
[Federal Register Volume 78, Number 59 (Wednesday, March 27, 2013)]
[Notices]
[Pages 18655-18657]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-07010]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69203; File No. SR-CBOE-2013-032]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to an Order Router Subsidy Program for 
Complex Orders

March 21, 2013.
    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 March 8, 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, 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 enter into subsidy arrangements with any 
CBOE Trading Permit Holder or Non-CBOE Trading Permit Holder broker-
dealer that provide certain order routing functionalities with respect 
to complex orders \3\ to other CBOE Trading Permit Holders, Non-CBOE 
Trading Permit Holders and/or use such functionalities themselves.
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    \3\ For purposes of the ORS [sic] Program, a ``complex order'' 
shall have the definition set forth in the first sentence of CBOE 
Rule 6.53C(a)(1) which reads ``[a] ``complex order'' is any order 
involving the execution of two or more different options series in 
the same underlying security occurring at or near the same time in a 
ratio that is equal to or greater than one-to-three (.333) and less 
than or equal to three-to-one (3.00) (or such lower ratio as may be 
determined by the Exchange on a class-by-class basis) and for the 
purpose of executing a particular investment strategy.''
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    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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    On April 5, 2007, CBOE established the Order Router Subsidy Program 
(the ``ORS Program'') which allows CBOE to enter into subsidy 
arrangements with CBOE Trading Permit Holders (``TPHs'') that provide 
certain order routing functionalities to other CBOE TPHs and/or use 
such functionalities themselves.\4\ The Exchange later extended this 
program to enable CBOE to establish such subsidy arrangements with 
broker-dealers that are not CBOE TPHs and to permit participating CBOE 
TPHs and participating non-CBOE TPHs to receive subsidy payments for 
providing order routing functionality to broker-dealers who are not 
CBOE TPHs.\5\ Specifically, CBOE TPHs and non-CBOE TPHs who enter into 
such subsidy arrangements receive a payment from CBOE for every 
executed contract for orders routed to CBOE through their system. 
Currently, the ORS Program permits subsidy payments with respect to 
simple, non-complex orders only. The Exchange now proposes to establish 
the Complex Order Router Subsidy Program (the ``CORS Program'' or 
``Program''), which is a similar program but would permit subsidy 
payments with respect to complex orders only. Specifically, the CORS 
Program would permit CBOE to enter into subsidy arrangements with any 
CBOE TPH (each, a ``Participating TPH'') or Non-CBOE TPH broker-dealer 
(each a ``Participating Non-CBOE TPH'') that provide certain order 
routing functionalities with respect to complex orders \6\ to other 
CBOE TPHs, Non-CBOE TPHs and/or use such functionalities themselves. 
(The term ``Participant'' as used in this filing refers to either a 
Participating TPH or a Participating Non-CBOE TPH). The purpose of this 
proposed change is to incentivize the sending of complex orders to the 
Exchange.
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    \4\ See Securities Exchange Act Release No. 55629 (April 13, 
2007), 72 FR 19992 (April 20, 2007) (SR-CBOE-2007-034). 
Additionally, the description of the current program was clarified 
in SR-CBOE-2008-27. See Securities Exchange Act Release No. 57498 
(March 14, 2008), 73 FR 15018 (March 20, 2008) (SR-CBOE-2008-27).
    \5\ See Securities Exchange Act Release No. 63631 (January 3, 
2011), 76 FR 1203 (January 7, 2011) (SR-CBOE-2010-117).
    \6\ For purposes of the CORS Program, a ``complex order'' shall 
have the definition set forth in the first sentence of CBOE Rule 
6.53C(a)(1) which reads ``[a] ``complex order'' is any order 
involving the execution of two or more different options series in 
the same underlying security occurring at or near the same time in a 
ratio that is equal to or greater than one-to-three (.333) and less 
than or equal to three-to-one (3.00) (or such lower ratio as may be 
determined by the Exchange on a class-by-class basis) and for the 
purpose of executing a particular investment strategy.''
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    To qualify for the complex order subsidy arrangement, a 
Participant's order routing functionality would have to be capable of 
interfacing with CBOE's API to access current CBOE trade engine 
functionality and must be configured to cause CBOE to be the default 
destination exchange for complex orders, but allow any user to manually 
override CBOE as the default destination on an order-by-order basis. 
Any CBOE TPH or broker-dealer that is not a CBOE TPH would be permitted 
to avail itself of this arrangement, provided that its order routing 
functionality incorporates the features described above and it signs an 
agreement agreeing to abide by the provisions of the Program. 
Additionally, Participants must satisfy CBOE that their order routing 
functionality appears to be robust and reliable. The Participant would 
be solely responsible for implementing and operating its system.
    CBOE is proposing to make payments to Participants for every 
executed contract for complex orders routed to CBOE through that 
Participant's system to subsidize their costs associated with providing 
order routing functionalities for complex orders. The payment would be 
$0.04 per executed contract of each leg \7\ for complex orders routed 
to CBOE through a Participant's system. The Exchange notes that the 
amount of the subsidy payment per executed contract for complex orders 
will be the same as the subsidy payment per executed contract for 
simple, non-complex orders under the ORS Program. The Participants 
would have to agree that they are not entitled to receive any other 
revenue for the use of their system, specifically with respect to 
complex orders routed to CBOE.\8\ Participants

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would not be precluded, however, from receiving payment for order flow 
if they choose to do so. Any CBOE TPH or broker-dealer that is not a 
CBOE TPH would be permitted to avail itself of both this arrangement 
and the arrangement under the ORS Program, so long as its order routing 
functionality incorporates the features required under the CORS Program 
and the features required under the ORS Program.
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    \7\ For example, if a complex order to buy ten March 50 call 
options and to sell ten March 55 call options were executed, the 
transaction would count as 20 contracts for calculating the fee 
payable to Participant.
    \8\ This requirement would not prevent the Participant from 
charging fees (for example, a flat monthly fee) for the general use 
of its order routing system. Nor would it prevent the Participant 
from charging fees or commissions in accordance with its general 
practices with respect to transactions effected through its system.
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    The Exchange notes that the proposed CORS Program is substantially 
similar to the current ORS Program. One notable difference however, is 
that Participants in the ORS Program are required to incorporate a 
function allowing orders at a specified price to be sent to multiple 
exchanges with a simple click (``sweep function'') and the sweep 
function needs to be configured to cause an order to be sent to CBOE 
for up to the full size quoted by CBOE if CBOE is at the NBBO. Unlike 
simple, non-complex orders, there is no NBBO for complex orders and an 
exception from the prohibition on trade-throughs is provided for any 
transaction that was effected as a portion of a complex order.\9\ 
Therefore, the sweep function required under the ORS Program for 
simple, non-complex orders would not be applicable to complex orders 
and accordingly is not required under the CORS Program. Additionally, 
Participants under the CORS Program would not be required to enable the 
electronic routing of orders to all of the U.S. options exchanges or 
provide current consolidated market data from the U.S. options 
exchanges. The Exchange notes that this requirement would not make 
sense in the CORS Program as some options exchanges do not offer 
complex order execution systems. The Exchange also notes that the 
optional Marketing Service Election and Billing Election under the ORS 
Program would not be available under the CORS Program.
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    \9\ See CBOE Rule 6.81(b)(7).
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    Finally, nothing in the proposed subsidy arrangement relieves any 
CBOE TPH or non-CBOE TPH broker-dealer that is using an order routing 
functionality whose provider is participating in the CORS Program from 
complying with its best execution obligations. Just as with any 
customer order and any other routing functionality, both a CBOE TPH and 
a non-CBOE TPH broker dealer have an obligation to consider the 
availability of price improvement at various markets and whether 
routing a customer order through a functionality that incorporates the 
features described above would allow for access to such opportunities 
if readily available. Moreover, any user, whether or not a CBOE TPH, 
needs to conduct best execution evaluations on a regular basis, at a 
minimum quarterly, that include its use of any router incorporating the 
features described above.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Securities Exchange Act of 1934 (``Act''), in general. Specifically, 
the Exchange believes the proposed rule change is consistent with 
Section 6(b)(4) of the Act,\10\ which requires that Exchange rules 
provide for the equitable allocation of reasonable dues, fees, and 
other charges among its Trading Permit Holders and other persons using 
its facilities. In particular, the proposed adoption of a subsidy 
payment program for complex orders is reasonable because it affords 
Participants an opportunity to receive payments to subsidize the costs 
associated with providing certain order routing functionalities. The 
Exchange believes that limiting the subsidy payment to those that 
provide complex order routing functionalities is equitable and not 
unfairly discriminatory because the Participants of the Program have 
devoted resources to provide the order routing functionalities. The 
proposed change further encourages CBOE TPHs and broker-dealers that 
are not CBOE TPHs to provide complex order routing functionalities. 
Limiting the Program to complex orders is reasonable because a similar 
program already exists for simple, non-complex orders. Moreover, the 
proposed complex order subsidy amount is the same amount as already 
exists for simple, non-complex orders under the ORS Program.
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    \10\ 15 U.S.C. 78f(b)(4).
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    In addition, the Exchange believes that this proposed change is 
equitable and not unfairly discriminatory because any CBOE TPH or 
broker-dealer that is not a CBOE TPH may avail itself of this 
arrangement, provided that its complex order routing functionality 
incorporates the requirements set forth above. Finally, the proposed 
change incentivizes the sending of more complex orders to the Exchange. 
This increased liquidity creates greater trading opportunities that 
benefit all market participants, including market participants who send 
only simple orders to the Exchange (as simple orders can trade with the 
legs of complex orders).

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

    CBOE does not believe that the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange does not believe 
that the proposed change will impose an unnecessary burden on 
intramarket competition because it will apply equally to all 
participating parties. Although the subsidy for complex orders routed 
to CBOE through a Participant's system only applies to Participants of 
the Program, the subsidy for complex orders is designed to encourage 
the sending of more complex orders to the Exchange, which should 
provide greater liquidity and trading opportunities for all market 
participants. This includes market participants who send simple orders 
to the Exchange (as simple orders can trade with the legs of complex 
orders).
    Further, the Exchange does not believe that such change will impose 
any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The Exchange 
notes that, should the proposed changes make CBOE more attractive for 
trading, market participants trading on other exchanges can always 
elect to provide order routing functionality to CBOE for complex 
orders. Additionally, to the extent that subsidy payments for complex 
orders under the CORS Program may result in increased trading volume on 
CBOE and lessened volume on other exchanges, the Exchange notes that 
market participants trading on other exchanges can always elect to 
become TPHs on CBOE to take advantage of the trading opportunities.

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 foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \11\ and paragraph (f) of Rule 19b-4 \12\ 
thereunder. At any time within 60 days of the filing of the proposed 
rule change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such

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action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act. If the Commission takes such action, the Commission will 
institute proceedings to determine whether the proposed rule change 
should be approved or disapproved.
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f).
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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-2013-032 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-2013-032. 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-2013-032, and should be 
submitted on or before April 17, 2013.
    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-07010 Filed 3-26-13; 8:45 am]
BILLING CODE 8011-01-P


