
[Federal Register Volume 79, Number 152 (Thursday, August 7, 2014)]
[Notices]
[Pages 46282-46285]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-18650]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72742; File No. SR-CBOE-2014-059]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating To Amend Market-Maker Quoting Obligations

August 1, 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 July 22, 2014, Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or

[[Page 46283]]

``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 amend its rules regarding Market-Maker 
quoting obligations. 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, and at the Commission's Public Reference Room.

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 amend Rules 1.1(ccc), 
8.7, 8.13, 8.15A, and 8.85: (i) To provide that compliance with 
continuous quoting obligations apply to Market-Makers' appointed 
classes collectively and (ii) to provide that the Exchange will 
determine Market-Makers' compliance with continuous quoting obligations 
on a monthly basis. These changes do not substantially change Market-
Makers' quoting obligations and make CBOE's Market-Maker obligations 
more consistent with market-maker obligations at other options 
exchanges. The proposed rule change only changes how and when the 
Exchange determines a Market-Maker's compliance with continuous quoting 
obligations.
Collective Application
    Rule 1.1(ccc) currently provides that a Market-Maker who is 
obligated to provide continuous electronic quotes on the Exchange's 
Hybrid Trading System will be deemed to have provided continuous 
electronic quotes if the Market-Maker provides electronic two-sided 
quotes for 90% of the time that the Market-Maker is required to provide 
electronic quotes in an appointed option class on a given trading 
day.\3\ Rules 8.7, 8.13, 8.15A, and 8.85 impose the following 
continuous electronic quoting obligations on Market-Makers, Preferred 
Market-Makers (``PMMs''), Lead Market-Makers (``LMMs''), and Designated 
Primary Market-Makers (``DPMs''), respectively (collectively, ``Market-
Makers'' unless the context otherwise requires): \4\
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    \3\ Rule 1.1(ccc) also provides that if a technical failure or 
limitation of a system of the Exchange prevents a Market-Maker from 
maintaining or communicating to the Exchange timely and accurate 
electronic quotes in a class, the duration of such failure will not 
be considered in determining whether the Market-Maker has satisfied 
the 90% quoting standard with respect to that class. The Exchange 
may consider other exceptions to this continuous electronic quote 
obligation based on demonstrated legal or regulatory requirements or 
other mitigating circumstances.
    \4\ Rule 8.15 imposes obligations on LMMs in Hybrid 3.0 classes. 
The Exchange intends to propose similar changes to those obligations 
in a separate rule filing that will update those obligations, 
including codify Hybrid 3.0 LMMs' continuous quoting obligations.
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     Rule 8.7(d)(ii)(B) requires Market-Makers to provide 
continuous electronic quotes when quoting in a particular class on a 
given trading day in 60% of the non-adjusted option series of the 
Market-Maker's appointed class that have a time to expiration of less 
than nine months; \5\
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    \5\ This obligation applies in classes to which a Market-Maker 
is appointed and transacts more than 20% of its contract volume 
electronically. The proposed rule change makes nonsubstantive, 
technical changes to the introductory language and headings in Rule 
8.7(d) that are consistent with the existing rule text in that 
paragraph.
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     Rule 8.13(d) requires PMMs to provide continuous 
electronic quotes when the Exchange is open for trading in at least the 
lesser of 99% of the non-adjusted option series that have a time to 
expiration of less than nine months or 100% of the non-adjusted option 
series that have a time to expiration of less than nine months minus 
one call-put pair \6\ of each class for which it receives Preferred 
Market-Maker orders;
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    \6\ A ``call-put'' pair refers to one call and one put that 
cover the same underlying instrument and have the same expiration 
date and exercise price.
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     Rule 8.15A(b)(i) requires LMMs to provide continuous 
electronic quotes when the Exchange is open for trading in at least the 
lesser of 99% of the non-adjusted option series or 100% of the non-
adjusted option series minus one call-put pair within their assigned 
classes; and
     Rule 8.85(a)(i) requires DPMs to provide continuous 
electronic quotes when the Exchange is open for trading in at least the 
lesser of 99% of the non-adjusted option series or 100% of the non-
adjusted option series minus one call-put pair in each of their 
allocated classes.

These continuous electronic quoting obligations do not apply to intra-
day add-on series on the day during which such series are added for 
trading.
    CBOE proposes to amend Rules 1.1(ccc),\7\ 8.7(d)(ii)(B), 8.13(d), 
8.15A(b)(i), and 8.85(a)(i) to provide that the continuous electronic 
quoting obligation for Market-Makers will be applied collectively 
across all classes in which the Market-Maker has appointments (as 
discussed above, with respect to each Market-Maker type as the Market-
Maker is approved to act), rather than on a class-by-class basis.\8\

[[Page 46284]]

The Exchange believes that applying the continuous electronic quoting 
requirements for Market-Makers collectively across all classes is a 
fair and efficient way for the Exchange and market participants to 
evaluate compliance with the continuous electronic quoting obligation. 
Applying the continuous electronic quoting requirements collectively 
across all classes rather than on a class-by-class basis is beneficial 
to Market-Makers by providing some flexibility to choose which series 
in their appointed classes they will continuously electronically 
quote--increasing the continuous electronic quoting in the series of 
one class while allowing for a decrease in the continuous electronic 
quoting in the series of another class. This flexibility, however, does 
not diminish the Market-Maker's obligation to continuously 
electronically quote in a significant percentage of series for a 
significant part of the trading day. This flexibility is especially 
important for classes that have relatively few series and may prevent a 
Market-Maker from reaching the continuous electronic quoting obligation 
when failing to quote 90% of the trading day in more than one series in 
an appointed class. The Exchange believes that the proposed rule change 
will not diminish, and may in fact increase, market-making activity on 
the Exchange, by applying continuous electronic quoting obligations in 
a reasonable manner, which is already in place on other options 
exchanges.\9\
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    \7\ The proposed rule change indicates that the quoting 
obligation applies collectively with respect to each Market-Maker 
type as the Hybrid Market-Maker is approved to act. As this rule 
filing demonstrates, the Exchange has several types of Market-
Makers, each of which has separate quoting obligations. Thus, the 
collective application of the continuous quoting obligation applies 
to classes for each Market-Maker type (i.e. classes for which the 
Market-Maker has the same quoting obligation). For example, if a 
Market-Maker is a Trading Permit Holder organization with 
appointments in ten classes, with 100 series in each, for a total of 
1,000 series (with an obligation to quote in 60% of the series in 
those classes 90% of the time it is quoting in those classes) and 
acts as a DPM in three classes, with 100 series in each, for a total 
of 300 series (with an obligation to quote the lesser of 99% of the 
series or 100% of the series minus one call-put pair in those 
classes 90% of the time), for purposes of compliance with the 
continuous quoting obligation, the Trading Permit Holder must quote 
in 600 series (or 60% of the series) in the ten Market-Maker classes 
collectively for 90% of the time it is quoting in those classes and 
297 series (or 99% of the series) in the three DPM classes 
collectively for 90% of the trading day. While other exchanges do 
not explicitly state this in their rules, the Exchange believes this 
is consistent with the application of those exchanges' rules, as it 
would not be possible to apply the collective standard across 
classes for which a Market-Maker has different quoting obligations.
    \8\ With respect to Rule 8.7(d)(ii)(B), the proposed rule change 
indicates that it applies collectively to all appointed classes for 
which it must maintain continuous electronic quotes (i.e. those 
classes in which the Market-Maker transacts more than 20% of its 
contract volume electronically). The proposed rule change makes a 
corresponding change to Rule 8.7(d)(iii), including adding an 
example to demonstrate the collective application of the continuous 
electronic quoting obligation for Market-Makers. The proposed rule 
change makes corresponding changes to Rule 8.13(d) to delete rule 
text that a PMM must quote the specified percentage of series in 
each class it receives PMM orders, to Rule 8.15A(b)(ii) [sic] to 
delete rule text that an LMM must quote the specified percentage of 
series within its assigned classes, and to Rule 8.85(a)(i) to delete 
rule text that a DPM must quote the specified percentage of series 
in each class allocated to it. This language is no longer applicable 
given the proposed collectively application of the continuous 
quoting obligation.
    \9\ See, e.g., Box Options Exchange, LLC (``BOX'') Rule 8050(e); 
International Securities Exchange, LLC (``ISE'') Rule 804, 
Supplementary Material .01; Miami International Securities Exchange, 
LLC (``MIAX'') Rule 604(e); NYSE Arca, Inc. (``NYSE Arca'') Options 
Rules 6.37B(b) and (c) and 6.88(iv); and NYSE MKT LLC (``NYSE MKT'') 
Options Rules 925.1NY(b) and (c) and 964.1NY(iv).
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Monthly Compliance
    The continuous electronic quoting obligations described above apply 
on a daily basis. CBOE proposes to amend Rules 1.1(ccc), 8.7(d)(iii), 
8.13(d), 8.15A(b)(i), and 8.85(a)(i) to provide that the Exchange will 
determine compliance by Market-Makers with continuous electronic 
quoting obligations on a monthly basis.\10\ Determining compliance with 
these quoting obligations does not relieve Market-Makers from meeting 
these quoting obligations on a daily basis, nor does it prohibit the 
Exchange from taking disciplinary action against Market-Makers for 
failing to meet any of these requirements each trading day.
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    \10\ The Exchange will continue to provide to Market-Makers 
daily reports to enable them to monitor their compliance with their 
quoting obligations. On the basis of these daily reports, the 
Exchange will continue to monitor Market-Maker compliance on a daily 
basis and inform Market-Makers if they are failing to satisfy their 
quoting obligations. Additionally, on the basis of this daily 
monitoring activity, the Exchange can determine whether Market-
Makers violated any other Exchange rules, such as Rule 4.1 regarding 
just and equitable principles of trade. This daily monitoring will 
allow the Exchange to investigate unusual activity and to take 
appropriate regulatory action.
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    Similar to the proposed rule change to apply continuous electronic 
quoting obligations to all classes collectively, the Exchange believes 
that reviewing compliance on a monthly basis is a fair and more 
efficient way for the Exchange and market participants to evaluate 
compliance with these quoting obligations. Reviewing compliance on a 
monthly basis allows the Exchange to review a Market-Maker's daily 
compliance in the aggregate and determine the appropriate disciplinary 
action for single or multiple compliance failures during a one-month 
period. CBOE believes that the proposed rule change will not diminish, 
and in fact may increase, market-making on the Exchange by establishing 
quoting compliance standards that are reasonable and, with respect to 
continuous electronic quoting obligations, already in place on other 
options exchanges.\11\ CBOE also believes that determining compliance 
by Market-Makers with all of these quoting obligations on a monthly 
basis will facilitate CBOE's determination of appropriate penalties or 
other remedial measures for violation(s) of these obligations.
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    \11\ See, e.g., ISE Rule 804(e), Supplementary Material .01; 
MIAX Rule 604(e); and NASDAQ OMX PHLX LLC (``PHLX'') Rule 
1014(b)(ii)(D)(1) and (2).
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    The Exchange 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. The implementation date will be no 
later than 180 days following the effective date. Because the proposed 
change provides for a monthly compliance standard, the Exchange 
believes it is appropriate for implementation of the proposed rule 
change to occur on the first trading day of a month. Additionally, the 
implementation date will provide sufficient time for the Exchange to 
make any necessary changes to its surveillances with respect to 
continuous quoting obligations and for Market-Makers to make any system 
changes in connection with the proposed collective standard.
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.\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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    The proposed rule change removes impediments to and perfects the 
mechanisms of a free and open market and a national market system 
because it is consistent with standards currently in place on other 
options exchanges. With respect to the application of continuous 
electronic quoting obligations collectively, the Exchange believes that 
providing Market-Makers with flexibility to satisfy their continuous 
electronic quoting obligations collectively across their appointed 
classes will not diminish Market-Makers' obligations to provide 
continuous electronic quotes in a significant percentage of series for 
a significant part of the trading day. With respect to the monthly 
compliance standard, the Exchange believes that the proposed rule 
change will enhance compliance efforts by Market-Makers and the 
Exchange. The Exchange believes that determining compliance with 
continuous electronic quoting obligations on a monthly basis will 
prevent fraudulent and manipulative acts and practices and to promote 
just and equitable principles of trade, because it will increase 
regulatory efficiency to the benefit of both the Exchange and market 
participants. The Exchange believes that the proposed rule change will 
not diminish, and in fact may increase, market-making

[[Page 46285]]

activity and liquidity on the Exchange by establishing a quoting 
compliance standard that is reasonable and is already in place on other 
options exchanges.
    CBOE continues to believe that the balance between the obligations 
imposed on and benefits provided to Market-Makers under the rules is 
appropriate. The proposed rule change does not diminish any of the 
obligations imposed on Market-Makers. Rather, it merely changes how the 
continuous electronic quoting obligation is applied and when the 
Exchange determines compliance with continuous electronic quoting 
obligations. The Exchange notes that Market-Makers are subject to many 
obligations under the rules, including the obligation to satisfy bid/
ask differential requirements, to meet minimum quote size requirements, 
and to contribute to the maintenance of a fair and orderly market in 
their appointed classes, which the Exchange believes will ensure 
continued liquidity on the Exchange. CBOE believes that its proposed 
rule change is consistent with the Act in that providing flexibility 
does not detract from the overall market-making obligations of Market-
Makers. The proposed rule change better supports a Market-Maker's 
continuous obligation to engage in dealings for its own account. 
Accordingly, any benefits of the proposed rule change to provide 
flexibility to Market-Makers are offset by the continued 
responsibilities to provide significant liquidity to the market to the 
benefit of all market participants.

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 proposed rule change 
applies to all Market-Makers. All Market-Makers may benefit from the 
flexibility provided by the proposed rule change, which benefit is 
offset by the continued responsibilities to provide significant 
liquidity to the market to the benefit of all market participants. The 
proposed rule change to the compliance standard does not change the 
obligations imposed on Market-Makers; it merely changes the time at 
which the Exchange will determine compliance with these obligations. 
The proposed rule change is substantially similar to rules in place at 
other options exchanges, which the Exchange believes may enhance, 
rather than burden, competition among the options exchanges. CBOE is 
better able to compete for liquidity providers when its Market-Maker 
obligations are consistent with those of other options exchanges, which 
may increase competition and liquidity on CBOE. Market participants on 
other exchanges are welcome to trade at CBOE if they determine that 
this proposed rule change has made CBOE more attractive or favorable to 
them.

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 
paragraph (A) of section 19(b)(3) of the Exchange 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 for 30 days after the date of the filing, 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 
\17\ and Rule 19b-4(f)(6)(iii) thereunder.\18\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
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 the 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 pre-filing requirement.
    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f)(6)(iii).
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    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.

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-2014-059 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-2014-059. 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-2014-059 and should be 
submitted on or before August 28, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2014-18650 Filed 8-6-14; 8:45 am]
BILLING CODE 8011-01-P


