
[Federal Register Volume 79, Number 211 (Friday, October 31, 2014)]
[Notices]
[Pages 64858-64862]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-25877]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73435; File No. SR-CBOE-2014-071]


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

October 27, 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 October 15, 2014, Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I, II, and III 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 related to the complex 
order book (``COB''). The text of the proposed rule change is provided 
below.

(additions are italicized; deletions are [bracketed])
* * * * *

Chicago Board Options Exchange, Incorporated Rules

* * * * *

Rule 6.53C. Complex Orders on the Hybrid System

    (a)-(d) No change.
    . . . Interpretations and Policies:
    .01-.10 No change.
    .11 Execution of Complex Orders on the COB Open:
    (a) Complex orders, including stock-option orders, do not 
participate in opening rotations for individual component option series 
legs conducted pursuant to Rule 6.2B. When the last of the individual 
component option series legs that make up a complex order strategy has 
opened (and, in the case of a stock-option order, the underlying stock 
has opened), the COB for that strategy will open. The COB will open 
with no trade, except as follows:
    ([a]i) The COB will open with a trade against the individual 
component option series legs if there are complex orders on only one 
side of the COB that are marketable against the opposite side of the 
derived net market. The resulting execution will occur at the derived 
net market price to the extent marketable pursuant to the rules of 
trading priority otherwise applicable to incoming electronic orders in 
the individual component legs. To the extent there is any remaining 
balance, the complex orders will trade pursuant to subparagraph (ii) 
below or, if unable to trade, be processed as they would on an intra-
day basis under Rule 6.53C. [(]This subparagraph ([a]i) is not 
applicable to

[[Page 64859]]

stock-option orders because stock-option orders do not trade against 
the individual component option series legs when the COB opens.[)]
    ([b]ii) The COB will open (or continue to open with another trade 
if a trade occurred pursuant to subparagraph (i) above) with a trade 
against complex orders if there are complex orders in the COB 
(including any remaining balance of an order that enters the COB after 
a partial trade with the legs pursuant to subparagraph (i)) that are 
marketable against each other and priced within the derived net market. 
The resulting execution will occur at a market clearing price that is 
inside the derived net market and that matches complex orders to the 
extent marketable pursuant to the electronic allocation algorithm from 
Rule 6.45A or 6.45B, as applicable, as determined by the Exchange on a 
class-by-class basis[. In determining the priority,] with the addition 
that the COB gives priority to complex orders whose net price is better 
than the market clearing price first, and then to complex orders at the 
market clearing price. To the extent there is any remaining balance, 
the complex orders will be processed as they would on an intra-day 
basis under Rule 6.53C. [(]This subparagraph ([b]ii) is applicable to 
stock-option orders.[)]
    ([c]b) The ``derived net market'' for a stock-option order strategy 
will be calculated using the Exchange's best bid or offer in the 
individual option series leg(s) and the NBBO in the stock leg. The 
``derived net market'' for any other complex order strategy will be 
calculated using the Exchange's best bid or offer in the individual 
option series legs.
    (c) The Exchange may also use the process described in paragraph 
(a) of this Interpretation and Policy .11 when the COB reopens a 
strategy after a time period during which trading of that strategy was 
unavailable.
    .12 No change.
* * * * *
    The text of the proposed rule change is also 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 Exchange proposes to amend its rules related to its COB. Rule 
6.53C, Interpretation and Policy .11 describes how complex orders 
execute when the COB opens. Complex orders do not participate in the 
opening rotation for the individual leg series (which occurs pursuant 
to Rule 6.2B). Rather, the COB for a complex order strategy will open 
when the last of the individual legs series that make up the strategy 
has opened (and, in the case of a stock-option order, when the 
underlying stock has opened). Under the current rules, the COB will 
open with no trade, except as follows:
     The COB will open with a trade against the individual 
component option series legs if there are complex orders on only one 
side of the COB that are marketable against the opposite side of the 
derived net market.\3\ The resulting execution will occur at the 
derived net market price to the extent marketable. To the extent there 
is any remaining balance, the complex orders will be processed as they 
would on an intra-day basis under Rule 6.53C.\4\ This does not apply to 
stock-option orders, which cannot trade against the individual leg 
series when the COB opens.
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    \3\ The ``derived net market'' is calculated based on the 
Exchange's best bid or offer (``BBO'') in the individual series 
legs. For stock-option orders, the derived net market is calculated 
based on the BBO in the individual option series leg(s) and the 
national best bid or offer (``NBBO'') in the stock leg. See Rule 
6.53C, Interpretation and Policy .11(c) (which this rule filing 
proposes to change to paragraph (b)).
    \4\ Pursuant to Rule 6.53C, complex orders may either enter the 
COB or process through a complex order auction (COA).
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     The COB will open with a trade against complex orders if 
there are complex orders in the COB that are marketable against each 
other and priced within the derived net market. The resulting execution 
will occur at a market clearing price that is inside the derived net 
market and that matches complex orders to the extent marketable. In 
determining the priority, the COB gives priority to complex orders 
whose net price is better than the market clearing price first, and 
then to complex orders at the market clearing price. To the extent 
there is any remaining balance, the complex orders will be processed as 
they would on an intra-day basis under Rule 6.53C.\5\ This applies to 
stock-option orders.
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    \5\ Id.
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    The proposed rule change adds to current paragraph (b) of 
Interpretation and Policy .11 \6\ that the Exchange may determine, on a 
class-by-class basis, which electronic allocation algorithm \7\ will 
apply to complex order trades on the COB open pursuant to current 
paragraph (b) (proposed paragraph (a)(ii)).\8\ The Exchange may 
determine on a class-by-class basis which electronic allocation 
algorithm from Rule 6.45A or 6.45B, as applicable, will apply to 
executions to opening rotations.\9\ This opening allocation algorithm 
may be different than the intraday allocation algorithm. The proposed 
rule change provides the Exchange with the same flexibility with 
respect to executions of complex orders on the COB open. While Rule 
6.53C, Interpretation and Policy .09 provides the Exchange with the 
flexibility to determine on a class-by-class basis which electronic 
allocation algorithm from Rule 6.45A or 6.45B, as applicable, will 
apply to COB executions (in lieu of the algorithm specified in Rule 
6.53C(c)(ii)(2) and (3) \10\), Interpretation

[[Page 64860]]

and Policy .11 does not state that the applicable allocation algorithm 
for complex order executions on the COB open may be different than the 
intraday allocation algorithm for the COB. The proposed rule change 
adds this detail to the rules and allows the Exchange to determine on a 
class-by-class basis which electronic allocation algorithm will apply 
to complex order trades on the COB open, which may be different than 
the allocation algorithm applicable to intraday complex order trades on 
the COB.\11\ The Exchange will announce any allocation algorithm 
determinations via Regulatory Circular.\12\
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    \6\ The proposed rule change reorganizes Interpretation and 
Policy .11. This proposed language appears in proposed paragraph 
(a)(ii) (current paragraph (b)), which is the paragraph related to 
trades of complex orders on the COB at the open.
    \7\ The electronic allocation algorithms include price-time, 
pro-rata, and the ultimate matching algorithm base priorities and a 
combination of various optional priority overlays pertaining to 
public customer priority, Market-Maker participation entitlements, 
small order preference and market turn. See Rules 6.45A (related to 
equity options) and 6.45B (related to index and exchange-traded fund 
(ETF) options).
    \8\ The proposed rule change also adds to current paragraph (a) 
(proposed paragraph (a)(i)) that executions of complex orders 
against the individual legs will be pursuant to the rules of trading 
priority otherwise applicable to incoming electronic orders in the 
individual component legs. The current rule is silent on what 
electronic allocation algorithm applies to executions of complex 
orders on the COB against the individual legs. The Exchange believes 
the proposed rule text merely eliminates any potential confusion 
regarding how complex orders will be allocated in accordance with 
proposed paragraph (a)(i).
    \9\ See Rule 6.2B, Interpretation and Policy .04.
    \10\ Rule 6.53C(c)(ii) states that complex orders submitted to 
the COB may trade as follows: (a) A complex order in the COB will 
automatically execute against individual quotes and orders on the 
book; (b) complex orders in the COB that are marketable against each 
other will automatically execute, and the allocation of such 
executions will be pursuant to the rules of trading priority 
otherwise applicable to incoming electronic orders in the individual 
component legs; and (c) market participants may submit orders or 
quotes to trade against orders in the COB, and the allocation of 
such executions will be pursuant to Rule 6.45A(c) or 6.45B(c), as 
applicable (which describes the interaction of a market 
participant's quotes and orders with orders in the electronic book).
    \11\ Currently, complex orders that execute against complex 
orders in the COB on the open (proposed subparagraph (a)(ii)) 
allocate pursuant to price-time priority.
    \12\ See Rule 6.53C, Interpretation and Policy .01 (which states 
that the Exchange will announce to Trading Permit Holders via 
Regulatory Circular all pronouncements regarding determinations by 
the Exchange pursuant to Rule 6.53C and the Interpretations and 
Policies thereunder).
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    The Exchange is not proposing to adopt any new allocation 
algorithms or priority rules nor is it proposing to modify the COB 
opening process.\13\ Rather, it is adding detail to the Exchange rule 
regarding the COB opening process and providing the Exchange with 
flexibility to choose an algorithm from among the existing algorithms 
that will apply to complex order trades on the COB open, rather than 
simply defaulting to the algorithm in effect for intraday trading on 
the COB in that class. The Exchange believes this flexibility is 
consistent with its other rules regarding the determination of 
allocation algorithms and will further promote fair and orderly 
openings of strategies on the COB.\14\
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    \13\ The Exchange represents that complex orders continue to 
have opportunities to trade against the leg markets, both at the 
open pursuant to proposed paragraph (a)(i) and intraday pursuant to 
Rule 6.53C(c) (execution of orders in the COB) and (d) (execution of 
orders through COA). Additionally, this filing does not change the 
complex order priority principles (including public customer 
priority) set forth in Rules 6.45A, 6.45B and 6.53C.
    \14\ Additionally, because Rules 6.2B, Interpretation and Policy 
.04, 6.45A, 6.45B and 6.53C, Interpretation and Policy .09 provide 
the Exchange with flexibility to determine allocation algorithms on 
a class-by-class basis, the Exchange believes it is appropriate to 
provide the same class-by-class flexibility to trading at the COB 
open.
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    The proposed rule change also adds detail to proposed paragraph 
(a)(ii) regarding which trades on the COB are deemed to be part of the 
opening of the COB (and thus subject to the allocation algorithm in 
place for the COB open). To the extent a complex order partially trades 
with the leg series on the COB open, and the remaining balance enters 
the COB (pursuant to Rule 6.53C) as set forth in proposed subparagraph 
(a)(i), if that remaining balance is marketable against another complex 
order on the COB at the open, those orders will execute as set forth in 
proposed subparagraph (a)(ii). Thus, any execution of that remaining 
balance on the COB is considered an execution at the COB open, as the 
open is intended to cause any marketable complex orders to trade, and 
thus subject to proposed subparagraph (a)(ii) (current paragraph (b)). 
The proposed rule change makes a corresponding change to proposed 
paragraph (a)(i) to provide that any remaining balance may trade 
pursuant to proposed paragraph (a)(ii) (if unable to trade, it will be 
processed as it would on an intra-day basis). The proposed rule change 
also makes a corresponding change to proposed paragraph (a)(ii) to 
provide that the COB will open, or continue to open, with a trade of 
complex orders on the COB, as the COB opening may already have been 
initiated by a trade pursuant to paragraph (a)(i).
    For example, suppose Complex Order X is an order to buy 20 Series A 
and 20 Series B for a net price of $2.40 and on the COB at the open. If 
the market for Series A is $1.00-$1.20 and the market for Series B is 
$1.00-$1.20 (for a net price of $2.00-$2.40), with the offer to sell at 
$2.40 for 10 contracts, then when the COB opens, 10 contracts of 
Complex Order X will trade against the 10 contracts in the leg markets. 
The remaining balance of 10 of Complex Order X then enters the COB 
pursuant to Rule 6.53C(c). If Complex Order Y to sell 10 Series A and 
10 Series B at $2.40 is on the COB at the open, then the remaining 
balance of Complex Order X will trade against Complex Order Y. This 
trade of Complex Order X against Complex Order Y is part of the COB 
open. If there were multiple complex orders at the same price, they 
would allocate in accordance with the algorithm in place for the COB 
open.
    The Exchange believes that the rule text is currently unclear as to 
whether any remaining balance from proposed subparagraph (a)(i) enters 
the COB and is marketable against the COB would trade in accordance 
with COB open or COB intraday rules. Currently, if the remaining 
balance is marketable against other complex orders in the COB, the 
System will execute the remaining balance against orders in the COB as 
part of the COB open (and thus in accordance with the opening matching 
algorithm). Generally, the ``opening'' includes all trades that would 
``clear'' the market.\15\ The proposed rule change is consistent with 
this idea and adds this detail to proposed subparagraph (a)(ii) to 
codify the intent of the current rule.
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    \15\ See Rule 6.2B regarding the opening of series at a market-
clearing price and Rule 6.53C, Interpretation and Policy .11(b) 
regarding the opening of the COB at a market-clearing price.
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    In addition, the proposed rule change adds paragraph (c) to 
Interpretation and Policy .11, which states that the Exchange may use 
the process described in paragraph (a) when the COB reopens a strategy 
after a time period during which trading of that strategy was 
unavailable pursuant to the rules. The Exchange may use the opening 
rotation process to reopen a class after a trading halt.\16\ The 
proposed rule change provides the Exchange with the same flexibility 
with respect to reopening the COB. Trading of strategies may be 
unavailable on the COB, for example, if there is a trading halt in the 
underlying security or if trading on the COB is ``on hold'' because the 
derived net market is outside of price check parameters set by the 
Exchange to prevent extreme executions.\17\ The Exchange uses the 
opening rotation process to reopen after a trading halt to provide for 
an orderly reopening, and the Exchange would similarly like to provide 
for a fair and orderly reopening of the COB after any period during 
which COB trading was unavailable.
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    \16\ See Rule 6.2B(g).
    \17\ See Rule 6.53C, Interpretation and Policy .08. For example, 
pursuant to paragraph (a)(3), if the BBO or derived net market is 
not within an acceptable price range, the System holds marketable 
limit orders and does not allow trading of complex orders for that 
strategy until the market is no longer outside the applicable price 
range.
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    The proposed rule change also makes nonsubstantive, technical 
changes to Interpretation and Policy .11, including adding and 
modifying subparagraph lettering and numbering, indenting 
subparagraphs, and deleting unnecessary parentheticals.
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.\18\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \19\ 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

[[Page 64861]]

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) \20\ requirement that the rules 
of an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(5).
    \20\ Id.
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    In particular, the proposed rule change adds detail to its rules 
regarding the opening of trading on its COB, which benefits investors. 
The Exchange believes the flexibility provided by the proposed rule 
change is consistent with its other rules. The Exchange already has 
flexibility to apply a different allocation algorithm at the open of 
trading of simple orders and to use its opening procedure after a 
trading halt for simple orders.\21\ It also already has the flexibility 
to apply a different allocation algorithm to complex order executions 
on the COB.\22\ The Exchange is merely extending this flexibility to 
the opening and reopening of trading of complex orders on the COB. The 
Exchange notes that the level of trading activity is often different at 
the open than during the trading day. To ensure a fair and orderly 
opening in light of this trading activity, rules often allow the 
Exchange to apply them in a different manner to the opening of trading 
(such as different bid-ask differential requirements, different price 
reasonability checks and different allocation algorithms). The Exchange 
believes extending similar flexibility to the opening of complex order 
trading on the Exchange will allow it to similarly ensure a fair and 
orderly COB open, which protects investors and promotes just and 
equitable principles of trade.
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    \21\ See Rule 6.2B(g) (use of opening procedures after a trading 
halt) and Interpretation and Policy .04 (determination of allocation 
algorithm on a class-by-class basis during opening rotations, which 
may be different than allocation algorithm for intraday trading).
    \22\ See Rule 6.53C, Interpretation and Policy .09.
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    The proposed rule change that specifies that the remaining balance 
of a complex order that partially trades with the individual leg series 
may be executed as part of the COB open provision, and that the COB 
open may include both trades of complex orders with the legs and with 
other complex orders, further benefits investors and promotes an open 
market by adding detail to the rules regarding how the System treats 
this remaining balance. Openings generally include a series of trades 
in order to execute all orders that are marketable upon the open, and 
the Exchange believes the proposed rule change is consistent with that 
idea.

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 complex order trading on the COB when it opens or 
reopens. In addition, the proposed rule change applies only to the COB 
opening process on the Exchange. Its purpose is to include the COB 
opening procedure that is currently in place on the Exchange, which 
procedure is designed to open complex order strategies on the Exchange 
in a fair and orderly manner. The proposed rule change does not help 
CBOE market participants to the detriment of market participants on 
other exchanges.

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

    Because the foregoing proposed rule change does not:
    A. Significantly affect the protection of investors or the public 
interest;
    B. impose any significant burden on competition; and
    C. become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \23\ and 
Rule 19b-4(f)(6) \24\ 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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    \23\ 15 U.S.C. 78s(b)(3)(A).
    \24\ 17 CFR 240.19b-4(f)(6).
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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-2014-071 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-2014-071. 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 filing also will be available 
for inspection and copying at the principal offices 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-2014-071, 
and should be submitted on or before November 21, 2014.


[[Page 64862]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-25877 Filed 10-30-14; 8:45 am]
BILLING CODE 8011-01-P


