
[Federal Register Volume 78, Number 74 (Wednesday, April 17, 2013)]
[Notices]
[Pages 22926-22935]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-08972]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69364; File No. SR-CBOE-2013-026]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change, as Modified 
by Amendment No. 1, Relating to Complex Orders

April 11, 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 28, 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. On April 11, 2013, the Exchange filed Amendment No. 1 to the 
proposed rule change. The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, 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 the 
Substance of the Proposed Rule Change

    The Exchange proposed to amend its rules related to complex orders. 
The text of the proposed rule change is provided below.\3\
---------------------------------------------------------------------------

    \3\ The Exchange notes that it has separately proposed, among 
other things, to add Interpretation and Policy .01 to Rule 6.53 and 
to add paragraph (f) to Rule 6.53C, Interpretation and Policy .06. 
See Exchange Act Release No. 34-69082 (March 8, 2013), 78 FR 16351 
(March 14, 2013) (SR-CBOE-2013-030) (as amended by Amendment No. 1, 
filed March 26, 2013) (proposed rule change to modify the Exchange's 
rules to address certain option order handling procedures and 
quoting obligations on the Exchange after the implementation of the 
market wide equity Plan to Address Extraordinary Market Volatility). 
Those proposed changes are pending approval of the Commission and 
thus are not included in the rule text in this rule filing. The 
Exchange does not believe that the changes proposed in SR-CBOE-2013-
030 have any effect on the proposed changes in this rule filing.
---------------------------------------------------------------------------

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

Chicago Board Options Exchange, Incorporated Rules

* * * * *
Rule 6.53. Certain Types of Orders Defined
    One or more of the following order types may be made available on a 
class-by-class basis. Certain order types may not be made available for 
all Exchange systems. The classes and/or systems for which the order 
types shall be available will be as provided in the Rules, as the 
context may indicate, or as otherwise specified via Regulatory 
Circular.
    (a)-(w) No change.
    (x) Leg Order. A leg order is a limit order on the EBook that 
represents one leg of a complex order resting on the COB if the ratio 
of that leg is equal to or can be reduced to one (1) (e.g. 1:1, 1:2, 
1:3) and the complex order is noncontingent. A leg order is a firm 
order that may be included in the Exchange's displayed best bid or 
offer (``Exchange BBO'') on the EBook. A leg order functions as set 
forth in Rule 6.53C(c)(iv) .
* * * * *
Rule 6.53C. Complex Orders on the Hybrid System
    (a) Definition: No change.
    (b) Types of Complex Orders: No change.
    (c) Complex Order Book
    (i)-(iii) No change.
    (iv) Leg Orders:
    (1) Generation of Leg Orders. Leg orders may be automatically 
generated on behalf of complex orders so that they are represented in 
the individual leg markets. Specifically, the System will evaluate the 
COB when a complex order enters the COB, when the Exchange BBO changes 
and at a regular time interval to be determined by the Exchange (which 
interval shall not exceed one (1) second) to determine whether leg 
orders may be generated or displayed in accordance with the provisions 
in subparagraphs (A) through (C) below. The Exchange may determine to 
limit the number of leg orders generated on an objective basis.
    (A) A leg order will be automatically generated for a leg of a 
complex order resting on the top of the COB: (I) if the price of the 
complex order is inside the ``derived net market,'' which is based on 
the derived net price of the best-priced orders or quotes (other than 
leg orders) in the EBook, and (II) at a price at which net price 
execution of the complex order can be achieved if the other leg(s) of 
the complex order executes against the best-priced orders or quotes 
(other than leg orders). Notwithstanding the foregoing, a leg order 
will not be generated if it would lock or cross the NBBO.
    (B) A leg order will only be displayed in the EBook if the price 
matches or improves the Exchange BBO. If multiple resting complex 
orders in different strategies generate leg orders for the same price 
on the same side of a series, then the leg order with the largest size 
will be displayed. If such leg orders are also for the same size, then 
the first leg order generated will be displayed.
    (C) The size of a leg order will be the lesser of (I) the size of 
the complex order and (II) the maximum size available in the EBook for 
the other leg(s) of the complex order (divided by the leg ratio, if 
applicable). If multiple resting complex orders in the same strategy 
generate leg orders for the same price on the same side of a series, 
then the sizes of the leg orders will be aggregated (those leg orders 
will be treated as a single order until execution).

[[Page 22927]]

    (2) Execution of Leg Orders.
    (A) Leg orders (including any nondisplayed leg orders) will only 
execute after all other executable orders and quotes (including any 
nondisplayed size) at the same price are executed in full. Leg orders 
at the same price will execute pursuant to the priority and execution 
rules applicable to the complex orders they represent as set forth in 
Rule 6.53C(c)(ii), except that displayed leg orders will have higher 
priority than nondisplayed leg orders. A leg order may not execute 
against another leg order.
    (B) When a leg order executes against an incoming order or quote, 
the other leg(s) of the complex order represented by the leg order will 
automatically execute against the best-priced resting orders or quotes 
(other than leg orders) that would cause net price full or partial (in 
a permissible ratio) execution of the complex order. Any leg orders on 
the opposite side of the legs of the executing complex order will be 
cancelled prior to the execution of that complex order. Upon execution 
of the complex order, any leg orders that represent other legs of the 
complex order will be cancelled. If such execution was a partial 
execution, the System may generate leg orders for the remaining size of 
the complex order in accordance with subparagraph (iv)(1).
    (C) An all-or-none order will only execute against a leg order if 
it is at least the same size as the all-or-none order and there are no 
non-leg orders at the Exchange BBO. If there are a leg order and a non-
leg order(s) at the Exchange BBO, then the all-or-none order will 
either (I) execute against the non-leg order(s) if it is at least the 
same size as the all-or-none order or (II) the leg order will be 
cancelled and the all-or-none order will be handled as otherwise set 
forth in the Rules (no new leg orders in the applicable series will be 
generated until the all-or-none order is executed or cancelled).
    (3) Removal or Cancellation of Leg Orders.
    (A) The System will remove from display in the EBook a leg order if 
the price of the leg order is no longer at the Exchange BBO or if a 
complex order in a different strategy generates a larger-sized leg 
order at the same price. Any leg orders removed from display in the 
EBook will remain in the EBook as nondisplayed orders and will be 
eligible for execution as set forth in subparagraph (iv)(2) above.
    (B) The System will cancel a leg order if: (I) execution at the 
price of the leg order would no longer achieve the net price of the 
complex order when the other leg(s) executes against the best-priced 
orders or quotes (other than leg orders); (II) the complex order 
executes in full or in part against another complex order; or (III) the 
complex order is cancelled or modified (e.g., change in price). 
Additionally, the System will cancel a leg order as set forth in 
subparagraph (iv)(2) above.
    (d) Process for Complex Order RFR Auction: No change.
    . . . Interpretations and Policies:
    .01-.03 No change.
    .04 (a) No change.
    (b) For each class where COA is activated, the Exchange may also 
determine to activate COA for complex orders resting in COB. For such 
classes, any non-marketable order resting at the top of COB may be 
automatically subject to COA if the order is within a number of ticks 
away from the current derived net market. The ``derived net market'' 
will be calculated based on the derived net price of the individual 
series legs. For stock-option orders, the derived net market for a 
strategy will be calculated using the Exchange's best bid or offer in 
the individual option series leg(s) and the NBBO in the stock leg. The 
Exchange may also determine on a class-by-class and strategy basis to 
limit the frequency of COAs initiated for complex orders resting in 
COB. Notwithstanding the foregoing, if a leg order has been generated 
for a complex order resting in the COB pursuant to paragraph (c)(iv) of 
this Rule, the complex order will not be eligible for COA.
    .05 No change.
    .06 Special Provisions Applicable to Stock-Option Orders: Stock-
option orders may be executed against other stock-option orders through 
the COB and COA. Stock-option orders will not be legged against the 
individual component legs, except as provided in paragraph (d) below, 
and leg orders will not be generated pursuant to paragraph (c)(iv) of 
this Rule for stock-option orders.
    (a)-(e) No change.
    .07 [Reserved.]Leg Orders and Auctions:
    If there is an auction occurring in a leg series at the time that a 
leg order in that series would otherwise be generated pursuant to 
paragraph (c)(iv) of this Rule:
    (a) If the leg order would be on the same side of the market as the 
auctioned order with a price worse than the initial auction price of 
the auctioned order, then the leg order will be generated and the 
auction will continue.
    (b) If the leg order would be on the same side of the market as the 
auctioned order with a price equal to or better than the initial 
auction price of the auctioned order, then no leg order would be 
generated and the auction will continue. A leg order may later be 
generated after execution of the auctioned order.
    (c) If the leg order would be on the opposite side of the market as 
the auctioned order with a price that locks or crosses the initial 
auction price of the auctioned order, then no leg order would be 
generated and the auction will continue. A leg order may later be 
generated after execution of the auctioned order.
    (d) If the leg order would be on the opposite side of the market as 
the auctioned order with a price that does not lock or cross the 
initial auction price of the auctioned order, then the leg order will 
be generated and the auction will continue.
    .08-.09 No change.
    .10 Execution of Complex Orders in Hybrid 3.0 Classes: For each 
class trading on the Hybrid 3.0 Platform, the Exchange may determine to 
not allow marketable complex orders entered into COB and/or COA to 
automatically execute against individual quotes residing in the EBook. 
The Exchange also may determine for each class trading on the Hybrid 
3.0 Platform to not allow leg orders to be generated pursuant to 
paragraph (c)(iv) for complex orders resting in the COB. The allocation 
of such marketable complex orders against orders residing in the EBook 
and other complex orders shall be based on the best net price(s) and, 
at the same net price, multiple orders will be allocated as provided in 
paragraphs (c) and/or (d) in the Rule, as applicable, subject to the 
following:
    (a)-(d) No change.
    .11 No change.
    .12 Nondisplayed Leg Orders: Any generated leg order that does not 
satisfy the requirements to be displayed as set forth under 
subparagraph (iv)(1)(B) in this Rule will be nondisplayed. Any 
nondisplayed leg orders (including leg orders removed from display) 
will remain in the EBook and be eligible for execution as set forth in 
subparagraph (iv)(2) in this Rule but will not be visible in the EBook 
depth.
* * * * *
    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.

[[Page 22928]]

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 related to complex orders 
to provide additional liquidity for complex orders resting on the 
complex order book (``COB''). The Exchange proposes to adopt a new 
order type called ``leg orders.'' Under Rule 6.53C, complex orders are 
eligible to trade with other complex orders or by ``legging'' with the 
individual orders and quotes resting in the CBOE electronic book (the 
``EBook'') for the individual component legs, provided the complex 
order can be executed in full (or in a permissible ratio) by the orders 
and quotes in the EBook in those individual component legs. Leg orders 
are designed to increase the opportunities for complex orders resting 
in the COB to leg into the market and execute.
    Specifically, as defined in proposed Rule 6.53(x), a leg order is a 
limit order on the EBook that represents one leg of a complex order 
resting on the COB if the ratio of that leg is equal to or can be 
reduced to one \4\ and the complex order is noncontingent. A leg order 
is a firm order that may be included in the Exchange's displayed best 
bid or offer (``Exchange BBO'') on the EBook. Like all order types 
defined in Rule 6.53, the Exchange may make leg orders available on a 
class-by-class basis and may not make leg orders available for all 
Exchange systems.\5\
---------------------------------------------------------------------------

    \4\ Thus, a leg order may be generated for the legs of complex 
orders with a ratio of 1:1, 1:2 or 1:3. For example, if a complex 
order to buy 10 of series 1 and sell 20 of series 2 is resting on 
the COB, a leg order will be generated for the leg to buy 10 of 
series 1 (ratio of 1:2), but not for the leg to sell 20 of series 2 
(ratio of 2:1). If a complex order to buy 20 of series 1 and sell 30 
of series 2 is resting on the COB, no leg orders will be generated 
for either leg (ratio is 2:3 for leg 1 and 3:2 for leg 2). The same 
requirement applies to complex orders with more than two legs. For 
example, if a complex order to buy 10 of series 1, sell 20 of series 
2 and buy 10 of series 3 is resting on the COB, then leg orders will 
be generated for the leg to buy 10 of series 1 and the leg to buy 10 
of series 3 (ratio of 1:2), but not for the leg to sell 20 of series 
2 (ratio of 2:1).
    \5\ See Rule 6.53. Consistent with provision that the Exchange 
may not make leg orders available in all classes or for all Exchange 
systems, the proposed rule change amends Rule 6.53C, Interpretation 
and Policy .10 to provide that, for each class trading on the Hybrid 
3.0 Platform, the Exchange may determine to not allow leg orders for 
complex orders resting in the COB. This is also consistent with the 
current rule, which provides that, for each class trading on the 
Hybrid 3.0 Platform, the Exchange may determine to now allow complex 
orders to leg into the market. Additionally, the proposed rule 
change amends Rule 6.53C, Interpretation and Policy .06 to provide 
that leg orders will not be generated for stock-option orders 
resting on the COB. This is also consistent with the current rule, 
which prohibits stock-option orders from legging into the regular 
market. Providing the Exchange with authority to allow leg orders on 
a class-by-class basis will help the Exchange manage the number of 
leg orders generated under the proposed rule change to ensure that 
they do not negatively impact system capacity and performance.
---------------------------------------------------------------------------

    The proposed rule change provides that leg orders may be 
automatically generated on behalf of complex orders so that they are 
represented in the individual leg markets. Specifically, the System 
will reevaluate the COB when a complex order enters the COB, when the 
Exchange BBO changes and at a regular time interval to be determined by 
the Exchange (which will not exceed one second) to determine whether 
leg orders may be generated or displayed. A leg order will be 
automatically generated for a leg of a complex order resting on the top 
of the COB: (1) if the price of the complex order is inside the 
``derived net market,'' which is based on the derived net price of the 
best-priced orders or quotes (other than leg orders) in the EBook; and 
(2) at a price at which the net price execution can be achieved if the 
other leg(s) of the complex order executes against the best-priced 
orders or quotes (other than leg orders).\6\ For example:

    \6\ Overlapping legs of complex orders may not execute against 
each other due to the operational difficulties that would result, 
which is consistent with the current execution principles for 
complex orders as otherwise set forth in Rule 6.53C that do not 
allow overlapping legs of complex orders to execute against each 
other. Therefore, the proposed rule change provides that the derived 
net market and the price of leg orders will be based on the best-
priced non-leg orders in the other leg series, as those are the 
orders against which a complex order may execute.

    Example A A complex order to buy 10 Series 1 (S1) and to sell 10 
Series 2 (S2) at a net price of -$0.05 (buy S1/sell S2 10 @ -$0.05) 
is entered into the COB, and there is no off-setting complex 
order.\7\ The complex order cannot leg into the EBook because the 
Exchange BBO net price available for the complex order on the EBook 
is -$0.20 as follows:
---------------------------------------------------------------------------

    \7\ For purposes of the examples in this rule filing, the 
Exchange presumes that (a) the complex orders for which leg orders 
are generated are the best-priced orders for that strategy and are 
thus at the top of the COB, and (b) there are no non-leg orders 
resting at the same price as the best-priced leg orders, unless the 
example provides otherwise.

------------------------------------------------------------------------
              CBOE Bid                            CBOE Offer
------------------------------------------------------------------------
S1 10 @ $1.00                        20 @ $1.20
S2 10 @ $1.00                        20 @ $1.20
------------------------------------------------------------------------

(buy S1 @ $1.20 + sell S2 @ $1.00 = -$0.20 net)
    The derived net market is -$0.20 to $0.20, and the -$0.05 price 
of the complex order is within that market,\8\ so the System 
generates and displays leg orders to buy 10 S1 @ $1.05 and sell 10 
S2 at $1.15, which improves the Exchange's best bid for S1 and best 
offer for S2:
---------------------------------------------------------------------------

    \8\ If the price of the complex order was at -$0.20 or $0.20, 
the complex order would leg into the market pursuant to Rule 
6.53C(c)(ii)(1). If the price of the complex order was outside of 
the derived net market (e.g. -$0.25, $0.25), then the Hybrid Trading 
System (the ``System''), which is the Exchange's trading platform 
that allows Market-Makers to submit electronic quotes in their 
appointed classes, would not generate leg orders for the complex 
order.

------------------------------------------------------------------------
              CBOE Bid                            CBOE Offer
------------------------------------------------------------------------
S1 10 @ $1.05                        20 @ $1.20
 (leg order)
S2 10 @ $1.00                        10 @ $1.15
                                     (leg order)
------------------------------------------------------------------------

    The Exchange believes it is appropriate to only generate leg orders 
for complex orders resting at the top of the COB, as those are the 
best-priced in that strategy and thus would have the highest priority. 
Additionally, the Exchange believes it is appropriate to only generate 
leg orders for complex orders with prices inside the derived net market 
because the price of leg orders of a complex order outside of the 
derived net market would always be generated at prices worse than the 
BBO. While the Exchange wants to increase execution opportunities for 
resting complex orders, the Exchange balances that interest with its 
need to manage the number of leg orders generated to ensure that it 
continues to have appropriate system capacity to support the leg order 
functionality (as further discussed below). The Exchange believes that 
not generating leg orders for complex orders that are not at the top of 
the COB or that have prices outside of the derived net market helps 
achieve this balance and is consistent with the Exchange's order 
management plan. Additionally, because the System will evaluate the COB 
when the BBO changes, those complex orders not at the top of the COB or 
with prices outside the derived net market when entered

[[Page 22929]]

will have an opportunity to take advantage of the leg order 
functionality when the market changes.
    However, a leg order will not be generated if it would lock or 
cross the national best bid or offer (the ``NBBO'') in the leg series. 
The Exchange believes that this is appropriate to assure compliance 
with the options linkage plan. This provision will also prevent any leg 
orders from trading through the best displayed prices in the leg 
markets on other exchanges.
    A leg order will only be displayed in the EBook if the price 
matches or improves the Exchange BBO. For example:
    Example B A complex order (Order 1) to buy 10 Series 1 (S1) and 
to sell 10 Series 2 (S2) at a net price of -$0.40 (buy S1/sell S2 10 
@ -$0.40) is entered into the COB, and there is no off-setting 
complex order. Order 1 cannot leg into the EBook because the 
Exchange BBO net price available for Order 1 on the EBook is -$0.60 
as follows:

------------------------------------------------------------------------
              CBOE Bid                            CBOE Offer
------------------------------------------------------------------------
S1 10 @ $1.00                        10 @ $1.30
S2 10 @ $0.70                        10 @ $1.10
------------------------------------------------------------------------

(buy S1 @ $1.30 + sell S2 @ $0.70 = -$0.60 net)
    The derived net market is -$0.60 to $0.10, and the -$0.40 price 
of Order 1 is within that market, so the System generates and 
displays leg orders to buy 10 S1 @ $1.10 and sell 10 S2 at $0.90, 
which improves the Exchange's best bid for S1 and best offer for S2:

------------------------------------------------------------------------
              CBOE Bid                            CBOE Offer
------------------------------------------------------------------------
S1 10 @ $1.10                        10 @ $1.30
 (leg order)
S2 10 @ $0.70                        10 @ $0.90
                                     (leg order)
------------------------------------------------------------------------

    Another complex order (Order 2) to buy 10 Series 3 (S3) and to 
sell 10 Series 2 (S2) at a net price of -$0.25 (buy S3/sell S2 10 @ 
-$0.25) is then entered into the COB, and there is no off-setting 
complex order. Order 2 cannot leg into the EBook because the 
Exchange BBO net price available for Order 2 on the EBook is -$0.60 
as follows:

------------------------------------------------------------------------
              CBOE Bid                            CBOE Offer
------------------------------------------------------------------------
S2 10 @ $0.70                        10 @ $0.90
                                     (leg order)
S3 10 @ $1.00                        10 @ $1.30
------------------------------------------------------------------------

(buy S3 @ $1.30 + sell S2 @ $0.70 = -$0.60 net)
    The derived net market excluding the leg orders representing is 
-$0.60 to $0.10 (excluding the leg order in S2), and the -$0.25 
price of Order 2 is within that market, so the System generates leg 
orders to buy 10 S3 @ $0.95 and sell 10 S2 at $1.05. Because these 
leg orders are at worse prices than the BBO, they are not 
displayed.\9\
---------------------------------------------------------------------------

    \9\ Alternatively, if Order 2 was entered into the COB given the 
original BBO market in this example (prior to the entry of Order 1), 
then the leg order to buy 10 S3 @ $0.95 would still not have been 
displayed, because that price would not have improved the $1.00 bid 
resting in the EBook. The leg order to sell 10 S2 @ $1.05 would have 
been displayed, because that price would have improved the $1.10 
offer resting in the EBook.

    The proposed rule change contemplates that some leg orders may be 
generated but not displayed on the EBook. To clarify how the System 
handles nondisplayed leg orders, proposed Rule 6.53C, Interpretation 
and Policy .12 provides that any generated leg order that does not 
satisfy the requirements to be displayed as set forth in subparagraph 
(iv)(1)(B) of proposed Rule 6.53C(c) will be nondisplayed. Any 
nondisplayed leg orders (including leg orders that are removed from 
display) will remain and the EBook and will be eligible for execution 
as set forth in subparagraph (iv)(2) of proposed Rule 6.53C(c) but will 
not be visible in the EBook depth. Displayed leg orders will have 
higher priority than nondisplayed leg orders (i.e., if there are two 
leg orders at the same price, but only one is displayed, the displayed 
leg order would execute ahead of the nondisplayed leg order).\10\ The 
Exchange believes that having nondisplayed leg orders available for 
execution will further increase the execution opportunities for 
execution of complex orders. Nondisplayed leg orders function in the 
same manner as displayed leg orders, except that, for system and 
technical reasons, they will not be visible in the EBook depth (which 
displays resting orders and quotes not at the BBO). Additionally, the 
Exchange believes having nondisplayed leg orders available for 
execution with orders on the EBook is consistent with the ability for a 
complex order resting in the COB to leg into the regular market and 
execute against orders and quotes in the EBook. Complex orders resting 
in the EBook are not visible in the regular market, but like 
nondisplayed leg orders are still eligible to execute against orders 
and quotes in the EBook. Nondisplayed leg orders are merely 
representations of those same complex orders that are intended to 
facilitate executions of those complex orders in the regular market.
---------------------------------------------------------------------------

    \10\ For example, if there are two leg orders in a series 
representing complex orders in different strategies, one to buy 10 
(Leg Order 1) and one to buy 20 (Leg Order 2), and the price of 
those leg orders is the Exchange best bid (and there are no non-leg 
orders resting at that price), Leg Order 2 is displayed because it 
is larger, and Leg Order 1 is nondisplayed. If a market order to 
sell 20 enters the EBook, it will execute against Leg Order 2 (Leg 
Order 1 would be displayed after that execution, assuming it is 
still at the Exchange best bid). Alternatively, if a market order to 
sell 25 enters the EBook, 20 would execute against Leg Order 2, and 
5 would execute against Leg Order 1 (the System would generate a new 
leg order to buy for the remaining 5 of Leg Order 1 and display the 
new leg order, assuming it is still at the Exchange best bid). As a 
third alternative, if a market order to sell 35 enters the EBook, 20 
would execute against Leg Order 2, 10 would execute against Leg 
Order 1, and 5 would execute against the highest-priced non-leg 
order in the EBook. See the discussion below for further details on 
the execution of leg orders.
---------------------------------------------------------------------------

    If multiple resting complex orders in different strategies generate 
leg orders for the same price on the same side of a series, then the 
leg order with the largest size will be displayed.\11\ For example:
    Example C A complex order (Order 1) to buy 10 Series 1 (S1) and 
to sell 10 Series 2 (S2) at a net price of -$0.05 (buy S1/sell S2 10 
@ -$0.05) is entered into the COB, and there is no off-setting 
complex order. Order 1 cannot leg into the EBook because the 
Exchange BBO net price available for Order 1 on the EBook is -$0.20 
as follows:
---------------------------------------------------------------------------

    \11\ If these leg orders are also for the same size, then the 
first leg order generated will be displayed.

------------------------------------------------------------------------
              CBOE Bid                            CBOE Offer
------------------------------------------------------------------------
S1 10 @ $1.00                        10 @ $1.20
S2 20 @ $1.00                        10 @ $1.20
------------------------------------------------------------------------

(buy S1 @ $1.20 + sell S2 @ $1.00 = -$0.20 net)
    The derived net market is -$0.20 to $0.20, and the -$0.05 price 
is within that market, so the System generates and displays leg 
orders to buy 10 S1 @ $1.05 and sell 10 S2 at $1.15, which improves 
the Exchange's best bid for S1 and best offer for S2:

------------------------------------------------------------------------
              CBOE Bid                            CBOE Offer
------------------------------------------------------------------------
S1 10 @ $1.05                        10 @ $1.20
 (Order 1 leg order)
S2 20 @ $1.00                        10 @ $1.15
                                     (Order 1 leg order)
------------------------------------------------------------------------

    Another complex order (Order 2) to buy 20 Series 3 (S3) and to 
sell 20 Series 2 (S2) at a net price of -$0.05 (buy S3/sell S2 20 @ 
-$0.05) is then entered into the COB, and there is no off-setting 
complex order. Order 2 cannot leg into the EBook because the 
Exchange BBO net price available for Order 2 on the EBook is -$0.20 
as follows:

------------------------------------------------------------------------
              CBOE Bid                            CBOE Offer
------------------------------------------------------------------------
S2 20 @ $1.00                        10 @ $1.15
                                     (Order 1 leg order)
S3 20 @ $1.00                        20 @ $1.20
------------------------------------------------------------------------

(buy S3 @ $1.20 + sell S2 @ $1.00 = -$0.20 net)
    The derived net market excluding leg orders is -$0.20 to $0.20, 
and the -$0.05 price is within that market, so the System generates 
and displays leg orders to buy 20 S3 @ $1.05 and sell 20 S2 at 
$1.15, and removes from display the smaller leg order to

[[Page 22930]]

sell 10 S2 at $1.15,\12\ which improves the Exchange's best bid for 
S3 and maintains the Exchange's best offer for S2 but increases the 
available size:
---------------------------------------------------------------------------

    \12\ This smaller order will remain in the EBook as a 
nondisplayed leg order that will be eligible for execution.

------------------------------------------------------------------------
              CBOE Bid                            CBOE Offer
------------------------------------------------------------------------
S2 20 @ $1.00                        20 @ $1.15 \13\
                                     (Order 2 leg order)
S3 20 @ $1.05                        20 @ $1.20
 (Order 2 leg
 order)
------------------------------------------------------------------------

     
---------------------------------------------------------------------------

    \13\ If a market order to buy 20 S2 is received, that order will 
execute against the leg order to sell 20 S2 at $1.15 (the larger-
sized leg order), and the leg of Order 2 to buy 20 S3 will execute 
against the resting offer to sell 20 S3 at $1.20. The leg order to 
buy 20 S3 at $1.05 will then be cancelled upon execution of Order 2. 
As a result, the net price of -$0.05 is achieved for Order 2 (buy S3 
@ $1.20 + sell S2 @ $1.15 = -$0.05 net). After this execution, the 
System may redisplay the leg order for Order 1 to sell 10 S2 at 
$1.15, which was previously removed from display. See the discussion 
below regarding the execution of leg orders.

    As set forth in the proposed definition of leg order, a leg order 
will only be generated for a leg of a complex order if the ratio of the 
leg is or can be reduced to one and the complex order is noncontingent. 
The size of a leg order will be the lesser of (1) the size of the 
complex order and (2) the maximum size available in the EBook in the 
other leg series of the complex order (divided by the leg ratio, if 
applicable).\14\ For example:
---------------------------------------------------------------------------

    \14\ If multiple resting complex orders in the same strategy 
generate leg orders for the same price on the same side of a series, 
then the sizes of the leg orders will be aggregated. The System will 
treat these aggregated orders as a single leg order (until 
execution, at which time they would execute in accordance with 
applicable Exchange priority and execution rules set forth in Rule 
6.53C(c)(ii)). Thus, if a leg order is generated and is smaller than 
the aggregated size of multiple leg orders but is larger than the 
individual sizes of those leg orders, the aggregated leg orders 
would be displayed.

    Example D A complex order to buy 15 Series 1 (S1) and to sell 30 
Series 2 (S2) (ratio of 1 buy to 2 sell) at a net price of $0.95 
(buy 15 S1/sell 30 S2 @ $0.95) is entered into the COB, and there is 
no off-setting complex order. The complex order cannot leg into the 
EBook because the Exchange BBO net price available for the complex 
order on the EBook is $0.80 as follows:

------------------------------------------------------------------------
              CBOE Bid                            CBOE Offer
------------------------------------------------------------------------
S1 10 @ $1.00                        10 @ $1.20
S2 30 @ $1.00                        30 @ $1.20
------------------------------------------------------------------------

(buy one S1 @ $1.20 + sell two S2 @ $1.00 = $0.80 net)
    The derived net market is $0.80 to $1.40, and the $0.95 price is 
within that market, so the System generates and displays a leg order 
to buy 15 S1 @ $1.05 (maximum size on the EBook in S2 is 30, divided 
by the 2:1 ratio of the leg to sell S2), which improves the 
Exchange's best bid for S1:

------------------------------------------------------------------------
              CBOE Bid                            CBOE Offer
------------------------------------------------------------------------
S1 15 @ $1.05                        10 @ $1.20
 (leg order)
S2 30 @ $1.00                        30 @ $1.20
------------------------------------------------------------------------

    The System does not generate a leg order in S2, because any leg 
order could only be for 10 (maximum size available on S1), and 
because the ratio of that leg is 2:1 and cannot be reduced to 1.
    The Exchange may determine to limit the number of leg orders on an 
objective basis, such as limiting the number of orders generated in a 
particular class, in order to curtail the number of leg orders 
generated so that the Exchange may effectively manage leg orders and 
ensure that it continues to have appropriate system capacity to support 
the leg order functionality.\15\
---------------------------------------------------------------------------

    \15\ The Exchange will not limit the generation of leg orders on 
the basis of the entering participant or the participant category of 
the order (i.e., professional, professional customer, or public 
customer).
---------------------------------------------------------------------------

    Leg orders (including any nondisplayed leg orders) will execute 
only after all other executable orders and quotes (including any 
nondisplayed size) at the same price are executed in full. Accordingly, 
the generation of a leg order will not affect the existing priority, or 
execution opportunities, currently provided to market participants in 
the regular market in any way. Additionally, leg orders at the same 
price will execute pursuant to the priority and execution rules as set 
forth in Rule 6.53C(c)(ii), except that displayed leg orders will have 
higher priority than nondisplayed leg orders.\16\
---------------------------------------------------------------------------

    \16\ Pursuant to Rule 6.53C(c)(ii)(2), allocation of a complex 
order within the COB will be pursuant to the rules of trading 
priority otherwise applicable to incoming electronic orders in the 
individual component legs.
---------------------------------------------------------------------------

    When a leg order executes against an incoming order or quote, the 
other leg(s) of the complex order represented by the leg order will 
automatically execute against the best-priced resting orders or quotes 
(other than leg orders) that would cause net price full or partial (in 
a permissible ratio) execution of the complex order.\17\ Upon execution 
of the complex order, any leg orders that represent other legs of the 
complex order will be cancelled. For example:
---------------------------------------------------------------------------

    \17\ As discussed above, operational difficulties would result 
if overlapping legs of complex orders executed against each other. 
To prevent this, prior to execution of a leg order and the 
represented complex order, any leg orders on the opposite side of 
the legs of the executing complex order will be cancelled. As 
discussed above, the price of a leg order is based on the best-
priced non-leg order in the other series, which ensures that the 
executing complex order will achieve net price execution in the 
event there is another leg order on the opposite side in that series 
prior to execution. The other legs of the complex order will still 
execute at the best available price of individual orders or quotes. 
The Exchange notes that this provision will also allow resting 
individual orders or quotes to execute against complex order legs, 
rather than allowing those legs to execute against leg orders. After 
the complex order executes, new leg orders may be generated to 
``replace'' the cancelled leg orders for the still-resting complex 
orders, assuming the conditions for generation in the rule have been 
met. In the event a leg order is generated to ``replace'' a 
previously cancelled leg order, it will have the same priority as 
the ``original'' leg order with respect to any other leg orders at 
the same price representing complex orders in the same strategy, as 
the priority of those leg orders (which would be aggregated) is 
based on the priority of the complex orders they represent (which 
remains unchanged regardless of cancellations of leg orders).

    Example E A complex order to buy 10 Series 1 (S1) and to buy 10 
Series 2 (S2) at a net price of $2.25 (buy S1/S2 10 @ $2.25) is 
entered into the COB, and there is no off-setting complex order to 
sell. The complex order cannot leg into the EBook because the 
Exchange BBO net price available for the complex order on the EBook 
is $2.40 as follows:

------------------------------------------------------------------------
              CBOE Bid                            CBOE Offer
------------------------------------------------------------------------
S1 10 @ $1.00                        20 @ $1.20
S2 10 @ $1.00                        20 @ $1.20
------------------------------------------------------------------------

(buy S1 @ $1.20 + buy S2 @ $1.20 = $2.40 net)
    The derived net market is $2.00 to $2.40, and the $2.25 price is 
within that market, so the System generates and displays leg orders 
to buy 10 S1 @ $1.05 and 10 S2 at $1.05, which improves the 
Exchange's best bid for both S1 and S2:

------------------------------------------------------------------------
              CBOE Bid                            CBOE Offer
------------------------------------------------------------------------
S1 10 @ $1.05                        20 @ $1.20
 (leg order)
S2 10 @ $1.05                        20 @ $1.20
 (leg order)
------------------------------------------------------------------------

    If a market order to sell 10 S1 is received, that order will 
execute against the leg order to buy 10 S1 at $1.05, and the leg of 
the complex order to buy 10 S2 will execute against the resting 
offer to sell 10 S2 at $1.20. The leg order to buy 10 S2 will then 
be cancelled upon execution of the complex order. As a result, the 
net price of $2.25 is achieved for the complex order (buy 10 S1 @ 
$1.05 + buy 10 S2 @ $1.20 = $2.25 net).\18\
---------------------------------------------------------------------------

    \18\ If a market order to sell 10 S2 is received, that order 
will execute against the leg order to buy 10 S2 at $1.05, and the 
leg of the complex order to buy 10 S1 will execute against the 
resting offer to sell 10 S1 at $1.20. The leg order to buy 10 S1 
will then be cancelled. As a result, the net price of $2.25 is 
achieved for the complex order (buy S1 @ $1.20 + buy S2 @ $1.05 = 
$2.25 net).
---------------------------------------------------------------------------

    Following the execution of the complex order, the Exchange BBO 
is:

[[Page 22931]]



------------------------------------------------------------------------
              CBOE Bid                            CBOE Offer
------------------------------------------------------------------------
S1 10 @ $1.00                        20 @ $1.20
S2 10 @ $1.00                        10 @ $1.20
------------------------------------------------------------------------

    In addition to enabling the execution of the complex order at a 
net price of $2.25, the leg order enhanced execution for orders in 
the EBook, as (1) the incoming market order to sell S1 received a 
better price ($1.05 instead of $1.00) and (2) the complex order 
provided liquidity to execute resting interest to sell 10 S2 at 
$1.20.

    If execution of the complex order is partial, the System may 
generate and display new leg orders for the remaining size of the 
complex order, assuming all other conditions for generation and display 
of leg orders have been met. For example:

    Example F A complex order to buy 50 S1 and to buy 50 S2 at a net 
price of $2.25 (buy S1/S2 50 @ $2.25) is entered into the COB, and 
there is no off-setting complex order to sell. The complex order 
cannot leg into the EBook because the Exchange BBO net price 
available for the complex order on the EBook is $2.40 as follows:

------------------------------------------------------------------------
              CBOE Bid                            CBOE Offer
------------------------------------------------------------------------
S1 40 @ $1.05                        60 @ $1.20
S2 20 @ $1.05                        80 @ $1.20
------------------------------------------------------------------------

(buy S1 @ $1.20 + buy S2 @ $1.20 = $2.40 net)
    The derived net market is $2.10 to $2.40, and the $2.25 price is 
within that market, so the System generates and displays leg orders 
to buy 50 S1 @ $1.05 and 50 S2 at $1.05, which increases the size of 
the Exchange's best bid for both S1 and S2:

------------------------------------------------------------------------
              CBOE Bid                            CBOE Offer
------------------------------------------------------------------------
S1 90 @ $1.05                        60 @ $1.20
 (50 leg order)
S2 70 @ $1.05                        80 @ $1.20
 (50 leg order)
------------------------------------------------------------------------

    If a market order to sell 30 S1 is received, it will execute 
against the orders or quotes resting at $1.05, other than the leg 
order at $1.05, pursuant to the Exchange's priority and execution 
rules,\19\ and the size of the bid for S1 will be reduced:
---------------------------------------------------------------------------

    \19\ See Rules 6.45A and 6.45B.

------------------------------------------------------------------------
              CBOE Bid                            CBOE Offer
------------------------------------------------------------------------
S1 60 @ $1.05                        60 @ $1.20
 (50 leg order)
S2 70 @ $1.05                        80 @ $1.20
 (50 leg order)
------------------------------------------------------------------------

    If a market order to sell 50 S1 were then received, it will 
first execute the remaining 10 S1 from the orders or quotes resting 
at $1.05, other than the leg order, and then execute 40 S1 against 
the leg order to buy 40 S1 at $1.05. The leg of the complex order to 
buy S2 will execute against the resting offer to sell 40 S2 at 
$1.20. As a result, the net price of $2.25 is achieved for a partial 
execution of the complex order (buy 40 S1 @ $1.05 + buy 40 S2 @ 
$1.20 = $2.25 net), and the leg order to buy 50 S2 will be cancelled 
upon execution of the complex order. New leg orders for the 
remaining 10 S1 and 10 S2 of the complex order will be generated and 
displayed at $1.05 (assuming all other criteria are met).
    Following the execution of the complex order and generation and 
display of the new leg orders for the remaining size of the complex 
order, the Exchange BBO is:

------------------------------------------------------------------------
              CBOE Bid                            CBOE Offer
------------------------------------------------------------------------
S1 10 @ $1.05                        60 @ $1.20
 (leg order)
S2 30 @ $1.05                        40 @ $1.20
 (10 leg order)
------------------------------------------------------------------------

    These provisions, again, will not affect the existing priority, or 
execution opportunities, currently provided to market participants in 
the regular market in any way, and incoming orders will still execute 
at the best available prices.
    An all-or-none order will only execute against a leg order if it is 
at least the same size as the all-or-none order and there are no non-
leg orders at the Exchange BBO. If there are a leg order and a non-leg 
order(s) at the BBO, then the all-or-none order will either (a) execute 
against the non-leg order(s) if it is at least the same size as the 
all-or-none order or (b) the leg order will be cancelled and the all-
or-none order will be handled as otherwise set forth in the Rules (no 
new leg orders will be generated until the all-or-none order is 
executed or cancelled). This provision will ensure that an all-or-none 
order will execute in full per its terms. Additionally, this provision 
will ensure that a leg order will not trade before a non-leg order 
(which may otherwise occur if a non-leg order at the BBO was smaller 
than the all-or-none order, but the leg order at the BBO was of 
sufficient size).\20\
---------------------------------------------------------------------------

    \20\ This is consistent with other Exchange rules regarding all-
or-none orders. See, e.g., Rule 6.44, Interpretation and Policy .02, 
which states, among other things, that any number of transactions of 
any size may appear on the tape at the same price as the all-or-none 
order without the all-or-none order participating.
---------------------------------------------------------------------------

    The System will remove from display in the EBook a leg order if the 
price of the leg order is no longer at the Exchange BBO or if a complex 
order in a different strategy generates a larger-sized leg order at the 
same price (as discussed above, if complex orders in different 
strategies generate leg orders for the same price, the largest size 
will be displayed).\21\ The System will cancel a leg order if: (1) 
Execution at the price of the leg order would no longer achieve net 
price of the complex order when the other leg(s) executes against the 
best-priced orders or quotes (other than leg orders); (2) the complex 
order executes in full or in part against another complex order; or (3) 
the complex order is cancelled or modified (for example, the price 
changes).\22\ For example:
---------------------------------------------------------------------------

    \21\ Any leg order that is removed from display in the EBook 
will be nondisplayed (but still eligible for execution), and the 
System may later redisplay the leg order if the conditions for 
display set forth in the rule are met.
    \22\ The System may also cancel a leg order at the times set 
forth in proposed subparagraph (iv)(2) of Rule 6.53C(c). After 
cancellation of a leg order, the System may later generate a new leg 
order for a complex order that is still resting in the COB if the 
conditions for generation set forth in the rule are met.

    Example G A complex order to buy 20 S1 and to buy 20 S2 at a net 
price of $2.25 (buy S1/S2 20 @ $2.25) is entered into the COB, and 
there is no off-setting complex order to sell. The complex order 
cannot leg into the EBook because the Exchange BBO net price 
available for the complex order on the EBook is $2.40 as follows:

------------------------------------------------------------------------
              CBOE Bid                            CBOE Offer
------------------------------------------------------------------------
S1 10 @ $1.05                        20 @ $1.20
S2 10 @ $1.05                        50 @ $1.20
------------------------------------------------------------------------

(buy S1 @ $1.20 + buy S2 @ $1.20 = $2.40 net)
    The derived net market is $2.10 to $2.40, and the $2.25 price is 
within that market, so the System generates and displays leg orders 
to buy 20 S1 @ $1.05 and 20 S2 at $1.05, which increases the size of 
the Exchange's best bid for both S1 and S2:

------------------------------------------------------------------------
              CBOE Bid                            CBOE Offer
------------------------------------------------------------------------
S1 30 @ $1.05                        20 @ $1.20
 (20 leg order)
S2 30 @ $1.05                        50 @ $1.20
 (20 leg order)
------------------------------------------------------------------------

    If a limit order to buy 10 S1 @ $1.10 is received, the System 
will remove from display the leg order to buy 20 S1 at $1.05 because 
it is no longer at the Exchange best bid: \23\
---------------------------------------------------------------------------

    \23\ This removed leg order will remain in the EBook as a 
nondisplayed leg order that will be eligible for execution.

------------------------------------------------------------------------
              CBOE Bid                            CBOE Offer
------------------------------------------------------------------------
S1 10 @ $1.10                        20 @ $1.20
S2 30 @ $1.05                        50 @ $1.20
 (20 leg order)
------------------------------------------------------------------------

    If a market order to buy 20 S1 is received, the Exchange best 
offer will move above $1.20, and the System will cancel the leg 
order to buy S2 at $1.05 because the net price of $2.25 can no 
longer be achieved:

[[Page 22932]]



------------------------------------------------------------------------
              CBOE Bid                            CBOE Offer
------------------------------------------------------------------------
S1 10 @ $1.10                        10 @ $1.25
S2 30 @ $1.05                        50 @ $1.20
------------------------------------------------------------------------

(buy S1 @ $1.25 + buy S2 @ $1.05 = $2.30 net)

    The following example further demonstrates how leg orders function 
when there are leg orders representing complex orders in different 
strategies:

    Example H Three complex orders enter the COB in the following 
order: Order 1 to buy 10 S1 and to buy 10 S2 at a net price of $2.10 
(buy S1/S2 10 @ $2.10), Order 2 to buy 10 S2 and to buy 10 S3 at a 
net price of $2.10 (buy S2/S3 10 @ $2.10), and Order 3 to buy 10 S1 
and to buy 10 S3 at a net price of $2.10 (buy S1/S3 10 @ $2.10. 
There are no off-setting complex orders to sell with respect to any 
of the three orders. The complex orders cannot leg into the EBook 
because the Exchange BBO net prices available on the EBook for Order 
1 is $2.20, for Order 2 is $2.20, and for Order 3 is $2.40 as 
follows:

------------------------------------------------------------------------
              CBOE Bid                            CBOE Offer
------------------------------------------------------------------------
S1 10 @ $1.00                        10 @ $1.20
S2 10 @ $0.80                        10 @ $1.00
S3 10 @ $1.00                        10 @ $1.20
------------------------------------------------------------------------

(buy S1 @ $1.20 + buy S2 @ $1.00 = $2.20 net)
(buy S2 @ $1.00 + buy S3 @ $1.20 = $2.20 net)
(buy S1 @ $1.20 + buy S3 @ $1.20 = $2.40 net)
    The derived net market is $1.80 to $2.20 for Order 1, $1.80 to 
$2.20 for Order 2, and $2.00 to $2.40 for Order 3, and the net price 
of each complex order is within the applicable derived net market, 
so the System generates leg orders to buy 10 S1 @ $1.10 and 10 S2 at 
$0.90 for Order 1, leg orders to buy 10 S2 @ $0.90 and 10 S3 @ $1.10 
for Order 2, and to buy 10 S1 @ $0.90 and 10 S3 @ $0.90 for Order 3. 
The System will display the leg order to buy 10 S1 @ $1.10 for Order 
1, which improves the Exchange's best bid for S1, the leg order to 
buy 10 S2 @ $0.90 for Order 1, which improves the Exchange's best 
bid for S2, and the leg order to buy 10 S3 @ $1.10, which improves 
the Exchange's best bid for S3:

------------------------------------------------------------------------
               CBOE Bid                            CBOE Offer
------------------------------------------------------------------------
S1 10 @ $1.10                           10 @ $1.20
 (Order 1 leg order)
S2 10 @ $0.90                           10 @ $1.00
 (Order 1 leg order)
S3 10 @ $1.10                           10 @ $1.20
 (Order 2 leg order)
------------------------------------------------------------------------

    The leg order to buy 10 S1 @ $0.90 for Order 3 is nondisplayed 
because it is worse than the Exchange's best bid; the leg order to 
buy 10 S2 @ $0.90 for Order 2 is nondisplayed because it is at the 
same price and size as the Order 1 leg order, which was generated 
first; and the leg order to buy 10 S3 @ $0.90 for Order 3 is 
nondisplayed because it is worse than the Exchange's best bid.\24\
---------------------------------------------------------------------------

    \24\ These nondisplayed leg orders will remain in the EBook and 
will be eligible for execution.
---------------------------------------------------------------------------

    If a market order to sell 5 S2 is received, it will execute 
against 5 of the Order 1 leg order to buy @ $0.90, and the leg of 
Order 1 to buy S1 will execute against the resting offer to sell 5 
S1 @ $1.20. As a result, the net price of $2.10 is achieved for a 
partial execution of Order 1 (buy 5 S1 @ $1.20 + buy 5 S2 @ $0.90 = 
$2.10 net), and the Order 1 leg order to buy 10 S1 @ $1.10 is 
cancelled upon partial execution of Order 1. Following the partial 
execution, Order 1 is still at the top of the COB, so the System 
generates new leg orders to buy 5 S1 @ $1.10, which is displayed 
because it is at the Exchange best bid for S1, and to buy 5 S2 at 
$0.90, which is nondisplayed because the S2 leg order for Order 2 is 
larger (the leg orders for Order 3 remain nondisplayed because they 
are still at worse prices than the Exchange's best bids in S1 and 
S3):

------------------------------------------------------------------------
               CBOE Bid                            CBOE Offer
------------------------------------------------------------------------
S1 5 @ $1.10                            5 @ $1.20
 (Order 1 leg order)
S2 10 @ $0.90                           10 @ $1.00
 (Order 2 leg order)
S3 10 @ $1.10                           10 @ $1.20
 (Order 2 leg order)
------------------------------------------------------------------------

    As discussed above, to prevent leg orders from executing against 
each other and complex orders with overlapping legs from executing 
against each other, prior to execution of a leg order and the related 
complex order, any leg orders on the opposite side of the legs of the 
executing complex order will be cancelled prior to execution of that 
complex order. Thus, a leg order is firm with respect to the complex 
order that it represents in the individual leg series, as overlapping 
complex orders are viewed separately under the Rules.\25\
---------------------------------------------------------------------------

    \25\ Leg orders are thus not firm with respect to other complex 
orders and will not trade against legs of other complex orders, 
which is consistent with the existing complex order execution 
provisions in Rule 6.53C that do not allow execution of overlapping 
legs of complex orders.
---------------------------------------------------------------------------

    The proposed rule change provides for how the adoption of leg 
orders will interact with the various auction functions available on 
the Exchange. First, the proposed rule change amends Rule 6.53C, 
Interpretation and Policy .04 to provide that if a leg order has been 
generated for a complex order resting in the COB, the complex order 
will not be eligible for the automated complex order request for 
responses (``RFR'') auction process (``COA'') \26\ pursuant to 
Interpretation and Policy .04. The Exchange believes that the 
representation of complex orders in the leg markets through the 
existence of leg orders eliminates the need to have those complex 
orders re-enter a COA, and the Exchange further believes that leg 
orders will more effectively create opportunities for execution of 
complex orders resting in the COB than having those complex orders re-
COA.
---------------------------------------------------------------------------

    \26\ Rule 6.53C(d) provides that prior to routing to the COB or 
once on PAR, eligible complex orders may initiate a COA, which is an 
automated auction process to provide complex orders with 
opportunities for price improvement.
---------------------------------------------------------------------------

    The proposed rule change further describes whether the System will 
generate a leg order if a simple order auction (such as a Hybrid Agency 
Liaison (HAL) auction per Rule 6.14A or Automated Improvement Mechanism 
(AIM) auction per Rule 6.74A) is occurring at the time the leg order 
would otherwise be generated. If there is a simple order auction 
occurring in a leg series at the time that a leg order in that series 
would otherwise be generated pursuant to Rule 6.53C(c)(iv):
     If the leg order would be on the same side of the market 
as the auctioned order with a price worse than the initial auction 
price of the auctioned order, then the leg order will be generated and 
the auction will continue.
     If the leg order would be on the same side of the market 
as the auctioned order with a price equal to or better than the initial 
auction price of the auctioned order, then no leg order would be 
generated and the auction will continue. A leg order may later be 
generated after execution of the auctioned order.
     If the leg order would be on the opposite side of the 
market as the auctioned order with a price that locks or crosses the 
initial auction price of the auctioned order, then no leg order would 
be generated and the auction will continue. A leg order may later be 
generated after execution of the auctioned order.
     If the leg order would be on the opposite side of the 
market as the auctioned order with a price that does not lock or cross 
the initial auction price of the auctioned order, then the leg order 
will be generated and the auction will continue.
    The Exchange proposes these provisions to ensure that leg orders 
will not interact with simple order auctions in order to avoid the 
system complexities that would otherwise result from combining the 
execution of complex orders with the already complex auction processes. 
The auction rules describe certain instances in which the entry of an 
unrelated limit order while an auction is ongoing may terminate the 
auction.\27\ For example, if

[[Page 22933]]

the Exchange receives an unrelated order on the opposite side of the 
auctioned order that could trade against the auctioned order at the 
prevailing NBBO price or better during a HAL auction (such a marketable 
unrelated order would thus lock or cross the price of the auctioned 
order, which is the NBBO), the orders would trade and the auction would 
generally terminate.\28\ Additionally, during a HAL auction, if the 
Exchange receives an unrelated order on the same side of the market as 
the auctioned order that is priced equal to or better than the 
auctioned order, then the auction would terminate.\29\ Similarly, 
during an AIM or SAM auction, if the Exchange receives an unrelated 
limit order on the opposite side of the auctioned order that improves 
any auction response (because auction responses would at least lock or 
cross the price of the auctioned order, such limit order would also 
thus lock or cross the price of the auctioned order), then the auction 
will terminate.\30\ Additionally, during an AIM or SAM auction, if the 
Exchange receives an unrelated order that is marketable against the 
Exchange's disseminated quote (if that quote is the NBBO) or the 
auction responses, and thus on the same side of the market as the 
auctioned order (because auction responses would match or improve the 
auctioned price, the price of such unrelated order would thus be equal 
to or better than the auctioned price), then the auction would 
terminate.\31\
---------------------------------------------------------------------------

    \27\ See Rules 6.13A(d) (Simple Auction Liaison (``SAL'')), 
6.14A(d) (HAL), 6.74A(b)(2) and (3) (AIM), and 6.74B(b)(2) 
(Solicitation Auction Mechanism (``SAM'')).
    \28\ Rule 6.14A(d)(i). The Exchange notes that it is not 
discussing the SAL auctions in this filing, because SAL is currently 
only active for Hybrid 3.0 classes, and the leg order functionality 
will not be enabled for Hybrid 3.0 classes. However, the principles 
described in this discussion regarding auctions apply in a similar 
manner to the SAL rule.
    \29\ Rule 6.14A(d)(ii).
    \30\ Rules 6.74A(b)(2)(C) and 6.74B(b)(2). Pursuant to such 
rules, the unrelated order would also execute against the auctioned 
order following the termination of the auction. See Rules 
6.74A(b)(3)(D) and (E) and 6.74B(b)(2).
    \31\ Rules 6.74A(b)(2)(D) and 6.74B(b)(2).
---------------------------------------------------------------------------

    The Exchange does not want the generation of leg orders to 
terminate auctions like other unrelated orders do [sic] due to the 
system complexities that would otherwise result. Thus, market 
participants will continue to have the same opportunities for execution 
and potential price improvement through simple auctions as they would 
if there were no leg orders present. Proposed Interpretation and Policy 
.07(b) and (c) cover the circumstances described in the auction rules 
under which the generation of leg orders may terminate an auction under 
the rules and provide that leg orders will not be generated under these 
circumstances. So that the proposed rule is complete, proposed 
Interpretation and Policy .07(a) and (d) cover the circumstances under 
which the generation of leg orders would not terminate an auction and 
provide that leg orders will be generated under these circumstances.
    The Exchange would also like to note that if a leg order is 
displayed in a series at the time an auction order enters the System, 
and the leg order is at the same price as the starting point of the 
auction and on the opposite side of the auctioned order, then the leg 
order would not participate in the auction. Instead, the auctioned 
order would trade with other resting interest at that price and/or the 
contra order that stopped the auctioned order, as previously discussed, 
leg orders only trade after all other executable orders and quotes. The 
leg order, however, would continue to be displayed.
    The Exchange notes that it maintains a rigorous capacity planning 
program that monitors system performance and projected capacity demands 
and that, as a general matter, the Exchange considers the potential 
system capacity impact of all new initiatives. The Exchange has 
analyzed the potential impact on system capacity that may result from 
the proposed rule change and has concluded that the Exchange has 
sufficient system capacity to handle the generation of leg orders 
without degrading the performance of its systems or reducing the number 
of complex order instruments it currently supports.
    The Exchange also notes that the proposed rule change limits the 
generation of leg orders. As discussed above, the Exchange may allow 
leg orders to be generated on a class-by-class basis, and leg orders 
may not be generated for all complex orders resting on the COB. 
Ultimately, the Exchange believes that while generating leg orders 
requires additional System processes, it has the necessary systems 
capacity to implement leg orders as described in this proposed rule 
change. The Exchange will closely monitor the generation of leg orders 
and its effect on CBOE's systems, and will carefully manage and curtail 
the number of leg orders being generated, to ensure that they do not 
negatively impact system capacity and performance.
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.\32\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \33\ 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) \34\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \32\ 15 U.S.C. 78f(b).
    \33\ 15 U.S.C. 78f(b)(5).
    \34\ Id.
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    In particular, the Exchange believes that the proposed rule change 
furthers the objectives of the Act by increasing the interaction 
between complex orders on the COB and individual orders and quotes on 
the EBook, providing greater liquidity by providing increased 
opportunities for order execution, and improving execution prices 
compared to those otherwise available in the regular market. The 
Exchange believes that automatically generating leg orders, which will 
only be executed after all other executable interest at the same price 
(including nondisplayed interest) is executed in full, will provide 
additional execution opportunities for complex orders, without 
negatively impacting any investors in the regular market. In fact, the 
generation of leg orders may enhance execution quality for investors in 
the regular market by improving the price and/or size of the Exchange 
BBO and by providing additional execution opportunity for individual 
orders and quotes in the EBook. As the proposed rule change describes, 
a leg order will not be generated while a simple auction in the leg 
series is ongoing if the generation of the leg order due to its price 
would terminate the auction, and potentially trade with the auctioned 
order or auction responses. The Exchange believes it is appropriate to 
prevent the generation of leg orders from terminating simple auctions 
due to the system complexities that would otherwise result. Thus, 
market participants will continue to have the same opportunities for 
execution and potential price improvement as they

[[Page 22934]]

would if there were no leg orders present.
    The Exchange believes leg orders will increase opportunities for 
execution of complex orders, potentially increase executions of 
interest on the EBook, and lead to tighter spreads and finder pricing 
on CBOE, which will benefit investors. Leg orders will provide 
investors with opportunities to trade at better prices than would 
otherwise be available--inside the otherwise existing BBO in a leg 
series. The Exchange believes that the opportunity for investors to 
receive executions inside the otherwise existing BBO could result in 
better executions for investors, thus making leg orders consistent with 
the Act.
    The Exchange believes leg orders will provide market participants 
with another tool for adding trading interest on CBOE. Leg orders may 
serve to increase liquidity to the extent market participants find leg 
orders result in better executions. This may result in more aggressive 
trading interest in the overall CBOE market.
    The Exchange also believes that the generation of leg orders is 
fully compliant with all regulatory requirements. In particular, leg 
orders are firm (with respect to the complex orders they represent) 
\35\ and may be included in the Exchange BBO if they match or improve 
the otherwise existing BBO. When a leg order executes, the other legs 
of the complex order will execute against the best-priced orders or 
quotes (other than leg orders). A leg order will be removed from 
display in the EBook if it is no longer at the Exchange BBO or if a 
complex order in a different strategy generates a larger-sized leg 
order at the same price (consistent with the proposed rule regarding 
display of leg orders), and will be cancelled if the net price of the 
complex order can no longer be achieved, if the complex order executes, 
or if the complex order is cancelled or modified, as well as at times 
prior to execution of another leg order to prevent execution of leg 
orders against each other and overlapping legs of separate complex 
orders against each other. Additionally, to assure compliance with the 
options linkage plan, a leg order will not be generated if it would 
lock or cross another market.
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    \35\ See supra notes 17 and 22 and related discussion regarding 
the circumstances under which leg orders may be cancelled to prevent 
execution of leg orders against each other and overlapping legs of 
separate complex orders against each other, and thus the extent to 
which leg orders are not firm, which will eliminate the operational 
difficulties that may otherwise result from those executions and the 
potential for those executions to interfere with the System and 
other trading.
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    The Exchange believes having nondisplayed leg orders available for 
execution will increase the execution opportunities for more complex 
orders and will result in better-priced executions for individual 
orders and quotes, which will benefit investors. The presence of 
nondisplayed leg orders is similar to current complex order 
functionality, in that complex orders are already eligible to leg into 
the regular market and trade with simple orders, even though this 
complex order interest is not visible in the regular market.
    The generation of leg orders is also limited in scope, as they may 
be generated only for legs of noncontingent complex orders with a ratio 
that is or can be reduced to one for complex orders that are priced 
within the derived net market. Additionally, the Exchange may enable 
leg orders on a class-by-class basis. The Exchange believes it has the 
necessary systems capacity to implement leg orders as described in this 
proposed rule change. The proposed rule change prevents the execution 
of leg orders against each other, and the execution of overlapping legs 
of complex order against each other, in order to prevent operational 
difficulties related to these executions. This is consistent with 
current Exchange rules regarding the execution of complex orders, and 
the Exchange believes that eliminating unnecessary operational 
difficulties will protect investors. The Exchange does not believe that 
the number of leg orders generated will become unmanageable. Finally, 
pursuant to the proposed rule change, the Exchange will closely manage 
and curtail the generation of leg orders to assure that they do not 
negatively impact system capacity and performance.

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 adoption of leg orders does 
not impose any obligations on any market participants--the System will 
automatically generate and handle leg orders. Leg orders will be 
available to all market participants and for all complex orders in 
classes designated by the Exchange that satisfy the requirements set 
forth in the rules (even if a complex order does not generate leg 
orders because, for example, it is priced outside of the derived net 
market, leg orders may later be generated for that complex order if the 
market changes). Accordingly, all complex orders in classes in which 
the Exchange has enabled leg order functionality will be treated in the 
same manner. Further, all market participants have the option to send 
their complex orders to CBOE in order to take advantage of this order 
type.
    Additionally, CBOE believes that the proposed rule change will 
relieve any burden on, and otherwise promote, competition among options 
exchanges. The Exchange believes the proposed rule change is 
procompetitive because it adds an order type that is substantially 
similar to functionality available at another options exchange.\36\ The 
Exchange believes the proposed rule change could result in improved 
liquidity, finer pricing, better executions and increased competition 
within its complex order market to the benefit of the Exchange, its 
Trading Permit Holders, and market participants and thus allow the 
Exchange to better compete with other options exchanges for complex 
order flow. The Exchange also believes leg orders may facilitate 
additional executions and enhance execution quality for investors in 
the regular market by improving the price and/or size of the Exchange 
BBO and by providing additional execution opportunities for resting 
orders on the regular order book.
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    \36\ See International Securities Exchange, LLC (``ISE'') Rules 
715(k) and 722(b)(3); see also Securities Exchange Act Release No. 
34-66234 (January 25, 2012), 77 FR 4852 (January 31, 2012) (SR-ISE-
2011-082) (order approving rule to adopt legging orders).
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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 up to 90 days of such date if it finds such 
longer period to be appropriate and publishes its reasons for so 
finding or (ii) as to which the 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.

[[Page 22935]]

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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-2013-026 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-2013-026. 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 20549-1090 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 offices 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-2013-026, and should be submitted on or before May 8, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\37\
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    \37\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-08972 Filed 4-16-13; 8:45 am]
BILLING CODE 8011-01-P


