[Federal Register Volume 82, Number 73 (Tuesday, April 18, 2017)]
[Notices]
[Pages 18320-18323]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-07751]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-80439; File No. SR-CBOE-2017-031]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change Relating to Complex Order Price Protections
April 12, 2017.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on April 5, 2017, 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 and II below, which Items have been prepared by the
Exchange. The Exchange filed the proposal 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.
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\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).
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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 current price protections related to
complex orders. The text of the proposed rule change is provided below
(additions are italicized; deletions are [bracketed]).
* * * * *
Chicago Board Options Exchange, Incorporated Rules
* * * * *
Rule 6.53C. Complex Orders on the Hybrid System
(a)-(d) No change.
. . . Interpretations and Policies:
.01-.07 No change.
.08 Price Check Parameters: On a class-by-class basis, the Exchange
may determine (and announce to the Trading Permit Holders via
Regulatory Circular) which of the following price check parameters will
apply to eligible complex orders. Paragraph (b) will not be applicable
to stock-option orders.
For purposes of this Interpretation and Policy .08:
Vertical Spread. A ``vertical'' spread is a two-legged complex
order with one leg to buy a number of calls (puts) and one leg to sell
the same number of calls (puts) with the same expiration date but
different exercise prices.
Butterfly Spread. A ``butterfly'' spread is a three-legged complex
order with two legs to buy (sell) the same number of calls (puts) and
one leg to sell (buy) twice as many calls (puts), all with the same
expiration date but different exercise prices, and the exercise price
of the middle leg is between the exercise prices of the other legs. If
the exercise price of the middle leg is halfway between the exercise
prices of the other legs, it is a ``true'' butterfly; otherwise, it is
a ``skewed'' butterfly.
Box Spread. A ``box'' spread is a four-legged complex order with
one leg to buy calls and one leg to sell puts with one strike price,
and one leg to sell calls and one leg to buy puts with another strike
price, all of which have the same expiration date and are for the same
number of contracts.
To the extent a price check parameter is applicable, the Exchange
will not automatically execute an eligible complex order that is:
(a)-(b) No change.
(c) Debit/Credit Price Reasonability Checks:
(1)-(5) No change.
(6) This check does not apply to multi-class spreads or to orders
routed from a PAR workstation or order management terminal.
(d) No change.
(e) Acceptable Percentage Range Parameter:
(i) An incoming complex order (including a stock-option order)
after the series for all legs of the complex order are open for trading
that is marketable and would execute immediately upon submission to the
COB or following a COA if the execution would be at a price outside an
acceptable percentage range. The ``acceptable percentage range'' is the
national spread market (or Exchange spread market if the NBBO in any
leg is locked, crossed or unavailable and for pairs of orders submitted
to AIM or SAM) that existed when the System received the order or at
the start of the COA, as applicable, plus/minus:
(A) the amount equal to a percentage (which may not be less than %)
of the national spread market (the ``percentage
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amount'') if that amount is not less than a minimum amount or greater
than a maximum amount (the Exchange will determine the percentage and
minimum and maximum amounts on a class-by-class basis and announce them
to Trading Permit Holders by Regulatory Circular);
(B) the minimum amount, if the percentage amount is less than the
minimum amount; or
(C) the maximum amount, if the percentage amount is greater than
the maximum amount.
(ii) The System cancels an order (or any remaining size after
partial execution of the order) that would execute or rest in the COB
at a price outside the acceptable price range.
(iii) If the System rejects either order in a pair of orders
submitted to AIM or SAM pursuant to this parameter, then the System
also cancels the paired order. Notwithstanding the foregoing, with
respect to an AIM Retained (``A:AIR'') order as defined in
Interpretation and Policy .09 to Rule 6.74A, if the System rejects the
Agency Order pursuant to this check, then the System also rejects the
contra-side order; however, if the System rejects the contra-side order
pursuant to this check, the System still accepts the Agency Order if it
satisfies the check. [To the extent a contra-side order or response is
marketable against the Agency Order, the execution price will be capped
at the opposite side of the acceptable price range.]
(iv) This parameter applies to auction responses in the same manner
as it does orders.
(f)-(g) No change.
.09-.12 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
The Exchange proposes to amend its debit/credit price reasonability
check and acceptable percentage range parameter for complex orders.
Debit/Credit Price Reasonability Check
In general, pursuant to the debit/credit price reasonability check
in Rule 6.53C, Interpretation and Policy .08(c), the System rejects a
limit complex order for a debit strategy with a net credit price, a
limit complex order for a credit strategy with a net debit price, or a
market order for a credit strategy that would be executed at a net
debit price.\5\ Currently, the check applies to orders routed from a
PAR workstation or order management terminal (``OMT''). The proposed
change amends Rule 6.53C, Interpretation and Policy .08(c)(6) to
provide the check will not apply to orders routed from a PAR
workstation or OMT. These orders are subject to manual handling, so the
PAR or OMT operator will have evaluated the price of an order based on
then-existing market conditions prior to submitting the order for
electronic execution, and thus there is minimal risk of execution at an
erroneous price. Other price protections similarly do not apply to
these orders.\6\
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\5\ See Rule 6.53C, Interpretation and Policy .08(c). The System
determines whether an order is a debit or credit strategy as set
forth in that Rule.
\6\ See, e.g., Rule 6.12(a)(3) and (4).
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Acceptable Percentage Range Parameter
In general, pursuant to the acceptable percentage range parameter
in Rule 6.53C, Interpretation and Policy .08(e), the System cancels an
incoming order that is marketable and would execute immediately upon
submission to the complex order book (``COB'') or following a COA if
the execution would be at a price outside an acceptable percentage
range, which is the national spread market that existed when the System
received the order or at the start of COA, as applicable, plus/minus:
The amount equal to a percentage (which may not be less
than 3%) of the national spread market (the ``percentage amount'') if
that amount is not less than a minimum amount or greater than a maximum
amount (the Exchange will determine the percentage and minimum and
maximum amounts and announce them to Trading Permit Holders by
Regulatory Circular);
the minimum amount, if the percentage amount is less than
the minimum amount; or
the maximum amount, if the percentage amount is greater
than the maximum amount.
First, the proposed rule change amends Rule 6.53C, Interpretation
and Policy .08(e)(i)(A) to provide the Exchange may determine the
percentage and the minimum and maximum amounts on a class-by-class
basis. Currently, the rule states the percentage and minimum and
maximum amounts will be the same for all classes. Because of class
differences such as the minimum increment and option prices, the
Exchange believes it may be appropriate to set different amounts so the
outside of the range is not too close or too far away from the market
price for a class and ensure the range creates an effective check for
all classes. Therefore, the proposed rule change adds this flexibility
to the Rule. Other price protections have similar flexibility.\7\
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\7\ Id.
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Second, the proposed rule change adds Rule 6.53C, Interpretation
and Policy .08(e)(iv) to provide this parameter will apply to auction
responses in the same manner as it does orders. The current parameter
does not apply to auction responses. As noted in a recent rule filing
enhancing this parameter, even if the parameter does not apply to
auction responses, this protection will prevent an order from executing
outside the acceptable price range (including against an auction
response), and thus responses will not execute against an order outside
the acceptable price range.\8\ However, cancelling an auction response
prior to the end of an auction that would execute outside the
acceptable price range may give the submitting Trading Permit Holder an
opportunity to submit a new response within the acceptable price range
prior to the end of the auction, and thus increase execution
opportunities. Therefore, the proposed rule change applies this
parameter to auction response. An auction response at a price outside
the acceptable price range will not execute regardless of whether this
parameter applies to the auction response; applying the parameter to
auction responses merely changes the timing of when the response is
cancelled.\9\ Other price
[[Page 18322]]
protections similarly apply to auction responses.\10\
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\8\ See Securities Exchange Act Release No. 34-80181 (March 8,
2017), 82 FR 13678, note 26 (March 14, 2017) (SR-CBOE-2017-016).
\9\ Paragraph (e)(iii) currently states to the extent a contra-
side order or response is marketable against the Agency Order, the
execution price will be capped at the opposite side of the
acceptable price range. The proposed rule change deletes this rule
language, as it is redundant. The price protection will, as
proposed, cancel orders and responses (or remaining size after
partial execution) that would execute outside the acceptable price
range. There [sic] is effectively the same as capping an execute
[sic] price no wider than the acceptable price range, as no order or
response will be able to execute at a price outside the range.
\10\ See, e.g., Rule 6.53C, Interpretation and Policy .08(c)(4).
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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.\11\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \12\ 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) \13\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(5).
\13\ Id.
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In particular, the Exchange believes the proposed rule change to
not apply the debit/credit price reasonability check to orders routed
from a PAR workstation or OMT would remove impediments to and perfect
the mechanism of a free and open market and a national market system,
as those orders were subject to manual handling by a PAR or OMT
operator who will have evaluated the price of an order based on then-
existing market condition [sic] prior to submitted [sic] it for
electronic execution, thus minimizing risk of an erroneous execution
and reducing the need for application of the additional reasonability
check. Other price protections similarly do not apply to these
orders.\14\
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\14\ See, e.g., Rule 6.12(a)(3) and (4).
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The proposed rule change to provide the Exchange with flexibility
to determine settings for the acceptable percentage range parameter on
a class-by-class manner will permit the Exchange to ensure the range is
not too close or too far away from the market price for a class based
on factors such as minimum increment and premium, and thus ensure the
range creates an effective check for all classes. This will protect
investors from potentially erroneous executions while removing
impediments to and perfecting the mechanism of a free and open market
and a national market system by ensuring orders are not inadvertently
cancelled due to a range that is too narrow. Other price protections
have similar flexibility.\15\
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\15\ Id.
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The proposed rule change to apply the acceptable percentage range
parameter to auction responses merely changes the time at which
responses outside the acceptable price range is cancelled. However,
application of the acceptable percentage range parameter to auction
responses may permit the submitting Trading Permit Holder to enter a
new auction response at a price within the range prior to the end of
the auction, which improves execution opportunities and thus protects
investors. Other price protections similarly apply to auction
responses.\16\
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\16\ See, e.g., Rule 6.53C, Interpretation and Policy .08(c)(4).
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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 proposed rule change will
apply to all complex orders submitted to CBOE in the same manner. The
enhancements to the price protection mechanisms applicable to all
incoming orders will help further prevent potentially erroneous
executions, which benefits all market participants. Additionally, the
proposed rule change is substantially similar to other price
protections.\17\ The proposed rule change will not impose any burden on
intermarket competition, as it applies only to CBOE price protection
mechanisms that prevent erroneous executions on CBOE.
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\17\ See, e.g., Rules 6.12(a)(3) and (4) and Rule 6.53C,
Interpretation and Policy .08(c)(4).
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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: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
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 \18\ and Rule 19b-
4(f)(6) thereunder.\19\
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\18\ 15 U.S.C. 78s(b)(3)(A).
\19\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written
notice of its intent to file the proposed rule change, along with a
brief description and the text of the proposed rule change, at least
five business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission.
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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: (i)
Necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission shall institute proceedings to determine whether the
proposed rule change should be approved or 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-2017-031 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2017-031. 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/
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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-2017-031 and should be submitted on or before May 9, 2017.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-07751 Filed 4-17-17; 8:45 am]
BILLING CODE 8011-01-P