[Federal Register Volume 77, Number 121 (Friday, June 22, 2012)]
[Notices]
[Pages 37724-37727]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-15260]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67209; File No. SR-CBOE-2012-048]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of a Proposed Rule Change Relating to
Distribution of Auction Messages
June 18, 2012.
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 June 6, 2012, the Chicago Board Options Exchange, Incorporated
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange
Commission (the ``Commission'') the proposed rule change as described
in Items I, II, and III below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
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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 rules regarding the distribution of
certain auction messages. 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.
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 purpose of this proposed rule change is: (i) To amend Rule
6.13A relating to the Simple Auction Liaison (``SAL''); (ii) to delete
Rule 6.14 relating to the Hybrid Agency Liaison system (``HAL''); (iii)
to amend Rule 6.14A relating to the Hybrid Agency Liaison 2 system
(``HAL2'') and rename HAL2 as HAL; and (iv) to amend Rule 6.53C
relating to Complex Orders on the Hybrid System. The proposed rule
change modifies the provisions in each of these rules regarding who is
eligible to respond to auction messages on a class-by-class basis to be
more consistent. The proposed rule change provides that all Trading
Permit Holders \3\ may respond to SAL, HAL2 and COA auction messages in
certain classes designated by the Exchange and that Trading Permit
Holders may redistribute auction messages in these classes.
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\3\ By definition, all Market-Makers are Trading Permit Holders;
therefore, references to ``Trading Permit Holders'' include all
Market-Makers. See Rule 8.1.
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SAL
Rule 6.13A governs the operation of SAL, a feature within the
Hybrid System that auctions marketable orders for price improvement
over the national best bid or offer (``NBBO''). The Exchange determines
the eligible order size, eligible order types, eligible origin code
(i.e., public customer orders, non-Market-Maker broker-dealer orders
and Market-Maker broker-dealer orders), and classes in which SAL is
activated.\4\ For these classes, SAL automatically initiates an auction
process for any order that is eligible for automatic execution by the
Hybrid System (``Agency Order'').\5\ Prior to commencing an auction,
SAL stops the Agency Order at the NBBO against Market-Maker quotations
displayed at the NBBO on the opposite side of the Market as the Agency
Order.\6\
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\4\ Rule 6.13A(a).
\5\ Id. SAL will not initiate an auction process if the
Exchange's disseminated quotation on the opposite side of the market
from the Agency Order does not contain sufficient Market-Maker
quotation size to satisfy the entire Agency Order.
\6\ Rule 6.13A(b). These quotations may not be cancelled or
moved to an inferior price or size throughout the duration of the
auction. The auction may last no longer than two seconds, as
determined by the Exchange on a class-by-class basis. Id. Rule
6.13A(c) describes the manner in which an Agency Order is allocated
under SAL, and Rule 6.13A(d) lists the circumstances in which an
auction would terminate early.
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Rule 6.13A(b) provides that auction responses may be submitted by
Market-Makers with an appointment in the relevant option class and
Trading Permit Holders acting as agent for orders resting at the top of
the Exchange's book opposite the Agency Order. Interpretation and
Policy .05 provides that in lieu of permitting auction responses by
Market-Makers with an appointment in the relevant option class and
Trading Permit Holders acting as agent for orders resting at the top of
the Exchange's book opposite the Agency Order (``Qualifying Trading
Permit Holders''), the Exchange may determine on a class-by-class basis
to permit SAL responses by all CBOE Market-Makers and Qualifying
Trading Permit Holders.
The proposed rule change allows the Exchange to determine on a
class-by-class basis to permit all Trading Permit Holders to respond to
auction messages and eliminates the concept of Qualifying Trading
Permit Holders under this provision. Additionally, the proposed rule
change moves this language from Interpretation and Policy .05 to
paragraph (b), which relates to Auction responses. The Exchange also
proposes to amend Rule 6.13A, Interpretation and Policy .02 to allow
Trading Permit Holders to redistribute
[[Page 37725]]
Auction messages in classes in which the Exchange allows all Trading
Permit Holders to submit Auction responses. The purpose of this
proposed change is to increase the opportunities for all types of
market participants (e.g., public customers, broker-dealers and market-
makers) to participate in SAL auctions in certain classes. This broader
participation could lead to more robust competition in these auctions
because more market participants will be able to submit responses in
these auctions, which responses may result in better prices for
customers.
The proposed rule change also adds a new Interpretation and Policy
.05 to provide that all pronouncements regarding determinations by the
Exchange pursuant to Rule 6.13A and the Interpretations and Policies
thereunder will be announced to Trading Permit Holders via Regulatory
Circular. This method of notification will allow the Exchange to
promptly inform Trading Permit Holders of any new or modification to
any determinations made by the Exchange, such as in which classes all
Trading Permit Holders will be allowed to respond to auction messages.
HAL
Rule 6.14 governs the operation of HAL, a feature within the Hybrid
System that provides automated order handling in designated classes
trading on the Hybrid System for qualifying electronic orders that are
not automatically executed by the Hybrid System. The Exchange proposes
to delete Rule 6.14, as it is outdated and no longer applicable. In
connection with the Exchange's adoption of updated linkage rules in
2009, the Exchange created HAL2, which created an opportunity for price
improvement, similar to HAL but with advanced functionality.\7\ After
enabling HAL2 (which was gradually rolled out so that for a period of
time some classes traded pursuant to HAL while others traded pursuant
to HAL2), the Exchange phased out the use of HAL, which is now no
longer used for any classes. Rule 6.14A currently governs automated
order handling on the Hybrid System through HAL2 for all designated
classes. This proposal also amends Rules 6.2B, 6.13, 6.14A, 6.25 and
6.53 to delete cross-references to Rule 6.14 and HAL and correct other
cross-references to conform to numbering changes in this proposal
throughout the Rules.
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\7\ See Securities Exchange Act Release No. 34-60551 (August 20,
2009), 74 FR 43196 (August 26, 2009) (SR-CBOE-2009-040) (approval of
proposed rule change to amend and adopt new CBOE rules to implement
the Options Order Protection and Locked/Crossed Market Plan).
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HAL2 \8\
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\8\ The Exchange notes that this proposed rule change renames
``HAL2'' as ``HAL'' in the CBOE Rules since the initial HAL is no
longer in use and is being deleted. The Exchange believes this will
eliminate any potential confusion that investors may have if there
was a HAL2 but no HAL. However, for purposes of this filing, this
filing uses the current terms ``HAL'' and ``HAL2'' to distinguish
between the two separate mechanisms and avoid any confusion.
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Rule 6.14A governs the operation of HAL 2, a feature within the
Hybrid System that provides automated order handling in designated
classes trading on Hybrid for qualifying electronic orders that are not
automatically executed by the Hybrid System. The Exchange determines
the eligible order size, eligible order types, eligible origin code
(i.e., public customer orders, non-Market-Maker broker-dealer orders
and Market-Maker broker-dealer orders), and classes in which HAL2 is
activated.\9\ When the Exchange receives a qualifying order that is
marketable against the NBBO and/or the Exchange's best bid or offer
(``BBO''),\10\ HAL2 electronically exposes the order \11\ at the NBBO
price to allow Market-Makers appointed in that class as well as all
Trading Permit Holders acting as agent for orders at the top of the
Exchange's book in the relevant series (or all Trading Permit Holders
if allowed by the Exchange) \12\ to step-up to the NBBO price.
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\9\ Rule 6.14A(a).
\10\ HAL2 will not electronically expose the order if the
Exchange's quotation contains resting orders and does not contain
sufficient Market-Maker quotation interest to satisfy the entire
order.
\11\ The duration of the exposure period may not exceed one
second. Rule 6.14A(c) describes the manner in which an exposed order
is allocated under HAL2, and Rule 6.14A(d) lists the circumstances
in which an exposure period would terminate early.
\12\ The Exchange notes that, pursuant to this authority under
Rule 6.14A(b), it currently permits all Trading Permit Holders to
respond to HAL2 exposure messages, effective August 23, 2010. See
CBOE Regulatory Circular RG10-91.
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Rule 6.14A(b) provides that the exposure message will be made
available to all Market-Makers appointed to the relevant option class
and all Trading Permit Holders acting as agent for orders at the top of
the Exchange's book in the relevant option series, or to all Market-
Makers or all Trading Permit Holders on a class-by-class basis, as
determined by the Exchange. The proposed rule change revises the
language to be more consistent with similar provisions in other rules
discussed in this filing and provides that all Market-Makers with an
appointment in the relevant option class and all Trading Permit Holders
acting as agent for orders at the top of the Exchange's book in the
relevant option series, or all Trading Permit holders if determined by
the Exchange on a class-by-class basis, may submit responses to
exposure messages. The proposed rule change also clarifies that only
Trading Permit Holders acting as agent for orders at the top of the
Exchange's book in the relevant option series may respond to exposure
messages if they represent orders on the opposite side of the order
submitted to HAL. The System currently only accepts responses that are
on the opposite side of the exposed order; this proposed change amends
the Rule to more clearly reflect this current practice. The Exchange
also proposes to amend Rule 6.14A, Interpretation and Policy .01 to
allow Trading Permit Holders to redistribute HAL2 exposure messages in
classes in which the Exchange allows all Trading Permit Holders to
submit HAL2 Auction responses. The purpose of this proposed change is
to increase the opportunities for all types of market participants
(e.g., public customers, broker-dealers and market-makers) to
participate in HAL2 auctions in certain classes. This broader
participation could lead to more robust competition in these auctions
because more market participants will be able to submit responses in
these auctions, which responses may result in better prices for
customers.
The Exchange also proposes to amend paragraph (b) in Rule 6.14A to
change the word ``flashed'' to ``exposed.'' The Rule contains
variations of the word ``expose'' throughout to describe the exposure
of orders in HAL2, except in two instances in paragraph (b). The
Exchange proposes to amend these two instances to create consistency of
terminology in this Rule.
The proposed rule change also adds a new Interpretation and Policy
.03 to provide that all pronouncements regarding determinations by the
Exchange pursuant to Rule 6.14A and the Interpretations and Policies
thereunder will be announced to Trading Permit Holders via Regulatory
Circular. This method of notification will allow the Exchange to
promptly inform Trading Permit Holders of any new or modification to
any determinations made by the Exchange, such as in which classes all
Trading Permit Holders will be allowed to respond to exposure messages.
COA
On a class-by-class basis, the Exchange may activate the electronic
complex order request for responses (``RFR'') auction (``COA''), which
is a
[[Page 37726]]
process by which eligible complex orders \13\ are given an opportunity
for price improvement before being booked in the electronic complex
order book (``COB'') or once on a PAR workstation. Rule 6.53C(d)
provides that prior to routing a complex order to the COB or once on
PAR, eligible complex orders may be subject to a COA. On receipt of a
COA-eligible order and request from a Trading Permit Holder
representing the order that it be COA'd, the Exchange will send an RFR
message to all Trading Permit Holders who have elected to receive RFR
messages.\14\ Each Market-Maker with an appointment in the relevant
option class and each Trading Permit Holder acting as agent for orders
resting at the top of the COB in the relevant options series may then
submit responses to the RFR message during the Response Time
Interval.\15\
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\13\ An eligible complex order, referred to in Rule 6.53C as a
``COA-eligible order,'' means a complex order that, as determined by
the Exchange on a class-by-class basis, is eligible for a COA
considering the order's marketability (defined as a number of ticks
away from the current market), size, complex order type and complex
order origin type (i.e., non-broker-dealer public customer, broker-
dealers that are not Market-Makers or specialists on an options
exchange, and/or Market-Makers or specialists on an options
exchange). All determinations by the Exchange on COA-eligible order
parameters are announced to Trading Permit Holders by Regulatory
Circular. See Rule 6.53C(d)(i)(2) and Interpretation and Policy .01
to Rule 6.53C.
\14\ See Rule 6.53C(d)(ii). The RFR message will identify the
component series, the size of the COA-eligible order and any
contingencies, but will not identify the side of the market.
\15\ See Rule 6.53C(d)(iii). A ``Response Time Interval'' means
the period of time during which responses to the RFR may be entered,
the length of which is determined by the Exchange on a class-by-
class basis but may not exceed three seconds. See Rule
6.53C(d)(iii)(2). RFR response sizes will be limited to the size of
the COA-eligible order for allocation purposes and may be expressed
on a net price basis in a multiple of the minimum increment or in a
small [sic] increment that may not be less than $0.01, as determined
by the Exchange on a class-by-class basis. RFR responses are not
visible other than by the COA system. See Rule 6.53C(d)(iii)(1).
Paragraphs (d)(iv)-(viii) of Rule 6.53C describe the processing,
execution and routing of COA-eligible orders, firm quote
requirements for COA-eligible orders and handling of unrelated
complex orders.
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Rule 6.53(C)(d)(iii) provides that Market-Makers with an
appointment in the relevant option class and Trading Permit Holders
acting as agent for orders resting at the top of the COB in the
relevant option series may submit responses to the RFR messages during
the Response Time Interval. Interpretation and Policy .07 provides that
in lieu of permitting auction responses by Market-Makers with an
appointment in the relevant option class and Trading Permit Holders
acting as agent for orders resting at the top of the Exchange's book
opposite the Agency Order (``Qualifying Trading Permit Holders''), the
Exchange may determine on a class-by-class basis to permit COA
responses by all CBOE Market-Makers and Qualifying Trading Permit
Holders.
The proposed rule change allows the Exchange to determine on a
class-by-class basis to permit all Trading Permit Holders to respond to
auction messages and eliminates the concept of Qualifying Trading
Permit Holders under this provision. Additionally, the proposed rule
change moves this language from Interpretation and Policy .07 to
paragraph (d)(iii), which relates to RFR responses. The proposed rule
change also clarifies that only Trading Permit Holders acting as agent
for orders at the top of the Exchange's book in the relevant option
series may respond to exposure messages if they represent orders on the
opposite side of the order submitted to COA. The System currently only
accepts responses that are on the opposite side of the Agency Order;
this proposed change amends the Rule to more clearly reflect this
current practice. The Exchange also proposes to amend Interpretation
and Policy .05 to Rule 6.53C to allow Trading Permit Holders to
redistribute RFR messages in classes in which the Exchange allows all
Trading Permit Holders to submit RFR responses. The purpose of this
proposed change is to increase the opportunities for all types of
market participants (e.g., public customers, broker-dealers and market-
makers) to participate in COAs in certain classes. This broader
participation could lead to more robust competition in these auctions
because more market participants will be able to submit responses in
these auctions, which responses may result in better prices for
customers.
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.\16\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \17\ requirements that the rules
of an exchange be designed to promote just and equitable principles of
trade, to prevent fraudulent and manipulative acts, to remove
impediments to and to perfect the mechanism for a free and open market
and a national market system, and, in general, to protect investors and
the public interest.
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\16\ 15 U.S.C. 78f(b).
\17\ 15 U.S.C. 78f(b)(5).
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In particular, the Exchange believes the proposed rule change to
allow the Exchange to open up auctions in certain classes to all
Trading Permit Holders and allow redistribution of the auction messages
in these classes protects investors and is in the public interest
because it will increase the opportunities for all types of market
participants (e.g., public customers, broker-dealers and market-makers)
to participate in SAL auctions, HAL2 auctions and COAs in these
classes. This broader participation could lead to more robust
competition in these auctions because more market participants will be
able to submit responses in these auctions, which responses may result
in better prices for customers. Ultimately, this proposal will provide
additional opportunities for price improvement over the NBBO for its
customers, because responses to exposure or RFR messages, as
applicable, may be better than the NBBO. Additionally, the Exchange
believes that deleting Rule 6.14 regarding HAL, which is no longer in
use, and renaming HAL2 as HAL protects investors and is in the public
interest because the deletion of the obsolete language will alleviate
any potential confusion by investors.
The Exchange also believes that having consistent language among
these rules regarding which Trading Permit Holders are eligible to
respond to auction messages will provide more clarify [sic] and
uniformity to these auction rules. These changes simplify and
reorganize these provisions so that the requirements related to auction
responses for each auction type are included in a single paragraph,
making it easier to read and understand. Additionally, allowing this
information to be more widely available to market participants rather
than only Trading Permit Holders also helps remove impediments to and
to perfect the mechanism for a free and open market and a national
market system.
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.
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.
[[Page 37727]]
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 (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization 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-2012-048 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2012-048. 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
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of FINRA. 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-2012-048, and should be
submitted on or before July 13, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-15260 Filed 6-21-12; 8:45 am]
BILLING CODE 8011-01-P