
[Federal Register Volume 78, Number 55 (Thursday, March 21, 2013)]
[Notices]
[Pages 17454-17462]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-06478]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69146; File No. SR-CBOE-2013-027]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change Relating to 
Trading Ahead of Customer Orders and Best Execution and 
Interpositioning Requirements

March 15, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 5, 2013, 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

[[Page 17455]]

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 the Rules of CBOE Stock Exchange, 
LLC (``CBSX''), CBOE's stock trading facility, by amending the rule 
related to trading ahead of customer orders and adopting a rule related 
to best execution and interpositioning requirements. The text of the 
proposed rule change is provided below.

(additions are italicized; deletions are [bracketed])
* * * * *

Chicago Board Options Exchange, Incorporated Rules

* * * * *

CBOE Stock Exchange (CBSX) Rules

* * * * *
Rule 53.2 [Trading Permit Holders Acting As Brokers]Prohibition 
Against Trading Ahead of Customer Orders

    (a) [While Holding Unexecuted Market Order. No Trading Permit 
Holder shall on the CBSX System (1) personally buy or initiate the 
purchase of any security subject to the rules in these Chapters for 
his own account or for any account in which he or his TPH 
organization or any member, partner, officer, or employee is 
directly or indirectly interested, while such Trading Permit Holder 
personally holds or has knowledge that his TPH organization or any 
member, partner, officer or employee holds an unexecuted market 
order to buy such security in the unit of trading for a customer, or 
(2) personally sell or initiate the sale of any security subject to 
the rules in these Chapters for any such account, while he 
personally holds or has knowledge that his TPH organization or any 
member, partner, officer or employee holds an unexecuted market 
order to sell such security in the unit of trading for a 
customer.]Except as provided herein, a Trading Permit Holder that 
accepts and holds an order in an equity security from its own 
customer or a customer of another broker-dealer without immediately 
executing the order is prohibited from trading that security on the 
same side of the market for its own account at a price that would 
satisfy the customer order, unless it immediately thereafter 
executes the customer order up to the size and at the same or better 
price at which it traded for its own account.
    (b) [While Holding Unexecuted Limit Order. No Trading Permit 
Holder shall on CBSX (1) personally buy or initiate the purchase of 
any security subject to the rules in these Chapters for any such 
account, at or below the price at which he personally holds or has 
knowledge that his TPH organization or any member, partner, officer 
or employee holds an unexecuted limited price order to buy such 
security in the unit of trading for a customer, or (2) personally 
sell or initiate the sale of any security for any such account at or 
above the price at which he personally holds or has knowledge that 
his TPH organization or any member, partner, officer or employee 
holds an unexecuted limited price order to sell such security in the 
unit of trading for a customer.]A Trading Permit Holder must have 
written procedures in place governing the execution and priority of 
all pending orders that is consistent with the requirements of this 
Rule and Rule 53.8. A Trading Permit Holder also must ensure that 
these procedures are consistently applied.
    [(c) Special Contract Exemption. The provisions of this Rule 
shall not apply to any purchase or sale of a security the delivery 
of which is to be upon a day other than the day of delivery provided 
in such unexecuted market or limited price order.]

* * * Interpretations and Policies:

    .01 Large Orders and Institutional Account Exceptions. With 
respect to orders for customer accounts that meet the definition of 
an ``institutional account'' (as defined below) or for orders of 
10,000 shares or more (unless such orders are less than $100,000 in 
value), a Trading Permit Holder is permitted to trade a security on 
the same side of the market for its own account at a price that 
would satisfy such customer order, provided that the Trading Permit 
Holder has provided clear and comprehensive written disclosure to 
such customer at account opening and annually thereafter that:
    (a) discloses that the Trading Permit Holder may trade 
proprietarily at prices that would satisfy the customer order, and
    (b) provides the customer with a meaningful opportunity to opt 
in to the Rule 53.2 protections with respect to all or any portion 
of its order.
    If the customer does not opt in to the Rule 53.2 protections 
with respect to all or any portion of its order, the Trading Permit 
Holder may reasonably conclude that such customer has consented to 
the Trading Permit Holder trading a security on the same side of the 
market for its own account at a price that would satisfy the 
customer's order.
    In lieu of providing written disclosure to customers at account 
opening and annually thereafter, a Trading Permit Holder may provide 
clear and comprehensive oral disclosure to and obtain consent from 
the customer on an order-by-order basis, provided that the Trading 
Permit Holder documents who provided such consent and such consent 
evidences the customer's understanding of the terms and conditions 
of the order.
    For purposes of this rule, the term ``institutional account'' 
shall mean the account of:
    (A) a bank, savings and loan association, insurance company, or 
registered investment company;
    (B) an investment adviser registered either with the Securities 
and Exchange Commission under Section 203 of the Investment Advisers 
Act of 1940 or with a state securities commission (or any agency or 
office performing like functions); or
    (C) any other entity (whether a natural person, corporation, 
partnership, trust, or otherwise) with total assets of at least $50 
million.
    .02 No-Knowledge Exception. With respect to NMS stocks, as 
defined in Rule 600 of SEC Regulation NMS, if a Trading Permit 
Holder implements and utilizes an effective system of internal 
controls, such as appropriate information barriers, that operate to 
prevent one trading unit from obtaining knowledge of customer orders 
held by a separate trading unit, those other trading units trading 
in a proprietary capacity may continue to trade at prices that would 
satisfy the customer orders held by the separate trading unit. A 
Trading Permit Holder that structures its order handling practices 
in NMS stocks to permit its proprietary and/or market-making desk to 
trade at prices that would satisfy customer orders held by a 
separate trading unit must disclose in writing to its customers, at 
account opening and annually thereafter, a description of the manner 
in which customer orders are handled by the Trading Permit Holder 
and the circumstances under which the Trading Permit Holder may 
trade proprietarily at its proprietary and/or market-making desk at 
prices that would satisfy the customer order.
    If a Trading Permit Holder intends to rely on this exception by 
implementing information barriers, those information barriers (i) 
must provide for the organizational separation of a Trading Permit 
Holder's customer order trading unit and proprietary trading unit; 
(ii) must ensure that one trading unit does not exert influence over 
the other trading unit; (iii) must ensure that information relating 
to each trading unit's stock positions, trading activities, and 
clearing and margin arrangements is not improperly shared (except 
with persons in senior management who are involved in exercising 
general managerial oversight of one or both entities); (iv) must 
require each trading unit to maintain separate books and records 
(and separate financial accounting); (v) must require each trading 
unit to separately meet all required capital requirements; (vi) must 
ensure the confidentiality of the trading unit's book as provided by 
Exchange rules; and (vii) must ensure that any other material, non-
public information (e.g. information related to any business 
transactions between the trading unit and an issuer or any research 
reports or recommendations issued by the trading unit) is not made 
improperly available to the other trading unit in any manner that 
would allow that trading unit to take undue advantage of that 
information while trading on CBSX. A Trading Permit Holder must 
submit the proposed information barriers in writing to the Exchange 
upon request.
    .03 ISO Exception. A Trading Permit Holder shall be exempt from 
the obligation to execute a customer order in a manner consistent 
with this Rule with regard to trading for its own account that is 
the result of an intermarket sweep order routed in compliance with 
Rule 600(b)(30)(ii) of SEC Regulation NMS (``ISO'') where the 
customer order is received after the Trading Permit Holder routed 
the ISO. Where a Trading Permit Holder routes an ISO to facilitate a 
customer order and that customer has consented to not receiving the 
better prices obtained by the ISO, the Trading Permit Holder also 
shall be exempt with respect to any trading for its own account that 
is the

[[Page 17456]]

result of the ISO with respect to the consenting customer's order.
    .04 Odd Lot and Bona Fide Error Transaction Exceptions. The 
obligations under this Rule shall not apply to a Trading Permit 
Holder's proprietary trade that is (1) to offset a customer order 
that is in an amount less than a normal unit of trading; or (2) to 
correct a bona fide error. Trading Permit Holders are required to 
demonstrate and document the basis upon which a transaction meets 
the bona fide error exception.
    .05 Minimum Price Improvement Standards. The minimum amount of 
price improvement necessary for a Trading Permit Holder to execute 
an order on a proprietary basis when holding an unexecuted limit 
order in that same security, and not be required to execute the held 
limit order is as follows:
    (a) For customer limit orders priced greater than or equal to 
$1.00, the minimum amount of price improvement required is $0.01;
    (b) For customer limit orders priced greater than or equal to 
$0.01 and less than $1.00, the minimum amount of price improvement 
required is the lesser of $0.01 or one-half (\1/2\) of the current 
inside spread;
    (c) For customer limit orders priced less than $0.01 but greater 
than or equal to $0.001, the minimum amount of price improvement 
required is the lesser of $0.001 or one-half (\1/2\) of the current 
inside spread;
    (d) For customer limit orders priced less than $0.001 but 
greater than or equal to $0.0001, the minimum amount of price 
improvement required is the lesser of $0.0001 or one-half (\1/2\) of 
the current inside spread;
    (e) For customer limit orders priced less than $0.0001 but 
greater than or equal to $0.00001, the minimum amount of price 
improvement required is the lesser of $0.00001 or one-half (\1/2\) 
of the current inside spread;
    (f) For customer limit orders priced less than $0.00001, the 
minimum amount of price improvement required is the lesser of 
$0.000001 or one-half (\1/2\) of the current inside spread; and
    (g) For customer limit orders priced outside the best inside 
market, the minimum amount of price improvement required must either 
meet the requirements set forth above or the Trading Permit Holder 
must trade at a price at or inside the best inside market for the 
security.
    In addition, if the minimum price improvement standards above 
would trigger the protection of a pending customer limit order, any 
better-priced customer limit order(s) must also be protected under 
this Rule, even if those better-priced limit orders would not be 
directly triggered under the minimum price improvement standards 
above.
    .06 Order Handling Procedures. A Trading Permit Holder must make 
every effort to execute a marketable customer order that it receives 
fully and promptly. A Trading Permit Holder that is holding a 
customer order that is marketable and has not been immediately 
executed must make every effort to cross such order with any other 
order received by the Trading Permit Holder on the other side of the 
market up to the size of such order at a price that is no less than 
the best bid and no greater than the best offer at the time that the 
subsequent order is received by the Trading Permit Holder and that 
is consistent with the terms of the orders. In the event that a 
Trading Permit Holder is holding multiple orders on both sides of 
the market that have not been executed, the Trading Permit Holder 
must make every effort to cross or otherwise execute such orders in 
a manner that is reasonable and consistent with the objectives of 
this Rule and with the terms of the orders. A Trading Permit Holder 
can satisfy the crossing requirement by contemporaneously buying 
from the seller and selling to the buyer at the same price.
    .07 Trading Outside Normal Market Hours. Trading Permit Holder s 
generally may limit the life of a customer order to the period of 
normal market hours of 8:30 a.m. to 3:00 p.m. Central Time. However, 
if the customer and Trading Permit Holder agree to the processing of 
the customer's order outside normal market hours, the protections of 
this Rule shall apply to that customer's order(s) at all times the 
customer order is executable by the Trading Permit Holder.
* * * * *
Rule 53.8. Best Execution and Interpositioning[Reserved]

    [Reserved](a)(1) In any transaction for or with a customer or a 
customer of another broker-dealer, a Trading Permit Holder and 
persons associated with a Trading Permit Holder shall use reasonable 
diligence to ascertain the best market for the subject security and 
buy or sell in such market so that the resultant price to the 
customer is as favorable as possible under prevailing market 
conditions. Among the factors that will be considered in determining 
whether a Trading Permit Holder or person associated with a Trading 
Permit Holder has used ``reasonable diligence'' are:
    (A) the character of the market for the security (e.g., price, 
volatility, relative liquidity, and pressure on available 
communications);
    (B) the size and type of transaction;
    (C) the number of markets checked;
    (D) accessibility of the quotation; and
    (E) the terms and conditions of the order which result in the 
transaction, as communicated to the Trading Permit Holder and 
persons associated with the Trading Permit Holder.
    (2) In any transaction for or with a customer or a customer of 
another broker-dealer, no Trading Permit Holder or person associated 
with a Trading Permit Holder shall interject a third party between 
the Trading Permit Holder or the person associated with a Trading 
Permit Holder and the best market for the subject security in a 
manner inconsistent with paragraph (a)(1) of this Rule.
    (b) When a Trading Permit Holder cannot execute directly with a 
market but must employ a broker's broker or some other means in 
order to ensure an execution advantageous to the customer, the 
burden of showing the acceptable circumstances for doing so is on 
the Trading Permit Holder.
    (c) Failure to maintain or adequately staff a department 
assigned to execute customers' orders cannot be considered 
justification for executing away from the best available market; nor 
can channeling orders through a third party as described above as 
reciprocation for service or business operate to relieve a Trading 
Permit Holder of its obligations under this Rule.
    (d) A Trading Permit Holder through which an order is channeled 
and that knowingly is a party to an arrangement whereby the 
initiating Trading Permit Holder has not fulfilled its obligations 
under this Rule will also be deemed to have violated this Rule.
    (e) The obligations described in paragraphs (a) through (d) 
above exist not only when the Trading Permit Holder acts as agent 
for the account of its customer but also when transactions are 
executed as principal.

    * * * Interpretations and Policies:

    .01 Execution of Marketable Customer Orders. A Trading Permit 
Holder must make every effort to execute a marketable customer order 
that it receives fully and promptly.
    .02 Definition of ``Market.'' For the purposes of Rule 53.8 and 
the accompanying Interpretations and Policies, the term ``market'' 
or ``markets'' is to be construed broadly, and it encompasses a 
variety of different venues, including, but not limited to, market 
centers that are trading a particular security. This expansive 
interpretation is meant to both inform broker-dealers as to the 
breadth of the scope of venues that must be considered in the 
furtherance of their best execution obligations and to promote fair 
competition among broker-dealers, exchange markets, and markets 
other than exchange markets, as well as any other venue that may 
emerge, by not mandating that certain trading venues have less 
relevance than others in the course of determining a firm's best 
execution obligations.
    .03 Best Execution and Executing Brokers. A Trading Permit 
Holder's duty to provide best execution in any transaction ``for or 
with a customer of another broker-dealer'' does not apply in 
instances when another broker-dealer is simply executing a customer 
order against the Trading Permit Holder's quote. The duty to provide 
best execution to customer orders received from other broker-dealers 
arises only when an order is routed from the broker-dealer to the 
Trading Permit Holder for the purpose of order handling and 
execution. This clarification is intended to draw a distinction 
between those situations in which the Trading Permit Holder is 
acting solely as the buyer or seller in connection with orders 
presented by a broker-dealer against the Trading Permit Holder's 
quote, as opposed to those circumstances in which the Trading Permit 
Holder is accepting order flow from another broker-dealer for the 
purpose of facilitating the handling and execution of such orders.
    .04 Use of a Broker's Broker. Paragraph (b) of Rule 53.8 
provides that when a Trading Permit Holder cannot execute directly 
with a market but must employ a broker's broker or some other means 
in order to ensure an execution advantageous to the customer, the 
burden of showing the acceptable circumstances for doing so is on 
the Trading Permit Holder. Examples of acceptable circumstances are 
where a customer's order

[[Page 17457]]

is ``crossed'' with another firm that has a corresponding order on 
the other side, or where the identity of the firm, if known, would 
likely cause undue price movements adversely affecting the cost or 
proceeds to the customer.
    .05 Orders Involving Securities with Limited Quotations or 
Pricing Information. Although the best execution requirements in 
Rule 53.8 apply to orders in all securities, markets for securities 
differ dramatically. One of the areas in which a Trading Permit 
Holder must be especially diligent in ensuring that it has met its 
best execution obligations is with respect to customer orders 
involving securities for which there is limited pricing information 
or quotations available. Each Trading Permit Holder must have 
written policies and procedures in place that address how the 
Trading Permit Holder will determine the best inter-dealer market 
for such a security in the absence of pricing information or 
multiple quotations and must document its compliance with those 
policies and procedures. For example, a Trading Permit Holder should 
analyze pricing information based on other data, such as previous 
trades in the security, to determine whether the resultant price to 
the customer is as favorable as possible under prevailing market 
conditions. In these instances, a Trading Permit Holder should 
generally seek out other sources of pricing information or potential 
liquidity, which may include obtaining quotations from other sources 
(e.g., other firms that the Trading Permit Holder previously has 
traded with in the security).
    .06 Customer Instructions Regarding Order Handling. If a Trading 
Permit Holder receives an unsolicited instruction from a customer to 
route that customer's order to a particular market for execution, 
the Trading Permit Holder is not required to make a best execution 
determination beyond the customer's specific instruction. Trading 
Permit Holders are, however, still required to process that 
customer's order promptly and in accordance with the terms of the 
order. Where a customer has directed that an order be routed to 
another specific broker-dealer that is also a Trading Permit Holder, 
the receiving Trading Permit Holder to which the order was directed 
would be required to meet the requirements of Rule 53.8 with respect 
to its handling of the order.
    .07 Regular and Rigorous Review of Execution Quality.
    (a) No Trading Permit Holder can transfer to another person its 
obligation to provide best execution to its customers' orders. A 
Trading Permit Holder that routes customer orders to other broker-
dealers for execution on an automated, non-discretionary basis, as 
well as a Trading Permit Holder that internalizes customer order 
flow, must have procedures in place to ensure the Trading Permit 
Holder periodically conducts regular and rigorous reviews of the 
quality of the executions of its customers' orders if it does not 
conduct an order-by-order review. The review must be conducted on a 
security-by-security, type-of-order basis (e.g., limit order, market 
order, and market on open order). At a minimum, a Trading Permit 
Holder must conduct such reviews on a quarterly basis; however, 
Trading Permit Holders should consider, based on the firm's 
business, whether more frequent reviews are needed.
    (b) In conducting its regular and rigorous review, a Trading 
Permit Holder must determine whether any material differences in 
execution quality exist among the markets trading the security and, 
if so, modify the Trading Permit Holder's routing arrangements or 
justify why it is not modifying its routing arrangements. To assure 
that order flow is directed to markets providing the most beneficial 
terms for their customers' orders, the Trading Permit Holder must 
compare, among other things, the quality of the executions the 
Trading Permit Holder is obtaining via current order routing and 
execution arrangements (including the internalization of order flow) 
to the quality of the executions that the Trading Permit Holder 
could obtain from competing markets. In reviewing and comparing the 
execution quality of its current order routing and execution 
arrangements to the execution quality of other markets, a Trading 
Permit Holder should consider the following factors:
    (1) price improvement opportunities (i.e., the difference 
between the execution price and the best quotes prevailing at the 
time the order is received by the market);
    (2) differences in price disimprovement (i.e., situations in 
which a customer receives a worse price at execution than the best 
quotes prevailing at the time the order is received by the market);
    (3) the likelihood of execution of limit orders;
    (4) the speed of execution;
    (5) the size of execution;
    (6) transaction costs;
    (7) customer needs and expectations; and
    (8) the existence of internalization or payment for order flow 
arrangements.
    (c) A Trading Permit Holder that routes its order flow to 
another Trading Permit Holder that has agreed to handle that order 
flow as agent for the customer (e.g., a clearing firm or other 
executing broker-dealer) can rely on that Trading Permit Holder's 
regular and rigorous review as long as the statistical results and 
rationale of the review are fully disclosed to the Trading Permit 
Holder and the Trading Permit Holder periodically reviews how the 
review is conducted, as well as the results of the review.
* * * * *

    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 Rule 53.2 of the CBSX Rules, which 
governs the treatment of customer orders and prohibits a CBSX Trading 
Permit Holder from proprietarily trading ahead of a customer order, and 
to adopt Rule 53.8 in the CBSX Rules to govern Trading Permit Holders' 
best execution and interpositioning requirements. This proposed rule 
change is consistent with Financial Industry Regulatory Authority 
(``FINRA'') Rules 5320 (Prohibition Against Trading Ahead of Customer 
Orders) \3\ and 5310 (Best Execution and Interpositioning),\4\ 
respectively, in the Consolidated FINRA Rulebook. The purpose of these 
rules is to enhance customer order protection and help customers 
receive efficient executions of their transactions at the best market 
prices.
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    \3\ See Securities Exchange Act Release No. 63895 (February 11, 
2011), 76 FR 9386 (February 17, 2011) (SR-FINRA-2009-090) (order 
approving FINRA Rule 5320, ``Prohibition Against Trading Ahead of 
Customer Orders''). Other exchanges have adopted substantially 
similar rules prohibiting trading ahead of customer orders. See, 
e.g., Securities Exchange Act Release No. 64418 (May 6, 2011), 76 FR 
27735 (May 12, 2011) (SR-CHX-2011-008) (notice of filing and 
immediate effectiveness of proposed rule change of Chicago Stock 
Exchange, Inc. to adopt customer order protection language 
consistent with FINRA Rule 5320); Securities Exchange Act Release 
No. 65165 (August 18, 2011), 76 FR 53009 (August 24, 2011) (SR-
NYSEAmex-2011-059) (notice of filing and immediate effectiveness of 
proposed rule change of NYSE Amex LLC (now known as NYSE MKT LLC) to 
adopt customer order protection language substantially the same as 
FINRA Rule 5320); and Securities Exchange Act Release No. 65166 
(August 18, 2011), 76 FR 53012 (August 24, 2011) (SR-NYSEArca-2011-
057) (notice of filing and immediate effectiveness of proposed rule 
change of NYSE Arca, Inc. to adopt customer order protection 
language substantially the same as FINRA Rule 5320).
    \4\ See Securities Exchange Act Release No. 65895 (December 5, 
2011), 76 FR 77042 (December 9, 2011) (SR-FINRA-2011-052) (order 
approving FINRA Rule 5310, ``Best Execution and Interpositioning''). 
Other exchanges have similar best execution and interpositioning 
rules. See, e.g., NASDAQ Stock Market LLC Rule 2320 (Best Execution 
and Interpositioning) and IM-2320; and NASDAQ OMX PHLX LLC Rule 764 
(Best Execution and Interpositioning).
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Rule 53.2--Prohibition Against Trading Ahead of Customer Orders
    Currently, Rule 53.2 prohibits a Trading Permit Holder on the CBSX

[[Page 17458]]

System \5\ from trading for its own account any security subject to the 
CBSX Rules while the Trading Permit Holder personally holds or has 
knowledge that his Trading Permit Holder organization (or any member, 
partner, officer or employee) holds an unexecuted market order to buy 
or sell that security in the unit of trading for a customer.\6\ Rule 
53.2 also prohibits a Trading Permit Holder on the CBSX System from 
trading for its own account any security subject to the CBSX Rules at a 
price that is equal to or better [sic] the price at which the Trading 
Permit Holder personally holds or has knowledge that his Trading Permit 
Holder organization (or any member, partner, officer or employee) holds 
an unexecuted limit order to buy or sell that security in the unit of 
trading for a customer.
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    \5\ The ``CBSX System'' means the electronic system that 
performs the functions set out in the CBSX Rules, including 
controlling, monitoring, and recording trading by Trading Permit 
Holders through CBSX Workstations and trading between Trading Permit 
Holders. See Rule 50.1.
    \6\ Rule 53.2 currently also provides a special contract 
exemption, stating that the provisions of the Rule do not apply to 
any purchase or sale of a security the delivery of which is to be 
upon a day other than the day of delivery provided in the unexecuted 
market or limit order.
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    The proposed rule change replaces in its entirety the text of Rule 
53.2 and adds a number of exceptions. Proposed Rule 53.2 includes 
customer order protection language similar to the current Rule that 
states if a Trading Permit Holder holds an order in an equity security 
from its own customer or a customer of another broker-dealer, the 
Trading Permit Holder is prohibited from trading that security on the 
same side of the market for its own account at a price that would 
satisfy the customer order. The proposed rule change adds that this 
prohibition does not apply if a Trading Permit Holder, who has traded 
proprietarily ahead of a customer order, immediately thereafter 
executes the customer order up to the size and at the same or better 
price at which it traded for its own account. In other words, in the 
event that a Trading Permit Holder trades ahead of an unexecuted 
customer order at a price that is equal to or better than the 
unexecuted customer order on the CBSX System, the Trading Permit Holder 
is required to execute the customer order at the price received by the 
Trading Permit Holder or better; otherwise the Trading Permit Holder 
will be in violation of improperly trading ahead of the customer 
order.\7\ The proposed rule change also establishes the minimum amount 
of price improvement necessary for a Trading Permit Holder to execute 
an order on a proprietary basis when holding an unexecuted limit 
order.\8\
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    \7\ For example, if a Trading Permit Holder buys 100 shares of a 
security at $10 per share while holding customer limit orders in the 
same security to buy at $10 per share equaling, in aggregate, 1000 
shares, the Trading Permit Holder is required to fill 100 shares of 
the customer limit orders at $10 per share or better.
    \8\ See proposed Rule 53.2, Interpretation and Policy .05. For 
example, for customer limit orders priced greater than or equal to 
$1.00, the minimum amount of price improvement required is $0.01.
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    The Exchange also proposes to establish that a Trading Permit 
Holder must have written procedures in place governing the execution 
and priority of all pending orders that is consistent with proposed 
Rule 53.2 and the best execution requirements of proposed Rule 53.8 and 
ensure that these procedures are consistently applied.
    In furtherance of ensuring customer order protection on CBSX, the 
proposed rule change clarifies Trading Permit Holder obligations in 
handling marketable customer orders. In meeting these obligations, a 
Trading Permit Holder must make every effort to execute a marketable 
customer order that it receives fully and promptly. A Trading Permit 
Holder that is holding a customer order that is marketable and has not 
been immediately executed must make every effort to cross the order 
with any other order received by the Trading Permit Holder on the other 
side of the market up to the size of such order at a price that is no 
less than the best bid and no greater than the best offer at the time 
that the subsequent order is received by the Trading Permit Holder and 
that is consistent with the terms of the orders. In the event that a 
Trading Permit Holder is holding multiple orders on both sides of the 
market that have not been executed, the Trading Permit Holder must make 
every effort to cross or otherwise execute these orders in a manner 
that is reasonable and consistent with the objects of the proposed rule 
change and with the terms of the orders. A Trading Permit Holder can 
satisfy the crossing requirement by contemporaneously buying from the 
seller and selling to the buyer at the same price.\9\
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    \9\ See proposed Rule 53.2, Interpretation and Policy .06.
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Large Orders and Institutional Accounts Exception \10\
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    \10\ See proposed Rule 53.2, Interpretation and Policy .01.
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    The most notable proposed exception to the prohibition on trading 
ahead of customer orders permits Trading Permit Holders to negotiate 
terms and conditions on the acceptance of certain large-sized orders 
(orders of 10,000 shares or more and greater than or equal to $100,000 
in value) or orders from institutional accounts.\11\ These terms and 
conditions would permit Trading Permit Holders to continue to trade 
along side or ahead of these customer orders if the customer agrees.
---------------------------------------------------------------------------

    \11\ Proposed Rule 53.2, Interpretation and Policy .01 defines 
``institutional account'' as an account of: (a) A bank, savings and 
loan association, insurance company, or registered investment 
company; (b) an investment adviser registered either with the 
Commission under Section 203 of the Investment Advisers Act of 1940 
or with a state securities commission (or any agency or office 
performing like functions); or (c) any other entity (whether a 
natural person, corporation, partnership, trust, or otherwise) with 
total assets of at least $50 million.
---------------------------------------------------------------------------

    Specifically, under the proposed rule, a Trading Permit Holder 
would be permitted to trade a security on the same side of the market 
for its own account at a price that would satisfy a customer order 
provided that the Trading Permit Holder provides clear and 
comprehensive written disclosure to each customer at account opening 
and annually thereafter that: (1) Discloses that the Trading Permit 
Holder may trade proprietarily at prices that would satisfy the 
customer order, and (b) provides the customer with a meaningful 
opportunity to opt in to the Rule 53.2 protections with respect to all 
or any portion of its order(s).
    If a customer does not opt in to the Rule 53.2 protections with 
respect to all or any portion of its order(s), the Trading Permit 
Holder may reasonably conclude that the customer has consented to the 
Trading Permit Holder trading a security on the same side of the market 
for its own account at a price that would satisfy the customer's 
order.\12\
---------------------------------------------------------------------------

    \12\ As is always the case, customers retain the right to 
withdraw consent at any time. Therefore, a Trading Permit Holder's 
reasonable conclusion that a customer has consented to the Trading 
Permit Holder trading along with the customer's order is subject to 
further instruction and modification from the customer.
---------------------------------------------------------------------------

    In lieu of providing written disclosure to customers at account 
opening and annually thereafter, the proposed rule would permit Trading 
Permit Holders to provide clear and comprehensive oral disclosure to, 
and obtain consent from, a customer on an order-by-order basis, 
provided that the Trading Permit Holder documents who provided that 
consent and that the consent evidences the customer's understanding of 
the terms and conditions of the order. In addition, where a customer 
has opted in to the Rule 53.2 protections, a Trading Permit Holder may 
still obtain consent on an order-by-order basis to trade ahead of or 
along with an order from that customer, provided that the Trading 
Permit Holder documents who provided the consent

[[Page 17459]]

and that the consent evidences the customer's understanding of the 
terms and conditions of the order.\13\
---------------------------------------------------------------------------

    \13\ While a Trading Permit Holder organization relying on this 
or any exception must be able to proffer evidence of its eligibility 
for and compliance with the exception, the Exchange believes that 
when obtaining consent on an order-by-order basis, Trading Permit 
Holders must, at a minimum, document not only the terms and 
conditions of the order (e.g., the relative price and size of the 
allocated order/percentage split with the customer), but also the 
identity of the person at the customer who approved the trade-along 
request. For example, the identity of the person must be noted in a 
manner that will enable subsequent contact with that person if a 
question as to the consent arises (i.e., first names only, initials, 
and nicknames will not suffice). A ``trade along'' request would be 
when a Trading Permit Holder asks to trade for his/her proprietary 
account while simultaneously holding and working a customer order in 
that same stock.
---------------------------------------------------------------------------

No-Knowledge Exception \14\
---------------------------------------------------------------------------

    \14\ See proposed Rule 53.2, Interpretation and Policy .02.
---------------------------------------------------------------------------

    The Exchange also proposes to add a ``no-knowledge'' exception to 
CBSX's customer order protection rule. This proposed exception would 
allow a proprietary trading unit of a Trading Permit Holder 
organization to continue trading in a proprietary capacity and at 
prices that would satisfy customer orders that were being held by 
another, separate trading unit at the Trading Permit Holder 
organization. The ``no-knowledge'' exception would be applicable with 
respect to NMS stocks, as defined in Rule 600 of SEC Regulation NMS. In 
order to avail itself of the ``no-knowledge'' exception, a Trading 
Permit Holder organization must first implement and utilize an 
effective system of internal controls (such as appropriate information 
barriers) that operate to prevent the proprietary trading unit from 
obtaining knowledge of the customer orders that are held at a separate 
trading unit. For example, a CBSX Broker \15\ that conducts both a 
proprietary and agency brokerage business and has implemented and 
utilized an effective system of internal controls, the ``walled off'' 
proprietary desk(s) of the CBSX Broker would be permitted to trade at 
prices that would satisfy the customer orders held by the agency 
brokerage desk without any requirement that these proprietary 
executions trigger an obligation to fill pending customer orders at the 
same price. The ``no-knowledge'' exception would also apply to a 
Trading Permit Holder organization's market-making unit.
---------------------------------------------------------------------------

    \15\ A ``CBSX Broker'' is a Trading Permit Holder who enters 
orders as an agent. See Rule 50.3(5).
---------------------------------------------------------------------------

    A Trading Permit Holder organization that structures its order 
handling practices in NMS stocks to permit its proprietary and/or 
market-making desk to trade at prices that would satisfy customer 
orders held as a separate trading unit must disclose in writing to its 
customers, at account opening and annually thereafter, a description of 
the manner in which customer orders are handled by the Trading Permit 
Holder and the circumstances under which the Trading Permit Holder may 
trade proprietarily at its market-making desk at prices that would 
satisfy the customer order. This proposed disclosure may be combined 
with the disclosure and negative consent statement permitted in 
connection with the proposed large order and institutional account 
exceptions.
    If a Trading Permit Holder intends to rely on the no-knowledge 
exception by implementing information barriers, those information 
barriers must (1) provide for the organizational separation of a 
Trading Permit Holder's trading unit that holds customer orders and a 
proprietary trading unit; (2) ensure that one trading unit does not 
exert influence over the other trading unit; (3) ensure that 
information relating to each trading unit's stock positions, trading 
activities, and clearing and margin arrangements is not improperly 
shared (except with persons in senior management who are involved in 
exercising general managerial oversight of one or both entities); (4) 
require each trading unit to maintain separate books and records (and 
separate financial accounting); (5) require each trading unit to 
separately meet all required capital requirements; (6) ensure the 
confidentiality of each trading unit's book as provided by Exchange 
rules; and (7) ensure that any other material, non-public information 
(e.g. information related to any business transactions between a 
trading unit and an issuer or any research reports or recommendations 
issued by the trading unit) is not made improperly available to the 
other trading unit in any manner that would allow that trading unit to 
take undue advantage of that information while trading on CBSX. A 
Trading Permit Holder must submit the proposed information barriers in 
writing to the Exchange upon request.
    Similar to FINRA Rule 5320, the proposed rule change requires 
Trading Permit Holders that intend to rely on the no-knowledge 
exception by implementing information barriers to have ``appropriate'' 
information barriers. The Exchange believes that including these 
specific information barrier requirements will clarify for Trading 
Permit Holders what types of information barriers would be deemed 
appropriate information barriers and thus better allow Trading Permit 
Holders to rely on this exception. The Exchange notes that its 
surveillance procedures will continue to include a review of all orders 
for compliance with the prohibition on trading ahead of customer 
orders, and part of that will review [sic] include review of Trading 
Permit Holders' information barriers to determine whether they are 
sufficient for the Trading Permit Holders to avail themselves of the 
no-knowledge exception for each applicable order. These requirements 
regarding information barriers are substantially similar to those set 
forth in CBOE Rule 54.8, which includes special provisions for trading 
commodity-based trust shares on CBSX, except that the proposed rule 
change provides that information barriers must be submitted upon 
request while CBOE Rule 54.8 provides that information barriers must be 
submitted and approved in advance. The Exchange believes it is 
appropriate and efficient to request from a Trading Permit Holder its 
information barriers as part of its surveillance procedures with 
respect to the customer order protection rule.
ISO Exception \16\
---------------------------------------------------------------------------

    \16\ See proposed Rule 53.2, Interpretation and Policy .03.
---------------------------------------------------------------------------

    The proposed rule change also clarifies that a Trading Permit 
Holder will be exempt from the obligation to execute a customer order 
in a manner consistent with CBSX's customer order protection rule with 
regard to trading for its own account that is the result of an 
intermarket sweep order routed in compliance with Rule 600(b)(30)(ii) 
of SEC Regulation NMS (``ISO'') where the customer order is received 
after the Trading Permit Holder routed the ISO. Where a Trading Permit 
Holder routes an ISO to facilitate a customer order and that customer 
has consented to not receiving the better prices obtained by the ISO, 
the Trading Permit Holder also will be exempt with respect to any 
trading for its own account that is the result of the ISO with respect 
to the consenting customer's order.
Odd Lot and Bona Fide Error Transaction Exception \17\
---------------------------------------------------------------------------

    \17\ See proposed Rule 53.2, Interpretation and Policy .04.
---------------------------------------------------------------------------

    The Exchange also proposes applying an exception for a firm's 
proprietary trade that (1) offsets a customer odd lot order (i.e., an 
order less than one round lot, which is typically 100 shares); or (2) 
corrects a bona fide error. With respect to bona fide errors, Trading 
Permit Holder would be required to demonstrate and document the basis

[[Page 17460]]

upon which a transaction meets the bona fide error exception. For 
purposes of this proposed Rule, the definition of a ``bona fide error'' 
is as defined in SEC Regulation NMS's exemption for error correction 
transactions.\18\
---------------------------------------------------------------------------

    \18\ See Securities Exchange Act Release No. 55884 (June 8, 
2007), 72 FR 32926 (June 14, 2007) (Order Exempting Certain Error 
Correction Transactions from Rule 611 of Regulation NMS under the 
Securities Exchange Act of 1934).
---------------------------------------------------------------------------

Trading Outside Normal Market Hours \19\
---------------------------------------------------------------------------

    \19\ See proposed Rule 53.2, Interpretation and Policy .07.
---------------------------------------------------------------------------

    This proposed rule change also expands CBSX's customer order 
protection requirements to apply at all times that a customer order is 
executable by the Trading Permit Holder, even outside the period of 
normal market hours. Thus, customers would have the benefit of the 
customer order protection rules at all times where such order is 
executable by the Trading Permit Holder, subject to any applicable 
exceptions. This exception will apply to those Trading Permit Holders 
that accept customer orders after normal market hours.
Rule 53.8--Best Execution and Interpositioning
    The Exchange proposes to adopt a new rule to govern Trading Permit 
Holders' best execution and interpositioning requirements. Proposed 
Rule 53.8(a)(1) requires a Trading Permit Holder or person associated 
with a Trading Permit Holder, in any transaction for or with a customer 
or a customer of another broker-dealer, to use ``reasonable diligence'' 
to ascertain the best market for a security and to buy or sell in that 
market so that the resultant price to the customer is as favorable as 
possible under prevailing market conditions. The rule identifies five 
factors that are among those to be considered in determining whether 
the Trading Permit Holder or person associated with a Trading Permit 
Holder has used reasonable diligence:
    (1) the character of the market for the security;
    (2) the size and type of transaction;
    (3) the number of markets checked;
    (4) the accessibility of the quotation; and
    (5) the terms and conditions of the order as communicated to the 
Trading Permit Holder or person associated with the Trading Permit 
Holder.
    Proposed Rule 53.8(a)(2) relates to interpositioning and prohibits 
a Trading Permit Holder or person associated with a Trading Permit 
Holder, in any transaction for or with a customer or a customer of 
another broker-dealer, from interjecting a third party between the 
Trading Permit Holder or person associated with a Trading Permit Holder 
and the best market for the subject security in a manner inconsistent 
with the best execution requirements in subparagraph (a)(1) of proposed 
Rule 53.8.
    Proposed Rule 53.8 also includes provisions related to the use of a 
broker's broker, the staffing of order rooms, and the application of 
the best execution requirements to other parties. Proposed paragraph 
(b) provides that when a Trading Permit Holder cannot execute directly 
with a market but must employ a broker's broker or some other means in 
order to ensure an execution advantageous to the customer, the burden 
of showing the acceptable circumstances for doing so is on the Trading 
Permit Holder. Proposed paragraph (c) provides that failure to maintain 
or adequately staff a department assigned to execute customers' orders 
cannot be considered justification for executing away from the best 
available market; nor can channeling orders through a third party as 
reciprocation for service or business operate to relieve a Trading 
Permit Holder of its obligations under proposed Rule 53.8. Proposed 
paragraph (d) provides that a Trading Permit Holder through which an 
order is channeled and that knowingly is a party to an arrangement 
whereby the initiating Trading Permit Holder has not fulfilled its 
obligations under Rule 53.8 will also be deemed to have violated Rule 
53.8. Proposed paragraph (e) provides that the obligations in 
paragraphs (a) through (d) apply when the Trading Permit Holder acts as 
agent for the account of its customer as well as when transactions are 
executed as principal.
    Proposed Rule 53.8 includes several Interpretations and Policies to 
provide additional guidance and clarity regarding Trading Permit 
Holders' obligations with respect to the best execution and 
interpositioning requirements. Proposed Interpretation and Policy .01 
reinforces a Trading Permit Holder's duty to make every effort to 
execute a marketable customer order that it receives fully and 
promptly. Proposed Interpretation and Policy .02 defines the term 
``market'' for the purposes of proposed Rule 53.8.\20\
---------------------------------------------------------------------------

    \20\ For purposes of proposed Rule 53.8 and the accompanying 
Interpretations and Policies, the term ``market'' or ``markets'' is 
to be construed broadly, and it encompasses a variety of different 
venues, including, but not limited to, market centers that are 
trading a particular security. This expansive interpretation is 
meant to both inform broker-dealers as to the breadth of the scope 
of venues that must be considered in the furtherance of their best 
execution obligations and to promote fair competition among broker-
dealers, exchange markets, and markets other than exchange markets, 
as well as any other venue that may emerge, by not mandating that 
certain trading venues have less relevance than others in the course 
of determining a firm's best execution obligations.
---------------------------------------------------------------------------

    Proposed Interpretation and Policy .03 addresses broker-dealers 
that are executing a customer's order against the Trading Permit 
Holder's quote. It provides that a Trading Permit Holder's duty to 
provide best execution in any transaction ``for or with a customer of 
another broker-dealer'' does not apply in instances when another 
broker-dealer is simply executing a customer order against the Trading 
Permit Holders' quote. The duty to provide best execution to customer 
orders received from other broker-dealers arises only when an order is 
routed from the broker-dealer to the Trading Permit Holder for the 
purpose of order handling and execution. This clarification is intended 
to draw a distinction between those situations in which the Trading 
Permit Holder is acting solely as the buyer or seller in connection 
with orders presented by a broker-dealer against the Trading Permit 
Holder's quote, as opposed to those circumstances in which the Trading 
Permit Holder is accepting order flow from another broker-dealer for 
the purpose of facilitating the handling and execution of such orders.
    Proposed Interpretation and Policy .04 provides that when a Trading 
Permit Holder cannot execute directly with a market but must employ a 
broker's broker or some other means in order to ensure an execution 
advantageous to the customer, the burden of showing the acceptable 
circumstances for doing so is on the Trading Permit Holder. Examples of 
acceptable circumstances are where a customer's order is crossed with 
another firm that has a corresponding order on the other side, or where 
the identity of the firm, if known, would likely cause undue price 
movements adversely affecting the cost or proceeds to the customer.
    Proposed Interpretation and Policy .05 addresses the fact that 
markets for securities differ dramatically and provides additional 
guidance regarding a Trading Permit Holder's best execution obligations 
when handling an order involving any security for which there is 
limited pricing information or other quotations available. The 
Interpretation and Policy emphasizes that Trading Permit Holders must 
be especially diligent with respect to best execution obligations where 
there is limited quotation or other pricing

[[Page 17461]]

information available regarding the security that is the subject of the 
order and requires Trading Permit Holders to have written policies and 
procedures in place to address the steps the Trading Permit Holder will 
take to determine the best interdealer market for such a security in 
the absence of multiple quotations or pricing information and to 
document how they have complied with those policies and procedures. The 
Interpretation and Policy specifically notes that, when handling orders 
for these securities, Trading Permit Holders should generally seek out 
other sources of pricing information or potential liquidity, which may 
include obtaining quotations from other sources (e.g., other firms that 
the Trading Permit Holder previously has traded with in the security). 
For example, in many instances, particularly in the context of equity 
securities with limited quotation information available, contacting 
other broker-dealers may be necessary to comply with a Trading Permit 
Holder's best execution obligations.
    When placing an order with a Trading Permit Holder, customers may 
specifically instruct the Trading Permit Holder to route the order to a 
particular market for execution.\21\ Proposed Interpretation and Policy 
.06 addresses situations where the customer has, on an unsolicited 
basis, specifically instructed the Trading Permit Holder to route that 
customer's order to a particular market for execution.\22\ Under those 
circumstances, the Trading Permit Holder would not be required to make 
a best execution determination beyond that specific instruction; 
however, the Interpretation and Policy mandates that Trading Permit 
Holders process that customer's order promptly and in accordance with 
the terms of the order. The Interpretation and Policy also makes clear 
that where a customer has directed the Trading Permit Holder to route 
an order to another specific broker-dealer that is also a Trading 
Permit Holder, the exception would not apply to the receiving Trading 
Permit Holder to which the order was directed.\23\
---------------------------------------------------------------------------

    \21\ When the order is for an NMS security, these orders are 
often referred to as ``directed orders.'' See 17 CFR 242.600(b)(19). 
Of note, directed orders are excluded from the order routing 
statistics required to be produced under Rule 606 of SEC Regulation 
NMS. See 17 CFR 242.606.
    \22\ The Interpretation and Policy also clarifies that a Trading 
Permit Holder's best execution obligations extend to all customer 
orders and is intended to avoid the potential misimpression that the 
paragraph limits the scope of the rule's requirements.
    \23\ For example, if a customer of Trading Permit Holder Firm A 
directs Trading Permit Holder Firm A to route an order to Trading 
Permit Holder Firm B, Trading Permit Holder Firm B would continue to 
have best execution obligations to that customer order received from 
Trading Permit Holder Firm A.
---------------------------------------------------------------------------

    Proposed Interpretation and Policy .07 codifies a Trading Permit 
Holder's obligation when it undertakes a regular and rigorous review of 
execution quality likely to be obtained from different market centers. 
These longstanding obligations are set forth and explained in various 
SEC releases and NASD Notices to Members.\24\
---------------------------------------------------------------------------

    \24\ See, e.g., Securities Exchange Act Release No. 37619A 
(September 6, 1996), 61 FR 48290 (September 12, 1996); and NASD 
Notice to Members 01-22 (April 2001).
---------------------------------------------------------------------------

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.\25\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \26\ 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 
facilitation 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) \27\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 78f(b).
    \26\ 15 U.S.C. 78f(b)(5).
    \27\ Id.
---------------------------------------------------------------------------

    In particular, the Exchange believes that amending CBSX's customer 
order protection rule and adopting a best execution and 
interpositioning rule will promote just and equitable principles of 
trade and protect investors and the public interest by bringing CBSX's 
Rules more in line with industry standards, most notably FINRA Rules 
5320 and 5310, respectively. Additionally, the requirement to have 
certain information barriers in place to take advantage of the no-
knowledge exception to the prohibition on trading ahead of customer 
orders is substantially similar to the information barrier requirement 
set forth in CBOE Rule 54.8 regarding trading commodity-based trust 
shares on CBSX. The Exchange believes it will be efficient to review 
the information barriers upon request in connection with its overall 
surveillances procedures related to the customer order protection rule.
    The Exchange believes this consistency among Rules of different 
self-regulatory organizations will in turn reduce the complexity of 
customer order protection for those firms subject to the rules of 
multiple trading venues. It will also contribute to investor protection 
by defining important parameters by which Trading Permit Holders must 
abide when trading proprietarily and when handling customer orders. In 
addition, the Exchange believes harmonizing customer order protection, 
best execution and interpositioning rules across self-regulatory 
organizations will foster cooperation and contribute to perfecting the 
mechanism of a free and open market and national market system. The 
Exchange also believes that including these rules in CBSX's rules will 
reinforce the importance of these requirements and ensure that Trading 
Permit Holders are aware of these requirements. The Interpretations and 
Policies for each Rule will provide Trading Permit Holders with 
additional guidance and clarification on their obligations under these 
Rules and thus potentially increase compliance with those obligations. 
The proposed rule change will impose the same requirements on all 
Trading Permit Holders. Finally, the Exchange believes that the 
proposed rule change will maintain the necessary protection and 
priority of customer orders designed to prevent fraudulent and 
manipulative acts, without imposing any undue regulatory costs on 
industry participants.

B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange believes the 
proposed rule change will reduce the burdens on market participants 
that result from their having to comply with varying rules related to 
customer order protection, thus reducing the complexity of customer 
order protection rules, particularly for those firms subject to the 
rules of multiple trading venues. Overall, the Exchange believes the 
proposed rule change enhances customer order protection by harmonizing 
customer order protection, best execution and interpositioning rules 
across self-regulatory organizations, which ultimately benefits

[[Page 17462]]

market participants and does not impose a burden on competition.

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 rule-comments@sec.gov. Please include 
File Number SR-CBOE-2013-027 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-2013-027. 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 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-2013-027, and should be submitted on or before April 11, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
---------------------------------------------------------------------------

    \28\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-06478 Filed 3-20-13; 8:45 am]
BILLING CODE 8011-01-P


