
[Federal Register Volume 79, Number 112 (Wednesday, June 11, 2014)]
[Notices]
[Pages 33627-33629]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-13559]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72329; File No. SR-CBOE-2014-017]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Instituting Proceedings To Determine Whether To 
Approve or Disapprove a Proposed Rule Change, as Modified by Amendment 
1, To Amend Its Rules Related to Complex Orders

June 5, 2014.

I. Introduction

    On February 19, 2014, Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend its rules relating to 
complex orders. On March 3, 2014, the Exchange filed Amendment No. 1 to 
the proposed rule change. The proposed rule change, as modified by 
Amendment No. 1 thereto, was published for comment in the Federal 
Register on March 10, 2014.\3\ The Commission received no comments on 
the proposed rule change. On April 23, 2014, the Commission extended 
the time period in which to either approve the proposal, disapprove the 
proposal, or to institute proceedings to determine whether to approve 
or disapprove the proposal, to June 6, 2014.\4\ This order institutes 
proceedings under Section 19(b)(2)(B) of the Act \5\ to determine 
whether to approve or disapprove the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 71648 (March 5, 
2014), 79 FR 13359 (``Notice'').
    \4\ See Securities Exchange Act Release No. 72008, 79 FR 24032 
(April 29, 2014).
    \5\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of Proposed Rule Change

    Under current CBOE Rule 6.53C(d)(ii), a Trading Permit Holder 
representing a COA-eligible order may request that the Exchange 
initiate a complex order auction (``COA'') for the COA-eligible order 
before such order enters the complex order book (``COB'').\6\ In this 
proposed rule change, the Exchange proposes to require all complex 
orders with three or more legs to be subject to a COA prior to entering 
the COB.\7\ Specifically, the Exchange proposes to amend Rule 
6.53C(d)(ii) to provide that CBOE's Hybrid Trading System \8\ (the 
``System'') will initiate a COA on receipt of: (1) A COA-eligible order 
with two

[[Page 33628]]

legs and request from the Trading Permit Holder representing the order 
that it initiate a COA; or (2) a complex order with three or more legs, 
regardless of the order's routing parameters (e.g., a request to route 
directly to the COB) or handling instructions (except for orders routed 
for manual handling).\9\ Thus, as proposed, all complex orders in 
Hybrid classes with three or more legs would automatically be subject 
to a COA (other than those routed for manual handling) prior to 
entering the COB where they can leg into the market.\10\
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    \6\ Under current CBOE Rule 6.53C(d)(i)(2), the Exchange may 
determine on a class-by-class basis which complex orders are 
eligible for a COA, including by complex order type and origin type. 
The Exchange notes that currently, in all Hybrid classes, customer, 
firm and broker-dealer complex orders are eligible for a COA, and 
all complex order types except for immediate-or-cancel (``IOC'') 
orders are eligible for a COA in all Hybrid classes. See Notice, 
supra note 3, n.8. Additionally, only marketable orders and 
``tweeners'' (limit orders bettering the same side of the derived 
net market) are eligible for a COA. For Hybrid 3.0 classes (i.e. 
SPX), all complex order types (including IOC orders) are eligible 
for a COA, but only customer complex orders are eligible for a COA. 
See id. (citing CBOE Regulatory Circulars RG06-73, RG08-38, and 
RG08-97).
    \7\ The Exchange explains that this proposed change applies to 
Hybrid classes only, and not Hybrid 3.0 classes. See Notice, supra 
note 3, n.7. In this regard, the proposed rule change proposes to 
amend CBOE Rule 6.53C, Interpretation and Policy .10 to indicate 
that complex orders in Hybrid 3.0 classes, regardless of the number 
of legs, will initiate a COA in the same manner they currently do. 
See id.
    \8\ The proposed rule change proposes to amend CBOE Rule 
6.53C(d)(ii) to say that the System, rather than the Exchange, will 
send the RFR message. See id. at n.9. Because the System will 
automatically send the RFR message when the conditions set forth in 
CBOE Rule 6.53C(d)(ii) are met, the Exchange believes using the term 
``System'' in the rule text is appropriate. See id.
    \9\ The Exchange explains that if a complex order with three or 
more legs contains an instruction to route for manual handling, such 
as to PAR, and through such manual handling routes to the COB, the 
proposed rule change would provide that such order will initiate a 
COA prior to entry on the COB, even if the PAR operator requests 
that the order not initiate a COA. See Notice, supra note 3, n.10.
    \10\ The Exchange states that this automatic initiation of a COA 
does not apply to stock-option orders. See id. at n.11.
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    The Exchange proposes to amend CBOE Rule 6.53C(d)(ii) to provide 
that CBOE's System will reject back to a Trading Permit Holder any 
complex order with three or more legs that includes a request pursuant 
to CBOE Rule 6.53C, Interpretation and Policy .04 \11\ that the order 
not initiate a COA.\12\ The Exchange also proposes to amend CBOE Rule 
6.53C(d)(ii), which currently provides that only a Trading Permit 
Holder representing an order may request that the order initiate a COA, 
to also provide that PAR operators handling an order may request that a 
COA-eligible order initiate a COA.\13\
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    \11\ CBOE Rule 6.53C, Interpretation and Policy .04 provides 
that Trading Permit Holders routing complex orders directly to the 
COB may request that the complex orders initiate a COA on a class-
by-class basis and Trading Permit Holders with resting complex 
orders on PAR may request that complex orders initiate a COA on an 
order-by-order basis.
    \12\ See Notice, supra note 3, at 13362.
    \13\ CBOE believes that permitting orders resting on PAR to 
initiate a COA is consistent with other CBOE rules. See id. at n. 15 
and accompanying text (citing to CBOE Rule 6.53C(d), which, 
according to the Exchange, states that complex orders may be subject 
to a COA once on PAR, and CBOE Rule 6.53C, Interpretation and Policy 
.04(a), which, according to the Exchange, states that Trading Permit 
Holders with resting complex orders on PAR may request that complex 
orders initiate a COA).
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    According to the Exchange, this proposed rule change will address 
the concern that market makers may reduce the size of their quotations 
in the leg markets because of the presence of certain complex orders 
that are designed to circumvent the ``Quote Risk Monitor Mechanism'' 
(``QRM'') settings established by market makers.\14\ CBOE describes the 
QRM as a functionality designed to help market makers provide liquidity 
across most series in their appointed classes without being at risk of 
executing the full cumulative size of all their quotes before being 
given adequate opportunity to adjust their quotes.\15\
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    \14\ See Notice, supra note 3, at 13363.
    \15\ See id. at 13361.
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    The QRM, according to CBOE, generally operates by allowing market 
makers to set a variety of parameters, which, if triggered, will cause 
the System to cancel a market maker's quotes in all series in an 
appointed class after executing the order that triggered the 
parameter.\16\ CBOE states that the System performs the QRM parameter 
calculations to determine if the QRM has been triggered after each 
execution against a market maker's quotes.\17\ According to the 
Exchange, when a complex order legs into the regular market (i.e., 
executes against individual quotes for each of the legs in the regular 
market), all of the legs of a complex order are considered as a single 
execution for purposes of the QRM, and not as a series of individual 
transactions, because each leg of the complex order is contingent on 
the other leg.\18\ Thus, the System performs the QRM parameter 
calculations after the entire complex order executes against interest 
in the regular market. In contrast, if the legs of the complex order 
had been submitted to the regular market separately and without any 
complex order contingency, the System would perform the QRM parameter 
calculations after each leg executed against interest in the regular 
market. According to the Exchange, this differential treatment may 
result in market makers exceeding their risk parameters by a greater 
number of contracts when complex orders leg into the regular 
market.\19\
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    \16\ See id. at 13360-61. CBOE states that the System performs 
the parameter calculations after an execution against a market maker 
quote occurs in order to assure that all quotations are firm for 
their full size. See id. at 13361.
    \17\ See id.
    \18\ See id.
    \19\ See id.
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    The Exchange believes that the potential risk to market makers of 
complex orders legging into the regular market limits the amount of 
liquidity that market makers are willing to provide in the regular 
market.\20\ In particular, according to the Exchange, market makers may 
reduce the size of their quotations in the regular market because of 
the presence of these complex orders that are designed to circumvent 
QRM and risk the execution of the cumulative size of market makers' 
quotations across multiple series without market makers' being aware of 
these complex orders or having an opportunity to adjust their 
quotes.\21\ Accordingly, the Exchange believes that reducing market 
maker risk in the regular market by requiring complex orders in Hybrid 
classes with three or more legs to be subject to a COA--which will 
allow market makers to react accordingly, including adjusting their 
quotes to avoid the circumvention of their QRM parameter settings--will 
benefit investors by encouraging market makers to provide additional 
liquidity in the regular market and enhance competition in those 
classes.\22\ According to the Exchange, this potential benefit to 
investors far exceeds any ``perceived detriment'' to requiring certain 
complex orders to be subject to a COA prior to potential interaction 
with the leg markets.\23\ The Exchange notes that complex orders with 
three or more legs will still have opportunities for execution through 
a COA, in the COB or in the leg markets if they do not execute at the 
end of the COA.\24\
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    \20\ See Notice, supra note 3, at 13362.
    \21\ See id.
    \22\ See id.
    \23\ See id.
    \24\ See id.
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    In the Notice, the Exchange states that it will announce the 
implementation date of the proposed rule change in a Regulatory 
Circular to be published no later than 90 days following the effective 
date of this proposed rule change.\25\ The Exchange also states that 
the implementation date will be no later than 180 days following the 
effective date of this proposed rule change.\26\
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    \25\ See Notice, supra note 3, at 13363.
    \26\ See id.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-CBOE-
2014-017 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \27\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change, as discussed below. 
Institution of proceedings does not indicate that the Commission has 
reached any conclusions with respect to any of the issues involved. 
Rather, as described in greater detail below, the Commission seeks and 
encourages interested persons to provide additional comment on the 
proposed rule change.
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    \27\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\28\ the Commission is 
providing

[[Page 33629]]

notice of the grounds for disapproval under consideration. The 
Commission is instituting proceedings to allow for additional analysis 
of, and input from commenters with respect to, the proposed rule 
change's consistency with Section 6(b)(5) of the Act, which require 
that the rules of a national securities exchange be designed, among 
other things, to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, 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; and not be designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers.\29\
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    \28\ Id. Section 19(b)(2)(B) of the Exchange Act also provides 
that proceedings to determine whether to disapprove a proposed rule 
change must be concluded within 180 days of the date of publication 
of notice of the filing of the proposed rule change. See id. The 
time for conclusion of the proceedings may be extended for up to 60 
days if the Commission finds good cause for such extension and 
publishes its reasons for so finding. See id.
    \29\ 15 U.S.C. 78f(b)(5).
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
concerns identified above, as well as any other concerns they may have 
with the proposed rule change. In particular, the Commission invites 
the written views of interested persons concerning whether the proposal 
is consistent with Section 6(b)(5) \30\ or any other provision of the 
Act, or the rules and regulations thereunder. Although there do not 
appear to be any issues relevant to approval or disapproval which would 
be facilitated by an oral presentation of views, data, and arguments, 
the Commission will consider, pursuant to Rule 19b-4, any request for 
an opportunity to make an oral presentation.\31\
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    \30\ Id.
    \31\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Reps. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change should be approved 
or disapproved by July 2, 2014. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
July 16, 2014. The Commission asks that commenters address the 
sufficiency and merit of the Exchange's statements in support of the 
proposed rule change, in addition to any other comments they may wish 
to submit about the proposed rule change. In particular, the Commission 
seeks comment on the following:
    1. According to the Exchange, the proposed rule change is designed 
to limit a market maker's risk against executions of complex orders 
with three or more legs. Please provide data, if available, showing how 
the execution of such orders against market maker quotes in the regular 
market affects a market maker's risk exposure, including for complex 
orders with only three legs.
    2. Do commenters agree with CBOE's assertion that the potential 
risk to market makers in the regular market that may result from 
complex orders with three or more legs legging into the regular market 
outweighs the potential benefit of continuing to allow a COA to remain 
voluntary for complex orders with three or more legs? If so, why? If 
not, why not?
    3. Do commenters agree with CBOE's assertion that the proposed rule 
change would encourage market makers to provide additional liquidity on 
the Exchange? If so, why? If not, why not? To the extent possible, 
please provide supporting data.
    4. Do commenters agree with CBOE's assertion that any resulting 
benefit to investors far exceeds any ``perceived detriment'' of 
requiring certain complex orders to be subject to a COA prior to 
potential interaction with the leg markets? If so, why? If not, why 
not? What are the possible ``perceived detriment[s]'' that could result 
from the proposal?
    5. The proposed rule change would require that complex orders of 
three or more legs be subject to a COA prior to potential interaction 
with the leg markets. What are commenters' views on the impact of such 
a requirement on the execution of such complex orders? Please explain.
    6. Do commenters agree with CBOE's assertion that market makers may 
reduce the size of their quotations if complex orders of three or more 
legs are able to execute against the leg markets? Have market makers 
already begun to reduce the size of their quotations as a result of 
such orders? If so, when did market makers begin reducing the size of 
their quotes? Was there a particular event or other change that 
resulted in additional executions against the leg markets that, in 
turn, prompted market makers to begin changing the size of their 
quotes? To the extent possible, please provide supporting data.
    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-2014-017 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2014-017. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filings 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-2014-017 and should be 
submitted on or before July 2, 2014. Rebuttal comments should be 
submitted by July 16, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(57).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-13559 Filed 6-10-14; 8:45 am]
BILLING CODE 8011-01-P


