
[Federal Register Volume 77, Number 151 (Monday, August 6, 2012)]
[Notices]
[Pages 46783-46786]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-19144]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67548; File No. SR-CBOE-2012-049]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Adopt Four New Order Types on the CBOE Stock 
Exchange

July 31, 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 July 24, 2012, Chicago Board Options Exchange, Incorporated 
(the ``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 adopt four new order types on the CBOE 
Stock Exchange (``CBSX''). 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to add four new order types to CBSX: silent 
orders, silent-mid orders, silent-post-mid orders, and silent-mid-
seeker orders.
    A silent order is an order that is not displayed publicly on the 
CBSX Book but is to be executed at the National Best Bid (``NBB'') (for 
a ``buy'' order) or National Best Offer (``NBO'') (for a ``sell'' 
order). A silent order is an order with an optional contingency price 
which will indicate the highest price that a buyer is willing to pay or 
the lowest price at which a seller is willing to accept (such 
contingency price to be in $0.01 (full penny) increments only). If NBB 
is higher than this contingency price for a Buy order, or the NBO is 
lower than this contingency price for a Sell, Sell Short, or Sell Short 
Exempt order, the order, or remainder of the order, will be canceled 
prior to trading. The reason that the order, or remainder of the order, 
will be canceled prior to trading (as opposed to upon entry) in these 
circumstances is because it is possible that, when an order comes in, 
the NBB is lower than the contingency price (for a Buy order), but the 
order doesn't trade because there is not interest to trade with, and 
then the NBB moves to a point at which it is higher than the 
contingency price (at which point the order would cancel). The reverse 
would be true for Sell, Sell Short, or Sell Short Exempt orders.
    A silent order may trade with any other type of order and is to 
execute following the execution of any displayed orders at the National 
Best Bid and Offer (``NBBO'') (if there are any displayed orders at the 
NBBO) and has a higher trading priority than All or None orders. A 
silent order will never be routed to an away market. When the NBBO is 
locked or crossed, a silent order will never trade, but instead rest on 
the CBSX Book and remain eligible to trade once the NBBO is no longer 
locked or crossed.
    The following examples will explain how silent orders will trade on 
CBSX:
    Consider, in example 1, a situation in which the NBBO is quoting at 
$1.01--$1.02, while CBSX is quoting $0.99-$1.02. A 100-lot silent order 
comes in to sell at the market, and rests behind a displayed 100-lot 
order to sell at $1.02 in the CBSX Book. A 500-lot order to buy at 
$1.02 comes in, and first trades with the displayed 100-lot order to 
sell at $1.02. Since there are no more displayed orders to sell at or 
better than $1.02, and $1.02 is at the NBBO, the silent order would 
then trade with the next 100 contracts in the 500-lot buy order. The 
remaining 300 lots of the buy order would be routed to the away 
exchange displaying the NBBO.
    Consider now, in example 2, a situation in which the NBBO is once 
again quoting at $1.01--$1.02, while CBSX is quoting $0.99-$1.02. 
Again, a 100-lot silent order comes in to sell at the market, and rests 
behind a displayed 100-lot order to sell at $1.02 in the CBSX Book. A 
100-lot buy order comes in at $1.02. This buy order would trade with 
the displayed 100-lot order to sell at $1.02, causing the CBSX market 
to move to $0.99-$1.03. The silent order would continue to rest while 
waiting for the opportunity to trade at the National Best Offer. If the 
NBO becomes $1.03, the silent order can then trade with any incoming 
orders to buy at $1.03 after any resting displayed orders to sell at 
$1.03 have already traded.
    In this third example, consider a situation in which the NBBO is 
quoting at $1.00-$1.01 and CBSX is quoting at $0.99-$1.02. A 100-lot 
silent order comes in to buy at the market. A 10,000-lot Intermarket 
Sweep Order (``ISO'') comes in to sell at $0.99. The silent order would 
trade first at $1.00, since that is the NBBO, regardless of the fact 
that there are no current CBSX displayed orders at the NBBO. The 
remainder of the ISO trades against CBSX $0.99 orders until volume is

[[Page 46784]]

exhausted and any remainder is canceled.
    A silent-mid order is an order that is not displayed publicly on 
the CBSX Book but is to be executed at the mid-point between the NBBO. 
A silent-mid order is an order with an optional contingency price which 
will indicate the highest price that a buyer is willing to pay or the 
lowest price at which a seller is willing to accept. A silent-mid order 
may trade in $0.005 increments if priced at or above $1 and $0.0001 
increments if priced below $1. If the mid-point between the NBBO is not 
at a tradable increment, CBSX will round down to the nearest tradable 
increment. If the mid-point of the NBBO is higher than this contingency 
price for a Buy order or is lower than this contingency price for a 
Sell, Sell Short, or Sell Short Exempt order, the order, or remainder 
of the order, will be canceled prior to trading. The reason that the 
order, or remainder of the order, will be canceled prior to trading (as 
opposed to upon entry) in these circumstances is because it is possible 
that, when an order comes in, the mid-point of the NBBO is lower than 
the contingency price (for a Buy order), but the order doesn't trade 
because there is not interest to trade with, and then the mid-point of 
the NBBO moves to a point at which it is higher than the contingency 
price (at which point the order would cancel). The reverse would be 
true for Sell, Sell Short, or Sell Short Exempt orders.
    A silent-mid order may trade with any other type of order and is to 
execute following the execution of any displayed orders at the NBBO (if 
there are any displayed orders at the NBBO) and has a higher trading 
priority than All or None orders and Silent-Post-Mid orders. A silent-
mid order will never be routed to an away market. When the NBBO is 
locked or crossed, a silent-mid order will never trade, but instead 
rest on the CBSX Book and remain eligible to trade once the NBBO is no 
longer locked or crossed.
    For example, consider a situation in which the NBBO is $13.00--
$14.00, and a 1,000-lot silent-mid buy order comes to CBSX. That order 
rests undisplayed. Then a 500-lot order to sell at $13.00 comes in. The 
silent-mid order will trade 500 contracts with that sell order at 
$13.50. The remaining 500 contracts of the silent-mid order would 
continue to rest undisplayed.
    A silent-post-mid order is an order that is not displayed publicly 
on the CBSX Book but is to be executed at the mid-point between the 
NBBO. A silent-post-mid order is an order with an optional contingency 
price which will indicate the highest price that a buyer is willing to 
pay or the lowest price at which a seller is willing to accept. A 
silent-post-mid order may trade in $0.005 increments if priced at or 
above $1 and $0.0001 increments if priced below $1. If the mid-point 
between the NBBO is not at a tradable increment, CBSX will round down 
to the nearest tradable increment. If a silent-post-mid order is to 
trade upon its arrival into the system (thereby ``removing'' 
liquidity), it will not trade, but instead rest until another order 
comes in for it to trade against. If the mid-point of the NBBO is 
higher than this contingency price for a Buy order or is lower than 
this contingency price for a Sell, Sell Short, or Sell Short Exempt 
order, the order, or remainder of the order, will be canceled prior to 
trading. The reason that the order, or remainder of the order, will be 
canceled prior to trading (as opposed to upon entry) in these 
circumstances is because it is possible that, when an order comes in, 
the mid-point of the NBBO is lower than the contingency price (for a 
Buy order), but the order doesn't trade because there is not interest 
to trade with, and then the mid-point of the NBBO moves to a point at 
which it is higher than the contingency price (at which point the order 
would cancel). The reverse would be true for Sell, Sell Short, or Sell 
Short Exempt orders.
    A silent-post-mid order may trade with any other type of order and 
is to execute following the execution of any displayed orders at the 
NBBO (if there are any displayed orders at the NBBO) and has a higher 
trading priority than All or None orders but a lower priority than 
Silent-Mid orders. A silent-post-mid order will never be routed to an 
away market. When the NBBO is locked or crossed, a silent-post-mid 
order will never trade, but instead rest on the CBSX Book and remain 
eligible to trade once the NBBO is no longer locked or crossed. For 
example, consider a situation in which the NBBO is $13.00--$14.00, and 
500-lot silent-mid order to sell rests on the CBSX Book. A 500-lot 
silent-post-mid buy order comes in. That order will not trade with the 
resting silent-mid sell order because the silent-post-mid buy order 
would be taking liquidity. Instead, the silent-post-mid buy order will 
rest on the CBSX Book until another sell order comes in for it to trade 
against, and the silent-mid sell order will do the same.
    A silent-mid-seeker order is a take-only order that will never rest 
in the CBSX Book and is to be executed only at the mid-point between 
the NBBO. A silent-mid-seeker order may trade in $0.005 increments if 
priced at or above $1 and $0.0001 increments if priced below $1. If the 
mid-point between the NBBO is not at a tradable increment, CBSX will 
round down to the nearest tradable increment. If, upon the entry of a 
silent-mid-seeker order, there is undisplayed interest resting on the 
CBSX Book at the mid-point between the NBBO, the silent-mid-seeker 
order will interact with this interest. If the undisplayed resting 
interest is for a greater quantity than the silent-mid-seeker order, 
the silent-mid-seeker order will trade with the undisplayed resting 
interest up to the quantity of the silent-mid-seeker order, and the 
remainder of the undisplayed interest will remain resting on the CBSX 
Book. If the undisplayed resting interest is for a smaller quantity 
than the silent-mid-seeker order, the silent-mid-seeker order will 
trade with the undisplayed resting interest up to the quantity of the 
undisplayed resting interest, and the remainder of the silent-mid-
seeker order will be canceled. If there is no undisplayed resting 
interest at the midpoint of the NBBO, the silent-mid-seeker order will 
be canceled. A silent-mid-seeker order will never be routed to an away 
market. When the NBBO is locked or crossed, a silent-mid-seeker order 
will be canceled. For example, consider a situation in which the NBBO 
is $13.00--$14.00, and 500-lot silent-mid order to sell rests on the 
CBSX Book. A 500-lot silent-mid-seeker buy order comes in. That order 
will trade with the resting silent-mid sell order.
    Consider another example in which the NBBO is $13.00--$14.00, and 
no orders rest at the midpoint of the NBBO on the CBSX Book. A silent-
mid-seeker order comes in. Because no orders rest at the midpoint of 
the NBBO on the CBSX Book, the silent-mid-seeker order would not rest 
on the CBSX Book, but instead be canceled.
    The four new proposed order types are similar to Pegged Orders and 
Mid-Point Pegged Orders that may be entered on BATS Exchange, Inc. 
(``BATS'').\3\ Like the four new CBSX order types, the Pegged and Mid-
Point Pegged Orders are not displayed publicly,\4\ have a lower 
priority than displayed orders,\5\ and are never routed to away 
markets.\6\ Like silent orders, Primary Pegged Orders are executed at 
the NBB (for a ``buy'' order) or the NBO (for a ``sell''

[[Page 46785]]

order) \7\ and also provide the user the option to enter such orders 
with or without a limit (contingency) price.\8\ Like silent-mid orders, 
Mid-Point Peg Orders are executed at the mid-point of the NBBO.\9\ Like 
silent-post-mid orders, Mid-Point Peg Orders can be designated to only 
add liquidity and not trade if they are to take liquidity.\10\ Like 
silent-mid-seeker orders, Mid-Point Peg Orders can be designated to 
immediately cancel if there is no resting interest at the midpoint of 
the NBBO.\11\
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    \3\ See BATS Rules 11.9(c)(8)-(9). On BATS, various different 
types of orders and modifiers may be combined into one order. 
Explanations of different order types and the ways they operate can 
be found at http://batstrading.com/resources/features/bats_exchange_definitions.pdf (the ``BATS Order Description Sheet'').
    \4\ See BATS Rules 11.9(c)(8)-(9).
    \5\ See BATS Rules 11.9(c)(8)-(9) and 11.12(a)(2).
    \6\ See BATS Rules 11.9(c)(8)-(9).
    \7\ See BATS Rule 11.9(c)(8).
    \8\ See BATS Rule 11.9(c)(8), which states that Pegged Orders 
can be specified that the order's price will either be inferior to 
or equal the inside quote by an amount set by the entering party on 
the same side of the market.
    \9\ See BATS Rule 11.9(c)(9).
    \10\ See BATS Order Description Sheet, which states that pegged 
orders can be designated ``Add Liquidity Only'' and BATS Rule 
11.9(c)(6), which states that the BATS Post Only Order ``will not 
remove liquidity from the BATS book.''
    \11\ See BATS Order Description Sheet, which states that 
``midpoint orders can have a time in force (TIF) of immediate or 
cancel (IOC)'' and BATS Rule 11.9(b)(1) which states that limit 
orders can have the time-in-force of ``Immediate-or-Cancel.''
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    While there are differences between the CBSX's four new proposed 
order types and the BATS Pegged and Mid-Point Pegged Orders, these 
differences are not substantive. CBSX uses different terminology than 
BATS to describe these order types because the proposed language is 
consistent with other language used in the CBSX rules and because CBSX 
believes that the proposed language is clearer and more descriptive. 
Another difference is that, while the BATS orders optionally allow for 
the pegging of the order price to be offset from the opposite side of 
the NBBO from the order, the proposed CBSX order types are more 
restrictive in only permitting the pegging of the order on either the 
bid (for buy orders), offer (for sell orders) or midpoint (due to 
system reasons).
    One further difference is that, whereas BATS automatically adjusts 
the price of a Pegged or Mid-Point Peg Order in response to changes in 
the NBBO,\12\ the CBSX System is not enabled to make such adjustments 
each time the NBBO changes. However, the CBSX System will adjust the 
price of resting silent, silent-mid and silent-post-mid orders prior to 
effecting any transaction involving such orders. As such, the same 
execution price would result as would if the price of such orders had 
been adjusted in response to each change in the NBBO.
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    \12\ See BATS Rules 11.9(c)(8)-(9).
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    Finally, whereas BATS creates a new timestamp for Pegged and Mid-
Point Pegged Orders each time the orders are automatically 
adjusted,\13\ the CBSX System prohibits the creation of such 
timestamps. However, CBSX maintains market data that allows CBSX to 
create an accurate history of any adjustments in price to the order, 
thereby functionally achieving the same goal as occurs on BATS. As 
such, orders will maintain their original timestamps as provided when 
the order came in and will receive priority, in regards to other 
undisplayed orders, based on the time at which they originally came in.
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    \13\ See BATS Rules 11.9(c)(8)-(9).
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    The Exchange believes that the addition of these new order types 
will enhance order execution opportunities on CBSX and should help 
provide market participants with flexibility in executing transactions 
that meet the specific requirements of the order type. The silent 
order, silent-mid order, silent-post-mid order and silent-mid-seeker 
order will allow for additional opportunities for liquidity providers 
to passively interact with interest on the CBSX Book.
    Once the CBSX System is so enabled to permit the use of the silent 
order, silent-mid order, silent-post-mid order and silent-mid-seeker 
order, and such use has been appropriately tested, CBSX intends to 
announce the availability of the silent order, silent-mid order, 
silent-post-mid order and silent-mid-seeker order to the CBSX Traders 
via Regulatory Circular prior to the implementation of the silent 
order, silent-mid order, silent-post-mid order and silent-mid-seeker 
order.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act \14\ and the rules and regulations thereunder and, in 
particular, the requirements of Section 6(b) of the Act.\15\ 
Specifically, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \16\ 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 by providing new order execution opportunities, 
similar to those available on other exchanges, to CBSX market 
participants. Silent orders perfect the mechanism for a free and open 
market by providing investors the opportunity to enter an order that is 
not displayed publicly but is to be executed at the NBB (for a ``buy'' 
order) or NBO (for a ``sell'' order). Silent-mid orders perfect the 
mechanism for a free and open market by providing investors the 
opportunity to enter an order that is not displayed publicly but is to 
be executed at the mid-point between the NBBO. Silent-post-mid orders 
perfect the mechanism for a free and open market by providing investors 
the opportunity to enter an order that is not displayed publicly but is 
to be executed at the mid-point between the NBBO and only add 
liquidity. Silent-mid-seeker orders perfect the mechanism for a free 
and open market by providing investors the opportunity to enter an 
order that is not displayed publicly but is to be executed at the mid-
point between the NBBO and only take liquidity. Also, all four new 
order types are similar to order types already offered on BATS.
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    \14\ 15 U.S.C. 78s(b)(1).
    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
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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.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not:
    A. Significantly affect the protection of investors or the public 
interest;
    B. Impose any significant burden on competition; and
    C. Become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) \17\ of the Act and 
Rule 19b-4(f)(6) \18\ thereunder.
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of this proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

[[Page 46786]]

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 Exchange 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 rule-comments@sec.gov. Please include 
File Number SR-CBOE-2012-049 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-2012-049. 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 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-2012-049 and should be 
submitted on or before August 27, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-19144 Filed 8-3-12; 8:45 am]
BILLING CODE 8011-01-P


