
[Federal Register Volume 79, Number 11 (Thursday, January 16, 2014)]
[Notices]
[Pages 2916-2919]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-00690]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71285; File No. SR-CBOE-2013-130]


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

January 10, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on December 31, 2013, Chicago Board Options Exchange, 
Incorporated (the ``Exchange'' or ``CBOE'') filed with the Securities 
and Exchange Commission (``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by the self-regulatory organization. The Commission is publishing this 
notice to solicit comments on the proposed rule 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 purpose of the proposed rule change is to expand on the 
Exchange's past description of the PULSe workstation. There are no 
proposed changes to the text of the Exchange's rules.

[[Page 2917]]

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 purpose of the proposed rule change is to expand on the 
Exchange's past description of the PULSe workstation. By way of 
background, the PULSe workstation is a front-end order entry system 
designed for use with respect to orders that may be sent to the trading 
systems of CBOE and CBOE Stock Exchange, LLC (``CBSX''), CBOE's stock 
trading facility. In addition, the PULSe workstation provides a user 
with the capability to send options orders to other U.S. options 
exchanges and/or stock orders to other U.S. stock exchanges and trading 
centers \3\ (``away-market routing'').\4\ To use away-market routing 
functionality, a CBOE or CBSX Trading Permit Holder must either be a 
PULSe Routing Intermediary or establish a relationship with a third-
party PULSe Routing Intermediary.\5\ A ``PULSe Routing Intermediary'' 
is a CBOE or CBSX Trading Permit Holder that has connectivity to, and 
is a member of, other options and/or stock exchanges and other trading 
centers. If a Trading Permit Holder sends an order from a PULSe 
workstation, the PULSe Routing Intermediary will route that order to 
the designated market on behalf of the entering Trading Permit Holder 
(if the Trading Permit Holder is not a PULSe Routing Intermediary). 
Among other things, the PULSe workstation also causes CBOE and/or C2 
Options Exchange, Incorporated (``C2''), an affiliate of CBOE and CBSX 
(if the CBOE/CBSX Trading Permit Holder is also a C2 Trading Permit 
Holder) \6\ (CBSX) to be the default destination exchange(s) (trading 
center) for individually executed marketable option (stock) orders if 
CBOE and/or C2 (CBSX) is at the national best bid or offer (``NBBO''), 
regardless of size or time, but allows users to manually override CBOE 
and/or C2 (CBSX) as the default destination exchange(s) (trading 
center) on an order-by-order basis or on a global basis.\7\ Users may 
also direct a PULSe Routing Intermediary to use its ``smart router'' 
functionality and have the capability to send orders between PULSe 
workstations. Please refer to the CBOE Fees Schedule for a complete 
listing of PULSe workstation-related fees.
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    \3\ A ``trading center,'' as provided under Rule 600(b)(78) of 
Regulation NMS, 17 CFR 242.600(b)(78), means a national securities 
exchange or national securities association that operates an SRO 
trading facility, an alternative trading system, an exchange market 
maker, an OTC market maker, or any other broker or dealer that 
executes orders internally by trading as principal or crossing 
orders as agent.
    \4\ For a more detailed description of the PULSe workstation and 
its functionality, see, e.g., Securities Exchange Act Release Nos. 
62286 (June 11, 2010), 75 FR 34799 (June 18, 2010) (SR-CBOE-2010-
051), 63244 (November 4, 2010), 75 FR 69148 (November 10, 2010) (SR-
CBOE-2010-100), 63721 (January 14, 2011), 76 FR 3929 (January 21, 
2011) (SR-CBOE-2011-011 [sic], 65280 (September 7, 2011), 76 FR 
56838 (September 14, 2011), 65491 (October 6, 2011), 76 FR 63680 
(October 13, 2011) (SR-CBOE-2011-092 [sic]), and 69990 (July 16, 
2013), 78 FR 43953 (July 22, 2013) (SR-CBOE-2013-062).
    \5\ The Exchange notes that the away-market routing 
functionality is offered as a convenience to Trading Permit Holders 
and is not an exclusive means available to a Trading Permit Holder 
to send orders intermarket. With respect to options (stocks), the 
Exchange also notes that the away-market routing functionality in 
the PULSe workstation will not displace the provisions of the 
Options Order Protection and Locked/Crossed Market Plan (Regulation 
NMS), which will continue to apply in the circumstances described in 
the Plan (Regulation NMS).
    \6\ By way of background, the PULSe workstation offers the 
ability to route orders to any market, including CBOE/CBSX affiliate 
C2. To the extent a CBOE/CBSX Trading Permit Holder that is also a 
C2 Trading Permit Holder obtains a PULSe workstation through CBOE, 
it is not necessary for that Trading Permit Holder to obtain a 
separate PULSe workstation through C2 to route orders to C2. It is 
also not necessary for that Trading Permit Holder to utilize the 
services of a Routing Intermediary to route orders to C2.
    \7\ Nothing about the PULSe order routing functionality would 
relieve any TPH that is using the PULSe workstation from complying 
with its best execution obligations. Specifically, just as with any 
customer order and any other routing functionality, a Trading Permit 
Holder would have an obligation to consider the availability of 
price improvement at various markets and whether routing a customer 
order through the PULSe functionality would allow for access to 
opportunities for price improvement if readily available. Moreover, 
a Trading Permit Holder would need to conduct best execution 
evaluations on a regular basis, at a minimum quarterly, that would 
include its use of the PULSe workstation.
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    The PULSe workstation is made available to Trading Permit Holders 
by Signal Trading Systems, LLC (``STS'').\8\ Trading Permit Holders may 
also make the workstation available to their customers (including 
sponsored users \9\). STS grants licenses to use the PULSE workstation 
directly to CBOE and CBSX Trading Permit Holders, as well as their 
customers. STS also has the ability, if it determines to do so, to 
permit Trading Permit Holders to make the PULSe workstation available 
to their customers (including sponsored users) through the use of 
sublicenses. However, whether the PULSe workstation is made available 
to Trading Permit Holders' customers through a direct license or 
sublicense, any order routed to CBOE or CBSX through a PULSe 
workstation must be routed through a Trading Permit Holder or sponsored 
user (whose orders are sponsored by the Trading Permit Holder). The 
Trading Permit Holder will also remain responsible for any applicable 
PULSe fees.
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    \8\ STS is an affiliate of CBOE that is jointly owned by CBOE 
and FlexTrade Systems, Inc. (``FlexTrade''), a technology services 
provider.
    \9\ The PULSe workstation may be made available by a Trading 
Permit Holder to its customers on a pass-through basis (where orders 
pass through the Trading Permit Holder's systems prior to reaching 
the Exchange) or a sponsored access basis. To the extent that a 
Trading Permit Holder makes the workstation available to a customer 
on a sponsored access basis, the customer would be considered a 
``sponsored user,'' and the Trading Permit Holder-customer 
relationship would be subject to Rule 6.20A. Please note that in the 
adopting release for Commission Rule 15c3-5 (risk management 
controls for brokers or dealers with market access), the Commission 
indicated that a broker-dealer relying on risk management technology 
developed by third parties should perform appropriate due diligence 
to help assure the controls are reasonably designed, effective, and 
otherwise consistent with Rule 15c3-5. Mere reliance on 
representations of the third party technology developer--even if an 
exchange or other regulated entity--is insufficient to meet this due 
diligence standard.
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    The Exchange is proposing to allow a Trading Permit Holder that 
licenses the PULSe workstation and makes workstations available to its 
customers (including sponsored users) to ``co-brand'' the workstations 
used by those customers.\10\ If a Trading Permit Holder elects to co-
brand its customers' workstations, the Trading Permit Holder will enter 
into a co-branding agreement with STS (which supplements the Trading 
Permit Holder's license agreement to use the PULSe workstation), 
pursuant to which STS will include the Trading Permit Holder's brand 
(such as name or logo) on the PULSe workstation screens used by the 
Trading Permit Holder's customers. There are no fees for co-branding.
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    \10\ Trading Permit Holders' use of the co-branding service is 
voluntary.
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    The Exchange notes that if a Trading Permit Holder elects to co-
brand PULSe workstations, the PULSe logo will continue to be on the 
workstation screen. The PULSe workstation functionality will not change 
and will

[[Page 2918]]

continue to work as described in this and previous rule filings. No 
Trading Permit Holder will obtain any additional rights or interest in 
the PULSe workstation if it elects to use co-branding; STS will remain 
the sole owner of PULSe (and related PULSe materials and intellectual 
property). Any Trading Permit Holder that elects to co-brand will 
remain subject to the terms and conditions of its license agreement 
with STS. Additionally, neither STS nor its owners (CBOE and FlexTrade) 
will obtain any rights in a Trading Permit Holder that co-brands or 
that Trading Permit Holder's intellectual property, other than STS's 
right to include the Trading Permit Holder's branding on PULSe 
workstations. Neither STS nor its owners will be involved in any manner 
in any account of a Trading Permit Holder (or its customers) that uses 
the PULSe workstation. The Exchange notes that the inclusion of a 
Trading Permit Holder's branding on the PULSe workstation is not an 
endorsement or indication of the value of the Trading Permit Holder or 
its products or services.\11\
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    \11\ The Exchange intends to include similar language on the 
PULSe workstation.
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    The Exchange notes that FlexTrade \12\ engages and will engage in 
business activities in addition to its provision of services to STS and 
that these activities include providing other technology services to 
broker-dealers.\13\ The Exchange also notes that STS does not currently 
but may in the future engage in business activities in addition to 
making the PULSe workstation available, and that these activities may 
also include the provision of other technology services to broker-
dealers. In this regard, the Exchange reiterates the following 
statements that it made in the initial PULSe rule filing: (i) There are 
and will continue to be procedures and internal controls in place that 
are reasonably designed so that FlexTrade does not unfairly take 
advantage of confidential information related to PULSe in its other 
business activities and so that STS does not unfairly take advantage of 
confidential information related to PULSe to the extent that STS 
engages in any business activities other than providing the PULSe 
workstation. (ii) The books, records, premises, officers, directors, 
agents, and employees of STS, with respect to the PULSe workstation, as 
a facility of CBOE, are deemed to be those of CBOE for purposes of and 
subject to oversight pursuant to the Act. (iii) Use of the PULSe 
workstation is optional. Trading Permit Holders (and their customers) 
are not required to use the PULSe workstation to initiate their orders, 
and Trading Permit Holders (and their customers) may use any available 
order-entry system that they select, including ones that they develop 
themselves for use to initiate their orders. These statements continue 
to be accurate with the availability of the new co-branding service, 
which is also optional.
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    \12\ FlexTrade is the sole member of a single member limited 
liability company named FlexTrade LLC, FlexTrade LLC is a registered 
broker-dealer, and FlexTrade and FlexTrade LLC each currently makes 
a front-end order entry workstation named ``FlexTrader'' available. 
FlexTrade LLC is not a member of CBOE or CBSX.
    \13\ FlexTrade is not and, currently does not intend to be, 
registered as a broker-dealer under Section 15(a) of the Act. STS 
also is not and, currently does not intend to be, registered as a 
broker-dealer under Section 15(a) of the Act. In this regard, the 
Exchange reiterates the following statements that it made in the 
initial PULSe rule filing (see supra note 4, Securities Exchange Act 
Release No. 62286): (a) CBOE is primarily responsible for the 
marketing of the PULSe workstation. The Exchange notes that any 
Trading Permit Holder that elects to co-brand must use commercially 
reasonable efforts to promote PULSe pursuant to the co-branding 
agreement (although the Trading Permit Holder may offer other 
products to its customers, and customers may continue to use any 
other products they choose, for front-end order entry). FlexTrade 
has no role, and in no event will have any role, in marketing the 
PULSe workstation. FlexTrade is not, and will continue not to be, 
party to any agreements with Trading Permit Holders for the PULSe 
workstation. (b) In contributing services to STS, FlexTrade is 
limited to providing software and systems technology and maintaining 
proper technical functioning. CBOE is responsible for ensuring that 
STS's provision of the PULSe workstation, as a facility of CBOE, 
meets CBOE's obligations as a self-regulatory organization. (c) 
Unless it becomes registered as a broker-dealer under Section 15(a) 
of the Act, neither STS nor FlexTrade will hold itself out as a 
broker-dealer, provide advice related to securities transactions, 
match orders, make decisions about routing orders, facilitate the 
clearance and settlement of executed trades, prepare or send 
transaction confirmations, screen counterparties for 
creditworthiness, hold funds or securities, open, maintain, 
administer or close brokerage accounts, or provide assistance in 
resolving problems, discrepancies or disputes related to brokerage 
accounts. These statements continue to be accurate with the 
availability of the new co-branding service. Should STS or FlexTrade 
seek to register as a broker-dealer in the future, the Exchange 
represents that the broker-dealer would not perform any operations 
without first discussing with the Commission staff whether any of 
the broker-dealer's operations should be subject to an Exchange rule 
filing required under the Act, 15 U.S.C. 78s(b)(1).
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\14\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \15\ 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) \16\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
    \16\ Id.
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    In particular, describing the new ``co-branding'' service available 
to PULSe Trading Permit Holder users provides more information to the 
public about PULSe, which information benefits investors and the 
public. Permitting PULSe Trading Permit Holder users to have their 
branding included on PULSe workstations that they make available to 
their customers (including sponsored users) is reasonable given that, 
as discussed above, Trading Permit Holders are responsible for their 
customers' orders entered into PULSe workstations, as well as for any 
applicable PULSe fees related to workstations used and orders entered 
into those workstations by their customers. Trading Permit Holder 
users' election to co-brand those workstations is consistent with those 
responsibilities and provides those users with more freedom in their 
uses of the PULSe workstations, which perfects the mechanism of a free 
and open market and a national market system.
    The PULSe functionality remains unchanged. If a Trading Permit 
Holder elects to use the co-branding service, STS would merely add 
information (such as a name or logo) to the workstation screen and 
change nothing else with respect to PULSe. PULSe currently competes 
with similar products offered by other technology providers as well as 
other options exchanges. Additionally, firms can continue to create 
their own proprietary front-end order entry software. Given the robust 
competition for volume among options exchanges, offering additional 
services on PULSe that may attract order flow is consistent with the 
above-mentioned goals of the Act.
    The Exchange believes that the proposed rule change does not 
discriminate between Trading Permit Holders because the use by Trading

[[Page 2919]]

Permit Holders of co-branding is completely voluntary and available as 
a convenience to all Trading Permit Holders that elect to use the PULSe 
workstation. The Exchange also believes it is reasonable to offer the 
co-branding service only to Trading Permit Holder PULSe users, because 
those users make PULSe available to their customers. Such customers do 
not make the PULSe workstation available to others, and are not 
responsible for the use of PULSe by other parties, and thus providing 
the co-branding service to customers of Trading Permit Holders would 
not be appropriate.

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

    CBOE does not believe that the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange will make the co-
branding service described in this rule filing available to all Trading 
Permit Holders that use PULSe on the same terms and conditions, and use 
of the co-branding service is completely voluntary. As discussed above, 
the Exchange believes it is reasonable to not offer the co-branding 
service to non-Trading Permit Holder customers of PULSe.
    Trading Permit Holders (and their customers) will continue to have 
the flexibility to use any order-entry technology they choose to access 
the Exchange and may elect not to use the co-branding service if they 
elect to use PULSe. The PULSe functionality remains unchanged and 
continues to be made available as described in this and previous rule 
filings. The Exchange is merely offering Trading Permit Holder that use 
PULSe the opportunity to add branding to the workstation screens used 
by their customers (including sponsored users) for which workstations 
and orders entered through those workstations the Trading Permit 
Holders are responsible. This service would only add information to the 
workstation screen and change nothing else with respect to PULSe. The 
Exchange's offering of the co-branding service is another effort to 
have PULSe compete with the numerous other order-entry systems 
available in the marketplace. If Trading Permit Holders believe that 
other order-entry systems available in the marketplace are more 
beneficial than PULSe, then Trading Permit Holders may simply use those 
products instead. Orders sent to the Exchange for execution by Trading 
Permit Holders that use PULSe, whether they co-brand or not, will 
receive no preferential treatment.
    CBOE believes that the proposed rule change will relieve any burden 
on, or otherwise promote, competition. CBOE will be offering a service 
with respect to PULSe that is available or could be made available on 
similar products throughout the industry. Market participants can also 
develop their own proprietary products with the same functionality, 
which they can offer to their customers. Market participants are also 
able to become Trading Permit Holders and license PULSe, and elect to 
co-brand PULSe workstations for their customers, if they believe the 
new co-branding service makes CBOE and PULSe more attractive.

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

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

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \17\ and paragraph (f) of Rule 19b-4 \18\ 
thereunder. At any time within 60 days of the filing of the proposed 
rule change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission will institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2013-130 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-2013-130. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-CBOE-2013-130 and should be 
submitted on or before February 6, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
Kevin M. O'Neill,
Deputy Secretary.
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    \19\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2014-00690 Filed 1-15-14; 8:45 am]
BILLING CODE 8011-01-P


