[Federal Register Volume 81, Number 208 (Thursday, October 27, 2016)]
[Notices]
[Pages 74828-74840]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-25940]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-79133; File No. SR-CBOE-2016-071]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of a Proposed Rule Change Relating to
Opening and Closing Rotations Under the HOSS System
October 21, 2016.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
[[Page 74829]]
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on October 7, 2016, Chicago Board Options Exchange, Incorporated
(``Exchange'' or ``CBOE'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend its rules related to the opening of
series for trading on the Exchange. The text of the proposed rule
change is 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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
CBOE proposes to amend its rules related to the opening of series
for trading on the Exchange. Rule 6.2B describes the process the
Exchange's Hybrid Trading System (the ``System'') uses to open series
on the Exchange each trading day (referred to as ``HOSS''). The
Exchange may also use this same process for closing series or opening
series after a trading halt. The Exchange proposes to make various
changes to this rule to reorganize and simplify the rule as well as
make other changes to the opening procedures in order to reflect
current System functionality.
Opening (and Sometimes Closing) Procedures
The Exchange proposes to amend Rule 6.2B by reorganizing the
provisions of the rule to describe the HOSS procedures in a more
sequential manner, clarifying the timing of each stage of the process
and enhancing or modifying the description of certain provisions within
the rule. HOSS generally processes the opening of each series as
follows:
(1) Pre-Opening Period: During the pre-opening period, the System
will accept orders and quotes and disseminate messages that contain
information based on resting orders and quotes in the book, which may
include the expected opening price (``EOP''), expected opening size
(``EOS''), any reason why a series may not open and imbalance
information, including the size and side of an imbalance (``expected
opening information'' or ``EOIs'').
(2) Initiation of the Opening Rotation: At this time, the System
initiates the opening rotation procedure and distributes a rotation
notice to market participants.
(3) Opening Rotation Period: During the opening rotation period,
the System matches and executes orders and quotes against each other in
order to establish an opening Exchange best bid and offer (``BBO'') and
trade price for each series while continuing to disseminate expected
opening information.
(4) Opening of Trading: At this time, the System opens series for
trading, subject to the satisfaction of certain conditions.
The proposed rule change more clearly organizes the provisions of
Rule 6.2B in this order and makes the additional following changes.
Pre-Opening Period
Rule 6.2B(a) currently provides that, for regular trading hours,
for a period of time before the opening of trading in the underlying
security or, in the case of index options, prior to 8:30 a.m.,\3\ and
for extended trading hours, for a period of time prior to 2:00 a.m. (as
determined by the Exchange on a class-by-class basis), the System will
accept orders and quotes (the System will not accept certain orders
during the pre-opening period, as discussed below). The times specified
in the current rule are not the times at which series open for trading,
but rather the times at which the System initiates opening rotations,
which is described later in the rule (see description of proposed
paragraph (b)(i) below). The Exchange proposes to amend Rule 6.2B(a) to
provide the pre-opening period begins for each trading session no later
than 15 minutes prior to the expected initiation of an opening rotation
(the Exchange determines the specific time at which the pre-opening
period will begin).\4\ The Exchange believes it is repetitive to
include a description of the time at which series open in this
paragraph. The proposed rule change adds the pre-opening period will
begin no earlier than 2:00 a.m. for regular trading hours and no
earlier than 4:00 p.m. on the previous day for extended trading hours
to provide additional information regarding when the Exchange may begin
the pre-opening period. The Exchange believes it is appropriate to have
pre-opening periods of different lengths for the different trading
sessions in order to accommodate extended trading hours Trading Permit
Holders who may want to submit orders for that trading session, for
example, after regular trading hours close but prior to the end of the
day rather than in the middle of the night. Additionally, the System
begins the pre-opening period at the same time for each class within
each type of option (equity, index and exchange-traded products
(``ETP'')), so the proposed rule change deletes the provision of the
rule that says the Exchange will determine the time on a class-by-class
basis. The Exchange believes indicating a minimum and maximum time for
the pre-opening period provides Trading Permit Holders with more
specific information regarding the timeframe of the pre-opening period.
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\3\ All times are central time.
\4\ Currently, the pre-opening period begins at approximately
6:30 a.m. for regular trading hours and approximately 4:00 p.m. on
the previous day for extended trading hours.
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The proposed rule change amends Rule 6.2B(a)(i) by deleting the
provision that indicates the Exchange will designate eligible order
size, order type and order origin code as order terms for which the
Exchange may designate eligibility for submission during the pre-
opening period on a class-by-class basis. The Exchange currently does
not, and does not intend to, restrict the size or origin code of orders
that may be submitted during the pre-opening period, so this provision
is no longer necessary. Additionally, the System currently accepts all
quotes and all order types during the pre-opening period except for
immediate-or-cancel, fill-or-fill, intermarket sweep orders, and
Market-Maker trade prevention orders, as acceptance of those order
types during the pre-opening period
[[Page 74830]]
would be inconsistent with their terms.\5\ The proposed rule change
lists these few exceptions in the rule. The proposed rule change also
adds if an order entered during the pre-opening period for regular
trading hours is not eligible for book entry (including minimum volume,
not held and market-if-touched orders), the System routes the order via
the order handling system pursuant to Rule 6.12.\6\ As discussed below,
not all of these orders may participate in the opening rotation.
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\5\ See Rule 6.53 for definitions of these order types. For
example, an immediate-or-cancel order is intended to execute
immediately once represented on the Exchange or be cancelled. As
there is no trading during the pre-opening period, an immediate-or-
cancel order submitted during the pre-opening period would never
execute and always be cancelled; thus, the Exchange determined to
not permit this order type during the pre-opening period. Rule
6.53(l) defines opening rotation orders, and the proposed rule
change amends this definition to include limit orders. The Exchange
does not believe it is necessary to restrict limit orders from being
entered to participate in the opening rotation, as they will execute
during the opening rotation pursuant to the opening procedures in
the same manner as market orders.
\6\ Orders not eligible for book entry may only be traded open
outcry on the Exchange floor. Because trading during extended
trading hours is electronic only, the System does not accept these
order [sic] during that trading session and, thus, this proposed
provision is not applicable during that trading session.
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The proposed rule change proposes to amend Rule 6.2B(a)(ii) in
several ways. First, the proposed rule change amends the description of
when the System begins disseminating expected opening information.
Currently, the rule states, at specified intervals of time determined
by the Exchange, the System will disseminate information about resting
orders in the book that remain from the prior business day and orders
and quote submitted before the opening, which may include the EOP and
EOS. The Exchange proposes to revise this provision to state beginning
at a time (determined by the Exchange) no earlier than three hours
prior to the expected initiation of an opening rotation for a series,
the System disseminates EOIs to all market participants that have
elected to receive them at regular intervals of time (the length of
which is determined by the Exchange) or less frequently if there are no
updates to the opening information since the previously disseminated
EOI. This revised rule text clarifies the time at which the System will
begin disseminating expected opening information, which may be
different (and generally later) than the beginning of the pre-opening
period, as the Exchange believes recipients generally want to receive
EOIs closer to the opening of trading.\7\ Additionally, this proposed
rule change indicates EOIs are generally sent out regularly, but if
there have been no changes (for example, the EOS and EOP have not
changed because there are no new orders or quotes), then the System
does not disseminate a duplicate message to users at the next regular
interval time.
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\7\ Currently, the System begins disseminating EOIs at
approximately 7:30 a.m. for SPX and EEM options and approximately
8:00 a.m. for all other options. The System disseminates EOIs at 30-
second intervals during the pre-open period and 1-second intervals
during the opening rotation period (see discussion below for
additional information regarding the dissemination of EOIs during
the opening rotation). See Regulatory Circular RG13-061.
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Second, the proposed rule change also amends Rule 6.2B(a)(ii) to
more specifically describe the information regarding the expected
opening of a series that the System disseminates. Currently,
subparagraph (a)(ii) provides that the System will disseminate
information about resting orders in the book that remain from the prior
business day and any orders and quotes submitted before the opening,
including the expected opening price and size. The Exchange proposes to
simplify this provision by stating that the expected opening
information will be based on resting orders in the book (which includes
orders remaining from the prior trading day and orders entered during
the pre-opening period) and quotes submitted prior to the opening of
trading. Additionally, in addition to the EOP and EOS, these messages
may include additional information based on the circumstances, such as
a description of the reason why a series may not or did not open (e.g.,
no quote or opening trade) and imbalance information, including the
size and side of the imbalance (see discussion below regarding opening
conditions), which reasons are described in current Rule 6.2B(e) and
proposed Rule 6.2B(d). The Exchange proposes to add a definition of
EOIs, which may include not only the EOP and EOS but also these other
types of information. The Exchange proposes to incorporate this
definition in other parts of the rule (as further discussed below).
Third, the proposed rule change amends the provision about what the
EOP is and when it is calculated. Currently, Rule 6.2B(a)(ii) states
that the EOP is the price at which the greatest number of orders and
quotes in the book are expected to trade and that an EOP may only be
calculated if (a) there are market orders in the book, or the book is
crossed or locked and (b) at least one quote is present. The proposed
rule change revises this language to state the EOP is the price at
which any opening trade is expected to execute. The EOS is the size of
any expected opening trade. As further discussed below, the definition
of opening price is included in current paragraph (c), so the proposed
rule change deletes that definition from paragraph (a)(ii) and only
includes the definition in proposed paragraph (c), as the Exchange
believes it is less confusing to include the opening price definition
in the rules only one time. Additionally, the proposed rule change
deletes the language the EOP may only be calculated if there are market
orders in the book or the book is crossed. Because the EOP is a price
of an expected opening trade, it is only possible to have a trade if
there are market orders or a locked or crossed market, so the Exchange
believes this language is unnecessary. Further, the proposed rule
change states the System will only disseminate EOP and EOS messages:
(a) If the width between the highest quote bid and lowest quote offer
on the Exchange is no wider than the OEPW range (as defined below), in
classes in which the Hybrid Agency Liaison (``HAL'') \8\ is not
activated for openings; or (b) if the width between the highest quote
bid and lowest quote offer on the Exchange or disseminated by other
exchanges is no wider than the OEPW range, in classes in which HAL is
activated for openings (``HALO'').\9\ As discussed below, the
Exchange's opening quote width must be no wider than OEPW range for a
series to open, and this revised language is consistent with that
opening condition.
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\8\ HAL provides automated order handling in designated Hybrid
classes for electronic orders that are not automatically executed by
the System. HAL exposes these orders at the national best bid or
offer, and Trading Permit Holders may submit responses to trade with
the orders. See Rule 6.14A.
\9\ Because this proposed language implies there must be a
quote, the proposed rule change also deletes the language that the
EOP may only be calculated if at least one quote is present, as it
would be duplicative.
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Opening Rotation Initiation and Notice
Rule 6.2B(b) currently provides, unless unusual circumstances
exist, at a randomly selected time within a number of seconds after the
opening trade and/or the opening quote is disseminated in the market
for the underlying security \10\ (or after 8:30 a.m.
[[Page 74831]]
for index options) with respect to regular trading hours, or after 2:00
a.m. with respect to extended trading hours, the System initiates the
opening rotation procedure and sends a notice (``Rotation Notice'') to
market participants. It further provides the Rotation Notice will be
sent following the opening trade or opening quote or which occurs first
(as determined by the Exchange on a class-by-class basis). The Exchange
proposes to amend Rule 6.2B(b) to provide in proposed subparagraph (i)
that the System initiates the opening rotation procedure on a class-by-
class basis: \11\
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\10\ The ``market for the underlying security'' is currently the
primary listing market, the primary volume market (defined as the
market with the most liquidity in that underlying security for the
previous two calendar months) or the first market to open the
underlying security. The Exchange does not designate the primary
volume market as the market for the underlying security for any
class, and thus the proposed rule change deletes that option. The
proposed rule change also changes the term ``market'' to
``exchange,'' as the primary listing market or first market to open
is a national securities exchange. The proposed rule change
clarifies that the Exchange determines on a class-by-class basis
which market is the market for the underlying security.
\11\ See discussion below regarding the proposed rule change to
amend various provisions of Rule 6.2B to allow the Exchange to make
determinations on a series-by-series basis rather than class-by-
class basis.
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For regular trading hours:
[cir] With respect to equity and ETP options, after the opening
trade or the opening quote is disseminated in the market for the
underlying security, or at 8:30 for classes determined by the Exchange
(including over-the-counter equity classes); or
[cir] with respect to index options, at 8:30 a.m., or at the later
of 8:30 a.m. and the time the Exchange receives a disseminated index
value for classes determined by the Exchange; and
for extended trading hours, at 2:00 a.m.
The proposed rule change also deletes the phrase regarding the
initiation of the opening rotation procedure at a randomly selected
time within a number of seconds after the triggering event.
The Exchange believes this proposed change more accurately
describes the timing at which the System initiates the opening rotation
procedure for each type of option, which generally occurs immediately
after the triggering event rather than a randomly selected number of
seconds after the event. The proposed rule change provides, while the
dissemination of the opening trade or quote in the market for the
underlying security is generally the trigger to initiate the opening
rotation for an equity or ETP class, the Exchange may determine to open
certain equity and ETP classes at 8:30 a.m. instead if it does not have
access to underlying information for those classes. The Exchange does
not receive underlying information regarding the opening of certain
equities.\12\ The proposed rule change provides the Exchange with the
necessary flexibility to ensure it can open trading in options
overlying these equities in such circumstances. Similarly, the proposed
rule change provides the Exchange with flexibility to open certain
index options at the later of 8:30 a.m. and the time the Exchange
receives a disseminated index value, in addition to at 8:30 a.m., to
address circumstances in which this may be a more useful opening
trigger.
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\12\ For example, with respect to pink sheet stocks, the
Exchange does not receive underlying information from the over-the-
counter market (``OTC'') and believes it is in the interest of a
fair and orderly market to initiate the opening rotation at 8:30 for
those stocks rather than take additional time to confirm the OTC
market for those stocks opened.
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In addition, the Exchange proposes to amend current Rule
6.2B(b)(i), which is proposed Rule 6.2B(b)(ii), to state the System
notifies market participants of the opening rotation initiation upon
initiating the opening rotation procedure (defined as the ``Rotation
Notice'') rather than following the opening trade or quote. The
initiation of the opening rotation for a series triggers the
dissemination of the notice, so the Exchange believes this proposed
change more accurately and simply describes when market participants
will receive the rotation notice.
Opening Rotation Period
Current Rule 6.2B(c) provides after the rotation notice is sent,
the System will enter into a rotation period, during which the opening
price will be established for each series. During the rotation period,
the System will continue to calculate and provide the EOP and EOS given
the current resting orders and quotes. The System will process the
series of a class in a random order, and the series will begin opening
after a period following the rotation notice, which period will not
exceed 60 seconds and will be established on a class-by-class basis.
The proposed rule change reorganizes paragraph (c) to describe when
the opening rotation period begins (which is after the System initiates
the opening rotation procedure and sends the rotation notice) (proposed
subparagraph (c)), what happens during the period (proposed
subparagraph (c)(i)), the handling of EOIs during the period (proposed
subparagraph (c)(ii)), and when the period ends (proposed subparagraph
(c)(iii)). The Exchange believes this will more clearly describe for
investors the opening rotation process.
The proposed rule change adds detail regarding what occurs during
the opening rotation period. Specifically, while the rules currently
state the System establishes the opening trade price for a series
during the opening rotation period, the proposed rule change adds
proposed subparagraph (c)(i), which states the System does this (as
well as establish the opening BBO) by matching and executing resting
orders and quotes against each other. The proposed rule change moves
the definition of opening trade price to proposed subparagraph
(c)(i)(A) from current subparagraph (c)(iv) so the rules include
discussions of the opening trade price in a single location within the
rules. The proposed rule change amends the definition of the opening
trade price of a series to be the ``market-clearing'' price, which is
the single price at which the largest number of contracts in the book
can execute, leaving bids and offers that cannot trade with each other.
The Exchange believes it is more appropriate to clear the largest size
from the book at the open, even if that size is comprised of a smaller
number of orders and quotes (as stated in Rule 6.2B(a)(ii)). The EOS is
the size of any expected opening trade. This is consistent with the
change to the definition of EOP, as discussed above. The proposed rule
change adds if there are multiple prices at which the same number of
contracts would clear, the System uses (a) the price at or nearest to
the midpoint of the opening BBO, or the widest offer (bid) point of the
OEPW range if the midpoint is higher (lower) than that price point, in
classes in which the Exchange has not activated HALO; or (b) the price
at or nearest to the midpoint of the range consisting of the higher of
the opening NBB and widest bid point of the OEPW range, and the lower
of the opening NBO and widest offer point of the OEPW range, in classes
in which the Exchange has activated HALO.
The proposed rule change also adds proposed paragraph (c)(i)(B),
which states all orders (except complex orders and, in classes in which
the Exchange has not activated HALO, all-or-none orders and orders with
a stop contingency) and quotes in a series in the book prior to the
opening rotation period participate in the opening rotation for a
series. Contingency orders that participate in the opening rotation may
execute during the opening rotation period only if their contingencies
are triggered. The proposed rule change also notes complex orders do
not participate in the opening rotation. While the System accepts those
orders prior to the open, the Exchange believes it would complicate the
opening rotation if they participated in the opening rotation and
attempted to execute against the leg markets. Similarly, the Exchange
[[Page 74832]]
determined to not have all-or-none orders and orders with a stop
contingency participate in the opening rotation in classes in which the
Exchange has not activated HALO, so the proposed rule change codifies
this in the Rules. Because proposed subparagraph (c)(i)(B) describes
the matching process that occurs during the opening rotation period,
the proposed rule change moves the rule provision regarding the
priority order of orders and quotes during this matching process from
current subparagraph (c)(iv) to proposed subparagraph (c)(i)(C).\13\
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\13\ The System prioritizes orders in the following order: (1)
Market orders, (2) limit orders and quotes whose prices are better
than the opening price, and (3) resting orders and quotes at the
opening price. The proposed rule change also notes contingency
orders are prioritized as set forth in Rules 6.45A and 6.45B.
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The proposed rule change also revises the language regarding the
messages disseminated during the opening rotation period to provide the
System will continue to disseminate EOIs (not just the EOP and EOS).
This proposed revision is consistent with the proposed language
described above regarding dissemination of EOIs during the pre-opening
period (and incorporates the proposed definition of EOIs). The proposed
rule change provides the Exchange with the authority to determine a
shorter interval length for the dissemination of EOIs during the
opening rotation period than during the pre-opening period, as the
Exchange believes market participants may want to receive these
messages more frequently closer to the opening. This flexibility is
intended to ensure the Exchange may disseminate these messages to
market participants as frequently as it deems necessary to ensure a
fair and orderly opening.
Proposed subparagraph (c)(iii) updates the description of the
length of the opening rotation period and how the System processes
series to open following the opening rotation period. Current
subparagraph (c)(ii) states the System will process the series of a
class in a random order and the series will begin opening after a
period following the Rotation Notice, which period may not exceed sixty
seconds and will be established on a class-by-class basis by the
Exchange. Proposed subparagraph (c)(iii) states after a period of time
determined by the Exchange for all classes, the System opens series of
a class in a random order, staggered over regular intervals of time
(the Exchange determines the length and number of these intervals for
all classes).\14\ Subject to satisfaction of opening conditions
described below (in proposed paragraph (d)), the opening rotation
period (including these intervals) may not exceed 60 seconds. The
Exchange believes this change more clearly and accurately describes how
the System opens series for trading, which it does randomly as set
forth in the current rule but in a staggered manner over regular
intervals. These intervals are intended to manage the number of series
that will open during a short time period to ensure a fair and orderly
opening.
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\14\ Currently, the Exchange has set the period of time that
must pass before the System begins processing series to open at two
seconds, and the Exchange has set the number of intervals to two and
the length of the intervals to one second. As a result, the opening
rotation period currently lasts two to four seconds (the proposed
rule change clarifies that the various time periods and intervals
combine to form the opening rotation period). See Regulatory
Circular RG11-072. In other words, after two seconds, the System
randomly selects a group of series to open; after the first one-
second interval passes, the System randomly selects another group of
series to open; and after the second one-second interval, the System
opens the remaining group of series.
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The proposed rule change also deletes current subparagraph
(c)(iii), which states prior the expiration of the opening rotation
period, the System will not open a series unless opening quotes that
comply with the bid/ask differential requirements have been entered by
at least one Market-Maker. Current paragraph (e) (and proposed
paragraph (d)) describes conditions that must be satisfied for a series
to open, including the required quotes, so the Exchange believes this
provision is duplicative.\15\
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\15\ As further discussed below, while Market-Makers' quotes
(including opening quotes) must all be within Exchange-set bid/ask
differentials pursuant to Rule 8.7, whether a series opens is based
on whether the opening quote width is no wider than the OEPW range
and not bid/ask differentials.
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Opening Quote and Trade Price
The proposed rule change deletes the language in current paragraph
(d) stating as the opening price is determined by series, the System
will disseminate through OPRA the opening quote and the opening trade
price, if any. The System disseminates all quote and trade price
information to OPRA once a series opens pursuant to the OPRA plan,
including opening quote and trade price information, so the Exchange
believes it is unnecessary to include this provision specifically in
the opening rule.
Opening Conditions
Current Rule 6.2(e) provides that the System will not open a series
if one of the following conditions is met:
(1) There is no quote present in the series that complies with the
bid/ask differential requirements (as determined by the Exchange on a
class-by-class basis) that has been entered by at least one Market-
Maker appointed to the class (or by the DPM or LMM, as determined by
the Exchange on a class-by-class basis);
(2) the opening price is not within an acceptable range (as
determined by the Exchange) compared to the lowest quote offer and the
highest quote bid; or
(3) the opening trade would leave a market order imbalance (i.e.
there are more market orders to buy or to sell for the particular
series than can be satisfied by the limit order, quotes and market
orders on the opposite side); however, in series that will open at a
minimum price increment, the System will open the series even if a sell
market order imbalance exists.
The proposed rule change amends these conditions to provide that,
notwithstanding proposed paragraph (c),\16\ in classes in which the
Exchange has not activated HALO:
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\16\ The final provision of current paragraph (e) provides the
following: If the first or second condition is present, the senior
official in the Control Room may authorize the opening of the
affected series where necessary to ensure a fair and orderly market;
if the second condition is present, the System will not open the
series but will send a notification to market participants
indicating the reason; if the third condition is present, a
notification will be sent to market participants indicating the size
and direction of the market order imbalance. It further provides
that the System will not open the series until the condition causing
the delay is satisfied, and the System will repeat this process
until the series is open. The proposed rule change combines the
exceptions in current paragraph (e) with the applicable opening
conditions in current subparagraphs (e)(i) through (iii) into
proposed paragraph (d)(i) for ease of review.
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(1) If there are no quotes in the series on the Exchange, the
System does not open the series. There are no exceptions to this
opening condition. The Exchange generally requires an opening quote to
ensure there will be liquidity in a series when it opens;
(2) if the width between the Exchange's best quote bid and best
quote offer (for purposes of subparagraph (d)(i), the ``opening
quote'') \17\ is wider than an acceptable opening price range (as
determined by the Exchange on a class-by-class and premium basis) (the
``Opening Exchange Prescribed Width range'' or ``OEPW range'') \18\ and
there are orders or quotes
[[Page 74833]]
marketable against each other, the System does not open the series.
However, if the opening quote width is no wider than the intraday
acceptable price range for the series (``IEPW range'') \19\ and there
are no orders or quotes marketable against each other, the System opens
the series. If the opening quote width is wider than the IEPW range,
the System does not open the series. The Exchange uses the OEPW range
as a price protection measure to prevent orders from executing at
extreme prices on the open. However, if there are no marketable orders,
but the quote width would satisfy the price check parameter the
Exchange uses for intraday trading, then there is no risk that an order
will execute at an extreme price on the open. Because the risk that the
OEPW range is intended to address is not present in that situation, the
Exchange believes it is appropriate to open a series in that situation.
If the opening quote width is wider than IEPW, then the System does not
open the series, as executions at prices outside that range are not
permitted by the above-referenced rule. The proposed rule change
deletes the language regarding the ability of the senior official in
the control room to authorize the opening of the affected series where
necessary to ensure a fair and orderly market, as this is duplicative
of current and proposed paragraph (e) (as discussed below). Proposed
paragraph (e) provides the Exchange with the authority to open an
affected series that does not open for any reason, not just due to lack
of a quote, to ensure a fair and orderly market. Additionally, all
quotes entered by Market-Makers (including quotes entered during the
pre-opening period and opening rotation period) must satisfy bid/ask
differentials,\20\ so the Exchange does not believe Rule 6.2B needs to
include this requirement as well and thus deletes it from current
subparagraph (c)(iii) (as discussed above). With respect to openings,
the System looks to determine whether the opening quote width (whether
the opening quote consists of a bid and offer from one Market-Maker or
multiple Market-Makers \21\) is within the OEPW range (or IEPW range if
there are no orders against each other), which the Exchange uses as a
price protection measure, rather than within the bid/ask
differentials.\22\ The Exchange generally requires an opening quote to
ensure there will be liquidity in a series when it opens;
---------------------------------------------------------------------------
\17\ The term opening quote is used throughout the subparagraph,
so the Exchange believes it is beneficial to clarify in the rules
what this term means in the various places it is used. Additionally,
as discussed below, the term opening quote has a different meaning
for classes in which classes in which the Exchange has not activated
HALO and classes in which it has activated HALO, so this proposed
change reflects this distinction.
\18\ Current OEPW settings are set forth in Regulatory Circular
RG 13-025. The acceptable price range is determined by taking the
midpoint of the highest quote bid and lowest quote offer plus/minus
half of the designated OEPW. The rules currently permit CBOE to set
the OEPW on a class-by-class basis. The proposed rule change also
clarifies that the Exchange may set the OEPW on a premium basis; as
options with higher premiums may have wider spreads, the Exchange
believes it is appropriate to have OEPW settings to reflect that.
This is consistent with the Exchange's authority to set the IEPW
pursuant to Rule 6.13(b)(v).
\19\ See Rule 6.13(b)(v).
\20\ See Rule 8.7(d). The Exchange may set different bid/ask
differential requirements for a Market-Maker's opening quotes than
for its intraday quotes (which it currently does). The proposed rule
change specifies this in Interpretation and Policy .02 regarding
Market-Maker quotes, which currently provides that the Exchange may
also set a different minimum number of contracts for a Market-
Maker's opening quotes. Because trading conditions at the open are
generally different than intraday, the Exchange believes it is
appropriate to have the flexibility to set different quoting
restrictions for the opening to address these trading conditions.
\21\ The term Market-Maker includes Designated Primary Market-
Maker (``DPM'') or Lead Market-Maker (``LMM''), as applicable
appointed to the class, and thus the proposed rule change only uses
the term Market-Maker when referring to all types of Market-Makers.
The proposed rule change deletes this language from Interpretation
and Policy .02, as it is unnecessary.
\22\ Regulatory Circular RG13-025 sets forth the current OEPW
range and how to calculate the range. This is the term with which
Trading Permit Holders are familiar for the acceptable opening price
range, as it is the term regularly used in circulars, and the
Exchange believes it will be beneficial for investors if the rules
refer to the same term.
---------------------------------------------------------------------------
(3) if the opening trade price would be outside of the OEPW range,
the System does not open the series. As discussed above, the Exchange
believes using the term OEPW range with respect to the acceptable range
for opening price in the rules is a more accurate description of the
appropriate range for opening prices (as this is the term used in
circulars and among Trading Permit Holders). As indicated in the
previous paragraph, the OEPW range is used as a price protection
measure. There are no exceptions to this opening condition in order to
prevent executions at extreme prices on the open. Additionally, the
proposed rule change clarifies that a series will open if the opening
trade price is at the widest part of OEPW range (it will only not open
if it is outside OEPW range); or
(4) if the opening trade would leave a market order imbalance,
which means there are more market orders to buy or to sell for the
particular series than can be satisfied by the orders and quotes on the
opposite side, the System does not open the series. However, if a sell
market order imbalance exists, there is no bid in the series and the
best offer is $0.50 or less, the System opens the series; if there is
no bid in the series and the best offer is greater than $0.50, the
System does not open the series. The proposed rule change deletes the
language regarding the exception for series that will open at a minimum
increment and revises this exception to use language consistent with
the existing rule regarding the treatment of no-bid series. Pursuant to
Rule 6.13(b)(vi), in the situation in which there is no bid in the
series and the best offer is $0.50 or less, the System considers these
market orders to be limit orders for the minimum increment applicable
to the series and enter these orders in the book (behind limit orders
to sell at the minimum increment already resting in the book).
Essentially, this creates a situation in which a series opens at a
minimum price increment (i.e. $0.00-$0.05). In the situation in which
there is no bid in the series and the best offer is greater than $0.50,
if the no-bid series were to open while the best offer is greater than
$0.50, under the rules, a market order to sell will be handled via the
order handling system pursuant to Rule 6.12 rather than route to the
book. The Exchange believes it is appropriate to delay opening the
series until the best offer is less than or equal to $0.50 so that the
market order can be placed in the book and more likely to get an
execution. The proposed rule change deletes the language from the
current provision regarding sending a notification when this condition
as present, as notifications go out when a series does not open for any
reason, as discussed below. This concept is included in proposed
subparagraph (d)(iii).
Current Interpretation and Policy .03 describes opening conditions
that apply to classes in which the Exchange has activated HALO. To keep
the description of opening conditions for all classes in a single
location within the rules, the proposed rule change moves these opening
conditions to proposed subparagraph (d)(ii). Current Interpretation and
Policy .03(a) provides that the System will not open a series if one of
the following conditions is met:
(1) There is no quote present in the series that complies with the
bid/ask differential requirements (as determined by the Exchange on a
class-by-class basis) have been entered by at least one Market-Maker
appointed to the class (or by the DPM or LMM, as determined by the
Exchange on a class-by-class basis);
(2) the opening price is not within an acceptable range (as
determined by the Exchange) compared to the lowest quote offer and the
highest quote bid;
(3) the opening trade would be at a price that is not the national
best bid or offer; or
(4) the opening trade would leave a market order imbalance (i.e.,
there are more market orders to buy or to sell for the particular
series than can be satisfied by the limit order, quotes and market
orders on the opposite side).
[[Page 74834]]
Paragraph (b) describes what happens when each of these conditions
is present:
(1) If the condition in paragraph (a)(i) is present (i.e., there is
no quote), the System will check to see if there is an NBBO quote on
another market that falls within the acceptable opening range. If such
an NBBO quote is present, the series will open and expose the
marketable order(s) at the NBBO price. If such an NBBO quote is not
present, the System will not open the series and will send a
notification to market participants indicating the reason.
(2) If the condition in paragraph (a)(ii) is present (i.e., the
opening price is not within an acceptable range), the System will match
orders and quotes to the extent possible and report the opening trade,
if any, at a single clearing price within the acceptable range, then
expose the remaining marketable order(s) at the widest price point
within the acceptable opening range or the NBBO price, whichever is
better.
(3) If the condition in paragraph (a)(iii) is present (i.e., the
opening trade would not be at the NBBO), the System will match orders
and quotes to the extent possible and report the opening trade, if any,
at a single clearing price within the acceptable opening range or the
NBBO price, whichever is better, then expose the remaining marketable
order(s) at the NBBO price.
(4) If the condition in paragraph (a)(iv) is present (i.e., the
opening trade would leave market order imbalance), the System will
match orders and quotes to the extent possible and report the opening
trade, if any, at a single clearing price, then expose the remaining
marketable order(s) at the widest price point within the acceptable
opening range or the NBBO price, whichever is better.
The proposed rule change amends the opening conditions to provide
in proposed paragraph (d)(ii) as follows: \23\
---------------------------------------------------------------------------
\23\ Similar to proposed paragraph (d)(i) above, the proposed
rule change combines the exceptions in current Interpretation and
Policy .03(b) with the applicable opening conditions in current
Interpretation and Policy .03(a) into single proposed subparagraph
(d)(ii) for ease of review.
---------------------------------------------------------------------------
(1) If there are no quotes on the Exchange or disseminated from at
least one away exchange present in the series, the System does not open
the series. There are no exceptions to this opening condition. The
Exchange generally requires an opening quote to ensure there will be
liquidity in a series when it opens;
(2) if the width between the best quote bid and best quote offer,
which may consist of Market-Makers quotes or bids and offers
disseminated from an away exchange (for purposes of proposed
subparagraph (d)(ii), the ``opening quote''), is wider than the OEPW
range and there are orders or quotes marketable against each other or
that lock or cross the OEPW range, the System does not open the series.
However, if the opening quote width is no wider than the IEPW range and
there are no orders or quotes marketable against each other or that
lock or cross the OEPW range, the System opens the series. If the
opening quote width is wider than the IEPW range, the System does not
open the series. If the opening quote for a series consists solely of
bids and offers disseminated from an away exchange(s), the System opens
the series by matching orders and quotes to the extent they can trade
and reports the opening trade, if any, at the opening trade price. The
System then exposes any remaining marketable buy (sell) orders at the
widest offer (bid) point of the OEPW range or NBO (NBB), whichever is
lower (higher). The proposed rule change only makes nonsubstantive,
simplifying changes to the exception to this opening condition. Because
the proposed definition of opening quote width includes bids and offers
from away exchanges, opening quote width incorporates those bids and
offers. If there are no Market-Maker quotes on CBOE but other exchanges
have disseminated bids and offers in a series, those away quotes
constitute the NBBO for the series. Thus, the proposed rule change
clarifies that the System will open a series if the opening quote
width, which is comprised of the best quotes on CBOE and other
exchanges (essentially, the NBBO) is no wider than the OEPW range. As
discussed above, the OEPW range is a price protection measure intended
to prevent orders from executing at extreme prices on the open. If that
market is no wider than the OEPW range, the Exchange believes it is
appropriate to open a series under these circumstances and provide
marketable orders on the Exchange with the opportunity to execute at
the NBBO. If the opening quote width is no wider than the OEPW range,
then the Exchange believes the risk of execution at an extreme risk is
not present. With respect to the exception to this opening condition,
similar to the exception in proposed Rule 6.2B(d)(i)(B), if the best
market (whether the Exchange or national market) would satisfy the
price check parameter the Exchange uses for intraday trading, and there
are no orders that can execute on the open, then there is no risk that
an order will execute at an extreme price on the open. Because the risk
that the OEPW range is intended to address is not present in this
situation, the Exchange believes it is appropriate to open a series
given these conditions. Other proposed changes make the language (e.g.,
language regarding matching orders and quotes and reporting the opening
trade, and regarding the opening price being that which clears the
largest number of contracts) in this paragraph consistent with language
used in the other opening conditions and exceptions in proposed
subparagraphs (d)(i) and (ii). Additionally, as discussed above, all
quotes entered by Market-Makers (including quotes entered during the
pre-opening period and opening rotation period) must satisfy bid/ask
differentials,\24\ so the Exchange does not believe the Rule 6.2B needs
to include this requirement as well. With respect to openings, the
System looks to determine whether the opening quote width (whether the
opening quote consists of a bid and offer from one Market-Maker,
multiple Market-Makers or quotes disseminated from away exchanges) is
within the OEPW range, which the Exchange uses as a price protection
measure, rather than within the bid/ask differentials.\25\
---------------------------------------------------------------------------
\24\ See Rule 8.7(d). The Exchange may set different bid/ask
differential requirements for a Market-Maker's opening quotes than
for its intraday quotes (which it currently does). The proposed rule
change specifies this in Interpretation and Policy .02 regarding
Market-Maker quotes, which currently provides the Exchange may also
set a different minimum number of contracts for a Market-Maker's
opening quotes.
\25\ Regulatory Circular RG13-025 sets forth the current OEPW
range. This is the term with which Trading Permit Holders are
familiar for the acceptable opening, and the Exchange believes it
will be beneficial for investors if the rules refer to the same
term.
---------------------------------------------------------------------------
(3) if the opening trade price would be outside the OEPW range or
the NBBO, the System opens the series by matching orders and quotes to
the extent they can trade and reports the opening trade, if any, at an
opening trade price not outside either the OEPW range or NBBO. The
System then exposes any remaining marketable buy (sell) orders at the
widest offer (bid) point of the OEPW range or NBO (NBB), whichever is
lower (higher). As discussed above, the Exchange believes using the
term OEPW range with respect to the acceptable range for opening price
in the rules is a more accurate description of the appropriate range
for opening prices (as this is the term used in circulars and among
Trading Permit Holders). The OEPW range is used as a price protection
measure. Additionally, the proposed rule change clarifies that a series
will open if the opening trade price is at the widest part of the OEPW
[[Page 74835]]
range (it will expose orders if it is outside the OEPW range). The
proposed rule change makes nonsubstantive, simplifying changes to this
opening condition and clarifies that the opening trade price must be
something not outside the OEPW range or the NBBO (including the ends of
the applicable range). Other proposed changes make the language in this
paragraph consistent with language used in the other conditions in
proposed subparagraphs (d)(i) and (ii);
(4) if the opening trade would leave a market order imbalance,
which means there are more market orders to buy or to sell for the
particular series than can be satisfied by the orders and quotes on the
opposite side, the System opens the series by matching orders and
quotes to the extent they can trade and reports the opening trade, if
any, at the opening trade price. The System then exposes any remaining
marketable buy (sell) orders at the widest offer (bid) point of the
OEPW range or NBO (NBB), whichever is lower (higher). The proposed rule
change makes nonsubstantive, simplifying changes to this provision.
Other proposed changes make the language in this paragraph consistent
with language used in the other conditions in proposed subparagraphs
(d)(i) and (ii); or
(5) if the opening quote bid (offer) or the NBB (NBO) crosses the
opening quote offer (bid) or the NBO (NBB) by more than an amount
determined by the Exchange on a class-by-class and premium basis, the
System does not open the series.\26\ The System currently does not open
a series if this condition exists to prevent executions at extreme
prices, and the Exchange proposes to codify this condition in the rules
so that market participants are aware of all circumstances under which
a series may not open. There are no exceptions to this opening
condition. If the opening quote bid (offer) or NBO (NBO) crosses the
opening quote offer (bid) or NBO (NBB) by no more than the specified
amount, the System will open the series by matching orders and quotes
to the extent they can trade and report the opening trade, if any, at
the opening trade price. The System then exposes any remaining
marketable buy (sell) orders at the widest offer (bid) point of the
OEPW range or NBO (NBB), whichever is lower (higher). If the best away
market bid and offer are inverted by no more than the specified amount,
there is a marketable order on each side of the series, and the System
opens the series, the System will expose the order on the side with the
larger size and route for execution the order on the side with the
smaller size to an away exchange that is at the NBBO. Only one order in
a series may be exposed in a HAL auction, so this provision is
consistent with this limitation and is intended to address the
situation in which there may be a marketable order on each side of the
market so that both orders have a possibility for execution. This
exception is consistent with the other exceptions in proposed paragraph
(b) as well as with current System functionality.
---------------------------------------------------------------------------
\26\ Currently, this amount is $0.25 for options with prices
less than $3.00 and $0.50 for options with prices of $3.00 or more.
---------------------------------------------------------------------------
Generally, the purpose of these opening conditions and exceptions
is to ensure that series open in a fair and orderly manner and at
prices consistent with the current market conditions for the series and
not at extreme prices, while taking into consideration the markets of
other exchanges that may be better than the Exchange's at the open.
With respect to classes in which the Exchange has activated HAL for
openings, the exceptions provide the opportunity for orders to execute
through a HAL auction or at an away exchange when that is the case.
Current Interpretation and Policy .03 states for classes for which
HALO is activated, the procedures in Interpretation and Policy .03 will
apply in lieu of current paragraph (e) (and proposed subparagraph
(d)(i)) regarding opening conditions (see above discussion). The
proposed rule change adds subparagraph (d)(ii) to specify the opening
conditions in that subparagraph apply to those classes. The proposed
rule change deletes the provision regarding the allocation period of
the HAL openings. The Exchange no longer uses an allocation period and
just uses the exposure period, which may not exceed 1.5 seconds. There
is no allocation period for the HAL exposure process described in Rule
6.14A, and the Exchange does not believe it is necessary to include one
for HAL on the openings. As provided in current Interpretation and
Policy .03(c)(ii) and proposed subparagraph (d)(ii), the exposure
process will be conducted via HAL pursuant to Rule 6.14A for an
exposure period designated by the Exchange for a class (which period of
time will not exceed 1.5 seconds),\27\ so the Exchange believes the
process for HAL on the openings should be consistent with the standard
HAL process. The proposed rule change deletes Interpretation and Policy
.03(c)(i) regarding the priority of orders and quotes during the open
for classes in which the Exchange has activated HAL for openings, as it
is the same as the priority in proposed subparagraph (c)(i)(C).
---------------------------------------------------------------------------
\27\ The proposed rule change adds to this provision any
remaining balances of orders not executed after the exposure period
will enter the book at their limit prices (to the extent consistent
with Rule 6.53) or route via the order handling system pursuant to
Rule 6.12 in accordance with their routing instructions. The
Exchange believes this is implied by the routing parameters and
handling instructions of orders and is merely adding detail to the
rules, which current Interpretation and Policy .03(c)(ii) and
proposed subparagraph (d)(ii) only specify what happens to orders
that are priced or would be executed ``too far'' from the initial
HAL price.
---------------------------------------------------------------------------
The Exchange also proposes to add subparagraph (d)(iii), which
provides if the System does not open a series pursuant subparagraphs
(i) or (ii), notwithstanding proposed paragraph (c) (which states the
opening rotation period may not last more than 60 seconds), the opening
rotation period continues (including the dissemination of EOIs, which
is consistent with language the Exchange proposes to delete regarding
the notifications sent to market participants if one of the opening
conditions is present) until the condition causing the delay is
satisfied or the Exchange otherwise determines it is necessary to open
a series in accordance with proposed paragraph (e). This is currently
how the System operates, and the Exchange believes it will benefit
investors to explicitly state this in the rules, particularly because,
under these circumstances, the opening rotation period will last longer
than the standard length of time determined by the Exchange. The
Exchange believes it is important for market participants to continue
to receive EOIs, particularly those describing why a series is not
open, so they have close to real-time information regarding the
potential opening of a series.\28\
---------------------------------------------------------------------------
\28\ Current Rule 6.2B(h) and proposed Rule 6.2B(g) provides the
opening procedures described in the rule may also be used after the
close of a trading session for series that open pursuant to HOSS.
The proposed rule change makes nonsubstantive changes to proposed
paragraph (g) to more clearly and simply state the potential
applicability of the opening procedures to a closing rotation for
series that open pursuant to HOSS and to include additional detail
regarding the notification to Trading Permit Holders regarding the
decision to conduct a closing rotation. The proposed rule change
also amends the name of Rule 6.2B to indicate that the procedures
may also be used for closing rotations.
---------------------------------------------------------------------------
Hybrid 3.0 Classes
The proposed rule change moves Rule 6.2B, Interpretation and Policy
.01(a), which contains provisions related to the opening applicable to
classes that trade on the Hybrid 3.0 platform, to proposed paragraph
(h) of Rule 6.2B. Interpretation and Policy .01 generally
[[Page 74836]]
describes the modified opening procedures for Hybrid 3.0 series that
are used to calculate volatility indexes. Current paragraph (a),
however, applies to Hybrid 3.0 classes on all trading days, not just
the days on which the Exchange uses the modified opening procedures.
The proposed rule change moves this provision to proposed paragraph (h)
within the body of the rule, rather than the Interpretation and Policy,
to clarify this point.
The introduction to proposed paragraph (h) explicitly states all
the provisions set forth in Rule 6.2B apply to the opening of Hybrid
3.0 series except as set forth in proposed paragraph (i).\29\ The
primary difference between the opening procedures for Hybrid series and
the opening procedures for Hybrid 3.0 series is in Hybrid classes, all
Market-Makers with appointments may submit quotes prior to the open in,
while in Hybrid 3.0 classes, only DPMs or LMMs with appointments may
submit quotes prior to the open. Proposed paragraph (h)(i) provides,
nothwithstanding proposed subparagraph (a)(i) (which provides the
System accepts all orders during the pre-opening period), only the LMM
or DPM with an appointment or allocation, respectively, to the class or
series may enter quotes prior to the opening of trading, subject to the
obligation set forth in Rule 8.15 or 8.85, respectively.\30\ This more
clearly states which participants are permitted to submit opening
quotes in Hybrid 3.0 classes (Market-Makers other than LMMs and DPMs
are not). Proposed paragraph (h)(ii) merely states all market
participants may enter orders into the book prior to the opening
(consistent with current paragraph (a) in Interpretation and Policy
.01). However, the proposed rule change adds, consistent with the
current practice in Hybrid 3.0 classes that only public customer orders
may rest in the book,\31\ the System only accepts opening rotation
orders from non-public customers during the pre-opening period. The
System accepts all order types designated as eligible for entry during
the pre-opening rotation as set forth in proposed paragraph (a)(i) (as
discussed above) from public customers during the pre-opening rotation.
---------------------------------------------------------------------------
\29\ Interpretation and Policy .01 currently provides the
provisions in that Interpretation and Policy apply for purposes of
Hybrid 3.0 classes, notwithstanding Rule 6.2B(a). The intent of this
language is the same as the revised rule language; however, the
Exchange believes the rule as revised more directly states this
intent.
\30\ Currently, LMMs and DPMs must enter opening quotes within
one minute of the initiation of an opening rotation in any series
that is not open due to the lack of a quote.
\31\ Pursuant to Rule 7.4(a), public customer orders are
eligible for entry into the electronic book. While non-public
customers may submit orders in Hybrid classes for entry into the
book, the Exchange may determine on a class-by-class basis that non-
public customers may also submit orders in Hybrid 3.0 classes for
entry into the book; currently, the Exchange has determined not to
permit this.
---------------------------------------------------------------------------
Modified Opening Procedures on Volatility Index Settlement Dates
The proposed rule change amends the modified opening procedures for
classes and series used to calculate volatility indexes on the exercise
and final settlement dates for those indexes. Current Interpretation
and Policy .01(b) requires the DPM or LMM to enter opening quotes in
all series in a Hybrid 3.0 class on during a modified opening procedure
(as it does not specify any subset of series to which the obligation
applies). The proposed rule change deletes this obligation. As a
result, the opening quoting obligations in Rules 8.15 and 8.85, as
applicable, would apply to LMMs and DPMs, respectively, in Hybrid 3.0
classes on volatility settlement days.\32\ While this is a slight
reduction in the quoting obligation of LMMs and DPMs on volatility
settlement days, the purpose of the obligation relates to liquidity in
the series for purposes of calculating the exercise/final settlement
value of the volatility index for expiring options and (security)
futures contracts (``constituent series''). The Exchange believes the
standard opening quoting obligation, in addition to other general
obligations applicable to LMMs and DPMs,\33\ provides sufficient
liquidity in these series on the volatility settlement days and thus
does not believe it is necessary to impose additional opening quoting
obligations on LMMs and DPMs on those days.
---------------------------------------------------------------------------
\32\ See supra note 30.
\33\ See Rules 8.15 and 8.85. For example, LMMs and DPMs must
make competitive markets, and LMMs in Hybrid 3.0 classes (currently,
only LMMs are appointed in the only class authorized to trade on the
Hybrid 3.0 platform, and thus only those LMMs are subject to the
obligation proposed to be deleted), must facilitate order
imbalances. Additionally, all Market-Makers (including LMMs and
DPMs) must submit a quote if called upon by an Exchange official if
necessary in the interest of maintaining a fair and orderly market.
See Rule 8.7(d)(iv).
---------------------------------------------------------------------------
Current Rule 6.2B, Interpretation and Policy .01(c) describes a
modified opening procedure that applies to series in Hybrid 3.0 classes
that are used to calculate a volatility index on expiration and final
settlement dates for those indexes.\34\ The introductory paragraph of
current paragraph (c) states to facilitate the calculation of exercise
or final settlement values for options or futures contracts on
volatility indexes, the Exchange will utilize a modified HOSS opening
procedure for any Hybrid 3.0 series with respect to which a volatility
index is calculated. This modified opening procedure will be utilized
only on the expiration and final settlement dates of the options or
futures contracts on the applicable volatility index for each
expiration. The proposed introductory paragraph to Interpretation and
Policy .01 simplifies these two sentences, which are redundant, and
states on the dates on which the exercise and final settlement values
are calculated for options \35\ or (security) futures contracts on a
volatility index (i.e., expiration and final settlement dates), the
Exchange will utilize the modified opening procedure described in that
Interpretation and Policy for all series used to calculate the
exercise/final settlement value of the volatility index for expiring
options and (security) futures contracts (i.e., constituent options).
---------------------------------------------------------------------------
\34\ Interpretation and Policy .08 has a substantially similar
procedure for series in Hybrid classes that are used to calculate
volatility indexes on settlement dates. As discussed below, the
proposed rule change deletes Interpretation and Policy .08 and
applies Interpretation and Policy .01 to all classes. All proposed
changes to Interpretation and Policy .01 described in this section
of the rule filing will thus apply to the modified opening procedure
for both Hybrid and Hybrid 3.0 classes.
\35\ The proposed rule references Rules 24.9(a)(5) and (6)
(which references are included in current Rule 6.2B, Interpretation
and Policy .08), which describe the method of determining the day on
which the exercise settlement value will be calculated for
volatility indexes with a 30-day volatility period and VXST,
respectively.
---------------------------------------------------------------------------
The introduction to current paragraph (c) continues to state on
settlement dates, public customers, broker-dealers, Exchange Market-
Makers, away market-makers and specialists may enter orders in any
index options series used to calculate the exercise settlement or final
settlement value of that volatility index. As discussed above, proposed
Rule 6.2B(a) provides market participants may submit orders prior to
the open. The group of market participants listed in current
Interpretation and Policy .01(c) generally covers all market
participants, so it is unnecessary to list them out. Additionally,
proposed Rule 6.2B(a) applies to expiration and final settlement dates
unless otherwise set forth in Interpretation and Policy .01; however,
the current provision about entering orders on settlement dates is
consistent with proposed Rule 6.2B(a). Therefore, the proposed rule
change deletes that provision, as it is duplicative and unnecessary.
Current Interpretation and Policy .01(c)(i) states all orders
(including public customer, broker-dealer, Market-
[[Page 74837]]
Maker, away market-maker and specialist orders), other than spread or
contingency orders, will be eligible to be placed on the electronic
book for those option contract expirations whose prices are used to
derive the volatility indexes on which options and futures are traded,
for the purpose of permitting those orders to participate in the
opening price calculation for the applicable series. The Exchange
permits the same order types during the modified opening procedure as
it does during the standard procedure (as set forth in proposed
paragraph (a)(i) and, with respect to Hybrid 3.0 classes, proposed
paragraph (h)(ii)). Therefore, the proposed rule change deletes this
paragraph.
Current subparagraph (c)(ii) provides, in addition to the LMM
quoting requirement, all LMMs in Hybrid 3.0 classes, if applicable,
must enter opening orders during the modified opening procedures on
settlement dates. The Exchange does not require LMMs (or any Market-
Makers) to enter orders on settlement dates (or any trading days), and
instead imposes a quoting obligation. Thus, the Exchange proposes to
delete the requirement for LMMs to submit orders on exercise and final
settlement dates. Market-Makers are permitted, but not required, to
enter orders in addition to quotes. The Exchange requires, and will
continue to require, LMMs (or DPMs) in Hybrid 3.0 classes to enter
opening quotes in series that may be used to calculate the exercise and
final settlement values of options or futures on the volatility index
on expiration and final settlement dates. Additionally, LMMs and DPMs
must enter quotes within a certain timeframe as necessary on all
trading days.\36\ The Exchange believes that opening quoting obligation
will ensure LMMs and DPMs will continue to enter opening quotes and
provide sufficient liquidity at the open in all necessary series on
settlement dates.
---------------------------------------------------------------------------
\36\ See supra note 30.
---------------------------------------------------------------------------
The proposed rule change also makes nonsubstantive changes to
Interpretation and Policy .01, including changes to delete unnecessary
language, update cross-references and paragraph numbering and
lettering, and incorporate defined terms.
Obsolete and Duplicate Language
The proposed rule change deletes obsolete and duplicate language in
Rule 6.2B as follows:
Current Rule 6.2B(b)(ii) describes how a DPM or LMM, as
applicable takes part in determining the cause of a delay in the
opening of an underlying security, and the Exchange may consider such
information when deciding whether to open a series despite the delay in
the opening of the underlying. Exchanges continue to increase
connectivity communication among each other, and thus the Exchange Help
Desk generally is aware of any delayed openings in the underlying
securities, making this provision obsolete. While DPMs and LMMs may
still communicate any issues related to an opening to the Exchange,
given that CBOE generally knows of these issues prior to them being
reported by DPMs and LMMs, the Exchange does not believe the rules
should impose this reporting requirement on DPMs and LMMs. Given the
increased importance of speed within the marketplace, the Exchange
believes it is necessary to have the ability to react to any issues it
is aware of, even though it may not have yet received information from
DPMs or LMMs. Additionally, pursuant to proposed paragraph (f) (as
discussed below), the Exchange's Help Desk may compel the opening of a
series for the reasons set forth in that paragraph. Therefore, the
Exchange proposes to delete this provision.
Current Rule 6.2B provides in various places Exchange
Floor Officials, including paragraphs (b)(ii), (e) and (f) and
Interpretations and Policies .01 and .08. The Exchange believes it is
simpler to have one single rule provision within Rule 6.2B that applies
to the entire rule stating designated Exchange personnel may determine
whether to modify the opening procedures when they deem necessary. The
Exchange proposes to delete these references and combine them into
current paragraph (f) and proposed paragraph (e). Additionally, the
Exchange proposes to amend proposed paragraph (e) to state senior Help
Desk personnel make these determinations. This is consistent with the
current language that states Floor Officials make these determinations.
However, the Exchange proposes to clarify in the rules the Floor
Officials that do make these determinations are located in the Help
Desk, as this terminology is more familiar to market participants.\37\
The proposed rule change lists examples of actions Senior Help Desk
personnel have flexibility to take when necessary in the interests of
commencing or maintaining a fair and orderly market (some of which are
listed throughout current Rule 6.2B), in the event of unusual market
conditions or in the public interest, including delaying or compelling
the opening of any series in any options class, modifying timers or
settings described in Rule 6.2B, and not using the modified opening
procedure set forth in proposed Interpretation and Policy .01. The
proposed rule change adds the Exchange will make and maintain records
to document all determinations to deviate from the standard manner of
the opening procedure, and periodically review these determinations for
consistency with the interests of a fair and orderly market.
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\37\ Current paragraph (b)(ii) references the Exchange Control
Room. The Control Room is now referred to as the Help Desk, so the
Exchange proposes to delete the references to the Control Room.
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Rule 6.2B, Interpretation and Policy .01(b) states the DPM
or LMM must enter opening quotes that comply with the bid/ask
differential requirements determined by the Exchange on a class-by-
class basis and that if there is not a quote present in a series that
complies with the bid/ask differential requirements established by the
Exchange, then that series will not open. As discussed above, bid/ask
differential requirements apply to all Market-Maker quotes, and whether
the System opens a series depends on whether the opening quote
satisfies the OEPW range (not bid/ask differentials) for the series.
Thus, the Exchange believes including language that DPMs and LMM must
comply with bid/ask differential requirements in the opening procedures
rules is duplicative of rules regarding Market-Maker obligations
related to bid/ask differential requirements (including Rules 8.7,
8.15, 8.15A and 8.85). Additionally, because the proposed rule change
explicitly states all provisions of Rule 6.2B apply to Hybrid 3.0
classes except as provided in proposed paragraph (i), the Exchange does
not believe it is necessary to repeat in subparagraph (a) the opening
quote must satisfy the OEPW range.
The Exchange also proposes to delete current
Interpretation and Policy .01(c)(v), which states the HOSS system will
automatically generate cancels immediately prior to the opening of the
applicable index option series for broker-dealer, Market-Maker, away
market-maker, and specialist (i.e., non-public customer) orders that
remain on the book following the modified HOSS opening procedures. This
provision applies to Hybrid 3.0 classes (a similar provision is not in
current Interpretation and Policy .08 regarding the modified opening
procedure for Hybrid classes). As discussed above, proposed Rule
6.2B(h)(ii) states non-public customers may only enter opening rotation
orders in Hybrid 3.0 classes. By definition, the System will cancel
opening rotation
[[Page 74838]]
orders that do not execute during the opening rotation of a series,
making this provision is redundant. Further, the Exchange proposes to
delete current Interpretation and Policy .01(c)(vi) regarding
publication of an imbalance of contracts, as this is covered by
proposed Rule 6.2B(d)(iii) regarding dissemination of expected opening
messages if a series does not open.
The proposed rule change deletes Interpretation and Policy
.08. The modified opening procedures described in Interpretations and
Policies .01 and .08 are nearly identical for Hybrid and Hybrid 3.0
classes. Therefore, the proposed rule change amends Interpretation and
Policy .01 (as amended by this proposed rule change) to apply to all
classes. Proposed Interpretation and Policy .01 does not distinguish
between 30-day volatility indexes and short-term volatility indexes, as
the modified opening procedure operates in the same manner for all
volatility indexes on settlement dates.\38\
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\38\ The proposed rule change deletes references to VXST, the
CBOE Short-Term Volatility Index, in Interpretation and Policy .01,
as VXST is a type of volatility index and does not need to be
specified.
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Exchange Determinations
There are various provisions throughout Rule 6.2B that allow the
Exchange to make certain determinations on a class-by-class basis.
However, pursuant to Rule 8.14, Interpretation and Policy .01,\39\ the
Exchange may authorize groups of series of a class to trade on
different trading platforms, and thus, the Exchange would make
determinations for each group rather than the class as a whole.
Proposed Interpretation and Policy .05 provides, for these groups, the
Exchange may make determinations pursuant to Rule 6.2B and the
Interpretations and Policies thereunder on a group-by-group basis that
would otherwise be made on a class-by-class basis. The proposed rule
change also adds to proposed Interpretation and Policy .05 it will
announce via Regulatory Circular with appropriate advanced notice any
determinations it makes under Rule 6.2B to ensure Trading Permit
Holders are aware of these determinations and have sufficient time to
make any necessary changes in response to the determinations.
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\39\ Rule 8.14, Interpretation and Policy .01 provides the
Exchange may determine to authorize a group of series of a Hybrid
3.0 class to trade on the Hybrid system, in which case the Exchange
would establish trading parameters on a group basis to the extent
rules otherwise provide for such parameters to be established on a
class basis. Thus, this proposed change is consistent with current
rules.
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Nonsubstantive Changes
The proposed rule change makes numerous nonsubstantive and clerical
changes throughout Rule 6.2B and in Rule 6.53(l), including adding or
amending headings and defined terms, updating cross-references, adding
introductory and clarifying language, using consistent language and
punctuation, replacing terms such as ``option series'' with series (all
series listed for trading on the Exchange are for options, making it
unnecessary to include ``option''), and using more plain English. The
proposed rule change also amends current Rule 6.2B(g) and proposed Rule
6.2B(f) to indicate the procedure described in Rule 6.2B may be used to
reopen a series, in addition to a class, after a trading halt. This
proposed changes addresses a potential situation in which only certain
series are subjected to halt. As series open on an individual basis,
the Exchange does not believe this to be a significant change. The
proposed rule change also adds detail regarding notice of use of this
opening procedure following a trading halt and clarifies the procedure
would be the same, however, based on then-existing facts and
circumstances, there may be no pre-opening period or a shorter pre-
opening period than the regular pre-opening period. Specifically,
proposed paragraph (f) states the Exchange will announce the reopening
of a class or series after a trading halt as soon as practicable via
verbal message to the trading floor and electronic message to Trading
Permit Holders that request to receive such messages.\40\ CBOE believes
it is in investors' best interests to reopen a class or series as soon
as possible after a trading halt, which may make advance notice in
certain situations impractical. The proposed rule change provides the
Exchange with the ability to re-open as quickly as possible following a
halt.
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\40\ The proposed rule change also notes the Exchange may reopen
a class after a trading halt as otherwise set forth in the Rules,
including Rules 6.3, 6.3B, and 6.3C.
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The Exchange also proposes to amend Interpretation and Policy .04,
which states the Exchange may determine on a class-by-class basis which
electronic algorithm from Rule 6.45A or 6.45B, as applicable, applies
to the class during rotations. The proposed rule change makes the
electronic algorithm that applies to a class intraday the algorithm
that applies to a class during rotations, but still leaves the Exchange
with the same flexibility to apply a different algorithm to a class
during rotations if it deems necessary or appropriate. This proposed
change merely makes the intraday algorithm the default opening
algorithm for a class. The Exchange believes it is important to
maintain this flexibility so that it can facilitate a robust opening
with sufficient liquidity in all classes.
The Exchange also proposes to amend Rules 6.1A(e)(iii)(C),
8.15(b)(v), 8.85(a)(xi), and 17.50(g)(14) to update cross-references
related to proposed changes described above.
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.\41\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \42\ 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) \43\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\41\ 15 U.S.C. 78f(b).
\42\ 15 U.S.C. 78f(b)(5).
\43\ Id.
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In particular, the proposed rule change enhances the description of
the opening procedures in the rules to reflect how the System opens
series, which perfects the mechanism of a free and open market and
ultimately protects investors. The Exchange believes the proposed rule
changes to reorganize and enhance the description of the opening (and
sometimes) closing procedures (for Hybrid and Hybrid 3.0 classes) will
benefit investors, because the rule as amended more accurately and
clearly describes how the System opens series on the Exchange. Thus,
investors will have a better understanding of how their quotes and
orders will be handled during opening rotations if they elect to submit
quotes and orders during the pre-opening period or if they have orders
resting on the book from the prior
[[Page 74839]]
trading day. Similarly, the Exchange believes the deletion of obsolete
and duplicative provisions from Rule 6.2B will benefit investors by
eliminating potential confusion about the applicability of those
provisions. The nonsubstantive and clerical changes will create more
consistency and clarity throughout and otherwise simplify the rule.
Additionally, explicitly stating the few differences between the
opening procedure for Hybrid classes and Hybrid 3.0 classes will
further eliminate potential confusion from the rules and ultimately
benefit investors. Further, the Exchange believes the additional
information regarding notification of the use of the opening procedure
following a trading halt will clarify for Trading Permit Holders when
and how they will know from the Exchange such use is occurring.
The Exchange also believes the proposed changes to the modified
opening procedures on settlement dates more clearly state the standard
opening procedures apply in those situations except as specifically set
forth in the Interpretation and Policy, which will also eliminates
potential investor confusion. While the proposed rule change deletes
the obligation for LMMs in Hybrid 3.0 classes to enter opening orders
and quotes (in addition to the standard opening quoting obligation) on
volatility settlement dates, the Exchange does not believe this impacts
the balance of LMM obligations and benefits, as this obligation applies
only to a brief period of time on certain days. Market-Maker
obligations generally do not require the entry of orders in addition to
quotes. Additionally, LMMs in Hybrid 3.0 must enter opening quotes in
accordance with the obligation in Rule 8.15, including in series of
classes that may be used to calculate the exercise and final settlement
values of options or futures on the volatility index on settlement
dates. The Exchange believes the standard opening quoting obligation,
in addition to other general obligations applicable to LMMs, provides
sufficient liquidity in these series on the volatility settlement days
and thus does not believe it is necessary to impose additional opening
quoting obligations on LMMs on those days. Additionally, the Exchange
believes imposing the same opening quoting obligation on LMMs every day
will promote compliance with the obligation.
The revised opening conditions (for both the standard opening
procedures and HAL opening procedures) are intended promote just and
equitable principles of trade, as they ensure that series open in a
fair and orderly market with sufficient liquidity in the series and
opportunities for execution at prices that are consistent with then-
current market conditions rather than potentially extreme prices. These
proposed changes ensure that market participants are aware of all
circumstances under which the System may not open a series.
The proposed rule change to allow the Exchange to make
determinations in Rule 6.2B for groups of series on different trading
platforms provides the Exchange with the appropriate flexibility to
make these determinations in a manner consistent with how the System's
opening (and closing) process, which it performs by series, not class.
It is also consistent with Exchange rules that permit the Exchange to
authorize a group of series of a class for trading on different
platforms. The Exchange believes this consistency removes impediments
to and perfects the mechanism of a free and open market and promotes
just and equitable principles of trade.
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. The opening procedures as
revised by the proposed rule change will still apply to all market
participants in the same manner as they do today. The proposed rule
change more accurately describes the opening procedures that are
currently in place on the Exchange, which procedures are designed to
open series on the Exchange in a fair and orderly manner. These changes
have no impact on competition. The purposes of the opening conditions
are to ensure there is sufficient liquidity in a series when it opens
and the series opens at prices consistent with the current market
conditions (at the Exchange and other exchanges) rather than extreme
prices that could result in unfavorable executions to market
participants. The nonsubstantive changes as well as the deletion of
obsolete and duplicative language have no impact on competition, as
they are intended to eliminate confusion within and simplify the rules.
While the proposed rule change deletes the obligation for LMMs in
Hybrid 3.0 classes to enter opening orders and quotes (in addition to
the standard opening quoting obligation) on volatility settlement
dates, the Exchange does not believe this impacts the balance of LMM
obligations and benefits, as this obligation applies only to a brief
period of time on certain days. Market-Maker obligations generally do
not require the entry of orders in addition to quotes. Additionally,
LMMs in Hybrid 3.0 must enter opening quotes in accordance with the
obligation in Rule 8.15, including in series of classes that may be
used to calculate the exercise and final settlement values of options
or futures on the volatility index on settlement dates. The Exchange
believes the standard opening quoting obligation, in addition to other
general obligations applicable to LMMs, provides sufficient liquidity
in these series on the volatility settlement days and thus does not
believe it is necessary to impose additional opening quoting
obligations on LMMs on those days. Additionally, the Exchange believes
imposing the same opening quoting obligation on LMMs every day will
promote compliance with the obligation.
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-2016-071 on the subject line.
[[Page 74840]]
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-2016-071. 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-2016-071, and should be
submitted on or before November 17, 2016.
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\44\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\44\
Brent J. Fields,
Secretary.
[FR Doc. 2016-25940 Filed 10-26-16; 8:45 am]
BILLING CODE 8011-01-P