible order
with two legs and request from the Trading Permit Holder
representing the order or the PAR operator handling the order, as
applicable, that it be COA'd or (2) a complex order with three or
more legs that (A) meets the class, marketability, size, and complex
order type parameters of subparagraph (d)(i)(2) or (B) is designated
as immediate or cancel and meets the class, marketability, and size
parameters of subparagraph (d)(i)(2), in both cases regardless of
the order's routing parameters or handling instructions (except for
orders routed for manual handling), the System will send an RFR
message to all Trading Permit Holders who have elected to receive
RFR messages. Notwithstanding clause (2) of this subparagraph (ii),
the System will reject back to a Trading Permit Holder any complex
order with three or more legs that includes a request pursuant to
Interpretation and Policy .04 that the order not COA. Any complex
order described in subparagraph (d)(ii)(2) [with three or more legs]
on PAR will COA even if the PAR operator requests that the order not
COA. The RFR message will identify the component series, the size
and side of the market of the COA-eligible order and any
contingencies, if applicable.
(iii)-(ix) No change.
* * * * *
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
Introduction
On September 4, 2014, the Securities and Exchange Commission (the
``Commission'') approved a proposal to amend Exchange rules related to
complex orders (``SR-CBOE-2014-017'').\5\ SR-CBOE-2014-017 was intended
to limit a potential source of unintended Market-Maker risk related to
how the Exchange's Hybrid Trading System (the ``System'') \6\
calculates risk parameters under Rule 8.18 when complex orders leg into
the market.\7\ SR-CBOE-2014-017 accomplished this by, among other
things, providing that a COA \8\ would be initiated ``[o]n receipt of
(1) a COA-eligible order with two legs and request from the Trading
Permit Holder representing the order or the PAR operator handling the
order, as applicable, that it be COA'd or (2) a complex order with
three or more legs, regardless of the order's routing parameters or
handling instructions (except for orders routed for manual handling),
the System will send an RFR message to all Trading Permit Holders who
have elected to receive RFR messages.'' \9\ However, the System was
designed to filter complex orders
[[Page 62127]]
through the COA eligibility requirements of subparagraph (d)(i)(2)
prior to initiating a COA pursuant to paragraph (d)(ii). Therefore, the
rule change from SR-CBOE-2014-017 was not implemented; instead, the
Exchange immediately began drafting this corrective filing, which
proposes to amend Rule 6.53C(d)(ii) to provide that a COA will be
initiated upon receipt of a complex order with three or more legs that
(A) meets the class, marketability, size, and complex order type
parameters of subparagraph (d)(i)(2) or (B) is designated as immediate
or cancel and meets the class, marketability, and size parameters of
subparagraph (d)(i)(2), in both cases (i.e., both (A) or (B))
regardless of the order's routing parameters or handling instructions
(except for orders routed for manual handling).
---------------------------------------------------------------------------
\5\ The Exchange filed the proposed rule change with the
Securities and Exchange Commission (the ``Commission'') on February
19, 2014. On March 3, 2014, the Exchange filed Amendment No. 1 to
the proposed rule change. The proposed rule change, as modified by
Amendment No. 1 thereto, was published for comment in the Federal
Register on March 10, 2014. See Securities Exchange Act Release No.
71648 (March 5, 2014), 79 FR 13359 (March 10, 2014) (SR-CBOE-2014-
017) (``Notice''). On June 5, 2014, the Commission instituted
proceedings to determine whether to approve or disapprove the
proposed rule change. After receiving two comment letters in support
of the proposal, the Commission approved the proposed rule change on
September 4, 2014. See Securities Exchange Act Release No. 72986, 79
FR 53798 (September 10, 2014) (SR-CBOE-2014-017).
\6\ The System is a trading platform that allows automatic
executions to occur electronically and open outcry trades to occur
on the floor of the Exchange. To operate in this ``hybrid''
environment, the Exchange has a dynamic order handling system that
has the capability to route orders to the trade engine for automatic
execution and book entry, to Trading Permit Holder and PAR Official
workstations located in the trading crowds for manual handling, and/
or to other order management terminals generally located in booths
on the trading floor for manual handling. Where an order is routed
for processing by the Exchange order handling system depends on
various parameters configured by the Exchange and the order entry
firm itself.
\7\ As noted by the Amendment, Rule 6.53C(c)(ii)(1) provides
that complex orders in the complex order book (``COB'') may execute
against individual orders or quotes in the book provided the complex
order can be executed in full (or a permissible ratio) by the orders
and quotes in the book. Rule 6.53C(d)(v)(1) provides that orders
that are eligible for the complex order auction (``COA'') may trade
with individual orders and quotes in the book provided the COA-
eligible order can be executed in full (or a permissible ratio) by
the orders and quotes in the book. COA is an automated request for
responses (``RFR'') auction process. Upon initiation of a COA, the
Exchange sends an RFR message to all Trading Permit Holders who have
elected to receive RFR messages, which RFR message identifies the
series, size and side of the market of the COA-eligible order and
any contingencies. Eligible market participants may submit responses
during a response time interval. At the conclusion of the response
time interval, COA-eligible orders are allocated in accordance with
Rule 6.53C(d)(v), including against individual orders and quotes in
the book.
\8\ COA is the automated complex order RFR auction process. See
Rule 6.53C(d)(i)(1).
\9\ See Securities Exchange Act Release No. 71648 (March 5,
2014), 79 FR 13359 (March 10, 2014) (SR-CBOE-2014-017) (``Notice'')
---------------------------------------------------------------------------
Proposal
Prior to implementing SR-CBOE-2014-017, it was discovered that the
filing did not reference certain System requirements that must be met
before a COA would be initiated (e.g., the marketability and size
requirements of Rule 6.53C(d)(i)(2), which are determined by the
Exchange on a class-by-class basis). This was not the Exchange's
intent. In fact, the Exchange stated in SR-CBOE-2014-017 that the
Exchange may determine on a class-by-class basis which complex orders
are eligible for COA, including by complex order type and origin
type.\10\ The Exchange simply failed to reference the size and
marketability parameters also set forth in Rule 6.53C(d)(i)(2). In
addition, the System was not designed to initiate a COA even if a
complex order did not meet the marketability and size requirements
determined by the exchange in accordance with paragraph (d)(i)(2). The
System was designed to filter complex orders through the COA
eligibility requirements of paragraph (d)(i)(2) prior to initiating a
COA pursuant to paragraph (d)(ii).\11\ As it was never the intention of
the Exchange to COA all complex orders with three or more legs
irrespective of the COA eligibility requirements of paragraph
(d)(i)(2), the Exchange proposes to amend Rule 6.53(d)(ii) to provide
that a COA will be initiated:
---------------------------------------------------------------------------
\10\ See SR-CBOE-2014-017 at 29 (referencing some of the
parameters that determine whether a complex order is eligible for
COA, including order type and origin code).
\11\ As noted in SR-CBOE-2014-017, Rule 6.53C(d)(i)(2) provides
that the Exchange may determine on a class-by-class basis which
complex orders are eligible for COA, including by complex order type
and origin type; however, SR-CBOE-2014-017 inadvertently failed to
reference the marketability and size of a complex order which is
also a parameter under paragraph (d)(i)(2). Id.
On receipt of (1) a COA-eligible order with two legs and request
from the Trading Permit Holder representing the order or the PAR
operator handling the order, as applicable, that it be COA'd or (2)
a complex order with three or more legs that (A) meets the class,
marketability, size, and complex order type parameters of
subparagraph (d)(i)(2) or (B) is designated as immediate or cancel
and meets the class, marketability, and size parameters of
subparagraph (d)(i)(2), in both cases regardless of the order's
routing parameters or handling instructions (except for orders
routed for manual handling), the System will send an RFR message to
all Trading Permit Holders who have elected to receive RFR messages.
Notwithstanding clause (2) of this subparagraph (ii), the System
will reject back to a Trading Permit Holder any complex order with
three or more legs that includes a request pursuant to
Interpretation and Policy .04 that the order not COA. Any complex
order described in subparagraph (d)(ii)(2) on PAR will COA even if
the PAR operator requests that the order not COA. The RFR message
will identify the component series, the size and side of the market
of the COA-eligible order and any contingencies, if applicable.\12\
---------------------------------------------------------------------------
\12\ This proposed change applies to Hybrid classes only, and
not Hybrid 3.0 classes. The Exchange does not believe the risk
discussed in this rule filing is present in Hybrid 3.0 classes. The
proposed rule change amends Rule 6.53C, Interpretation and Policy
.10 to indicate that complex orders in Hybrid 3.0 classes,
regardless of the number of legs, will COA in the same manner they
currently do.
The Exchange notes that complex orders that are not COA-eligible
are either routed to the Public Automatic Routing System (``PAR'')
(e.g., orders that do not meet the size, order type, and origin type
parameters are routed to PAR) or routed to COB (e.g., orders that do
not meet the marketability parameter).
As noted in the rule text above, the Exchange is proposing to
hardcode the complex order type parameter as it relates to complex
orders with three or more legs that are entered as immediate or cancel
(``IOC''). Currently, the Exchange does not COA complex orders that are
entered as IOC. The effect of this proposed rule will be that complex
orders with three or more legs that are designated as IOC and meet the
class, marketability, and size parameters will always be eligible to
COA. Complex orders with three or more legs that are entered as IOC are
the orders that primarily create the Market-Maker risk described in SR-
CBOE-2014-017.\13\ Therefore, the Exchange believes it is appropriate
for complex orders with three or more legs that are entered as IOC to
COA. The Exchange notes that the class, marketability, size, and
complex order type parameters will have the same settings whether the
complex order has two or three or more legs, except, as noted, complex
orders with three or more legs will not be prohibited from accessing
COA based on an IOC designation. The Exchange notes that all market
participants submitting complex orders with three or more legs that are
marked IOC are treated the same--that is, assuming the complex orders
with three or more legs that are marked IOC meet the class,
marketability and size parameters, the orders shall COA. The Exchange
also notes that market participants determine whether an order is
marked IOC; thus, it is market participants that decide whether an
order with three or more legs will COA.
---------------------------------------------------------------------------
\13\ The Exchange notes that the rule text provided for in SR-
CBOE-2014-017 essentially required all complex orders with three or
more legs to COA (including orders entered as IOC), but the Exchange
never implemented the requirement with regards to complex orders
with three or more legs because, as previously noted, it was not the
Exchange's intention to COA all complex orders with three or more
legs irrespective of the COA eligibility requirements. As soon as
the Exchange realized SR-CBOE-2014-017 did not accurately reflect
the Exchange's intentions, the Exchange began drafting this rule
filing.
---------------------------------------------------------------------------
Additionally, the proposed rule does not affect the outcome of SR-
CBOE-2014-017 as it relates to complex orders with three or more legs
that are entered as IOC because neither SR-CBOE-2014-017 nor this
proposal allow the Exchange to limit access to COA for orders with
three or more legs based on the IOC designation. In other words, a
market participant entering a complex order with three or more legs
designated as IOC would expect (based on SR-CBOE-2014-017 providing
that all complex orders with three or more legs shall COA) the order to
COA. This proposed rule does not change that expectation. The only
difference is that this proposed rule specifies that the complex order
with three or more legs that is marked IOC must also meet the class,
marketability, and size parameters in order to COA.
Further, the proposed rule does not materially affect the outcome
or purpose of SR-CBOE-2014-017; rather, the proposed rule seeks to
clarify that a complex order must meet the eligibility requirements of
Rule 6.53C(d)(i)(2) prior to the Exchange initiating a COA. The
Exchange still believes the proposed rule will allow Market-Makers to
better manage their risk in their appointments and that the reduced
risk will encourage Market-Makers to quote larger size, which will
increase liquidity and enhance competition in those classes. The
Exchange also notes that regardless of marketability requirements of
paragraph (d)(i)(2), an order that is not
[[Page 62128]]
marketable will not be executed. The proposed rule change is simply
intended to clarify when a COA will be initiated and to reflect the
design of the System, which is set-up to filter complex orders through
the COA eligibility requirements prior to the initiation of a COA.
Additionally, the Exchange believes the proposed rule is non-
controversial because, as with the current rule, all market
participants submitting orders with three or more legs will be treated
equally (i.e., for orders with three or more legs the Exchange will not
have the flexibility to limit COA-eligibility to certain origin types;
rather, the Exchange will, by rule, accept all origin types for complex
orders with three or more legs).
The Exchange will announce the implementation date of the proposed
rule change in a Regulatory Circular to be published no later than 90
days following the effective date of this filing. The implementation
date will be no later than 180 days following the effective date of
this filing.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\14\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \15\ 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)\16\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
---------------------------------------------------------------------------
\14\ 15 U.S.C. 78f(b).
\15\ 15 U.S.C. 78f(b)(5).
\16\ Id.
---------------------------------------------------------------------------
In particular, the Exchange believes the proposed rule change
serves to clarify SR-CBOE-2014-017 and does not materially affect the
outcome of SR-CBOE-2014-017. As noted above, it was not the intent of
SR-CBOE-2014-017 to COA all complex orders irrespective of the
eligibility parameters of Rule 6.53C(d)(i)(2); rather, the filing was
intended to reflect the System's design, which filters complex orders
through the COA eligibility requirements of paragraph (d)(i)(2) prior
to initiating a COA. Therefore, under the proposed rule, complex orders
with three or more legs will need to meet the class, marketability,
size, and order type parameters of subparagraph (d)(i)(2) in order to
COA, except the Exchange, by rule, will not be able to limit COA-
eligibility based on a complex order with three or more legs being
entered as IOC. Additionally, complex Orders with three or more legs
will filter through the origin type parameter of subparagraph
(d)(i)(2); however, for complex orders with three or more legs the
Exchange, by rule, will not have the flexibility to limit COA-
eligibility to certain origin types. This is consistent with SR-CBOE-
2014-017 because SR-CBOE-2014-017 also did not provide the Exchange the
flexibility to limit COA-eligibility for complex orders with three or
more legs to certain origin types.
B. Self-Regulatory Organization's Statement on Burden on Competition
CBOE does not believe that the proposed rule change will impose any
burden on intramarket or intermarket competition that is not necessary
or appropriate in furtherance of the purposes of the Act because the
rule change does not materially affect the outcome or purpose of SR-
CBOE-2014-017. SR-CBOE-2014-017 was designed to reduce risk to Market-
Makers that are quoting in the regular market, and this proposed rule
change will not affect that outcome. In addition, Rule 6.53C(d)(ii), as
amended by SR-CBOE-2014-017, clearly provides that the origin type of a
complex order with three or more legs has no bearing on whether the
complex order will COA, and this proposed rule does not modify how
different origin types will be treated for purposes of COA. This
proposed rule also does not affect the outcome of SR-CBOE-2014-017 as
it relates to complex orders with three or more legs that are entered
as IOC because neither SR-CBOE-2014-017 nor this proposal allow the
Exchange to limit access to COA for orders with three or more legs
based on the IOC designation. In other words, a market participant
entering a complex order with three or more legs designated as IOC
would expect (based on SR-CBOE-2014-017 providing that all complex
orders with three or more legs shall COA) the order to COA. This
proposed rule does not change that expectation. The only difference is
that this proposed rule specifies that the complex order with three or
more legs that is marked IOC must also meet the class, marketability,
and size parameters in order to COA. This proposed rule simply seeks to
apply the class, marketability, size, and complex order type parameters
of Rule 6.53C(d)(i)(2) to complex orders with three or more legs.
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
Because the foregoing proposed rule change does not:
A. Significantly affect the protection of investors or the public
interest;
B. impose any significant burden on competition; and
C. 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 \17\ and
Rule 19b-4(f)(6) \18\ 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.
---------------------------------------------------------------------------
\17\ 15 U.S.C. 78s(b)(3)(A).
\18\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
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-2015-081 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange
[[Page 62129]]
Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2015-081. 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-2015-081 and should be
submitted on or before November 5, 2015.
---------------------------------------------------------------------------
\19\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-26156 Filed 10-14-15; 8:45 am]
BILLING CODE 8011-01-P