
[Federal Register Volume 78, Number 153 (Thursday, August 8, 2013)]
[Notices]
[Pages 48532-48535]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-19150]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70103; File No. SR-CBOE-2013-077]


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

August 2, 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 July 23, 2013, Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I and II below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit 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 modify its rules to address certain option 
order handling procedures on the Exchange in connection with the 
implementation of the market wide equity Plan to Address Extraordinary 
Market Volatility (the ``Plan''). The text of the proposed rule change 
is available at the Exchange's Office of the Secretary, on the 
Exchange's Web site at http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx, at the Commission's Public Reference 
Room, and on the Commission's Web site at http://www.sec.gov.

[[Page 48533]]

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
    In an attempt to address extraordinary market volatility in NMS 
Stock, and, in particular, events like the severe volatility on May 6, 
2010, the Exchange, in conjunction with the other national securities 
exchanges and the Financial Industry Regulatory Authority, Inc. 
(collectively, ``Participants'') drafted the Plan pursuant to Rule 608 
of Regulation NMS and under the Securities Exchange Act of 1934 (the 
``Act'').\3\ The Plan is primarily designed to, among other things, 
address extraordinary market volatility in NMS stocks, protect 
investors, and promote fair and orderly markets. The Plan provides for 
market-wide limit up-limit down requirements that prevent trades in 
individual NMS Stocks from occurring outside of specified price bands, 
as defined in Section I(N) of the Plan. These requirements are coupled 
with trading pauses, as defined in Section I(Y) of the Plan, to 
accommodate more fundamental price moves (as opposed to erroneous 
trades or monetary gaps of liquidity).
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    \3\ See Securities Exchange Act Release No. 64547 (May 25, 
2011), 76 FR 31647 (June 1, 2011) (File No. 4-631).
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    The Plan was filed on April 5, 2011 by the Participants for 
publication and comment.\4\ The Participants requested the Commission 
approve the Plan as a one-year pilot. On May 24, 2012, the Participants 
filed an amendment to the Plan which clarified, among other things, the 
calculation of the reference price, as defined in Section I(T) of the 
Plan, potential for order type exemption, and the creation of an 
Advisory Committee.\5\ On May 31, 2012, the Commission approved the 
Plan, as amended, on a one-year pilot basis.\6\ The Plan was 
implemented on April 8, 2013.
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    \4\ Id.
    \5\ See Securities and Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631).
    \6\ See Securities and Exchange Act Release No. 67091 (May 31, 
2012) 77 FR 33498 (June 6, 2012).
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    Though the Plan was primarily designed for equity markets, the 
Exchange believed it would impact the options markets as well. Thus, 
the Exchange filed rule changes to amend the Exchange rules to ensure 
the option markets are not compromised as a result of the Plan's 
implementation.\7\ The Exchange is proposing to further amend these 
rules to clarify how the ``Hybrid Opening System'' will operate on the 
Exchange in the event of a limit up-limit down state.
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    \7\ See Securities and Exchange Act Release No. 34-69328 (April 
5, 2013), 78 FR 21642 (April 11, 2013) (order approving SR-CBOE-
2013-030).
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    The current rule 6.2B.07, as recently amended, states that if an 
underlying security for an option class enters into a limit up-limit 
down state when the class moves to opening rotation, ``all market 
orders in the system will be cancelled except market orders that are 
considered limit orders pursuant to Rule 6.13(b)(iv) and entered the 
previous trading day.''\8\ The Exchange is proposing to: (1) Correct 
the incorrect reference to Exchange Rule 6.13(b)(iv), and (2) provide 
greater clarity on the effect of a limit up-limit down state on an 
underlying security after the opening rotation has begun.
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    \8\ See Exchange Rule 6.2B.07.
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    First, the Exchange is proposing to clarify an incorrect reference 
in Rule 6.13(b)(iv). The orders described in the purpose section of the 
original rule filing are, ``No-Bid Series'' which are actually found in 
Exchange Rule 6.13(b)(vi) and not Exchange Rule 6.13(b)(iv). The 
Exchange is now proposing to amend Rule 6.2B.07 to reflect this 
correction. As stated in the original rule filing, the Exchange is 
proposing to allow such market orders to remain in the Exchange Book 
because these orders essentially act as limit orders at the minimum 
increment. Cancelling such orders could potentially cause such orders 
to lose their priority with respect to other market orders in the 
Exchange Book. In addition, limit orders are not cancelled while the 
underlying security is in a limit up-limit down state, so the Exchange 
believes allowing market orders that function as a limit orders to 
remain in the Exchange Book is consistent with the way limit order are 
generally handled.
    Next, the Exchange is proposing to add further clarity to the 
recently amended rule to clarify that if a limit up-limit down state 
commences after the opening rotation process has begun for a class of 
options, the opening rotation will continue normally. More 
specifically, the Exchange is proposing to add language to state that 
market and limit orders will continue through the opening rotation as 
they would if there was not a limit up-limit down state. Once the 
opening rotation has begun for a class of options, due to how the 
Exchange System operates, the process will not be interrupted to modify 
the order handling mid-process.
    Market orders will continue to process even though they are 
normally returned during a limit up-limit down state,\9\ limit orders 
will process normally,\10\ and auctions will open and operate as they 
normally do.\11\ Market orders, though normally returned during a limit 
up-limit down state to avoid executions at unfavorable or unreliable 
prices, do not face the same risks when they are part of the opening 
process. This is because preopening orders are matched with each other 
and with other interest during the opening rotation. Thus market orders 
will trade at the calculated opening price. Preopening limit orders 
will also be filled at the opening price and cannot be filled through 
their limit prices.
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    \9\ See Exchange Rule 6.53(a) which describes how market orders 
process.
    \10\ See Exchange Rule 6.53(b) which describes how limit orders 
process.
    \11\ See Exchange Rule 6.2B.03 which describes the HAL Opening 
Procedure on the Exchange. If a limit up-limit down state commences 
after the opening rotation has begun for a class of options, options 
to buy and sell will be paired to the extent possible. If another 
market is displaying a more favorable price, then the HAL opening 
procedure (``HALO'') will begin as described in Exchange Rule 
6.2B.03. At the end of the HALO, consistent with Rule 6.2B.03, the 
Exchange will link any unmatched portion of the market order to an 
away trading venue. Any portion of a market order that is unfilled 
and returned to the Exchange will be cancelled. Thus, markets orders 
will not be filled at an unreliable price because they will either 
be paired with other resting orders at the open or linked to an away 
trading venue displaying a more favorable price. The Exchange 
believes this is consistent with the treatment of market orders and 
ensures they will not be given an unreliable price despite the limit 
up-limit down state. Additionally, because limit orders have a limit 
price, these orders will also not fill at an unreliable price.
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    The Exchange believes this clarity is necessary to ensure Trading 
Permit Holders are fully aware of special order handling during limit 
up-limit down states. Though the rule currently specifies what happens 
to orders on the Exchange if the limit up-limit down state commences 
prior to the opening rotation beginning for a class of options, the 
Exchange believes it is necessary to additionally state what would 
happen if the opening rotation had already begun and the limit up-limit 
down state triggers during the time of that process.

[[Page 48534]]

The Exchange believes that including pre-opening market order interest 
in the opening rotation will enhance the liquidity available during the 
rotation, and that the nature of the opening match process will protect 
market orders against anomalous opening prices that could otherwise be 
caused by market conditions associated with a limit-up limit-down 
state. This will also help to ensure the options markets remain just 
and equitable with the implementation of the Plan.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\12\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \13\ requirements that the rules of an exchange be 
designed to 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 facilitating 
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) \14\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ Id.
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    In particular, the Exchange believes the proposed changes will be 
in accordance with the Act as they are merely intended to ensure the 
options markets will continue to remain just and equitable with the 
implementation of the Plan which is intended to reduce the negative 
impacts of a sudden, unanticipated price movement in NMS stocks. The 
proposed rule changes would promote this intention in the options 
markets while protecting investors participating there. More 
specifically, the currently proposed changes will correct and clarify 
current Exchange rules promoting the interest of investors. Finally, 
creating a more orderly market will promote just and equitable 
principles of trade by allowing investors to feel more secure in their 
participation in the national market system after the implementation of 
the Plan. In addition, the Exchange is proposing to provide a more 
robust rule text by clarifying what occurs if a limit up-limit down 
states initiates after the beginning of the Exchange's opening 
rotation. The Exchange believes that not cancelling the pre-opening 
interest will ensure investors can execute more interest despite the 
change in the market conditions after the opening process has begun. 
This will also help to ensure the options markets remain just and 
equitable with the implementation of the Plan.

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. Specifically, the Exchange 
believes the proposed changes will not impose any burden on intramarket 
competition because it applies to all TPHs equally. The Exchange does 
not believe the proposed changes will impose any burden on intermarket 
competition as the changes are merely being made to protect investors 
with the implementation of the Plan. In addition, the proposed changes 
will provide certainty of treatment and execution of options orders 
during periods of extraordinary market volatility.

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

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

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \15\ and Rule 19b-4(f)(6) thereunder.\16\ 
Because the proposed rule change does not: (i) Significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
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    \15\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \16\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B) \17\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \17\ 15 U.S.C. 78s(b)(2)(B).
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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-2013-077 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-2013-077. 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 Section, 100 F Street 
NE., Washington, DC 20549-1090 on official

[[Page 48535]]

business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of 
the filing will also 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-2013-077 and should be submitted on or before 
August 29, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-19150 Filed 8-7-13; 8:45 am]
BILLING CODE P


