
[Federal Register Volume 79, Number 16 (Friday, January 24, 2014)]
[Notices]
[Pages 4188-4191]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-01401]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71347; File No. SR-CBOE-2014-002]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to the Exchange's Quote Risk Monitor 
Mechanism

January 17, 2014.
    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 January 15, 2014, Chicago Board Options Exchange, Incorporated 
(``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (``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 amend its Quote Risk Monitor Mechanism. 
The text of the proposed rule change is available on the Exchange's Web 
site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at 
the Exchange's Office of the Secretary, at the Commission's Public 
Reference Room, and on the Commission's Web site (http://www.sec.gov).

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 operation of the Exchange's Quote Risk Monitor (``QRM'') 
Mechanism is codified in Rule 8.18. The purpose of this proposed rule 
change is to add three new functions to QRM Mechanism to help Hybrid 
Market-Makers (as defined in Rule 8.18) and TPH organizations control 
the risk of multiple, nearly-simultaneous executions across related 
option series. The use of the new functions is voluntary. The proposed 
rule change also makes clear that the TPH organization with which a 
Hybrid Market-Maker is associated (as well as the Hybrid Market-Maker 
himself) may establish parameters by which the Exchange will activate 
the QRM Mechanism for the Hybrid Market-Maker (the current rule text 
only explicitly permits Hybrid Market-Makers to establish such 
parameters). The Exchange also proposes to make some changes to the 
Rule 8.18 text to

[[Page 4189]]

make such rule more readable in conjunction with the other changes 
proposed herein.\3\
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    \3\ Specifically, the Exchange proposes to amend the beginning 
of the second sentence of Rule 8.18, which reads ``Hybrid Market-
Makers that use the QRM Mechanism shall specify, for each such 
option class in which the Hybrid Market-Maker is engaged in trading, 
a maximum number of contracts for such option class (the ``Contract 
Limit'') and a rolling time period in seconds within which such 
Contract Limit is to be measured (the ``Measurement Interval'')'' to 
read: ``The functionality of the QRM Mechanism that is available to 
Hybrid Market-Makers includes, for each such option class in which 
the Hybrid Market-Maker is engaged in trading: (i) A maximum number 
of contracts for such option class (the ``Contract Limit'') and a 
rolling time period in milliseconds within which such Contract Limit 
is to be measured (the ``Measurement Interval'');''. The Exchange's 
systems will allow Hybrid Market-Makers to set the Measurement 
Interval in milliseconds (as opposed to seconds), so the Exchange 
proposes to provide this more precise option to Hybrid Market-
Makers.
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    The first new function available to Hybrid Market Makers allows 
each Hybrid Market-Maker the ability to specify a maximum cumulative 
percentage that the Hybrid Market-Maker is willing to trade (the 
``Cumulative Percentage Limit''). Under the proposal, the cumulative 
percentage is the sum of the percentages of the original quoted size of 
each side of each series within a class that traded, and a rolling time 
period in milliseconds within which such Cumulative Percentage Limit is 
to be measured (the ``Measurement Interval''). When the QRM Mechanism 
determines that the Hybrid Market-Maker has traded at least the 
Cumulative Percentage Limit for any option class on a trading platform 
during any rolling Measurement Interval, the QRM Mechanism will 
automatically cancel all of the electronic quotes being disseminated on 
that trading platform with respect to that Hybrid Market-Maker in that 
option class and any other classes with the same underlying security 
until the Hybrid Market-Maker refreshes those electronic quotes.\4\
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    \4\ The Exchange also proposes to delete the words ``more than'' 
from the specification that ``When the Exchange determines that the 
Hybrid Market-Maker has traded more than the Contract Limit or 
Cumulative Percentage Limit for such option class on a trading 
platform during any rolling Measurement Interval, or has traded at 
least the Number of Series Fully Traded on a trading platform during 
any rolling Measurement Interval, the QRM Mechanism shall cancel all 
electronic quotes that are being disseminated on the same trading 
platform with respect to that Hybrid Market-Maker in that option 
class and any other classes with the same underlying security until 
the Hybrid Market-Maker refreshes those electronic quotes'' and 
replace ``more than'' with the words ``at least''. This is because 
the QRM Mechanism is triggered (and quotes are canceled) at the 
moment when the Hybrid Market-Maker trades the Contract Limit or 
Cumulative Percentage Limit (as opposed to when the Hybrid Market-
Maker has traded more than Contract Limit or Cumulative Percentage 
Limit). The Exchange also proposes to delete the words ``that are'' 
from the above statement for reasons of grammatical simplicity.
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    By way of example, assume a Hybrid Market-Maker is quoting the 
following series:

 Series A Quote: 1.00--1.20 50 x 50
 Series B Quote 2.00--2.20 75 x 75
 Series C Quote 3.00--3.20 100 x 100

    If the Cumulative Percentage Limit is set at 150% for the Hybrid 
Market-Maker and an order to buy 40 contracts of Series A is received, 
the series percentage would be 80% (i.e., 40/50). The cumulative 
percentage would also be 80%. If a second order to sell 25 contracts of 
Series B is received, the series percentage would be 33% (i.e., 25/75). 
The cumulative percentage would now be 113% (i.e., 80 + 33 = 113). If a 
third order to buy 70 contracts of Series C is received, the series 
percentage would be 70% (i.e., 70/100). The cumulative percentage would 
now be 183% (i.e., 113 + 70 = 183). Since 183% exceeds the Cumulative 
Percentage Limit of 150%, the Hybrid Market-Maker's quotes in the 
class, and any class on the same trading platform with the same 
underlying security, would be cancelled. This cancellation, however, 
would not occur until after execution of the third order. Due to firm 
quote obligations rules, the QRM Mechanism will not cancel quotes (and 
in the case of an Exchange-wide QRM Incident, orders) until after the 
execution of the order that caused the triggering of the QRM Mechanism. 
Note that percentages are added to one another, regardless of the 
denominator.
    Percentages are also calculated based on the original quote size, 
not the remaining quote size. Using the quotes set forth above as an 
example, if an order to buy 40 contracts of Series A is received, the 
series percentage would be 80% (i.e., 40/50). The cumulative percentage 
would also be 80%. If a second order to sell 25 contracts of Series B 
is received, the series percentage would be 33% (i.e., 25/75). The 
cumulative percentage would then be 113% (i.e., 80 + 33 = 113). If a 
third order to buy 10 contracts of Series A is received, the series 
percentage would be 20% (i.e., 10/50). The cumulative percentage would 
then be 133% (i.e., 113 + 20 = 133). If a fourth order to buy 70 
contracts of Series C is received, the series percentage would be 70% 
(i.e., 70/100). The cumulative percentage would then be 203% (i.e., 133 
+ 70 = 203).
    The proposed rule change adds a second new function to the QRM 
Mechanism that would allow each Hybrid Market-Maker to specify the 
maximum number of series for which either side of the quote is fully 
traded (the ``Number of Series Fully Traded'') and a Measurement 
Interval. When the QRM Mechanism determines that the Hybrid Market-
Maker has traded at least the Number of Series Fully Traded for any 
option class on a trading platform during any rolling Measurement 
Interval, the QRM mechanism will automatically cancel all of the Hybrid 
Market-Maker's electronic quotes being disseminated on the same trading 
platform in that option class and any other classes with the same 
underlying security until the Hybrid Market-Maker refreshes those 
electronic quotes.
    To illustrate this functionality, assume that a Hybrid Market-Maker 
is quoting the following series:

 Series A Quote: 1.00--1.20 50 x 50
 Series B Quote 2.00--2.20 75 x 75
 Series C Quote 3.00--3.20 100 x 100

    If the Number of Series Fully Traded is set at two, and an order to 
buy 50 contracts of Series A is received, the number of series traded 
in full will be one. If a second order to sell 25 contracts of Series B 
is received, the number of series traded in full will still be one 
because Series B did not trade in full. If a third order to buy 100 
contracts of Series C is received, the number of series traded in full 
will then be two. Since two meets the parameter set for Number of 
Series Fully Traded, the Hybrid Market-Maker's quotes on that trading 
platform in that class (and any other classes with the same underlying 
security traded on that trading platform) would be cancelled.
    Whenever one of the QRM functions (i.e., Contract Limit, Cumulative 
Percentage Limit or Number of Series Fully Traded) has been triggered 
and the QRM Mechanism automatically cancels all of the Hybrid Market-
Maker's electronic quotes in all series of that option class traded on 
that trading platform (and any other classes with the same underlying 
security traded on that trading platform), such action by the Exchange 
shall be termed a ``QRM Incident''. Both of the new functionalities 
described above (along with the already-existing Contract Limit QRM 
functionality) are optional and Hybrid Market-Makers are not required 
to set parameters for the aforementioned QRM Mechanism functions.
    The Exchange has above proposed that, when the QRM Mechanism 
automatically cancels all of a Hybrid Market-Maker's electronic quotes 
in an option class, the Exchange will also cancel all of the Hybrid 
Market-Maker's electronic quotes in any other classes with the same 
underlying security. The

[[Page 4190]]

purpose of this is because the risk involved in trading beyond a 
Market-Maker's risk profile extends to classes that have the same 
underlying security (since often the only difference between such 
classes is the multiplier of number of units of the underlying 
security).
    However, the Exchange has also limited cancellation of quotes to 
those being disseminated on the same trading platform. When a Hybrid 
Market-Maker has traded at least the Contract Limit or Cumulative 
Percentage Limit, on an option class on a trading platform during any 
rolling Measurement Interval, or has traded the Number of Series Fully 
Traded on an option class on a trading platform during any rolling 
Measurement Interval, the QRM Mechanism shall cancel all electronic 
quotes being disseminated on the same trading platform. This 
qualification is proposed because of the Exchange's SPX options class. 
SPX options (and QIXs on the S&P 500) are traded on the Exchange's 
Hybrid 3.0 platform, while SPX options with End-of-Week expiration 
(``SPXW'') trade on the Exchange's Hybrid platform. The Exchange 
believes that the differences between trading on the two platforms are 
such that a Market-Maker exceeding his risk profile trading on one 
platform will not necessarily mean that the Market-Maker will have 
exceeded his risk profile on the other platform. This will also allow a 
Market-Maker to set different QRM limits on SPX and SPXW.
    Finally, the proposed amendment adds a third function that allows 
the Exchange to cancel all quotes and orders of a Hybrid Market-Maker 
or TPH Organization once a specified number of QRM Incidents has been 
reached. Under this proposed functionality, a Hybrid Market-Maker or a 
TPH organization may specify a maximum number of QRM Incidents with 
respect to all QRM Functions (i.e., Contract Limit, Cumulative 
Percentage Limit and Number of Series Fully Traded) and a Measurement 
Interval on an Exchange-wide basis. When the Exchange determines that 
such Hybrid Market-Maker or TPH organization has reached its QRM 
Incident limit during any rolling Measurement Interval, the QRM 
Mechanism shall cancel all of the Hybrid Market-Maker's or TPH 
organization's electronic quotes and Market-Maker orders resting in the 
Book in all option classes on the Exchange and prevent a Hybrid Market-
Maker or TPH organization from sending additional quotes or orders to 
the Exchange until the Hybrid Market-Maker or TPH organization 
reactivates its ability to send quotes or orders in a manner prescribed 
by the Exchange.\5\
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    \5\ The Exchange will announce such manner to Trading Permit 
Holders via Regulatory Circular. The current plan for such 
reactivation is for the Hybrid Market-Maker or TPH Organization to 
contact the Exchange's Help Desk to request reactivation, though the 
Exchange is examining the possibility of creating a systematized 
manner for Hybrid Market-Makers or TPH Organizations to reactivate.
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    Once the QRM Mechanism is triggered and quotes (and in the case of 
an Exchange-wide cancellation, orders) are cancelled, all counters that 
determine whether the QRM Mechanism is triggered and a QRM Incident 
occurs will be reset for all classes for which quotes (and in the case 
of an Exchange-wide cancellation, orders) were canceled for all parties 
for whom such quotes (and in the case of an Exchange-wide cancellation, 
orders) were canceled. This means that, if the QRM Mechanism is 
triggered due to a party's reaching the Contract Limit, Cumulative 
Percentage Limit, or Number of Series Fully Traded for a class, and 
quotes (and in the case of an Exchange-wide cancellation, orders) are 
canceled, the number of contracts traded in all classes for which 
quotes and orders were canceled would be reset to zero, the cumulative 
percentage for all classes for which quotes and orders were canceled 
would be reset to zero, and the number of series that are fully traded 
for all classes for which quotes and orders were canceled would be 
reset to zero. If the Exchange cancels all of the Hybrid Market-Maker's 
or TPH organization's electronic quotes and Market-Maker orders resting 
in the Book, and the Hybrid Market-Maker or TPH organization does not 
reactivate its ability to send quotes or orders, the block will be in 
effect only for the trading day that the Hybrid Market-Maker or TPH 
organization reached its QRM Incident limit.
    As with the Contract Limit, Cumulative Percentage Limit or Number 
of Series Fully Traded QRM functions, Hybrid Market-Makers and TPH 
organizations are not required to set parameters for the Exchange-wide 
QRM. All QRM Mechanism functionalities are currently optional.
    The Exchange represents that it has the systems capacity to permit 
the operation of these enhanced QRM Mechanism functions. The Exchange 
does note that, in a situation in which the QRM Mechanism is triggered, 
and quotes (and in the case of an Exchange-wide cancellation, orders) 
must be canceled for multiple classes related to the same underlying 
security or across multiple business clusters,\6\ it may take a brief 
period for such cancellation to occur (during which period orders may 
execute against such quotes and orders; this functionality will not 
violate the Exchange's firm quote rules). The Exchange will use best 
efforts to cancel such quotes and orders as rapidly as possible.
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    \6\ The Exchange's systems group various classes into different 
business clusters for systems purposes.
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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.\7\ Specifically, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \8\ 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) \9\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
    \9\ Id.
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    In particular, the Exchange believes that investors and market 
participants will benefit from the proposed new functionality of the 
QRM Mechanism. Hybrid Market-Makers are vulnerable to the risk that, 
through an error in pricing or due to market events, they will receive 
multiple, automatic executions at disadvantageous or erroneous prices 
before they can adjust their quotes. Without adequate risk management 
tools such as the QRM, Hybrid Market-Makers could widen their quotes, 
quote less aggressively or limit their quote size. Such actions may 
undermine the quality of the markets available to customers and other 
market participants.
    Accordingly, with the enhancements proposed by the Exchange to QRM, 
the use of the QRM Mechanism will encourage more aggressive and 
narrower quoting, thereby removing impediments to and perfecting the 
mechanism of a

[[Page 4191]]

free and open market and a national market system, and, in general, 
more effectively protecting investors and the public interest. In 
addition, providing Market-Makers with more tools for managing risk 
will facilitate transactions in securities because, as noted above, the 
quotes of market makers will be more reliable and could help prevent 
erroneous orders and transactions. As a result, the new functionality 
for the QRM Mechanism has the potential to promote just and equitable 
principles of trade. Also, the proposed changes do not change to whom 
any aspects of the QRM Mechanism applies, as the proposed changes apply 
to all market participants to whom the QRM Mechanism previously 
applied.

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

    The Exchange 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. Rather, the Exchange 
believes that the functions of the QRM mechanism help promote fair and 
orderly markets.
    The Exchange does not believe that the proposed rule change will 
impose any burden on intramarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act because the use 
of the QRM Mechanism including the new enhancements is voluntary. 
Further, the proposed changes do not change to whom any aspects of the 
QRM Mechanism applies, as the proposed changes apply to all market 
participants to whom the QRM Mechanism previously applied. Similarly, 
the Exchange does not believe that the proposed rule change will impose 
any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act because, again, 
the use of the QRM Mechanism including the new enhancements is 
voluntary. Moreover, the proposed enhancements to the QRM Mechanism 
apply only to trading on CBOE. To the extent that the proposed changes 
may make CBOE a more attractive trading venue for market participants 
on other exchanges, such market participants may elect to become CBOE 
market participants.

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) of the Act \10\ and Rule 19b-4(f)(6) thereunder.\11\ 
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 \12\ and Rule 19b-
4(f)(6) thereunder.\13\
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires the Exchange to give the Commission written notice of the 
Exchange's intent to file the proposed rule change, along with a 
brief description and text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission. The 
Exchange has satisfied this requirement.
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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.

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-2014-002 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-2014-002. 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-2014-002 and should be 
submitted on or before February 14, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-01401 Filed 1-23-14; 8:45 am]
BILLING CODE 8011-01-P


