
[Federal Register Volume 79, Number 215 (Thursday, November 6, 2014)]
[Notices]
[Pages 66016-66018]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-26346]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73487; File No. SR-CBOE-2014-067]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to the Automatic Order Handling Process 
in No-Bid Series

October 31, 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 22, 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Exchange rules regarding the 
automatic order handling process in no-bid series. 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 Exchange proposes to amend its rules regarding its automatic 
order handling process. The proposed rule change seeks to modify 
subparagraph (vi) to Rule 6.13(b), which sets forth how the CBOE Hybrid 
System \3\ handles market orders to sell in option series for which the 
national best bid in the series is zero (``no-bid series'').\4\ 
Currently, if the CBOE Hybrid System receives during the trading day or 
has resting in the electronic book \5\ after the opening of trading a 
market order to sell in a no-bid series, it handles the order as 
follows:
---------------------------------------------------------------------------

    \3\ The CBOE Hybrid System is a trading platform that allows 
automatic executions to occur electronically and open outcry trades 
to occur on the floor of the Exchange. To operate in this ``hybrid'' 
environment, the Exchange has a dynamic order handling system that 
has the capability to route orders to the trade engine for automatic 
execution and book entry, to Trading Permit Holder and PAR 
workstations located in the trading crowds for manual handling, and/
or to other order management terminals generally located in booths 
on the trading floor for manual handling.
    \4\ The Exchange notes that, for singly listed series, the 
national best bid is equivalent to the Exchange's best bid and the 
national best offer is equivalent to the Exchange's best offer.
    \5\ For example, the Exchange receives a market order to sell 
prior to the opening of a series and the series opens with a sell 
market order imbalance pursuant to Rule 6.2B(e)(iii). When the 
series opens the market order to sell, which was resting in the book 
prior to the opening of the series, will be routed according to the 
no-bid procedures in Rule 6.13.
---------------------------------------------------------------------------

     If the Exchange best offer in that series is less than or 
equal to $0.30, then the CBOE Hybrid System will consider, for the 
remainder of the trading day, the market order as a limit order to sell 
with a limit price equal to the minimum trading increment applicable to 
the series and enter the order into the electronic book behind limit 
orders to sell at the minimum increment that are already resting in the 
book.
     If the Exchange best offer in that series is greater than 
$0.30, then the CBOE Hybrid System will route the market order to sell 
to PAR or, at the order entry firm's discretion, to the order entry 
firm's booth. If the market order is not eligible to route to PAR, then 
it will be cancelled.
    Based on experience since the implementation of this parameter, the 
Exchange now proposes to change the parameter from $0.30 to $0.50. The 
Exchange believes that the automatic handling of market orders to sell 
in no-bid series if the Exchange best offer is less than or equal to 
$0.50 would reduce

[[Page 66017]]

the manual handling of orders and facilitate the CBOE Hybrid System's 
automatic handling process. Additionally, the $0.50 threshold serves as 
a protection feature for investors in certain situations, such as when 
a series is no-bid because the last bid traded just prior to the entry 
of the market order to sell. The purpose of this threshold is to limit 
the manual handling of market orders to sell in no-bid series to only 
those for true zero-bid options, as options in no-bid series with an 
offer of more than $0.50 are less likely to be worthless.
    For example, if the CBOE Hybrid System receives a market order to 
sell in a no-bid series with a minimum increment of $0.01 and the 
Exchange best offer is $0.01, the CBOE Hybrid System will consider, for 
the remainder of the trading day, the order as a limit order with a 
price of $0.01 and submit it to the electronic book behind other limit 
orders to sell at the minimum increment that are already resting in the 
book. At that point, even if the series is no-bid because, for example, 
the last bid just traded and the limit order trades at $0.01, the next 
bid entered after the trade would not be higher than $0.01.\6\
---------------------------------------------------------------------------

    \6\ If the order does not execute during the trading day as a 
limit order and remains outstanding after the close of trading 
(i.e., a good-til-cancelled order), the CBOE Hybrid System at that 
time will no longer consider the order as a limit order and will 
again handle the order as a market order to sell after the close of 
trading. The market order will stay on the electronic book until the 
opening of the next trading day (or until cancelled), at which point 
it may execute during the open or, if it remains unexecuted after 
the opening of trading, it will either execute with the best bid at 
the time or, if the series is still no-bid, again be handled 
pursuant to proposed Rule 6.13(b)(vi).
---------------------------------------------------------------------------

    However, if the CBOE Hybrid System receives a market order to sell 
in a no-bid series with a minimum increment of $0.01 and the Exchange 
best offer is $1.20 (because, for example, the last bid of $1.00 just 
traded and a new bid has not yet populated the Exchange's quote), the 
CBOE Hybrid System will instead route the order to PAR (or, at the 
order entry firm's discretion, to the order entry firm's booth). Manual 
handling of the order prevents an anomalous execution price, since the 
next bid entered in that series is likely to be much higher than 
$0.01.\7\ It would be unfair to the entering firm to let its market 
order trade as a limit order for $0.01 because, for example, the firm 
submitted the order during the brief time when there were no 
disseminated bids in a series trading significantly higher than the 
minimum increment. To combat the potential unfairness outlined above, 
the order entry firm has the discretion to have the market order to 
sell routed to a PAR Official,\8\ the PAR workstation of a Trading 
Permit Holder (``TPH User''), or to the order entry firm's booth. A PAR 
Official that receives such an order will review the terms of the order 
and handle the order as set forth in Rule 7.12 (e.g., the PAR Official 
may bring the order to the trading crowd or enter the order into the 
electronic book at the minimum increment). Currently, TPH Users that 
receive orders pursuant to the no-bid scenario are systematically 
blocked from booking the order into the electronic book. The Exchange 
proposes to allow TPH Users to review the order and handle the order in 
a similar manner to PAR Officials (e.g., bring the order to the trading 
crowd or enter the order into the electronic book at the minimum 
increment). The Exchange notes that PAR Officials and TPH Users must 
use due diligence to execute orders that they receive at their PAR 
workstations at the best prices available to them under the Exchange 
Rules.\9\
---------------------------------------------------------------------------

    \7\ Routing the market order to PAR or the order entry firm's 
booth provides for an alternative means through which the order may 
be executed before it is simply cancelled.
    \8\ A ``PAR Official'' is an Exchange employee or independent 
contractor whom the Exchange may designate as being responsible for 
(a) operating the PAR workstation in a DPM trading crowd with 
respect to the classes of options assigned to him/her; (b) when 
applicable, maintaining the book with respect to the classes of 
options assigned to him/her; and (c) effecting proper executions of 
orders placed with him/her. The PAR Official may not be affiliated 
with any Trading Permit Holder that is approved to act as a Market-
Maker. See Rule 7.12(a).
    \9\ See, e.g., Rule 7.12(b)(ii) (governing PAR Officials) and 
Rule 6.73(a). PAR workstations are only available on the trading 
floor; therefore, the use of a PAR workstation by a TPH User 
requires the TPH User to comply with Rule 6.73(a).
---------------------------------------------------------------------------

    The Exchange believes the threshold of $0.50 is reasonable. The 
Exchange notes that this threshold is equal to or less than the bid-ask 
differential applicable to all options classes.\10\ The Exchange also 
notes that this threshold is less than the current acceptable price 
range (``APR'') parameter for series with a bid price of less than 
$100.00.\11\ Pursuant to the price check provision in Rule 6.13(b)(v) 
\12\ the CBOE Hybrid System will not automatically execute a marketable 
order if the width between the national best bid and national best 
offer is not within the APR, which the Exchange has currently set at 
$10.00 for any bid price between $0.00 and $100.00. Instead, the CBOE 
Hybrid System will route the order to a PAR workstation or the order 
entry firm's booth, or if the order is not eligible to route to PAR, it 
will be cancelled.\13\ Notwithstanding this provision, proposed Rule 
6.13(b)(vi) allows for the potential execution of market orders to sell 
in no-bid series with offers less than $0.50 as limit orders at the 
price of a minimum increment. If the threshold in proposed Rule 
6.13(b)(vi) were higher, the risk of having a market order trade at a 
minimum increment in a series that is not truly no-bid would increase.
---------------------------------------------------------------------------

    \10\ Bid-Ask differentials are determined by the Exchange on a 
class-by-class basis. See CBOE Rule 8.7(b)(iv) and Regulatory 
Circular RG-14-117 (Bid-Ask Differentials). Currently, the opening 
rotation and open outcry quote widths for a series with a bid of 
less than $2.00 is $0.50 for all options classes, excluding LEAPS; 
EEM; NDX; PCLN; RUT; SPX; SPXPM; UltraShorts; UltraLongs; Direxion 
3X; and DirexionShares 3X, which all have higher bid-ask 
differentials. Intraday Electronic Quoting Widths are also higher 
than $0.50.
    \11\ The acceptable APR parameter is determined by the Exchange 
on a class-by-class basis. See CBOE Rule 6.13(b)(v) and CBOE 
Regulatory Circular RG14-061 (Operational Systems Settings--APR and 
OEPW).
    \12\ Rule 6.13(b)(v) also provides that the CBOE Hybrid System 
will not automatically execute eligible orders that are marketable 
if the execution would follow an initial partial execution on the 
Exchange and would be at a subsequent price that is not within an 
acceptable tick distance from the initial execution. The APR for 
purposes of Rule 6.13(b)(v) is determined by the Exchange on a 
class-by-class basis and may not be less than $0.375 between the bid 
and offer for each option contract for which the bid is less than 
$2, $0.60 where the bid is at least $2 but does not exceed $5, $0.75 
where the bid is more than $5 but does not exceed $10, $1.20 where 
the bid is more than $10 but does not exceed $20, and $1.50 where 
the bid is more than $20. An ``acceptable tick distance'' shall be 
no less than two minimum increments.
    \13\ See CBOE Rule 6.13(b)(v)(B).
---------------------------------------------------------------------------

    The proposed rule change will require the Exchange to modify the 
System in two installments. The first installment will change the $0.30 
parameter to $0.50. The second installment will allow market orders to 
sell in no-bid series that were routed to a PAR workstation of a TPH 
User to be entered into the electronic book. After the rule change is 
effective, the Exchange will announce the implementation dates for the 
two installments in a Regulatory Circular to be published no later than 
90 days following the effective date. The implementation date for each 
installment will be no later than 180 days following the effective date 
and at least two weeks after the publication of the above Regulatory 
Circular.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\14\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section

[[Page 66018]]

6(b)(5) \15\ requirements that the rules of an exchange be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest. Additionally, the Exchange 
believes the proposed rule change is consistent with the Section 
6(b)(5) \16\ requirement that the rules of an exchange not be designed 
to permit unfair discrimination between customers, issuers, brokers, or 
dealers.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
    \16\ Id.
---------------------------------------------------------------------------

    In particular, the Exchange believes that the automated handling of 
market orders to sell in no-bid series if the Exchange best offer is 
$0.50 or less assists with the maintenance of fair and orderly markets 
and protects investors and the public interest because it provides for 
automated handling of these orders, ultimately resulting in more 
efficient executions of these orders. The Exchange believes that the 
$0.50 threshold also protects investors and assists with the 
maintenance of fair and orderly markets by preventing executions of 
market orders to sell in no-bid series with higher offers at 
potentially extreme prices in series that are not truly no-bid. The 
Exchange believes this threshold appropriately reflects the interests 
of investors, as options in no-bid series with offers higher than $0.50 
are less likely to be worthless, and manual handling of these orders 
will lead to better executions for investors than would occur through 
automatic handling. The Exchange also believes that the $0.50 threshold 
promotes fair and orderly markets because market orders to sell in no-
bid series with offers of $0.50 or less are likely to be individuals 
seeking to close out a worthless position for which automatic handling 
is appropriate.

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

    CBOE does not believe that the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. More specifically, the Exchange 
does not believe that the proposed rule changes will impose any burden 
on intramarket competition because it will be applicable to all TPHs 
trading on the Exchange trading floor. In addition, the Exchange does 
not believe the proposed changes will impose any intermarket burden 
because the Exchange will operate in a similar manner only with a more 
applicable no-bid series threshold.

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:
    (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 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 \17\ and 
Rule 19b-4(f)(6) \18\ thereunder. At any time within 60 days of the 
filing of the proposed rule change, the Commission summarily may 
temporarily suspend such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission will institute proceedings to determine whether the proposed 
rule change should be approved or disapproved.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

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-2014-067 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-2014-067. 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-2014-067 and should be 
submitted on or before November 28, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
---------------------------------------------------------------------------

    \19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-26346 Filed 11-5-14; 8:45 am]
BILLING CODE 8011-01-P


