
[Federal Register Volume 77, Number 163 (Wednesday, August 22, 2012)]
[Notices]
[Pages 50748-50750]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-20573]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67670; File No. SR-CBOE-2012-076]


 Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to its Automatic Order Handling Process

August 15, 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 August 2, 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 and II 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 regarding its automatic 
order handling process. The text of the proposed rule change is 
available on the Exchange's Web site at http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx, at the principal office of the Exchange, 
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 rules regarding its automatic 
order handling process. The proposed rule change adds subparagraph (vi) 
to Rule 6.13(b) to codify how the CBOE Hybrid System \3\ handles market 
orders to sell in option series for which the national best bid in the 
series is zero (``no-bid series'').\4\ If the CBOE Hybrid System 
receives during the trading day or has resting in the electronic book 
after the opening of trading a market order to sell in a no-bid series, 
it handles the order as follows:
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    \3\ The CBOE Hybrid System is a trading platform that allows 
automatic executions to occur electronically and open outcry trades 
to occur on the floor of the Exchange. To operate in this ``hybrid'' 
environment, the Exchange has a dynamic order handling system that 
has the capability to route orders to the trade engine for automatic 
execution and book entry, to Trading Permit Holder and PAR Official 
workstations located in the trading crowds for manual handling, and/
or to other order management terminals generally located in booths 
on the trading floor for manual handling. Where an order is routed 
for processing by the Exchange order handling system depends on 
various parameters configured by the Exchange and the order entry 
firm itself.
    \4\ The Exchange notes that, for singly listed series, the 
national best bid is equivalent to the Exchange's best bid and the 
national best offer is equivalent to the Exchange's best offer.
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     If the Exchange best offer in that series is less than or 
equal to $0.30, then the CBOE Hybrid System will consider, for the 
remainder of the trading day, the market order as a limit order to sell 
with a limit price equal to the minimum trading increment applicable to 
the series and enter the order into the electronic book behind limit 
orders to sell at the minimum increment that are already resting in the 
book.
     If the Exchange best offer in that series is greater than 
$0.30, then the CBOE Hybrid System will route the market order to sell 
to PAR or, at the order entry firm's discretion, to the order entry 
firm's booth. If the market order is not eligible to route to PAR, then 
it will be cancelled.
    The Exchange's Rules are currently silent on how the CBOE Hybrid 
System handles market orders to sell in no-bid series. The Exchange 
believes that proposed Rule 6.13(b)(vi) will clarify for investors how 
the CBOE Hybrid System handles these orders.\5\ The Exchange

[[Page 50749]]

believes that the automatic handling of market orders to sell in no-bid 
series if the Exchange best offer is less than or equal to $0.30 
reduces the manual handling of orders and facilitates the CBOE Hybrid 
System's automatic handling process. Additionally, the $0.30 threshold 
serves as a protection feature for investors in certain situations, 
such as when a series is no-bid because the last bid traded just prior 
to the entry of the market order to sell. The purpose of this threshold 
is to limit the automatic handling of market orders to sell in no-bid 
series to only those for true zero-bid options, as options in no-bid 
series with an offer of more than $0.30 are likely not worthless.
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    \5\ The Exchange notes for informational purposes that other 
options exchanges have rules that address how their systems handle 
market orders to sell no-bid series. See, e.g., NASDAQ OMX PHLX 
(``Phlx'') Rule 1080(i) (which provides that the Phlx system will 
convert market orders to sell a no-bid series to limit orders to 
sell with a limit price of the minimum trading increment applicable 
to that series that are received when Phlx's disseminated quotation 
in the series has a bid/ask differential less than or equal to 
$0.25, and will place the limit orders on the book).
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    For example, if the CBOE Hybrid System receives a market order to 
sell in a no-bid series with a minimum increment of $0.01 and the 
Exchange best offer is $0.20, the CBOE Hybrid System will consider, for 
the remainder of the trading day, the order as a limit order with a 
price of $0.01 and submit it to the electronic book behind other limit 
orders to sell at the minimum increment that are already resting in the 
book. At that point, even if the series is no-bid because, for example, 
the last bid just traded and the limit order trades at $0.01, the next 
bid entered after the trade would not be higher than $0.20.\6\
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    \6\ If the order does not execute during the trading day as a 
limit order and remains outstanding after the close of trading 
(i.e., a good-til-cancelled order), the CBOE Hybrid System at that 
time will no longer consider the order as a limit order and will 
again handle the order as a market order to sell after the close of 
trading. The market order will stay on the electronic book until the 
opening of the next trading day (or until cancelled), at which point 
it may execute during the open or, if it remains unexecuted after 
the opening of trading, it will either execute with the best bid at 
the time or, if the series is still no-bid, again be handled 
pursuant to proposed Rule 6.13(b)(vi).
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    However, if the CBOE Hybrid System receives a market order to sell 
in a no-bid series with a minimum increment of $0.01 and the Exchange 
best offer is $1.20 (because, for example, the last bid of $1.00 just 
traded), the CBOE Hybrid System will instead route the order to PAR 
(or, at the order entry firm's discretion, to the order entry firm's 
booth). Manual handling of the order provides the entering firm with a 
potential opportunity to trade at a better price, since the next bid 
entered in that series is likely to be much higher than $0.01.\7\ It 
would be unfair to the entering firm to let its market order trade as a 
limit order for $0.01 because, for example, the firm submitted the 
order during the brief time when there were no disseminated bids in a 
series trading significantly higher than the minimum increment. Once 
entered into PAR, the appropriate PAR Official \8\ will review the 
terms of the order and handle the order as set forth in Rule 7.12 (for 
example, the PAR Official may bring the order to the trading crowd or 
enter the order into the electronic book). PAR Officials must use due 
diligence to execute orders that they receive at their PAR workstations 
at the best prices available to them under the Exchange Rules.\9\
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    \7\ Routing the market order to PAR or the order entry firm's 
booth provides for an alternative means through which the order may 
be executed before it is simply cancelled.
    \8\ A ``PAR Official'' is an Exchange employee or independent 
contractor whom the Exchange may designate as being responsible for 
(a) operating the PAR workstation in a DPM trading crowd with 
respect to the classes of options assigned to him/her; (b) when 
applicable, maintaining the book with respect to the classes of 
options assigned to him/her; and (c) effecting proper executions of 
orders placed with him/her. The PAR Official may not be affiliated 
with any Trading Permit Holder that is approved to act as a Market-
Maker. See Rule 7.12(a).
    \9\ Rule 7.12(b)(ii).
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    The $0.30 threshold has been in place for a number of years, and 
the Exchange believes the threshold is reasonable. The Exchange notes 
that this threshold is less than the acceptable price range (``APR'') 
in the price check parameter provision in Rule 6.13(b)(v). Pursuant to 
that provision, the CBOE Hybrid System will not automatically execute a 
marketable order if the width between the national best bid and 
national best offer is not within the APR, which for an option contract 
with a bid of less than $2 may not be less than $0.375.\10\ Instead, 
the CBOE Hybrid System will route the order to PAR or the order entry 
firm's booth, or if the order is not eligible to route to PAR, it will 
be cancelled. Notwithstanding this provision, proposed Rule 6.13(b)(vi) 
allows for the potential execution of market orders to sell in no-bid 
series with offers less than [sic] \11\ $0.30 as limit orders at the 
price of a minimum increment. If the threshold in proposed Rule 
6.13(b)(vi) were higher, the risk of having a market order trade at a 
minimum increment in a series that is not truly no-bid would increase. 
This risk of execution is not present in the price check parameter 
provision in Rule 6.13(b)(v), and therefore the Exchange believes a 
wider APR is appropriate for that provision.
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    \10\ Rule 6.13(b)(v) also provides that the CBOE Hybrid System 
will not automatically execute eligible orders that are marketable 
if the execution would follow an initial partial execution on the 
Exchange and would be at a subsequent price that is not within an 
acceptable tick distance from the initial execution. The APR for 
purposes of Rule 6.13(b)(v) is determined by the Exchange on a 
class-by-class basis and may not be less than $0.375 between the bid 
and offer for each option contract for which the bid is less than 
$2, $0.60 where the bid is at least $2 but does not exceed $5, $0.75 
where the bid is more than $5 but does not exceed $10, $1.20 where 
the bid is more than $10 but does not exceed $20, and $1.50 where 
the bid is more than $20. An ``acceptable tick distance'' [sic] less 
than two minimum increments.
    \11\ The Commission notes that CBOE's proposed rule text 
actually specifies that the Exchange would convert market orders in 
no-bid series to limit orders where the Exchange's best offer is 
less than or equal to $.30 (emphasis added).
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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.\12\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \13\ 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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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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    In particular, the proposed rule change protects investors and the 
public interest by providing investors with more clarity regarding the 
CBOE Hybrid System's automatic order handling process--specifically how 
it processes market orders to sell in no-bid series. The Exchange 
believes that the automated handling of market orders to sell in no-bid 
series if the Exchange best offer is $0.30 or less assists with the 
maintenance of fair and orderly markets and protects investors and the 
public interest because it provides for automated handling of these 
orders, ultimately resulting in more efficient executions of these 
orders. The Exchange believes that the $0.30 threshold also protects 
investors and assists with the maintenance of fair and orderly markets 
by preventing executions of market orders to sell in no-bid series with 
higher offers at potentially extreme prices in series that are not 
truly no-bid. The Exchange believes this threshold appropriately 
reflects the interests of investors, as options in no-bid series with 
offers higher than $0.30 are likely not worthless, and manual handling 
of these orders will lead to better executions for investors than would 
occur through automatic handling.

[[Page 50750]]

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \14\ and Rule 19b-4(f)(6) thereunder.\15\ 
Because the 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 prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.\16\
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    \14\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \15\ 17 CFR 240.19b-4(f)(6).
    \16\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-
4(f)(6)(iii) requires a self-regulatory organization to provide the 
Commission with written notice of its intent to file the proposed 
rule change, along with a brief description and 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. The Exchange has fulfilled this requirement.
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    At any time within 60 days of the filing of such 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.

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 rule-comments@sec.gov. Please include 
File Number SR-CBOE-2012-076 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-2012-076. 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 such 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-2012-076 and should be 
submitted on or before September 12, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-20573 Filed 8-21-12; 8:45 am]
BILLING CODE 8011-01-P


